-----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, PbACE4sxT5lYSq7R1da7ipCY++0U0yuhCY4wofRrEn3WmiKagGYUt6/LTEdDj8xg vJOTW2XiryA56mYO8R74/A== 0001068800-05-000522.txt : 20050811 0001068800-05-000522.hdr.sgml : 20050811 20050811172216 ACCESSION NUMBER: 0001068800-05-000522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050811 DATE AS OF CHANGE: 20050811 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: 051018089 BUSINESS ADDRESS: STREET 1: 50607 AMERIPRISE FINANCIAL CENTER CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 6126713288 MAIL ADDRESS: STREET 1: 50607 AMERIPRISE FINANCIAL CENTER CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE INSURANCE CO /MN DATE OF NAME CHANGE: 19920703 10-Q 1 ael10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to -------- -------- Commission file number 333-65080 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY ------------------------------------------ (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) 829 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474 - ------------------------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131 ---------------- 829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA - ------------------------------------------------------------------------------ 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. AMERICAN ENTERPRISE LIFE INSURANCE COMPANY FORM 10-Q INDEX Page No. -------- PART I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2005 and December 31, 2004 1 Consolidated Statements of Income - Three Months Ended June 30, 2005 and 2004 2 Consolidated Statements of Income - Six Months Ended June 30, 2005 and 2004 3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2005 and 2004 4 Consolidated Statements of Stockholder's Equity - Six Months Ended June 30, 2005 and 2004 5 Notes to Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 Item 4. Controls and Procedures 15-16 Part II. Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index E-1 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN ENTERPRISE LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (thousands, except share data)
June 30, December 31, 2005 2004 ---------- ------------ (Unaudited) Assets - ------ Investments: Available-for-Sale: Fixed maturities, at fair value (amortized cost: 2005, $6,049,262; 2004, $6,257,483) $6,142,395 $6,368,833 Preferred and common stocks, at fair value (cost: 2005 and 2004, $6,000) 6,357 6,246 Mortgage loans on real estate, at cost (less reserves: 2005 and 2004, $6,862) 391,703 420,899 Other investments 1,182 2,286 ---------- ---------- Total investments 6,541,637 6,798,264 Cash and cash equivalents 77,147 47,356 Amounts due from brokers 8,869 71 Other accounts receivable 5,565 4,299 Accrued investment income 64,442 67,655 Deferred policy acquisition costs 315,419 299,708 Deferred sales inducement costs 53,264 49,822 Other assets 2,347 3,394 Separate account assets 2,282,468 1,878,620 ---------- ---------- Total assets $9,351,158 $9,149,189 ========== ========== Liabilities and Stockholder's Equity - ------------------------------------ Liabilities: Future policy benefits: Fixed annuities $6,098,116 $6,325,427 Variable annuity guarantees 10,166 5,505 Policy claims and other policyholders' funds 11,009 4,150 Amounts due to brokers 26,636 6,962 Deferred income taxes, net 44,894 34,984 Other liabilities 22,603 41,826 Separate account liabilities 2,282,468 1,878,620 ---------- ---------- Total liabilities 8,495,892 8,297,474 ---------- ---------- Stockholder's equity: Capital stock, $150 par value; 100,000 shares authorized, 20,000 shares issued and outstanding 3,000 3,000 Additional paid-in capital 591,872 591,872 Retained earnings 210,381 199,175 Accumulated other comprehensive income, net of tax: Net unrealized securities gains 52,226 62,082 Net unrealized derivative losses (2,213) (4,414) ---------- ---------- Total accumulated other comprehensive income 50,013 57,668 ---------- ---------- Total stockholder's equity 855,266 851,715 ---------- ---------- Total liabilities and stockholder's equity $9,351,158 $9,149,189 ========== ========== See Notes to Consolidated Financial Statements
1 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (thousands) (Unaudited)
Three Months Ended June 30, ----------------------- 2005 2004 ------- -------- Revenues: Net investment income $86,771 $ 96,066 Contractholder charges 3,511 2,778 Mortality and expense risk and other fees 9,896 5,609 Net realized (loss) gain on investments (539) 2,331 ------- -------- Total 99,639 106,784 ------- -------- Benefits and Expenses: Death and other benefits for investment contracts 8,138 2,450 Interest credited to account values 54,645 57,854 Amortization of deferred policy acquisition costs 16,307 15,566 Separation costs 1,638 - Other insurance and operating expenses 17,771 11,335 ------- -------- Total 98,499 87,205 ------- -------- Income before income tax provision 1,140 19,579 Income tax provision 40 17,262 ------- -------- Net income $ 1,100 $ 2,317 ======= ======== See Notes to Consolidated Financial Statements
2 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (thousands) (Unaudited)
Six Months Ended June 30, ----------------------- 2005 2004 -------- -------- Revenues: Net investment income $177,352 $190,461 Contractholder charges 6,900 5,255 Mortality and expense risk and other fees 18,456 10,619 Net realized (loss) gain on investments (1,903) 4,098 -------- -------- Total 200,805 210,433 -------- -------- Benefits and Expenses: Death and other benefits for investment contracts 10,951 6,784 Interest credited to account values 107,123 115,617 Amortization of deferred policy acquisition costs 32,410 30,218 Separation costs 1,638 - Other insurance and operating expenses 32,274 29,755 -------- -------- Total 184,396 182,374 -------- -------- Income before income tax provision and accounting change 16,409 28,059 Income tax provision 5,203 20,129 -------- -------- Income before accounting change 11,206 7,930 Cumulative effect of accounting change, net of tax (Note 1) - (3,562) -------- -------- Net income $ 11,206 $ 4,368 ======== ======== See Notes to Consolidated Financial Statements
3 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS) (UNAUDITED)
Six Months Ended June 30, ------------------------------ 2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,206 $ 4,368 Adjustments to reconcile net income to net cash provided by operating activities: Change in accrued investment income 3,213 499 Change in deferred policy acquisition costs, net (13,200) (12,509) Change in deferred sales inducement costs, net (3,010) (2,563) Change in policy claims and other policyholders' funds 6,859 3,390 Deferred income taxes 14,033 12,852 Change in other assets and liabilities, net (10,008) (413) Amortization of premium, net 12,224 12,282 Net realized loss (gain) on investments 1,903 (4,098) Cumulative effect of accounting change, net of tax (Note 1) - 3,562 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 23,220 17,370 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Available-for-Sale securities: Sales 292,162 160,891 Maturities, sinking fund payments and calls 230,028 211,064 Purchases (327,008) (216,039) Other investments: Sales, maturities, sinking fund payments and calls 32,401 46,571 Purchases (3,294) (3,267) Change in amounts due to and from brokers, net 10,876 (66,740) --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES 235,165 132,480 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Activity related to investment contracts and universal life-type insurance: Considerations received 43,219 141,549 Interest credited to account values 107,123 115,617 Surrenders and other benefits (378,936) (399,211) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (228,594) (142,045) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 29,791 7,805 Cash and cash equivalents at beginning of period 47,356 9,065 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,147 $ 16,870 ========= ========= SUPPLEMENTAL DISCLOSURES: Income taxes (refunded) paid $ (357) $ 1,713 Interest paid on borrowings $ 33 $ 378 See Notes to Consolidated Financial Statements
4 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (thousands) (Unaudited)
Accumulated Additional Other Capital Paid-In Comprehensive Retained Total Stock Capital Income/(Loss) Earnings - ----------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2003 $823,679 $3,000 $591,872 $ 51,262 $177,545 - ----------------------------------------------------------------------------------------------------------------------------- Comprehensive loss: Net income 4,368 4,368 Change in net unrealized holding gains on Available-for-Sale securities, net of reclassification adjustments and other adjustments to deferred policy acquisition costs and deferred sales inducement costs, net of related deferred income taxes (81,884) (81,884) Reclassification adjustment for losses on derivatives included in net income, net of related deferred income taxes 2,201 2,201 -------- Total comprehensive loss (75,315) - ----------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2004 $748,364 $3,000 $591,872 $(28,421) $181,913 ============================================================================================================================= Balances at December 31, 2004 $851,715 $3,000 $591,872 $ 57,668 $199,175 Comprehensive income: Net income 11,206 11,206 Change in net unrealized holding gains on Available-for-Sale securities, net of reclassification adjustments and other adjustments to deferred policy acquisition costs and deferred sales inducement costs, net of related deferred income taxes (9,856) (9,856) Reclassification adjustment for losses on derivatives included in net income, net of related deferred income taxes 2,201 2,201 -------- Total comprehensive income 3,551 - ----------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2005 $855,266 $3,000 $591,872 $ 50,013 $210,381 ============================================================================================================================= See Notes to Consolidated Financial Statements
5 AMERICAN ENTERPRISE 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 American Enterprise Life Insurance Company (American Enterprise Life) for the year ended December 31, 2004. 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. Separation of Ameriprise Financial ---------------------------------- American Enterprise Life Insurance Company is a wholly owned subsidiary of IDS Life Insurance Company (IDS Life), a Minnesota Corporation. IDS Life is a wholly owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Prior to August 1, 2005, Ameriprise Financial was known as American Express Financial Corporation (AEFC). Ameriprise Financial is a wholly owned subsidiary of American Express Company (American Express). Ameriprise Financial changed its name on August 1, 2005 as a consequence of the plans announced by American Express on February 1, 2005, to pursue a spin off of the businesses now being operated under the Ameriprise Financial name. The separation from American Express is expected to be completed on or after September 30, 2005, subject to certain regulatory and other approvals, including final approval by the board of directors of American Express. After the expected separation from American Express, Ameriprise Financial and its subsidiaries will no longer be affiliated with American Express. Ameriprise Financial and American Express will be independent companies, with separate public ownership, boards of directors and management. In connection with the separation, American Enterprise Life will be allocated certain separation and distribution-related expenses incurred as a result of Ameriprise Financial becoming an independent company. Cumulatively, the expenses allocated to American Enterprise Life are expected to be significant to American Enterprise Life. IDS Life will provide additional capital to American Enterprise Life to support its current financial strength ratings. Separation Costs ---------------- During the quarter ended June 30, 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. During the quarter ended June 30, 2005, American Enterprise Life recorded $1.6 million in allocated separation costs. Had this allocation method been applied for the quarter ended March 31, 2005, approximately $0.2 million of these costs would have been charged to American Enterprise Life during that period. Separation costs generally consist of employee retention program costs, information technology costs, re-branding and marketing costs and certain consulting expenses related to the separation and distribution of Ameriprise Financial. 6 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Application of Recently Issued Accounting Standards --------------------------------------------------- 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 consider whether to establish additional liabilities for benefits that may become payable under variable annuity death benefit guarantees or other insurance or annuity contract provisions. Where an additional liability is established, the recognition of this liability will then be considered in amortizing 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 $3.6 million ($5.5 million pretax). The cumulative effect of accounting change related to establishing additional liabilities for certain variable annuity guaranteed benefits ($3.4 million) and from considering these liabilities in valuing DAC and deferred sales inducement costs associated with those contracts. Prior to the adoption of SOP 03-1, amounts paid in excess of contract value were expensed when payable. American Enterprise Life's accounting for separate accounts was already consistent with the provisions of SOP 03-1 and, therefore, there was no impact related to this requirement. 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" (EITF 03-1). American Enterprise 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 years ended December 31, 2004 and 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" (SFAS No. 115), and other cost method investments are other-than-temporarily impaired. However, with the issuance of FASB Staff Position (FSP) No. EITF 03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1," on September 30, 2004, 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. American Enterprise Life will evaluate the potential impact of EITF 03-1 after the FASB completes its reassessment. 7 AMERICAN ENTERPRISE LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 six months ended June 30:
Three Months Ended Six Months Ended June 30, June 30, ------------------- --------------------- 2005 2004 2005 2004 ------- ------ ------- ------- (Thousands) Gross realized gains on sales $ 5,766 $ 2,738 $ 6,345 $ 5,727 Gross realized (losses) on sales $(5,215) $ (907) $(6,929) $(1,467) Realized (losses) recognized for other-than-temporary impairments $ - $ - $ (229) $ -
3. COMMITMENTS AND CONTINGENCIES At June 30, 2005 and December 31, 2004, American Enterprise Life had commitments to fund mortgage loans on real estate of $8.2 million and $0.2 million, respectively. 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 product financial practices, generally including suitability, late trading, market timing, disclosure of revenue sharing arrangements, and inappropriate sales of B shares. American Enterprise Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries. American Enterprise Life and its affiliates are involved in other legal and arbitration proceedings concerning matters arising in connection with the conduct of their respective business activities. American Enterprise Life believes it has meritorious defenses to each of these actions and intends to defend them vigorously. In addition, American Enterprise Life is subject to periodic state insurance department regulatory action, through examinations or other proceedings. 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 American Enterprise 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. The IRS routinely examines American Enterprise Life's federal income tax returns and is currently conducting an audit for the 1997 through 2002 tax years. Management does not believe there will be a material adverse effect on American Enterprise Life's consolidated financial position as a result of these audits. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS American Enterprise Life Insurance Company is a stock life insurance company organized under the laws of the State of Indiana. American Enterprise Life Insurance Company is a wholly owned subsidiary of IDS Life Insurance Company (IDS Life), a Minnesota Corporation. IDS Life is a wholly owned subsidiary of Ameriprise Financial, Inc. (Ameriprise Financial). Prior to August 1, 2005, Ameriprise Financial was known as American Express Financial Corporation (AEFC). Ameriprise Financial is a wholly owned subsidiary of American Express Company (American Express). Ameriprise Financial changed its name on August 1, 2005 as a consequence of the plans announced by American Express on February 1, 2005, to pursue a spin off of the businesses now being operated under the Ameriprise Financial name. The separation from American Express is expected to be completed on or after September 30, 2005, subject to certain regulatory and other approvals, including final approval by the board of directors of American Express. After the expected separation from American Express, Ameriprise Financial and its subsidiaries will no longer be affiliated with American Express. Ameriprise Financial and American Express will be independent companies, with separate public ownership, boards of directors and management. American Enterprise Life Insurance Company provides financial institution clients with financial products and wholesaling services to support its retail insurance and annuity operations. American Enterprise Life principally underwrites fixed and variable annuity contracts primarily through regional and national financial institutions and regional and/or independent broker-dealers, in all states except New York. American Enterprise Life Insurance Company also owns American Enterprise REO 1, LLC which holds real estate investments. American Enterprise Life Insurance Company and its subsidiary are referred to collectively as "American Enterprise Life" in this form 10-Q. In connection with the separation, American Express has indicated that it will provide additional capital to Ameriprise Financial of approximately $1 billion. This capital contribution is intended to provide adequate support for Ameriprise Financial's senior debt rating on the distribution date, to allow Ameriprise Financial to have efficient access to the capital markets, and to support the current financial strength ratings of Ameriprise Financial's insurance subsidiaries. American Enterprise Life will be allocated certain separation and distribution-related expenses incurred as a result of Ameriprise Financial becoming an independent company. Cumulatively, the expenses allocated to American Enterprise Life will be significant to American Enterprise Life. IDS Life will provide additional capital to American Enterprise Life to support its current financial strength ratings. American Enterprise 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. Management's narrative analysis of the results of operations is presented in lieu of management's discussion and analysis of financial condition and results of operations, pursuant to General Instructions H(1) (a) of Form 10-Q. 9 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004 Net income was $1.1 million for the three months ended June 30, 2005, compared to $2.3 million for the three months ended June 30, 2004. The decrease primarily reflects lower net investment income, higher death and other benefits and higher insurance and operating expenses, partially offset by a significantly lower effective tax rate as further described below. The effective tax rate decreased to 4 percent in the three months ended June 30, 2005 from 88 percent in the three months ended June 30, 2004. The effective tax rate in the three months ended June 30, 2004 included a reduction in net deferred tax assets which increased the effective rate. REVENUES Net investment income decreased $9.3 million or 10 percent reflecting lower average balances of invested assets. Mortality and expense risk and other fees increased $4.3 million or 76 percent, reflecting higher average values of separate account assets. Net realized loss on investments was $0.5 million for the three months ended June 30, 2005 compared to a net realized gain on investments of $2.3 million for the three months ended June 30, 2004. For the three months ended June 30, 2005, $5.8 million of total investment gains were offset by $6.3 million of losses and impairments. Included in these total net investment gains and losses were $5.8 million of gross realized gains and $5.2 million of gross realized losses from sales of securities, classified as Available-for-Sale. Included in net realized loss on investments classified as Available-for-Sale for the three months ended June 30, 2005 were gross realized 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 (CDO) securitization trust, reflecting management's decision to continue to improve the investment portfolio's risk profile through the liquidation of certain structured investments. For the three months ended June 30, 2004, $3.2 million of total investment gains were partially offset by $0.9 million of losses and impairments. Included in these total net investment gains and losses were $2.7 million of gross realized gains and $0.9 million of gross realized losses from sales of securities, classified as Available-for-Sale. BENEFITS AND EXPENSES Death and other benefits for investment contracts increased $5.7 million primarily related to guaranteed minimum withdrawal benefit (GMWB) riders on variable annuity contracts. This increase was partially offset by a reduction in variable annuity death benefit guarantees. Interest credited to account values decreased $3.2 million or 6 percent reflecting lower average accumulation values and lower interest crediting rates on annuity products. 10 Separation costs generally consist of employee retention program costs, information technology costs, re-branding and marketing costs and certain consulting expenses related to the separation and distribution of Ameriprise Financial. During the quarter ended June 30, 2005, American Enterprise Life recorded $1.6 million in allocated separation costs. Other insurance and operating expense increased $6.4 million or 57 percent primarily reflecting $6.8 million of unfavorable mark-to-market adjustments on interest rate swaps in the current quarter compared to the same period a year ago. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 Income before income tax provision and accounting change was $16.4 million for the six months ended June 30, 2005, compared to $28.1 million for the six months ended June 30, 2004. The decrease primarily reflects lower net investment income, as further described below. Net income was $11.2 million for the six months ended June 30, 2005, compared to $4.4 million for the six months ended June 30, 2004. Net income for the six months ended June 30, 2004 reflects the $3.6 million after-tax ($5.5 million pretax) cumulative effect of accounting change as a result of American Enterprise Life's adoption of SOP 03-1. See "Application of Recently Issued Accounting Standards" section of Note 1 to the Consolidated Financial Statements for discussion regarding the impact of adoption of SOP 03-1. The effective tax rate decreased to 32 percent in the six months ended June 30, 2005 from 72 percent in the six months ended June 30, 2004. The effective tax rate in the six months ended June 30, 2004 included a reduction in net deferred tax assets which increased the effective rate. REVENUES Net investment income decreased $13.1 million or 7 percent reflecting lower average balances of invested assets. Mortality and expense risk and other fees increased $7.8 million or 74 percent primarily reflecting higher average values of separate account assets. Net realized loss on investments was $1.9 million for the six months ended June 30, 2005 compared to a net realized gain on investments of $4.1 million for the six months ended June 30, 2004. For the six months ended June 30, 2005, $6.3 million of total investment gains were offset by $8.2 million of losses and impairments. Included in these total net investment gains and losses were $6.3 million of gross realized gains and $6.9 million of gross realized losses from sales of securities, as well as $0.2 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. Included in net realized loss on investments classified as Available-for-Sale for the six months ended June 30, 2005 were gross realized 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 CDO securitization trust, reflecting management's decision to continue to improve the investment portfolio's risk profile through the liquidation of certain structured investments. For the six months ended June 30, 2004, $6.2 million of total investment gains were partially offset by $2.1 million of losses and impairments. Included in these total net investment gains and losses were $5.7 million of gross realized gains and $1.5 million of gross realized losses from sales of securities, classified as Available-for-Sale. 11 BENEFITS AND EXPENSES Death and other benefits for investment contracts increased $4.2 million or 61 percent primarily related to GMWB riders on variable annuity contracts. This increase was partially offset by a reduction in variable annuity death benefit guarantees and other death benefit reserves. Interest credited to account values decreased $8.5 million or 7 percent reflecting lower average accumulation values and lower interest crediting rates on annuity products. Separation costs generally consist of employee retention program costs, information technology costs, re-branding and marketing costs and certain consulting expenses related to the separation and distribution of Ameriprise Financial. During 2005, American Enterprise Life recorded $1.6 million in allocated separation costs. DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs (DAC) represent the costs of acquiring new business, principally direct sales commissions and other distribution and underwriting costs that have been deferred on the sale of annuity products. These costs are deferred to the extent they are recoverable from future profits. DAC for certain annuities are amortized as a percentage of estimated gross profits or as a portion of product interest margins depending on the product's characteristics. For American Enterprise Life's annuity products, the projections underlying the amortization of DAC require the use of certain assumptions, including interest margins, persistency rates, maintenance expense levels and customer asset value growth rates for variable products. Management routinely monitors a wide variety of trends in the business, including comparisons of actual and assumed experience. The customer asset value growth rate is the rate at which contract values are assumed to appreciate in the future. The rate is net of asset fees and anticipates a blend of equity and fixed income investments. Management reviews and, where appropriate, adjusts its assumptions with respect to customer asset value growth rates on a quarterly basis. Management monitors other principal DAC assumptions, such as persistency, mortality rates, 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 might also change. A change in the required amortization percentage is applied retrospectively; an increase in amortization percentage will result in an increase in DAC amortization expense while a decrease in amortization percentage will result in a decrease in DAC amortization expense. The impact on results of operations of changing assumptions with respect to the amortization of DAC can be either positive or negative in any particular period and is reflected in the period in which such changes are made. During the first quarter of 2004 and in conjunction with the adoption of SOP 03-1, American Enterprise Life established additional liabilities for insurance benefits that may become payable under variable annuity death benefit guarantees, which prior to January 1, 2004, were expensed when payable. As a result, American Enterprise Life recognized a $5.5 million pretax charge due to accounting change on establishing the future liability under death benefit guarantees. 12 LIQUIDITY AND CAPITAL RESOURCES Risk Management American Enterprise Life through its Board of Directors' investment committees or staff functions, review models projecting different interest rate scenarios, risk/return measures, and their effect on profitability. They also review the distribution of assets in the portfolio by type and credit risk sector. The objective is to structure the investments security portfolio based upon the type and behavior of the liabilities underlying the products portfolios to achieve targeted levels of profitability within defined risk parameters to meet contractual obligations. American Enterprise Life has developed an asset/liability management approach with separate investment objectives to support specific product liabilities, such as insurance and annuity. As part of this approach, American Enterprise Life develops specific investment guidelines outlining the minimum required investment return and liquidity requirements to support future benefit payments under its insurance and annuity obligations. These same objectives must be consistent with management's overall investment objectives for the general account investment portfolio. American Enterprise Life's owned investment securities are primarily invested in long-term and intermediate-term fixed maturity securities to provide clients with a competitive rate of return on their investments while controlling risk. Investment in fixed maturity securities is designed to provide American Enterprise Life with a targeted margin between the yield earned on investments and the interest rate credited to clients' accounts. American Enterprise Life does not trade in securities to generate short-term profits for its own account. As part of American Enterprise Life's investment process, management, with the assistance of its investment advisors, conducts a quarterly review of investment performance. The review process conducted by American Enterprise Life's Investment Committee involves the review of certain invested assets which the committee evaluates to determine whether or not any investments are other than temporarily impaired and/or which specific interest earning investments should be put on an interest non-accrual basis. Capital Strategy The liquidity requirements of American Enterprise Life are generally met by funds provided by deposits, investment income, proceeds from sales of investments as well as maturities and periodic repayments of investments and capital contributions from IDS Life. The primary uses of funds are annuity benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to IDS Life and investment purchases. American Enterprise Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations. Funding Strategy American Enterprise Life, on a consolidated basis, has available lines of credit with Ameriprise Financial aggregating $50 million. At June 30, 2005, there were no line of credit borrowings outstanding with Ameriprise Financial and no outstanding reverse repurchase agreements. Both the line of credit and the reverse repurchase agreements are used strictly as short-term sources of funds. Investments include $0.4 billion, $0.5 billion and $0.5 billion of below investment grade securities (excluding net unrealized appreciation and depreciation) at June 30, 2005, December 31, 2004 and June 30, 2004, respectively. These investments represent 7 percent, 8 percent and 7 percent of American Enterprise Life's investment portfolio at June 30, 2005, December 31, 2004 and June 30, 2004, respectively. 13 Separate account assets represent funds held for the exclusive benefit of variable annuity contractholders. These assets are generally carried at market value, and separate account liabilities are equal to separate account assets. American Enterprise Life earns fees from the related accounts. During the second quarter 2005, American Enterprise Life sold all of its retained interest in a CDO securitization trust and recognized a net realized loss of $1.2 million. As of December 31, 2004, the carrying value of this retained interest was $41.8 million of which $31.0 million was considered investment grade. IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS As discussed above, various aspects of American Enterprise Life's business are impacted by equity market levels and other market-based events. Several areas in particular involve DAC and deferred sales inducements, recognition of guaranteed minimum death benefits (GMDB), guaranteed minimum withdrawal benefits (GMWB) 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 benefits, incurred amounts under GMDB, GMWB 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 American Enterprise Life's structured investment portfolios is 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. OTHER REPORTING MATTERS Accounting Developments See "Application of Recently Issued Accounting Standards" section of Note 1 to the Consolidated Financial Statements. 14 ITEM 4. CONTROLS AND PROCEDURES American Enterprise Life's management, with the participation of American Enterprise Life's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of American Enterprise Life's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the 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, American Enterprise Life's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, American Enterprise Life's disclosure controls and procedures are effective. There have not been any 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. 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: fluctuation in the equity and fixed income markets, which can affect the amount and types of investment products sold by American Enterprise Life, and other fees received based on the value of those assets; American Enterprise Life's ability to recover Deferred Policy Acquisition Costs (DAC), as well as the timing of such DAC amortization, in connection with the sale of annuity products; changes in assumptions relating to DAC, which could impact the amount of DAC amortization; the ability to improve investment performance in American Enterprise Life's businesses, including attracting and retaining high-quality personnel; the success, timeliness and financial impact, including costs, cost savings and other benefits including increased revenues, of reengineering initiatives being implemented or considered by American Enterprise Life, including cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation, outsourcing (including, among others, technologies operations), relocating certain functions to lower-cost overseas locations, moving internal and external functions to the Internet to save costs, and planned staff reductions relating to certain of such reengineering actions; the ability to control and manage operating, infrastructure, advertising and promotion and other expenses as business expands or changes, including balancing the need for longer-term investment spending; the potential negative effect on American Enterprise Life's businesses and infrastructure, including information technology, of terrorist attacks, disasters or other catastrophic events in the future; American Enterprise Life's ability to develop and roll out new and attractive products to clients in a timely manner; successfully cross-selling annuity products and services to Ameriprise Financial's customer base; fluctuations in interest rates, which impacts American Enterprise Life's spreads in the annuity businesses; credit trends and the rate of bankruptcies which can affect returns on American Enterprise Life's investment portfolios; lower than anticipated spreads in the annuity business; 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 American Enterprise Life against losses; negative changes in American Enterprise Life's credit ratings; increasing competition in all American Enterprise Life's annuity business, which could affect both American Enterprise Life's financial condition and results of operations; changes in laws or government regulations; outcomes associated with litigation and compliance and regulatory matters. A further description of these and other risks and 15 uncertainties can be found in American Enterprise Life's Annual Report on Form 10-K for the year ended December 31, 2004 and its other reports filed with the Securities and Exchange Commission (SEC). 16 PART II. OTHER INFORMATION AMERICAN ENTERPRISE 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, generally including suitability, late trading, market timing, disclosure of revenue sharing arrangements and inappropriate sales of B shares. American Enterprise Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries. American Enterprise Life and its affiliates are involved in a number of other legal and arbitration proceedings concerning matters arising in connection with the conduct of their respective business activities. American Enterprise Life believes it has meritorious defenses to each of these actions and intends to defend them vigorously. American Enterprise 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 American Enterprise 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. Form 8-K, filed May 23, 2005, item 5.02, reporting that on May 18, 2005, Arthur H. Berman resigned his position as Executive Vice President - Finance of the Company. Mr. Berman resigned to assume the role of Senior Vice President and Treasurer of American Express Financial Advisors, Inc. (n/k/a Ameriprise Financial Services, Inc.) and American Express Financial Corporation (n/k/a Ameriprise Financial, Inc.) and not due to any disagreements with the Board, auditors or officers of the Company. In the interim period, Jeryl A. Millner will assume the role of Executive Vice President - Finance of the company until the board of the Company can appoint a new Executive Vice President - Finance. Mr. Berman will continue to serve upon the board of the Company. 17 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: August 11, 2005 By /s/ Mark E. Schwarzmann ----------------------------------- Mark E. Schwarzmann Director, Chairman of the Board and Chief Executive Officer Date: August 11, 2005 By /s/ Jeryl A. Millner ----------------------------------- Jeryl A. Millner Executive Vice President - Finance and Chief Financial Officer 18 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 Jeryl A. Millner pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. 32.1 Certification of Mark E. Schwarzmann and Jeryl A. Millner 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 2 ex31p1.txt Exhibit 31.1 CERTIFICATION ------------- I, Mark E. Schwarzmann, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Enterprise 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: August 11, 2005 /s/ Mark E. Schwarzmann ----------------------- Mark E. Schwarzmann Chief Executive Officer EX-31.2 3 ex31p2.txt Exhibit 31.2 CERTIFICATION ------------- I, Jeryl A. Millner, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Enterprise 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: August 11, 2005 /s/ Jeryl A. Millner ----------------------- Jeryl A. Millner Chief Financial Officer EX-32.1 4 ex32p1.txt 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 American Enterprise Life Insurance Company (the "Company") for the quarterly period ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Mark E. Schwarzmann, as Chief Executive Officer of the Company, and Jeryl A. Millner as Chief Financial Officer of the Company, 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 the Company. /s/ Mark E. Schwarzmann - ------------------------------ Name: Mark E. Schwarzmann Title: Chief Executive Officer Date: August 11, 2005 /s/ Jeryl A. Millner - ------------------------------ Name: Jeryl A. Millner Title: Chief Financial Officer Date: August 11, 2005 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 the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----