10-Q 1 idsl_2q06.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________ COMMISSION FILE NUMBER 33-28976 IDS LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter) MINNESOTA 41-0823832 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 55 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 671-3131 Former name, former address and former fiscal year, if changed since last report NOT APPLICABLE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT AUGUST 9, 2006 ----------------------------------------- ----------------------------- Common Stock (par value $30 per share) 100,000 shares THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. IDS LIFE INSURANCE COMPANY FORM 10-Q INDEX
PAGE NO. -------- Part I. Financial Information: Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2006 and December 31, 2005................................... 1 Consolidated Statements of Income - Three months and six months ended June 30, 2006 and 2005........ 2 Consolidated Statements of Cash Flows - Six months ended June 30, 2006 and 2005..................... 3 Consolidated Statements of Shareholder's Equity - Six months ended June 30, 2006 and 2005........... 4 Notes to Consolidated Financial Statements.......................................................... 5-8 Item 2. Management's Discussion and Analysis................................................................ 9-13 Item 4. Controls and Procedures............................................................................. 14 Part II.Other Information: Item 1. Legal Proceedings................................................................................... 14 Item 1A. Risk Factors........................................................................................ 14 Item 6. Exhibits............................................................................................ 14 Signatures.................................................................................................... 15 Exhibit Index................................................................................................. E-1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
JUNE 30, DECEMBER 31, 2006 2005 ------------ ------------ ASSETS (UNAUDITED) Investments: Available-for-Sale: Fixed maturities, at fair value (amortized cost: 2006, $27,000,557; 2005, $27,817,021) .... $ 26,123,018 $ 27,753,174 Common and preferred stocks, at fair value (cost: 2006, $29,965; 2005, $13) ............... 29,573 21 Mortgage loans on real estate, at cost (less allowance for loan losses: 2006, $37,347; 2005, $41,347) ............................................................................ 2,797,890 2,842,362 Policy loans ................................................................................. 622,459 605,212 Trading securities and other investments ..................................................... 406,137 547,668 ------------ ------------ Total investments .......................................................................... 29,979,077 31,748,437 Cash and cash equivalents .................................................................... 48,172 233,589 Reinsurance recoverables ..................................................................... 1,042,741 982,521 Amounts due from brokers ..................................................................... 6,349 4,166 Other accounts receivable .................................................................... 54,550 62,930 Accrued investment income .................................................................... 325,313 328,567 Deferred acquisition costs ................................................................... 4,240,902 4,035,879 Deferred sales inducement costs .............................................................. 419,792 370,166 Deferred income tax assets, net .............................................................. 194,584 -- Other assets ................................................................................. 259,249 220,371 Separate account assets ...................................................................... 41,788,456 37,929,960 ------------ ------------ Total assets ............................................................................... $ 78,359,185 $ 75,916,586 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits: Fixed annuities ........................................................................... $ 24,801,082 $ 26,126,068 Variable annuity guarantees ............................................................... 12,460 29,550 Universal life insurance .................................................................. 3,692,498 3,711,628 Traditional life insurance ................................................................ 314,594 298,479 Disability income and long-term care insurance ............................................ 2,270,494 2,145,969 Policy claims and other policyholders' funds ................................................. 102,139 90,233 Amounts due to brokers ....................................................................... 200,922 31,772 Deferred income tax liabilities, net ......................................................... -- 9,099 Other liabilities ............................................................................ 358,285 381,938 Separate account liabilities ................................................................. 41,788,456 37,929,960 ------------ ------------ Total liabilities .......................................................................... 73,540,930 70,754,696 ------------ ------------ Shareholder's equity: Common shares, $30 par value; 100,000 shares authorized, issued and outstanding ........................................ 3,000 3,000 Additional paid-in capital ................................................................... 2,020,388 2,020,388 Retained earnings ............................................................................ 3,390,402 3,269,206 Accumulated other comprehensive loss, net of tax ............................................. (595,535) (130,704) ------------ ------------ Total shareholder's equity ................................................................. 4,818,255 5,161,890 ------------ ------------ Total liabilities and shareholder's equity ................................................. $ 78,359,185 $ 75,916,586 ============ ============
See Notes to Consolidated Financial Statements. 1 IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- -------------------------- 2006 2005 2006 2005 ---------- ---------- ---------- ---------- REVENUES Premiums: Traditional life insurance .................................... $ 18,162 $ 19,267 $ 36,326 $ 36,757 Disability income and long-term care insurance ................ 77,567 72,776 151,910 144,119 ---------- ---------- ---------- ---------- Total premiums ............................................ 95,729 92,043 188,236 180,876 Net investment income ........................................... 416,180 422,922 860,655 881,710 Contractholder and policyholder charges ......................... 173,425 142,757 325,833 285,814 Mortality and expense risk and other fees ....................... 153,849 108,390 300,121 223,168 Net realized investment gains ................................... 4,976 37,645 10,815 37,839 ---------- ---------- ---------- ---------- Total revenues ............................................ 844,159 803,757 1,685,660 1,609,407 ---------- ---------- ---------- ---------- BENEFITS AND EXPENSES Death and other benefits: Traditional life insurance .................................... 7,079 8,511 12,497 20,580 Investment contracts and universal life-type insurance ........ 69,786 66,437 127,109 118,724 Disability income and long-term care insurance ................ 19,847 19,022 40,595 36,199 Increase in liabilities for future policy benefits: Traditional life insurance .................................... 2,911 1,472 2,692 2,410 Disability income and long-term care insurance ................ 31,278 29,969 73,449 59,566 Interest credited to account values ............................. 264,626 280,359 533,867 553,621 Amortization of deferred acquisition costs ...................... 104,507 98,193 209,792 197,275 Separation costs ................................................ 30,785 25,772 55,392 25,772 Other insurance and operating expenses .......................... 159,780 148,171 316,634 285,695 ---------- ---------- ---------- ---------- Total benefits and expenses ............................... 690,599 677,906 1,372,027 1,299,842 ---------- ---------- ---------- ---------- Income before income tax provision ................................. 153,560 125,851 313,633 309,565 Income tax provision ............................................... 44,263 34,387 92,437 92,560 ---------- ---------- ---------- ---------- Net income ......................................................... $ 109,297 $ 91,464 $ 221,196 $ 217,005 ========== ========== ========== ==========
See Notes to Consolidated Financial Statements. 2 IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
SIX MONTHS ENDED JUNE 30, ------------------------------- 2006 2005 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................................................. $ 221,196 $ 217,005 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred acquisition costs ............................................... 209,792 197,275 Amortization of deferred sales inducement costs .......................................... 23,951 20,206 Capitalization of deferred acquisition costs ............................................. (341,599) (303,430) Capitalization of deferred sales inducement costs ........................................ (60,732) (46,064) Premium and discount amortization on Available-for-Sale and other securities ............. 37,599 46,370 Deferred income taxes .................................................................... 46,612 39,900 Policyholder and contractholder charges, non-cash ........................................ (109,338) (115,827) Net realized investment gains ............................................................ (10,815) (37,839) Net realized gain on trading securities and equity method investments in hedge funds ..... (28,531) (4,962) Change in operating assets and liabilities: Trading securities and equity method investments in hedge funds, net ..................... 182,057 116,791 Future policy benefits for traditional life, disability income and long-term care insurance ............................................................................. 140,640 119,236 Policy claims and other policyholders' funds ............................................. 11,906 9,771 Policy loans, excluding universal life-type insurance: Repayment ............................................................................. 17,553 18,265 Issuance .............................................................................. (19,416) (18,500) Reinsurance recoverables ................................................................. (60,220) (71,548) Other accounts receivable ................................................................ 8,380 (4,999) Accrued investment income ................................................................ 3,254 13,021 Other assets and liabilities, net ........................................................ (91,862) 47,587 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES .................................................. 180,427 242,258 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Available-for-Sale securities: Proceeds from sales ...................................................................... 926,510 1,907,590 Maturities, sinking fund payments and calls .............................................. 1,081,838 887,324 Purchases ................................................................................ (1,245,802) (2,458,636) Other investments, excluding policy loans: Proceeds from sales, maturities, sinking fund payments and calls ......................... 243,879 308,521 Purchases ................................................................................ (211,554) (227,876) Change in amounts due to and from brokers, net ............................................. 166,967 47,033 Change in restricted cash .................................................................. -- 327,511 ----------- ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES .................................................. 961,838 791,467 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Activity related to investment contracts and universal life-type insurance: Considerations received .................................................................. 651,682 883,552 Interest credited to account values ...................................................... 533,867 553,621 Surrenders and other benefits ............................................................ (2,397,847) (1,578,649) Universal life-type insurance policy loans: Repayment ................................................................................ 47,866 46,477 Issuance ................................................................................. (63,250) (50,771) Cash dividend to Ameriprise Financial, Inc. ................................................ (100,000) -- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES ...................................................... (1,327,682) (145,770) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... (185,417) 887,955 Cash and cash equivalents at beginning of period ........................................... 233,589 131,427 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 48,172 $ 1,019,382 =========== =========== Supplemental Disclosures: Income taxes paid, net ................................................................... $ 85,559 $ 99,798 Interest paid on borrowings .............................................................. $ 589 $ 63
See Notes to Consolidated Financial Statements. 3 IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (in thousands)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE SHARES CAPITAL EARNINGS INCOME (LOSS) TOTAL ----------- ----------- ----------- -------------- ----------- BALANCES AT DECEMBER 31, 2004 ............. $ 3,000 $ 1,370,388 $ 3,190,474 $ 341,693 $ 4,905,555 Comprehensive income: Net income ............................. 217,005 217,005 Unrealized holding losses on securities, net ...................... (18,656) (18,656) Unrealized derivative losses, net ...... (8,008) (8,008) ----------- Total comprehensive income ................ 190,341 ----------- ----------- ----------- ----------- ----------- BALANCES AT JUNE 30, 2005 ................. $ 3,000 $ 1,370,388 $ 3,407,479 $ 315,029 $ 5,095,896 =========== =========== =========== =========== =========== BALANCES AT DECEMBER 31, 2005 ............. $ 3,000 $ 2,020,388 $ 3,269,206 $ (130,704) $ 5,161,890 Comprehensive loss: Net income ............................. 221,196 221,196 Unrealized holding losses on securities, net ...................... (468,102) (468,102) Unrealized derivative gains, net ....... 3,271 3,271 ----------- Total comprehensive loss .................. (243,635) Cash dividend to Ameriprise Financial, Inc. (100,000) (100,000) ----------- ----------- ----------- ----------- ----------- BALANCES AT JUNE 30, 2006 ................. $ 3,000 $ 2,020,388 $ 3,390,402 $ (595,535) $ 4,818,255 =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 4 IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying Consolidated Financial Statements include the accounts of IDS Life Insurance Company and companies in which it directly or indirectly has a controlling financial interest. All material intercompany transactions and balances between or among IDS Life Insurance Company and its subsidiaries and affiliates have been eliminated in consolidation. IDS Life Insurance Company is a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"). IDS Life Insurance Company is a stock life insurance company with four wholly-owned operating subsidiaries: IDS Life Insurance Company of New York, American Partners Life Insurance Company, American Enterprise Life Insurance Company and American Centurion Life Assurance Company. IDS Life Insurance Company also owns IDS REO 1, LLC; IDS REO 2, LLC and American Enterprise REO 1, LLC which hold real estate investments. IDS Life Insurance Company and its seven subsidiaries are referred to collectively in this Form 10-Q as "IDS Life". The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes in the Annual Report on Form 10-K of IDS Life for the year ended December 31, 2005, filed with the Securities and Exchange Commission ("SEC") on March 10, 2006. Certain reclassifications of prior period amounts have been made to conform to the current presentation. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a two-step process to recognize and measure a tax position taken or expected to be taken in a tax return. The first step is to determine whether a tax position has met the more-likely-than -not recognition threshold and the second step is to measure a tax position that meets the threshold to determine the amount of benefit to recognize. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. IDS Life is currently evaluating the impact of FIN 48 on IDS Life's consolidated financial condition and results of operations. In February 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 155, "Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140." SFAS No. 155 improves financial reporting by eliminating the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. It also improves financial reporting by allowing a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. IDS Life is currently evaluating the impact of SFAS No. 155 on IDS Life's consolidated financial condition and results of operations. 5 IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 2. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. IDS Life is currently evaluating the impact of SOP 05-1 on IDS Life's consolidated financial condition and results of operations. 3. SEPARATION OF AMERIPRISE FINANCIAL, INC. Prior to August 1, 2005, Ameriprise Financial was referred to as American Express Financial Corporation. On February 1, 2005, the American Express Company ("American Express") Board of Directors announced its intention to pursue the disposition of 100% of its shareholdings in what is now Ameriprise Financial ("the Separation") through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and distribution of common shares to American Express shareholders ("the Distribution"). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the separation of its business and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. IDS Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. Cumulatively, the expenses allocated to IDS Life are significant to IDS Life. IDS Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its financial strength ratings and to cover separation costs. During 2005, Ameriprise Financial developed an allocation policy for separation costs resulting in the allocation of certain costs to IDS Life that it considered to be a reasonable reflection of separation costs benefiting IDS Life. Separation costs incurred during the first half of 2006 primarily related to marketing and rebranding and technology costs, while separation costs in 2005 were primarily comprised of marketing and rebranding, technology costs and advisor and other retention programs. Net income includes separation costs of $30.8 million and $25.8 million for the three months ended June 30, 2006 and 2005, respectively, and $55.4 million and $25.8 million for the six months ended June 30, 2006 and 2005, respectively. 6 4. INVESTMENTS The following is a summary of Available-for-Sale securities by type for the periods indicated:
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED INVESTMENT INVESTMENT FAIR JUNE 30, 2006 COST GAINS LOSSES VALUE ----------- ----------- ----------- ----------- (IN THOUSANDS) Fixed maturities: Corporate debt securities ......................... $12,842,265 $ 80,108 $ (515,246) $12,407,127 Mortgage and other asset-backed securities ........ 10,335,156 17,341 (363,004) 9,989,493 Foreign corporate bonds and obligations ........... 3,257,576 30,400 (132,558) 3,155,418 U.S. government and agencies obligations .......... 296,227 10,248 (9,616) 296,859 State and municipal obligations ................... 149,165 1,553 (6,951) 143,767 Foreign government bonds and obligations .......... 117,773 10,524 (338) 127,959 Structured investments (a) ........................ 2,395 -- -- 2,395 ----------- ----------- ----------- ----------- Total fixed maturities ............................ 27,000,557 150,174 (1,027,713) 26,123,018 Preferred and common stocks ....................... 29,965 7 (399) 29,573 ----------- ----------- ----------- ----------- Total ............................................. $27,030,522 $ 150,181 $(1,028,112) $26,152,591 =========== =========== =========== ===========
(a) Includes unconsolidated collateralized debt obligations.
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED INVESTMENT INVESTMENT FAIR DECEMBER 31, 2005 COST GAINS LOSSES VALUE ----------- ----------- ----------- ----------- (IN THOUSANDS) Fixed maturities: Corporate debt securities ......................... $13,318,636 $ 208,577 $ (198,774) $13,328,439 Mortgage and other asset-backed securities ........ 10,804,984 45,531 (158,784) 10,691,731 Foreign corporate bonds and obligations ........... 3,148,534 67,097 (54,721) 3,160,910 U.S. government and agencies obligations .......... 300,337 16,207 (5,282) 311,262 State and municipal obligations ................... 114,165 2,756 (3,262) 113,659 Foreign government bonds and obligations .......... 127,912 16,922 (114) 144,720 Structured investments (a) ........................ 2,453 -- -- 2,453 ----------- ----------- ----------- ----------- Total fixed maturities ........................... 27,817,021 357,090 (420,937) 27,753,174 Preferred and common stocks ....................... 13 8 -- 21 ----------- ----------- ----------- ----------- Total ............................................. $27,817,034 $ 357,098 $ (420,937) $27,753,195 =========== =========== =========== ===========
(a) Includes unconsolidated collateralized debt obligations. The majority of the gross unrealized investment losses related to corporate debt securities and substantially all of the gross unrealized investment losses related to mortgage and other asset-backed securities was attributable to changes in interest rates. A portion of the gross unrealized investment losses, particularly related to corporate debt securities, was also attributable to credit spreads and specific issuer credit events. Gross realized investment gains and losses on Available-for-Sale securities and other-than-temporary impairments on Available-for-Sale securities included in net realized investment gains were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- (IN THOUSANDS) Gross realized investment gains .................... $ 9,440 $ 63,529 $ 19,977 $ 72,363 Gross realized investment losses ................... (4,096) (24,153) (9,268) (32,247) Other-than-temporary impairments ................... -- -- -- (636)
7 IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. LINES OF CREDIT Effective June 30, 2006, IDS Life has available a committed line of credit with Ameriprise Financial aggregating $200 million. The interest rate for any borrowings is established by reference to LIBOR plus 28 basis points. There were no amounts outstanding on this line of credit at June 30, 2006. 6. INCOME TAXES IDS Life is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Included in IDS Life's deferred tax assets is a significant deferred tax asset relating to capital losses realized for tax return purposes and capital losses that have been recognized for financial statement purposes but not yet for tax return purposes. Under current U.S. federal income tax law, capital losses generally must be used against capital gain income within five years of the year in which the capital losses are recognized for tax purposes. IDS Life's deferred tax assets include $231 million in capital loss carryforwards that expire December 31, 2009. Based on analysis of IDS Life's tax position, management believes it is more likely than not that the results of future operations and implementation of tax planning strategies will generate sufficient taxable income to enable IDS Life to utilize all of its deferred tax assets. Accordingly, no valuation allowance for deferred tax assets was established as of June 30, 2006 and December 31, 2005. 7. COMMITMENTS AND CONTINGENCIES At June 30, 2006 and December 31, 2005, IDS Life had commitments to fund mortgage loans on real estate of $111.7 million and $106.8 million, respectively. The SEC, the National Association of Securities Dealers and several state authorities have brought proceedings challenging several mutual fund and variable product financial practices, generally including suitability, late trading, market timing, compensation and disclosure of revenue sharing arrangements. IDS Life has received requests for information and has been contacted by regulatory authorities concerning its practices and is cooperating fully with these inquiries. IDS Life is involved in other proceedings concerning matters arising in connection with the conduct of its business activities. IDS Life believes that it is not a party to, nor are any of its properties the subject of, any pending legal, arbitration or regulatory proceedings that would have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, it is possible that the outcome of any such proceedings could have a material adverse impact on results of operations in any particular reporting period as the proceedings are resolved. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS The following Management's Discussion and Analysis ("MD&A") should be read in conjunction with IDS Life Insurance Company's Consolidated Financial Statements and related notes presented in Item 1. IDS Life Insurance Company and its seven subsidiaries are referred to collectively in this Form 10-Q as "IDS Life". This discussion may contain forward-looking statements that reflect IDS Life's plans, estimates and beliefs. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed under "Forward-Looking Statements." IDS Life believes it is useful to read its MD&A in conjunction with its Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission ("SEC") on March 10, 2006, as well as its current reports on Form 8-K and other publicly available information. IDS Life follows U.S. generally accepted accounting principles ("GAAP"), and the following discussion is presented on a consolidated basis consistent with GAAP. Management's narrative analysis of the results of operations is presented in lieu of MD&A, pursuant to General Instructions H(2) (a) of Form 10-Q. OVERVIEW IDS Life Insurance Company is a stock life insurance company with four wholly-owned operating subsidiaries: IDS Life Insurance Company of New York, American Partners Life Insurance Company, American Enterprise Life Insurance Company and American Centurion Life Assurance Company. IDS Life Insurance Company is a wholly-owned subsidiary of Ameriprise Financial, Inc. ("Ameriprise Financial"). o IDS Life Insurance Company is domiciled in Minnesota and holds Certificates of Authority in American Samoa, the District of Columbia and all states except New York. IDS Life Insurance Company issues insurance and annuity products. o American Enterprise Life Insurance Company ("American Enterprise Life") is a stock life insurance company domiciled in Indiana, which holds Certificates of Authority in the District of Columbia and all states except New York. American Enterprise Life provides RiverSource branded financial products and wholesaling services to support its annuity operations. American Enterprise Life issues variable and fixed annuity contracts primarily through regional and national financial institutions and regional and/or independent broker-dealers, in all states except New York. In past years, American Enterprise Life issued a nominal number of variable universal life contracts. o American Partners Life Insurance Company ("American Partners Life") is a stock life insurance company domiciled in Arizona, which holds Certificates of Authority in the District of Columbia and all states except New York and New Hampshire. American Partners Life markets annuity products directly to customers, generally persons holding an American Express(R) Card. o IDS Life Insurance Company of New York ("IDS Life of New York") is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York and North Dakota. IDS Life of New York issues insurance and annuity products. o American Centurion Life Assurance Company ("American Centurion Life") is a stock life insurance company domiciled in New York, which holds Certificates of Authority in New York, Alabama and Delaware. American Centurion Life issues fixed and variable annuity contracts primarily through financial institutions and independent broker-dealers. American Centurion Life also markets annuity products directly, generally to persons holding an American Express(R) Card. IDS Life Insurance Company also owns IDS REO 1, LLC; IDS REO 2, LLC and American Enterprise REO 1, LLC which hold real estate investments. 9 Prior to August 1, 2005, Ameriprise Financial was referred to as American Express Financial Corporation. On February 1, 2005, American Express Company ("American Express") announced its intention to pursue the disposition of 100% of its shareholdings in what is now Ameriprise Financial ("the Separation") through a tax-free distribution to American Express shareholders. Effective as of the close of business on September 30, 2005, American Express completed the Separation and distribution of common shares to American Express shareholders ("the Distribution"). In connection with the Distribution, Ameriprise Financial entered into certain agreements with American Express to effect the separation of its business and to define the responsibility for obligations arising before and after the date of the Distribution, including, among others, obligations relating to transition services, taxes, and employees. IDS Life was allocated certain expenses incurred as a result of Ameriprise Financial becoming an independent company. Cumulatively, the expenses allocated to IDS Life are significant to IDS Life. The majority of such costs are expected to be incurred by December 31, 2006. IDS Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its financial strength ratings and to cover separation costs. RECENT ACCOUNTING PRONOUNCEMENTS For information regarding recent accounting pronouncements and their expected impact on future consolidated financial condition or results of operations, see Note 2 to the Consolidated Financial Statements. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 Overview Net income was $221.2 million for the six months ended June 30, 2006 compared to $217.0 million for the six months ended June 30, 2005. The increase in net income primarily reflects increases in mortality and expense risk and other fees and contractholder and policyholder charges, as well as a decrease in interest credited, partially offset by lower net realized gain on investments and net investment income and higher other insurance and operating expense and separation costs. Revenues Premiums for disability income ("DI") and long-term care ("LTC") insurance increased $7.8 million or 5% reflecting higher DI insurance in force levels. Net investment income decreased $21.1 million or 2% reflecting a decrease in both the average yield and in the average level of invested assets, as well as unfavorable mark-to-market adjustments on derivatives economically hedging guaranteed minimum withdrawal benefit ("GMWB") provisions. The lower level of invested assets is primarily a result of declining fixed annuity account values. The decrease in net investment income also reflects a reduction in income in 2006 compared to 2005 related to the liquidation of secured loan trusts. These changes were partially offset by favorable mark-to-market adjustments on both equity method investments in hedge funds and derivatives economically hedging equity index annuities ("EIA") and lower losses related to other derivatives. The impacts from derivatives economically hedging EIA and GMWB were primarily offset in the interest credited to account values and death and other benefits for investment contracts and universal life-type insurance line items, respectively. Contractholder and policyholder charges increased $40.0 million or 14% including $17.9 million from recognizing previously deferred cost of insurance revenues and an increase in the cost of insurance charges on variable universal life products and charges for variable annuity GMWB provisions. Mortality and expense risk and other fees increased $77.0 million or 34% reflecting higher average values of separate account assets due to increased inflows and market appreciation. Net realized investment gains were $10.8 million for the six months ended June 30, 2006 compared to $37.8 million for the six months ended June 30, 2005. For the six months ended June 30, 2006, $20.5 million of gross realized investment gains were partially offset by $9.7 million of losses. Included in these total net investment gains and losses were $20.0 million of gross realized investment gains, partially offset by $9.3 million of gross realized investment losses, classified as Available-for-Sale. 10 For the six months ended June 30, 2005, $72.5 million of gross realized investment gains were partially offset by $34.7 million of losses and impairments. Included in these total net investment gains and losses were $72.4 million of gross realized investment gains partially offset by $32.2 million of gross realized investment losses, as well as $0.6 million of other-than-temporary impairment losses on investments, classified as Available-for-Sale. Included in net realized investment gains classified as Available-for-Sale for the six months ended June 30, 2005 were gross realized investment gains and losses of $39.2 million and $14.3 million, respectively, related to the sale of all of IDS Life's retained interest in a collateralized debt obligation securitization trust. Benefits and Expenses Death and other benefits for traditional life insurance decreased $8.1 million or 39% reflecting lower claims volume. Death and other benefits for investment contracts and universal life-type insurance increased $8.4 million or 7% reflecting a net increase in guaranteed minimum death benefit ("GMDB") costs of $15.5 million, $13.8 million of additional claims expense, including $6.9 million in connection with the recognition of the previously deferred cost of insurance revenues discussed previously, higher sales inducement costs of $5.3 million and other increases in costs and benefits of $10.4 million, partially offset by a net decrease in GMWB costs of $36.6 million. Benefits for DI and LTC insurance increased $4.4 million or 12% reflecting unfavorable claims experience relative to the same period a year ago. Increase in liabilities for future policy benefits for DI and LTC insurance increased $13.9 million or 23% including a $5.1 million adjustment to the liabilities for incurred but not reported claims. Interest credited to account values decreased by $19.8 million or 4% primarily due to lower interest crediting rates and lower average accumulation values of annuities, partially offset by the effect of appreciation on equity indexed annuities linked to the S&P 500 Index in 2006 versus depreciation in the same period a year ago. Amortization of deferred acquisition costs ("DAC") increased to $209.8 million for the six months ended June 30, 2006 from $197.3 million for the six months ended June 30, 2005. Continued strong growth in variable annuity products and the associated DAC balance resulted in increased DAC amortization. DAC amortization also increased as a result of an adjustment of $4.7 million to the unearned commission balance. Partially offsetting these increases, in connection with recognizing the deferred cost of insurance revenues, the related claim liabilities and other outstanding claim liabilities were included in the calculation of estimated gross profits for variable universal life/universal life resulting in a $5.1 million reduction to DAC amortization. During the six months ended June 30, 2006 and 2005, IDS Life incurred $55.4 million and $25.8 million, respectively, in separation costs. Separation costs incurred during the first half of 2006 primarily related to marketing and rebranding and technology costs, while separation costs in 2005 were primarily comprised of marketing and rebranding, technology costs and advisor and other retention programs. Other insurance and operating expenses increased $30.9 million or 11% primarily reflecting increased business reinvestment initiatives, compensation costs and corporate overhead expenses, as well as increased non-deferrable distribution costs, due in part to higher variable annuity sales. Income Taxes IDS Life's effective tax rate was 29% for the six months ended June 30, 2006 compared to 30% for the six months ended June 30, 2005. The lower effective tax rate primarily reflects higher tax-advantaged items compared to pretax income in the six months of 2006 compared to the same period a year ago. 11 LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of IDS Life are generally met by funds provided by investment income, maturities and periodic repayments of investments, deposits, premiums and proceeds from sales of investments, as well as capital contributions from Ameriprise Financial. The primary uses of funds are surrenders and other benefits, commissions, other product-related acquisition and sales inducement costs, operating expenses, policy loans, dividends to Ameriprise Financial and investment purchases. IDS Life routinely reviews its sources and uses of funds in order to meet its ongoing obligations. In connection with the separation, IDS Life received a capital contribution of $650 million from Ameriprise Financial during the third quarter of 2005 to support its financial strength ratings and to cover separation costs. On May 15, 2006, IDS Life paid an extraordinary dividend of $100 million to Ameriprise Financial. Prior to the payment of this dividend, IDS Life made the required advance notice to the Minnesota Department of Commerce, its primary state regulator, and received a response from them stating that they did not object to the payment of this dividend. IDS Life of New York and American Centurion Life paid dividends to IDS Life Insurance Company on June 19, 2006 of $23 million and $2 million, respectively. Effective June 30, 2006, IDS Life has available a committed line of credit with Ameriprise Financial aggregating $200 million. At June 30, 2006 there were no amounts outstanding on this line of credit. At June 30, 2006 and December 31, 2005, IDS Life had outstanding reverse repurchase agreements totaling $106.4 million and $25.0 million, respectively. Both the line of credit and reverse repurchase agreements are used strictly as short-term sources of funds. IDS Life Insurance Company and its wholly-owned life insurance subsidiaries are subject to regulatory capital requirements. Actual capital, determined on a statutory basis, and regulatory capital requirements, based on the most recent statutory risk-based capital filings for each of the life insurance entities, are as follows:
REGULATORY CAPITAL ACTUAL CAPITAL AS OF (a) REQUIREMENT ----------------------------------- ------------------ JUNE 30, DECEMBER 31, DECEMBER 31, 2006 2005 2005 -------------- ------------- ------------------ (IN THOUSANDS) IDS Life Insurance Company.......................... $ 3,382,370 $ 3,270,285 $ 750,975 American Enterprise Life Insurance Company.......... 565,009 583,303 125,285 IDS Life Insurance Company of New York.............. 239,052 246,001 39,880 American Partners Life Insurance Company............ 73,199 67,884 10,906 American Centurion Life Assurance Company........... 65,167 61,748 12,654
(a) Actual capital, as defined by the National Association of Insurance Commissioners for purposes of meeting regulatory capital requirements, includes statutory capital and surplus, plus certain statutory valuation reserves. FORWARD-LOOKING STATEMENTS This report includes forward-looking statements, which are subject to risks and uncertainties. The words "believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. IDS Life undertakes no obligation to update or revise any forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: the success, timeliness and financial impact (including the amount of intercompany costs allocated to IDS Life, cost savings and other benefits including increased revenues), both in the short-term and over time, of reengineering initiatives being implemented or considered by Ameriprise Financial that could impact IDS Life, including cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation and outsourcing (including, among others, technologies operations); the ability to control and manage operating infrastructure, advertising and promotion expenses as business expands or changes; the ability to attract and retain high-quality personnel; a downturn in IDS Life's businesses and/or negative 12 changes in IDS Life's credit or financial strength ratings, which could result in decreased liquidity, negative impact on marketing and sale of products, and higher borrowing costs; IDS Life's ability to improve investment performance and reduce outflows of invested funds; IDS Life's ability to develop and introduce new and attractive products to clients in a timely manner and effectively manage the economics in selling a growing volume of non-proprietary mutual funds and other retail financial products to clients; fluctuation in the equity and fixed income markets, which can affect the amount and types of investment products sold by IDS Life, and other fees received based on the value of those assets; IDS Life's ability to recover DAC, as well as the timing of such DAC amortization, in connection with the sale of annuity and insurance products; the level of GMDB or living benefits paid to clients; changes in assumptions relating to DAC, which could impact the amount of DAC amortization; IDS Life's ability to avoid deterioration in its high-yield portfolio in order to mitigate losses in its investment portfolio; fluctuations in interest rates, which impact IDS Life's borrowing costs, return on lending products and spreads in the insurance and annuity products; accuracy of estimates for the fair value of the assets in IDS Life's investment portfolio and, in particular, those investments that are not readily marketable; the potential negative effect on IDS Life's businesses and infrastructure, including information technology, terrorist attacks, disasters or other catastrophic events in the future; changes in laws or government regulations, including changes in tax laws or regulations that could result in the elimination of certain tax benefits; outcomes and costs associated with litigation and compliance and regulatory matters; successfully cross-selling insurance and annuity products and services to Ameriprise Financial's customer base; lower than anticipated spreads in the insurance and annuity business; the type and the value of certain benefit features on variable annuity contracts; the effect of assessments and other surcharges for guaranty funds; the response of reinsurance companies under reinsurance contracts; the impact of the separation of Ameriprise Financial from American Express; the impact of reinsurance rates and the availability and adequacy of reinsurance; and competitive pressures in IDS Life's business. A further description of these and other risks and uncertainties can be found under "Item 1A - Risk Factors" and elsewhere in IDS Life's Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 10, 2006 and its other reports filed with the Securities and Exchange Commission. 13 ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES IDS Life maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ("the Exchange Act")) designed to provide reasonable assurance that the information required to be reported in the Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission, including controls and procedures designed to ensure that this information is accumulated and communicated to IDS Life's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosure. IDS Life's management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of IDS Life's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, IDS Life's Chief Executive Officer and Chief Financial Officer have concluded that IDS Life's disclosure controls and procedures were effective at a reasonable level of assurance as of June 30, 2006. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in IDS Life's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, IDS Life's internal control over financial reporting. PART II . OTHER INFORMATION Item 1. Legal Proceedings The information set forth in Note 7 to the Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference. Item 1A. Risk Factors There have been no material changes in the risk factors provided in Part I, Item 1A of IDS Life's Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 10, 2006. Item 6. Exhibits The list of exhibits required to be filed as exhibits to this report are listed on page E-1 hereof, under "Exhibit Index," which is incorporated herein by reference. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDS LIFE INSURANCE COMPANY -------------------------- (Registrant) Date: August 9, 2006 By /s/ Mark E. Schwarzmann ------------------------------------ Mark E. Schwarzmann Director, Chairman of the Board and Chief Executive Officer Date: August 9, 2006 By /s/ Brian J. McGrane ------------------------------------ Brian J. McGrane Executive Vice President and Chief Financial Officer 15 EXHIBIT INDEX The following exhibits are filed as part of this Quarterly Report: EXHIBIT DESCRIPTION --------- -------------------------------------------------------------- * 31.1 Certification of Mark E. Schwarzmann pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. * 31.2 Certification of Brian J. McGrane pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. * 32.1 Certification of Mark E. Schwarzmann and Brian J. McGrane pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed electronically herewith. E-1