UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
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
incorporation or organization) Identification No.)
829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
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.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations -
Three months ended June 30, 2003 and 2002 3
Consolidated Statements of Operations -
Six months ended June 30, 2003 and 2002 4
Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index E-1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands)
(unaudited)
Three months ended
June 30,
2003 2002
Revenues:
Contractholder charges $ 1,995 $ 1,740
Mortality and expense risk fees 3,063 3,394
Net investment income 92,194 70,719
Net realized loss on investments (892) (3,642)
---- ------
Total revenues 96,360 72,211
------ ------
Benefits and expenses:
Interest credited on investment contracts and
universal life-type insurance 65,262 50,290
Amortization of deferred policy acquisition costs 14,326 11,000
Other insurance and operating expenses 20,239 27,395
------ ------
Total benefits and expenses 99,827 88,685
------ ------
Loss before income tax benefit (3,467) (16,474)
Income tax benefit (1,215) (5,752)
------ ------
Net loss $(2,252) $(10,722)
======= ========
See accompanying notes to consolidated financial statements.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands)
(unaudited)
Six months ended
June 30,
2003 2002
Revenues:
Contractholder charges $ 3,786 $ 2,888
Mortality and expense risk fees 5,763 6,813
Net investment income 178,529 139,850
Net realized gain (loss) on investments 25,257 (3,560)
------ ------
Total revenues 213,335 145,991
------- -------
Benefits and expenses:
Interest credited on investment contracts and
universal life-type insurance 126,434 98,995
Amortization of deferred policy acquisition costs 28,305 20,706
Other insurance and operating expenses 32,452 43,312
------ ------
Total benefits and expenses 187,191 163,013
------- -------
Income (loss) before income tax expense (benefit) 26,144 (17,022)
Income tax expense (benefit) 9,145 (5,877)
----- ------
Net income (loss) $ 16,999 $(11,145)
======== ========
See accompanying notes to consolidated financial statements.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except par value and share amounts)
June 30, December 31,
2003 2002
(Unaudited)
ASSETS
Investments:
Fixed maturity Available-for-Sale securities,
at fair value (amortized cost:
2003, $6,450,062; 2002, $5,105,431) $6,695,661 $5,288,855
Mortgage loans on real estate
(less reserves: 2003, $7,927; 2002, $6,082) 548,558 587,535
Other investments 5,370 2,381
----- -----
Total investments 7,249,589 5,878,771
Cash and cash equivalents 84,468 1,118,692
Amounts due from brokers 574 2,775
Accrued investment income 62,400 53,673
Deferred policy acquisition costs 312,936 260,577
Other assets 18,934 17,471
Separate account assets 799,776 694,771
------- -------
Total assets $8,528,677 $8,026,730
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities
and universal life-type insurance $6,598,893 $5,411,954
Policy claims and other
policyholders' funds 20,950 9,050
Amounts due to brokers 116,228 985,081
Deferred income taxes 49,017 17,608
Other liabilities 62,868 82,453
Separate account liabilities 799,776 694,771
------- -------
Total liabilities 7,647,732 7,200,917
--------- ---------
Stockholder's equity:
Capital stock, $150 par value per share;
100,000 shares authorized, 20,000 shares
issued and outstanding 3,000 3,000
Additional paid-in capital 591,872 591,872
Retained earnings 156,915 139,916
Other comprehensive income (loss), net of tax:
Net unrealized securities gains 140,175 104,259
Net unrealized derivative losses (11,017) (13,234)
------- -------
Accumulated other comprehensive income 129,158 91,025
------- ------
Total stockholder's equity 880,945 825,813
------- -------
Total liabilities and stockholder's equity $8,528,677 $8,026,730
========== ==========
See accompanying notes to consolidated financial statements.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Six months ended
June 30,
2003 2002
Cash flows from operating activities:
Net income (loss) $ 16,999 $ (11,145)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Change in accrued investment income (8,727) (2,716)
Change in other assets (1,463) 8,527
Change in deferred policy
acquisition costs, net (59,286) (21,184)
Change in policy claims and other
policyholders' funds 11,900 10,390
Deferred income taxes 10,878 (13,727)
Change in other liabilities (19,585) (8,762)
Amortization of premium, net 10,590 127
Net realized (gain) loss on investments (25,257) 3,560
Other 3,501 5,771
----- -----
Net cash used in operating activities (60,450) (29,159)
------- -------
Cash flows from investing activities:
Fixed maturity Available-for-Sale securities:
Sales 1,539,712 470,898
Maturities, sinking fund payments and calls 454,320 242,841
Purchases (3,322,928) (1,163,750)
Other investments:
Sales 41,268 36,147
Purchases (6,433) (2,691)
Change in amounts due to and from brokers, net (866,652) 18,828
-------- ------
Net cash used in investing activities (2,160,713) (397,727)
---------- --------
Cash flows from financing activities:
Activity related to investment contracts
and universal life-type insurance:
Considerations received 1,387,425 593,172
Interest credited to account balances 126,434 98,995
Surrenders and death benefits (326,920) (287,734)
-------- --------
Net cash provided by financing activities 1,186,939 404,433
--------- -------
Net decrease in cash and cash equivalents (1,034,224) (22,453)
Cash and cash equivalents at beginning of period 1,118,692 260,214
--------- -------
Cash and cash equivalents at end of period $ 84,468 $ 237,761
=========== ===========
See accompanying notes to consolidated financial statements.
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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 (the Company) for the year
ended December 31, 2002. Certain reclassifications of prior period amounts
have been made to conform to the current presentation.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair presentation
of the consolidated financial position and the consolidated results of
operations for the interim periods have been made. All adjustments made were
of a normal, recurring nature. Results of operations reported for interim
periods are not necessarily indicative of results for the entire year.
Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). The accounting
provisions and expanded disclosure requirements for VIEs are effective at
inception for VIEs created after January 31, 2003, and are effective for
reporting periods beginning after June 15, 2003, for VIEs created prior to
February 1, 2003. The adoption of FIN 46 is not expected to have a material
impact on the Company's financial statements. However, the Company continues
to evaluate all relationships and interests in entities that may be
considered VIEs as detailed interpretations of FIN 46 continue to emerge.
In April 2003, the FASB issued Statement of Financial Accounting Standards
Board (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." The Statement amends and clarifies accounting for
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The Statement is effective for contracts
entered into or modified and hedging relationships designated after June 30,
2003, and to certain preexisting contracts. The adoption of this Statement
is not expected to have a material impact on the Company's financial
statements.
In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). The Company is currently evaluating its
impact, which, among other provisions, requires reserves related to
guaranteed minimum death benefits (GMDBs) included within the variable
annuity contracts offered by the Company. SOP 03-1 is required to be adopted
on January 1, 2004.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. Investment Securities
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $4
million and $5 million for the three months ended June 30, 2003 and 2002,
respectively. Gross realized losses on sales of securities classified as
Available-for-Sale were ($1 million) and ($0.3 million) for the three months
ended June 30, 2003 and 2002, respectively. The Company also recognized
other-than-temporary impairment losses on Available-for-Sale securities of
($3 million) and ($8 million) for the three months ended June 30, 2003 and
2002, respectively.
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $45
million and $12 million for the six months ended June 30, 2003 and 2002,
respectively. Gross realized losses on sales of securities classified as
Available-for-Sale were ($9 million) and ($5 million) for the six months
ended June 30, 2003 and 2002, respectively. The Company also recognized
other-than-temporary impairment losses on Available-for-Sale securities of
($9 million) and ($8 million) for the six months ended June 30, 2003 and
2002, respectively.
3. Comprehensive Income
Comprehensive income is defined as the aggregate change in stockholders'
equity, excluding changes in ownership interests. It is the sum of net
income and changes in unrealized gains or losses on Available-for-Sale
securities, net of related tax and applicable deferred policy acquisition
costs, and unrealized gains or losses on derivatives, net of related tax.
Total comprehensive income was $41 million and $45 million for the three
months ended June 30, 2003 and 2002, respectively. Total comprehensive
income was $55 million and $21 million for the six months ended June 30,
2003 and 2002, respectively. The difference between net income and total
comprehensive income for these periods is primarily the result of the change
in net unrealized gains on Available-for-Sale securities.
4. Taxes and interest
Cash paid for income taxes totaled $14 million and $24 million for the six
months ended June 30, 2003 and 2002, respectively. Cash paid for interest on
borrowings was $5 thousand and $0 for the six months ended June 30, 2003 and
2002, respectively.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Commitments and contingencies
Commitments to fund mortgage loan investments in the ordinary course of
business at June 30, 2003 aggregated $20 million.
The maximum amount of life insurance risk retained by the Company is
$750,000 on any single life. Risk not retained is reinsured with other life
insurance companies on a yearly renewable term basis. The Company retains
all accidental death benefit and waiver of premium risk. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business. The outcome of any litigation or threatened
litigation cannot be predicted with any certainty. However, in the
aggregate, the Company does not consider any lawsuits in which it is named
as a defendant to have a material impact on the Company's financial position
or operating results.
The variable annuity contracts offered by the Company contain guaranteed
minimum death benefit (GMDB) provisions. To the extent that the GMDB is
higher than the current account value at the time of death, a cost is
incurred by the issuer of the policy. Current accounting literature does not
prescribe advance recognition of the projected future net costs associated
with these guarantees, and accordingly, the Company currently does not
record a liability corresponding to these future obligations for death
benefits in excess of annuity account value. At present, the amount paid in
excess of contract value is expensed when payable. Amounts expensed for the
six months ended June 30, 2003 and 2002, were $2 million and $1 million,
respectively. The Company also issues certain variable annuity contracts
that contain a guaranteed minimum income benefit (GMIB) feature which, if
elected by the contract owner and after a stipulated waiting period from
contract issuance, guarantees a minimum lifetime annuity based on
predetermined annuity purchase rates. To date, the Company has not expensed
any amount related to GMIBs. As discussed in Note 1, SOP 03-1, which was
issued by the AICPA in July 2003 with a required adoption date of January 1,
2004, will require reserves related to GMDBs. The impact of that
requirement, as well as other provisions of SOP 03-1, is being evaluated.
The Company's annuity products all have minimum interest rate guarantees in
their fixed accounts. These guarantees range from 3% to 4.5%. To the extent
the yield on the Company's invested asset portfolio declines below its
target spread plus the minimum guarantee, the Company's profitability would
be negatively affected.
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AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The IRS routinely examines the Company's federal income tax returns and is
currently conducting an audit for the 1993 through 1996 tax years.
Management does not believe there will be a material adverse effect on the
Company's consolidated financial position as a result of these audits.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American Enterprise Life Insurance Company (the "Company") is a stock life
insurance company organized under the laws of the State of Indiana. The Company
is a wholly owned subsidiary of IDS Life Insurance Company ("IDS Life"), a
Minnesota corporation. IDS Life is a wholly owned subsidiary of American Express
Financial Corporation ("AEFC"). AEFC is a wholly owned subsidiary of American
Express Company. The Company provides financial institution clients American
Express branded financial products and services to support their retail
insurance and annuity operations. The Company issues variable life insurance and
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 and New Hampshire. American Enterprise REO 1, LLC is a
wholly owned subsidiary of the Company. This subsidiary holds real estate
investments and/or mortgage loans on real estate.
The Company follows accounting principles generally accepted in the United
States (GAAP).
Results of Operations for the Three Months Ended June 30, 2003 and 2002
Net loss was $2 million for the three months ended June 30, 2003, compared to a
net loss of $11 million for the three months ended June 30, 2002. The decrease
in the Company's net loss reflects increased investment income due to higher
investment levels, partially offset by an increase in interest credited on
investment contracts and universal life-type insurance.
Premiums and investment contract deposits totaled $878 million for the three
months ended June 30, 2003, compared to $379 million for the three months ended
June 30, 2002. This growth is due to relatively strong cash sales of both fixed
annuities and fixed account portions of the Company's variable annuities.
Contractholder charges increased 15 percent to $2.0 million for the three months
ended June 30, 2003, compared with $1.7 million for the three months ended June
30, 2002, due primarily to an increase in variable annuity contract surrender
charges.
Mortality and expense risk fees decreased 10 percent to $3.1 million for the
three months ended June 30, 2003 compared with $3.4 million for the three months
ended June 30, 2002.
Net investment income increased to $92 million for the three months ended June
30, 2003 compared with $71 million for the same period last year. This increase
was primarily due to a higher level of investments, partially offset by lower
average yields.
Net realized loss on investments was ($1 million) for the three months ended
June 30, 2003 compared to a net loss of ($4 million) for the three months ended
June 30, 2002. For the three month period ended June 30, 2003, $4 million of
total investment gains were more than offset by ($5 million) of impairments and
losses. Included in these total investment gains and losses are $4 million of
gross realized gains and ($1 million) of
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gross realized losses from sales of securities, as well as ($3 million) of
other-than-temporary investment impairment losses, classified as
Available-for-Sale.
For the three month period ended June 30, 2002, $5.0 million of total investment
gains were more than offset by ($9 million) of impairments and losses. Included
in these total investment gains and losses are $5 million of gross realized
gains and ($0.3 million) of gross realized losses from sales of securities, as
well as ($8 million) of other-than-temporary investment impairment losses,
classified as Available-for-Sale.
Total benefits and expenses were $99.8 million, an increase of 13 percent from
the three months ended June 30, 2002. This increase reflects higher interest
credited on investment contracts and universal life-type insurance, which
increased 30 percent to $65 million. This was primarily due to higher aggregate
amounts of fixed annuities in force, partially offset by a decrease in the rate
of interest credited to annuity contracts due to the relatively low interest
rate environment.
Other insurance and operating expenses declined $7 million or 26 percent. The
decrease reflects comparatively more favorable market value adjustments on
interest rate swaps during 2003.
Amortization of deferred policy acquisition costs (DAC) increased to $14 million
for the three months ended June 30, 2003, compared to $11 million for the three
months ended June 30, 2002. The increase was primarily due to third quarter 2002
changes in assumed customer asset value growth rates.
Results of Operations for the Six Months Ended June 30, 2003 and 2002
Net income was $17 million for the six months ended June 30, 2003, compared to a
net loss of $11 million for the six months ended June 30, 2002. The increase in
net income primarily reflects increased investment income due to higher
investment levels and increased net realized gains partially offset by increased
interest credited on annuity contracts and the impact of lower average
investment yields.
Premiums and investment contract deposits totaled $1.4 billion for the six
months ended June 30, 2003, compared to $651 million for the six months ended
June 30, 2002. This growth is due to a significant increase in annuity sales,
both fixed and variable, particularly in the fixed account portion of the
Company's variable annuities.
Contractholder charges increased 31 percent to $3.8 million for the six months
ended June 30, 2003, compared with $2.9 million for the six months ended June
30, 2002, due primarily to an increase in variable annuity contract surrender
charges.
Mortality and expense risk fees decreased 15 percent to $5.8 million for the six
months ended June 30, 2003 compared with $6.8 million for the six months ended
June 30, 2002.
Net investment income increased to $179 million for the six months ended June
30, 2003 compared with $140 million for the same period last year. This increase
was primarily due to higher average fixed maturity security portfolio balances
in 2003 partially offset by the impact of lower average yields.
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Net realized gain on investments was $25 million for the six months ended June
30, 2003 compared to a net loss of $4 million for the six months ended June 30,
2002. For the six month period ended June 30, 2003, $45 million of total
investment gains were partially offset by $20 million of impairments and losses.
Included in these total investment gains and losses are $45 million of gross
realized gains and $9 million of gross realized losses from sales of securities,
as well as $9 million of other-than-temporary investment impairment losses,
classified as Available-for-Sale.
For the six month period ended June 30, 2002, $12 million of total investment
gains were more than offset by ($16 million) of impairments and losses. Included
in these total investment gains and losses are $12 million of gross realized
gains and ($5 million) of gross realized losses from sales of securities, as
well as ($8 million) of other-than-temporary investment impairment losses,
classified as Available-for-Sale.
Total benefits and expenses were $187 million, an increase of 15 percent from
the six months ended June 30, 2002. This increase reflects higher interest
credited on investment contracts and universal life-type insurance, which
increased 28 percent to $126 million. This was primarily due to higher aggregate
amounts of fixed annuities in force, partially offset by a decrease in the rate
of interest credited to annuity contracts due to the relatively low interest
rate environment.
Other insurance and operating expenses declined $11 million or 25 percent. The
decrease reflects comparatively more favorable market value adjustments on
interest rate swaps during 2003.
Amortization of deferred policy acquisition costs (DAC) increased to $28 million
for the six months ended June 30, 2003, compared to $21 million for the six
months ended June 30, 2002. The expense growth was primarily due to third
quarter 2002 changes in assumed customer asset value growth rates.
Deferred policy acquisition costs
The costs of acquiring new business, including, for example, direct sales
commissions, policy issue costs and other related costs have been deferred on
the sale of annuity contracts. Deferred policy acquisition costs (DAC) for
certain annuities are amortized as a percentage of the estimated gross profits
expected to be realized on the policies. DAC for other annuities are amortized
using the interest method.
Amortization of DAC requires the use of certain assumptions including interest
margins, persistency rates, maintenance expense levels and customer asset value
growth rates for variable annuities. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. This rate
is net of asset fees, and anticipates a blend of equity and fixed income
investments. Management routinely monitors a wide variety of trends in the
business including comparisons of actual and assumed experience. Management
reviews and, where appropriate, adjusts its assumptions with respect to customer
asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality, interest margin and maintenance expense level assumptions, each
quarter. Unless
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management identifies a material deviation over the course of the quarterly
monitoring process, management reviews and updates these DAC assumptions
annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change in
the required amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization while
a decrease in amortization percentage will result in a deceleration of DAC
amortization. The impact on results of operations of changing assumptions with
respect to the amortization of DAC can be either positive or negative in any
particular period, and is reflected in the period that such changes are made.
DAC of $313 million related to annuities was on the Company's consolidated
balance sheet at June 30, 2003.
Impact of Recent Market-Volatility on Results of Operations
Various aspects of the Company business are impacted by equity market levels and
other market-based events. Three areas in particular involve DAC, mortality and
expense risk fees and structured investments. The direction and magnitude of the
changes in equity markets can increase or decrease DAC expense levels and
mortality and expense risk fees and correspondingly affect results of operations
in any particular period. Similarly, the value of the Company's structured
investment portfolio 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.
Another area impacted by market-based events is guaranteed minimum death
benefits (GMDBs). The variable annuity contracts offered by the Company contain
guaranteed minimum death benefit (GMDB) provisions. To the extent that the GMDB
is higher than the current account value at the time of death, a cost is
incurred by the issuer of the policy. Current accounting literature does not
prescribe advance recognition of the projected future net costs associated with
these guarantees, and accordingly, the Company currently does not record a
liability corresponding to these future obligations for death benefits in excess
of annuity account value. At present, the amount paid in excess of contract
value is expensed when payable. Amounts expensed for the six months ended June
30, 2003 and 2002, were $2 million and $1 million, respectively. The Company
also issues certain variable annuity contracts that contain a guaranteed minimum
income benefit (GMIB) feature which, if elected by the contract owner and after
a stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates. To date, the
Company has not expensed any amount related to GMIBs. In July 2003, the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1)
which requires reserves related to GMDBs. The impact of that requirement as well
as other provisions of SOP 03-1 are currently being evaluated.
The Company's annuity products all have minimum interest rate guarantees in
their fixed accounts. These guarantees range from 3% to 4.5%. To the extent the
yield on the
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Company's invested asset portfolio declines below its target spread plus the
minimum guarantee, the Company's profitability would be negatively affected.
Liquidity and Capital Resources
The liquidity requirements of the Company are generally met by funds provided by
annuity considerations, capital contributions, investment income, proceeds from
sales of investments as well as maturities and periodic repayments of investment
principal. The primary uses of funds are annuity obligations, commissions and
operating expenses and investment purchases. The Company routinely reviews its
sources and uses of funds in order to meet its ongoing obligations.
The Company has an available line of credit with AEFC aggregating $50 million.
The line of credit is used strictly as a short-term source of funds. No
borrowings were outstanding under the agreement at June 30, 2003. The Company
also, from time to time, uses reverse repurchase agreements for short term
liquidity needs. There were no outstanding reverse repurchase agreements at June
30, 2003.
At June 30, 2003, based on amortized cost, approximately 4 percent of the
Company's investments in fixed maturities were below investment grade bonds.
These investments may be subject to a higher degree of risk than the investment
grade issues because of the borrower's generally greater sensitivity to adverse
economic conditions, such as recession or increasing interest rates, and in
certain instances, the lack of an active secondary market. Expected returns on
below investment grade bonds reflect consideration of such factors. The Company
has identified those fixed maturities for which a decline in fair value is
determined to be other than temporary, and has written them down to fair value
with a charge to earnings. Additionally, the Company had a reserve for losses on
mortgage loans of $8 million at June 30, 2003.
During 2001, the Company placed its rated CDO securities and related accrued
interest, (collectively referred to as transferred assets), having an aggregate
book value of $54 million, into a securitization trust. In return, the Company
received $7 million in cash (excluding transaction expenses) relating to sales
to unaffiliated investors and retained interests in the trust with allocated
book amounts aggregating $47 million. As of June 30, 2003, the retained
interests had a carrying value of $42 million, of which $31 million is
considered investment grade. The Company has no obligations, contingent or
otherwise, to such unaffiliated investors. One of the results of this
transaction is that increases or decreases in future cash flows of the
individual CDOs are combined into one overall cash flow for purposes of
determining the carrying value of the retained interests and related impact on
results of operations.
OTHER REPORTING MATTERS
Accounting Developments
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
which addresses consolidation by business enterprises of variable interest
entities (VIEs). Certain disclosures are required for financial statements
issued after January 31, 2003 and are
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addressed in Note 1 to the Consolidated Financial Statements. The impact of
adopting FIN 46 on the Consolidated Financial Statements is still being
reviewed.
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This Statement amends and clarifies accounting for
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. The Statement is effective for contracts entered into or
modified and hedging relationships designated after June 30, 2003, and to
certain preexisting contracts. The Company is currently evaluating the impact of
adopting SFAS No. 149 on the Consolidated Financial Statements.
In July 2003, the AICPA issued Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts." The Company is currently evaluating its
impact, which, among other provisions, requires reserves related to GMDBs
included within its variable annuity contracts. The SOP is required to be
adopted on January 1, 2004. See Impact of Recent Market-Volatility on Results of
Operations section of Management's Discussion and Analysis for further
discussion.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company'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, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
(b) Internal Control Over Financial Reporting. There have not been any changes
in the Company'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, the Company'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," "should," "could," "likely," and similar
expressions are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. The Company 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 Company's ability to
successfully implement a business model that allows for significant earnings
growth based on revenue growth that is lower than historical levels, including
the ability to improve its operating
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expense to revenue ratio both in the short-term and over time, which will depend
in part on the effectiveness of reengineering and other cost control
initiatives, as well as factors impacting the Company's revenues; the Company's
ability to grow its business over time, which will depend on the Company's
ability to manage its capital needs and the effect of business mix, and rating
agency requirements; the ability to increase investment spending, which will
depend in part on the equity markets and other factors affecting revenues, and
the ability to capitalize on such investments to improve business metrics; the
accuracy of certain critical accounting estimates, including, the fair value of
the assets in the Company's investment portfolio (including those investments
that are not readily marketable); fluctuation in the equity and fixed income
markets, which can affect the amount and types of investment products sold, the
market value of its managed assets, management, distribution and other fees
received based on the value of those assets, the Company's ability to recover
DAC as well as the timing of such DAC amortization, in connection with the sale
of annuity and insurance products, and the level of guaranteed minimum death
benefits paid to clients; changes in assumptions relating to DAC, which could
impact the amount of DAC amortization; potential deterioration in the Company's
high-yield and other investments, which could result in further losses in the
investment portfolio; the ability to sell certain high-yield investments at
expected values and within anticipated timeframes and to maintain its high-yield
portfolio at certain levels in the future; the types and 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 the Company against losses; a downturn in the
Company's business and/or negative changes in the Company's and its
subsidiaries' claims-paying ability and other ratings, which could negatively
impact sales; increasing competition in all of the Company's major lines of
business; fluctuations in interest rates, which impact the Company's spreads,
credit trends and the rate of bankruptcies, which can affect returns on the
Company's investment portfolios; changes in laws or government regulations,
including tax laws affecting the Company's business or that may affect the sales
of the Company's products, and regulatory activity in the areas of customer
privacy, consumer protection, business continuity and data protection; the
adoption of recently issued accounting rules related to the consolidation of
variable interest entities, including those involving CDOs and SLTs that the
Company invests in, which could affect both the Company's balance sheet and
results of operations; and outcomes and costs associated with litigation and
compliance and regulatory matters.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business. The outcome of any litigation or
threatened litigation cannot be predicted with any certainty. However,
in the aggregate, the Company does not consider any lawsuits in which
it is named as a defendant to have a material impact on the Company's
financial position or operating results.
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Item 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K.
Form 8-K, filed April 21, 2003, Item 5, reporting that on April 15,
2003 American Enterprise Life Insurance Company appointed Jeryl A.
Millner, Vice President and Controller. Ms. Millner will act as the
Company's Principal Accounting Officer. She succeeds Philip C. Wentzel,
who was recently appointed Vice President, Business Planning & Analysis
for American Express Financial Corporation, IDS Life Insurance
Company's parent. On April 17, 2003 John T. Sweeney was appointed Vice
President-Finance for the Company. Mr. Sweeney will act as the
Company's Principal and Chief Financial Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
(Registrant)
Date: August 13, 2003 By /s/ John T. Sweeney
----------------------
John T. Sweeney
Executive Vice President -Finance
and Chief Financial Officer
Date: August 13, 2003 By /s/ Carol A. Holton
---------------------
Carol A Holton
Chief Executive Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
31.1 Certification of Carol A. Holton pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
31.2 Certification of John T. Sweeney pursuant to Rule 13a-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Carol A. Holton pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of John T. Sweeney pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
E-1