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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ______ No __X__
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a)
and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
Form 10-K
Item Number
Page
PART I
1. Business................................................................1
Introduction.......................................................1
Regulation.........................................................1
Ratings............................................................1
Risk Based Capital.................................................2
The General Account................................................2
The Variable Accounts..............................................3
Annuities: Product Features and Risks.............................4
Variable Annuities.................................................4
Fixed Annuities....................................................4
Annuity Risks......................................................4
Insurance: Product Features and Risks.............................5
Variable Life Insurance............................................5
Insurance Risks....................................................6
2. Properties..............................................................6
3. Legal Proceedings.......................................................6
4. Submission of Matters to a Vote of Security Holders.....................6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...6
6. Selected Financial Data.................................................6
7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.....................................7
7A. Quantitative and Qualitative Disclosures About Market Risk..............15
8. Financial Statements and Supplementary Data.............................15
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................15
9A. Controls and Procedures.................................................16
PART III
14. Principal Accountant Fees and Services..................................16
PART VI
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........17
Signatures..............................................................18
Index to Financial Statements...........................................F-1
Exhibit Index...........................................................E-1
PART I
ITEM 1. BUSINESS
Introduction
American Enterprise Life Insurance Company ("American Enterprise Life") is a
stock life insurance company organized under the laws of the State of Indiana.
American Enterprise Life 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. American Enterprise Life provides
financial institution clients American Express branded financial products and
services to support their retail insurance and annuity operations. American
Enterprise Life 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. During 2003, American Enterprise Life continued to expand its
network of third-party distributors and its range of variable annuity products
offered through them, resulting in strong third-party sales efforts. American
Enterprise Life improved its competitive position during 2003, increasing market
share, substantially adding to its client base, and further broadening its
variable annuity product lineup. American Enterprise Life also expanded and
strengthened its distribution and technology capability. American Enterprise
Life competes directly with several other insurers in the third-party
distribution channel. American Enterprise Life's 2003 sales decreased slightly
to $1.9 billion from the $2.2 billion of record-setting sales in 2002. American
Enterprise REO 1, LLC is a wholly owned subsidiary of American Enterprise Life.
This subsidiary holds real estate investments and/or mortgage loans on real
estate.
Regulation
American Enterprise Life is subject to comprehensive regulation by the Indiana
Department of Insurance. The laws of the other states in which American
Enterprise Life does business also regulate such matters as the licensing of
sales personnel and, in many cases, the marketing and contents of insurance
policies and annuity contracts. The primary purpose of such regulation and
supervision is to protect the interests of contract owners.
Regulatory scrutiny of market conduct practices of insurance companies,
including sales, marketing and replacements of life insurance and annuities and
"bonus" annuities, and market timing and late trading under variable products
has increased significantly in recent years and is affecting the manner in which
companies approach various operational issues, including compliance. The number
of private lawsuits alleging violations of laws in connection with insurance and
annuity market conduct has increased (see "Legal Proceedings" section herein).
On the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuities and life insurance policies, accounting procedures, as well as the
treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an insurance contract. New federal regulation
in any of these areas could potentially have an adverse effect upon American
Enterprise Life.
Ratings
American Enterprise Life had consolidated assets at December 31, 2003 of
approximately $8.7 billion, based on accounting principles generally accepted in
the United States ("GAAP") and reported total statutory capital and surplus at
December 31, 2003 of $495.8 million, on a statutory accounting basis.
American Enterprise Life receives ratings from independent rating agencies.
Generally, American Enterprise Life does not receive an individual rating, but
receives the same rating as IDS Life. These agencies evaluate the financial
soundness and claims-paying ability of insurance companies based on a
number of different factors. The ratings relate to American Enterprise Life's
general account and not to the variable accounts. This information generally
does not relate to the management or performance of the variable subaccounts of
the contracts.
Ratings are important to maintaining public confidence in American Enterprise
Life and its ability to market its annuity and life insurance products. Lowering
of American Enterprise Life ratings could have a material adverse effect on
American Enterprise Life's ability to market products and could lead to
increased surrenders of American Enterprise Life's products. Rating agencies
continually review the financial performance and condition of insurers. Also,
the rating agencies have a variety of policies and practices regarding the
relationships among ratings of affiliated entities. As such, the ratings of
American Enterprise Life could be affected by changes in ratings of IDS Life
and/or American Express Company. As of the end of 2003, American Enterprise Life
was rated "A+" (Superior) by A.M. Best Company, Inc. and its claims-paying
ability/financial strength was rated "Aa3" (Excellent) by Moody's Investors
Service, Inc. (Moody's), and "AA" (Very Strong) by Fitch.
The foregoing ratings reflect each rating agency's opinion of American
Enterprise Life's financial strength, operating performance and ability to meet
its obligations to contract owners. Such factors are of primary concern to
contract owners, agents and intermediaries, but also may be of interest to
investors.
Risk Based Capital
The National Association of Insurance Commissioners ("NAIC") adopted Risk Based
Capital ("RBC") requirements for life insurance companies. The RBC requirements
are to be used as minimum capital requirements by the NAIC and states to
identify companies that merit further regulatory action. At December 31, 2003,
American Enterprise Life had total adjusted capital of approximately $543.4
million on a statutory accounting basis. As defined by the NAIC, total adjusted
capital includes certain asset valuation reserves excluded from the $495.8
million of statutory capital and surplus referred to above. The Insurance
Department of the State of Indiana, American Enterprise Life's insurance
regulator, requires insurance companies to maintain a minimum RBC called the
"authorized control level." If total adjusted capital fell below the authorized
control level, the Insurance Department of the State of Indiana would be
authorized to exercise management control over American Enterprise Life. For
American Enterprise Life, the authorized control level capital was $92.1 million
at December 31, 2003.
In addition, American Enterprise Life, like other life insurance companies, is
expected to maintain capital at a level above which would require a company to
file an action plan with the Insurance Department of the State of Indiana. This
is referred to as the "company action level." For American Enterprise Life, the
company action level capital was $184.2 million at December 31, 2003.
As described above, American Enterprise Life maintains levels of RBC far in
excess of the authorized control and company action levels required by the
Insurance Department of the State of Indiana. The level of capital maintained in
American Enterprise Life is thought to be appropriate by management and is more
commensurate with standards necessary to maintain American Enterprise Life's
ratings with the various credit and claims-paying rating agencies.
The General Account
Assets supporting contract values associated with fixed account annuity
products, as well as those associated with fixed account options under variable
insurance and annuity products (collectively, the "fixed accounts") are part of
an insurer's "general account." Under fixed accounts, the insurer bears the
investment risk. By investing general account assets, American Enterprise Life
seeks to maintain a dependable and targeted difference or "spread" between the
interest rate earned on general account assets and the interest rate credited to
contract owners' fixed accounts. This spread is a major driver of net income for
American Enterprise Life.
-2-
In the general account, American Enterprise Life primarily invests in fixed
maturity securities over a broad range of maturities for the purpose of
providing a targeted rate of return on its investments while controlling risk.
The majority of these fixed income securities are interest bearing investments
such as government obligations, mortgage-backed obligations and various
corporate debt instruments. American Enterprise Life does not invest in
securities to generate trading profits.
American Enterprise Life has the discretion to set the rate of interest credited
to contract owners' fixed accounts. However, this discretion is limited by the
contract's guaranteed minimum crediting interest rates ranging from 1.5% to
4.5%. The interest rates credited to contract owners' fixed accounts are
generally reset at shorter intervals than the maturity of underlying
investments. Therefore, margins may be negatively impacted by increases in the
general level of interest rates. In a low interest rate environment, such as
that experienced recently, and to the extent the yield on American Enterprise
Life's investment portfolio declines below its target spread plus the minimum
guarantee, American Enterprise Life's profitability would be negatively
affected. American Enterprise Life's investment committee deploys several
strategies to help manage risk. See the Risk Management section that follows for
more details on the investment committee and the specific strategies employed.
The Variable Accounts
Variable insurance and annuity products also offer variable account investment
options in addition to the fixed account options. Under variable accounts,
contract owners bear the investment risk. The variable accounts are registered
as unit investment trusts under the Investment Company Act of 1940.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund. Contract owners can allocate their
payments among variable subaccounts that invest in underlying mutual funds. The
underlying funds are managed both by internal and third-party money managers.
Internally managed proprietary funds for American Enterprise Life's variable
annuities include the nineteen AXP Variable Portfolio Funds. During the fourth
quarter of 2003, AEFC replaced IDS Life Insurance Company as the investment
manager of these internally managed proprietary funds. Concurrent with the
investment manager change, American Enterprise Life entered into an agreement
with AEFC to receive administrative services fees for the fund management
services, other than investment management, that American Enterprise Life
continues to provide the underlying proprietary mutual funds.
American Enterprise Life also retains third-party money managers AIM Advisors
Inc., Alliance Capital Management, L.P., American Century Investment Management,
Inc., BAMCO, INC., Credit Suisse Asset Management, LLC, Columbia Management Co.,
The Dreyfus Corporation, Evergreen Investment Management Company, LLC., Fidelity
Management & Research Company, Fleet Investments Advisor Inc.,
Franklin/Advisors, Inc., Franklin Mutual Advisors, LLC, Franklin Advisory
Services, LLC, Templeton Asset Management Ltd., Templeton Investment Counsel,
LLC, Goldman Sachs Asset Management, L.P., Goldman Sachs Asset Management
International, Janus Capital, J.P.Morgan Investment Management Inc., Lazard
Asset Management, LLC, Liberty Wanger Asset Management, L.P., MFS Investment
Management(R), MFS Institutional Advisors, Inc., Morgan Stanley Investment
Management Inc., OpCap Advisors LLC, OppenheimerFunds, Inc., Putnam Investment
Management, LLC, Royce & Associates, LLC, Stein Roe & Farnham Incorporated,
Third Avenue Management LLC, Trustco Capital Management, Inc., Van Kampen Asset
Management Inc. and Wells Fargo Funds Management, LLC.
Funds underlying the variable accounts invest in portfolios containing a variety
of securities including common stocks, bonds, managed assets and/or short-term
securities. The value of the subaccounts fluctuates with the investment return
of the funds in which the subaccounts invest.
-3-
American Enterprise Life earns fee revenues from the variable accounts related
to the underlying proprietary and non-proprietary mutual funds and mortality and
expense risk fees from variable subaccounts.
Variable annuities are "separate account" products rather than general account
products. State insurance law prohibits charging variable accounts with
liabilities of the general account business. Under the subaccounts of each
variable account, American Enterprise Life credits or charges income, capital
gains and capital losses only to that subaccount.
Annuities: Product Features and Risks
American Enterprise Life's principal products are variable and fixed deferred
annuities, which are issued to a broad range of individual consumers through
third-party distribution channels. American Enterprise Life offers single
premium and flexible premium deferred fixed annuities as well as flexible
premium deferred variable annuities. American Express Financial Advisors, Inc.'s
(an American Enterprise Life affiliate) retail sales force can offer American
Enterprise Life's variable annuities only in limited circumstances. With
deferred annuities, assets accumulate until the contract is surrendered, the
contract owner dies, or the contract owner begins receiving benefits under an
annuity payout option.
Variable Annuities
Variable annuities provide contract owners with investment returns linked to the
underlying investments the contract owner chooses. These products also offer a
fixed account with a guaranteed minimum interest crediting rate of 1.5% to 3%.
Fixed Annuities
American Enterprise Life's fixed annuities provide cash value that increases by
a fixed interest rate. The rate is periodically reset according to the terms of
the contract at the discretion of the issuer. The contracts provide a guaranteed
minimum interest crediting rate, generally 1.5% to 4.5%.
Annuity Risks
The relative proportion between fixed and variable annuities sales volumes is
generally driven by the relative performance of the equity and fixed income
markets. In times of lackluster performance in equity markets, fixed product
sales are generally stronger. In times of superior performance in equity
markets, variable product sales are generally stronger. In addition, investment
management performance is critical to the profitability of annuity business.
In past years, innovative features for variable annuity contracts have been
continually evolving. These features include minimum income guarantees and death
benefit guarantees that protect against a drop in benefits due to performance of
the related underlying investments. American Enterprise Life issues annuity
contracts with guaranteed death and income benefit features. These guarantees
are supported by general account assets. American Enterprise Life's exposure to
risk from these guarantees will generally increase when equity markets decline.
American Enterprise Life 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 that may be in excess of what the contract account value can purchase at
then-current annuity purchase rates. American Enterprise Life bears the risk
that protracted under-performance of the financial markets could result in GMIB
benefits being higher than what accumulated contract owner account balances
would support. Through December 31, 2003, American Enterprise Life had not
expensed any amount related to GMIBs as all terms on GMIB features are within
the stipulated waiting periods.
-4-
The majority of the variable annuity contracts offered by American Enterprise
Life contain guaranteed minimum death benefit ("GMDB") provisions. American
Enterprise Life's standard guaranteed minimum death benefit for annuities
provides that the beneficiary receives the greater of 1) contract value; or 2)
purchase payments minus adjusted partial surrenders. For additional protection,
contract owners may purchase optional benefits including a maximum anniversary
value death benefit and enhanced earnings death benefits. These are optional
benefits available for an additional charge. The maximum anniversary value death
benefit guarantees the death benefit will not be less than the highest contract
value achieved on a contract anniversary before the contract owner reaches the
age of 81, adjusted for partial withdrawals. The enhanced earnings death benefit
riders are intended to provide additional benefits to a beneficiary to offset
expenses after the contract owner's death. American Enterprise Life bears the
risk that protracted under-performance of the financial markets could result in
GMDB benefits being higher than what accumulated contract owner account balances
would support.
To the extent that a GMDB or GMIB is higher than the current account value at
the time of death, American Enterprise Life incurs a benefit cost. For the
results through December 31, 2003, GAAP did not prescribe advance recognition of
the projected future net costs associated with these guarantees, and
accordingly, American Enterprise Life did not record a liability corresponding
to these future obligations for death benefits in excess of annuity account
value. The amount paid in excess of contract value was expensed when payable.
Amounts expensed for the years ended December 31, 2003 and 2002 were $2.9
million and $6.4 million, respectively.
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) with an effective date of January 1, 2004. SOP 03-1 requires
insurance enterprises to establish additional liabilities for benefits that may
become payable under variable annuity death benefit guarantees or other
insurance or annuity contract provisions. Where additional liabilities are
established, the recognition of this liability may also impact the valuation and
amortization of DAC associated with those insurance or annuity contracts. SOP
03-1 also provides clarifying guidance as to the recognition of bonus interest
and other sales inducement benefits and the presentation of any deferred amounts
in the financial statements.
Detailed interpretations of SOP 03-1 and related implementation guidance
continue to emerge and, accordingly, American Enterprise Life continues to
evaluate its impact. Current estimates of applying SOP 03-1 would reduce first
quarter 2004 results by approximately $5 million (after-tax).
For long-term profitability, it is crucial to ensure adequate pricing to cover
annuity product risks, and to accumulate adequate reserves. Reserves are a
measure of the assets American Enterprise Life estimates are needed to
adequately provide for future benefits and expenses. These reserves are
discussed in more detail in the "Certain Critical Accounting Policies" section
herein.
Insurance: Product Features and Risks
American Enterprise Life issues a variable life insurance product. American
Enterprise Life has no short-duration life insurance liabilities. American
Enterprise Life issues only non-participating contracts.
Variable Life Insurance
American Enterprise Life's only life insurance sales are from variable life
insurance policies sold by third-party distributors. Variable life insurance
provides life insurance coverage along with investment returns linked to the
underlying investments the policyholder chooses. American Enterprise Life's
variable life insurance product is American Express Signature Variable Universal
Life(R) an individual flexible premium policy. This product also offers a fixed
account with a guaranteed minimum interest crediting rate of 4%.
-5-
Insurance Risks
The insurance business is highly competitive, and American Enterprise Life's
competitors consist of both stock and mutual insurance companies. Competitive
factors applicable to the insurance business include product features, interest
rates credited to products, charges deducted from the cash values of such
products, investment performance, financial strength of the organization,
distribution and management expenses, claims-paying ratings and services
provided to policyholders.
For long-term profitability, it is crucial to ensure adequate pricing to cover
insurance risks and to accumulate adequate reserves. Reserves are a measure of
the assets American Enterprise Life estimates are needed now to adequately
provide for future benefits and expenses. These reserves are also discussed in
the "Certain Critical Accounting Policies" section herein.
ITEM 2. PROPERTIES
American Enterprise Life has no employees and is charged by IDS Life for the use
of joint facilities in Minneapolis, Minnesota, which are owned or leased by
AEFC. These facilities are believed to be adequate for the purposes for which
they are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable product financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements, and inappropriate sales. American
Enterprise Life has received requests for information and has been contacted by
regulatory authorities concerning its practices and is cooperating fully with
these inquiries.
American Enterprise Life and its affiliates are involved in a number of other
legal and arbitration proceedings concerning matters arising in connection with
the conduct of their respective business activities. American Enterprise Life
believes it has meritorious defenses to each of these actions and intends to
defend them vigorously. American Enterprise Life believes that it is not a party
to, nor are any of its properties the subject of, any pending legal or
arbitration proceedings that would have a material adverse effect on American
Enterprise Life's consolidated financial condition, results of operations or
liquidity. However, it is possible that the outcome of any such proceedings
could have a material impact on results of operations in any particular
reporting period as the proceedings are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
-6-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
American Enterprise Life follows accounting principles generally accepted in the
United States (GAAP), and the following discussion is presented on a
consolidated basis consistent with GAAP.
Results of Operations for the Years Ended December 31, 2003 and 2002:
Net income was $37.6 million for the year ended December 31, 2003, compared to a
net loss of $33.7 million for the year ended December 31, 2002. The favorable
change in net income primarily reflects increased net investment income and net
realized gains on investments, as well as decreased other insurance and
operating expense, partially offset by increased interest credited on investment
contracts and universal life-type insurance.
Revenues
Net investment income increased 27 percent reflecting a higher average level of
investments partially offset by lower average yields on the investment
portfolio.
Gross realized gains on sales of securities classified as Available-for-Sale,
using the specific identification method, were $65.8 million and $38.2 million
for the years ended December 31, 2003 and 2002, respectively. Gross realized
losses on sales were ($30.3 million) and ($17.6 million) for the same periods.
American Enterprise Life also recognized losses of ($9.3 million) and ($14.5
million) in other-than-temporary impairments on Available-for-Sale securities
for the years ended December 31, 2003 and 2002, respectively. Realized gains and
losses on Available-for-Sale securities are reflected in net realized gain
(loss) on investments. Also included in net realized gain (loss) on investments
is ($1.1 million) and ($6.1 million) in loan loss provisions for mortgage loans
on real estate for the years ended December 31, 2003 and 2002, respectively.
Expenses
Total benefits and expenses decreased slightly from $363.2 million in 2002 to
$361.9 million in 2003. The increase in interest credited on investment
contracts and universal life-type contracts was offset by a substantial decrease
in other insurance and operating expenses as well as a slight decrease in
amortization of DAC. Interest credited on investment contracts and
universal-type insurance increased 19 percent reflecting higher average levels
of fixed annuities in force, partially offset by lower crediting rates as a
result of the relatively low interest rate environment. Other insurance and
operating expenses decreased 40 percent, partially reflecting favorable market
value changes on interest rate swaps during 2003 compared to unfavorable market
value changes in 2002. The relatively low and stable interest rate environment
during 2003 compared to declining interest rates during 2002 is the primary
driver behind the favorable market value changes to the interest rate swaps.
American Enterprise Life enters into pay-fixed, receive-variable interest rate
swaps with IDS Life to protect the spread between yields earned on investments
and interest rates credited to fixed-annuity products. The interest rate swaps
are economic hedges that are not designated for hedge accounting treatment under
SFAS No. 133.
Amortization of deferred policy acquisition costs (DAC) was 6 percent lower in
2003 than 2002. This reflected a $3.2 million decrease in DAC amortization
expense in 2003 compared to a $4.6 million increase in DAC amortization in 2002
as a result of management's third quarter reviews of various DAC assumptions and
practices. DAC amortization expense was otherwise higher in 2003 than in 2002,
reflecting higher business volumes and the ongoing impact of 2002 changes in
customer asset value growth rate assumptions. See the DAC and related
adjustments discussion below for further information.
The 2003 versus 2002 change in the income tax provision (benefit) reflects
pre-tax income of $56.7 million during the year ended December 31, 2003, while
during the year ended December 31, 2002, the American Enterprise Life incurred a
pre-tax loss of $52.2 million.
-7-
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 reviews and, where appropriate, adjusts its assumptions
with respect to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest margin and maintenance expense level assumptions, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC may also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an increase in DAC amortization expense while a decrease in amortization
percentage will result in a decrease in DAC amortization expense. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period and is
reflected in the period that such changes are made. As a result of these
reviews, American Enterprise Life took actions in both 2003 and 2002 that
impacted the DAC balance and expenses.
In the third quarter of 2003, American Enterprise Life improved its modeling of
certain variable annuity contract revenues and unlocked estimated gross profits
retrospectively to reflect actual interest margins and death and other benefits.
American Enterprise Life also adjusted its assumptions to reflect lower than
previously assumed spreads on fixed account values and adjusted the near-term
rate and period used in projecting growth in customer asset values on variable
annuities. These actions resulted in a $3.2 million reduction in DAC
amortization expense.
In the third quarter of 2002, American Enterprise Life reset its customer asset
value growth rate assumptions for variable annuity products to anticipate
near-term and long-term growth at an annual rate of 7%. This action resulted in
a $4.6 million increase in DAC amortization expense.
American Enterprise Life uses a mean reversion method as a guideline in setting
the near-term customer asset value growth rate, also referred to as the mean
reversion rate. In periods when market performance results in actual contract
value growth at a rate different than that assumed, American Enterprise Life
will reassess the near-term rate in order to continue to project its best
estimate of long-term growth. For example, if actual contract value growth
during a quarter is less than 7% on an annualized basis, American Enterprise
Life would increase the mean reversion rate assumed over the near term to the
rate needed to achieve the long-term annualized growth rate of 7% by the end of
that period, assuming this long-term view is still appropriate.
DAC of $346.0 million related to annuities was on American Enterprise Life's
consolidated balance sheet at December 31, 2003. The DAC balance was $260.6
million at December 31, 2002, and was also related to annuities.
Results of Operations for the Years Ended December 31, 2002 and 2001
American Enterprise Life's net loss was $33.7 million in 2002, compared to a net
loss of $41.7 million in 2001. Loss before income taxes totaled $52.2 million in
2002, compared with a loss of $63.9 million in 2001. The change primarily
reflects the write-down and sale of certain high-yield securities in 2001, as
-8-
described below. In addition, the significant growth in annuity sales during
2002 drove higher levels of both investment income and interest credited to
contractholders. Other operating expenses increased in 2002 due primarily to
higher expenses related to interest rate swaps.
Revenues
Total revenues increased to $311.0 million in 2002, compared with $198.0 million
in 2001. The increase is primarily due to a net realized gain on investments of
$3 thousand in 2002 compared to a net realized loss on investments of $89.9
million in 2001.
Net investment income, the largest component of revenues, increased 7 percent
from the prior year, primarily due to the significant growth in average invested
assets in 2002 and to credit related yield adjustments on fixed maturity
investments in 2001. Partially offsetting this was the impact of lower average
yields in 2002, primarily due to portfolio repositioning, as discussed below.
Contractholder charges increased 8 percent to $6.5 million in 2002, compared
with $6.0 million in 2001, due primarily to an increase in variable annuity
surrender charges. American Enterprise Life also received mortality and expense
risk fees from the separate accounts. Mortality and expense risk fees increased
to $12.5 million in 2002, compared with $10.2 million in 2001, reflecting an
increase in average separate account assets outstanding as favorable sales in
2002 more than offset market depreciation.
Net realized gains on investments were $3 thousand in 2002, compared to net
realized losses on investments of $89.9 million in 2001. Included in the current
years' net gains are impairment charges of $15 million from other-than-temporary
impairments of fixed maturity investments. The losses in 2001 are comprised of
an $18 million net loss in the first quarter resulting primarily from the
recognition of impairment losses and the sale of certain high-yield securities;
a $20 million write-down in the second quarter to recognize the impact of higher
default assumptions on certain structured investments; a $51 million write-down
of lower-rated securities (most of which were sold in 2001) in the second
quarter primarily in connection with American Enterprise Life's decision to
lower its risk profile by reducing the level of its high-yield fixed maturity
investment portfolio, allocating holdings toward stronger credits, and reducing
the concentration of exposure to individual companies and industry sectors; and
$1 million of other net losses related to the sale and write-down of other
investments.
Expenses
Total benefits and expenses increased 39 percent to $363.2 million in 2002
compared to $262.0 million in 2001. The largest component of expenses, interest
credited on investment contracts, increased 19 percent to $215.9 million in
2002. This increase is primarily due to higher aggregate amounts of fixed
annuities inforce driven by the significant increases in sales, partially offset
by a decrease in interest crediting rates to annuity contracts due to declining
interest rates. The lower level of interest rates also resulted in a significant
decrease in the market value of interest rate swaps, which is the primary reason
for the significant increase in other operating expenses. American Enterprise
Life enters into pay-fixed, receive-variable interest rate swaps to protect the
margin between interest rates earned on investments and the interest rates
credited to annuity contract holders (interest margins). The swaps are economic
hedges that are not designated for hedge accounting treatment under SFAS No.
133. If interest rates remain at current levels, the decrease in the value of
the interest rate swaps recognized currently will be approximately offset in the
future by increases in interest margins. Other operating expenses also include
an increase of $5 million due to greater guaranteed minimum death benefits paid
this year ($6 million) versus last year ($1 million).
Impact of Recent Market-Volatility on Results of Operations
Various aspects of American Enterprise Life's business are impacted by equity
market levels and other market-based events. Several areas in particular, as of
December 31, 2003, involve DAC, mortality and expense risk fees and structured
investments and guaranteed minimum death benefits (GMDB). The direction and
magnitude of the changes in equity markets can increase or decrease DAC expense
levels
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and mortality and expense risk fees and correspondingly affect results of
operations in any particular period. Similarly, the value of American Enterprise
Life'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.
The variable annuity contracts offered by American Enterprise Life 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, American
Enterprise Life incurs a benefit cost by policy. For the results through
December 31, 2003, GAAP did not prescribe advance recognition of the projected
future net costs associated with these guarantees, and accordingly, American
Enterprise Life did not record a liability corresponding to these future
obligations for death benefits in excess of annuity account value. The amount
paid in excess of contract value was expensed when payable. Amounts expensed for
the years ended December 31, 2003 and 2002, were $2.9 million and $6.4 million,
respectively. American Enterprise Life 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, American Enterprise Life has not expensed any
amount related to GMIBs as all terms on GMIB features are within the stipulated
waiting periods.
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) with an effective date of January 1, 2004. SOP 03-1 requires
insurance enterprises to establish additional liabilities for benefits that may
become payable under variable annuity death benefit guarantees or other
insurance or annuity contract provisions. Where additional liabilities are
established, the recognition of this liability may also impact the valuation and
amortization of DAC associated with those insurance or annuity contracts. SOP
03-1 also provides clarifying guidance as to the recognition of bonus interest
and other sales inducement benefits and the presentation of any deferred amounts
in the financial statements.
Detailed interpretations of SOP 03-1 and related implementation guidance
continue to emerge and, accordingly, American Enterprise Life continues to
evaluate its impact. Current estimates of applying SOP 03-1 would reduce first
quarter 2004 results by approximately $5 million (after-tax).
American Enterprise Life's annuity products all have minimum interest rate
guarantees in their fixed accounts. These guarantees range from 1.5% to 4.5%. To
the extent the yield on American Enterprise Life's invested asset portfolio
declines below its target spread plus the minimum guarantee, American Enterprise
Life's profitability would be negatively affected.
Certain Critical Accounting Policies
American Enterprise Life's significant accounting policies are described in Note
1 to the Consolidated Financial Statements. The following provides information
about certain critical accounting policies that are important to the
Consolidated Financial Statements and that involve estimates requiring
significant management assumptions and judgments about the effect of matters
that are uncertain. These policies relate to investment securities valuation the
recognition of impairment within the investment portfolio, deferred policy
acquisition costs and liabilities for future policy benefits.
Investment securities valuation
Generally, investment securities are carried at fair value on the balance sheet
with unrealized gains and losses recorded in other comprehensive income (loss)
within equity, net of income tax provisions (benefits). At December 31, 2003,
American Enterprise Life had net unrealized pretax gains on
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Available-for-Sale securities of $105.4 million. Gains and losses are recognized
in results of operations upon disposition of the securities. In addition, losses
are also recognized when management determines that a decline in value is
other-than-temporary, which requires judgment regarding the amount and timing of
recovery. Indicators of other-than-temporary impairment for debt securities
include issuer downgrade, default or bankruptcy. American Enterprise Life also
considers the extent to which cost exceeds fair value, the duration and size of
that gap, and management's judgment about the issuer's current and prospective
financial condition. Fair value is generally based on quoted market prices. As
of December 31, 2003, there were $47.3 million in gross unrealized losses that
related to $2.4 billion of securities (excluding structured investments), of
which only $55 thousand has been in a continuous unrealized loss position for 12
months or more. American Enterprise Life does not believe that the unrealized
loss on any individual security at December 31, 2003 represents an
other-than-temporary impairment, and American Enterprise Life has the ability
and intent to hold these securities for a time sufficient to recover its
amortized cost.
American Enterprise Life's investment portfolio also contains structured
investments of various asset quality, including collateralized debt obligations
(CDOs) backed by high-yield bonds, which are not readily marketable. As a
result, the carrying values of these structured investments are based on future
cash flow projections that require a significant degree of management judgment
as to the amount and timing of cash payments, defaults and recovery rates of the
underlying investments and, as such, are subject to change. The carrying value
will vary if the actual cash flows differ from projected due to actual defaults
or an increase in the near-term default rate. As an example, an increase in the
near-term default rate by 100 basis points, in and of itself, would reduce the
cash flow projections by approximately $1 million based on underlying
investments as of December 31, 2003.
The reserve for losses on mortgage loans on real estate is measured as the
excess of the loan's recorded investment over its present value of expected
principal and interest payments discounted at the loan's effective interest rate
or the fair value of collateral. Additionally, the level of the reserve for
losses considers other factors, including historical experience and current
economic and political conditions. Management regularly evaluates the adequacy
of the reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
Deferred policy acquisition costs
Deferred policy acquisition costs represent the costs of acquiring new business,
principally direct sales commissions and other distribution costs that have been
deferred on the sale of annuity products. For annuity products, DAC are
amortized over periods approximating the lives of the business, generally as a
percentage of estimated gross profits or as a portion of the interest margins
associated with the products.
For annuity products, the DAC balances at any reporting date are supported by
projections that show management expects there to be adequate estimated gross
profits or interest margins after that date to amortize the remaining balances.
These projections are inherently uncertain because they require management to
make assumptions about financial markets and policyholder behavior over periods
extending well into the future. Projection periods used for American Enterprise
Life's annuity business are typically 10 or 15 years. Management regularly
monitors financial market conditions and compares actual contractholder behavior
experience to its assumptions. For annuity products, the assumptions made in
projecting future results and calculating the DAC balance and DAC amortization
expense are management's best estimates. Management is required to update these
assumptions whenever it appears that, based on actual experience or other
evidence, earlier estimates should be revised. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC might also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in a decrease in DAC balance and increase in DAC amortization expense while a
decrease in amortization percentage will result in an increase in DAC balance
and a decrease in DAC amortization expense. The impact on results of operations
of changing
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assumptions can be either positive or negative in any particular period and is
reflected in the period in which such changes are made.
For annuity products, key assumptions underlying these long-term projections
include interest rates, equity market performance, mortality rates and the rates
at which contractholders are expected to surrender their contracts, make
withdrawals from their contracts and make additional deposits to their
contracts. Assumptions about interest rates drive projected interest margins,
while assumptions about equity market performance drive projected customer asset
value growth rates and assumptions about surrenders, withdrawals and deposits
comprise projected persistency rates. Management must also make assumptions to
project maintenance expenses associated with servicing its annuity business
during the DAC amortization period.
The customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. The rate is net of asset fees and
anticipates a blend of equity and fixed income investments. Management reviews
and, where appropriate, adjusts its assumptions with respect to customer asset
value growth rates on a quarterly basis. American Enterprise Life uses a mean
reversion method as a guideline in setting near-term customer asset value growth
rates based on a long-term view of financial market performance. In periods when
market performance results in actual contract value growth at a rate that is
different than that assumed, American Enterprise Life will reassess the
near-term rate in order to continue to project its best estimate of long-term
growth. Management is currently assuming a 7 percent long-term customer asset
value growth rate. If American Enterprise Life increased or decreased its
assumption related to this growth rate by 100 basis points, the impact on the
DAC balance would be an increase or decrease of approximately $2 million.
Management monitors other principal DAC assumptions, such as persistency,
mortality, interest margin and maintenance expense levels each quarter. Unless
management identifies a material deviation over the course of the quarterly
monitoring, management reviews and updates these DAC assumptions annually in the
third quarter of each year.
The analysis of DAC balances and the corresponding amortization is a dynamic
process that considers all relevant factors and assumptions discussed above.
Therefore, an assessment of sensitivity associated with changes in any single
assumption would not necessarily be an indicator of future results.
Liabilities for future policy benefits
Liabilities for variable universal life insurance and fixed and variable
deferred annuities are equal to accumulation values.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates ranging from 4.6% to 8.5%,
depending on year of issue, with an average rate of approximately 6.1%.
Risk Management
The sensitivity analysis discussed below estimates the effects of hypothetical
sudden and sustained changes in the applicable market conditions of two
different types of market risk on the ensuing year's net income, based on
year-end positions. The market changes, assumed to occur as of year-end, are a
100 basis point increase in market interest rates and a 10 percent decline in
the value of equity securities held in separate accounts. Computations of the
prospective effects of the hypothetical interest rate and equity market changes
are based on numerous assumptions, including relative levels of market interest
rates and equity market prices, as well as the levels of assets and liabilities.
The hypothetical changes and assumptions will be different from what actually
occur. Furthermore, the computations do not incorporate actions that management
could take if the hypothetical market changes took place. As a result, actual
net income consequences will differ from those quantified below.
-12-
American Enterprise Life primarily invests in fixed maturity securities over a
broad range of maturities for the purpose of providing fixed account annuity
contractholders with a competitive rate of return on their investments while
controlling risk, and to provide a dependable and targeted spread between the
interest rate earned on investments and the interest rate credited to
contractholders' accounts. American Enterprise Life does not invest in
securities to generate short-term trading profits.
American Enterprise Life has an investment committee that meets periodically. At
these meetings, the committee reviews models projecting different interest rate
scenarios, risk/return measures and their impact on profitability of American
Enterprise Life. The committee also reviews the distribution of assets in the
portfolio by type and credit risk sector. The objective of the committee is to
structure the investment portfolio based upon the type and expected behavior of
products in the liability portfolio so as to meet contractual obligations and to
achieve targeted levels of profitability within defined risk parameters.
Interest rates credited to annuity contractholders' accounts are generally reset
at shorter intervals than the maturity of American Enterprise Life's underlying
investments portfolio. Therefore, margins may be negatively impacted by
increases in the general level of interest rates. Part of the investment
committee's strategy includes the use of derivatives, such as interest rate
caps, swaps and floors, for risk management purposes. These derivatives help
protect margins by increasing investment returns if there is a sudden and severe
rise in interest rates, thereby mitigating the impact of an increase in rates
credited to contract owner's fixed accounts. Conversely, in a low interest rate
environment, such as that experienced recently, and to the extent the yield on
American Enterprise Life's investment portfolio declines below its targeted
spread plus the guaranteed minimum interest crediting rates on American
Enterprise Life's annuity contracts with fixed accounts, American Enterprise
Life's profitability would be negatively effected. This negative impact may be
compounded by the fact that many of American Enterprise Life's interest bearing
investments are callable or prepayable by the issuer and calls and prepayments
are more likely to occur in low interest rate environments. Interest rate
derivatives with notional amounts totaling approximately $2 billion were
outstanding at December 31, 2003 to hedge interest rate exposure. The entire $2
billion of the notional par relates to interest rate swaps and floors American
Enterprise Life has exclusively with IDS Life.
The negative effect on American Enterprise Life's annual pretax net income of a
100 basis point increase in interest rates, which assumes intervals at which
interest credited to contractholder's fixed accounts are reset and customer
behavior based on the application of proprietary models to the book of business
at December 31, 2003, and the impact of any derivatives, would be a decrease of
approximately $3.6 million.
The amount of the fee income American Enterprise Life receives is based upon the
daily market value of the separate account assets or of the underlying mutual
funds. As a result, American Enterprise Life's fee income would be negatively
impacted by a decline in the equity markets. Another part of the investment
committee's strategy is to use, from time to time, index options to manage the
equity market risk related to fee income. These derivatives economically hedge
fee income by providing option income when there is a significant decline in the
equity markets. American Enterprise Life did not have equity-based derivatives
outstanding at December 31, 2003 for this purpose.
The negative effect on American Enterprise Life's pretax earnings of a 10
percent decline in equity prices would be approximately $1.5 million based on
separate account assets as of December 31, 2003.
Liquidity and Capital Resources
American Enterprise Life's liquidity requirements 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 and capital contributions received from IDS Life. The
primary uses of funds are annuity obligations, commissions and operating
expenses and
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investment purchases. American Enterprise Life routinely reviews its sources and
uses of funds in order to meet its ongoing obligations.
American Enterprise Life has an available line of credit with AEFC aggregating
$50 million. No borrowings were outstanding under the line of credit at December
31, 2003. At December 31, 2003, American Enterprise Life had outstanding reverse
repurchase agreements totaling $67.5 million. Both the line of credit and the
reverse repurchase agreements are used strictly as short-term sources of funds.
At December 31, 2003, investments in Available-for-Sale fixed maturity
securities comprised 92 percent of American Enterprise Life's total invested
assets and primarily include mortgage and other asset-backed securities, and
corporate debt. Approximately 42 percent is invested in GNMA, FNMA and FHLMC
mortgage-backed securities which are considered AAA quality. American Enterprise
Life's corporate bonds and obligations comprise a diverse portfolio with the
largest concentrations accounting for approximately 47 percent of the portfolio,
in the following industries: banking and finance, utilities, communication and
media and transportation.
At December 31, 2003 and based on amortized costs, approximately 7 percent of
American Enterprise Life's investments in Available-for-Sale fixed maturity
securities were below investment grade bonds. These investments may be subject
to a higher degree of risk than investment grade issues because of the
borrower's generally greater sensitivity to adverse economic conditions, such as
a 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. American Enterprise Life has identified
certain Available-for-Sale fixed maturity securities for which a decline in fair
value has been determined to be other-than-temporary, and has written them down
to fair value with a charge to net income.
During 2001, American Enterprise Life 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, American Enterprise Life 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 December 31, 2003, the retained interests had a carrying value of $41.1
million, of which $30.3 million is considered investment grade. American
Enterprise Life 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.
At December 31, 2003, net unrealized gains on available-for-sale fixed maturity
securities included $160.8 million (pretax) of gross unrealized gains and $55.4
million (pretax) of gross unrealized losses.
At December 31, 2003, American Enterprise Life had reserves for losses for
mortgage loans of $7.4 million.
The economy and other factors have caused insurance companies to go under
regulatory supervision. These situations resulted in assessments by state
guaranty associations to cover losses to policyholders of insolvent or
rehabilitated companies. Some assessments can be partially recovered through a
reduction in future premium taxes in certain states. American Enterprise Life
established an asset for guaranty association assessments paid to those states
allowing a reduction in future premium taxes over a reasonable period of time.
The asset is being amortized as premium taxes are reduced. American Enterprise
Life has also estimated the potential effect of future assessments on American
Enterprise Life's financial position and results of operations and has
established a reserve for such potential assessments.
The National Association of Insurance Commissioners (NAIC) established
risk-based capital (RBC) standards for life insurance companies to determine
capital requirements based upon the risks inherent in
-14-
its operations. These standards require the computation of a RBC amount which is
then compared to a company's actual total adjusted statutory capital. The
computation involves applying factors to various statutory financial data to
address four primary risks: asset default, adverse insurance experience,
interest rate risk and external events. These standards provide for regulatory
attention when the percentage of total adjusted capital to authorized control
level RBC is below certain levels. As of December 31, 2003, American Enterprise
Life's total adjusted capital was well in excess of the levels requiring
regulatory attention. In 2003, any dividends would require the approval of the
Insurance Department of the State of Indiana.
Forward-Looking Statements
Certain statements in Item 7. of this Form 10-K Annual Report contain
forward-looking statements that are subject to risks and uncertainties that
could cause results to differ materially from such statements. The words
"believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "should," "could," "likely," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. American Enterprise Life undertakes no obligation to
publicly update or revise any forward-looking statements. Important factors that
could cause actual results to differ materially from American Enterprise Life's
forward-looking statements include, but are not limited to: fluctuations in
external markets, which can affect the amount and types of investment products
sold, the market value of its managed assets, fees received based on those
assets and the amount of amortization of DAC; potential deterioration in
high-yield and other investments, which could result in further losses in
American Enterprise Life's investment portfolio; changes in assumptions relating
to DAC which also could impact the amount of DAC amortization; the ability to
sell certain high-yield investments at expected values and within anticipated
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 American Enterprise Life against losses; negative changes in American
Enterprise Life's credit ratings; increasing competition in all American
Enterprise Life's major businesses; the adoption of recently issued rules
related to the consolidation of variable interest entities, including those
involving CDOs that American Enterprise Life may from time-to-time invest in
which could affect both American Enterprise Life's balance sheet and results of
operations; and outcomes of litigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Management's Discussion
and Analysis of financial condition and results of operations under the section
titled Risk Management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
See Index to financial statements at page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
American Enterprise Life's management, with the participation of American
Enterprise Life's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of American Enterprise Life's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, American
Enterprise Life's Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, American Enterprise Life's
disclosure controls and procedures are effective. There have not been any
changes in American Enterprise Life's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during American Enterprise Life's fourth fiscal quarter that have
materially affected, or are reasonably likely to materially affect, American
Enterprise Life's internal control over financial reporting.
PART III
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express Company has
appointed Ernst & Young LLP as independent auditors to audit the consolidated
financial statements of American Enterprise Life for the year ended December 31,
2003.
Audit Fees
The aggregated fees billed or to be billed by Ernst & Young for each of the last
two years for professional services rendered for the audit of American
Enterprise Life's annual financial statements and services that were provided in
connection with statutory and regulatory filings or engagements and other attest
services were $714,000 for 2003 and $401,000 for 2002.
Audit-Related Fees
American Enterprise Life was not billed by Ernst & Young for any fees for
audit-related services for 2003 or 2002.
Tax Fees
American Enterprise Life was not billed by Ernst & Young for any tax fees for
2003 or 2002.
All Other Fees
American Enterprise Life was not billed by Ernst & Young for any other fees for
2003 or 2002.
Policy on Pre-Approval of Services Provided by Independent Auditor
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the
engagement of Ernst & Young are subject to the specific pre-approval of the
Audit Committee of American Express Company. All audit and permitted non-audit
services to be performed by Ernst & Young for American Enterprise Life required
pre-approval by the Audit Committee of American Express Company in accordance
with pre-approval procedures established by the Audit Committee of American
Express Company. The procedures require all proposed engagements of Ernst &
Young for services to American Enterprise Life of any kind to be directed to the
General Auditor of American Express Company and then submitted for approval to
the Audit Committee of American Express Company prior to the beginning of any
services.
-16-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement Schedules.
(2) Financial Statement Schedules
See index to Financial Statements and Financial Statement Schedules.
All information on schedules to the consolidated financial
statements required by Article 7 of Regulation S-X is included in
the consolidated financial statements or is not required. Therefore,
all schedules have been omitted.
(3) Exhibits
See Exhibit Index on pages E-1 through E-3 hereof.
(b) Reports on Form 8-K filed in the fourth quarter of 2003
Form 8-K, dated November 15, 2003, Item 5, reporting that, on
November 15, 2003, American Enterprise Life appointed Arthur H.
Berman as Chief Financial Officer. He succeeds John T. Sweeney, who
was recently appointed Vice President, Brokerage and Banking at AEFC.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 29, 2004 By /s/ Mark E. Schwarzmann
- -------------- -------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
March 29, 2004 By /s/ Gumer C. Alvero
- -------------- -------------------------
Date Gumer C. Alvero, Director and
Executive Vice President - Annuities
March 29, 2004 By /s/ Arthur H. Berman
- -------------- -------------------------
Date Arthur H. Berman, Director,
Executive Vice President - Finance
and Chief Financial Officer
March 29, 2004 By /s/ Carol A. Holton
- -------------- -------------------------
Date Carol A. Holton, Director and
President
March 29, 2004 By /s/ Jeryl A. Millner
- -------------- -------------------------
Date Jeryl A. Millner, Vice President
and Controller
March 29, 2004 By /s/ Roger Natarajan
- -------------- -------------------------
Date Roger Natarajan, Director
March 29, 2004 By /s/ Mark E. Schwarzmann
- -------------- -------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and Chief
Executive Officer
-18-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14 (a))
Page Number
Report of Management F-2
Consolidated Financial Statements:
Report of Independent Auditors F-3
Consolidated Balance Sheets at December 31, 2003 and 2002 F-4
Consolidated Statements of Operations for each of the three
years ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Stockholder's Equity for each of the
three years ended December 31, 2003, 2002 and 2001 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-25
Schedules:
All information on schedules to the consolidated financial statements required
by Article 7 of Regulation S-X is included in the consolidated financial
statements and notes thereto or is not required. Therefore, all schedules have
been omitted.
F-1
Report of Management
The management of American Enterprise Life Insurance Company (American
Enterprise Life) is responsible for the preparation and fair presentation of its
Consolidated Financial Statements, which have been prepared in conformity with
accounting principles generally accepted in the United States, and include
amounts based on the best judgment of management. American Enterprise Life's
management is also responsible for the accuracy and consistency of other
financial information included in this annual report.
In recognition of its responsibility for the integrity and objectivity of data
in the financial statements, American Enterprise Life maintains a system of
internal control over financial reporting which is designed to provide
reasonable, but not absolute, assurance with respect to the reliability of
American Enterprise Life's financial statements. The concept of reasonable
assurance is based on the notion that the cost of the internal control system
should not exceed the benefits derived.
The internal control system is founded on an ethical climate and includes: (i)
an organizational structure with clearly defined lines of responsibility,
policies and procedures; (ii) a Code of Conduct; and (iii) a careful selection
and training of employees. Internal auditors monitor and assess the
effectiveness of the internal control system and report their findings to
management and the Board of Directors throughout the year. American Enterprise
Life's independent auditors are engaged to express an opinion on the year-end
financial statements and, with the coordinated support of the internal auditors,
review the financial records and related data and test the internal control
system over financial reporting to the extent they believed necessary to support
their report.
F-2
Report of Ernst & Young LLP Independent Auditors
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying consolidated balance sheets of American
Enterprise Life Insurance Company (a wholly owned subsidiary of IDS Life
Insurance Company) as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the management of American Enterprise Life
Insurance Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American
Enterprise Life Insurance Company at December 31, 2003 and 2002, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 26, 2004
F-3
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands, except share amounts)
2003 2002
---------- ----------
ASSETS
Investments: (Note 2)
Available-for-sale:
Fixed maturities, at fair value
(amortized cost: 2003, $6,545,561; 2002, $5,105,431) $6,650,906 $5,288,855
Common stocks, at fair value (cost: 2003, $--;2002, $--) 6 --
Mortgage loans on real estate 534,812 587,535
Other investments 6,069 2,381
---------- ----------
Total investments 7,191,793 5,878,771
Cash and cash equivalents (Note 1) 9,065 1,118,692
Amounts due from brokers 161 --
Other accounts receivable 3,572 1,584
Accrued investment income 70,591 56,448
Deferred policy acquisition costs (Note 3) 345,966 260,577
Other assets 6,335 15,887
Separate account assets 1,108,160 694,771
---------- ----------
Total assets $8,735,643 $8,026,730
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities $6,645,315 $5,411,938
Universal life-type insurance 27 16
Policy claims and other policyholders' funds 3,100 9,050
Amounts due to brokers 75,070 985,081
Deferred income taxes, net 11,618 17,608
Other liabilities 68,674 82,453
Separate account liabilities 1,108,160 694,771
---------- ----------
Total liabilities 7,911,964 7,200,917
Commitments and contingencies
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 177,545 139,916
Accumulated other comprehensive income (loss), net of tax:
Net unrealized securities gains 60,078 104,259
Net unrealized derivative losses (8,816) (13,234)
---------- ----------
Total accumulated other comprehensive income (loss) 51,262 91,025
---------- ----------
Total stockholder's equity 823,679 825,813
---------- ----------
Total liabilities and stockholder's equity $8,735,643 $8,026,730
========== ==========
See Notes to Consolidated Financial Statements.
F-4
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(Thousands)
2003 2002 2001
--------- ---------- ----------
REVENUES
Net investment income $372,194 $292,067 $271,718
Contractholder charges 7,569 6,454 5,998
Mortality and expense risk fees 13,749 12,452 10,247
Net realized gain (loss) on investments 25,105 3 (89,920)
--------- ---------- ----------
Total revenues 418,617 310,976 198,043
--------- ---------- ----------
BENEFITS AND EXPENSES
Interest credited on investment contracts and
universal life-type insurance 257,235 215,918 180,906
Amortization of deferred policy acquisition costs 45,605 48,469 45,494
Other insurance and operating expenses 59,073 98,766 35,579
--------- ---------- ----------
Total benefits and expenses 361,913 363,153 261,979
--------- ---------- ----------
Income (loss) before income tax provision (benefit) 56,704 (52,177) (63,936)
Income tax provision (benefit) 19,075 (18,487) (22,208)
--------- ---------- ----------
Net income (loss) $ 37,629 $(33,690) $(41,728)
========= =========== ===========
See Notes to Consolidated Financial Statements.
F-5
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Thousands)
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 37,629 $ (33,690) $ (41,728)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Change in accrued investment income (14,143) (11,026) 9,519
Change in other accounts receivable (1,988) 228 (945)
Change in deferred policy acquisition costs, net (75,285) (65,680) (19,301)
Change in other assets 9,552 (7,360) 31,411
Change in policy claims and other policyholders' funds (5,950) 6,764 (7,009)
Deferred income tax provision (benefit) 15,420 (3,725) (34,562)
Change in other liabilities (13,779) 17,936 6,553
Amortization of premium (accretion of discount), net 23,699 167 (689)
Net realized (gain) loss on investments (25,105) (3) 89,920
Other, net 7,730 12,784 (7,796)
----------- ----------- -----------
Net cash (used in) provided by operating activities (42,220) (83,605) 25,373
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Sales 3,365,402 1,092,923 803,034
Maturities, sinking fund payments and calls 875,785 500,348 379,281
Purchases (5,678,854) (3,409,718) (1,446,157)
Other investments:
Sales 72,281 64,988 71,110
Purchases (25,287) (4,391) (8,513)
Change in amounts due from brokers (161) 41,705 (40,389)
Change in amounts due to brokers (910,011) 759,954 200,740
----------- ----------- -----------
Net cash used in investing activities (2,300,845) (954,191) (40,894)
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to universal life-type insurance and
investment contracts:
Considerations received 1,733,030 2,052,002 779,626
Surrenders and other benefits (756,827) (621,646) (779,649)
Interest credited to account balances 257,235 215,918 180,906
Capital contribution -- 250,000 60,000
----------- ----------- -----------
Net cash provided by financing activities 1,233,438 1,896,274 240,883
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,109,627) 858,478 225,362
Cash and cash equivalents at beginning of year 1,118,692 260,214 34,852
----------- ----------- -----------
Cash and cash equivalents at end of year $ 9,065 $ 1,118,692 $ 260,214
=========== =========== ===========
Supplemental disclosures:
Income taxes paid $ 3,266 $ 12,761 $ -
Interest on borrowings $ 377 $ - $ 15
See Notes to Consolidated Financial Statements.
F-6
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2003
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
------ -------- -------- -------- --------
Balance, January 1, 2001 $3,000 $281,872 $(62,097) $215,334 $438,109
Comprehensive income:
Net loss - - - (41,728) (41,728)
Cumulative effect of adopting SFAS No. 133,
net of income tax benefit of $18,699 - - (34,726) - (34,726)
Net unrealized holding gains on
available-for-sale securities arising
during the year, net of income tax
provision of $73,754 - - 136,972 - 136,972
Reclassification adjustment for gains on
available-for-sale securities included in
net loss, net of income tax provision of
$30,811 - - (57,220) - (57,220)
Reclassification adjustment for losses on
derivatives included in net loss, net of
income tax benefit of $4,535 - - 8,422 - 8,422
--------
Total comprehensive income 11,720
Capital contribution - 60,000 - - 60,000
------ -------- -------- -------- --------
Balance, December 31, 2001 3,000 341,872 (8,649) 173,606 509,829
Comprehensive income:
Net loss - - - (33,690) (33,690)
Net unrealized holding gains on
available-for-sale securities arising
during the year, net of pretax deferred
policy acquisition costs of ($23,026) and
income tax provision of $51,599 - - 95,827 - 95,827
Reclassification adjustment for gains on
available-for-sale securities included in
net loss, net of income tax provision of
$2,471 - - (4,589) - (4,589)
Reclassification adjustment for losses on
derivatives included in net loss, net of
income tax benefit of $4,542 - - 8,436 - 8,436
--------
Total comprehensive income 65,984
Capital contribution - 250,000 - - 250,000
------ -------- -------- -------- --------
Balance, December 31, 2002 $3,000 $591,872 $ 91,025 $139,916 $825,813
See Notes to Consolidated Financial Statements.
F-7
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2003
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
------ -------- -------- -------- --------
Balance, December 31, 2002 $3,000 $591,872 $ 91,025 $139,916 $825,813
Comprehensive income:
Net income - - - 37,629 37,629
Net unrealized holding losses on
available-for-sale securities arising during
the year, net of pretax deferred policy
acquisition costs of $10,104 and income tax
benefit of $14,632 - - (27,174) - (27,174)
Reclassification adjustment for gains on
available-for-sale securities included in net
income, net of income tax provision of $9,157 - - (17,006) - (17,006)
Reclassification adjustment for losses on
derivatives included in net income, net of
income tax benefit of $2,378 - - 4,417 - 4,417
--------
Total comprehensive income (2,134)
Capital contribution - - - - -
------ -------- -------- -------- --------
Balance, December 31, 2003 $3,000 $591,872 $ 51,262 $177,545 $823,679
======= ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
F-8
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Nature of business
American Enterprise Life Insurance Company (American Enterprise Life) is a
stock life insurance company that is domiciled in Indiana and is licensed
to transact insurance and annuity business in 48 states. American
Enterprise Life is a wholly owned subsidiary of IDS Life Insurance Company
(IDS Life), which is a wholly owned subsidiary of American Express
Financial Corporation (AEFC). AEFC is a wholly owned subsidiary of American
Express Company. American Enterprise Life also wholly owns American
Enterprise REO 1, LLC. This subsidiary holds mortgage loans on real estate
and/or real estate investments.
American Enterprise Life's principal product is deferred annuities, which
are issued primarily to individuals. It offers single premium and flexible
premium deferred annuities on both a fixed and variable dollar basis.
Variable universal life insurance is offered as well. American Enterprise
Life distributes its products primarily through financial institutions and
regional and/or independent broker dealers.
American Enterprise Life's fixed annuity contracts guarantee a minimum
interest rate during the accumulation period (the time before the annuity
payments begin). However, American Enterprise Life has the option of paying
a higher rate set at its discretion, and has adopted a practice whereby any
higher current rate is guaranteed for a specified period. Under American
Enterprise Life's variable annuity products, the purchaser may choose among
general account and separate account investment options. Within the general
account, many contracts allow the purchaser to select the number of years a
fixed rate will be guaranteed. If a guarantee term longer than one year is
chosen, there may be a market value adjustment applied if funds are
withdrawn before the end of that term. Separate account options include
accounts investing in equities, bonds, managed funds and/or short term
securities.
Basis of presentation
The accompanying Consolidated Financial Statements include the accounts of
American Enterprise Life and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying Consolidated Financial Statements have been prepared in
conformity with accounting principles generally accepted in the United
States which vary in certain respects from reporting practices prescribed
or permitted by the Indiana Department of Insurance (see Note 5). Certain
prior year amounts have been reclassified to conform to the current year's
presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue recognition
Net investment income
Net investment income predominantly consists of interest income earned on
fixed maturity securities classified as Available-for-Sale, mortgage loans
on real estate, policy loans and other investments. Interest income is
accrued as earned using the effective interest method,
F-9
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which makes an adjustment of the yield for security premiums and discounts
on all performing fixed maturity securities classified as
Available-for-Sale, excluding structured securities, and mortgage loans on
real estate so that the related security or loan recognizes a constant rate
of return on the outstanding balance throughout its term. Interest income
on structured securities is recognized according to Emerging Issues Task
Force (EITF) Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets."
Contractholder and policyholder charges
Contractholder and policyholder charges include certain charges assessed on
annuities and universal and variable universal life insurance.
Contractholder and policyholder charges include cost of insurance charges,
administrative charges and surrender charges on annuities and universal and
variable universal life insurance. Cost of insurance charges on universal
and variable universal life insurance are recognized as revenue when
earned, whereas contract charges and surrender charges on annuities and
universal and variable universal life insurance are recognized as revenue
when collected.
Net realized gain (loss) on investments
Realized gains and losses are recognized on a trade date basis, and charges
are recorded when securities are determined to be other-than-temporarily
impaired.
Investments - Fixed maturity and equity securities
All fixed maturity securities and marketable equity securities are
classified as available-for-sale and carried at fair value. Unrealized
gains and losses on securities classified as available-for-sale are carried
as a separate component of accumulated other comprehensive income (loss),
net of the related deferred policy acquisition costs and income taxes.
Gains and losses are recognized in the results of operations upon
disposition of the securities using the specific identification method. In
addition, losses are also recognized when management determines that a
decline in a security's fair value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for fixed maturity securities include
issuer downgrade, default or bankruptcy. American Enterprise Life also
considers the extent to which cost exceeds fair value, the duration and
size of that gap, and management's judgment about the issuer's current and
prospective financial condition. The charges are reflected in net realized
gain (loss) on investments within the Consolidated Statements of Income.
Fair value of fixed maturity and equity securities is generally based on
quoted market prices. However, American Enterprise Life's investment
portfolio also contains structured investments of various asset quality,
including collateralized debt obligations (CDOs) (backed by high-yield
bonds), which are not readily marketable. As a result, the carrying values
of these structured investments are based on future cash flow projections
which require a significant degree of management judgment as to default and
recovery rates of the underlying investments and, as such, are subject to
change. American Enterprise Life's CDO investments are accounted for in
accordance with Emerging Issues Task Force (EITF) Issue 99-20 "Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets".
Net investment income, which primarily consists of interest earned on fixed
maturity securities, is generally accrued as earned using the effective
interest method, which makes an adjustment of the yield for security
premiums, discounts and anticipated prepayments on mortgage backed
securities.
F-10
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepayment estimates are based on information received from brokers who
deal in mortgage-backed securities.
Investments - Mortgage loans on real estate
Mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses. The estimated fair value of the mortgage loans is
determined by discounted cash flow analyses using mortgage interest rates
currently offered for mortgages of similar maturities.
The reserve for losses is measured as the excess of the loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate or the fair value
of collateral. Additionally, the level of the reserve for losses considers
other factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the
reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
American Enterprise Life generally stops accruing interest on mortgage
loans for which interest payments are delinquent more than three months.
Based on management's judgment as to the ultimate collectibility of
principal, interest payments received are either recognized as income or
applied to the recorded investment in the loan.
Cash and cash equivalents
American Enterprise Life considers investments with a maturity at the date
of their acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost, which approximates
fair value.
Deferred policy acquisition costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring
new business, principally direct sales commissions and other distribution
and underwriting costs that have been deferred on the sale of annuity
products. For annuity products, DAC are amortized over periods
approximating the lives of the business, generally as a percentage of
estimated gross profits or as a portion of the interest margins associated
with the products.
For annuity products, the projections underlying the amortization of DAC
require the use of certain assumptions, including interest margins,
mortality rates, persistency rates, maintenance expense levels and customer
asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. Management reviews and, where appropriate,
adjusts its assumptions with respect to customer asset value growth rates
on a quarterly basis. Management monitors other principle DAC assumptions,
such as persistency, mortality rate, interest margin and maintenance
expense level assumptions each quarter. Unless management identifies a
material deviation over the course of the quarterly monitoring 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
F-11
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
either be positive or negative in any particular period and is reflected in
the period in which such changes are made.
Guaranteed minimum death benefits
The majority of the variable annuity contracts offered by American
Enterprise Life contain guaranteed minimum death benefit (GMDB) provisions.
At time of issue, these contracts typically guarantee the death benefit
payable will not be less than the amount invested, regardless of the
performance of the customer's account. Most contracts also provide for some
type of periodic adjustment of the guaranteed amount based on the change in
value of the contract. A large portion of American Enterprise Life's
contracts containing a GMDB provision adjust once every six years. The
periodic adjustment of these contracts can either increase or decrease the
guaranteed amount though not below the amount invested adjusted for
withdrawals. When market values of the customer's accounts decline, the
death benefit payable on a contract with a GMDB may exceed the accumulated
contract value. Through December 31, 2003, the amount paid in excess of
contract value was expensed when payable. Amounts expensed in 2003, 2002
and 2001 were $2.9 million, $6.4 million, and $0.8 million, respectively.
American Enterprise Life 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, American Enterprise Life has
not expensed any amount related to GMIBs as all terms on GMIB features are
within the stipulated waiting periods. See Recently issued accounting
standards section herein for a description of Statement of Position 03-1.
Liabilities for future policy benefits
Liabilities for variable universal life insurance and fixed and variable
deferred annuities are accumulation values.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates, ranging from 4.6%
to 8.5%, depending on year of issue, with an average rate of approximately
6.1%.
Reinsurance
There are no amounts recoverable from reinsurers at December 31, 2003 and
2002.
Reinsurance premiums and benefits paid or provided are accounted for on a
basis consistent with that used in accounting for original policies issued
and with the terms of the reinsurance contracts.
The maximum amount of life insurance risk retained by American Enterprise
Life is $750,000 on any single life. American Enterprise Life retains all
accidental death benefit, and waiver of premium risk.
Federal income taxes
American Enterprise Life's taxable income is included in the consolidated
federal income tax return of American Express Company. American Enterprise
Life provides for income taxes on a separate return basis, except that,
under an agreement between AEFC and American Express Company, tax benefit
is recognized for losses to the extent they can be used on the consolidated
tax return. It is the policy of AEFC and its subsidiaries that AEFC will
reimburse subsidiaries for all tax benefits.
F-12
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance
contract owners. Through December 31, 2003, American Enterprise Life
received mortality and expense risk fees directly from the separate
accounts. During the fourth quarter of 2003, AEFC replaced IDS Life as the
investment manager of these proprietary mutual funds. In connection with
this change and through an agreement with AEFC, American Enterprise Life
receives fund administrative services fees for the fund management services
American Enterprise Life provides these proprietary mutual funds.
American Enterprise Life makes contractual mortality assurances to the
variable annuity contract owners that the net assets of the separate
accounts will not be affected by future variations in the actual life
expectancy experience of the annuitants and beneficiaries from the
mortality assumptions implicit in the annuity contracts. American
Enterprise Life makes periodic fund transfers to, or withdrawals from, the
separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. American Enterprise Life
also guarantees that the rates at which administrative fees are deducted
from contract funds will not exceed contractual maximums.
For variable life insurance, American Enterprise Life guarantees that the
rates at which insurance charges and administrative fees are deducted from
contract funds will not exceed contractual maximums. American Enterprise
Life also guarantees that the death benefit will continue to be payable at
the initial level regardless of investment performance so long as minimum
premium payments are made.
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) and was
subsequently revised in December 2003. FIN 46 was effective for American
Enterprise Life as of December 31, 2003. FIN 46 does not impact the
accounting for qualifying special purpose entities as defined by Statement
of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," such
as American Enterprise Life's CDO-related securitization trust established
in 2001. That trust contains a majority of American Enterprise Life's rated
CDOs whose retained interest in the trust had a carrying value of $41.1
million at December 31, 2003, of which $30.3 million is considered
investment grade. Additionally, there were no other impacts on the
financial statements as of December 31, 2003.
In April 2003, the FASB issued 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 adoption of this
Statement did not have a material impact on American Enterprise Life'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). American Enterprise Life is currently
evaluating its impact, which, among other provisions, requires reserves
related to guaranteed minimum death benefits included within the majority
of variable annuity contracts offered by American Enterprise Life. SOP 03-1
is required to be adopted on January 1, 2004, and any impact will be
recognized
F-13
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in American Enterprise Life's 2004 results of operations.
In November 2003, the FASB ratified a consensus on the disclosure
provisions of EITF Issue 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The disclosure
provisions of this rule, which are addressed in Note 2, require tabular
presentation of certain information regarding investment securities with
gross unrealized losses.
In July 2000, the FASB's EITF issued a consensus on Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." American Enterprise
Life adopted the consensus as of January 1, 2001. Issue No. 99-20
prescribed new procedures for recording interest income and measuring
impairment on retained and purchased beneficial interests. The consensus
primarily affects American Enterprise Life's CDO investments. Although
there was no significant impact resulting from the adoption of Issue 99-20,
American Enterprise Life holds structured securities that are accounted for
under Issue 99-20.
Effective January 1, 2001, American Enterprise Life adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
(SFAS No. 133), which required an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. Changes in the fair value of a derivative are
recorded in earnings or directly to equity, depending on the instrument's
designated use. The adoption of SFAS No. 133 resulted in a cumulative
after-tax reduction to other comprehensive income of $34.7 million. This
reduction in other comprehensive income is due to cash flow hedges that
existed previous to adopting SFAS No. 133 that no longer qualify or are not
designated for hedge accounting treatment under SFAS No. 133. The
cumulative impact to earnings was not significant. See Note 9 for further
discussion of American Enterprise Life's derivatives and hedging
activities.
F-14
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Investments
Fixed maturity and equity securities
Available-for-sale securities at December 31, 2003 are distributed by type
as presented below:
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------- -------- -------- ----------
Fixed maturity securities:
Mortgage and other asset-backed
securities $3,066,446 $ 37,207 $(22,106) $3,081,547
Corporate bonds and obligations 2,737,449 98,969 (18,067) 2,818,351
Foreign corporate bonds and
obligations 574,582 23,521 (6,055) 592,048
U.S. Government agency obligations 87,614 741 (19) 88,336
Structured investments 49,232 - (8,106) 41,126
State and municipal obligations 30,238 322 (1,062) 29,498
---------- -------- -------- ----------
Total fixed maturity securities 6,545,561 160,760 (55,415) 6,650,906
Common stocks - 6 - 6
---------- -------- -------- ----------
Total fixed maturity and equity
securities $6,545,561 $160,766 $(55,415) $6,650,912
========== ======== ========= ==========
Available-for-sale securities at December 31, 2002 are distributed by type
as presented below:
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------- -------- -------- ----------
Fixed maturity securities:
Mortgage and other asset-backed
securities $3,306,057 $101,719 $ (804) $3,406,972
Corporate bonds and obligations 1,459,454 89,905 (17,264) 1,532,095
Foreign corporate bonds and
obligations 278,974 19,078 (663) 297,389
U.S. Government agency obligations 4,928 389 - 5,317
Structured investments 53,768 - (9,142) 44,626
State and municipal obligations 2,250 206 - 2,456
---------- -------- -------- ----------
Total fixed maturity securities 5,105,431 211,297 (27,873) 5,288,855
Common stocks - - - -
---------- -------- -------- ----------
Total fixed maturity and equity
securities $5,105,431 $211,297 $(27,873) $5,288,855
========== ======== ======== ==========
F-15
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides information about available-for-sale
securities with gross unrealized losses and the length of time that
individual securities have been in a continuous unrealized loss position as
of December 31, 2003:
Less than 12 months 12 months or more Total
------------------- ----------------- -----
(Thousands) Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities: Value Losses Value Losses Value Losses
-------------------------- ---------- -------- ------ ---------- ---------- --------
Mortgage and other
asset-backed securities $1,411,059 $(22,106) $ - $ - $1,411,059 $(22,106)
Corporate bonds and obligations 797,463 (18,012) 1,438 (55) 798,901 (18,067)
Foreign corporate bonds
and obligations 172,213 (6,055) - - 172,213 (6,055)
U.S. Government agency
obligations 529 (19) - - 529 (19)
State and municipal obligations 21,943 (1,062) - - 21,943 (1,062)
---------- -------- ------ ---- ---------- --------
Total $2,403,207 $(47,254) $1,438 $(55) $2,404,645 $(47,309)
========== ======== ====== ==== ========== ========
Note: Excludes structured investments that are accounted for pursuant to
EITF 99-20, and are therefore outside the scope of EITF 03-1. At December
31, 2003, such investments had gross unrealized losses of $8.1 million.
Approximately 204 investment positions were in an unrealized loss position
as of December 31, 2003. The gross unrealized losses on these securities
are attributable to a number of factors including changes in interest rates
and credit spreads and specific credit events associated with individual
issuers. As part of its ongoing monitoring process, management has
concluded that none of these securities are other-than-temporarily impaired
at December 31, 2003. American Enterprise Life has the ability and intent
to hold these securities for a time sufficient to recover its amortized
cost. See the Available-for-sale Securities section of Note 1 for
information regarding American Enterprise Life's policy for determining
when an investment's decline in value is other-than-temporary.
The following is a distribution of available-for-sale securities by
maturity at December 31, 2003:
Amortized Fair
(Thousands) Cost Value
----------- ------------ ---------
Due within one year $ 37,979 $ 38,741
Due from one to five years 883,902 934,536
Due from five to ten years 2,306,080 2,354,394
Due in more than ten years 251,154 241,687
Mortgage and other asset-backed securities 3,066,446 3,081,548
--------- ---------
Total $6,545,561 $6,650,906
========== ==========
The timing of actual receipts will differ from contractual maturities
because issuers may have the right to call or prepay obligations.
F-16
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003, fixed maturity securities comprised approximately 92
percent of American Enterprise Life's total investments. These securities
are rated by Moody's and Standard & Poor's (S&P), except for approximately
$132.6 million of securities which are rated by AEFC's internal analysts
using criteria similar to Moody's and S&P. Ratings are presented using
S&P's convention and if the two agencies' ratings differ, the lower rating
is used. A summary of fixed maturity securities, at fair value, by rating
on December 31, is as follows:
Rating 2003 2002
---------------------- ---- ----
AAA 50% 65%
AA 2 1
A 18 10
BBB 23 19
Below investment grade 7 5
--- ---
Total 100% 100%
=== ===
At December 31, 2003, approximately 92% of the securities rated AAA were
GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any other
issuer were greater than ten percent of stockholder's equity.
The table below includes sales, maturities and purchases of investments
classified as available-for-sale for the years ended December 31:
(Thousands) 2003 2002 2001
------------------------------------- ----------- ----------- ------------
Sales $3,365,402 $1,092,923 $ 803,034
Maturities $ 875,785 $ 500,348 $ 379,281
Purchases $5,678,854 $3,409,718 $1,446,157
------------------------------------- ----------- ----------- ------------
Gross realized gains on sales of securities classified as
available-for-sale securities, using the specific identification method,
were approximately $65.8 million, $38.2 million and $17.9 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Gross realized
losses on sales of available-for-sale securities were approximately ($30.3
million), ($17.6 million) and ($72.6 million) for the same periods.
American Enterprise Life also recognized losses of approximately ($9.3
million), ($14.5 million) and ($30.1 million) in other-than-temporary
impairments on available-for-sale securities for the years ended December
31, 2003, 2002 and 2001, respectively. The 2001 losses include the effect
of the write-down and sale of high-yield securities discussed below.
During 2001, American Enterprise Life recognized pretax losses of $90.2
million to recognize the impact of higher default rate assumptions on
certain structured investments, to write down lower-rated securities (most
of which were sold in 2001) in connection with American Enterprise Life's
decision to lower its risk profile by reducing the level of its high-yield
portfolio, allocating holdings toward stronger credits, and reducing the
concentration of exposure to individual companies and industry sectors; to
write down certain other investments. Of the total charge of $90.2 million,
approximately $83.7 million of these losses are included in net realized
losses on investments and $6.5 million are included in net investment
income.
Also during 2001 American Enterprise Life placed a majority of its rated
CDO securities and related accrued interest (collectively referred to as
transferred assets) having an aggregate book value of $53.6 million, into a
securitization trust. In return, American Enterprise Life received $7.1
million in cash (excluding transaction expenses) relating to sales to
unaffiliated investors and retained interests in the trust with allocated
book amounts aggregating $46.5 million. As of December 31, 2003, the
retained interests had a carrying value of $41.1
F-17
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million, of which $30.3 million is considered investment grade. The book
amount is determined by allocating the previous carrying value of the
transferred assets between assets sold and the retained interests based on
their relative fair values. Fair values are based upon the estimated
present value of future cash flows. The retained interests are accounted
for in accordance with EITF Issue No. 99-20.
The change in net unrealized securities gains (losses) recognized in other
comprehensive income includes two components: (i) unrealized gains (losses)
that arose from changes in market value of securities that were held during
the period (holding gains (losses)), and (ii) gains (losses) that were
previously unrealized, but have been recognized in current period net
income due to sales of available-for-sale securities (reclassification for
realized gains (losses)). This reclassification has no effect on total
comprehensive income or shareholder's equity.
The following table presents these components of other comprehensive income
net of tax:
(Thousands) 2003 2002 2001
----------- ---- ---- ----
Holding (losses) gains $(27,174) $95,827 $136,972
Reclassification for realized securities losses (gains) (17,006) (4,589) (57,220)
--------- ------- --------
Increase in net unrealized securities (losses) gains
recognized in other comprehensive income $(44,180) $91,238 $79,752
========= ======= =======
At December 31, 2003 and 2002, bonds carried at $3.5 million and $3.4
million, respectively, were on deposit with various states as required by
law.
Pursuant to the adoption of SFAS No. 133 at January 1, 2001, American
Enterprise Life reclassified all held-to-maturity securities with a
carrying value of $934.1 million and net unrealized losses of $7.1 million
to available-for-sale.
Mortgage loans on real estate
The following is a summary of mortgage loans on real estate at December 31:
(Thousands) 2003 2002
----------- -------- ---------
Mortgage loans on real estate $542,174 $598,347
Mortgage loans on real estate reserves (7,362) (10,812)
-------- ---------
Net mortgage loans $534,812 $587,535
======== =========
Mortgage loans are first mortgages on real estate. American Enterprise Life
holds the mortgage document, which gives it the right to take possession of
the property if the borrower fails to perform according to the terms of the
agreements.
At December 31, 2003 and 2002, American Enterprise Life's recorded
investment in impaired mortgage loans on real estate was $2.8 million and
$11.7 million, with a reserve of $1.0 million and $4.7 million,
respectively. During 2003 and 2002, the average recorded investment in
impaired mortgage loans on real estate was $6.6 million and $9.4 million,
respectively. American Enterprise Life recognized $0.2 million, $0.3
million and $0.3 million of interest income related to impaired mortgage
loans on real estate for the years ended December 31, 2003, 2002 and 2001,
respectively.
The balances of and changes in the total reserve for mortgage loan losses
as of and for the years ended December 31, are as follows:
F-18
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands) 2003 2002 2001
----------- ------- ------- ------
Balance, January 1 $10,812 $ 5,067 $5,054
Provision for mortgage loan losses 281 6,079 928
Foreclosures, write-offs and other (3,731) (334) (915)
------- ------- ------
Balance, December 31 $ 7,362 $10,812 $5,067
======= ======= ======
Concentration of credit risk of mortgage loans on real estate by region at
December 31 were:
December 31, 2003 December 31, 2002
----------------------- ---------------------
(Thousands) On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
--------------------- ---------- ----------- ---------- -----------
South Atlantic $118,183 $ - $145,999 $ -
Middle Atlantic 75,056 - 85,680 -
East North Central 99,371 1,000 103,713 -
Mountain 74,347 - 75,001 -
West North Central 88,961 - 99,790 -
New England 25,229 - 28,360 -
Pacific 24,607 - 25,759 -
West South Central 25,724 - 26,889 -
East South Central 10,696 - 7,156 -
-------- ------ -------- -----
542,174 1,000 598,347 -
Less reserves for losses (7,362) - (10,812) -
-------- ------ -------- -----
Total $534,812 $1,000 $587,535 $ -
======== ====== ======== =====
Concentration of credit risk of mortgage loans on real estate by property
type at December 31 were:
December 31, 2003 December 31, 2002
----------------------- ---------------------
(Thousands) On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
--------------------- ---------- ----------- ---------- -----------
Department/retail stores $139,417 $ - $159,176 $ -
Apartments 113,746 - 132,567 -
Office buildings 169,904 1,000 171,799 -
Industrial buildings 60,275 - 67,776 -
Hotels/motels 33,091 - 35,421 -
Medical buildings 18,694 - 24,476 -
Nursing/retirement homes 2,413 - 2,707 -
Mixed use 4,634 - 4,425 -
-------- ------ -------- -----
542,174 1,000 598,347 -
Less reserves for losses (7,362) - (10,812) -
-------- ------ -------- -----
Total $534,812 $1,000 $587,535 $ -
======== ====== ======== =====
Commitments to fund mortgages are made in the ordinary course of business.
The estimated fair value of the mortgage commitments as of December 31,
2003 and 2002 was not material.
Mortgage loan findings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. American Enterprise Life holds the
mortgage document, which gives it the right to take possession of the
property if the borrower fails to perform according to the terms of the
agreement.
F-19
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sources of investment income and realized gains (losses) on investments
Net investment income for the years ended December 31 is summarized as
follows:
(Thousands) 2003 2002 2001
----------------------- -------- -------- --------
Income on fixed maturities $321,420 $239,084 $211,920
Income on mortgage loans on real estate 42,482 47,697 54,723
Other 11,600 8,874 6,498
-------- -------- --------
375,502 295,655 273,141
Less investment expenses 3,308 3,588 1,423
-------- -------- --------
Total $372,194 $292,067 $271,718
======== ======== ========
Net realized gains (losses) on investments for the years ended December 31
is summarized as follows:
(Thousands) 2003 2002 2001
----------------------- ------- ------- --------
Fixed maturities $26,163 $ 6,068 $(84,770)
Mortgage loans on real estate 3,450 (5,744) (1,263)
Other (4,508) (321) (3,887)
------- ------- --------
Total $25,105 $ 3 $(89,920)
======= ======= ========
3. Deferred policy acquisition costs
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, were:
(Thousands) 2003 2002 2001
----------------------- -------- -------- --------
Balance, beginning of year $260,577 $217,923 $ 198,622
Capitalization of expenses 120,890 114,149 64,795
Amortization (45,605) (48,469) (45,494)
Change in unrealized investment gains and losses 10,104 (23,026) -
-------- -------- ---------
Balance, end of year $345,966 $260,577 $(217,923)
======== ======== =========
4. Income taxes
American Enterprise Life qualifies as a life insurance company for federal
income tax purposes. As such, American Enterprise Life is subject to the
Internal Revenue Code provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists
of the following:
(Thousands) 2003 2002 2001
----------------------- -------- -------- --------
Federal income taxes
Current $ 3,371 $(15,096) $ 11,803
Deferred 15,420 (3,725) (34,562)
-------- -------- --------
18,791 (18,821) (22,759)
State income taxes-current 284 334 551
-------- -------- --------
Income tax expense (benefit) $ 19,075 $(18,487) $(22,208)
======== ======== ========
F-20
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense (benefit) differs from that computed by using the
federal statutory rate of 35%. The principal causes of the difference in
each year are shown below:
2003 2002 2001
---- ---- ----
(Dollars in thousands) Provision Rate Provision Rate Provision Rate
---------------------- --------- ---- --------- ---- --------- ----
Federal income taxes based
on the statutory rate $19,846 35.0% $(18,262) (35.0)% $(22,378) (35.0)%
Tax-exempt interest and
dividend income (485) (0.8) (62) (0.1) (3) -
State taxes, net of federal
benefit 184 0.3 217 0.4 358 0.6
Other, net (470) (0.9) (380) (0.7) (185) (0.3)
------- ---- -------- ----- -------- -----
Total income taxes $19,075 33.6% $(18,487) (35.4)% $(22,208) (34.7)%
======= ==== ======== ===== ======== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of American Enterprise Life's deferred income tax
assets and liabilities as of December 31 are as follows:
(Thousands) 2003 2002
----------- ---- ----
Deferred income tax assets:
Policy reserves $ 64,080 $ 48,048
Net unrealized losses on available-for-sale securities 10,688 -
Investments, other 3,252 3,154
Other 412 6,049
-------- --------
Total deferred income tax assets 78,432 57,251
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs 90,050 73,243
Net unrealized gains on available-for sale securities - 1,616
-------- --------
Total deferred income tax liabilities 90,050 74,859
-------- --------
Net deferred income tax liabilities $(11,618) $(17,608)
======== ========
American Enterprise Life is required to establish a valuation allowance for
any portion of the deferred income tax assets that management believes will
not be realized. In the opinion of management, it is more likely than not
that American Enterprise Life will realize the benefit of the deferred
income tax assets and, therefore, no such valuation allowance has been
established.
5. Stockholder's equity
Retained earnings available for distribution as dividends to IDS Life are
limited to American Enterprise Life's surplus as determined in accordance
with accounting practices prescribed by state insurance regulatory
authorities. American Enterprise Life's statutory unassigned deficit
aggregated $99.1 million and $101.5 million as of December 31, 2003 and
2002, respectively. Any dividend distributions in 2003 would require
approval by the Insurance Department of the State of Indiana.
F-21
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory net loss for the years ended December 31 and statutory capital
and surplus as of December 31 are summarized as follows:
(Thousands) 2003 2002 2001
----------- --------- --------- -------
Statutory net gain (loss) $ 6,483 $(85,113) $(81,461)
Statutory capital and surplus 495,816 493,339 303,501
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised regulations took effect January 1, 2001. The
State of Indiana adopted the provisions of the revised manual without
modification. The revised manual changed, to some extent, prescribed
statutory accounting practices and resulted in changes to the accounting
practices that American Enterprise Life uses to prepare its statutory-
basis financial statements. The impact of implementing these changes was a
decrease of $44.8 million to American Enterprise Life's statutory-basis
capital and surplus as of January 1, 2001.
6. Related party transactions
American Enterprise Life has no employees. Charges by IDS Life for the use
of joint facilities, technology support, marketing services and other
services aggregated $56.3 million, $44.5 million, and $34.7 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Certain of
these costs are included in deferred policy acquisition costs. Expenses
allocated to American Enterprise Life may not be reflective of expenses
that would have been incurred by American Enterprise Life on a stand-alone
basis.
In connection with AEFC being named the investment manager for the
proprietary mutual funds used as investment options by American Enterprise
Life's variable annuity and variable life insurance contract owners in the
fourth quarter of 2003 and, as discussed in the "Separate account business"
section of Note 1 herein, AEFC receives management fees from these funds.
American Enterprise Life continues to provide fund management services
other than investment management, and has entered into an administrative
services agreement with AEFC to be compensated for the services American
Enterprise Life provides. During the fourth quarter of 2003, $138 thousand
was received by American Enterprise Life under this arrangement.
American Enterprise Life has entered into interest rate swaps and interest
rate floors with IDS Life. See Note 8 for more details.
Included in other liabilities at December 31, 2003 and 2002 is $2.4 million
and $1.5 million, respectively, payable to IDS Life for federal income
taxes.
7. Lines of credit
American Enterprise Life has an available line of credit with AEFC
aggregating $50.0 million. The rate for the line of credit is established
by reference to various indices plus 20 to 45 basis points, depending on
the term. There were no borrowings outstanding under this agreement at
December 31, 2003 or 2002.
F-22
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and contingencies
The Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable product financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements, and inappropriate sales.
American Enterprise Life has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.
American Enterprise Life and its affiliates are involved in a number of
other legal and arbitration proceedings concerning matters arising in
connection with the conduct of their respective business activities.
American Enterprise Life believes it has meritorious defenses to each of
these actions and intends to defend them vigorously. American Enterprise
Life believes that it is not a party to, nor are any of its properties the
subject of, any pending legal or arbitration proceedings that would have a
material adverse effect on American Enterprise Life's consolidated
financial condition, results of operations or liquidity. However, it is
possible that the outcome of any such proceedings could have a material
impact on results of operations in any particular reporting period as the
proceedings are resolved.
At December 31, 2003, American Enterprise Life had no commitments to
purchase investments other than mortgage loan fundings (see Note 2).
Reinsurance contracts do not relieve American Enterprise Life from its
primary obligation to policyholders.
The IRS routinely examines American Enterprise Life's federal income tax
returns and is currently conducting an audit for the 1993 through 1996 tax
years. Management does not believe there will be a material adverse effect
on American Enterprise Life's consolidated financial position as a result
of these audits.
9. Derivative financial instruments
American Enterprise Life maintains an overall risk management strategy that
incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate and
equity market volatility. American Enterprise Life does not enter into
derivative instruments for speculative purposes. As prescribed by SFAS No.
133, derivative instruments that are designated and qualify as hedging
instruments are classified as cash flow hedges, fair value hedges, or
hedges of a net investment in a foreign operation, based upon the exposure
being hedged. American Enterprise Life currently has economic hedges that
either do not qualify or are not designated for hedge accounting treatment
under SFAS No. 133.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate. American
Enterprise Life is not impacted by market risk related to derivatives held
for non-trading purposes beyond that inherent in cash market transactions.
Derivatives held for purposes other than trading are largely used to manage
risk and, therefore, the cash flow and income effects of the derivatives
are inverse to the effects of the underlying transactions. Credit risk is
the possibility that the counterparty will not fulfill the terms of the
contract. American Enterprise Life monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of American Enterprise
Life's counterparties are rated A or better by Moody's and Standard &
Poor's.
F-23
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
American Enterprise Life enters into interest rate swaps, floors and caps
to manage American Enterprise Life's interest rate risk. Specifically,
American Enterprise Life uses the instruments to protect the margin between
interest rates earned on investments and the interest rates credited to
related annuity contract holders. The interest rate swaps and floors are
exclusively with IDS Life. The values of derivative financial instruments
are based on market values, dealer quotes or pricing models. The interest
rate swaps had carrying amounts of ($42.7 million) and ($72.5 million) at
December 31, 2003 and 2002, respectively, and are included in Other
liabilities. The interest rate floors had carrying amounts of $6.1 million
and $15.9 million at December 31, 2003 and 2002, respectively, and are
included in Other assets. The interest rate caps had carrying amounts of
$nil and $8 as of December 31, 2003 and 2002, respectively, and are
included in Other assets. American Enterprise Life incurred ($11.6 million)
and ($56.8 million) in derivative losses in 2003 and 2002, respectively,
which are included in Other operating expenses. The decrease in derivative
losses in 2003 is primarily due to the impact that increasing interest
rates had on the market value of American Enterprise Life's interest rate
swaps. The derivatives expire at various dates through 2006.
10. Fair values of financial instruments
American Enterprise Life discloses fair value information for financial
instruments for which it is practicable to estimate that value. The fair
values of financial instruments are estimates based upon market conditions
and perceived risks at December 31, 2003 and 2002 and require management
judgment. These figures may not be indicative of their future fair values.
Fair value of life insurance obligations, receivables and all non-financial
instruments, such as DAC, are excluded. Off-balance sheet intangible assets
are also excluded. Management believes the value of excluded assets and
liabilities is significant. The fair value of American Enterprise Life,
therefore, cannot be estimated by aggregating the amounts presented.
2003 2002
---- ----
Carrying Fair Carrying Fair
(Thousands) Amount Value Amount Value
----------- ---------- ---------- ---------- ----------
Financial Assets
----------------
Fixed maturities $6,650,906 $6,650,906 $5,288,855 $5,288,855
Common stocks $ 6 $ 6 $ - $ -
Mortgage loans on real estate $ 534,812 $ 585,295 $ 587,535 $ 656,200
Derivatives $ 6,072 $ 6,072 $ 15,852 $ 15,852
Cash and cash equivalents $ 9,065 $ 9,065 $1,118,692 $1,118,692
Separate account assets $1,108,160 $1,108,160 $ 694,771 $ 694,771
Financial Liabilities
---------------------
Future policy benefits for fixed annuities $6,623,247 $6,385,595 $5,388,765 $5,256,677
Derivatives $ 42,904 $ 42,904 $ 73,058 $ 73,058
Separate account liabilities $1,107,211 $1,064,419 $ 694,248 $ 671,315
At December 31, 2003 and 2002, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $22.1 million and $23.2 million, respectively. The
fair value of these benefits is based on the status of the annuities at
December 31, 2003 and 2002. The fair values of deferred annuities is
estimated as the carrying amount less applicable surrender charges. The
fair value for annuities in non-life contingent payout status is estimated
as the present value of projected benefit payments at rates appropriate for
contracts issued in 2003 and 2002.
F-24
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003 and 2002, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less applicable
surrender charges and less variable insurance contracts carried at $0.9
million and $0.5 million, respectively.
F-25
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report or, where
indicated, were already filed and are hereby incorporated by reference.
3.1 Amendment and Restatement of Articles of Incorporation of American
Enterprise Life dated July 29, 1986, filed electronically as Exhibit 6.1
to American Enterprise Life Personal Portfolio Plus 2's Initial
Registration Statement No. 33-54471, filed on or about July 5, 1994, is
incorporated by reference.
3.2 Amended By-laws of American Enterprise Life, filed electronically as
Exhibit 6.2 to American Enterprise Life Personal Portfolio Plus 2's
Initial Registration Statement No. 33-54471, filed on or about July 5,
1994, is incorporated by reference.
3.3 Consent in writing in lieu of a meeting of the Board of Directors of
American Enterprise Life Insurance Company establishing the American
Enterprise MVA Account dated Aug. 18, 1999, filed electronically as
Exhibit 3.3 to Registrant's Initial Registration Statement No. 333-86297,
filed on or about Aug. 31, 1999, is incorporated by reference.
3.4 Amended By-Laws of American Enterprise Life, dated September 11, 2002
filed electronically as Exhibit 6.3 to Post-Effective Amendment No. 10 to
the Registration Statement No. 333-92297, is incorporated by reference.
4.1 Form of Deferred Annuity Contract for the American Express(R) Signature
One Variable Annuity (form 240180), filed electronically as Exhibit 4.1 to
American Enterprise Variable Annuity Account's Post-Effective Amendment
No. 1 to Registration Statement No. 333-85567 on form N-4, filed on or
about Dec. 7, 1999, is incorporated by reference.
4.2 Form of Deferred Annuity Contract for the Wells Fargo Advantage(SM)
Variable Annuity (form 44209), filed electronically as Exhibit 4.1 to
American Enterprise Variable Annuity Account's Pre-Effective Amendment
No. 1 to Registration Statement No. 333-85567 on form N-4, filed on or
about Nov. 4, 1999, is incorporated by reference.
4.3 Form of Deferred Annuity Contract for the Wells Fargo Advantage(SM)
Builder Variable Annuity (form 44210), filed electronically as Exhibit 4.2
to American Enterprise Variable Annuity Account's Pre-Effective Amendment
No. 1 to Registration Statement No. 333-85567 on form N-4, filed on or
about Nov. 4, 1999, is incorporated by reference.
4.4 Form of Deferred Annuity Contract for the American Express New
Solutions(SM) Variable Annuity (form 240343) filed electronically as
Exhibit 4.1 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-92297 on
Form N-4, filed on or about Feb. 11, 2000, is incorporated by reference.
4.4(a) Form of Deferred Annuity Contract Data Pages (240343) filed as Exhibit
4.1(a) to Post-Effective Amendment No. 10 to Registration Statement No.
333-92297, is incorporated by reference.
4.5 Form of Deferred Annuity Contract for American Express Signature Variable
Annuity (R) (form 43431) filed electronically as Exhibit 4.1 to American
Enterprise Variable Annuity Account's Pre-Effective Amendment No. 1 to
Registration Statement No. 333-74865 on form N-4, filed on or about Aug.
4, 1999, is incorporated by reference.
4.6 Form of Deferred Annuity Contract for the American Express(R) Galaxy
Premier Variable Annuity and the American Express Pinnacle Variable
Annuity(SM) (form 44170) filed
E-1
electronically as Exhibit 4.1 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement No.
333-82149, filed on or about Sept. 21, 1999, is incorporated by reference.
4.7 Form of Deferred Annuity Contract for American Express FlexChoice(SM)
Variable Annuity contract Option L (form 271496) filed electronically as
Exhibit 4.1 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-73958 on
form N-4, filed on or Feb. 20, 2002, is incorporated by reference.
4.8 Form of Deferred Annuity Contract for American Express FlexChoice(SM)
Variable Annuity contract Option C (form 271491) filed electronically as
Exhibit 4.2 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-73958 on
form N-4, filed on or Feb. 20, 2002, is incorporated by reference.
4.9 Form of Enhanced Death Benefit Rider for the Wells Fargo Advantage(SM)
Variable Annuity, the Wells Fargo Advantage(SM) Builder Variable Annuity
and the American Express FlexChoice(SM) Variable Annuity contracts (form
44213), filed electronically as Exhibit 4.3 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No. 1 to Registration
Statement No. 333-85567 on form N-4, filed on or about Nov.4, 1999, is
incorporated by reference.
4.10 Form of Guaranteed Minimum Income Benefit Rider for the American Express
Signature Variable Annuity (R) and the American Express(R) Signature One
Variable Annuity (6% Accumulation Benefit Base) (form 240186), filed
electronically as Exhibit 4.2 to American Enterprise Variable Annuity
Account's Post-Effective Amendment No. 3 to Registration Statement No.
333-85567 on form N-4, filed on or about Feb. 11, 2000, is incorporated by
reference.
4.11 Form of Guaranteed Minimum Income Benefit Rider for the American Express
New Solutions(SM) Variable Annuity (form 240350), filed electronically as
Exhibit 4.4 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-92297 on
Form N-4, filed on or about Feb. 11, 2000, is incorporated by reference.
4.12 Form of Guaranteed Minimum Income Benefit Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity and the American Express FlexChoice(SM) Variable Annuity
contracts (form 44214), filed electronically as Exhibit 4.4 to American
Enterprise Variable Annuity Account's Pre-Effective Amendment No. 1 to
Registration Statement No. 333-85567 on form N-4, filed on or about Nov.
4, 1999, is incorporated by reference.
4.13 Form of 5% Accumulation Death Benefit Rider for the American Express
Signature Variable Annuity(R) and the American Express Signature One
Variable Annuity(SM) (form 240183), filed electronically as Exhibit 4.3 to
American Enterprise Variable Annuity Account's Post-Effective Amendment
No. 1 to Registration Statement No. 333-85567 on form N-4, filed on or
about Dec. 8, 1999, is incorporated by reference.
4.14 Form of Value Option Return of Purchase Payment Death Benefit Rider for
the American Express (R) Signature One Variable Annuity (form 240182),
filed electronically as Exhibit 4.11 to Registrant's Post-Effective
Amendment No. 6 to Registration Statement No. 333-86297 on form S-1, filed
on or about May 1, 2000, is incorporated by reference.
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4.15 Form of 8% Performance Credit Rider for the American Express Signature
Variable Annuity(R) and the American Express(R) Signature One Variable
Annuity (form 240187), filed electronically as Exhibit 4.4 to American
Enterprise Variable Annuity Account's Post-Effective Amendment No. 2 to
Registration Statement No. 333-85567 on form N-4, filed on or about Dec.
30, 1999, is incorporated by reference.
4.16 Form of Performance Credit Rider for the American Express New
Solutions(SM) Variable Annuity (form 240349), filed electronically as
Exhibit 4.2 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement No. 333-92297 on
Form N-4, filed on or about Feb. 11, 2000, is incorporated by reference.
4.17 Form of Benefit Protector(SM) Death Benefit Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity, the American Express New Solutions (SM) Variable
Annuity, the American Express(R) Galaxy Premier Variable Annuity, the
American Express Pinnacle Variable Annuity(SM), the American Express(R)
Signature One Variable Annuity and the American Express FlexChoice(SM)
Variable Annuity contracts (form 271155), filed electronically as Exhibit
4.15 to American Enterprise Variable Annuity Account's Post-Effective
Amendment No. 6 to Registration Statement No. 333-85567 on form N-4, filed
on or about March 1, 2001, is incorporated by reference.
4.18 Form of Benefit Protector(SM) Plus Death Benefit Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity, the American Express New Solutions (SM) Variable
Annuity, the American Express(R) Galaxy Premier Variable Annuity, the
American Express Pinnacle Variable Annuity(SM), the American Express(R)
Signature One Variable Annuity and the American Express FlexChoice(SM)
Variable Annuity contracts (form 271156), filed electronically as Exhibit
4.16 to American Enterprise Variable Annuity Account's Post-Effective
Amendment No. 6 to Registration Statement No. 333-85567 on form N-4, filed
on or about March 1, 2001, is incorporated by reference.
4.19 Form of Maximum Anniversary Value Death Benefit Rider for the American
Express New Solutions (SM) Variable Annuity (form 240346), filed
electronically as Exhibit 4.3 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement No.
333-92297, filed on or about February 11, 2000, is incorporated by
reference.
4.20 Form of Roth IRA Endorsement for the Wells Fargo Advantage(SM) Variable
Annuity, the Wells Fargo Advantage(SM) Builder Variable Annuity, the
American Express Signature Variable Annuity(R), the American Express(R)
Signature One Variable Annuity, the American Express New Solutions (SM)
Variable Annuity, the American Express(R) Galaxy Premier Variable Annuity,
the American Express Pinnacle Variable Annuity(SM) and the American
Express FlexChoice(SM) Variable Annuity contracts (form 43094), filed
electronically as Exhibit 4.2 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement No.
333-74865 on form N-4, filed on or about Aug. 4, 1999, incorporated by
reference.
4.21 Form of SEP-IRA for the Wells Fargo Advantage(SM) Variable Annuity, the
Wells Fargo Advantage(SM) Builder Variable Annuity, the American Express
(R) Signature One Variable Annuity, the American Express(R) Galaxy Premier
Variable Annuity, and the American Express Pinnacle Variable Annuity(SM)
(form 43412), filed electronically as Exhibit 4.3 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No. 1 to Registration
Statement No. 333-72777 on form N-4, filed on or about July 8, 1999, is
incorporated by reference.
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4.22 Form of SEP-IRA for the American Express Signature Variable Annuity(R),
the American Express New Solutions(SM) Variable Annuity and the American
Express FlexChoice(SM) Variable Annuity contracts (form 43433) filed
electronically as Exhibit 4.3 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement No.
333-74865 on form N-4, filed on or about Aug. 4, 1999, is incorporated by
reference.
4.23 Form of Disability Waiver of Withdrawal Charges Rider for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity and the American Express FlexChoice(SM) Variable Annuity
contracts (form 44215), filed electronically as Exhibit 4.5 to American
Enterprise Variable Annuity Account's Pre-Effective Amendment No. 1 to
Registration Statement No. 333-85567 on form N-4, filed on or about Nov.
4, 1999, is incorporated by reference.
4.24 Form of Unemployment Waiver of Withdrawal Charges Rider for the Wells
Fargo Advantage(SM) Variable Annuity and the Wells Fargo Advantage(SM)
Builder Variable Annuity (form 44216), to American Enterprise Variable
Annuity Account's Pre-Effective Amendment No. 1 to Registration Statement
No. 333-85567 on form N-4, filed on or about Nov. 4, 1999, is incorporated
by reference.
4.25 Form of TSA Endorsement for the Wells Fargo Advantage(SM) Variable
Annuity, the Wells Fargo Advantage(SM) Builder Variable Annuity, the
American Express Signature Variable Annuity(R) and the American Express
FlexChoice(SM) Variable Annuity contracts (form 43413), filed
electronically as Exhibit 4.4 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration Statement No.1 to
Registration Statement No. 333-72777 on form N-4, filed on or about July
8, 1999, is incorporated by reference.
4.26 Form of Traditional IRA or SEP-IRA Endorsement (form 272108), filed
electronically as Exhibit 4.11 to Post-Effective Amendment No. 10 to
Registration Statement No. 333-92297, is incorporated by reference.
4.27 Form of Roth IRA Endorsement (form 272109), filed electronically as
Exhibit 4.12 to Post-Effective Amendment No. 10 to Registration Statement
No. 333-92297, is incorporated by reference.
4.28 Form of Variable Annuity Unisex Endorsement (form 272110), filed
electronically as Exhibit 4.13 to the Post-Effective Amendment No. 10 to
Registration Statement No. 333-92297, is incorporated by reference.
*31.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.
*31.2 Certification of Arthur H. Berman, Chief Financial Officer, pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.
*32.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, and Arthur
H. Berman, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
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