UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission file number 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
---------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ____ No [X]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2004 and
December 31, 2003 1
Consolidated Statements of Operations - Three
months ended June 30, 2004 and 2003 2
Consolidated Statements of Operations - Six
months ended June 30, 2004 and 2003 3
Consolidated Statements of Cash Flows - Six
months ended June 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 14
Item 4. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
June 30, December 31,
2004 2003
------------------- --------------------
(Unaudited)
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value
(amortized cost: 2004, $6,375,622; 2003, $6,539,561) $ 6,338,324 $ 6,644,721
Preferred and common stocks, at fair value
(amortized cost: 2004, $6,000; 2003, $6,000) 5,864 6,191
Mortgage loans on real estate, at cost
(less reserves: 2004, $7,362; 2003, $7,362) 491,472 534,812
Other investments 5,818 6,069
------------------- --------------------
Total investments 6,841,478 7,191,793
------------------- --------------------
Cash and cash equivalents 16,870 9,065
Amounts due from brokers 584 161
Other accounts receivable 4,112 3,572
Accrued investment income 70,092 70,591
Deferred policy acquisition costs 313,169 296,722
Deferred sales inducement costs 51,516 49,244
Deferred income taxes, net 18,436 -
Other assets 1,387 6,335
Separate account assets 1,411,434 1,108,160
------------------- --------------------
Total assets $ 8,729,078 $ 8,735,643
=================== ====================
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits:
Fixed annuities $ 6,508,160 $ 6,645,315
Variable annuity guarantees 3,639 -
Universal life insurance 30 27
Policy claims and other policyholders' funds 6,490 3,100
Amounts due to brokers 8,753 75,070
Deferred income taxes, net - 11,618
Other liabilities 42,208 68,674
Separate account liabilities 1,411,434 1,108,160
------------------- --------------------
Total liabilities 7,980,714 7,911,964
------------------- --------------------
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 181,913 177,545
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities (loss) gain (21,806) 60,078
Net unrealized derivative losses (6,615) (8,816)
------------------- --------------------
Total accumulated other comprehensive (loss) income (28,421) 51,262
------------------- --------------------
Total stockholder's equity 748,364 823,679
------------------- --------------------
Total liabilities and stockholder's equity $ 8,729,078 $ 8,735,643
=================== ====================
See Notes to Consolidated Financial Statements.
-1-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands)
(Unaudited)
Three months ended
June 30,
--------------------------------------
2004 2003
--------------- -----------------
Revenues:
Net investment income $ 96,066 $ 92,194
Contractholder and policyholder charges 2,778 1,932
Mortality and expense risk and other fees 5,609 3,063
Net realized gain (loss) on investments 2,331 (892)
--------------- -----------------
Total 106,784 96,297
--------------- -----------------
Benefits and Expenses:
Death and other benefits-investment contracts and
universal life-type insurance 2,450 1,838
Interest credited on investment contracts and
universal life-type insurance 57,854 64,116
Amortization of deferred policy acquisition costs 15,566 14,392
Other insurance and operating expenses 11,335 19,418
--------------- -----------------
Total 87,205 99,764
--------------- -----------------
Pretax income (loss) 19,579 (3,467)
Income tax provision (benefit) 17,262 (1,215)
--------------- -----------------
Net income (loss) $ 2,317 $ (2,252)
=============== =================
See Notes to Consolidated Financial Statements.
-2-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands)
(Unaudited)
Six months ended
June 30,
--------------------------------------
2004 2003
--------------- -----------------
Revenues:
Net investment income $ 190,461 $ 178,529
Contractholder and policyholder charges 5,255 3,749
Mortality and expense risk and other fees 10,619 5,763
Net realized gain on investments 4,098 25,257
--------------- -----------------
Total 210,433 213,298
--------------- -----------------
Benefits and Expenses:
Death and other benefits-investment contracts and
universal life-type insurance 6,784 4,986
Interest credited on investment contracts and
universal life-type insurance 115,617 124,209
Amortization of deferred policy acquisition costs 30,218 28,380
Other insurance and operating expenses 29,755 29,579
--------------- -----------------
Total 182,374 187,154
--------------- -----------------
Pretax income before accounting change 28,059 26,144
Income tax provision 20,129 9,145
--------------- -----------------
Income before accounting change 7,930 16,999
Cumulative effect of accounting change, net of tax (Note 1) (3,562) -
--------------- -----------------
Net income $ 4,368 $ 16,999
=============== =================
See Notes to Consolidated Financial Statements.
-3-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Six months ended
June 30,
-----------------------------------------
2004 2003
------------------ ----------------
Cash Flows from Operating Activities
Net income $ 4,368 $ 16,999
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Change in accrued investment income 625 (8,727)
Change in other assets and liabilities, net (16,688) (22,130)
Change in deferred policy acquisition costs, net (844) (52,478)
Change in policy claims and other
policyholders' funds 3,390 11,900
Deferred income taxes 14,773 10,878
Amortization of premium, net 12,282 10,590
Net realized gain on investments (4,098) (25,257)
Cumulative effect of accounting change, net of tax (Note 1) 3,562 --
------------------ ----------------
Net cash provided by (used in) operating activities 17,370 (58,225)
------------------- ----------------
Cash Flows From Investing Activities
Available-for-Sale securities:
Sales 160,891 1,539,712
Maturities, sinking fund payments and calls 211,064 454,320
Purchases (216,039) (3,322,928)
Other investments:
Sales, maturities, sinking fund payments and calls 46,571 41,268
Purchases (3,267) (6,433)
Change in amounts due to and from brokers, net (66,740) (866,652)
------------------ ----------------
Net cash provided by (used in) investing activities 132,480 (2,160,713)
------------------ ----------------
Cash Flows from Financing Activities
Activity related to investment contracts
and universal life-type insurance:
Considerations received 141,549 1,387,425
Interest credited to account balances 115,617 124,209
Surrenders and other benefits (399,211) (326,920)
------------------ ----------------
Net cash (used in) provided by financing activities (142,045) 1,184,714
------------------ ----------------
Net increase (decrease) in cash and cash equivalents 7,805 (1,034,224)
Cash and cash equivalents at beginning of period 9,065 1,118,692
------------------ ----------------
Cash and cash equivalents at end of period $ 16,870 $ 84,468
================== ================
See Notes to Consolidated Financial Statements.
-4-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form 10-K
of American Enterprise Life Insurance Company (American Enterprise Life)
for the year ended December 31, 2003. Certain reclassifications of prior
period amounts have been made to conform to the current presentation.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of operations
reported for interim periods are not necessarily indicative of results for
the entire year.
Recently Issued Accounting Standards
In 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) effective for fiscal years beginning after
December 15, 2003. SOP 03-1 provides guidance on separate account
presentation and accounting for interests in separate accounts.
Additionally, SOP 03-1 provides clarifying guidance as to the recognition
of bonus interest and other sales inducement benefits and the presentation
of any deferred amounts in the financial statements. Lastly, SOP 03-1
requires insurance enterprises to consider whether to establish additional
liabilities for benefits that may become payable under variable annuity
death benefit guarantees or other insurance or annuity contract provisions.
Where an additional liability is established, the recognition of this
liability will then be considered in amortizing deferred policy acquisition
costs (DAC) and any deferred sales inducement costs associated with those
insurance or annuity contracts.
The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative
effect of accounting change that reduced 2004 results by $3.6 million ($5.5
million pretax). The cumulative effect of accounting change related to
establishing additional liabilities for certain variable annuity guaranteed
benefits and from considering these liabilities in valuing DAC and deferred
sales inducement costs associated with those contracts. Prior to the
adoption of SOP 03-1, amounts paid in excess of contract value were
expensed when payable. American Enterprise Life's accounting for separate
accounts was already consistent with the provisions of SOP 03-1 and,
therefore, there was no impact related to this requirement.
The additional liabilities for guaranteed benefits established under SOP
03-1 are supported by general account assets. Changes in these liabilities
are included in death and other benefits in the Consolidated Statements of
Operations.
Variable annuity contracts offered by American Enterprise Life all contain
guaranteed minimum death benefit (GMDB) provisions. When market values of
the customer's accounts decline, the death benefit payable on a contract
with a GMDB may exceed the contract accumulation value. American Enterprise
Life also offers variable annuities with death benefit provisions that
gross up the amount payable by a certain percentage of contract earnings;
these are referred to as gain gross-up benefits (GGU). In addition,
American Enterprise Life offers contracts containing guaranteed minimum
income benefit (GMIB) provisions. If elected by the contract owner and
after a stipulated waiting period from
-5-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
contract issuance, a GMIB guarantees a minimum lifetime annuity based on a
specified rate of contract accumulation value growth and predetermined
annuity purchase rates. American Enterprise Life has established additional
liabilities for these variable annuity death and GMIB benefits under SOP
03-1. American Enterprise Life has not established additional liabilities
for other insurance or annuitization guarantees for which the risk is
currently immaterial.
The variable annuity death benefit liability is determined each period by
estimating the expected value of death benefits in excess of the projected
contract accumulation value and recognizing the excess over the estimated
meaningful life based on expected assessments (e.g., mortality and expense
fees, contractual administrative charges and similar fees). Similarly, the
GMIB liability is determined each period by estimating the expected value
of annuitization benefits in excess of the projected contract accumulation
value at the date of annuitization and recognizing the excess over the
estimated meaningful life based on expected assessments. Significant
assumptions made in projecting future benefits and assessments relate to
customer asset value growth rates, mortality, persistency and investment
margins and are consistent with those used for DAC asset valuation for the
same contracts. In determining the additional liabilities for variable
annuity death benefits and GMIB, American Enterprise Life projects these
benefits and contract assessments over 200 randomly generated equity market
scenarios. As with DAC, management will review and, where appropriate,
adjust its assumptions each quarter. Unless management identifies a
material deviation over the course of the quarterly monitoring, management
will review and update these assumptions annually in the third quarter of
each year.
-6-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following provides summary information related to variable annuity
contracts for which American Enterprise Life has established additional
liabilities for death benefits and guaranteed minimum income benefits:
---------------------------------------------------------------------- ------------------ -------------------
Variable Annuity GMDB and GMIB by Benefit Type As of As of
June 30, 2004 December 31, 2003
-------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions)
------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GMDB Total Contract Value $ 1,103.4 $ 1,066.7
Providing for Return of -------------------------------------------- ------------------ -------------------
Premium Contract Value in Separate Accounts $ 202.0 $ 142.0
-------------------------------------------- ------------------ -------------------
Net Amount at Risk* $ 9.1 $ 7.4
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 64 66
------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GMDB Total Contract Value $ 1,497.7 $ 1,467.7
Providing for One Year -------------------------------------------- ------------------ -------------------
Ratchet Contract Value in Separate Accounts $ 913.2 $ 791.3
-------------------------------------------- ------------------ -------------------
Net Amount at Risk* $ 76.4 $ 79.1
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 64 62
------------------------- -------------------------------------------- ------------------ -------------------
Contracts with Other Total Contract Value $ 284.2 $ 244.6
GMDB -------------------------------------------- ------------------ -------------------
Contract Value in Separate Accounts $ 212.6 $ 169.2
-------------------------------------------- ------------------ -------------------
Net Amount at Risk* $ 48.6 $ 20.3
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 64 62
------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GGU Total Contract Value $ 86.6 $ 77.1
Death Benefit -------------------------------------------- ------------------ -------------------
Contract Value in Separate Accounts $ 50.0 $ 38.7
-------------------------------------------- ------------------ -------------------
Net Amount at Risk* $ 1.8 $ 1.1
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 64 63
------------------------- -------------------------------------------- ------------------ -------------------
Contracts with GMIB Total Contract Value $ 422.1 $ 349.9
-------------------------------------------- ------------------ -------------------
Contract Value in Separate Accounts $ 340.7 $ 263.0
-------------------------------------------- ------------------ -------------------
Net Amount at Risk* $ 25.1 $ 23.0
-------------------------------------------- ------------------ -------------------
Weighted Average Attained Age 59 59
------------------------- -------------------------------------------- ------------------ -------------------
* Represents current death benefit less total contract value for GMDB,
amount of gross up for GGU and accumulated guaranteed minimum benefit
base less total contract value for GMIB and assumes the actuarially
remote scenario that all claims become payable on the same day.
---------------------------------------------------------------------- ------------------ -------------------
Additional Liabilities and Incurred Benefits GMDB & GGU GMIB
------------------------- -------------------------------------------- ------------------ -------------------
Six months ended Liability balance at January 1 $ 1.2 $ 2.2
June 30, 2004 -------------------------------------------- ------------------ -------------------
Reported claims $ 1.0 $ -
-------------------------------------------- ------------------ -------------------
Liability balance at June 30 $ 1.3 $ 2.4
-------------------------------------------- ------------------ -------------------
Incurred claims (reported + change in
liability) $ 1.1 $ 0.2
------------------------- -------------------------------------------- ------------------ -------------------
Contract values in separate accounts were invested in various equity, bond
or other funds as directed by the contract holder. No gains or losses were
recognized on assets transferred to separate accounts for the periods
presented.
Sales inducement costs consist of bonus interest credits and premium
credits added to certain annuity contract values. These benefits are
capitalized to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. Deferred
sales inducement costs were $51.5 million and $49.2 million as of June 30,
2004 and December 31, 2003, respectively, and are stated separately in the
Consolidated Balance Sheets. These costs were previously included in DAC
and were reclassified as part of the adoption of SOP 03-1. The amounts
capitalized are amortized using the same methodology and assumptions used
to amortize DAC. American Enterprise Life capitalized $3.1 million and $7.0
million during the three months ended June 30, 2004 and 2003, respectively,
and $7.4 million and $11.4 million during the six months ended June 30,
2004 and 2003, respectively. American Enterprise Life amortized $2.5
million and $2.3 million during the
-7-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
three months ended June 30, 2004 and 2003, respectively, and $4.8 million
and $4.5 million during the six months ended June 30, 2004 and 2003,
respectively.
In November 2003, the Financial Accounting Standards Board (FASB) ratified
a consensus on the disclosure provisions of Emerging Issues Task Force
(EITF) Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." American Enterprise Life complied with
the disclosure provisions of this rule in Note 2 to the Consolidated
Financial Statements included in its Annual Report on Form 10-K for the
year ended December 31, 2003. In March 2004, the FASB reached a consensus
regarding the application of a three-step impairment model to determine
whether cost method investments are other-than-temporarily impaired. The
provisions of this rule are required to be applied prospectively to all
current and future investments accounted for in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
and other cost method investments for reporting periods beginning after
June 15, 2004. Assuming no market changes, American Enterprise Life does
not expect EITF 03-1 to have a material impact on its results of operations
at the time of adoption.
2. Investment Securities
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three months ended June 30, 2004 and 2003:
Three Months Ended June 30,
--------------------------------------
2004 2003
---------------- ------------------
(Millions)
Gross realized gains on sales $ 2.7 $ 4.1
Gross realized losses on sales $ (0.9) $ (1.0)
Realized losses recognized for other-than-temporary
impairments $ - $ (3.0)
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the six months ended June 30, 2004 and 2003:
Six Months Ended June 30,
--------------------------------------
2004 2003
---------------- ------------------
(Millions)
Gross realized gains on sales $ 5.7 $ 44.8
Gross realized losses on sales $ (1.5) $ (9.1)
Realized losses recognized for other-than-temporary
impairments $ - $ (9.3)
3. Comprehensive Income
Comprehensive income is defined as the aggregate change in stockholder's
equity, excluding changes in ownership interests. It is the sum of net
income and changes in unrealized gains or losses on Available-for-Sale
securities and applicable deferred policy acquisition and deferred sales
inducement costs, net of related tax and unrealized gains or losses on
derivatives, net of related tax.
-8-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total comprehensive (loss) income was $(154.2) million and $41.3 million
for the three months ended June 30, 2004 and 2003, respectively. Total
comprehensive (loss) income was $(75.3) million and $55.1 million for the
six months ended June 30, 2004 and 2003, respectively. The difference
between net income and total comprehensive income for these periods
primarily reflects the after-tax change in net unrealized (loss) gain on
Available-for-Sale securities.
4. Taxes and interest
Net income taxes paid during the six months ended June 30, 2004 and 2003,
were $1.7 million and $13.8 million, respectively. Interest paid on
borrowings during the six months ended June 30, 2004 and 2003, was $0.4
million and $5.3 thousand, respectively.
5. Commitments and contingencies
Commitments to fund mortgage loans on real estate at June 30, 2004 and
December 31, 2003 were $3.1 million and $1.0 million, respectively.
The maximum amount of life insurance risk retained by American Enterprise
Life is $750,000 on any single life. Risk not retained is reinsured with
other life insurance companies on a yearly renewable term basis. American
Enterprise Life retains all accidental death benefit and waiver of premium
risk. Reinsurance contracts do not relieve American Enterprise Life from
its primary obligation to policyholders.
Substantially all of American Enterprise Life's annuity products have
minimum interest rate guarantees in their fixed accounts. As of June 30,
2004, these minimum interest rate guarantees ranged from 1.5 percent to 5.0
percent. 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.
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 other legal and
arbitration proceedings concerning matters arising in connection with the
conduct of their respective business activities. American Enterprise Life
believes it has meritorious defenses to each of these actions and intends
to defend them vigorously. In addition, American Enterprise Life is subject
to periodic state insurance department regulatory action, through
examinations or other proceedings. American Enterprise Life believes that
it is not a party to, nor are any of its properties the subject of, any
pending legal, arbitration or regulatory proceedings that would have a
material adverse effect on American Enterprise Life's consolidated
financial condition, results of operations or liquidity. However, it is
possible that the outcome of any such proceedings could have a material
impact on results of operations in any particular reporting period as the
proceedings are resolved.
-9-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The IRS routinely examines American Enterprise Life's federal income tax
information 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.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American Enterprise Life Insurance Company is a stock life insurance company
organized under the laws of the State of Indiana. American Enterprise Life
Insurance Company is a wholly owned subsidiary of IDS Life Insurance Company, a
Minnesota corporation. IDS Life Insurance Company is a wholly owned subsidiary
of American Express Financial Corporation (AEFC). AEFC is a wholly owned
subsidiary of American Express Company. American Enterprise Life Insurance
Company provides financial institution clients American Express branded
financial products and services to support their retail insurance and annuity
operations. American Enterprise Life Insurance Company issues variable life
insurance and fixed and variable annuity contracts, primarily through regional
and national financial institutions and regional and/or independent
broker-dealers, in all states except New York and New Hampshire. American
Enterprise REO 1, LLC is a wholly owned subsidiary of American Enterprise Life
Insurance Company. This subsidiary holds real estate investments and/or mortgage
loans on real estate. American Enterprise Life Insurance Company and its
subsidiary are referred to collectively herein as "American Enterprise Life".
American Enterprise Life follows United States generally accepted accounting
principles (GAAP), and the following discussion is presented on a consolidated
basis consistent with GAAP.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. See the
Forward-Looking Statements section below.
Results of Operations for the Three Months Ended June 30, 2004 and 2003
Net income was $2.3 million for the three months ended June 30, 2004, compared
to a net loss of $2.3 million for the three months ended June 30, 2003,
reflecting an overall increase in revenues, and decreases in interest credited
on investment contracts and universal life-type insurance and other insurance
and operating expenses, partially offset by an increased effective tax rate, as
described further below.
Revenues
Net investment income increased 4 percent to $96.1 million. Net realized gain on
investments was $2.3 million for the three months ended June 30, 2004 compared
to a loss of $0.8 million for the three months ended June 30, 2003. For the
three months ended June 30, 2004, $3.2 million of investment gains were
partially offset by $0.9 million of gross realized losses from sales of
securities classified as Available-for-Sale. Included in investment gains are
$2.7 million of gross realized gains classified as Available-for-Sale.
For the three months ended June 30, 2003, $4.1 million of gross realized gains
from sales of securities classified as Available-for-Sale were more than offset
by $4.9 million of investment losses. Included in these total investment losses
are $1.0 million of gross realized losses from sales of securities, as well as
$3.0 million of other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Mortality and expense risk and other fees increased $2.5 million or 83 percent,
primarily reflecting higher average values of separate account assets.
-11-
Benefits and Expenses
Interest credited on investment contracts and universal life-type insurance
decreased $6.3 million or 10 percent reflecting lower interest crediting rates
and the effect of lower appreciation in the S&P 500 on equity indexed annuities
this year versus last year, partially offset by higher average inforce levels.
Other insurance and operating expenses decreased by $8.1 million or 42 percent,
primarily due to favorable market value changes on interest rate swaps for the
three months ended June 30, 2004, compared to the same period a year ago.
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.
The effective tax rate rose primarily due to a reduction in net deferred tax
assets.
Results of Operations for the Six Months Ended June 30, 2004 and 2003
Income before accounting change was $7.9 million for the six months ended June
30, 2004 compared to $17.0 million for the six months ended June 30, 2003,
primarily reflecting reduced net realized gains on investments and an increased
tax provision, partially offset by increased net investment income and reduced
interest credited on investment contracts and universal life-type insurance.
Net income for the six months ended June 30, 2004 reflects the $3.6 million
($5.5 million pretax) impact of American Enterprise Life's adoption of SOP 03-1.
See "Recently Issued Accounting Standards" section of Note 1 to the Consolidated
Financial Statements for discussion regarding the impact of adoption of SOP
03-1.
Revenues
Net investment income increased 6.7 percent to $190.5 million. Net realized gain
on investments was $4.1 million for the six months ended June 30, 2004 compared
to $25.3 million for the six months ended June 30, 2003. For the six months
ended June 30, 2004, $6.2 million of investment gains were partially offset by
$2.1 million of impairments and losses. Included in these total investment gains
and losses are $5.7 million of gross realized gains and $1.5 million of gross
realized losses from sales of securities classified as Available-for-Sale.
For the six months ended June 30, 2003, $44.8 million of gross realized gains
from sales of securities classified as Available-for-Sale were partially offset
by $19.5 million of impairments and losses. Included in these investment losses
are $9.1 million of gross realized losses from sales of securities, as well as
$9.3 million of other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Mortality and expense risk and other fees increased $4.9 million or 84 percent,
primarily reflecting higher average values of separate account assets.
-12-
Benefits and Expenses
Interest credited on investment contracts and universal life-type insurance
decreased $8.6 million or 7 percent reflecting lower interest crediting rates,
partially offset by higher average inforce levels. The effective tax rate rose
primarily due to the second quarter 2004 reduction in net deferred tax assets.
Deferred Policy Acquisition Costs
The costs of acquiring new business, including, for example, direct sales
commissions, policy issue costs and other related costs have been deferred on
the sale of annuity contracts. Deferred policy acquisition costs (DAC) for
certain annuities are amortized as a percentage of the estimated gross profits
expected to be realized on the policies. DAC for other annuities are amortized
using the interest method.
Amortization of DAC requires the use of certain assumptions including interest
margins, persistency rates, maintenance expense levels and customer asset value
growth rates for variable annuities. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. This rate
is net of asset fees, and anticipates a blend of equity and fixed income
investments. Management routinely monitors a wide variety of trends in the
business including comparisons of actual and assumed experience. Management
reviews and, where appropriate, adjusts its assumptions with respect to customer
asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality, interest margin and maintenance expense level assumptions, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring process, management reviews and updates these DAC
assumptions annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change in
the required amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization while
a decrease in amortization percentage will result in a deceleration of DAC
amortization. The impact on results of operations of changing assumptions with
respect to the amortization of DAC can be either positive or negative in any
particular period, and is reflected in the period that such changes are made.
DAC of $313.2 million and $296.7 million related to annuities was on American
Enterprise Life's consolidated balance sheet at June 30, 2004 and December 31,
2003, respectively. In addition to these DAC balances, and in conjunction with
American Enterprise Life's adoption of SOP 03-1, American Enterprise Life had
$51.5 million and $49.2 million of deferred sales inducement costs at June 30,
2004 and December 31, 2003, respectively. Sales inducement costs include bonus
interest credits and premium credits added to certain annuity contract values.
American Enterprise Life capitalizes these benefit costs to the extent they are
incremental to amounts that would be credited on similar contracts without the
applicable feature. The amounts capitalized are amortized using the same
methodology and assumptions used to amortize DAC.
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 involve
DAC and deferred sales inducement costs, recognition of benefits under GMDB and
certain other variable annuity benefits, mortality and expense risk and other
fees and structured investments. The direction and magnitude of the changes in
equity markets can increase or decrease amortization of DAC and
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deferred sales inducement costs, incurred amounts under GMDB and other variable
annuity benefit provisions, and mortality and expense risk and other fees and
correspondingly affect results of operations in any particular period.
Similarly, the value of 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.
Liquidity and Capital Resources
American Enterprise Life's liquidity requirements are generally met by funds
provided by annuity considerations, 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, other product-related acquisition
and sales inducement costs and operating expenses and 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 June 30,
2004. American Enterprise Life had no outstanding reverse repurchase agreements
at June 30, 2004. Both the line of credit and reverse repurchase agreements are
used strictly as short-term sources of funds.
Investments include $503.0 million, $467.6 million and $273.7 million of below
investment grade securities (excluding net unrealized appreciation and
depreciation) at June 30, 2004, December 31, 2003 and June 30, 2003,
respectively. These investments represent 7.3 percent, 6.6 percent and 3.9
percent of American Enterprise Life's investment portfolio at June 30, 2004,
December 31, 2003 and June 30, 2003, respectively.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the Consolidated
Financial Statements.
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ITEM 4. CONTROLS AND PROCEDURES
The 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, its disclosure controls and
procedures are effective. There have not been any changes in American Enterprise
Life's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter
to which this report relates that have materially affected, or are reasonably
likely to materially affect, American Enterprise Life's internal control over
financial reporting.
Forward-Looking Statements
This report includes forward-looking statements which are subject to risks and
uncertainties that could cause results to differ materially from such
statements. The words "believe," "expect," "anticipate," "optimistic," "intend,"
"plan," "aim," "will," "may," "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 update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to: fluctuations in
external markets, which can affect the amount and types of investment products
sold, the market value of its separate account assets, and related mortality and
expense risk and other fees 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 time frames 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 IDS Life Insurance Company's and 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 and reserves required pursuant
to SOP 03-1 which could affect both American Enterprise Life's balance sheet and
results of operations; and outcomes of litigation. A further description of
these and other risks and uncertainties can be found in American Enterprise
Life's Annual Report on Form 10-K for the year ended December 31, 2003 and its
other reports filed with the Securities and Exchange Commission (SEC).
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PART II. OTHER INFORMATION
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The Securities and Exchange Commission (SEC), the National
Association of Securities Dealers (NASD) and several state
attorneys general have brought proceedings challenging several
mutual fund and variable account financial practices,
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
other legal and arbitration proceedings concerning matters
arising in connection with the conduct of their respective
business activities. American Enterprise Life believes it has
meritorious defenses to each of these actions and intends to
defend them vigorously. American Enterprise Life believes that
it is not a party to, nor are any of its properties the
subject of, any pending legal or arbitration proceedings that
would have a material adverse effect on American Enterprise
Life's consolidated financial condition, results of operations
or liquidity. However, it is possible that the outcome of any
such proceedings could have a material impact on results of
operations in any particular reporting period as the
proceedings are resolved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(b) Reports on Form 8-K.
Form 8K, filed May 17, 2004, Item 5, reporting
that on May 17, 2004 American Enterprise Life
Insurance Company appointed Dave K. Stewart as
Principal Accounting Officer, replacing Jeryl
Millner.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
(Registrant)
Date: August 3, 2004 By /s/ Mark E. Schwarzmann
-------------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: August 3, 2004 By /s/ Arthur H. Berman
-------------------------------------------
Arthur H. Berman
Director and Executive Vice President -
Finance and Chief Financial Officer
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
31.1 Certification of Mark E. Schwarzmann pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Arthur H. Berman pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Mark E. Schwarzmann and Arthur H. Berman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-1