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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 September 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 Identification No.)
incorporation or organization)
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 -
September 30, 2004 and December 31, 2003
1
Consolidated Statements of Income -
Three months ended September 30, 2004
and 2003 2
Consolidated Statements of Income -
Nine months ended September 30, 2004
and 2003 3
Consolidated Statements of Cash Flows -
Nine months ended September 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 - 15
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
September 30, December 31,
2004 2003
------------------- --------------------
(Unaudited)
Assets
Investments:
Available-for-Sale:
Fixed maturities, at fair value
(amortized cost: 2004, $6,274,528; 2003,$6,539,561) $ 6,389,420 $ 6,644,721
Preferred and common stocks, at fair value
(amortized cost: 2004, $6,000; 2003, $6,000) 6,210 6,191
Mortgage loans on real estate, at cost
(less reserves: 2004, $6,862; 2003, $7,362) 447,426 534,812
Other investments 2,179 6,069
------------ -------------
Total investments 6,845,235 7,191,793
Cash and cash equivalents 80,342 9,065
Amounts due from brokers 10,504 161
Other accounts receivable 4,136 3,572
Accrued investment income 70,851 70,591
Deferred policy acquisition costs 306,830 296,722
Deferred sales inducement costs 49,762 49,244
Other assets 31,136 6,335
Separate account assets 1,559,696 1,108,160
------------ -------------
Total assets $ 8,958,492 $ 8,735,643
============ =============
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits:
Fixed annuities $ 6,418,515 $ 6,645,315
Variable annuity guarantees 3,945 -
Universal life insurance 31 27
Policy claims and other policyholders' funds 7,257 3,100
Amounts due to brokers 6,516 75,070
Deferred income taxes, net 42,488 11,618
Other liabilities 70,081 68,674
Separate account liabilities 1,559,696 1,108,160
------------ -------------
Total liabilities 8,108,529 7,911,964
------------ -------------
Stockholder's equity:
Capital stock, $150 par value;
100,000 shares authorized, 20,000 shares issued
and outstanding 3,000 3,000
Additional paid-in capital 591,872 591,872
Retained earnings 192,810 177,545
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 67,796 60,078
Net unrealized derivative losses (5,515) (8,816)
------------ -------------
Total accumulated other comprehensive income 62,281 51,262
------------ -------------
Total stockholder's equity 849,963 823,679
------------ -------------
Total liabilities and stockholder's equity $ 8,958,492 $ 8,735,643
============ =============
See Notes to Consolidated Financial Statements.
-1-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three months ended
September 30,
----------------------------------------
2004 2003
----------------- -----------------
Revenues:
Net investment income $ 95,403 $ 97,578
Contractholder and policyholder charges 3,023 1,793
Mortality and expense risk and other fees 6,504 3,478
Net realized gain (loss) on investments 1,018 (3,728)
----------------- -----------------
Total 105,948 99,121
----------------- -----------------
Benefits and Expenses:
Death and other benefits-investment contracts and
universal life-type insurance 3,356 1,127
Interest credited on investment contracts and
universal life-type insurance 56,143 66,046
Amortization of deferred policy acquisition costs 9,387 12,019
Other insurance and operating expenses 24,345 10,257
----------------- -----------------
Total 93,231 89,449
----------------- -----------------
Pretax income 12,717 9,672
Income tax provision 1,820 2,842
----------------- -----------------
Net income $ 10,897 $ 6,830
================= =================
See Notes to Consolidated Financial Statements.
-2-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Nine months ended
September 30,
--------------------------------------
2004 2003
----------------- -----------------
Revenues:
Net investment income $ 285,864 $ 276,107
Contractholder and policyholder charges 8,278 5,542
Mortality and expense risk and other fees 17,123 9,241
Net realized gain on investments 5,116 21,529
----------------- -----------------
Total 316,381 312,419
----------------- -----------------
Benefits and Expenses:
Death and other benefits-investment contracts and
universal life-type insurance 10,140 6,113
Interest credited on investment contracts and
universal life-type insurance 171,760 190,255
Amortization of deferred policy acquisition costs 39,605 40,399
Other insurance and operating expenses 54,100 39,836
----------------- -----------------
Total 275,605 276,603
----------------- -----------------
Pretax income before accounting change 40,776 35,816
Income tax provision 21,949 11,987
----------------- -----------------
Income before accounting change 18,827 23,829
Cumulative effect of accounting change, net of tax (Note 1) (3,562) --
----------------- -----------------
Net income $ 15,265 $ 23,829
================= =================
See Notes to Consolidated Financial Statements.
-3-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Nine months ended
September 30,
-----------------------------------------
2004 2003
------------------ ------------------
Cash Flows from Operating Activities
Net income $ 15,265 $ 23,829
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Change in accrued investment income (260) (11,938)
Change in deferred policy acquisition costs, net (7,590) (56,370)
Change in policy claims and other policyholders' funds 4,157 549
Deferred income taxes 26,855 12,455
Change in other assets and liabilities, net (21,150) (15,943)
Amortization of premium, net 19,671 17,374
Net realized gain on investments (5,116) (21,529)
Cumulative effect of accounting change, net of tax (Note 1) 3,562 --
------------------ ------------------
Net cash provided by (used in) operating activities 35,394 (51,573)
------------------ ------------------
Cash Flows From Investing Activities
Available-for-Sale securities:
Sales 235,867 2,411,140
Maturities, sinking fund payments and calls 310,338 740,832
Purchases (295,629) (4,522,086)
Other investments:
Sales, maturities, sinking fund payments and calls 97,272 53,545
Purchases (6,272) (23,227)
Change in amounts due to and from brokers, net (78,897) (977,772)
------------------ ------------------
Net cash provided by (used in) investing activities 262,679 (2,317,568)
------------------ ------------------
Cash Flows from Financing Activities
Activity related to investment contracts and
universal life-type insurance:
Considerations received 178,548 1,636,948
Interest credited to account values 171,760 190,255
Surrenders and other benefits (577,104) (517,891)
------------------ ------------------
Net cash (used in) provided by provided by financing activities
(226,796) 1,309,312
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 71,277 (1,059,829)
Cash and cash equivalents at beginning of period 9,065 1,118,692
------------------ ------------------
Cash and cash equivalents at end of period $ 80,342 $ 58,863
================== ==================
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 June 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) FAS No. 97-1, "Situations in Which Paragraphs 17(b)
and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments (SFAS No. 97), Permit or Require
Accrual of an Unearned Revenue Liability" (FSP 97-1). The implementation of
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1), raised a question regarding the
interpretation of the requirements of SFAS No. 97 concerning when it is
appropriate to record an unearned revenue liability. FSP 97-1 clarifies
that SFAS No. 97 is clear in its intent and language, and requires the
recognition of an unearned revenue liability for amounts that have been
assessed to compensate insurers for services to be performed over future
periods. SOP 03-1 describes one situation, when assessments result in
profits followed by losses, where an unearned revenue liability is
required. SOP 03-1 does not amend SFAS No. 97 or limit the recognition of
an unearned revenue liability to the situation described in SOP 03-1. The
guidance in FSP 97-1 is effective for financial statements for fiscal
periods beginning after June 18, 2004. The adoption of FSP 97-1 did not
have a material impact on American Enterprise Life's consolidated financial
condition or results of operations. (For further discussion of SOP 03-1,
see below and Note 3).
In July 2003, the American Institute of Certified Public Accountants issued
SOP 03-1 effective for fiscal years beginning after December 15, 2003. SOP
03-1 provides guidance on separate account presentation and accounting for
interests in separate accounts. Additionally, SOP 03-1 provides clarifying
guidance as to the recognition of bonus interest and other sales inducement
benefits and the presentation of any deferred amounts in the financial
statements. Lastly, SOP 03-1 requires insurance enterprises to consider
whether to establish additional liabilities for benefits that may become
payable under variable annuity death benefit guarantees or other insurance
or annuity contract provisions. Where an additional liability is
established, the recognition of this liability will then be considered in
amortizing deferred policy acquisition costs (DAC) and any deferred sales
inducement costs associated with those insurance or annuity contracts.
The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative
effect of accounting change that reduced 2004 results by $3.6 million ($5.5
million pretax). The cumulative effect of accounting change related to
establishing additional liabilities for
-5-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 investments accounted for in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
other cost method investments are other-than-temporarily impaired. However,
with the issuance of FASB Staff Position (FSP) No. EITF 03-1-1, the
provisions of the consensus relating to the measurement and recognition of
other-than-temporary impairments will be deferred pending further
clarification from the FASB. The remaining provisions of this rule, which
primarily relate to disclosure requirements, are required to be applied
prospectively to all current and future investments accounted for in
accordance with SFAS No. 115 and other cost method investments. American
Enterprise Life will evaluate the potential impact of EITF 03-1 after the
FASB completes its reassessment.
2. Investment Securities
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------
2004 2003 2004 2003
-- -------- -- --------- --------- -----------
(Millions)
Gross realized gains on sales $ 1.5 $ 6.5 $ 7.2 $ 51.2
Gross realized (losses) on sales $ (0.6) $ (10.2) $ (2.0) $ (19.3)
Realized (losses) recognized for
other-than-temporary impairments $ -- $ -- $ -- $ (9.3)
-6-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Variable Annuities and Sales Inducement Costs
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 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.
In determining the additional liabilities for variable annuity death
benefits and GMIB, American Enterprise Life projects these benefits and
contract assessments using actuarial models to simulate various equity
market scenarios. 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. 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.
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:
-7-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of
Variable Annuity GMDB and GMIB by Benefit Type September 30, As of
2004 December 31, 2003
---------------------------------------------------------------------- ----------------- ------------------
(Dollar amounts in millions)
------------------------- -------------------------------------------- ----------------- ------------------
Contracts with GMDB Total Contract Value $ 1,031.9 $ 1,066.7
Providing for Return of Contract Value in Separate Accounts $ 182.8 $ 142.0
Premium Net Amount at Risk* $ 5.8 $ 7.4
Weighted Average Attained Age 64 66
------------------------- -------------------------------------------- ----------------- ------------------
Contracts with GMDB Total Contract Value $ 1,400.7 $ 1,467.7
Providing for One Year Contract Value in Separate Accounts $ 826.5 $ 791.3
Ratchet Net Amount at Risk* $ 48.8 $ 79.1
Weighted Average Attained Age 64 62
------------------------- -------------------------------------------- ----------------- ------------------
Contracts with Other Total Contract Value $ 265.8 $ 244.6
GMDB Contract Value in Separate Accounts $ 192.4 $ 169.2
Net Amount at Risk* $ 31.0 $ 20.3
Weighted Average Attained Age 64 62
------------------------- -------------------------------------------- ----------------- ------------------
Contracts with GGU Total Contract Value $ 81.0 $ 77.1
Death Benefit Contract Value in Separate Accounts $ 45.3 $ 38.7
Net Amount at Risk* $ 1.1 $ 1.1
Weighted Average Attained Age 64 63
------------------------- -------------------------------------------- ----------------- ------------------
Contracts with GMIB Total Contract Value $ 394.7 $ 349.9
Contract Value in Separate Accounts $ 308.3 $ 263.0
Net Amount at Risk* $ 16.0 $ 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
---------------------- -------------------------------------------- ----------------- ------------------
Nine months ended Liability balance at January 1 $ 1.2 $ 2.2
September 30, 2004 Reported claims $ 1.7 $ 0.1
Liability balance at September 30 $ 1.5 $ 2.5
Incurred claims (reported + change in
liability) $ 2.0 $ 0.4
---------------------- -------------------------------------------- ----------------- ------------------
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.
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.
-8-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $49.8 million and $49.2 million at September
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 $2.7 million and $5.6
million during the three months ended September 30, 2004 and 2003,
respectively, and $10.1 million and $17.0 million during the nine months
ended September 30, 2004 and 2003, respectively. American Enterprise Life
amortized $2.3 million and $1.8 million during the three months ended
September 30, 2004 and 2003, respectively, and $7.1 million and $6.3
million during the nine months ended September 30, 2004 and 2003,
respectively.
4. Comprehensive Income (Loss)
Comprehensive income (loss) 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 (i) unrealized gains or losses on
Available-for-Sale securities and applicable deferred policy acquisition
and deferred sales inducement costs, and (ii) unrealized gains or losses on
derivatives. The components of comprehensive income (loss), net of related
tax, for the three and nine months ended September 30, 2004 and 2003 were
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
(Millions) 2004 2003 2004 2003
------------ -------------- ------------ --------------
Net income $ 10.9 $ 6.8 $ 15.3 $ 23.8
Change in:
Net unrealized securities gains (losses) 89.6 (46.7) 7.7 (10.8)
Net unrealized derivative gains 1.1 1.1 3.3 3.3
------------ -------------- ------------ --------------
Total $ 101.6 $ (38.8) $ 26.3 $ 16.3
============ ============== ============ ==============
5. Taxes and interest
Net income taxes paid during the nine months ended September 30, 2004 were
$4.8 million and cash received for income taxes during the nine months
ended September 30, 2003 was $2.4 million. Interest paid on borrowings
during the nine months ended September 30, 2004 and 2003, were $0.4 million
and $0.3 million, respectively.
-9-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Commitments and contingencies
Commitments to fund mortgage loans on real estate at September 30, 2004 and
December 31, 2003 were $2.9 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. At September 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.
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.
7. Subsequent Events
American Enterprise Life intends to enter into a modified co-insurance
indemnity reinsurance agreement, effective December 1, 2004 with its parent
company, IDS Life Insurance Company. This proposed transaction was filed
with state insurance regulators during the fourth quarter of 2004 and is
pending their approval. The reinsurance agreement calls for American
Enterprise Life to cede and IDS Life Insurance Company to assume American
Enterprise Life's liabilities relating to fixed-only plans of deferred
annuities.
-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
(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 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 September 30, 2004 and 2003
Net income was $10.9 million for the three months ended September 30, 2004,
compared to a net income of $6.8 million for the three months ended September
30, 2003, reflecting an overall increase in revenues, a decrease in interest
credited on investment contracts and Universal Life-type insurance, a decrease
in amortization of deferred policy acquisition costs, partially offset by
increases in other insurance and operating expenses.
Revenues
Net investment income decreased $2.2 million or 2 percent reflecting lower
average balances of invested assets.
Mortality and expense risk and other fees increased $3.0 million or 87 percent,
reflecting substantially higher average values of separate account assets.
Net realized gain on investments was $1.0 million for the three months ended
September 30, 2004 compared to net realized loss on investments of $3.7 million
for the three months ended September 30, 2003. For the three months ended
September 30, 2004, $2.8 million of total investment gains were partially offset
by $1.8 million of losses. Included in these total investment gains and losses
are $1.5 million of gross realized gains and $0.6 million of gross realized
losses from sales of securities classified as Available-for-Sale.
For the three months ended September 30, 2003, $6.5 million of gross realized
gains were more than offset by $10.2 million of gross realized losses from sales
of securities classified as Available-for-Sale.
-11-
Benefits and Expenses
Interest credited on investment contracts and Universal Life-type insurance
decreased $9.9 million or 15 percent, reflecting lower interest crediting rates,
partially offset by higher average accumulation values of annuities.
Amortization of deferred policy acquisition costs (DAC) decreased $2.6 million
or 22 percent. See the DAC section below for further discussion of DAC and
related third quarter adjustments.
Other insurance and operating expense increased $14.1 million reflecting
unfavorable mark-to-market adjustments on interest rate swaps for the three
months ended September 30, 2004 compared to the three months ended September 30,
2003. 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.
Results of Operations for the Nine months Ended September 30, 2004 and 2003
Income before accounting change was $18.8 million for the nine months ended
September 30, 2004 compared to $23.8 million for the nine months ended September
30, 2003. The decrease in income before accounting change primarily reflects
reduced net realized gains on investments and an increased tax provision,
increased other insurance and operating expenses, partially offset by lower
interest credited on investment contracts and universal life-type insurance and
increased net investment income.
Net income for the nine months ended September 30, 2004 reflects the $3.6
million ($5.5 million pretax) impact of American Enterprise Life's January 1,
2004 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. SOP 03-1 requires insurance enterprises to
establish liabilities for benefits that may become payable under variable
annuity death benefit guarantees or other insurance or annuity contract
provisions.
Revenues
Net investment income increased $9.8 million or 4 percent reflecting slightly
higher average yields on fixed maturity investments.
Mortality and expense risk and other fees increased $7.9 million or 85 percent,
primarily reflecting higher average values of separate account assets.
Net realized gain on investments was $5.1 million and $21.5 million for the nine
months ended September 30, 2004 and 2003, respectively. For the nine months
ended September 30, 2004, $9.0 million of investment gains were partially offset
by $3.9 million of losses. Included in these total investment gains and losses
are $7.2 million of gross realized gains and $2.0 million of gross realized
losses from sales of securities classified as Available-for-Sale.
For the nine months ended September 30, 2003, $51.2 million of gross realized
gains from sales of securities classified as Available-for-Sale, were partially
offset by $29.7 million of impairments and losses. Included in these total
investment losses are $19.3 million of gross realized losses from sales of
securities, as well as $9.3 million of other-than-temporary impairment losses on
investments, classified as Available-for-Sale.
-12-
Benefits and Expenses
Interest credited on investment contracts and universal life-type insurance
decreased $18.5 million or 10 percent, reflecting lower interest crediting rates
and partially offset by higher average accumulation values of annuities.
DAC amortization expense decreased to $39.6 million for the nine months ended
September 30, 2004 compared to $40.4 million for the nine months ended September
30, 2003. See the DAC section below for further discussion of DAC and related
adjustments.
Other insurance and operating expense increased $14.3 million or 36 percent
reflecting unfavorable mark-to-market adjustments on interest rate swaps for the
nine months ended September 30, 2004 compared to the nine months ended September
30, 2003.
The increase in the effective income tax rate partially reflects the second
quarter 2004 reduction in net deferred tax assets.
Other Events
American Enterprise Life intends to enter into a modified co-insurance indemnity
reinsurance agreement, effective December 1, 2004 with its parent company, IDS
Life. This proposed transaction was filed with state insurance regulators during
the fourth quarter of 2004 and is pending their approval. The reinsurance
agreement calls for American Enterprise Life to cede and IDS Life to assume
American Enterprise Life's liabilities relating to fixed-only plans of deferred
annuities.
Deferred Policy Acquisition Costs
Deferred Policy Acquisition Costs represent 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. As
a result of these reviews,
-13-
American Enterprise Life took actions in the third quarters of 2004 and 2003
that impacted DAC balances and expenses.
In the third quarter 2004, these actions resulted in a net $1.1 million DAC
amortization expense reduction reflecting higher than previously assumed
interest rate spreads and lower than previously assumed mortality rates on
variable annuity products.
In the third quarter 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.
DAC of $306.8 million and $296.7 million related to annuities was included in
American Enterprise Life's consolidated balance sheet at September 30,2004 and
December 31, 2003, respectively. In addition to the DAC balances shown above and
in conjunction with American Enterprise Life's adoption of SOP 03-1, sales
inducement costs previously included in DAC were reclassified from DAC and
presented as a separate line item in the Consolidated Balance Sheets. Deferred
sales inducement costs were $49.8 million and $49.2 million at September 30,
2004 and December 31, 2003, respectively. 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. The amounts capitalized are amortized using the same methodology and
assumptions used to amortize DAC.
Impact of 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 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.
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American Enterprise Life has an available line of credit with AEFC aggregating
$50 million. No borrowings were outstanding under the line of credit at
September 30, 2004. American Enterprise Life had no outstanding reverse
repurchase agreements at September 30, 2004. Both the line of credit and reverse
repurchase agreements are used strictly as short-term sources of funds.
Investments include $503.3 million, $467.6 million and $343.8 million of below
investment grade securities (excluding net unrealized appreciation and
depreciation) at September 30, 2004, December 31, 2003 and September 30, 2003,
respectively. These investments represent 7.5 percent, 6.6 percent and 4.9
percent of American Enterprise Life's investment portfolio at September 30,
2004, December 31, 2003 and September 30, 2003, respectively.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the Consolidated
Financial Statements.
-15-
ITEM 4. CONTROLS AND PROCEDURES
American Enterprise Life's management, with the participation of American
Enterprise Life's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of American Enterprise Life's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, American
Enterprise Life's Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, American Enterprise Life's
disclosure controls and procedures are effective. There have not been any
changes in American Enterprise Life's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, American Enterprise
Life's internal control over financial reporting.
Forward-Looking Statements
This report includes forward-looking statements which are subject to risks and
uncertainties 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 and deferred
sales inducement costs; 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 and deferred sales
inducement costs 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).
-16-
PART II. OTHER INFORMATION
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The Securities and Exchange Commission (SEC), the National
Association of Securities Dealers (NASD) and several state
attorneys general have brought proceedings challenging several
mutual fund and variable account financial practices,
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.
There were no reports on Form 8-K filed by
American Enterprise Life during the quarterly
period ended September 30, 2004.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
(Registrant)
Date: November 10, 2004 By /s/ Mark E. Schwarzmann
------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: November 10, 2004 By /s/ Arthur H. Berman
----------------------------------------
Arthur H. Berman
Director and Executive Vice President -
Finance and Chief Financial Officer
-18-
E-1
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