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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 MARCH 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
--------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
- ------------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
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.
IDS LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
--------
PART I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2005 and
December 31, 2004 1
Consolidated Statements of Income - Three Months Ended
March 31, 2005 and 2004 2
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2005 and 2004 3
Consolidated Statements of Stockholder's Equity - Three
Months Ended March 31, 2005 and 2004 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 4. Controls and Procedures 14-15
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
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
March 31, December 31,
2005 2004
------------------- ---------------------
Assets (Unaudited)
- ------
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2005, $27,268,249; 2004,
$27,400,640) $ 27,436,247 $ 28,131,195
Preferred and common stocks, at fair value (cost: 2005 and 2004, $30,019) 30,054 31,256
Mortgage loans on real estate, at cost (less reserves: 2005 and 2004, $45,347) 2,929,845 2,923,542
Policy loans 590,830 588,574
Trading and other investments 694,190 753,298
------------------- ---------------------
Total investments 31,681,166 32,427,865
Cash and cash equivalents 196,981 131,427
Restricted cash 576,085 535,821
Reinsurance recoverables 910,299 876,408
Amounts due from brokers 103,784 7,109
Other accounts receivable 57,317 52,527
Accrued investment income 358,552 351,522
Deferred policy acquisition costs 3,740,171 3,637,956
Deferred sales inducement costs 323,620 302,997
Other assets 185,651 308,398
Separate account assets 32,491,964 32,454,032
------------------- ---------------------
Total assets $ 70,625,590 $ 71,086,062
=================== =====================
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $ 26,823,122 $ 26,978,596
Variable annuity guarantees 24,820 32,955
Universal life insurance 3,701,328 3,689,639
Traditional life insurance 277,463 271,516
Disability income and long-term care insurance 1,996,046 1,942,656
Policy claims and other policyholders' funds 77,746 69,884
Amounts due to brokers 137,509 162,609
Deferred income taxes, net 14,057 141,202
Other liabilities 367,156 437,418
Separate account liabilities 32,491,964 32,454,032
------------------- ---------------------
Total liabilities 65,911,211 66,180,507
------------------- ---------------------
Stockholder's equity:
Capital stock, $30 par value;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 1,370,388 1,370,388
Retained earnings 3,316,015 3,190,474
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 60,582 370,615
Net unrealized derivative losses (35,606) (28,922)
------------------- ---------------------
Total accumulated other comprehensive income 24,976 341,693
------------------- ---------------------
Total stockholder's equity 4,714,379 4,905,555
------------------- ---------------------
Total liabilities and stockholder's equity $ 70,625,590 $ 71,086,062
=================== =====================
See Notes to Consolidated Financial Statements
1
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------------------------
2005 2004
------------------ ------------------
Revenues:
Premiums:
Traditional life insurance $ 17,490 $ 17,051
Disability income and long-term care insurance 71,343 68,098
------------------ ------------------
Total premiums 88,833 85,149
Net investment income 458,788 415,173
Contractholder and policyholder charges 143,057 136,203
Mortality and expense risk and other fees 114,778 107,242
Net realized gain on investments 194 8,646
------------------ ------------------
Total 805,650 752,413
------------------ ------------------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 12,069 10,562
Investment contracts and universal life-type insurance 52,287 58,233
Disability income and long-term care insurance 17,177 15,358
Increase (decrease) in liabilities for future policy benefits:
Traditional life insurance 938 (1,265)
Disability income and long-term care insurance 29,597 20,120
Interest credited to account values 273,262 283,071
Amortization of deferred policy acquisition costs 99,082 23,578
Other insurance and operating expenses 137,524 125,588
------------------ ------------------
Total 621,936 535,245
------------------ ------------------
Income before income tax provision and accounting change 183,714 217,168
Income tax provision 58,173 70,371
------------------ ------------------
Income before accounting change 125,541 146,797
Cumulative effect of accounting change, net of tax (Note 1) - (70,568)
------------------ -------------------
Net income $ 125,541 $ 76,229
================== ==================
See Notes to Consolidated Financial Statements
2
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------------------------
2005 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 125,541 $ 76,229
Adjustments to reconcile net income to net cash provided by
operating activities:
Policy loans, excluding universal life-type insurance
Repayment 8,799 9,761
Issuance (8,856) (8,475)
Change in reinsurance recoverables (33,891) (18,730)
Change in other accounts receivable (4,790) (6,398)
Change in accrued investment income (7,030) 4,281
Change in deferred policy acquisition costs, net (42,456) (102,534)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term care
insurance 59,337 37,066
Change in policy claims and other policyholders' funds 7,862 11,578
Deferred income taxes 43,394 24,282
Change in other assets and liabilities, net 29,505 47,396
Amortization of premium, net 22,719 25,364
Net realized gain on investments (194) (8,646)
Trading securities, net 63,236 (20,937)
Net realized gain on trading securities (8,971) (21,056)
Contractholder and policyholder charges, non-cash (57,584) (57,277)
Cumulative effect of accounting change, net of tax (Note 1) - 70,568
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 196,621 62,472
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 547,237 263,213
Maturities, sinking fund payments and calls 428,245 479,186
Purchases (864,336) (1,121,743)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 98,233 167,346
Purchases (99,298) (59,634)
Change in amounts due to and from brokers, net (121,775) 72,529
Change in restricted cash (40,264) 9,247
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (51,958) (189,856)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type
insurance:
Considerations received 443,345 565,352
Interest credited to account values 273,262 283,071
Surrenders and other benefits (793,517) (757,542)
Universal life-type insurance policy loans:
Repayment 21,991 24,438
Issuance (24,190) (23,421)
------------------ ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (79,109) 91,898
------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 65,554 (35,486)
Cash and cash equivalents at beginning of period 131,427 400,294
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 196,981 $ 364,808
================== ==================
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 31,651 $ 11,836
Interest paid on borrowings $ 53 $ 258
See Notes to Consolidated Financial Statements
3
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(thousands)
(Unaudited)
Accumulated
Additional Other
Capital Paid-In Comprehensive Retained
Total Stock Capital Income/(Loss) Earnings
- ---------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 5,397,836 $ 3,000 $ 1,370,388 $ 399,611 $ 3,624,837
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 76,229 76,229
Change in net unrealized holding
gains on Available-for-Sale
securities, net of
reclassification adjustments and
other adjustments to deferred
policy acquisition costs,
deferred sales inducement costs
and fixed annuity liabilities,
net of related deferred income
taxes 278,772 278,772
Reclassification adjustment for
gains on derivatives included
in net income, net of related
deferred income taxes (7,582) (7,582)
----------------
Total comprehensive income 347,419
- ---------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2004 $ 5,745,255 $ 3,000 $ 1,370,388 $ 670,801 $ 3,701,066
===========================================================================================================================
Balances at December 31, 2004 $ 4,905,555 $ 3,000 $ 1,370,388 $ 341,693 $ 3,190,474
Comprehensive loss:
Net income 125,541 125,541
Change in net unrealized holding
gains on Available-for-Sale
securities, net of
reclassification adjustments and
other adjustments to deferred
policy acquisition costs,
deferred sales inducement costs
and fixed annuity liabilities,
net of related deferred income
taxes (310,033) (310,033)
Reclassification adjustment for
gains on derivatives included
in net income, net of related
deferred income taxes (6,684) (6,684)
----------------
Total comprehensive loss (191,176)
- ---------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2005 $ 4,714,379 $ 3,000 $ 1,370,388 $ 24,976 $ 3,316,015
===========================================================================================================================
See Notes to Consolidated Financial Statements
4
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form
10-K of IDS Life Insurance Company (IDS Life) for the year ended
December 31, 2004. 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.
Application of Recently Issued Accounting Standards
---------------------------------------------------
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 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 the first quarter
2004 results by $70.6 million ($108.6 million pretax). The cumulative
effect of accounting change consisted of: (i) $42.9 million pretax from
establishing additional liabilities for certain variable annuity
guaranteed benefits ($32.8 million) and from considering these
liabilities in valuing DAC and deferred sales inducement costs
associated with those contracts ($10.1 million) and (ii) $65.7 million
pretax from establishing additional liabilities for certain variable
universal life and single pay universal life insurance contracts under
which contractual cost of insurance charges are expected to be less
than future death benefits ($92 million) and from considering these
liabilities in valuing DAC associated with those contracts ($26.3
million offset). Prior to the adoption of SOP 03-1, amounts paid in
excess of contract value were expensed when payable. IDS 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" (EITF 03-1). IDS
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 years ended December 31, 2004 and 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" (SFAS No. 115), and other
cost method investments are other-than-temporarily impaired. However,
with the issuance of FASB Staff Position (FSP) No. EITF 03-1-1,
"Effective Date of Paragraphs 10-20 of EITF 03-1," on September 30,
2004, the provisions of the consensus relating to the measurement
5
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. IDS 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 months ended March 31:
-------------------------------
2005 2004
-------------- -------------
(Thousands)
Gross realized gains on sales $ 8,834 $ 13,226
Gross realized (losses) on sales $ (8,094) $ (3,726)
Realized (losses) recognized for other-than-temporary impairments $ (636) $ (130)
3. COMMITMENTS AND CONTINGENCIES
At March 31, 2005 and December 31, 2004, IDS Life had commitments to
fund mortgage loans on real estate of $96.1 million and $92.5 million,
respectively.
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 of B shares. IDS Life and its subsidiaries have
received requests for information and have been contacted by regulatory
authorities concerning its practices and is cooperating fully with
these inquiries.
IDS Life and its subsidiaries are involved in a number of other legal
and arbitration proceedings concerning matters arising in connection
with the conduct of their respective business activities. IDS Life
believes it has meritorious defenses to each of these actions and
intends to defend them
6
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
vigorously. IDS 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 IDS 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 IDS Life's federal income tax returns and is
currently conducting an audit for the 1993 through 1996 tax years and
in February 2005 began the examination of the 1997 through 2002 tax
years. Management does not believe there will be a material adverse
effect on IDS Life's consolidated financial position as a result of
these audits.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IDS Life Insurance Company is a stock life insurance company organized
under the laws of the State of Minnesota. IDS Life Insurance Company is
a wholly owned subsidiary of American Express Financial Corporation
(AEFC), which is a wholly owned subsidiary of American Express Company.
IDS Life Insurance Company serves residents of the District of Columbia
and all states except New York. IDS Life Insurance Company distributes
its fixed and variable insurance and annuity products almost
exclusively through the American Express Financial Advisors Inc.
(AEFAI) retail sales force. IDS Life Insurance Company has four wholly
owned life insurance company subsidiaries: IDS Life Insurance Company
of New York, a New York stock life insurance company (IDS Life of New
York); American Partners Life Insurance Company, an Arizona stock life
insurance company (American Partners Life); American Enterprise Life
Insurance Company, an Indiana stock life insurance company (American
Enterprise Life); and American Centurion Life Assurance Company, a New
York stock life insurance company (American Centurion Life). IDS Life
of New York serves New York State residents and distributes its fixed
and variable insurance and annuity products exclusively through AEFAI's
retail sales force. American Enterprise Life provides clients of
financial institutions and regional and/or independent broker-dealers
with American Express branded financial products and wholesaling
services to support its retail insurance and annuity operations.
American Enterprise Life underwrites 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. Effective in December 2004, American Enterprise
Life received a Certificate of Authority to transact business in the
State of New Hampshire. American Centurion Life offers fixed and
variable annuity contracts directly to American Express(R) Cardmembers
and others in New York, as well as fixed and variable annuity contracts
for sale through non-affiliated representatives and agents of third
party distributors, in New York. American Partners Life offers fixed
and variable annuity contracts directly to American Express(R)
Cardmembers and others who reside in states other than New York. IDS
Life Insurance Company also owns IDS REO 1, LLC and IDS REO 2, LLC
which hold real estate investments. IDS Life Insurance Company and its
six subsidiaries are referred to collectively as "IDS Life" in this
Form 10-Q.
On February 1, 2005, American Express Company announced plans to pursue
a tax-free spin-off of the common stock of AEFC through a special
dividend to American Express common shareholders. The final
transaction, which is subject to certain conditions including receipt
of a favorable tax ruling and approval by American Express Company's
Board of Directors, is expected to close in the third quarter of 2005.
In connection with the spin-off, American Express Company intends to
provide additional capital to IDS Life to confirm its current financial
strength ratings.
IDS 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.
Management's narrative analysis of the results of operations is
presented in lieu of management's discussion and analysis of financial
condition and results of operations, pursuant to General Instructions
H(1)(a) of Form 10-Q.
8
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Net income for the three months ended March 31, 2005 was $125.5 million
compared to $76.2 million for the three months ended March 31, 2004.
Net income for the three months ended March 31, 2004 reflects the $70.6
million ($108.6 million pretax) impact of IDS Life's January 1, 2004
adoption of the American Institute of Certified Public Accountants
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration contracts and for
Separate Accounts" (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. See "Application of Recently Issued Accounting
Standards" section in Note 1 to the Consolidated Financial Statements
regarding the impact of adoption of SOP 03-1.
REVENUES
Net investment income increased $43.6 million or 11 percent. Net
investment income for the three months ended March 31, 2005 includes a
$7.8 million benefit from lower than expected losses resulting from
management's fourth quarter 2004 decision to liquidate the remaining
two structured investments. Net investment income for the three months
ended March 31, 2004 includes management's first quarter 2004 decision
to further improve IDS Life's portfolio risk profile by liquidating a
structured investment before maturity resulting in a $49 million pretax
charge. Offsetting the impacts related to the structured securities,
the mark-to-market impact of trading securities was $17 million lower
during the current quarter compared to the same period a year ago, as
well as the effect of depreciation during the current quarter versus
appreciation in the same period a year ago in the S&P 500 on the value
of options hedging equity indexed annuities.
Contractholder and policyholder charges increased $6.9 million or 5
percent reflecting increased cost of insurance charges on variable
universal life products, as well as a slight increase in the amount of
surrender charges on variable annuity products.
Mortality and expense risk and other fees increased $7.5 million or 7
percent reflecting higher average market values of separate account
assets.
Net realized gain on investments was $0.2 million for the three months
ended March 31, 2005 compared to $8.6 million for the three months
ended March 31, 2004. For the three months ended March 31, 2005, $8.8
million of gross realized gains were partially offset by $8.1 million
of gross realized losses from sales of securities, as well as $0.6
million of other-than-temporary impairment losses on investments,
classified as Available-for-Sale.
For the three months ended March 31, 2004, $15 million of investment
gains were partially offset by $6.4 million of losses and impairments.
Included in these total investment gains and losses are $13.2 million
of gross realized gains and $3.7 million of gross realized losses from
sales of securities, as well as $0.1 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Interest credited to account values decreased $9.8 million or 3
percent, reflecting lower interest crediting rates on annuity products
and the effect of depreciation during the current quarter versus
appreciation in the same period a year ago in the S&P 500 on equity
index annuities, partially offset by higher life insurance inforce
levels and average annuity accumulation values.
Amortization of deferred policy acquisition costs (DAC) increased to
$99.1 million for the three months ended March 31, 2005 from $23.6
million for the three months ended March 31, 2004
9
reflecting the first quarter 2004 $65.7 million pretax DAC valuation
benefit reflecting an adjustment associated with the lengthening of
amortization periods for certain insurance and annuity products in
conjunction with the adoption of SOP 03-1. These increases were
partially offset by changes made to the benefit ratios which are used
to estimate the cost of certain variable annuity guarantee features.
Other insurance and operating expenses increased $11.9 million or 10
percent reflecting increases in certain non-deferrable product
distribution costs.
DEFERRED POLICY ACQUISITION COSTS
DAC represent the costs of acquiring new business, principally direct
sales commissions and other distribution and underwriting costs that
have been deferred on the sale of annuity and life and health insurance
products. These costs are deferred to the extent they are recoverable
from future profits. For annuity and insurance products, DAC are
amortized over periods approximating the lives of the business,
generally as a percentage of premiums or estimated gross profits or as
a portion of product interest margins depending on the product's
characteristics.
For IDS Life's annuity and insurance products, the projections
underlying the amortization of DAC require the use of certain
assumptions, including interest margins, mortality rates, persistency
rates, maintenance expense levels and customer asset value growth rates
for variable products. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed
experience. The customer asset value growth rate is the rate at which
contract values are assumed to appreciate in the future. The rate is
net of asset fees and anticipates a blend of equity and fixed income
investments. Management reviews and, where appropriate, adjusts its
assumptions with respect to customer asset value growth rates on a
quarterly basis.
Management monitors other principal DAC assumptions, such as
persistency, mortality rates, interest margin and maintenance expense
level assumptions, each quarter. Unless management identifies a
material deviation over the course of the quarterly monitoring,
management reviews and updates these DAC assumptions annually in the
third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins
used to amortize DAC might also change. A change in the required
amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an increase in DAC amortization
expense while a decrease in amortization percentage will result in a
decrease in DAC amortization expense. The impact on results of
operations of changing assumptions with respect to the amortization of
DAC can be either positive or negative in any particular period and is
reflected in the period in which such changes are made.
During the first quarter of 2004 and in conjunction with the adoption
of SOP 03-1, IDS Life (1) established additional liabilities for
insurance benefits that may become payable under variable annuity death
benefit guarantees or on single pay universal life contracts, which
prior to January 1, 2004, were expensed when payable; and (2) extended
the time periods over which DAC associated with certain insurance and
annuity products are amortized to coincide with the liability funding
periods in order to establish the proper relationships between these
liabilities and DAC associated with the same contracts. As a result,
IDS Life recognized a $108.6 million pretax charge due to accounting
change on establishing the future liability under death benefit
guarantees and recognized a $65.7 million pretax reduction in DAC
amortization expense to reflect the lengthening of the amortization
periods for certain products impacted by SOP 03-1.
10
DAC balances for various insurance and annuity products sold by IDS
Life are set forth below:
(Millions) March 31, 2005 December 31, 2004
----------------------- ----------------------
(Unaudited)
Life and health insurance $ 1,792 $ 1,766
Annuities 1,948 1,872
----------------------- ----------------------
Total $ 3,740 $ 3,638
======================= ======================
LIQUIDITY AND CAPITAL RESOURCES
Risk Management
IDS Life and its subsidiaries through their respective Board of
Directors' investment committees or staff functions, review models
projecting different interest rate scenarios, risk/return measures, and
their effect on profitability. They also review the distribution of
assets in the portfolio by type and credit risk sector. The objective
is to structure the investment security portfolios based upon the type
and behavior of the liabilities underlying the products, portfolios to
achieve targeted levels of profitability within defined risk parameters
and to meet contractual obligations.
IDS Life has developed an asset/liability management approach with
separate investment objectives to support specific product liabilities,
such as insurance and annuity. As part of this approach, IDS Life
develops specific investment guidelines outlining the minimum required
investment return and liquidity requirements to support future benefit
payments under its insurance and annuity obligations. These same
objectives must be consistent with management's overall investment
objectives for the general account investment portfolio.
IDS Life's owned investment securities are primarily invested in
long-term and intermediate-term fixed maturity securities to provide
clients with a competitive rate of return on their investments while
controlling risk. Investment in fixed maturity securities is designed
to provide IDS Life with a targeted margin between the yield earned on
investments and the interest rate credited to clients' accounts. IDS
Life does not trade in securities to generate short-term profits for
its own account.
As part of IDS Life's investment process, management, with the
assistance of its investment advisors, conducts a quarterly review of
investment performance. The review process conducted by IDS Life's
Investment Committee involves the review of certain invested assets
which the committee evaluates to determine whether or not any
investments are other than temporarily impaired and/or which specific
interest earning investments should be put on an interest non-accrual
basis.
Capital Strategy
The liquidity requirements of IDS Life are generally met by funds
provided by deposits, premiums, investment income, proceeds from sales
of investments as well as maturities and periodic repayments of
investments and capital contributions from AEFC. The primary uses of
funds are policy benefits, commissions, other product-related
acquisition and sales inducement costs, operating expenses, policy
loans, dividends to AEFC and investment purchases. IDS Life routinely
reviews its sources and uses of funds in order to meet its ongoing
obligations.
Funding Strategy
IDS Life, on a consolidated basis, has available lines of credit with
AEFC aggregating $295 million ($195 million committed and $100 million
uncommitted). At March 31, 2005, there were no line of credit
borrowings outstanding with AEFC and no outstanding reverse repurchase
11
agreements. Both the line of credit and the reverse repurchase
agreements are used strictly as short-term sources of funds.
Investment securities include $2.2 billion, $2.3 billion and $2.5
billion of below investment grade securities (excluding net unrealized
appreciation and depreciation) at March 31, 2005, December 31, 2004 and
March 31, 2004, respectively. These investments represent 7 percent, 7
percent and 8 percent of IDS Life's investment portfolio at March 31,
2005, December 31, 2004 and March 31, 2004, respectively.
Separate account assets represent funds held for the exclusive benefit
of variable annuity contractholders and variable life insurance
policyholders. These assets are generally carried at market value, and
separate account liabilities are equal to separate account assets. IDS
Life earns fees from the related accounts.
As of March 31, 2005, IDS Life continued to hold investments in
collateralized debt obligations (CDOs), some of which are also managed
by an affiliate, and were not consolidated pursuant to the adoption of
FIN 46 as IDS Life was not considered the primary beneficiary. IDS Life
invested in CDOs as part of its investment strategy in order to offer a
competitive rate to contractholders' accounts. IDS Life's exposure as
an investor is limited solely to its aggregate investment in the CDOs,
and it has no obligations or commitments, contingent or otherwise, that
could require any further funding of such investments. As of March 31,
2005, the carrying values of the CDO residual tranches, managed by an
affiliate, were $4.1 million. IDS Life also has an interest in a CDO
securitization with a carrying value of $487.5 million of which $351.2
million is considered investment grade. CDOs are illiquid investments.
As an investor in the residual tranche of CDOs, IDS Life's return
correlates to the performance of portfolios of high-yield bonds and/or
bank loans comprising the CDOs.
The carrying value of the CDOs, as well as derivatives recorded on the
balance sheet as a result of consolidating the two secured loan trusts
(SLTs), which are in the process of being liquidated, and IDS Life's
projected return are based on discounted cash flow projections that
require a significant degree of management judgment as to assumptions
primarily related to default and recovery rates of the high-yield bonds
and/or bank loans either held directly by the CDOs or in the reference
portfolio of the SLTs and, as such, are subject to change. Although the
exposure associated with IDS Life's investment in CDOs is limited to
the carrying value of such investments, the CDOs have significant
volatility associated with them because the amount of the initial value
of the loans and/or other debt obligations in the related portfolios is
significantly greater than IDS Life's exposure. In the event of
significant deterioration of a portfolio, the relevant CDO may be
subject to early liquidation, which could result in further
deterioration of the investment return or, in severe cases, loss of the
CDO carrying amount. The derivatives recorded as a result of
consolidating and now liquidating certain SLTs under FIN 46 are
primarily valued based on the expected gains and losses from
liquidating a reference portfolio of high-yield loans. The overall
exposure to loss related to these derivatives is represented by the
pretax net assets of the SLTs, which is $465 million at March 31, 2005.
However, because the portfolio has been substantially liquidated, a
significant portion of the net assets within the structure is cash and
cash equivalents and, as a result, the overall market exposure has been
reduced to approximately $20 million.
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS
As discussed above, various aspects of IDS Life's business are impacted
by equity market levels and other market-based events. Several areas in
particular involve DAC and deferred sales inducements, recognition of
guaranteed minimum death benefits (GMDB) and certain other variable
annuity benefits, asset management fees and structured investments. The
direction and
12
magnitude of the changes in equity markets can increase or decrease
amortization of DAC and deferred sales inducement benefits, incurred
amounts under GMDB and other variable annuity benefit provisions and
asset management fees and correspondingly affect results of operations
in any particular period. Similarly, the value of IDS Life's structured
investment portfolios are 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.
OTHER REPORTING MATTERS
Accounting Developments
See "Application of Recently Issued Accounting Standards" section of
Note 1 to the Consolidated Financial Statements.
13
ITEM 4. CONTROLS AND PROCEDURES
IDS Life's management, with the participation of IDS Life's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of IDS 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, IDS Life's
Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, IDS Life's disclosure controls and
procedures are effective. There have not been any changes in IDS Life's
internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, IDS Life's internal control
over financial reporting.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements, which are subject to
risks and uncertainties. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "may," "should,"
"could," "would," "likely," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as
of the date on which they are made. IDS Life undertakes no obligation
to update or revise any forward-looking statements. Factors that could
cause actual results to differ materially from these forward-looking
statements include, but are not limited to: fluctuation in the equity
and fixed income markets, which can affect the amount and types of
investment products sold by IDS Life, and other fees received based on
the value of those assets; IDS Life's ability to recover Deferred
Policy Acquisition Costs (DAC), as well as the timing of such DAC
amortization, in connection with the sale of annuity and insurance
products; changes in assumptions relating to DAC, which could impact
the amount of DAC amortization; the ability to improve investment
performance in IDS Life's businesses, including attracting and
retaining high-quality personnel; the success, timeliness and financial
impact, including costs, cost savings and other benefits including
increased revenues, of reengineering initiatives being implemented or
considered by IDS Life, including cost management, structural and
strategic measures such as vendor, process, facilities and operations
consolidation, outsourcing (including, among others, technologies
operations), relocating certain functions to lower-cost overseas
locations, moving internal and external functions to the Internet to
save costs, and planned staff reductions relating to certain of such
reengineering actions; the ability to control and manage operating,
infrastructure, advertising and promotion and other expenses as
business expands or changes, including balancing the need for
longer-term investment spending; the potential negative effect on IDS
Life's businesses and infrastructure, including information technology,
of terrorist attacks, disasters or other catastrophic events in the
future; IDS Life's ability to develop and roll out new and attractive
products to clients in a timely manner; successfully cross-selling
insurance and annuity products and services to AEFC's customer base;
fluctuations in interest rates, which impacts IDS Life's spreads in the
insurance and annuity businesses; credit trends and the rate of
bankruptcies which can affect returns on IDS Life's investment
portfolios; lower than anticipated spreads in the insurance and annuity
business; the types and the 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 IDS Life against
losses; negative changes in IDS Life Insurance Company's and its four
life insurance company subsidiaries' credit ratings; increasing
competition in all of IDS Life's insurance and annuity business; the
adoption of recently issued rules related to the consolidation of
variable interest entities, including those involving SLTs that IDS
Life invests in which could affect both IDS Life's financial condition
and results of operations; changes in laws or government regulations;
outcomes associated with litigation and compliance and regulatory
matters. A further description of these and other risks and
14
uncertainties can be found in IDS Life's Annual Report on Form 10-K for
the year ended December 31, 2004, and its other reports filed with the
Securities and Exchange Commission (SEC).
15
PART II - OTHER INFORMATION
IDS 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 of B shares.
IDS Life and its subsidiaries have received requests for
information and have been contacted by regulatory authorities
concerning its practices and is cooperating fully with these
inquiries.
IDS Life and its subsidiaries are involved in a number of other
legal and arbitration proceedings concerning matters arising in
connection with the conduct of their respective business
activities. IDS Life believes it has meritorious defenses to each
of these actions and intends to defend them vigorously. IDS 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 IDS 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.
Reports on Form 8-K filed by IDS Life during the quarterly
period ended March 31, 2005 were previously disclosed on Form
10-K. There were no additional reports on Form 8-K filed by IDS
Life during the quarterly period ended March 31, 2005.
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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.
IDS LIFE INSURANCE COMPANY
--------------------------
(Registrant)
Date: May 5, 2005 By /s/ Mark E. Schwarzmann
---------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: May 5, 2005 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