UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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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 Identification No.)
incorporation or organization)
829 AMERIPRISE FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
- ------------------------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
----------------
829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA
- ------------------------------------------------------------------------------
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 -- June 30, 2005 and
December 31, 2004 1
Consolidated Statements of Income -- Three Months
Ended June 30, 2005 and 2004 2
Consolidated Statements of Income -- Six Months
Ended June 30, 2005 and 2004 3
Consolidated Statements of Cash Flows --
Six Months Ended June 30, 2005 and 2004 4
Consolidated Statements of Stockholder's
Equity -- Six Months Ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Item 4. Controls and Procedures 17-18
PART II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
June 30, December 31,
2005 2004
----------- ------------
(Unaudited)
Assets
- ------
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2005, $27,060,062;
2004, $27,400,640) $27,737,220 $28,131,195
Preferred and common stocks, at fair value (cost: 2005 and 2004, $30,019) 31,800 31,256
Mortgage loans on real estate, at cost (less reserves: 2005, $41,347
and 2004, $45,347) 2,849,178 2,923,542
Policy loans 593,103 588,574
Trading and other investments 681,686 802,096
----------- -----------
Total investments 31,892,987 32,476,663
Cash and cash equivalents 1,019,382 131,427
Restricted cash 208,310 535,821
Reinsurance recoverables 947,956 876,408
Amounts due from brokers 43,742 7,109
Other accounts receivable 57,526 52,527
Accrued investment income 338,501 351,522
Deferred policy acquisition costs 3,748,720 3,637,956
Deferred sales inducement costs 329,671 302,997
Other assets 118,712 259,600
Separate account assets 33,821,783 32,454,032
----------- -----------
Total assets $72,527,290 $71,086,062
=========== ===========
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $26,697,459 $26,978,596
Variable annuity guarantees 31,966 32,955
Universal life insurance 3,707,431 3,689,639
Traditional life insurance 283,783 271,516
Disability income and long-term care insurance 2,049,625 1,942,656
Policy claims and other policyholders' funds 79,655 69,884
Amounts due to brokers 246,275 162,609
Deferred income taxes, net 166,745 141,202
Other liabilities 346,672 437,418
Separate account liabilities 33,821,783 32,454,032
----------- -----------
Total liabilities 67,431,394 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 3,407,479 3,190,474
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 351,959 370,615
Net unrealized derivative losses (36,930) (28,922)
----------- -----------
Total accumulated other comprehensive income 315,029 341,693
----------- -----------
Total stockholder's equity 5,095,896 4,905,555
----------- -----------
Total liabilities and stockholder's equity $72,527,290 $71,086,062
=========== ===========
See Notes to Consolidated Financial Statements
1
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three Months Ended
June 30,
--------------------------
2005 2004
-------- --------
Revenues:
Premiums:
Traditional life insurance $ 19,267 $ 17,003
Disability income and long-term care insurance 72,776 70,268
-------- --------
Total premiums 92,043 87,271
Net investment income 422,922 464,644
Contractholder and policyholder charges 142,757 138,181
Mortality and expense risk and other fees 108,390 101,740
Net realized gain on investments 37,645 8,867
-------- --------
Total 803,757 800,703
-------- --------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 8,511 9,528
Investment contracts and universal life-type insurance 66,437 58,474
Disability income and long-term care insurance 19,022 16,178
Increase in liabilities for future policy benefits:
Traditional life insurance 1,472 649
Disability income and long-term care insurance 29,969 34,566
Interest credited to account values 280,359 280,009
Amortization of deferred policy acquisition costs 98,193 88,206
Separation costs 25,772 -
Other insurance and operating expenses 148,171 119,824
-------- --------
Total 677,906 607,434
-------- --------
Income before income tax provision 125,851 193,269
Income tax provision 34,387 70,165
-------- --------
Net income $ 91,464 $123,104
======== ========
See Notes to Consolidated Financial Statements
2
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2005 2004
---------- ----------
Revenues:
Premiums:
Traditional life insurance $ 36,757 $ 34,054
Disability income and long-term care insurance 144,119 138,366
---------- ----------
Total premiums 180,876 172,420
Net investment income 881,710 879,817
Contractholder and policyholder charges 285,814 274,384
Mortality and expense risk and other fees 223,168 208,982
Net realized gain on investments 37,839 17,513
---------- ----------
Total 1,609,407 1,553,116
---------- ----------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 20,580 20,090
Investment contracts and universal life-type insurance 118,724 116,707
Disability income and long-term care insurance 36,199 31,536
Increase (decrease) in liabilities for future policy benefits:
Traditional life insurance 2,410 (616)
Disability income and long-term care insurance 59,566 54,686
Interest credited to account values 553,621 563,080
Amortization of deferred policy acquisition costs 197,275 111,784
Separation costs 25,772 -
Other insurance and operating expenses 285,695 245,412
---------- ----------
Total 1,299,842 1,142,679
---------- ----------
Income before income tax provision and accounting change 309,565 410,437
Income tax provision 92,560 140,536
---------- ----------
Income before accounting change 217,005 269,901
Cumulative effect of accounting change, net of tax (Note 1) - (70,568)
---------- ----------
Net income $ 217,005 $ 199,333
========== ==========
See Notes to Consolidated Financial Statements
3
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 217,005 $ 199,333
Adjustments to reconcile net income to net cash provided by operating
activities:
Policy loans, excluding universal life-type insurance
Repayment 18,265 19,370
Issuance (18,500) (19,101)
Change in reinsurance recoverables (71,548) (54,109)
Change in other accounts receivable (4,999) (4,148)
Change in accrued investment income 13,021 9,528
Change in deferred policy acquisition costs, net (106,155) (151,457)
Change in deferred sales inducement costs, net (25,858) (20,112)
Change in liabilities for future policy benefits for traditional
life, disability income and long-term care insurance 119,236 100,690
Change in policy claims and other policyholders' funds 9,771 14,089
Deferred income taxes 39,900 32,367
Change in other assets and liabilities, net 47,587 48,803
Amortization of premium, net 46,370 43,069
Net realized gain on investments (37,839) (17,513)
Trading securities and equity method investments in hedge funds, net 116,791 (29,345)
Net realized gain on trading securities (4,962) (16,087)
Contractholder and policyholder charges, non-cash (115,827) (115,062)
Cumulative effect of accounting change, net of tax (Note 1) - 70,568
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 242,258 110,883
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-Sale securities:
Sales 1,907,590 795,643
Maturities, sinking fund payments and calls 887,324 1,026,235
Purchases (2,458,636) (2,041,103)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 308,521 307,311
Purchases (227,876) (198,010)
Change in amounts due to and from brokers, net 47,033 (36,033)
Change in restricted cash 327,511 10,929
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 791,467 (135,028)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activity related to investment contracts and universal life-type
insurance:
Considerations received 883,552 1,127,947
Interest credited to account values 553,621 563,080
Surrenders and other benefits (1,578,649) (1,400,677)
Universal life-type insurance policy loans:
Repayment 46,477 46,102
Issuance (50,771) (46,397)
Cash dividend to parent - (430,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (145,770) (139,945)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 887,955 (164,090)
Cash and cash equivalents at beginning of period 131,427 400,294
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,019,382 $ 236,204
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 99,798 $ 83,261
Interest paid on borrowings $ 63 $ 379
See Notes to Consolidated Financial Statements
4
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 loss:
Net income 199,333 199,333
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 (368,405) (368,405)
Reclassification adjustment for
gains on derivatives included in
net income, net of related
deferred income taxes (12,227) (12,227)
---------
Total comprehensive loss (181,299)
Dividends to parent (430,000) (430,000)
- -------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2004 $4,786,537 $3,000 $1,370,388 $ 18,979 $3,394,170
===============================================================================================================================
Balances at December 31, 2004 $4,905,555 $3,000 $1,370,388 $ 341,693 $3,190,474
Comprehensive income:
Net income 217,005 217,005
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 (18,656) (18,656)
Reclassification adjustment for
gains on derivatives included in
net income, net of related
deferred income taxes (8,008) (8,008)
---------
Total comprehensive income 190,341
- -------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2005 $5,095,896 $3,000 $1,370,388 $ 315,029 $3,407,479
===============================================================================================================================
See Notes to Consolidated Financial Statements
5
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.
Separation of Ameriprise Financial
----------------------------------
IDS Life Insurance Company is a wholly owned subsidiary of Ameriprise
Financial, Inc. (Ameriprise Financial). Prior to August 1, 2005,
Ameriprise Financial was known as American Express Financial
Corporation (AEFC). Ameriprise Financial is a wholly owned subsidiary
of American Express Company (American Express).
Ameriprise Financial changed its name on August 1, 2005 as a
consequence of the plans announced by American Express on February 1,
2005, to pursue a spin off of the businesses now being operated under
the Ameriprise Financial name. The separation from American Express is
expected to be completed on or after September 30, 2005, subject to
certain regulatory and other approvals, including final approval by the
board of directors of American Express. After the expected separation
from American Express, Ameriprise Financial and its subsidiaries will
no longer be affiliated with American Express. Ameriprise Financial and
American Express will be independent companies, with separate public
ownership, boards of directors and management.
In connection with the separation, IDS Life will be allocated certain
separation and distribution-related expenses incurred as a result of
Ameriprise Financial becoming an independent company. Cumulatively, the
expenses allocated to IDS Life are expected to be significant to IDS
Life. Ameriprise Financial will provide additional capital to IDS Life
to support its current financial strength ratings.
Separation Costs
----------------
During the quarter ended June 30, 2005, Ameriprise Financial developed
an allocation policy for separation costs resulting in the allocation
of certain costs to IDS Life that it considered to be a reasonable
reflection of separation costs benefiting IDS Life. During the quarter
ended June 30, 2005, IDS Life recorded $25.8 million in allocated
separation costs. Had this allocation method been applied for the
quarter ended March 31, 2005, approximately $6.7 million of these costs
would have been charged to IDS Life during that period. Separation
costs generally consist of financial advisor and employee retention
program costs, information technology costs, re-branding and marketing
costs and certain consulting expenses related to the separation and
distribution of Ameriprise Financial.
6
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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.
7
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 six months ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
-------- ------- -------- -------
(Thousands)
Gross realized gains on sales $ 63,529 $ 10,543 $ 72,363 $ 23,769
Gross realized (losses) on sales $(24,153) $ (2,663) $(32,247) $ (6,389)
Realized (losses) recognized for
other-than-temporary impairments $ - $ - $ (636) $ (130)
3. COMMITMENTS AND CONTINGENCIES
At June 30, 2005 and December 31, 2004, IDS Life had commitments to
fund mortgage loans on real estate of $217 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, generally including suitability, 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.
The IRS routinely examines IDS Life's federal income tax returns and is
currently conducting an audit for 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.
8
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 Ameriprise Financial, Inc. (Ameriprise
Financial). Prior to August 1, 2005, Ameriprise Financial was known as
American Express Financial Corporation (AEFC). Ameriprise Financial is
a wholly owned subsidiary of American Express Company (American
Express).
Ameriprise Financial changed its name on August 1, 2005 as a
consequence of the plans announced by American Express on February 1,
2005, to pursue a spin off of the businesses now being operated under
the Ameriprise Financial name. The separation from American Express is
expected to be completed on or after September 30, 2005, subject to
certain regulatory and other approvals, including final approval by the
board of directors of American Express. After the expected separation
from American Express, Ameriprise Financial and its subsidiaries will
no longer be affiliated with American Express. Ameriprise Financial and
American Express will be independent companies, with separate public
ownership, boards of directors and management.
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 Ameriprise Financial Services, Inc. (formerly
known as 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 the Ameriprise
Financial Services, Inc. retail sales force. American Enterprise Life
provides clients of financial institutions and regional and/or
independent broker-dealers with 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. 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.
In connection with the separation, American Express has indicated that
it will provide additional capital to Ameriprise Financial of
approximately $1 billion. This capital contribution is intended to
provide adequate support for Ameriprise Financial's senior debt rating
on the distribution date, to allow Ameriprise Financial to have
efficient access to the capital markets, and to support the current
financial strength ratings of Ameriprise Financial's insurance
subsidiaries.
9
IDS Life will be allocated certain separation and distribution-related
expenses incurred as a result of Ameriprise Financial becoming an
independent company. Cumulatively, the expenses allocated to IDS Life
are expected to be significant to IDS Life. Ameriprise Financial will
provide additional capital to IDS Life to support 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Net income was $91.5 million for the three months ended June 30, 2005,
compared to $123.1 million for the three months ended June 30, 2004.
The decrease in net income primarily reflects separation costs and
higher insurance and operating expenses partially offset by a lower
effective tax rate, as further described below.
The effective tax rate decreased to 27 percent in the three months
ended June 30, 2005 from 36 percent in the three months ended June 30,
2004 reflecting higher dividend exclusions and other tax-advantaged
items. The effective tax rate in the three months ended June 30, 2004
included a reduction in net deferred tax assets which increased the
effective rate.
REVENUES
Net investment income decreased $41.7 million or 9 percent primarily
reflecting a decline in overall investment yields and a lower benefit
related to the liquidation of structured investments. More
specifically, net investment income for the current quarter includes a
$4.8 million benefit on the liquidation of structured investments
compared to an $18.4 million benefit in the same period a year ago.
Contractholder and policyholder charges increased $4.6 million or
3 percent reflecting an increase in the amount of 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 $6.7 million or
7 percent reflecting higher average market values of separate account
assets.
10
Net realized gain on investments was $37.6 million for the three months
ended June 30, 2005 compared to $8.9 million for the three months ended
June 30, 2004. For the three months ended June 30, 2005, $63.6 million
of total investment gains were partially offset by $26.0 million of
losses and impairments. Included in these total net investment gains
and losses were $63.5 million of gross realized gains partially offset
by $24.2 million of gross realized losses from sales of securities,
classified as Available-for-Sale. Included in net realized gain on
investments classified as Available-for-Sale for the three months ended
June 30, 2005 were gross realized gains and losses of $39.2 million and
$14.3 million, respectively, related to the sale of all of IDS Life's
retained interest in a collateralized debt obligation (CDO)
securitization trust, reflecting management's decision to continue to
improve the investment portfolio's risk profile through the liquidation
of certain structured investments.
For the three months ended June 30, 2004, $11.6 million of total
investment gains were partially offset by $2.7 million of losses.
Included in these total net investment gains and losses were $10.5
million of gross realized gains and $2.7 million of gross realized
losses from sales of securities, classified as Available-for-Sale.
BENEFITS AND EXPENSES
Death and other benefits for investment contracts and universal
life-type insurance increased $8 million or 14 percent primarily
related to guaranteed minimum withdrawal benefit (GMWB) riders on
variable annuity contracts.
Amortization of deferred policy acquisition costs (DAC) increased to
$98.2 million for the three months ended June 30, 2005 from $88.2
million for the three months ended June 30, 2004. The increase
primarily reflects higher insurance and annuity DAC balances and the
impact on amortization of improved equity markets for the three months
ended June 30, 2005. These increases were partially offset by a
decrease of $2 million in DAC amortization related to the quarterly
recalculation of benefit ratios which are used to estimate the cost of
certain variable annuity guarantee features.
Separation costs generally consist of financial advisor and employee
retention program costs, information technology costs, re-branding and
marketing costs and certain consulting expenses related to the
separation and distribution of Ameriprise Financial. During the quarter
ended June 30, 2005, IDS Life recorded $25.8 million in allocated
separation costs.
Other insurance and operating expenses increased $28.3 million or 24
percent primarily reflecting a $20 million increase in non-deferrable
distribution costs due to increased sales related costs and other
spending through our distribution channel.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Income before accounting change was $217 million for the six months
ended June 30, 2005, compared to $269.9 million for the six months
ended June 30, 2004. The decrease in income before accounting change
primarily reflects higher amortization of deferred policy acquisition
costs and separation costs partially offset by a lower effective tax
rate, as further described below.
11
Net income was $217 million for the six months ended June 30, 2005
compared to $199.3 million for the six months ended June 30, 2004. Net
income for the six months ended June 30, 2004 reflects the $70.6
million after-tax ($108.6 million pretax) cumulative effect of
accounting change as a result of IDS Life's adoption of SOP 03-1. See
"Application of Recently Issued Accounting Standards" section of Note 1
to the Consolidated Financial Statements for discussion regarding the
impact of adoption of SOP 03-1.
The effective tax rate decreased to 30 percent in the six months ended
June 30, 2005 from 34 percent in the six months ended June 30, 2004
reflecting higher dividend exclusions and other tax-advantaged items.
The effective tax rate in the six months ended June 30, 2004 included a
reduction in net deferred tax assets which increased the effective
rate.
REVENUES
Disability income and long-term care insurance premiums increased
$5.8 million or 4 percent reflecting higher disability income insurance
inforce levels as well as a $1.6 million (net of reinsurance) increase
in long-term care premiums as a result of rate increases implemented
during the first six months of 2005.
Contractholder and policyholder charges increased $11.4 million or
4 percent reflecting an increase in the amount of cost of insurance
charges on variable universal life products, as well as an increase in
the amount of surrender charges on variable annuity products.
Mortality and expense risk and other fees increased $14.2 million or
7 percent reflecting higher average market values of separate account
assets.
Net realized gain on investments was $37.8 million for the six months
ended June 30, 2005 compared to $17.5 million for the six months ended
June 30, 2004. For the six months ended June 30, 2005, $72.5 million of
total investment gains were partially offset by $34.7 million of
losses and impairments. Included in these total net investment gains
and losses were $72.4 million of gross realized gains partially offset
by $32.2 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. Included in net realized
gain on investments classified as Available-for-Sale for the six months
ended June 30, 2005 were gross realized gains and losses of $39.2
million and $14.3 million, respectively, related to the sale of all of
IDS Life's retained interest in a CDO securitization trust, reflecting
management's decision to continue to improve the investment portfolio's
risk profile through the liquidation of certain structured investments.
For the six months ended June 30, 2004, $26.5 million of total
investment gains were partially offset by $9.0 million of losses and
impairments. Included in these total net investment gains and losses
were $23.7 million of gross realized gains and $6.4 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 $9.5 million or
2 percent, primarily reflecting lower interest crediting rates on
annuity products and the effect of depreciation during the current
period 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.
12
Amortization of deferred policy acquisition costs (DAC) increased to
$197.3 million for the six months ended June 30, 2005 from $111.8
million for the six months ended June 30, 2004 primarily 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, as well as higher insurance
and annuity DAC balances.
Separation costs generally consist of financial advisor and employee
retention program costs, information technology costs, re-branding and
marketing costs and certain consulting expenses related to the
separation and distribution of Ameriprise Financial. During 2005, IDS Life
recorded $25.8 million in allocated separation costs.
Other insurance and operating expenses increased $40.3 million or
16 percent reflecting a $26.6 million increase in non-deferrable
distribution costs due to increased sales related costs and other
spending through our distribution channel.
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 insurance and annuity 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 insurance and annuity products, the projections
underlying the amortization of DAC require the use of certain
assumptions, including interest margins, mortality rates, persistency
rates, maintenance expense levels and customer asset value growth rates
for variable products. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed
experience. 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.
13
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.
DAC balances for various insurance and annuity products sold by IDS
Life are set forth below:
(Millions) June 30, 2005 December 31, 2004
------------- -----------------
(Unaudited)
Life and health insurance $1,807 $1,766
Annuities 1,942 1,872
------ ------
Total $3,749 $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.
14
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 Ameriprise Financial. The
primary uses of funds are policy benefits, commissions, other
product-related acquisition and sales inducement costs, operating
expenses, policy loans, dividends to Ameriprise Financial 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
Ameriprise Financial aggregating $295 million ($195 million committed
and $100 million uncommitted). At June 30, 2005, there were no line of
credit borrowings outstanding with Ameriprise Financial and no
outstanding reverse repurchase 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 $2.7
billion of below investment grade securities (excluding net unrealized
appreciation and depreciation) at June 30, 2005, December 31, 2004 and
June 30, 2004, respectively. These investments represent 7 percent, 7
percent and 9 percent of IDS Life's investment portfolio at June 30,
2005, December 31, 2004 and June 30, 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.
During the second quarter 2005, IDS Life sold all of its retained
interest in a CDO securitization trust and recognized a net realized
gain of $24.9 million. As of December 31, 2004, the carrying value of
this retained interest was $526.2 million of which $389.9 million was
considered investment grade.
As of June 30, 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 June 30,
2005, the carrying values of the CDO residual tranches, managed by an
affiliate, were $3.2 million. 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.
15
The carrying value of the CDO residual tranches, 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 $164.6 million at June 30,
2005. However, because the portfolio has been substantially liquidated,
the net assets within the structure is cash and cash equivalents and,
as a result, the overall market exposure is considered negligible.
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), guaranteed minimum withdrawal
benefits (GMWB) and certain other variable annuity benefits, asset
management 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 benefits, incurred amounts under
GMDB, GMWB 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.
16
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 Ameriprise Financial'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
17
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).
18
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, generally
including suitability, 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.
Form 8-K, filed May 23, 2005, item 5.02, reporting that on May
18, 2005, Arthur H. Berman resigned his position as Executive
Vice President - Finance of the Company. Mr. Berman resigned
to assume the role of Senior Vice President and Treasurer of
American Express Financial Advisors, Inc. (n/k/a Ameriprise
Financial Services, Inc.) and American Express Financial
Corporation (n/k/a Ameriprise Financial, Inc.) and not due to
any disagreements with the Board, auditors or officers of the
Company. In the interim period, Jeryl A. Millner will assume the
role of Executive Vice President - Finance of the company until
the board of the Company can appoint a new Executive Vice
President - Finance. Mr. Berman will continue to serve upon the
board of the Company.
19
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: August 11, 2005 By /s/ Mark E. Schwarzmann
------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: August 11, 2005 By /s/ Jeryl A. Millner
------------------------------------
Jeryl A. Millner
Executive Vice President-Finance and
Chief Financial Officer
20
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 Jeryl A. Millner pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended.
32.1 Certification of Mark E. Schwarzmann and Jeryl A. Millner pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
E-1