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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0823832
-------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
829 AXP Financial Center, Minneapolis, Minnesota 55474
- --------------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 671-3131
------------------------
None
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------ --------
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
IDS LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
PART I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets --
September 30, 2004 and December 31, 2003 1
Consolidated Statements of Income --
Three months ended September 30, 2004 and 2003 2
Consolidated Statements of Income --
Nine months ended September 30, 2004
and 2003 3
Consolidated Statements of Cash Flows --
Nine months ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 11-18
Item 4. Controls and Procedures 19
PART II. Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
September 30, December 31,
2004 2003
------------------ --------------------
Assets (Unaudited)
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2004,
$26,780,791; 2003, $26,596,709) $ 27,518,496 $ 27,293,565
Preferred and common stocks, at fair value (cost: 2004,
$30,019; 2003, $30,019) 31,074 31,046
Mortgage loans on real estate, at cost (less reserves: 2004,
$45,347; 2003, $47,197) 2,995,749 3,180,020
Policy loans 581,738 578,000
Other investments 755,421 801,871
------------------ --------------------
Total investments 31,882,478 31,884,502
Cash and cash equivalents 786,889 400,294
Restricted cash 510,499 834,448
Amounts recoverable from reinsurers 843,391 754,514
Amounts due from brokers 105,579 1,792
Other accounts receivable 37,649 68,422
Accrued investment income 358,976 355,374
Deferred policy acquisition costs 3,605,204 3,336,208
Deferred sales inducement costs 298,034 278,971
Other assets 333,200 253,858
Separate account assets 29,448,993 27,774,319
------------------ --------------------
Total assets 68,210,892 65,942,702
================== ====================
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits:
Fixed annuities 26,795,532 26,376,944
Variable annuity guarantees 31,771 --
Universal life insurance 3,672,716 3,569,882
Traditional life insurance 265,293 254,641
Disability income and long-term care insurance 1,878,772 1,724,204
Policy claims and other policyholders' funds 77,660 67,911
Amounts due to brokers 96,299 228,707
Deferred income taxes, net 205,070 139,814
Other liabilities 418,667 408,444
Separate account liabilities 29,448,993 27,774,319
------------------ --------------------
Total liabilities 62,890,773 60,544,866
------------------ --------------------
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 3,526,673 3,624,837
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 444,760 405,456
Net unrealized derivative losses (24,702) (5,845)
------------------ --------------------
Total accumulated other comprehensive income 420,058 399,611
------------------ --------------------
Total stockholder's equity 5,320,119 5,397,836
------------------ --------------------
Total liabilities and stockholder's equity 68,210,892 65,942,702
================== ====================
See Notes to Consolidated Financial Statements.
-1-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three months ended
September 30,
--------------------------------------
2004 2003
----------------- -------------
Revenues:
Premiums:
Traditional life insurance $ 17,040 $ 16,021
Disability income and long-term care insurance 71,879 71,433
--------------- -------------
Total premiums 88,919 87,454
Net investment income 443,534 427,603
Contractholder and policyholder charges 139,449 131,895
Mortality and expense risk and other fees 106,420 101,980
Net realized gain (loss) on investments 788 (10,665)
--------------- -------------
Total 779,110 738,267
--------------- -------------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 6,921 11,179
Investment contracts and universal life-type insurance 51,442 58,982
Disability income and long-term care insurance 18,726 14,877
Increase (decrease) in liabilities for future policy benefits:
Traditional life insurance 104 (2,374)
Disability income and long-term care insurance 33,067 36,398
Interest credited on investment contracts and universal
life-type insurance 278,902 303,438
Amortization of deferred policy acquisition costs 63,446 82,419
Other insurance and operating expenses 128,754 103,776
----------------- -------------
Total 581,362 608,695
----------------- -------------
Pre-tax income 197,748 129,572
Income tax provision (benefit) 65,245 (3,592)
----------------- -------------
Net income $ 132,503 $ 133,164
================= =============
See Notes to Consolidated Financial Statements.
-2-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Nine months ended
September 30,
------------------------------------------
2004 2003
------------------ -------------------
Revenues:
Premiums:
Traditional life insurance $ 51,094 $ 48,406
Disability income and long-term care insurance 210,245 210,814
------------------ -------------------
Total premiums 261,339 259,220
Net investment income 1,323,351 1,246,136
Contractholder and policyholder charges 413,833 397,335
Mortality and expense risk and other fees 315,402 284,430
Net realized gain on investments 18,301 12,655
------------------ -------------------
Total 2,332,226 2,199,776
------------------ -------------------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 27,011 31,037
Investment contracts and universal life-type insurance 168,149 161,166
Disability income and long-term care insurance 50,262 42,224
(Decrease) increase in liabilities for future policy benefits:
Traditional life insurance (512) (2,733)
Disability income and long-term care insurance 87,753 102,237
Interest credited on investment contracts and universal
life-type insurance 841,982 905,330
Amortization of deferred policy acquisition costs 175,230 236,232
Other insurance and operating expenses 374,166 341,724
------------------ -------------------
Total 1,724,041 1,817,217
------------------ -------------------
Pre-tax income before accounting change 608,185 382,559
Income tax provision 205,781 42,974
------------------ -------------------
Income before accounting change 402,404 339,585
Cumulative effect of accounting change, net of tax (Note 1) (70,568) --
------------------ -------------------
Net income $ 331,836 $ 339,585
================== ===================
See Notes to Consolidated Financial Statements.
-3-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Nine months ended
September 30,
----------------------------------------
2004 2003
------------------ ------------------
Cash Flows from Operating Activities
Net income $ 331,836 $ 339,585
Adjustments to reconcile net income
to net cash provided by operating activities:
Policy loans, excluding universal life-type insurance
Repayment 28,693 33,403
Issuance (29,587) (25,868)
Change in amounts recoverable from reinsurers (88,877) (89,583)
Change in other accounts receivable 30,773 (2,258)
Change in accrued investment income (3,602) (72,249)
Change in deferred policy acquisition costs, net (222,936) (190,159)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term care
insurance 165,220 191,227
Change in policy claims and other policyholders' funds 9,749 (2,170)
Deferred income taxes 92,243 11,800
Change in other assets and liabilities, net 200,400 (87,688)
Amortization of premium, net 68,107 136,950
Net realized gain on investments (18,301) (12,655)
Net realized gain on trading securities (20,644) (19,079)
Policyholder and contractholder charges, non-cash (174,704) (175,764)
Cumulative effect of accounting change, net of tax (Note 1) 70,568 --
------------------ ------------------
Net cash provided by operating activities 438,938 35,492
------------------ ------------------
Cash Flows from Investing Activities
Available-for-Sale securities:
Sales 1,235,236 9,205,312
Maturities, sinking fund payments and calls 1,577,817 3,546,041
Purchases (3,037,184) (16,738,868)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 588,641 471,588
Purchases (342,767) (697,042)
Change in amounts due to and from brokers, net (236,195) (3,285,344)
------------------ ------------------
Net cash used in investing activities (214,452) (7,498,313)
------------------ ------------------
Cash Flows from Financing Activities
Activity related to investment contracts
and universal life-type insurance:
Considerations received 1,768,159 3,701,940
Interest credited to account values 841,982 905,330
Surrenders and other benefits (2,015,188) (1,492,730)
Universal life-type insurance policy loans:
Repayment 66,526 66,085
Issuance (69,370) (61,895)
Cash dividend to American Express Financial Corporation (430,000) --
------------------ ------------------
Net cash provided by financing activities 162,109 3,118,730
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 386,595 (4,344,091)
Cash and cash equivalents at beginning of period 400,294 4,424,061
------------------ ------------------
Cash and cash equivalents at end of period $ 786,889 $ 79,970
================== ==================
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,
2003. Certain reclassifications of prior period amounts have been made to
conform to the current presentation.
The interim financial information in this report has not been audited. In
the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the consolidated
results of operations for the interim periods have been made. All
adjustments made were of a normal, recurring nature. Results of operations
reported for interim periods are not necessarily indicative of results for
the entire year.
Recently Issued Accounting Standards
In June 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) FAS No. 97-1, "Situations in Which Paragraphs 17(b)
and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments (SFAS No. 97), Permit or Require
Accrual of an Unearned Revenue Liability" (FSP 97-1). The implementation of
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1), raised a question regarding the
interpretation of the requirements of SFAS No. 97 concerning when it is
appropriate to record an unearned revenue liability. FSP 97-1 clarifies
that SFAS No. 97 is clear in its intent and language, and requires the
recognition of an unearned revenue liability for amounts that have been
assessed to compensate insurers for services to be performed over future
periods. SOP 03-1 describes one situation, when assessments result in
profits followed by losses, where an unearned revenue liability is
required. SOP 03-1 does not amend SFAS No. 97 or limit the recognition of
an unearned revenue liability to the situation described in SOP 03-1. The
guidance in FSP 97-1 is effective for financial statements for fiscal
periods beginning after June 18, 2004. The adoption of FSP 97-1 did not
have a material impact on IDS Life's consolidated financial condition or
results of operations. (For further discussion of SOP 03-1, see below and
Note 3).
The AICPA released a series of technical practice aids (TPAs) in September
2004 which provide additional guidance related to, among other things, the
definition of an insurance benefit feature and the definition of policy
assessments in determining benefit liabilities, as described within SOP
03-1. Although IDS Life is studying the TPAs, its initial assessment is
that it will not have a material effect on IDS Life's calculation of
liabilities that were recorded in the first quarter of 2004 upon adoption
of SOP 03-1.
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
-5-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
be considered in amortizing deferred policy acquisition costs (DAC) and any
deferred sales inducement costs associated with those insurance or annuity
contracts.
The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative
effect of accounting change that reduced 2004 results by $70.6 million
($108.6 million pretax). The cumulative effect of accounting change
consisted of: (i) $42.8 million pretax from establishing additional
liabilities for certain variable annuity guaranteed benefits and from
considering these liabilities in valuing DAC and deferred sales inducement
costs associated with those contracts and (ii) $65.8 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 and
from considering these liabilities in valuing DAC associated with those
contracts. 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." 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 year ended December 31,
2003. In March 2004, the FASB reached a consensus regarding the application
of a three-step impairment model to determine whether investments accounted
for in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and other cost method investments are
other-than-temporarily impaired. However, with the issuance of FASB Staff
Position (FSP) No. EITF 03-1-1, the provisions of the consensus relating to
the measurement and recognition of other-than-temporary impairments will be
deferred pending further clarification from the FASB. The remaining
provisions of this rule, which primarily relate to disclosure requirements,
are required to be applied prospectively to all current and future
investments accounted for in accordance with SFAS No. 115 and other cost
method investments. 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 and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------
2004 2003 2004 2003
---------- ----------- --------- -----------
(Millions)
Gross realized gains on sales $ 10.2 $ 26.3 $ 33.9 $ 217.3
Gross realized (losses) on sales $ (5.3) $ (36.6) $ (11.7) $ (91.4)
Realized (losses) recognized for
other-than-temporary impairments $ -- $ -- $ (0.1) $ (102.6)
-6-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Variable Annuities and Sales Inducement Costs
The majority of the variable annuity contracts offered by IDS Life contain
guaranteed minimum death benefit (GMDB) provisions. When market values of
the customer's accounts decline, the death benefit payable on a contract
with a GMDB may exceed the contract accumulation value. IDS Life also
offers variable annuities with death benefit provisions that gross up the
amount payable by a certain percentage of contract earnings; these are
referred to as gain gross-up benefits (GGU). In addition, IDS Life offers
contracts containing guaranteed minimum income benefit (GMIB) provisions.
If elected by the contract owner and after a stipulated waiting period from
contract issuance, a GMIB guarantees a minimum lifetime annuity based on a
specified rate of contract accumulation value growth and predetermined
annuity purchase rates. IDS Life has established additional liabilities for
these variable annuity death and GMIB benefits under SOP 03-1. IDS Life has
not established additional liabilities for other insurance or annuitization
guarantees for which the risk is currently immaterial.
The variable annuity death benefit liability is determined each period by
estimating the expected value of death benefits in excess of the projected
contract accumulation value and recognizing the excess over the estimated
meaningful life based on expected assessments (e.g., mortality and expense
fees, contractual administrative charges and similar fees). Similarly, the
GMIB liability is determined each period by estimating the expected value
of annuitization benefits in excess of the projected contract accumulation
value at the date of annuitization and recognizing the excess over the
estimated meaningful life based on expected assessments.
In determining the additional liabilities for variable annuity death
benefits and GMIB, IDS Life projects these benefits and contract
assessments using actuarial models to simulate various equity market
scenarios. Significant assumptions made in projecting future benefits and
assessments relate to customer asset value growth rates, mortality,
persistency and investment margins and are consistent with those used for
DAC asset valuation for the same contracts. As with DAC, management will
review, and where appropriate, adjust its assumptions each quarter. Unless
management identifies a material deviation over the course of quarterly
monitoring, management will review and update these assumptions annually in
the third quarter of each year.
The following provides summary information related to variable annuity
contracts for which IDS Life has established additional liabilities for
death benefits and guaranteed minimum income benefits:
-7-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------- ----------------- --------------------
As of
Variable Annuity GMDB and GMIB by Benefit Type September 30, As of
2004 December 31, 2003
-------------------------------------------------------------------------------------- ---------------------
(Dollar amounts in millions)
-------------------------------------------------------------------------------------- ---------------------
Contracts with GMDB Total Contract Value $ 3,108.5 $ 3,162.4
Providing for Return of Contract Value in Separate Accounts $ 1,605.4 $ 1,600.7
Premium Net Amount at Risk* $ 22.9 $ 28.0
Weighted Average Attained Age 61 62
------------------------- ---------------------------------------------- ------------- ----- ---------------
Contracts with GMDB Total Contract Value $ 25,366.8 $ 24,570.6
Providing for Six Year Contract Value in Separate Accounts $ 20,851.4 $ 20,316.1
Reset Net Amount at Risk* $ 1,839.4 $ 2,077.5
Weighted Average Attained Age 60 60
------------------------- ---------------------------------------------- ------------- ----- ---------------
Contracts with GMDB Total Contract Value $ 2,989.2 $ 2,827.5
Providing for One Year Contract Value in Separate Accounts $ 2,148.0 $ 1,886.3
Ratchet Net Amount at Risk* $ 62.5 $ 84.7
Weighted Average Attained Age 61 60
------------------------- ---------------------------------------------- ------------- ----- ---------------
Contracts with Other Total Contract Value $ 346.4 $ 251.8
GMDB Contract Value in Separate Accounts $ 260.1 $ 174.8
Net Amount at Risk* $ 36.1 $ 20.8
Weighted Average Attained Age 65 63
------------------------- ---------------------------------------------- ------------- ----- ---------------
Contracts with GGU Total Contract Value $ 328.1 $ 276.4
Death Benefit Contract Value in Separate Accounts $ 253.6 $ 193.1
Net Amount at Risk* $ 9.1 $ 5.8
Weighted Average Attained Age 64 61
------------------------- ---------------------------------------------- ------------- ----- ---------------
Contracts with GMIB Total Contract Value $ 397.6 $ 357.8
Contract Value in Separate Accounts $ 311.2 $ 268.3
Net Amount at Risk* $ 16.1 $ 23.0
Weighted Average Attained Age 59 59
-------------------------------------------------------------------------------------- ----- ---------------
* Represents current death benefit less total contract value for GMDB, amount
of gross up for GGU and accumulated guaranteed minimum benefit base less
total contract value for GMIB and assumes the actuarially remote scenario
that all claims become payable on the same day.
--------------------------------------------------------------------- ---------------- --------------------
Additional Liabilities and Incurred Benefits GMDB & GGU GMIB
--------------------------------------------------------------------- ---------------- --------------------
------------------------- ------------------------------------------- ---------------- --------------------
Nine months ended Liability balance at January 1 $ 30.6 $ 2.2
September 30, 2004 Reported claims $ 14.5 $ 0.1
Liability balance at September 30 $ 29.3 $ 2.5
Incurred claims (reported + change in
liability) $ 13.2 $ 0.4
------------------------- ------------------------------------------- ---------------- --------------------
The additional liabilities for guaranteed benefits established under SOP
03-1 are supported by general account assets. Changes in these liabilities
are included in death and other benefits in the Consolidated Statements of
Income.
Contract values in separate accounts were invested in various equity, bond
and other funds as directed by the contract holder. No gains or losses were
recognized on assets transferred to separate accounts for the periods
presented.
-8-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sales inducement costs consist of bonus interest credits and premium
credits added to certain product contract values. These benefits are
capitalized to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. Deferred
sales inducement costs were $298.0 million and $279.0 million at September
30, 2004 and December 31, 2003, respectively. These costs were previously
included in DAC and were reclassified as part of the adoption of SOP 03-1.
The amounts capitalized are amortized using the same methodology and
assumptions used to amortize DAC. IDS Life capitalized $15.8 million and
$11.2 million during the three months ended September 30, 2004 and 2003,
respectively, and $52.8 million and $54.3 million during the nine months
ended September 30, 2004 and 2003, respectively. IDS Life amortized $7.1
million and $4.6 million during the three months ended September 30, 2004
and 2003, respectively, and $24.0 million and $17.9 million during the nine
months ended September 30, 2004 and 2003, respectively.
4. Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the aggregate change in
stockholder's equity, excluding changes in ownership interests. It is the
sum of net income and changes in (i) unrealized gains or losses on
Available-for-Sale securities and applicable deferred policy acquisition
and deferred sales inducement costs; and (ii) unrealized gains or losses on
derivatives. The components of comprehensive income (loss), net of related
tax, for the three and nine months ended September 30, 2004 and 2003 were
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
(Millions) 2004 2003 2004 2003
------------- --------------- ------------- --------------
Net income $ 132.5 $ 133.2 $ 331.8 $ 339.6
Change in:
Net unrealized securities gains (losses) 407.7 (206.1) 39.3 38.1
Net unrealized derivative (losses) gains (6.7) (0.2) (18.9) 0.5
------------- --------------- ------------- --------------
Total $ 533.5 $ (73.1) $ 352.2 $ 378.2
============= =============== ============= ==============
5. Taxes and Interest
Net income taxes paid during the nine months ended September 30, 2004 and
2003, were $154.7 million and $58.8 million, respectively. The income tax
benefit in the third quarter of 2003 reflects a $29 million reduction in
the tax provision resulting from adjustments related to the finalization of
the 2002 tax return filed during the quarter and the publication of
favorable technical guidance related to the taxation of dividend income.
Interest paid on borrowings during the nine months ended September 30, 2004
and 2003, were $0.4 million and $2.3 million, respectively.
-9-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Commitments and Contingencies
Commitments to fund mortgage loans on real estate at September 30, 2004 and
December 31, 2003 were $93.1 million and $58.5 million, respectively.
The maximum amount of life insurance risk retained by IDS Life is $750,000
on any policy insuring a single life and $1.5 million on any policy
insuring a joint-life combination. IDS Life generally retains 10 percent of
the mortality risk on new life insurance policies. Risk not retained is
reinsured with other life insurance companies. Risk on universal life and
variable universal life policies is reinsured on a yearly renewable term
basis. Risk on term insurance and long-term care policies is reinsured on a
coinsurance basis. IDS Life retains all accidental death benefit,
disability income and waiver of premium risk. Reinsurance contracts do not
relieve IDS Life from its primary obligation to policyholders.
Substantially all of IDS Life's life and annuity products have minimum
interest rate guarantees in their fixed accounts. At September 30, 2004,
these minimum interest rate guarantees ranged from 1.5 percent to 5.0
percent. To the extent the yield on IDS Life's investment portfolio
declines below its target spread plus the minimum guarantee, IDS Life's
profitability would be negatively affected.
The Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable account financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements and inappropriate sales. IDS
Life Insurance Company has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.
IDS Life Insurance Company and its subsidiaries are involved in 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. In addition, IDS Life is subject to periodic state
insurance department regulatory action, through examinations or other
proceedings. IDS Life believes that it is not a party to, nor are any of
its properties the subject of, any pending legal, arbitration, or
regulatory proceedings that would have a material adverse effect on its
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.
Management does not believe there will be a material adverse effect on IDS
Life's consolidated financial position as a result of these audits.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 exclusively through the
American Express Financial Advisors Inc.'s (AEFAI) retail sales force. IDS
Life Insurance Company has four wholly owned life insurance company
subsidiaries that distribute their products through various distribution
channels. IDS Life Insurance Company of New York (IDS Life of New York) is
a wholly owned subsidiary of IDS Life Insurance Company and serves New York
State residents. IDS Life of New York distributes its fixed and variable
insurance and annuity products exclusively through AEFAI's retail sales
force. IDS Life Insurance Company also owns American Enterprise Life
Insurance Company (American Enterprise Life), an Indiana corporation, which
primarily issues fixed and variable annuity contracts for sale through
non-affiliated representatives and agents of third party distributors.
American Centurion Life Assurance Company (American Centurion Life) is also
a subsidiary of IDS Life Insurance Company. American Centurion Life offers
fixed and variable annuity contracts 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. IDS Life Insurance Company also owns American
Partners Life Insurance Company (American Partners Life), an Arizona
corporation which offers fixed and variable annuity contracts 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 II, LLC.
These two subsidiaries hold real estate and mortgage loans on real estate.
IDS Life Insurance Company and its six subsidiaries are referred to
collectively herein as "IDS Life".
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.
Results of Operations for the Three Months Ended September 30, 2004 and
2003
Net income was $132.5 million for the three months ended September 30, 2004
and $133.2 for the three months ended September 30, 2003, which was
reflective of the favorable prior year tax adjustment noted below. Pretax
income rose 53 percent.
Revenues
Net investment income increased $15.9 million or 4 percent reflecting a
$6.6 million pretax benefit from lower than expected losses related to
management's first quarter decision to liquidate a secured loan trust
managed by an affiliate. Additionally, net investment income for the third
quarter of 2003 includes $19.3 million of amortization expense of certain
low income housing investments, whereas there was no amortization expense
of such investments in the third quarter of 2004. See effective tax rate
discussion below regarding IDS Life's December 2003 low income housing
investment distribution to AEFC. These increases were partially offset by
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, which was offset in the related benefits
and expenses.
Contractholder and policyholder charges increased $7.6 million or 6 percent
reflecting increased cost of insurance charges on Variable Universal Life
products, as well as an increase in surrender charges on variable annuity
products.
-11-
Mortality and expense risk and other fees increased $4.4 million or 4
percent, reflecting higher average values of separate account assets and
the impact of the change from IDS Life to AEFC as investment manager of the
internally managed proprietary funds during the fourth quarter of 2003.
Concurrent with the investment manager change, IDS Life entered into an
agreement with AEFC to receive fees for the services, other than investment
management, that IDS Life continues to provide the underlying proprietary
mutual funds. The administrative service fees will vary with the market
values of these proprietary mutual funds. Previous to this change, IDS Life
received management fees directly from the proprietary funds and was party
to an agreement with AEFC to compensate AEFC for the investment
sub-advisory services AEFC provided these proprietary funds. In addition to
the administrative service fees, IDS Life receives mortality and expense
risk fees from the separate accounts based on the level of assets.
Net realized gain on investments was $0.8 million for the three months
ended September 30, 2004 compared to net realized loss on investments of
$10.7 million for the three months ended September 30, 2003. For the three
months ended September 30, 2004, $13.8 million of total investment gains
were partially offset by $13.0 million of impairments and losses. Included
in these total investment gains and losses are $10.2 million of gross
realized gains and $5.3 million of gross realized losses from sales of
securities, classified as Available-for-Sale.
For the three months ended September 30, 2003, $26.4 million of investment
gains were more than offset by $37.1 million of losses and impairments.
Included in these total investment gains and losses are $26.3 million of
gross realized gains and $36.6 million of gross realized losses from sales
of securities, classified as Available-for-Sale.
Benefits and Expenses
Interest credited on investment contracts and universal life-type insurance
decreased $24.5 million or 8 percent, primarily due to lower interest
crediting rates and the effect of depreciation in the S&P 500 on equity
index annuities during the current quarter versus appreciation in the same
period a year ago, partially offset by higher average accumulation values
of annuities and inforce levels of life insurance products.
Amortization of deferred policy acquisition costs (DAC) decreased $19.0
million or 23 percent primarily reflecting a net $24 million DAC
amortization expense reduction in the third quarter of 2004, compared to a
net $2 million DAC amortization expense reduction in the third quarter of
2003, both as a result of IDS Life's annual third quarter review of various
DAC assumptions and practices. See the DAC section below for further
discussion of DAC and related third quarter 2004 and 2003 adjustments.
Other insurance and operating expense increased $25.0 million or 24 percent
reflecting increases in distribution costs and non-deferrable expenses
related to product management and business reinvestment initiatives. These
increases were partially offset by a reduction related to the change in the
investment manager of the proprietary mutual funds from IDS Life to AEFC.
Effective with this change, the previously existing arrangement under which
IDS Life compensated AEFC for investment sub-advisory services were
terminated.
The effective tax rate was 33 percent for the three months ended September
30, 2004 compared to an income tax benefit for the same period a year ago.
This change reflects the third quarter of 2003 $29 million reduction in the
tax provision resulting from adjustments related to the finalization of the
2002 tax return filed during the third quarter of 2003 and also the
publication of favorable technical guidance related to the taxation of
dividend income. Also impacting the increased effective rate is the
December 2003 distribution of substantially all of IDS Life's interests in
low income housing investments to AEFC which caused unfavorable tax
provision
-12-
impacts. For 2003 and prior years, IDS Life's federal income taxes were
reduced by credits arising from such low income housing investments. IDS
Life's distribution to AEFC is more fully discussed in IDS Life's Annual
Report on Form 10-K for the year ended December 31, 2003.
Results of Operations for the Nine Months Ended September 30, 2004 and 2003
Income before accounting change rose 19 percent to $402.4 million for the
nine months ended September 30, 2004. The increase primarily reflects
increased net investment income, contractholder and policyholder charges,
mortality and expense risk and other fees, net realized gain on
investments, lower interest credited on investment contracts and universal
life-type insurance costs and lower amortization of DAC, partially offset
by higher other insurance and operating costs and a higher effective income
tax rate. See the DAC section below for further discussion of DAC and
related third quarter 2004 and 2003 adjustments.
Net income for the nine months ended September 30, 2004 reflects the $70.6
million ($108.6 million pretax) impact of IDS Life's January 1, 2004
adoption of SOP 03-1. SOP 03-1 requires insurance enterprises to establish
liabilities for benefits that may become payable under variable annuity
death benefit guarantees or other insurance or annuity contract provisions.
Revenues
Net investment income increased $77.2 million or 6 percent reflecting
slightly higher average levels of invested assets and slightly higher
yields, as well as a $24.7 million pretax benefit in 2004, reflecting lower
than expected losses resulting from management's first quarter 2004
decision to liquidate a secured loan trust managed by an affiliate, offset
by the first quarter 2004 $49.0 million pretax charge related to the same
early liquidation. Additionally, net investment income for the nine months
ended September 30, 2003 includes $58.0 million of amortization expense of
certain low income housing investments. See effective tax rate discussion
below.
Contractholder and policyholder charges increased $16.5 million or 4
percent reflecting increased cost of insurance charges on Variable
Universal Life products as well as an increase in surrender charges on
variable annuity products.
Mortality and expense risk and other fees increased $31.0 million or 11
percent, reflecting higher average values of separate account assets, and
the impact of the change from IDS Life to AEFC as investment manager of the
internally managed proprietary funds during the fourth quarter of 2003.
Net realized gain on investments was $18.3 million for the nine months
ended September 30, 2004 and $12.7 million for the nine months ended
September 30, 2003. For the nine months ended September 30, 2004, $40.3
million of total investment gains were partially offset by $22.0 million of
impairments and losses. Included in these total investment gains and losses
are $33.9 million of gross realized gains and $11.7 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.
For the nine months ended September 30, 2003, $218.4 million of total
investment gains were partially offset by $205.7 million of impairments and
losses. Included in these total net investment gains and losses are $217.3
million of gross realized gains and $91.4 million of gross realized losses
from sales of securities, as well as $102.6 million of other-than-temporary
impairment losses on investments, classified as Available-for-Sale.
-13-
Benefits and Expenses
Interest credited on investment contracts and Universal Life-type insurance
decreased $63.3 million or 7 percent, primarily due to lower interest
crediting rates and the effect on equity indexed annuities of lower
appreciation in the S&P 500 during the first nine months of 2004 versus the
same period a year ago, partially offset by higher average accumulation
values of annuities and inforce levels of life insurance products.
DAC amortization expense decreased to $175.2 million for the nine months
ended September 30, 2004 from $236.2 million for the nine months ended
September 30, 2003. The decrease reflects the first quarter 2004 net $56.2
million decrease in expenses primarily in conjunction with the adoption of
SOP 03-1 during the first quarter of 2004, and the impact of the annual
third quarter DAC-related adjustments. See the DAC section below for
further discussion.
Other insurance and operating expenses increased $32.4 million or 9 percent
reflecting increases in distribution costs and non-deferrable expenses
related to product management and business reinvestment initiatives. These
increases were partially offset by a reduction related to the changes in
the previously existing arrangement between IDS Life and AEFC as noted
above.
As previously disclosed, IDS Life completed a valuation system conversion
for its Long-Term Care insurance business during the first quarter of 2004
which resulted in a $6.5 million pretax reduction of estimated Long-Term
Care liabilities for future policy benefits and an offsetting estimated
increase of $9.6 million in amortization of deferred policy acquisition
costs.
The effective tax rate rose to 34 percent in the nine months ended
September 30, 2004 from 11 percent in the nine months ended September 30,
2003 as a result of the second quarter 2004 reduction in net deferred tax
assets, and the effect of the $29 million reduction to the tax expense in
the third quarter of 2003 related to the finalization of the 2002 tax
return filed during the third quarter of 2003 and the publication of
favorable technical guidance related to the taxation of dividend income,
both of which caused relatively unfavorable tax provision impacts. Also
impacting the increased effective rate is the December 2003 distribution of
substantially all of IDS Life's interests in low income housing investments
to AEFC which also caused unfavorable tax provision impacts.
Deferred Policy Acquisition Costs
Deferred Policy Acquisition Costs represent the costs of acquiring new
business, including for example, direct sales commissions, related sales
incentive bonuses and awards, underwriting costs, policy issue costs and
other related costs, have been deferred on the sale of insurance and
annuity contracts. DAC for universal life and variable universal life
insurance and certain annuities are amortized as a percentage of the
estimated gross profits expected to be realized on the policies. DAC for
other annuities are amortized using the interest method. For traditional
life, disability income and long-term care insurance policies, the costs
are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including
interest margins, mortality rates, persistency rates, maintenance expense
levels and customer asset value growth rates for variable products. The
customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. This rate is net of asset fees, and
anticipates a blend of equity and fixed income investments. Management
routinely monitors a wide variety of trends in the business, including
comparisons of actual and assumed experience. Management reviews and, where
appropriate, adjusts its assumptions with respect to customer asset value
growth rates on a quarterly basis.
-14-
Management monitors other principal DAC assumptions, such as persistency,
mortality rate, interest margin and maintenance expense level assumptions,
each quarter. Unless management identifies a material deviation over the
course of the quarterly monitoring, management reviews and updates these
DAC assumptions annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change
in the required amortization percentage is applied retrospectively; an
increase in amortization percentage will result in an acceleration of DAC
amortization while a decrease in amortization percentage will result in a
deceleration of DAC amortization. The impact on results of operations of
changing assumptions with respect to the amortization of DAC can be either
positive or negative in any particular period, and is reflected in the
period that such changes are made. As a result of these reviews, IDS Life
took actions in the third quarters of 2004 and 2003 that impacted DAC
balances and expenses. In the third quarter 2004, these actions resulted in
a net $24 million DAC amortization expense reduction reflecting:
o A $27 million DAC amortization reduction reflecting lower than
previously assumed surrender and mortality rates on variable annuity
products, higher surrender charges collected on Universal and Variable
Universal Life products, and higher than previously assumed interest
rate spreads on annuity and Universal Life products. Variable annuity
surrender rates were reduced between 0 and 20%, depending on product
and duration. Additionally, there was an increase in surrender charge
revenue ranging from 60% to 80% for Universal Life products and 10% to
50% for certain variable annuity products. The mortality assumption
was changed from duration to an attained age basis. Interest rate
spreads were higher by approximately 40 basis points relative to
previously assumed spreads in 2003.
o A $3 million DAC amortization reduction reflecting the extension of
the mean reversion period by one year on variable annuity and Variable
Universal Life products.
o A $6 million DAC amortization increase primarily reflecting a
reduction in estimated future premiums on variable annuity products.
In the third quarter 2003, these actions resulted in a net $2 million DAC
amortization expense reduction reflecting:
o A $106 million DAC amortization reduction resulting from extending 10
- 15 year amortization periods for certain Flex Annuity contracts to
20 years. The Flex Annuity is an advisor-distributed variable annuity
product sold from 1986 - 1996. In reviewing the persistency of this
business in recent years, IDS Life had observed significant volumes
persisting beyond the end of the 10- and 15-year amortization periods.
IDS Life had maintained these amortization periods, however, due to
uncertainty over the impact of a program launched in April 2002 under
which eligible Flex Annuity contracts can be exchanged for new
variable annuity contracts offered by IDS Life. Exchange rates to date
under this program were less than those expected, and IDS Life
concluded in the third quarter of 2003 it would be appropriate to
measure the meaningful life of this business without anticipating
future exchanges. This is consistent with the measurement made for
other IDS Life products, and the resulting 20-year period is the same
as that used for other advisor-distributed variable annuity products.
o A $92 million DAC amortization increase resulting from the recognition
of a premium deficiency on IDS Life's Long-Term Care (LTC) business.
IDS Life has monitored this business closely in 2003 as claim and
persistency experience developed adversely. IDS Life discontinued
sales of its proprietary LTC product in the first quarter of 2003, and
outsourced claims administration on the existing book in the second
quarter of 2003. On the basis of
-15-
updated analysis completed in the third quarter of 2003, IDS Life
concluded that the associated DAC was not fully recoverable at current
premium levels. The associated DAC remaining after this $92 million
reduction was $162 million.
o A $12 million net DAC amortization increase across IDS Life's
Universal Life, Variable Universal Life and fixed and variable annuity
products. IDS Life updated a number of DAC assumptions resulting in
increases in amortization totaling $26 million and decreases in
amortization totaling $14 million. The largest single item was a $16
million increase in amortization from reflecting lower than previously
assumed spreads on fixed contract values.
During the first quarter of 2004 and in conjunction with the adoption of
SOP 03-1, IDS Life extended the time periods over which DAC associated with
certain insurance and annuity products are amortized. In adopting SOP 03-1,
IDS Life established additional liabilities for insurance benefits that may
become payable under variable annuity death benefit guarantees or on single
pay universal life contracts. In order to establish the proper
relationships between these liabilities and DAC associated with the same
contracts, IDS Life changed its estimates of meaningful life for certain
contracts so DAC amortization periods are the same as liability funding
periods. As a result, IDS Life recognized a $65.8 million valuation benefit
reflecting the lengthening of the amortization periods for the same
contracts impacted by SOP 03-1. The SOP 03-1 valuation benefit above was
partially offset by the pretax $9.6 million DAC reduction* due to the
valuation system conversion discussed in the Benefits and Expenses section
of Management's Discussion and Analysis of Results of Operations for the
nine months ended September 30, 2004 and 2003.
DAC balances for various insurance and annuity products sold by IDS Life
are set forth below:
(Millions) September 30, 2004 December 31, 2003
------------------- -------------------
(Unaudited)
Annuities $ 1,862 $ 1,734
Life and health insurance 1,743 1,602
------------------ -------------------
Total $ 3,605 $ 3,336
================== ===================
In addition to the DAC balances shown above and in conjunction with IDS
Life's adoption of SOP 03-1, sales inducement costs previously included in
DAC were reclassified from DAC and presented as a separate line item in the
Consolidated Balance Sheets. Deferred sales inducement costs were $298.0
million and $279.0 million at September 30, 2004 and December 31, 2003,
respectively. Sales inducement costs consist of bonus interest credits and
premium credits added to certain product contract values. These benefits
are capitalized to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. The amounts
capitalized are amortized using the same methodology and assumptions used
to amortize DAC.
* This valuation adjustment was an increase to the $92 million estimated
premium deficiency IDS Life recognized in the third quarter of 2003.
-16-
Impact of Market Volatility on Results of Operations
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 inducement costs, recognition of benefits under guaranteed
minimum death benefits (GMDB) and certain other variable annuity benefits,
mortality and expense risk and other fees and structured investments. The
direction and magnitude of the changes in equity markets can increase or
decrease amortization of DAC and deferred sales inducement costs, incurred
amounts under GMDB and other variable annuity benefit provisions and
mortality and expense risk and other fees and correspondingly affect
results of operations in any particular period. Similarly, the value of IDS
Life's structured investment portfolio and derivatives arising from the
consolidation of certain secured loan trusts 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. See Liquidity and Capital Resources section for a
further discussion of structured investments and consolidated derivatives.
Liquidity and Capital Resources
The liquidity requirements of IDS Life are generally met by funds provided
by premiums, investment income, proceeds from sales of investments, as well
as maturities, periodic repayments of investment principal 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. IDS Life intends to pay a dividend
to AEFC during the fourth quarter of 2004, which is subject to state
regulatory approval. If approved and paid, IDS Life expects to continue to
maintain adequate capital to meet internal and external Risk-Based Capital
requirements.
IDS Life, on a consolidated basis, has available lines of credit with AEFC
aggregating $295 million ($195 million committed and $100 million
uncommitted). At September 30, 2004, there were no line of credit
borrowings outstanding with AEFC and no outstanding reverse repurchase
agreements. Both the line of credit and reverse repurchase agreements are
used strictly as short-term sources of funds.
Investment securities include $2.4 billion, $2.4 billion and $2.0 billion
of below investment grade securities (excluding net unrealized appreciation
and depreciation) at September 30, 2004, December 31, 2003 and September
30, 2003, respectively. These investments represent 7.9 percent, 7.7
percent and 6.2 percent of IDS Life's investment portfolio at September 30,
2004, December 31, 2003 and September 30, 2003, respectively.
During 2004, 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 Financial Accounting
Standards Board Interpretation No. 46 "Consolidation of Variable Interest
Entities", as revised (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. At September 30, 2004, the carrying values of the CDO residual
tranches, managed by an affiliate, were $5.2 million. IDS Life also has a
retained interest in a CDO securitization with a carrying value of $519.6
million, of which $383.3 million is considered investment grade, as well as
an additional $20.7 million in rated CDO tranches managed by a third party.
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.
The carrying value of the CDOs, and IDS Life's projected return are based
on discounted cash flow projections that require a significant degree of
management judgment as to assumptions
-17-
primarily related to default and recovery rates of the high-yield bonds
and/or bank loans held directly by the CDO 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, they have additional
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 addition, the
derivatives recorded as a result of consolidating the two remaining Secured
Loan Trusts (SLT) under FIN 46 are valued based on the expected performance
of a reference portfolio of high-yield loans. Deterioration in the value of
the high-yield bonds or bank loans would likely result in deterioration of
IDS Life's investment return with respect to the relevant CDO or
consolidated derivative, as the case may be. In the event of significant
deterioration of a portfolio, the relevant CDO or SLT structure containing
the consolidated derivative may be subject to early liquidation, which
could result in further deterioration of the investment return or, in
severe cases, loss of the CDO or consolidated derivative carrying amount.
During the nine months ended September 30, 2004, IDS Life liquidated one of
its SLTs. The exposure to loss as a result of IDS Life's investment in the
two remaining SLTs consolidated under FIN 46 is represented by the pretax
net assets of the consolidated SLTs which were $471.7 million at September
30, 2004.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the
Consolidated Financial Statements.
-18-
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 that are subject to risks
and uncertainties that could cause results to differ materially from such
statements. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "should," "could," "likely," and similar
expressions are intended to identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. IDS
Life undertakes no obligation to publicly update or revise any
forward-looking statements. Important factors that could cause actual
results to differ materially from IDS Life's forward-looking statements
include, but are not limited to: fluctuations in external markets, which
can affect the amount and types of investment products sold, the market
value of its separate account assets and related fees received and the
amount of amortization of DAC; potential deterioration in high-yield and
other investments, which could result in further losses in IDS Life's
investment portfolio; changes in assumptions relating to DAC which also
could impact the amount of DAC amortization; the ability to sell certain
high-yield investments at expected values and within anticipated time
frames and to maintain its high-yield portfolio at certain levels in the
future; the types and 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 IDS Life's
major businesses; the adoption of recently issued accounting rules related
to the consolidation of variable interest entities, including those
involving SLTs that IDS Life invests in, and accounting for guarantees
under SOP 03-1, both of which could further affect both IDS Life's balance
sheet and results of operations; and outcomes of litigation. A further
description of these and other risks and uncertainties can be found in IDS
Life's Annual Report on Form 10-K for the year ended December 31, 2003, and
its other reports filed with the Securities and Exchange Commission (SEC).
-19-
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. IDS Life Insurance Company has received requests
for information and has been contacted by regulatory authorities
concerning its practices and is cooperating fully with these inquiries.
In November 2002, IDS Life Insurance Company was named in a purported
class action entitled John Haritos, et al. v. American Express
Financial Advisors, Inc. et al., No. 02 2255, United States District
Court, District of Arizona. The complaint originally named IDS Life
Insurance Company as a defendant, but IDS Life Insurance Company was
dismissed when plaintiffs chose to file an Amended Complaint not naming
IDS Life Insurance Company. This action alleges that defendants
violated the Investment Advisors Act of 1940, 15 U.S.C., in the sale of
financial plans and various products including those of IDS Life
Insurance Company. The complaint seeks certification of a nationwide
class, restitution, injunctive relief, and punitive damages. Defendants
have moved to dismiss the action and that motion is pending.
IDS Life Insurance Company and its subsidiaries are involved in 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.
There were no reports on Form 8-K filed by IDS Life
during the quarterly period ended September 30, 2004.
-20-
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: November 10, 2004 By /s/ Mark E. Schwarzmann
------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: November 10, 2004 By /s/ Arthur H. Berman
---------------------
Arthur H. Berman
Director and Executive Vice President -
Finance and Chief Financial Officer
-21-
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