10-Q 1 ids10q.txt 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 -------- -------- 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