Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA
41-0823832
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IDS TOWER 10, MINNEAPOLIS, MINNESOTA
55440-0534 (Address of principal executive
offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable] THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTIONS I(1) (a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS
FORM WITH THE PERMITTED ABBREVIATED NARRATIVE DISCLOSURE.
PART I
ITEM 1. BUSINESS
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. The Company is the fourteenth largest
life insurance company in the United States, with consolidated assets at
December 31, 1999 of $64.4 billion. IDS Life Insurance Company of New York and
American Centurion Life Assurance Company are wholly owned subsidiaries of the
Company and serve New York State residents. The Company also wholly owns
American Enterprise Life Insurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's insurance products
include universal life (fixed and variable), whole life, single premium life and
term products (including waiver of premium and accidental death benefits). The
Company also markets disability income and long-term care insurance.
The Company's fixed annuity contracts guarantee a minimum interest rate during
the accumulation period (the time before annuity payments begin), although the
Company has the option of paying a higher rate reflective of current market
rates. The Company has also adopted a practice whereby the higher current rate
is guaranteed for a specified period. The Company also offers fixed/variable
annuity products offering the purchaser a choice among mutual funds with
portfolios of equities, bonds, managed assets and/or short-term securities, and
the Company's general account, as the underlying investment vehicles. With
respect to funds applied to the variable portion of the annuity, the purchaser,
rather than the Company, assumes the investment risks and receives the rewards
inherent in the ownership of the underlying investments. At December 31, 1999,
the Company had $52.4 billion of fixed and variable annuities in force, an
increase of 13 percent from the prior year end.
The Company's principal insurance product is the flexible-premium,
adjustable-benefit universal life insurance policy. In this type of insurance
policy, premium payments either accumulate interest in a fixed account or
purchase units in one or more variable accounts. The policyholder has access to
the cash surrender value in whole or in part after the first year. The size of
the cash value of the fund can also be controlled by the policyholder by
increasing or decreasing premiums, subject only to maintaining a required
minimum to keep the policy in force. Monthly deductions from the cash value of
the policy are made for the cost of insurance, expense charges and any policy
riders. At December 31, 1999, the Company had $71.4 billion of fixed and
variable universal life-type insurance in force, up 11 percent from December 31,
1998.
Assets held in separate accounts which fund the variable annuity and variable
life insurance products totaled $35.9 billion at December 31, 1999, a 32 percent
increase from December 31, 1998.
IDS Life Insurance Company, American Enterprise Life Insurance Company and
American Partners Life Insurance Company are subject to comprehensive regulation
by the Minnesota Department of Commerce (Insurance Division), the Indiana
Department of Insurance and the Arizona Department of Insurance, respectively.
IDS Life Insurance Company of New York and American Centurion Life Assurance
Company are both subject to comprehensive regulation by the New York Department
of Insurance. The laws of the other states in which the Company does business
regulate such matters as the licensing of sales personnel and, in some cases,
the marketing and contents of insurance policies and annuity contracts. The
purpose of such regulation and supervision is primarily to protect the interests
of policyholders. Recently there has been an increased focus on the variable
annuity business by regulators. In the United States, the McCarran-Ferguson Act
provides that the primary regulation of the insurance industry is left to the
individual states. Typically, states regulate such matters as company licensing,
agent licensing, cancellation or nonrenewal of policies, minimum health
insurance policy benefits, life insurance cost disclosure, solicitation and
replacement practices, unfair trade and claims practices, rates, forms,
advertising, investment type and quality, minimum capital and surplus levels and
changes in control. Virtually all states mandate participation in insurance
guaranty associations, which assess insurance companies in order to fund claims
of policyholders of insolvent insurance companies. In addition to state laws,
the Company is affected by a variety of federal laws, and there is periodic
federal interest in various aspects of the insurance industry including taxation
of variable annuities and life insurance policies, solvency and accounting
procedures, as well as the treatment of persons differently because of gender,
with respect to terms, conditions, rates or benefits of an insurance contract.
New federal regulation in any of these areas could potentially have an adverse
effect upon the Company.
As a distributor of variable contracts, the Company is registered as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. As the investment manager for various investment companies, the Company is
registered as an investment advisor under applicable federal requirements.
The insurance and annuity business is highly competitive and the Company's
competitors consist of both stock and mutual insurance companies and other
financial institutions. Competitive factors applicable to the business of the
Company include the interest rates credited to its products, the charges
deducted from the cash values of such products, the financial strength of the
organization and the services provided to policyholders.
ITEM 2. PROPERTIES
The Company occupies office space in Minneapolis, Minnesota, which is leased by
its parent, AEFC. The Company reimburses AEFC for rent based on direct and
indirect allocation methods. IDS Life Insurance Company of New York and American
Centurion Life Assurance Company rent office space in Albany, New York.
Facilities occupied by the Company and its subsidiaries are believed to be
adequate for the purposes for which they are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company and AEFC do business involving insurers'
sales practices, alleged agent misconduct, failure to properly supervise agents,
and other matters. The Company and AEFC, like other life and health insurers,
from time to time are involved in such litigation. On December 13, 1996, an
action entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life Insurance
Company and American Express Financial Corporation was commenced in Minnesota
state court. The action is brought by individuals who replaced an existing
Company insurance policy with a new Company policy. The plaintiffs purport to
represent a class consisting of all persons who replaced existing Company
policies with new policies from and after January 1, 1985. The complaint puts at
issue various alleged sales practices and misrepresentations, alleged breaches
of fiduciary duties and alleged violations of consumer fraud statutes. The
Company and AEFC filed an answer to the Complaint on February 18, 1997, denying
the allegations. A second action, entitled Arnold Mork, Isabella Mork, Ronald
Melchart and Susan Melchart vs. IDS Life Insurance Company and American Express
Financial Corporation was commenced in the same court on March 21, 1997. In
addition to claims that are included in the Benacquisto lawsuit, the second
action includes an allegation of improper replacement of an existing IDS Life
annuity contract. A subsequent class action, Richard Thoreson and Elizabeth
Thoresen vs. AEFC, American Partners Life Insurance Company, American Enterprise
Life Insurance Company, American Centurion Life Assurance Company, IDS Life
Insurance Company and IDS Life Insurance Company of New York, was filed in the
same court on October 13, 1998 alleging that the sale of annuities in
tax-deferred contributory retirement investment plans (e.g. IRA's) was done
through deceptive marketing practices, which the Company denies. Plaintiffs in
each of the above actions seek damages in an unspecified amount and also seek to
establish a claims resolution facility for the determination of individual
issues.
The Company is included as a party to a preliminary settlement of all three
class action lawsuits. The Company believes this approach will put these cases
behind it and provide a fair outcome for the Company's clients. The Company's
decision to settle does not include any admission of wrongdoing. The settlement
costs allocated to the Company are included in the accompanying 1999 statement
of income and did not have a material impact on the Company's consolidated
financial position or results from operations. Further, the Company does not
anticipate that any other lawsuits in which the Company is a defendant will have
a material adverse effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1999 Compared to 1998:
Consolidated net income increased 18 percent to $636 million in 1999, compared
to $540 million in 1998. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1999.
Consolidated income before income taxes totaled $904 million in 1999, compared
with $776 million in 1998.
Total premiums and investment contract deposits received increased to $5.0
billion in 1999, compared with $4.4 billion in 1998. This increase is primarily
due to an increase in variable annuity deposits in 1999.
Total revenues increased to $3.1 billion in 1999, compared with $3.0 billion in
1998. The increase is primarily due to increased policyholder and contractholder
charges and management fees. Net investment income, the largest component of
revenues, decreased slightly from the prior year, reflecting decreases in
investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 7 percent to $412
million in 1999, compared with $384 million in 1998. This increase reflects
increased total life insurance in force, which grew 10 percent to $89 billion at
December 31, 1999.
Net realized gain on investments increased to $27 million in 1999, compared to
$7 million in 1998. The increase was primarily due to the sale of available for
sale fixed maturity investments at a gain as well as a decrease in the allowance
for mortgage loan losses based on management's regular evaluation of allowance
adequacy.
Management and other fees increased 18 percent to $473 million in 1999, compared
with $401 million in 1998. This is primarily due to an increase in separate
account assets, which grew 31 percent to $35.9 billion at December 31, 1999, due
to market appreciation and sales. The Company provides investment management
services for mutual funds used as investment options for variable annuities and
variable life insurance. The Company also receives a mortality and expense risk
fee from the separate accounts.
Total benefits and expenses decreased slightly to $2.2 billion in 1999. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased to $1.2
billion, reflecting a decrease in fixed annuities in force. Amortization of
deferred policy acquisition costs decreased to $333 million, compared to $383
million in 1998. This decrease was due primarily to the impact of changing
prospective separate account investment performance assumptions.
Other insurance and operating expenses increased 17 percent to $335 million in
1999, compared to $287 million in 1998. This increase is primarily a result of
business growth and technology costs related to growth initiatives.
1998 Compared to 1997:
Consolidated net income increased 14 percent to $540 million in 1998, compared
to $474 million in 1997. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1998.
Consolidated income before income taxes totaled $776 million in 1998, compared
with $681 million in 1997.
Total premiums and investment contract deposits received decreased to $4.4
billion in 1998, compared with $5.2 billion in 1997. This decrease is primarily
due to a decrease in sales of fixed annuities in 1998, reflecting the low
interest rate environment.
Total revenues increased to $3.0 billion in 1998, compared with $2.9 billion in
1997. The increase is primarily due to increased policyholder and contractholder
charges and management fees. Net investment income, the largest component of
revenues, decreased slightly from the prior year, reflecting slight decreases in
investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 12 percent to $384
million in 1998, compared with $342 million in 1997. This increase reflects
increased total life insurance in force, which grew 8 percent to $81 billion at
December 31, 1998.
Management and other fees increased 18 percent to $401 million in 1998, compared
with $341 million in 1997. This is primarily due to an increase in separate
account assets, which grew 18 percent to $27.3 billion at December 31, 1998, due
to market appreciation and sales. The Company provides investment management
services for the mutual funds used as investment options for variable annuities
and variable life insurance. The Company also receives a mortality and expense
risk fee from the separate accounts.
Total benefits and expenses increased slightly to $2.2 billion in 1998. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased to $1.3
billion, reflecting a decrease in fixed annuities in force and lower interest
rates. Amortization of deferred policy acquisition costs increased to $383
million, compared to $323 million in 1997. This increase was due primarily to
increased aggregate amounts in force, as well as accelerating amortization to
reflect actual lapse experience on certain fixed annuities.
Risk Management
The sensitivity analysis of two different tests of market risk discussed below
estimates the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, are a 100 basis
point increase in market interest rates and a 10% decline in equity prices.
Computations of the prospective effects of hypothetical interest rate and equity
price changes are based on numerous assumptions, including relative levels of
market interest rates and equity prices, as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by management if the hypothetical market
changes actually occurred over time. As a result, actual earnings effects in the
future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a competitive
rate of return on their investments while minimizing risk, and to provide a
dependable and targeted spread between the interest rate earned on investments
and the interest rate credited to contractholders' accounts. The Company does
not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1999, would be approximately $11 million.
On a certain annuity product, the interest is credited to contractholders'
accounts based upon the relative change in a major stock market index between
the beginning and end of the product's term. As a means of hedging the Company's
obligation under the provisions of this product, the committee's strategy is to
purchase and write options on the major stock market index.
The amount of the fee income the Company receives is based upon the daily market
value of the separate account assets. As a result, the Company's fee income
would be negatively impacted by a decline in the equity markets. Another part of
the committee's strategy is to enter into index option collars (combination of
puts and calls) for hedging purposes. These derivatives protect fee income by
providing option income when there is a significant decline in the equity
markets. The Company finances the cost of this protection through selling a
portion of the upside potential from an increasing market through written
options.
The negative effect on the Company's pretax earnings of the 10% decline in
equity prices would be approximately $45 million based on assets under
management and the index options as of December 31, 1999.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by premiums,
investment income, proceeds from sales of investments as well as maturities and
periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has available lines of credit with its parent aggregating $200
million ($100 million committed and $100 million uncommitted). The line of
credit is used strictly as a short-term source of funds. Borrowings outstanding
were $50,000 uncommitted at December 31, 1999. At December 31, 1999, outstanding
reverse repurchase agreements totaled $130 million.
At December 31, 1999, investments in fixed maturities comprised 81 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 31 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 1999, approximately 14 percent of the Company's investments in
fixed maturities were below investment grade bonds. These investments may be
subject to a higher degree of risk than the investment grade issues because of
the borrower's generally greater sensitivity to adverse economic conditions,
such as recession or increasing interest rates, and in certain instances, the
lack of an active secondary market. Expected returns on below investment grade
bonds reflect consideration of such factors. The Company has identified those
fixed maturities for which a decline in fair value is determined to be other
than temporary, and has written them down to fair value with a charge to
earnings.
At December 31, 1999, net unrealized depreciation on fixed maturities held to
maturity included $97 million of gross unrealized appreciation and $147 million
of gross unrealized depreciation. Net unrealized depreciation on fixed
maturities available for sale included $71 million of gross unrealized
appreciation and $725 million of gross unrealized depreciation.
At December 31, 1999, the Company had an allowance for losses for mortgage loans
totaling $28 million and for real estate investments totaling $nil.
The economy and other factors have caused a number of insurance companies to go
under regulatory supervision. This circumstance has resulted in assessments by
state guaranty associations to cover losses to policyholders of insolvent or
rehabilitated companies. Some assessments can be partially recovered through a
reduction in future premium taxes in certain states. The Company established an
asset for guaranty association assessments paid to those states allowing a
reduction in future premium taxes over a reasonable period of time. The asset is
being amortized as premium taxes are reduced. The Company has also estimated the
potential effect of future assessments on the Company's financial position and
results of operations and has established a reserve for such potential
assessments. The Company has adopted Statement of Position 97-3 providing
guidance when an insurer should recognize a liability for guaranty fund
assessments. The SOP is effective for fiscal years beginning after December 15,
1998. Adoption did not have a material impact on the Company's results of
operations or financial condition.
In the first quarter of 2000, the Company paid a $70 million dividend to its
parent. In 1999, dividends paid to its parent were $350 million.
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. The computation involves applying
factors to various statutory financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards provide for regulatory attention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. As of December 31, 1999, the Company's total adjusted capital was well
in excess of the levels requiring regulatory attention.
Year 2000 Issue
The Company is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly owned subsidiary of American Express
Company (American Express). All of the major systems used by the Company are
maintained by AEFC and are utilized by multiple subsidiaries and affiliates of
AEFC. American Express coordinated the Year 2000 (Y2K) efforts on behalf of all
of its businesses and subsidiaries. Representatives of AEFC participated in
these efforts.
The Company, to date, has not experienced any material systems failures related
to the Y2K rollover. American Express' and AEFC's remediation plan for the Y2K
issue is discussed in detail in the Company's 1998 10-K report and 1999 10-Q
reports. American Express and AEFC will continue their Y2K monitoring and
address any issues that may arise from internal systems or those of third
parties. American Express' and AEFC's cumulative costs since inception of the
Y2K initiative were $505 million and $67.7 million, respectively, through
December 31, 1999, and are expected to be approximately $10 million and $0.8
million, respectively, in 2000. The majority of these costs are managed by and
included in American Express' Corporate and Other segment, as most remediation
efforts are related to systems that are maintained by the American Express
Technologies organization. Costs related to Y2K have not had a material adverse
effect on the Company's results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Mangement's Discussion and
Analysis of financial condition and results of operations under the section
titled risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
Index to financial statements
The following consolidated financial statements of IDS Life Insurance
Company are included in Item 8:
Report of Independent Auditors 18
Consolidated Balance Sheets at December 31, 1999 and 1998 19-20
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 21
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1999, 1998 and 1997 22-23
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 24-25
Notes to Consolidated Financial Statements 26-43
All information on schedules to the consolidated financial statements
required by Article 7 of Regulation S-X is included in the consolidated
financial statements or is not required. Therefore, all schedules have been
omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedules on page 12.
(2) Financial Statement Schedules
See index to Financial Statements and Financial Statement
Schedules. All information on schedules to the consolidated
financial statements required by Article 7 of Regulation S-X is
included in the consolidated financial statements or is not
required. Therefore, all schedules have been omitted.
(3) Exhibits
3.1 Copy of Certificate of Incorporation of IDS Life Insurance
Company filed electronically as Exhibit 3.1 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company
filed electronically as Exhibit 3.2 to Post-Effective
Amendment No. 5 to Registration Statement No. 33-28976 is
incorporated herein by reference.
3.3 Copy of Resolution of the Board of Directors of IDS Life
Insurance Company, dated May 5, 1989, establishing IDS Life
Account MGA filed electronically as Exhibit 3.3 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.1 Copy of Non-tax qualified Group Annuity Contract, Form
30363C, filed electronically as Exhibit 4.1 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.2 Copy of Non-tax qualified Group Annuity Certificate, Form
30360C, filed electronically as Exhibit 4.2 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity
Contract filed electronically as Exhibit 4.3 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity
Certificate filed electronically as Exhibit 4.4 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C,
filed electronically as Exhibit 4.5 to Post-Effective
Amendment No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.6 Copy of Tax qualified Group Annuity Certificate, Form
30368C, filed electronically as Exhibit 4.6 to
Post-Effective Amendment No. 10 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed
electronically as Exhibit 4.7 to Post-Effective Amendment
No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed
electronically as Exhibit 4.8 to Post-Effective Amendment
No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.9 Copy of Non-tax qualified Individual Annuity Contract, Form
30365D, filed electronically as Exhibit 4.9 to
Post-Effective Amendment No. 10 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.10 Copy of Endorsement No. 30379 to the Individual Annuity
Contract, filed electronically as Exhibit 4.10 to Post
Effective Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.11 Copy of Tax qualified Individual Annuity Contract, Form
30370C, filed electronically as Exhibit 4.11 to
Post-Effective Amendment No. 10 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed
electronically as Exhibit 4.12 to Post-Effective Amendment
No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.13 Copy of Endorsement No. 33007 filed electronically as
Exhibit 4.13 to Post-Effective Amendment No. 12 to
Registration Statement No. 33-28976 is incorporated herein
by reference.
4.14 Copy of Group Annuity Contract, Form 30363D, filed
electronically as Exhibit 4.1 to Post-Effective Amendment
No. 2 to Registration Statement No. 33-50968 is incorporated
herein by reference.
4.15 Copy of Group Annuity Certificate, Form 30360D, filed
electronically as Exhibit 4.2 to Post-Effective Amendment
No. 2 to Registration Statement No. 33-50968 is incorporated
herein by reference.
4.16 Form of Deferred Annuity Contract, Form 30365E, filed
electronically as Exhibit 4.3 to Post-Effective Amendment
No. 2 to Registration Statement No. 33-50968 is incorporated
herein by reference.
4.17 Copy of Group Deferred Variable Annuity Contract, Form
34660, filed electronically as Exhibit 4.1 to Post-Effective
Amendment No. 2 to Registration Statement No. 33-48701 is
incorporated herein by reference.
4.18 Copy of Non-tax qualified Group Annuity Contract, Form
33111, filed electronically as Exhibit 4.1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.19 Copy of Non-tax qualified Group Annuity Certificate, Form
33114, filed electronically as Exhibit 4.2 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.20 Copy of Tax qualified Group Annuity Contract, Form 33112,
filed electronically as Exhibit 4.3 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115,
filed electronically as Exhibit 4.4 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.22 Copy of Group IRA Annuity Contract, Form 33113, filed
electronically as Exhibit 4.5 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed
electronically as Exhibit 4.6 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.24 Copy of Non-tax qualified Individual Annuity Contract, Form
30484, filed electronically as Exhibit 4.7 to Post-Effective
Amendment No. 1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.25 Copy of Tax qualified Individual Annuity Contract, Form
30485, filed electronically as Exhibit 4.8 to Post-Effective
Amendment No. 1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.26 Copy of Individual IRA Contract, Form 30486, filed
electronically as Exhibit 4.9 to Post-Effective Amendment
No. 1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
21. Copy of List of Subsidiaries filed electronically as Exhibit
21 to Post-Effective Amendment No. 7 to Registration
Statement No. 33-28976 is herein incorporated by reference.
27. Financial data schedule is filed electronically herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 1999
No reports on Form 8-K were required to be filed by the Company for the quarter
ended December 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
3/12/2000 By /s/ Richard W. Kling
Date Richard W. Kling, President
and Chief Executive Officer
3/12/2000 By /s/ Philip C. Wentzel
Date Philip C. Wentzel, Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
3/12/2000 By /s/ David R. Hubers
Date David R. Hubers, Director
3/12/2000 By /s/ Richard W. Kling
Date Richard W. Kling, President
and Chief Executive Officer
3/12/2000 By /s/ Paul F. Kolkman
Date Paul F. Kolkman, Executive Vice
President
3/12/2000 By /s/ James A. Mitchell
Date James A. Mitchell, Chairman of the
Board
3/12/2000 By /s/ Paula R. Meyer
Date Paula R. Meyer, Executive Vice
President, Assured Assets
3/12/2000 By /s/ Barry J. Murphy
Date Barry J. Murphy, Executive Vice
President, Client Service
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly-owned subsidiary of American Express Financial
Corporation) as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ KPMG LLP
KPMG LLP
February 3, 2000
Minneapolis, Minnesota
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
($ thousands)
ASSETS 1999 1998
- -
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1999, $7,105,743; 1998, $8,420,035) $ 7,156,292 $ 7,964,114
Available for sale, at fair value (amortized cost:
1999, $13,703,137; 1998, $13,344,949) 13,049,549 13,613,139
------------ ------------
20,205,841 21,577,253
Mortgage loans on real estate 3,606,377 3,505,458
Policy loans 561,834 525,431
Other investments 506,797 366,604
------------- ------------
Total investments 24,880,849 25,974,746
Cash and cash equivalents 32,333 22,453
Amounts recoverable from reinsurers 327,168 262,260
Amounts due from brokers 145 327
Other accounts receivable 48,578 47,963
Accrued investment income 343,449 366,574
Deferred policy acquisition costs 2,665,175 2,496,352
Deferred income taxes, net 216,020 --
Other assets 33,089 30,487
Separate account assets 35,894,732 27,349,401
----------- ------------
Total assets $64,441,538 $56,550,563
=========== ===========
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
($ thousands, except share amounts)
LIABILITIES AND STOCKHOLDER'S EQUITY 1999 1998
-- --
Liabilities:
Future policy benefits:
Fixed annuities $20,552,159 $21,172,303
Universal life-type insurance 3,391,203 3,343,671
Traditional life insurance 226,842 225,306
Disability income and long-term care insurance 811,941 660,320
Policy claims and other policyholders' funds 24,600 70,309
Deferred income taxes, net -- 16,930
Amounts due to brokers 148,112 195,406
Other liabilities 579,678 410,285
Separate account liabilities 35,894,732 27,349,401
------------ ------------
Total liabilities 61,629,267 53,443,931
------------ ------------
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 288,327 288,327
Accumulated other comprehensive (loss) income, net of tax:
Net unrealized securities (losses) gains (411,230) 169,584
Retained earnings 2,932,174 2,645,721
------------- -------------
Total stockholder's equity 2,812,271 3,106,632
------------- -------------
Total liabilities and stockholder's equity $64,441,538 $56,550,563
=========== ===========
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
1999 1998 1997
----------- ----------- ----------
Revenues:
Premiums:
Traditional life insurance $ 53,790 $ 53,132 $ 52,473
Disability income and long-term care insurance 201,637 176,298 154,021
---------- ---------- ----------
Total premiums 255,427 229,430 206,494
Policyholder and contractholder charges 411,994 383,965 341,726
Management and other fees 473,108 401,057 340,892
Net investment income 1,919,573 1,986,485 1,988,389
Net realized gain on investments 26,608 6,902 860
----------- ------------ ------------
Total revenues 3,086,710 3,007,839 2,878,361
--------- --------- ---------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 29,819 29,835 28,951
Universal life-type insurance
and investment contracts 118,561 108,349 92,814
Disability income and long-term care insurance 30,622 27,414 22,333
Increase in liabilities for future policy benefits:
Traditional life insurance 7,311 6,052 3,946
Disability income and long-term care insurance 87,620 73,305 63,631
Interest credited on universal life-type
insurance and investment contracts 1,240,575 1,317,124 1,386,448
Amortization of deferred policy
acquisition costs 332,705 382,642 322,731
Other insurance and operating expenses 335,180 287,326 276,596
---------- ---------- ----------
Total benefits and expenses 2,182,393 2,232,047 2,197,450
--------- --------- ---------
Income before income taxes 904,317 775,792 680,911
Income taxes 267,864 235,681 206,664
---------- ---------- ----------
Net income $ 636,453 $ 540,111 $ 474,247
========== ========== ==========
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1999
($ thousands)
Accumulated Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, December 31, 1996 $ 2,444,080 $ 3,000 $ 283,615 $ 86,102 $2,071,363
Comprehensive income:
Net income 474,247 -- -- -- 474,247
Unrealized holding gains arising during
the year, net of deferred policy acquisition
costs of ($7,714) and taxes of ($75,215) 139,686 -- -- 139,686 --
Reclassification adjustment for losses
included in net income, net of tax
of ($308) -- -- 571 571 --
Other comprehensive income 140,257 -- -- 140,257 --
Comprehensive income 614,504 -- -- -- --
Capital contribution from parent 7,232 -- 7,232 -- --
Cash dividends to parent (200,000) -- -- -- (200,000)
_____________________________________________________________________________
Balance, December 31, 1997 2,865,816 3,000 290,847 226,359 2,345,610
Comprehensive income:
Net income 540,111 -- -- -- 540,111
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $6,333 and taxes of $32,826 (60,964) -- -- (60,964) --
Reclassification adjustment for losses
included in net income, net of tax
of ($2,254) 4,189 -- -- 4,189
------------- --------
Other comprehensive loss (56,775) -- -- (56,775) --
Comprehensive income 483,336 -- -- -- --
Other changes (2,520) -- (2,520) -- --
Cash dividends to parent (240,000) -- -- -- (240,000)
___________ _________ _______ __________ __________
Balance, December 31, 1998 3,106,632 3,000 288,327 169,584 2,645,721
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
Three years ended December 31, 1999
($ thousands)
Accumulated
Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, December 31, 1998 $3,106,632 $3,000 $288,327 $169,584 $2,645,721
Comprehensive income:
Net income 636,453 -- -- -- 636,453
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $28,444 and taxes of $304,936 (566,311) -- -- (566,311) --
Reclassification adjustment for gains
included in net income, net of tax
of $7,810 (14,503) -- -- (14,503) --
----------------- ----------------
Other comprehensive loss (580,814) -- -- (580,814) --
Comprehensive income 55,639 -- -- -- --
Cash dividends to parent (350,000) -- -- -- (350,000)
---------------------------------------------------------------------------
Balance, December 31, 1999 $2,812,271 $3,000 $288,327 $(411,230) $2,932,174
============================================================================
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
1999 1998 1997
------------ ----------- ---------
Cash flows from operating activities:
Net income $ 636,453 $ 540,111 $ 474,247
Adjustments to reconcile net income to net cash
provided by operating activities:
Policy loans, excluding universal
life-type insurance:
Issuance (56,153) (53,883) (54,665)
Repayment 54,105 57,902 46,015
Change in amounts recoverable from reinsurers (64,908) (56,544) (47,994)
Change in other accounts receivable (615) (10,068) 6,194
Change in accrued investment income 23,125 (9,184) (14,077)
Change in deferred policy acquisition costs, net (140,379) (10,443) (156,486)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term
care insurance 153,157 138,826 112,915
Change in policy claims and other
policyholders' funds (45,709) 1,964 (15,289)
Deferred income tax provision (benefit) 79,796 (19,122) 19,982
Change in other liabilities 169,395 64,902 13,305
(Accretion of discount),
amortization of premium, net (17,907) 9,170 (5,649)
Net realized gain on investments (26,608) (6,902) (860)
Policyholder and contractholder charges, non-cash (175,059) (172,396) (160,885)
Other, net (5,324) 10,786 7,161
----------- ----------- -----------
Net cash provided by operating
activities $ 583,369 $ 485,119 $ 223,914
--------- --------- ---------
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
($ thousands)
1999 1998 1997
------------- ------------- -----------
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases $ (3,030) $ (1,020) $ (1,996)
Maturities, sinking fund payments and calls 741,949 1,162,731 686,503
Sales 66,547 236,963 236,761
Fixed maturities available for sale:
Purchases (3,433,128) (4,100,238) (3,160,133)
Maturities, sinking fund payments and calls 1,442,507 2,967,311 1,206,213
Sales 1,691,389 278,955 457,585
Other investments, excluding policy loans:
Purchases (657,383) (555,647) (524,521)
Sales 406,684 579,038 335,765
Change in amounts due from brokers 182 8,073 2,647
Change in amounts due to brokers (47,294) (186,052) 119,471
------------- ------------ -----------
Net cash provided by (used in)
investing activities 208,423 390,114 (641,705)
----------- ----------- -----------
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 2,031,630 1,873,624 2,785,758
Surrenders and other benefits (3,669,759) (3,792,612) (3,736,242)
Interest credited to account balances 1,240,575 1,317,124 1,386,448
Universal life-type insurance policy loans:
Issuance (102,239) (97,602) (84,835)
Repayment 67,881 67,000 54,513
Capital transaction with parent -- -- 7,232
Dividends paid (350,000) (240,000) (200,000)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (781,912) (872,466) 212,874
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 9,880 2,767 (204,917)
Cash and cash equivalents at beginning of year 22,453 19,686 224,603
------------ ------------ ------------
Cash and cash equivalents at end of year $ 32,333 $ 22,453 $ 19,686
============ ============ ============
See accompanying notes
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a
wholly-owned subsidiary of American Express Financial Corporation (AEFC),
which is a wholly owned subsidiary of American Express Company. The Company
serves residents of all states except New York. IDS Life Insurance Company
of New York is a wholly owned subsidiary of the Company and serves New York
State residents. The Company also wholly owns American Enterprise Life
Insurance Company, American Centurion Life Assurance Company, American
Partners Life Insurance Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single
premium and flexible premium deferred annuities on both a fixed and
variable dollar basis. Immediate annuities are offered as well. The
Company's insurance products include universal life (fixed and variable),
whole life, single premium life and term products (including waiver of
premium and accidental death benefits). The Company also markets disability
income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States which vary in certain respects from reporting practices prescribed
or permitted by state insurance regulatory authorities (see Note 4).
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Investments
Fixed maturities that the Company has both the positive intent and the
ability to hold to maturity are classified as held to maturity and carried
at amortized cost. All other fixed maturities and all marketable equity
securities are classified as available for sale and carried at fair value.
Unrealized gains and losses on securities classified as available for sale
are reported as a separate component of accumulated other comprehensive
(loss) income, net of the related deferred policy acquisition costs effect
and deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
1. Summary of significant accounting policies (continued)
Mortgage loans on real estate are carried at amortized cost less reserves
for mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate, or the fair
value of collateral. The amount of the impairment is recorded in a reserve
for mortgage loan losses. The reserve for mortgage loan losses is
maintained at a level that management believes is adequate to absorb
estimated losses in the portfolio. The level of the reserve account is
determined based on several factors, including historical experience,
expected future principal and interest payments, estimated collateral
values, and current economic and political conditions. Management regularly
evaluates the adequacy of the reserve for mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment income
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized
cost of interest rate caps and floors is included in other investments.
Amounts paid or received under interest rate swap agreements are recognized
as an adjustment to investment income.
The Company may purchase and write index options to hedge the fee income
earned on the management of equity securities in separate accounts and the
underlying mutual funds. These index options are carried at market value
and are included in other investments or other liabilities, as appropriate.
Gains or losses on index options that qualify as hedges are deferred and
recognized in management and other fees in the same period as the hedged
fee income.
The Company also uses index options to manage the risks related to a
certain annuity product that pay interest based upon the relative change in
a major stock market index between the beginning and end of the product's
term. Purchased options used in conjunction with this product are reported
in other investments and written options are included in other liabilities.
The amortization of the cost of purchased options, the proceeds of written
options and the changes in intrinsic value of the contracts are included in
net investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which
do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
1. Summary of significant accounting policies (continued)
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost, which approximates
fair value.
Supplementary information to the consolidated statements of cash flows for
the years ended December 31 is summarized as follows:
1999 1998 1997
--------- ---------- ---------
Cash paid during the year for:
Income taxes $214,940 $215,003 $174,472
Interest on borrowings 4,521 14,529 8,213
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over the
lives of the contracts, using primarily the interest method. Profits
represent the excess of investment income earned from investment of
contract considerations over interest credited to contract owners and other
expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. Under this method, profits are recognized over the
lives of the policies in proportion to the estimated gross profits expected
to be realized.
Premiums on traditional life, disability income and long-term care
insurance policies are recognized as revenue when due, and related benefits
and expenses are associated with premium revenue in a manner that results
in recognition of profits over the lives of the insurance policies. This
association is accomplished by means of the provision for future policy
benefits and the deferral and subsequent amortization of policy acquisition
costs.
Policyholder and contractholder charges include the monthly cost of
insurance charges, issue and administrative fees and surrender charges.
These charges also include the minimum death benefit guarantee fees
received from the variable life insurance separate accounts. Management and
other fees include investment management fees from underlying proprietary
mutual funds and mortality and expense risk fees received from the variable
annuity and variable life insurance separate accounts.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most
single premium deferred annuities and installment annuities are amortized
using primarily the interest method. The costs for universal life-type
insurance and certain installment annuities are amortized as a percentage
of the estimated gross profits expected to be realized on the policies. For
traditional life, disability income and long-term care insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue.
1. Summary of significant accounting policies (continued)
Amortization of deferred policy acquisition costs requires the use of
assumptions including interest margins, mortality margins, persistency
rates, maintenance expense levels and, for variable products, separate
account performance. For universal life-type insurance and deferred
annuities, actual experience is reflected in the Company's amortization
models monthly. As actual experience differs from the current assumptions,
management considers the need to change key assumptions underlying the
amortization models prospectively. The impact of changing prospective
assumptions is reflected in the period that such changes are made and is
generally referred to as an unlocking adjustment. During 1999, unlocking
adjustments resulted in a net decrease in amortization of $56.8 million.
Net unlocking adjustments in 1998 and 1997 were not significant.
Liabilities for future policy benefits
Liabilities for universal-life type insurance and fixed and variable
deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities are determined as the
present value of guaranteed benefits and the intrinsic value of index-based
benefits.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates ranging from 5% to
9.5%, depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on
the net level premium method, using anticipated mortality, policy
persistency and interest earning rates. Anticipated mortality rates are
based on established industry mortality tables. Anticipated policy
persistency rates vary by policy form, issue age and policy duration with
persistency on cash value plans generally anticipated to be better than
persistency on term insurance plans. Anticipated interest rates range from
4% to 10%, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based
on the net level premium method, using anticipated morbidity, mortality,
policy persistency and interest earning rates. Anticipated morbidity and
mortality rates are based on established industry morbidity and mortality
tables. Anticipated policy persistency rates vary by policy form, issue
age, policy duration and, for disability income policies, occupation class.
Anticipated interest rates for disability income and long-term care policy
reserves are 3% to 9.5% at policy issue and grade to ultimate rates of 5%
to 7% over 5 to 10 years.
Claim reserves are calculated based on claim continuance tables and
anticipated interest earnings. Anticipated claim continuance rates are
based on established industry tables. Anticipated interest rates for claim
reserves for both disability income and long-term care range from 5% to 8%.
1. Summary of significant accounting policies (continued)
Reinsurance
The maximum amount of life insurance risk retained by the Company is $750
on any policy insuring a single life and $1,500 on any policy insuring a
joint-life combination. Beginning in 1999, the Company retains only 20% of
the mortality risk on new variable universal life insurance policies. Risk
not retained is reinsured with other life insurance companies, primarily on
a yearly renewable term basis. Long-term care policies are primarily
reinsured on a coinsurance basis. The Company retains all disability income
and waiver of premium risk. Beginning in 2000, the Company will retain all
accidental death benefit risk.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company provides for income
taxes on a separate return basis, except that, under an agreement between
AEFC and American Express Company, tax benefit is recognized for losses to
the extent they can be used on the consolidated tax return. It is the
policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries
for all tax benefits.
Included in other liabilities at December 31, 1999 and 1998 are $852
receivable from and $26,291 payable to, respectively, AEFC for federal
income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance
contract owners. The Company receives investment management fees from the
proprietary mutual funds used as investment options for variable annuities
and variable life insurance. The Company receives mortality and expense
risk fees from the separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of
the annuitants and beneficiaries from the mortality assumptions implicit in
the annuity contracts. The Company makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are in the benefit payment period.
The Company also guarantees that the rates at which administrative fees are
deducted from contract funds will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds
will not exceed contractual maximums. The Company also guarantees that the
death benefit will continue payable at the initial level regardless of
investment performance so long as minimum premium payments are made.
1. Summary of significant accounting policies (continued)
Accounting changes
American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use" became effective January 1, 1999. The SOP requires the
capitalization of certain costs incurred after the date of adoption to develop
or obtain software for internal use. Software utilized by the Company is owned
by AEFC and capitalized by AEFC. As a result, the new rule did not have a
material impact on the Company's results of operations or financial condition.
Effective January 1, 1999, the Company adopted AICPA SOP 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments," providing
guidance for the timing of recognition of liabilities related to guaranty fund
assessments. The Company had historically carried a liability for estimated
guaranty fund assessment exposure. Adoption of the SOP did not have a material
impact on the Company's results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective January 1, 2001. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of all derivatives as either
assets or liabilities on the balance sheet at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The ultimate financial effect of
adoption of the new rule will depend on the derivatives in place at adoption and
cannot be estimated at this time.
2. Investments
Fair values of investments in fixed maturities represent quoted market prices
and estimated values when quoted prices are not available. Estimated values are
determined by established procedures involving, among other things, review of
market indices, price levels of current offerings of comparable issues, price
estimates and market data from independent brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1999 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
_________________ __________ ___________ __________ __________
U.S. Government agency obligations $ 37,613 $ 236 $ 2,158 $ 35,691
State and municipal obligations 9,681 150 -- 9,831
Corporate bonds and obligations 5,713,475 91,571 113,350 5,691,696
Mortgage-backed securities 1,395,523 4,953 31,951 1,368,525
------------ ---------- ----------- -----------
$ 7,156,292 $ 96,910 $ 147,459 $7,105,743
=========== ======== ========= ==========
2. Investments (continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
__________________ ______________ ____________ ______________ ____________
U.S. Government agency obligations $ 46,325 $ 612 $ 2,231 $ 44,706
State and municipal obligations 13,226 519 191 13,554
Corporate bonds and obligations 7,960,352 60,120 560,450 7,460,022
Mortgage-backed securities 5,683,234 9,692 161,659 5,531,267
------------- ----------- ---------- -------------
Total fixed maturities 13,703,137 70,943 724,531 13,049,549
Equity securities 16 -- 3,016
----------- --------- ---------- -------------
3,000
$13,706,137 $ 70,959 $ 724,531 $13,052,565
=========== ========= ========= ===========
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
U.S. Government agency obligations $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations 9,683 490 -- 10,173
Corporate bonds and obligations 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities 1,609,067 30,458 152 1,639,373
------------ ---------- ---------- -----------
$ 7,964,114 $483,160 $27,239 $8,420,035
=========== ======== ======= ==========
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations 11,060 1,231 -- 12,291
Corporate bonds and obligations 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities 5,949,502 151,511 3,869 6,097,144
------------ --------- ----------- -------------
Total fixed maturities 13,344,949 427,240 159,050 13,613,139
Equity securities 3,000 158 -- 3,158
------------- ------------ -------------- ------------
$13,347,949 $427,398 $159,050 13,616,297
=========== ======== ======== ===========
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. Amortized Fair Held to maturity Cost Value
Due in one year or less $ 238,740 $ 239,747
Due from one to five years 2,996,713 3,012,721
Due from five to ten years 1,922,199 1,893,918
Due in more than ten years 603,117 590,832
Mortgage-backed securities 1,395,523 1,368,525
-------------- -------------
$ 7,156,292 $ 7,105,743
============= ============
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 271,381 $ 274,415
Due from one to five years 595,747 592,533
Due from five to ten years 4,936,041 4,669,573
Due in more than ten years 2,216,734 1,981,761
Mortgage-backed securities 5,683,234 5,531,267
------------- -------------
$13,703,137 $13,049,549
During the years ended December 31, 1999, 1998 and 1997, fixed maturities
classified as held to maturity were sold with amortized cost of $68,470,
$230,036 and $229,848, respectively. Net gains and losses on these sales
were not significant. The sale of these fixed maturities was due to
significant deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1999 with proceeds of
$1,691,389 and gross realized gains and losses of $36,568 and $14,255,
respectively. Fixed maturities available for sale were sold during 1998
with proceeds of $278,955 and gross realized gains and losses of $15,658
and $22,102, respectively. Fixed maturities available for sale were sold
during 1997 with proceeds of $457,585 and gross realized gains and losses
of $6,639 and $7,518, respectively.
At December 31, 1999, bonds carried at $14,559 were on deposit with various
states as required by law.
2. Investments (continued)
At December 31, 1999, investments in fixed maturities comprised 81 percent
of the Company's total invested assets. These securities are rated by
Moody's and Standard & Poor's (S&P), except for securities carried at
approximately $3.7 billion which are rated by AEFC's internal analysts
using criteria similar to Moody's and S&P. A summary of investments in
fixed maturities, at amortized cost, by rating on December 31 is as
follows:
Rating 1999 1998
-------------------- ---------- ------
Aaa/AAA $ 7,144,280 $ 7,629,628
Aaa/AA 1,920 2,277
Aa/AA 301,728 308,053
Aa/A 314,168 301,325
A/A 2,598,300 2,525,283
A/BBB 1,014,566 1,148,736
Baa/BBB 6,319,549 6,237,014
Baa/BB 348,849 492,696
Below investment grade 2,816,069 2,664,051
------------- -------------
$20,859,429 $21,309,063
At December 31, 1999, 90 percent of the securities rated Aaa/AAA are GNMA, FNMA
and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than one percent of the Company's total investments in fixed maturities.
At December 31, 1999, approximately 14 percent of the Company's invested assets
were mortgage loans on real estate. Summaries of mortgage loans by region of the
United States and by type of real estate are as follows:
December 31, 1999 December 31, 1998
------------------------ ---------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
______________________ _____________ _____________ _____________ _____________
East North Central $ 715,998 $ 10,380 $ 750,705 $ 16,393
West North Central 555,635 42,961 491,006 81,648
South Atlantic 867,838 23,317 839,233 21,020
Middle Atlantic 428,051 1,806 476,448 6,169
New England 259,243 4,415 263,761 2,824
Pacific 238,299 3,466 195,851 16,946
West South Central 144,607 4,516 136,841 1,412
East South Central 43,841 -- 46,029 --
Mountain 381,148 9,380 345,379 8,473
------------ ----------- ------------ -----------
3,634,660 100,241 3,545,253 154,885
Less allowance for losses 28,283 -- 39,795 --
------------- -------------- ------------- -------------
$3,606,377 $100,241 $3,505,458 $154,885
========== ======== ========== ========
2. Investments (continued)
December 31, 1999 December 31, 1998
--------------------- -----------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
_______________ ___________ ____________ _____________ ____________
Department/retail stores $1,158,712 $ 33,829 $1,139,349 $ 59,305
Apartments 887,538 11,343 960,808 9,272
Office buildings 931,234 26,062 783,576 50,450
Industrial buildings 309,845 5,525 298,549 13,263
Hotels/motels 103,625 -- 109,185 14,122
Medical buildings 114,045 -- 124,369 --
Nursing/retirement homes 45,935 -- 46,696 --
Mixed use 66,893 -- 65,151 --
Other 16,833 23,482 17,570 8,473
------------- ---------- ------------- -----------
3,634,660 100,241 3,545,253 154,885
Less allowance for losses 28,283 -- 39,795 --
------------- -------------- ------------- --------------
$3,606,377 $100,241 $3,505,458 $154,885
========== ======== ========== ========
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. The Company holds the mortgage
document, which gives it the right to take possession of the property if
the borrower fails to perform according to the terms of the agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1999 and 1998, the Company's recorded investment in
impaired loans was $21,375 and $24,941, respectively, with allowances of
$5,750 and $6,662, respectively. During 1999 and 1998, the average recorded
investment in impaired loans was $23,815 and $37,873, respectively.
The Company recognized $1,190, $1,809 and $2,981 of interest income related
to impaired loans for the years ended December 31, 1999, 1998 and 1997
respectively.
The following table presents changes in the allowance for losses related to all
loans:
1999 1998 1997
---------- ------------ --------
Balance, January 1 $39,795 $38,645 $37,495
Provision (reduction) for
investment losses (9,512) 7,582 8,801
Loan payoffs (500) (800) (3,851)
Foreclosures and writeoffs (1,500) (5,632) (3,800)
-------- -------- ---------
Balance, December 31 $28,283 $39,795 $38,645
======= ======= =======
At December 31, 1999, the Company had no commitments to purchase investments
other than mortgage loans.
2. Investments (continued)
Net investment income for the years ended December 31 is summarized as follows:
1999 1998 1997
------------- ------------- ---------
Interest on fixed maturities $1,598,059 $1,676,984 $1,692,481
Interest on mortgage loans 285,921 301,253 305,742
Other investment income 70,892 43,518 25,089
Interest on cash equivalents 5,871 5,486 5,914
----------- ------------- -------------
1,960,743 2,027,241 2,029,226
Less investment expenses 41,170 40,756 40,837
----------- ------------- -------------
$1,919,573 $1,986,485 $1,988,389
========== ========== ==========
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
1999 1998 1997
--------- ------ --------
Fixed maturities $ 22,387 $ 12,084 $ 16,115
Mortgage loans 10,211 (5,933) (6,424)
Other investments (5,990) 751 (8,831)
---------- ------------ -----------
$ 26,608 $ 6,902 $ 860
========== ========== ===========
Changes in net unrealized appreciation (depreciation) of investments for the
years ended December 31 are summarized as follows:
1999 1998 1997
________ _________ _______
Fixed maturities available
for sale $(921,778) $(93,474) $223,441
Equity securities (142) (203) 53
3. Income taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists of the
following:
1999 1998 1997
---------- ---------- -----------
Federal income taxes:
Current $178,444 $244,946 $176,879
Deferred 79,796 (16,602) 19,982
---------- ---------- ---------
258,240 228,344 196,861
State income taxes-current 9,624 7,337 9,803
----------- ----------- ----------
Income tax expense $267,864 $235,681 $206,664
======== ======== ========
3. Income taxes (continued)
Increases (decreases) to the income tax provision applicable to pretax income
based on the statutory rate are attributable to:
1999 1998 1997
-------------------------- ------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
Federal income taxes based on
the statutory rate $316,511 35.0% $271,527 35.0% $238,319 35.0%
Tax-excluded interest and
dividend income (9,626) (1.1) (12,289) (1.6) (10,294) (1.5)
State taxes, net of federal
benefit 6,256 0.7 4,769 0.6 6,372 0.9
Affordable housing credits (31,000) (3.4) (19,688) (2.5) (20,705) (3.0)
Other, net (14,277) (1.6) (8,638) (1.1) (7,028) (1.0)
--------- ---- ---------- ----- ---------- -----
Total income taxes $267,864 29.6% $235,681 30.4% $206,664 30.4%
======== ==== ======== ==== ======== ====
A portion of life insurance company income earned prior to 1984 was not subject
to current taxation but was accumulated, for tax purposes, in a policyholders'
surplus account. At December 31, 1999, the Company had a policyholders' surplus
account balance of $20,114. The policyholders' surplus account is only taxable
if dividends to the stockholder exceed the stockholder's surplus account or if
the Company is liquidated. Deferred income taxes of $7,040 have not been
established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
1999 1998
Deferred tax assets:
Policy reserves $ 733,647 $756,769
Unrealized loss on available for sale investments 221,431 --
Investments, other 1,873 --
Life insurance guaranty fund assessment reserve 4,789 15,289
Other -- 4,253
------------- ----------
Total deferred tax assets 961,740 776,311
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs 740,837 698,471
Unrealized gain on available for sale investments -- 91,315
Investments, other -- 3,455
Other 4,883 --
-------------- ---------
Total deferred tax liabilities 745,720 793,241
---------- --------
Net deferred tax assets (liabilities) $ 216,020 $(16,930)
========= =========
3. Income taxes (continued)
The Company is required to establish a valuation allowance for any portion
of the deferred tax assets that management believes will not be realized.
In the opinion of management, it is more likely than not that the Company
will realize the benefit of the deferred tax assets and, therefore, no such
valuation allowance has been established.
4. Stockholder's equity
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $1,693,356 as of December 31, 1999
and $1,598,203 as of December 31, 1998 (see Note 3 with respect to the
income tax effect of certain distributions). In addition, any dividend
distributions in 2000 in excess of approximately $418,845 would require
approval of the Department of Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
1999 1998 1997
------------ ------------ --------
Statutory net income $ 478,173 $ 429,903 $ 379,615
Statutory capital and surplus 1,978,406 1,883,405 1,765,290
5. Related party transactions
The Company loans funds to AEFC under a collateral loan agreement. The
balance of the loan was $nil at December 31, 1999 and 1998. This loan can
be increased to a maximum of $75,000 and pays interest at a rate equal to
the preceding month's effective new money rate for the Company's permanent
investments. Interest income on related party loans totaled $nil, $nil and
$103 in 1999, 1998 and 1997, respectively.
The Company participates in the American Express Company Retirement Plan
which covers all permanent employees age 21 and over who have met certain
employment requirements. Employer contributions to the plan are based on
participants' age, years of service and total compensation for the year.
Funding of retirement costs for this plan complies with the applicable
minimum funding requirements specified by ERISA. The Company's share of the
total net periodic pension cost was $223, $211 and $201 in 1999, 1998 and
1997, respectively.
The Company also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a percent
of either each employee's eligible compensation or basic contributions.
Costs of these plans charged to operations in 1999, 1998 and 1997 were
$1,906, $1,503 and $1,245, respectively.
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and
retired financial advisors. The plans include participant contributions and
service related eligibility requirements. Upon retirement, such employees
are considered to have been employees of AEFC. AEFC expenses these benefits
and allocates the expenses to its subsidiaries. The Company's share of
postretirement benefits in 1999, 1998 and 1997 was $1,147, $1,352 and
$1,330, respectively.
5. Related party transactions (continued)
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $485,177, $411,337 and $414,155 for
1999, 1998 and 1997, respectively. Certain of these costs are included in
deferred policy acquisition costs.
6. Commitments and contingencies
At December 31, 1999, 1998 and 1997, traditional life insurance and
universal life-type insurance in force aggregated $89,271,957, $81,074,928
and $74,730,720 respectively, of which $8,281,576, $4,912,313 and
$4,351,904 were reinsured at the respective year ends. The Company also
reinsures a portion of the risks assumed under disability income and
long-term care policies. Under all reinsurance agreements, premiums ceded
to reinsurers amounted to $76,970, $66,378 and $60,495 and reinsurance
recovered from reinsurers amounted to $27,816, $20,982, and $19,042 for the
years ended December 31, 1999, 1998 and 1997, respectively. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
In January 2000, AEFC reached an agreement in principle to settle three
class-action lawsuits. The Company had been named as a co-defendant in all
three lawsuits. It is expected the settlement will provide $215 million of
benefits to more than 2 million class participants. The agreement in
principle to settle also provides for release by class members of all
insurance and annuity market conduct claims dating back to 1985 and is
subject to a number of contingencies including a definitive agreement and
court approval. The settlement costs allocated to the Company are included
in the accompanying 1999 statement of income and did not have a material
impact on the Company's consolidated financial position or results from
operations.
The Company is named as a defendant in various other lawsuits. The outcome
of any litigation cannot be predicted with certainty. In the opinion of
management, however, the ultimate resolution of these lawsuits, taken in
aggregate should not have a material adverse effect on the Company's
consolidated financial position.
The IRS routinely examines the Company's federal income tax returns and is
currently completing the audit for the 1990 through 1992 tax years.
Management does not believe there will be a material adverse effect on the
Company's consolidated financial position as a result of this audit.
7. Lines of credit
The Company has available lines of credit with its parent aggregating
$200,000 ($100,000 committed and $100,000 uncommitted). The interest rate
for any borrowings is established by reference to various indices plus 20
to 45 basis points, depending on the term. Borrowings outstanding under
this agreement were $50,000 uncommitted at December 31, 1999 and $nil at
December 31, 1998.
8. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk and equity market
risk, including hedging specific transactions. The Company does not hold
derivative instruments for trading purposes. The Company manages risks
associated with these instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market
index. The Company is not impacted by market risk related to derivatives
held for non-trading purposes beyond that inherent in cash market
transactions. Derivatives held for purposes other than trading are largely
used to manage risk and, therefore, the cash flow and income effects of the
derivatives are inverse to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of the Company's
counterparties are rated A or better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over
the life of the agreement. Notional amounts are not recorded on the balance
sheet. Notional amounts far exceed the related credit risk.
8. Derivative financial instruments (continued)
The Company's holdings of derivative financial instruments are as follows:
Notional Carrying Fair Total Credit
December 31, 1999 Amount Amount Value Exposure
Assets:
Interest rate caps $ 2,500,000 $ 9,685 $ 12,773 $ 12,773
Interest rate floors 1,000,000 602 319 319
Options purchased 180,897 49,789 61,745 61,745
Liabilities:
Options written 43,262 (1,677) (2,402) --
Off balance sheet:
Interest rate swaps 1,267,000 -- (17,582) --
----------- --------- --------------
$ 58,399 $ 54,853 $ 74,837
======== ========= =========
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
----------------- ---------- ------- ------- --------
Assets:
Interest rate caps $ 3,400,000 $ 15,985 $ 4,256 $ 4,256
Interest rate floors 1,000,000 1,082 13,971 13,971
Options purchased 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written 265,454 (10,526) (11,062) --
Off balance sheet:
Interest rate swaps 1,667,000 -- (73,477) --
------------- --------- ------------
$ 30,635 $(36,859) $47,680
======== ======== =======
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps, floors and
swaps expire on various dates from 2000 to 2003. The purchased and written
options expire on various dates from 2000 to 2006.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the
margin between interest rates earned on investments and the interest rates
credited to related annuity contract holders.
The Company also uses interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount
of fee income received is based upon the daily market value of the separate
account and mutual fund assets. As a result, changing interest rate
conditions could impact the Company's fee income significantly. The Company
entered into interest rate swaps to hedge anticipated fee income for 1999
related to separate accounts and mutual funds which invest in fixed income
securities. Interest was reported in management and other fees.
8. Derivative financial instruments (continued)
The Company offers an annuity product that pays interest based upon the
relative change in a major stock market index between the beginning and end
of the product's term. As a means of hedging its obligation under the
provisions of this product, the Company purchases and writes options on the
major stock market index.
Indexoptions are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the
underlying mutual funds. The amount of the fee income received is based
upon the daily market value of the separate account and mutual fund assets.
As a result, the Company's fee income could be impacted significantly by
fluctuations in the equity markets. The Company entered into index option
collars (combination of puts and calls) to hedge anticipated fee income for
1999 and 1998 related to separate accounts and mutual funds which invest in
equity securities. Testing demonstrated the impact of these instruments on
the income statement closely correlates with the amount of fee income the
Company realizes. At December 31, 1999 deferred losses on purchased put and
written call index options were $nil. At December 31, 1998 deferred losses
on purchased put and written call index options were $2,933 and deferred
gains on written call index options were $7,435, respectively.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair values of life insurance obligations and all non-financial
instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force,
are also excluded. Management believes the value of excluded assets and
liabilities is significant. The fair value of the Company, therefore,
cannot be estimated by aggregating the amounts presented.
1999 1998
--------------------- --------------------
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
Investments:
Fixed maturities (Note 2):
Held to maturity $ 7,156,292 $ 7,105,743 $ 7,964,114 $ 8,420,035
Available for sale 13,049,549 13,049,549 13,613,139 13,613,139
Mortgage loans on
real estate (Note 2) 3,606,377 3,541,958 3,505,458 3,745,617
Other:
Equity securities (Note 2) 3,016 3,016 3,158 3,158
Derivative financial
Instruments (Note 8) 60,076 74,837 41,161 47,680
Other 2,258 2,258 28,872 28,872
Cash and cash
equivalents (Note 1) 32,333 32,333 22,453 22,453
Separate account assets (Note 1) 35,894,732 35,894,732 27,349,401 27,349,401
9. Fair values of financial instruments (continued)
1999 1998
--------------------- --------------------
Carrying Fair Carrying Fair
Financial Liabilities Value Value Value Value
Future policy benefits for
fixed annuities $19,189,170 $18,591,859 $19,855,203 $19,144,838
Derivative financial
instruments (Note 8) 1,677 19,984 10,526 84,539
Separate account liabilities 31,869,184 31,016,081 25,005,732 24,179,115
At December 31, 1999 and 1998, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $1,270,094 and $1,226,985, respectively, and policy
loans of $92,895 and $90,115, respectively. The fair value of these
benefits is based on the status of the annuities at December 31, 1999 and
1998. The fair value of deferred annuities is estimated as the carrying
amount less any applicable surrender charges and related loans. The fair
value for annuities in non-life contingent payout status is estimated as
the present value of projected benefit payments at rates appropriate for
contracts issued in 1999 and 1998.
At December 31, 1999 and 1998, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less any applicable
surrender charges and less variable insurance contracts carried at
$4,025,548 and $2,343,669, respectively.
10. Year 2000 (unaudited)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than 2000. This could result in the failure of major systems or
miscalculations, which could have a material impact on the operations of
the Company. All of the major systems used by the Company are maintained by
AEFC and are utilized by multiple subsidiaries and affiliates of AEFC. The
Company's businesses are heavily dependent upon AEFC's computer systems and
have significant interaction with systems of third parties.
A comprehensive review of AEFC's computer systems and business processes,
including those specific to the Company, was conducted to identify the
major systems that could be affected by the Year 2000 issue. Steps were
taken to resolve potential problems including modification to existing
software and the purchase of new software. As of December 31, 1999, AEFC
had completed its program of corrective measures on its internal systems
and applications, including Year 2000 compliance testing. As of December
31, 1999, AEFC had also completed an evaluation of the Year 2000 readiness
of other third parties whose system failures could have an impact on the
Company's operations.
AEFC's Year 2000 project also included establishing Year 2000 contingency
plans for all key business units. Business continuation plans, which
address business continuation in the event of a system disruption, are in
place for all key business units. At December 31, 1999, these plans had
been amended to include specific Year 2000 considerations.
In assessing its Year 2000 initiatives and the results of actual production
since January 1, 2000, management believes no material adverse consequences
were experienced, and there was no material effect on the Company's
business, results of operations, or financial condition as a result of the
Year 2000 issue.