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, 2001
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 333-65080
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
INDIANA 94-786905
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
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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.
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PART I
ITEM 1. BUSINESS
American Enterprise Life Insurance Company (the Company) is a stock life
insurance company organized under the laws of the State of Indiana. The Company
is a wholly owned subsidiary of IDS Life Insurance Company (IDS Life) which is a
wholly owned subsidiary of American Express Financial Corporation (AEFC). AEFC
is a wholly owned subsidiary of American Express Company. The Company serves
residents of 48 states. The Company has consolidated assets at December 31, 2001
of $5.3 billion. American Enterprise REO 1, LLC is a wholly owned subsidiary of
the Company.
The Company's principal product is deferred annuities which are issued primarily
to individuals. It offers single premium and annual premium deferred annuities
on both a fixed and variable dollar basis. Immediate annuities and variable
universal life insurance are offered as well. The Company distributes its
products primarily through financial institutions and unbranded independent
financial advisors.
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 which give 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 any potential
rewards inherent in the ownership of the underlying investment. At December 31,
2001, the Company had $4.5 billion of fixed and variable annuities in force, an
increase of 10 percent from the prior year end.
Assets held in separate accounts which fund the variable annuity product totaled
$708 million at December 31, 2001, a 20 percent increase from December 31, 2000.
The Company is subject to comprehensive regulation by the Indiana 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 annuity contracts. The purpose of such regulation
and supervision is primarily to protect the interests of policyholders. There
has been increasing 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.
The 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.
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ITEM 2. PROPERTIES
The Company has no employees and is charged by IDS Life for the use of joint
facilities in Minneapolis, Minnesota, which are leased by AEFC. These facilities
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 involving insurance sales practices, alleged agent
misconduct, failure to properly supervise agents and other matters relating to
life insurance policies and annuity contracts have been filed against life and
health insurers in jurisdictions in which the Company and its affiliates do
business. The Company and its affiliates, like other life and health insurers,
are involved in such litigation. IDS Life was a named defendant in three class
action lawsuits of this nature. The Company is a named defendant in one of the
suits, Richard W. and Elizabeth J. Thoresen v. American Express Financial
Corporation, American Centurion Life Assurance Company, American Enterprise Life
Insurance Company, American Partners Life Insurance Company, IDS Life Insurance
Company and IDS Life Insurance Company of New York which was also commenced in
Minnesota state court on October 13, 1998. These class action lawsuits included
allegations of improper insurance and annuity sales practices including improper
replacement of existing annuity contracts and insurance policies, improper use
of annuities to fund tax deferred contributory retirement plans, alleged agent
misconduct, failure to properly supervise agents and other matters relating to
life insurance policies and annuity contracts.
In January 2000, AEFC and its subsidiaries reached an agreement in principle to
settle the three class action lawsuits, including the one described above. It is
expected the settlement will provide $215 million of benefits to more than two
million participants in exchange for a release by class members of all insurance
and annuity market conduct claims dating back to 1985.
In August 2000, an action entitled Lesa Benacquisto, Daniel Benacquisto, Richard
Thoresen, Elizabeth Thoresen, Arnold Mork, Isabella Mork, Ronald Melchert and
Susan Melchert v. American Express Financial Corporation, American Express
Financial Advisors, American Centurion Life Assurance Company, American
Enterprise Life Insurance Company, American Partners Life Insurance Company, IDS
Life Insurance Company and IDS Life Insurance Company of New York was commenced
in the United States District Court for the District of Minnesota. The complaint
put at issue various alleged sales practices and misrepresentations and
allegations of violations of federal laws.
In May 2001, the United States District Court for the District of Minnesota and
the District Court, Fourth Judicial District for the State of Minnesota,
Hennepin County entered orders approving the settlement as tentatively reached
in January 2000. Appeals were filed in both federal and state court but
subsequently dismissed by the parties filing the appeals. The orders approving
the settlement were final as of September 24, 2001. Implementation of the
settlement commenced October 15, 2001.
Numerous individuals opted out of the settlement described above and therefore
did not release their claims against the AEFC and its subsidiaries. Some of
these class members who opted out were represented by counsel and presented
separate claims to the Company. Most of their claims have been settled.
The outcome of any litigation or threatened litigation cannot be predicted with
any certainty. However, in the aggregate, the Company does not consider any
lawsuits in which it is named as a defendant to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2001 Compared to 2000:
The Company's net loss was $42 million in 2001, compared to net income of $24
million in 2000. Loss before income taxes totaled $64 million in 2001, compared
with income of $38 million in 2000. This decline was primarily the result of a
$91 million increase in net pretax realized loss on investments and a $28
million decrease in net investment income.
Total investment contract deposits received increased to $922 million in 2001,
compared with $721 million in 2000. This increase is primarily due to increases
in fixed and variable annuity deposits in 2001.
Total revenues decreased to $198 million in 2001, compared with $312 million in
2000. The decrease is primarily due to net investment losses and decreases in
net investment income. Net investment income, the largest component of revenues,
decreased 9% from the prior year, primarily due to lower overall investment
yields and credit related yield adjustments on fixed maturity investments.
Contractholder charges decreased 13 percent to $6.0 million in 2001, compared
with $6.9 million in 2000, due primarily to a decline in fixed annuity surrender
charges. The Company also receives mortality and expense risk fees from the
separate accounts. Mortality and expense risk fees increased to $10.2 million in
2001, compared with $5.4 million in 2000, reflecting an increase in separate
account assets.
Net realized losses on investments were $90 million in 2001, compared to net
realized gains on investments of $0.5 million in 2000. The losses in 2001 are
comprised of an $18 million net loss in the first quarter resulting primarily
from the recognition of impairment losses and the sale of certain high-yield
securities; a $20 million write-down in the second quarter to recognize the
impact of higher default assumptions on certain structured investments; a $51
million write-down of lower-rated securities (most of which were sold in 2001)
in the second quarter primarily in connection with the Company's decision to
lower its risk profile by reducing the level of its high-yield fixed maturity
investment portfolio, allocating holdings toward stronger credits, and reducing
the concentration of exposure to individual companies and industry sectors; and
$1 million of other net losses related to the sale and write-down of
investments.
Total benefits and expenses decreased 4 percent to $262 million in 2001 compared
to $274 million in 2000. The largest component of expenses, interest credited on
investment contracts, decreased to $181 million, reflecting lower crediting
rates which more than offset the growth in fixed annuities inforce. Amortization
of deferred policy acquisition costs (DACs) decreased to $45 million in 2001,
compared to $48 million in 2000. The decline was primarily due to DAC unlocking
adjustments (see footnote one of the attached financial statements for the
definition of unlocking adjustments), which resulted in net increases in
amortization of $1.9 million in 2001 and $1.5 million in 2000. Amortization,
excluding unlocking adjustments, was less in 2001 than in 2000, due primarily to
improved persistency of fixed deferred annuity business.
Other operating expenses increased slightly to approximately $36 million in
2001.
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2000 Compared to 1999:
Net income decreased 28 percent to $24 million in 2000, compared to $34 million
in 1999. Income before income taxes totaled $38 million in 2000, compared with
$51 million in 1999. The decrease was largely due to lower net investment income
in 2000 than in 1999.
Total investment contract deposits received increased to $721 million in 2000,
compared with $336 million in 1999. This increase is primarily due to an
increase in variable annuity deposits in 2000.
Total revenues decreased to $312 million in 2000, compared with $338 million in
1999. The decrease is primarily due to decreases in net investment income and
net realized gains on investments. Net investment income, the largest component
of revenues, decreased 7 percent from the prior year, reflecting a decrease in
investments owned and lower investment yields.
Contractholder charges increased 13 percent to $6.9 million in 2000, compared
with $6.1 million in 1999, reflecting an increase in annuity surrender charges.
The Company also receives mortality and expense risk fees from the separate
accounts. Mortality and expense risk fees increased 135 percent to $5.4 million
in 2000, compared with $2.3 million in 1999, this reflects the increase in
separate account assets.
Net realized gain on investments was $.5 million in 2000, compared with $6.6
million in 1999. The decrease in net realized gains was primarily due to the
loss on sale and writedown of fixed maturity investments.
Total benefits and expenses decreased 5 percent to $274 million in 2000,
compared with $287 million in 1999. The largest component of expenses, interest
credited on investment contracts, decreased to $191 million, reflecting a
decrease in fixed annuities in force and lower crediting rates. Amortization of
deferred policy acquisition costs increased to $48 million, compared to $43
million in 1999. This increase was due primarily to increased aggregate amounts
in force.
Other operating expenses remained steady at $35 million in 2000.
Certain Critical Accounting Policies
In December 2001, The Securities and Exchange Commission (SEC) issued a
financial reporting release, #FR-60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies." In this connection, the following
information has been provided about certain critical accounting policies that
are important to the Consolidated Financial Statements and that entail, to a
significant extent, the use of estimates, assumptions and the application of
management's judgment. These policies relate to the recognition of impairment
within the investment portfolio and deferred acquisition costs.
Generally, investment securities are carried at fair value on the balance sheet.
Gains and losses are recognized in the results of operations upon disposition of
the securities. In addition, losses are also recognized when management
determines that a decline in value is not temporary, which requires judgment
regarding the amount and timing of recovery. Typically, the Company defines an
event of impairment for debt securities as issuer default or bankruptcy. Fair
value is generally based on quoted market prices. However, the Company's
investment portfolio also contains structured investments of various asset
quality, including Collateralized Debt Obligations (CDOs) and Structured Loan
Trusts (backed by high-yield bonds and bank loans, respectively), which are not
readily marketable. As a result, the carrying values of these structured
investments are based on cash flow projections which require a significant
degree of judgment and as such are subject to change. If actual future cash
flows are less than projected, additional losses would be realized.
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The Company's deferred acquisition costs (DACs) represent costs of acquiring new
business, principally sales and other distribution and underwriting costs, that
have been deferred on the sale of annuity, insurance, and certain mutual fund
and long-term products. DACs are amortized over the lives of the products,
either as a constant percentage of projected earnings or as a constant
percentage of projected liabilities associated with such products. Such
projections require use of certain assumptions, including interest margins,
mortality rates, persistency rates, maintenance expense levels and, for variable
products, separate account performance. As actual experience differs from the
current assumptions, management considers on a quarterly basis the need to
change key assumptions underlying the amortization models prospectively. For
example, if the stock market trend rose or declined appreciably, it could impact
assumptions made about separate account performance and result in an adjustment
to income, either positively or negatively. The impact on results of operations
of changing prospective assumptions with respect to the amortization of DACs is
reflected in the period in which such changes are made.
Risk Management
The sensitivity analysis of two different types of market risk discussed below
estimate the effects of hypothetical sudden and sustained changes in the
applicable market conditions of two different types of market risk 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 the value of equity securities under
management. Computations of the prospective effects of the hypothetical interest
rate and equity market changes are based on numerous assumptions, including
relative levels of market interest rates and equity market prices, as well as
the levels of assets and liabilities. The hypothetical changes and assumptions
will be different from what actually occur. Furthermore, the computations do not
incorporate actions that management could take if the hypothetical market
changes actually occurred. As a result, actual earnings consequences 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 within defined risk
parameters and to meet contractual obligations.
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 use 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 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, 2001
and includes the impact of any derivatives, would be an increase of
approximately $5.4 million.
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.
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The negative effect on the Company's pretax earnings of a 10% decline in equity
prices would be approximately $1 million based on assets under management as of
December 31, 2001.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by annuity
considerations, capital contributions, 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 and investment purchases.
The Company has an available line of credit with AEFC aggregating $50 million.
The line of credit is used strictly as a short-term source of funds. No
borrowings were outstanding under the agreement at December 31, 2001. At
December 31, 2001, there were no outstanding reverse repurchase agreements.
At December 31, 2001, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 45 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 2001, approximately 3 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.
During 2001, the Company placed a majority of its rated Collateralized Debt
Obligation (CDO) (obligations that are backed primarily by high-yield bonds)
securities and related accrued interest, (collectively referred to as
transferred assets), having an aggregate book value of $54 million, into a
securitization trust. In return, the company received $7 million in cash
relating to sales to unaffiliated investors and retained interests with
allocated book amounts aggregating $47 million. The book amount is determined by
allocating the previous carrying value of the transferred assets between assets
sold and the retained interests based on their relative fair values. Fair values
are based on the estimated present value of future cash flows.
At December 31, 2001, net unrealized appreciation on available-for-sale fixed
maturities included $62 million of gross unrealized appreciation and $42 million
of gross unrealized depreciation. The Company does not have any held-to-maturity
fixed maturities at December 31, 2001.
At December 31, 2001, the Company had a reserve for losses for mortgage loans
totaling $4.2 million.
In 2001, the Company received a $60 million capital contribution from its
parent.
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.
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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, 2001, the Company's total adjusted capital was well
in excess of the levels requiring regulatory attention.
Forward-Looking Statements
Certain statements in item #7 of this Form 10-K Annual Report contain
forward-looking statements which are subject to risks and uncertainties that
could cause results to differ materially from such statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. The Company undertakes no
obligation to update publicly or revise any forward-looking statements.
Important factors that could cause actual results to differ materially from the
Company's forward-looking statements include, among other things, changes in the
ability of issuers of investment securities held by the Company to meet their
debt obligations, which could result in further losses in the Company's
investment portfolio.
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.
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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 American Enterprise Life
Insurance Company are included in Item 8:
Report of Independent Auditors 16
Consolidated Balance Sheets at December 31, 2001 and 2000 17
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 18
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2001, 2000 and 1999 19-20
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 21-22
Notes to Consolidated Financial Statements 23-35
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.
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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 11.
(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 Amendment and Restatement of Articles of Incorporation
of American Enterprise Life dated July 29, 1986, filed
electronically as Exhibit 6.1 to American Enterprise
Life Personal Portfolio Plus 2's Initial Registration
Statement No. 33-54471, filed on or about July 5, 1994,
is incorporated by reference.
3.2 Amended By-laws of American Enterprise Life, filed
electronically as Exhibit 6.2 to American Enterprise
Life Personal Portfolio Plus 2's Initial Registration
Statement No. 33-54471, filed on or about July 5, 1994,
is incorporated by reference.
3.3 Consent in writing in lieu of a meeting of the Board of
Directors of American Enterprise Life Insurance Company
establishing the American Enterprise MVA Account dated
Aug. 18, 1999, filed electronically as Exhibit 3.3 to
Registrant's Initial Registration Statement No.
333-86297, filed on or about Aug. 31, 1999, is
incorporated by reference.
4.1 Form of Deferred Annuity Contract for the American
Express(R) Signature One Variable Annuity (form
240180), filed electronically as Exhibit 4.1 to
American Enterprise Variable Annuity Account's
Post-Effective Amendment No. 1 to Registration
Statement No. 333-85567 on form N-4, filed on or about
Dec. 7, 1999, is incorporated by reference.
4.2 Form of Deferred Annuity Contract for the Wells Fargo
Advantage(SM) Variable Annuity (form 44209), filed
electronically as Exhibit 4.1 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No.
1 to Registration Statement No. 333-85567 on form N-4,
filed on or about Nov. 4, 1999, is incorporated by
reference.
4.3 Form of Deferred Annuity Contract for the Wells Fargo
Advantage(SM) Builder Variable Annuity (form 44210),
filed electronically as Exhibit 4.2 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-85567
on form N-4, filed on or about Nov. 4, 1999, is
incorporated by reference.
4.4 Form of Deferred Annuity Contract for the American
Express New Solutions(SM) Variable Annuity (form
240343) filed electronically as Exhibit 4.1 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-92297
on Form N-4, filed on or about Feb. 11, 2000, is
incorporated by reference.
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4.5 Form of Deferred Annuity Contract for American Express
Signature Variable Annuity (R) (form 43431) filed
electronically as Exhibit 4.1 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No.
1 to Registration Statement No. 333-74865 on form N-4,
filed on or about Aug. 4, 1999, is incorporated by
reference.
4.6 Form of Deferred Annuity Contract for the American
Express(R) Galaxy Premier Variable Annuity and the
American Express Pinnacle Variable Annuity(SM) (form
44170) filed electronically as Exhibit 4.1 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No.
333-82149, filed on or about Sept. 21, 1999, is
incorporated by reference.
4.7 Form of Deferred Annuity Contract for American Express
FlexChoice(SM) Variable Annuity contract Option L (form
271496) filed electronically as Exhibit 4.1 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-73958
on form N-4, filed on or Feb. 20, 2002, is incorporated
by reference.
4.8 Form of Deferred Annuity Contract for American Express
FlexChoice(SM) Variable Annuity contract Option C (form
271491) filed electronically as Exhibit 4.2 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-73958
on form N-4, filed on or Feb. 20, 2002, is incorporated
by reference.
4.9 Form of Enhanced Death Benefit Rider for the Wells
Fargo Advantage(SM) Variable Annuity, the Wells Fargo
Advantage(SM) Builder Variable Annuity and the American
Express FlexChoice(SM) Variable Annuity contracts (form
44213), filed electronically as Exhibit 4.3 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-85567
on form N-4, filed on or about Nov. 4, 1999, is
incorporated by reference.
4.10 Form of Guaranteed Minimum Income Benefit Rider for the
American Express Signature Variable Annuity (R) and the
American Express(R) Signature One Variable Annuity (6%
Accumulation Benefit Base) (form 240186), filed
electronically as Exhibit 4.2 to American Enterprise
Variable Annuity Account's Post-Effective Amendment No.
3 to Registration Statement No. 333-85567 on form N-4,
filed on or about Feb. 11, 2000, is incorporated by
reference.
4.11 Form of Guaranteed Minimum Income Benefit Rider for the
American Express New Solutions(SM) Variable Annuity
(form 240350), filed electronically as Exhibit 4.4 to
American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-92297 on Form N-4, filed on or about Feb. 11,
2000, is incorporated by reference.
4.12 Form of Guaranteed Minimum Income Benefit Rider for the
Wells Fargo Advantage(SM) Variable Annuity, the Wells
Fargo Advantage(SM) Builder Variable Annuity and the
American Express FlexChoice(SM) Variable Annuity
contracts (form 44214), filed electronically as Exhibit
4.4 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-85567 on form N-4, filed on or about Nov. 4,
1999, is incorporated by reference.
-12-
4.13 Form of 5% Accumulation Death Benefit Rider for the
American Express Signature Variable Annuity(R) and the
American Express Signature One Variable Annuity(SM)
(form 240183), filed electronically as Exhibit 4.3 to
American Enterprise Variable Annuity Account's
Post-Effective Amendment No. 1 to Registration
Statement No. 333-85567 on form N-4, filed on or about
Dec. 8, 1999, is incorporated by reference.
4.14 Form of Value Option Return of Purchase Payment Death
Benefit Rider for the American Express (R) Signature
One Variable Annuity (form 240182), filed
electronically as Exhibit 4.11 to Registrant's
Post-Effective Amendment No. 6 to Registration
Statement No. 333-86297 on form S-1, filed on or about
May 1, 2000, is incorporated by reference.
4.15 Form of 8% Performance Credit Rider for the American
Express Signature Variable Annuity(R) and the American
Express(R) Signature One Variable Annuity (form
240187), filed electronically as Exhibit 4.4 to
American Enterprise Variable Annuity Account's
Post-Effective Amendment No. 2 to Registration
Statement No. 333-85567 on form N-4, filed on or about
Dec. 30, 1999, is incorporated by reference.
4.16 Form of Performance Credit Rider for the American
Express New Solutions(SM) Variable Annuity (form
240349), filed electronically as Exhibit 4.2 to
American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-92297 on Form N-4, filed on or about Feb. 11,
2000, is incorporated by reference.
4.17 Form of Benefit Protector(SM) Death Benefit Rider for
the Wells Fargo Advantage(SM) Variable Annuity, the
Wells Fargo Advantage(SM) Builder Variable Annuity, the
American Express New Solutions (SM) Variable Annuity,
the American Express(R) Galaxy Premier Variable
Annuity, the American Express Pinnacle Variable
Annuity(SM), the American Express(R) Signature One
Variable Annuity and the American Express
FlexChoice(SM) Variable Annuity contracts (form
271155), filed electronically as Exhibit 4.15 to
American Znterprise Variable Annuity Account's
Post-Effective Amendment No. 6 to Registration
Statement No. 333-85567 on form N-4, filed on or about
March 1, 2001, is incorporated by reference.
4.18 Form of Benefit Protector(SM) Plus Death Benefit Rider
for the Wells Fargo Advantage(SM) Variable Annuity, the
Wells Fargo Advantage(SM) Builder Variable Annuity, the
American Express New Solutions (SM) Variable Annuity,
the American Express(R) Galaxy Premier Variable
Annuity, the American Express Pinnacle Variable
Annuity(SM), the American Express(R) Signature One
Variable Annuity and the American Express
FlexChoice(SM) Variable Annuity contracts (form
271156), filed electronically as Exhibit 4.16 to
American Enterprise Variable Annuity Account's
Post-Effective Amendment No. 6 to Registration
Statement No. 333-85567 on form N-4, filed on or about
March 1, 2001, is incorporated by reference.
4.19 Form of Maximum Anniversary Value Death Benefit Rider
for the American Express New Solutions (SM)
VariableAnnuity (form 240346), filed electronically as
Exhibit 4.3 to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration
Statement No. 333-92297, filed on or about February 11,
2000, is incorporated by reference.
-13-
4.20 Form of Roth IRA Endorsement for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo
Advantage(SM) Builder Variable Annuity, the American
Express Signature Variable Annuity(R), the American
Express(R) Signature One Variable Annuity, the American
Express New Solutions (SM) Variable Annuity, the
American Express(R) Galaxy Premier Variable Annuity,
the American Express Pinnacle Variable Annuity(SM) and
the American Express FlexChoice(SM) Variable Annuity
contracts (form 43094), filed electronically as Exhibit
4.2 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-74865 on form N-4, filed on or about Aug. 4,
1999, incorporated by reference.
4.21 Form of SEP-IRA for the Wells Fargo Advantage(SM)
Variable Annuity, the Wells Fargo Advantage(SM) Builder
Variable Annuity, the American Express (R) Signature
One Variable Annuity, the American Express(R) Galaxy
Premier Variable Annuity, and the American Express
Pinnacle Variable Annuity(SM) (form 43412), filed
electronically as Exhibit 4.3 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No.
1 to Registration Statement No. 333-72777 on form N-4,
filed on or about July 8, 1999, is incorporated by
reference.
4.22 Form of SEP-IRA for the American Express Signature
Variable Annuity(R), the American Express New
Solutions(SM) Variable Annuity and the American Express
FlexChoice(SM) Variable Annuity contracts (form 43433)
filed electronically as Exhibit 4.3 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-74865
on form N-4, filed on or about Aug. 4, 1999, is
incorporated by reference.
4.23 Form of Disability Waiver of Withdrawal Charges Rider
for the Wells Fargo Advantage(SM) Variable Annuity, the
Wells Fargo Advantage(SM) Builder Variable Annuity and
the American Express FlexChoice(SM) Variable Annuity
contracts (form 44215), filed electronically as Exhibit
4.5 to American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-85567 on form N-4, filed on or about Nov. 4,
1999, is incorporated by reference.
4.24 Form of Unemployment Waiver of Withdrawal Charges Rider
for the Wells Fargo Advantage(SM) Variable Annuity and
the Wells Fargo Advantage(SM) Builder Variable Annuity
(form 44216), to American Enterprise Variable Annuity
Account's Pre-Effective Amendment No. 1 to Registration
Statement No. 333-85567 on form N-4, filed on or about
Nov. 4, 1999, is incorporated by reference.
4.25 Form of TSA Endorsement for the Wells Fargo
Advantage(SM) Variable Annuity, the Wells Fargo
Advantage(SM) Builder Variable Annuity, the American
Express Signature Variable Annuity(R) and the American
Express FlexChoice(SM) Variable Annuity contracts (form
43413), filed electronically as Exhibit 4.4 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-72777
on form N-4, filed on or about July 8, 1999, is
incorporated by reference.
(b) Reports on Form 8-K filed in the fourth quarter of 2001 - None.
-14-
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.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Registrant
3/12/2002 By /s/ Carol A. Holton
----------------------------------------
Date Carol A. Holton, President
and Chief Executive Officer
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.
3/12/2002 By /s/ Gumer C. Alvero
----------------------------------------
Date Gumer C. Alvero, Chairman of the
Board and Executive Vice President - Annuities
3/12/2002 By /s/ Douglas K. Dunning
----------------------------------------
Date Douglas K. Dunning, Director
3/12/2002 By /s/ Carol A. Holton
----------------------------------------
Date Carol A. Holton, President
and Chief Executive Officer
3/12/2002 By
----------------------------------------
Date Paul S. Mannweiler, Director
3/12/2002 By /s/ Teresa J. Rasmussen
----------------------------------------
Date Teresa J. Rasmussen, Vice President, General
Counsel and Secretary
3/12/2002 By /s/ Philip C. Wentzel
----------------------------------------
Date Philip C. Wentzel, Vice President and
Controller
-15-
Report of Independent Auditors
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying consolidated balance sheets of American
Enterprise Life Insurance Company (a wholly-owned subsidiary of IDS Life
Insurance Company) as of December 31, 2001 and 2000, 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, 2001. 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 American
Enterprise Life Insurance Company at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
January 28, 2002
Minneapolis, Minnesota
-16-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share amounts)
ASSETS 2001 2000
---------- -------
Investments:
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 2000, $927,031) $ - $ 934,091
Available-for-sale, at fair value (amortized cost: 2001, $3,282,893;
2000, $2,163,906) 3,302,753 2,068,487
Common stocks 344 880
Mortgage loans on real estate 654,209 724,009
Other investments 2,400 -
---------- ----------
Total investments 3,959,706 3,727,467
Cash and cash equivalents 260,214 34,852
Amounts due from brokers 41,705 1,316
Other accounts receivable 1,812 867
Accrued investment income 45,422 54,941
Deferred policy acquisition costs 217,923 198,622
Deferred income taxes, net 32,132 26,350
Other assets 8,527 18,496
Separate account assets 708,240 589,310
---------- -----------
Total assets $5,275,681 $4,652,221
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities $3,765,679 $3,584,784
Universal life-type insurance 3 10
Policy claims and other policyholders' funds 2,286 9,295
Amounts due to brokers 225,127 24,387
Other liabilities 64,517 6,326
Separate account liabilities 708,240 589,310
---------- ----------
Total liabilities 4,765,852 4,214,112
Commitments and contingencies
Stockholder's equity:
Capital stock, $150 par value per share; 100,000 shares authorized, 20,000
shares issued and outstanding 3,000 3,000
Additional paid-in capital 341,872 281,872
Accumulated other comprehensive loss, net of tax:
Net unrealized securities gains (losses) 17,655 (62,097)
Net unrealized derivative losses (26,304) -
---------- -----------
Total accumulated other comprehensive loss (8,649) (62,097)
Retained earnings 173,606 215,334
---------- ----------
Total stockholder's equity 509,829 438,109
---------- ----------
Total liabilities and stockholder's equity $5,275,681 $4,652,221
========== ==========
See notes to consolidated financial statements.
-17-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(In thousands)
2001 2000 1999
------ ------ ------
REVENUES
Net investment income $271,718 $299,759 $322,746
Contractholder charges 5,998 6,865 6,069
Mortality and expense risk fees 10,247 5,383 2,269
Net realized (loss) gain on investments (89,920) 469 6,565
--------- ------------ ---------
Total revenues 198,043 312,476 337,649
-------- --------- ---------
BENEFITS AND EXPENSES
Interest credited on universal life-type insurance and
investment contracts 180,906 191,040 208,583
Amortization of deferred policy acquisition costs 45,494 47,676 43,257
Other operating expenses 35,579 35,308 35,147
---------- ---------- ----------
Total benefits and expenses 261,979 274,024 286,987
--------- --------- ---------
(Loss) income before income taxes (63,936) 38,452 50,662
Income tax (benefit) expense (22,208) 14,087 16,675
---------- ---------- ----------
Net (loss) income $(41,728) $ 24,365 $ 33,987
=========== ========= =========
See notes to consolidated financial statements.
-18-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2001
(In thousands)
Accumulated
other
Additional comprehensive Total
Capital paid-in income (loss), Retained stockholder's
Stock capital net of tax earnings equity
----- ------- ---------- -------- ------
Balance, January 1, 1999 $2,000 $282,872 $ 44,295 $156,982 $ 486,149
Comprehensive loss:
Net income - - - 33,987 33,987
Unrealized holding losses arising during the
year, net of income tax benefit of $59,231 - - (110,001) - (110,001)
Reclassification adjustments for gains included
in net income, net of income tax of $2,179
- - (4,047) - (4,047)
------- -------
Other comprehensive loss - - (114,048) (114,048)
---------
Comprehensive loss (80,061)
--------
Balance, December 31, 1999 2,000 282,872 (69,753) 190,969 406,088
Comprehensive income:
Net income - - - 24,365 24,365
Unrealized holding gains arising during the year,
net of income taxes of ($4,812) - - 8,937 - 8,937
Reclassification adjustment for gains included in
net income, net of income tax of $690
- - (1,281) - (1,281)
------- -------
Other comprehensive income - - 7,656 - 7,656
-----
Comprehensive income 32,021
Change in par value of capital stock 1,000 (1,000) - - -
----- ------ ------- ------- -------
Balance, December 31, 2000 $3,000 $281,872 $ (62,097) $215,334 $ 438,109
See notes to consolidated financial statements.
-19-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2001
(In thousands)
Accumulated
other
Additional comprehensive Total
Capital paid-in income (loss), Retained stockholder's
stock capital net of tax earnings equity
------ ---------- ---------- --------- ------
Balance, December 31, 2000 $3,000 $281,872 $(62,097) $215,334 $438,109
Comprehensive income:
Net loss - - - (41,728) (41,728)
Cumulative effect of adopting SFAS No. 133, net
of income tax benefit of $18,699 - - (34,726) - (34,726)
Unrealized holdings gains arising on
available-for-sale securities during the year,
net of income taxes of $73,754 - - 136,972 - 136,972
Reclassification adjustment for losses on
available-for-sale securities included in net
loss, net of income tax benefit of $30,811
- - (57,220) - (57,220)
Reclassification adjustment for losses on
derivatives included in net losses, net of
income tax benefit of $4,535 - - 8,422 - 8,422
------- -------
Other comprehensive income 53,448 53,448
-------
Comprehensive income 11,720
Capital contribution - 60,000 - - 60,000
---------- -------- ---------- ---------- ---------
Balance, December 31, 2001 $3,000 $341,872 $ (8,649) $173,606 $509,829
======= ======== ======== ======== ========
See notes to consolidated financial statements.
-20-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands)
2001 2000 1999
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (41,728) $ 24,365 $ 33,987
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Change in accrued investment income 9,519 1,735 5,064
Change in other accounts receivable (945) (551) (102)
Change in deferred policy acquisition costs, net (19,301) (18,334) 16,191
Change in other assets 31,411 (9,960) 34
Change in policy claims and other policyholders' funds (7,009) (2,802) 4,708
Deferred income tax (benefit) provision (34,562) 7,029 711
Change in other liabilities 6,553 (11,110) (7,064)
Amortization of premium (accretion of discount), net (689) 2,682 2,315
Net realized loss (gain) on investments 89,920 (469) (6,565)
Other, net (7,796) (233) (1,562)
-------------- ------------ -----------
Net cash provided by (used in) operating activities 25,373 (7,648) 47,717
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Maturities, sinking fund payments and calls - 65,716 65,705
Sales - 5,128 8,466
Available-for-sale securities:
Purchases (1,446,157) (101,665) (593,888)
Maturities, sinking fund payments and calls 379,281 171,297 248,317
Sales 803,034 176,296 469,126
Other investments:
Purchases (8,513) (1,388) (28,520)
Sales 71,110 65,978 57,548
Change in amounts due from brokers (40,389) (1,316) -
Change in amounts due to brokers 200,740 (828) (29,132)
----------- ----------- ----------
Net cash (used in) provided by investing activities $ (40,894) $ 379,218 $ 197,622
See notes to consolidated financial statements.
-21-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES 2001 2000 1999
----------- ----------- ---------
Activity related to universal life-type insurance and
investment contracts:
Considerations received $ 779,626 $ 398,462 $ 299,899
Surrenders and other benefits (779,649) (926,220) (753,821)
Interest credited to account balances 180,906 191,040 208,583
Capital contribution 60,000 - -
-------- --------- ---------
Net cash provided by (used in) financing activities 240,883 (336,718) (245,339)
-------- --------- ---------
Net increase in cash and cash equivalents 225,362 34,852 -
Cash and cash equivalents at beginning of year 34,852 - -
-------- --------- --------
Cash and cash equivalents at end of year $ 260,214 $ 34,852 $ -
========= ========= =========
Supplemental disclosures:
Income taxes paid $ - $ 14,861 $ 22,007
Interest on borrowings 15 1,073 2,187
See notes to consolidated financial statements.
-22-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
American Enterprise Life Insurance Company (the Company) is a stock life
insurance company that is domiciled in Indiana and is licensed to transact
insurance and annuity business in 48 states. The Company is a wholly-owned
subsidiary of IDS Life Insurance Company (IDS Life), which is a
wholly-owned subsidiary of American Express Financial Corporation (AEFC).
AEFC is a wholly-owned subsidiary of American Express Company. The Company
also wholly-owns American Enterprise REO 1, LLC.
The Company's principal product is deferred annuities, which are issued
primarily to individuals. It offers single premium and annual premium
deferred annuities on both a fixed and variable dollar basis. Immediate
annuities and variable universal life insurance are offered as well. The
Company distributes its products primarily through financial institutions
and unbranded independent financial advisors.
Revenue recognition
Profits on fixed deferred annuities are the excess of contractholder
charges and investment income earned from investment of contract
considerations over interest credited to contract values, amortization of
deferred acquisition costs, and other expenses. Profits on variable
deferred annuities also include the excess of mortality and expense risk
fees over the costs of guaranteed benefits provided. Contractholder charges
include policy fees and surrender charges.
Profits on variable universal life insurance are the excess of
contractholder charges, mortality and expense risk fees and investment
income earned from investment of contract considerations over interest
credited to contract values, death and other benefits paid in excess of
contract values, amortization of deferred acquisition costs and other
expenses. Contractholder charges include the monthly cost of insurance
charges, issue and administrative fees and surrender charges. Mortality and
expense risk fees are received from the variable life insurance separate
accounts.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. 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 the Indiana Department of Insurance (see Note 4). Certain
prior year amounts have been reclassified to conform to the current year's
presentation.
-23-
1. Summary of significant accounting policies (continued)
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 - securities
Debt securities 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 debt securities and 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 carried as a separate component of accumulated other comprehensive
income (loss), net of deferred income taxes. When evidence indicates there
is a decline in a security's value, which is other than temporary, the
security is written down to fair value through a charge to current year's
earnings.
The Company's investment portfolio contains structured investments,
including Collateralized Debt Obligations (CDO's) (obligations that are
primarily backed by high-yield bonds), which are not readily marketable.
The carrying values of these investments are based on cash flow projections
and, as such, these values are subject to change. If actual cash flows are
less than projected, losses would be recognized; increases in cash flows
would be recognized over future periods.
Realized investment gains or losses are 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.
Investments - mortgage loans on real estate
Mortgage loans on real estate are carried at amortized cost less reserves
for losses. The estimated fair value of the mortgage loans is determined by
discounted cash flow analyses using mortgage interest rates currently
offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of the 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 losses. The reserve for 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 collectability of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
-24-
1. Summary of significant accounting policies (continued)
Cash and cash equivalents
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.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, and certain sales expenses, have been deferred on annuity
contracts. These costs are amortized using the interest method.
Amortization of deferred policy acquisition costs requires the use of
assumptions including interest margins, persistency rates, maintenance
expense levels and, for variable annuities, separate account performance.
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 prospective assumptions
underlying the amortization models. 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 2001 and 2000,
unlocking adjustments resulted in a net increase in amortization of $1,900
and $1,500 respectively. Net unlocking adjustments in 1999 were not
significant.
In amortizing deferred policy acquisition costs associated with variable
annuities, the Company assumes contract values will appreciate at a
specified long-term annual rate. The Company may project near-term
appreciation at a different rate in order to maintain the long-term rate
assumption.
Liabilities for future policy benefits
Liabilities for variable universal life insurance and fixed and variable
deferred annuities are accumulation values.
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.
Reinsurance
Reinsurance premiums and benefits paid or provided are accounted for on a
basis consistent with those used in accounting for original policies issued
and with the terms of the reinsurance contracts.
The maximum amount of life insurance risk retained by the Company is $750
on any policy insuring a single life. Risk not retained is reinsured with
other life insurance companies on a yearly renewable term basis. The
Company retains all accidental death benefit and waiver of premium 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.
-25-
1. Summary of significant accounting policies (continued)
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity contract owners. The Company
receives mortality and expense risk fees from the variable annuity 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.
Accounting developments
In July 2000, the Financial Accounting Standards Board's (FASB) Emerging
Issues Task Force issued a consensus on Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets". The Company adopted the
consensus as of January 1, 2001. Issue 99-20 prescribes new procedures for
recording interest income and measuring impairment on retained and
purchased beneficial interests. The consensus primarily affects certain
structured securities. Although there was no significant impact resulting
from the adoption of Issue 99-20, the Company holds structured securities
that are accounted for under Issue 99-20.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended (SFAS No. 133), which requires an entity to
recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. Changes in the fair
value of a derivative are recorded in earnings or directly to equity,
depending on the instrument's designated use. The adoption of SFAS No. 133
on January 1, 2001, resulted in a cumulative after-tax reduction to other
comprehensive income of $34,726. This reduction in other comprehensive
income is due to cash flow hedges that existed previous to adopting SFAS
No. 133, that no longer qualify or are not designated for hedge accounting
treatment under SFAS No. 133. The cumulative impact to earnings was not
significant. See Note 8 for further discussion of the Company's derivatives
and hedging activities.
SFAS No. 133 also provided a one-time opportunity to reclassify
held-to-maturity security investments to available-for-sale without
tainting the remaining securities in the held-to-maturity portfolio. The
Company elected to take the opportunity to reclass all its held-to-maturity
investments to available-for-sale.
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which superceded
SFAS No. 125. The Statement was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. The Statement was effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. The impact
on the Company's financial position or results of operations of adopting
the Statement was not significant.
-26-
2. Investments
Securities
Pursuant to the adoption of SFAS No. 133 the Company reclassified all
held-to-maturity securities with a carrying value of $934,091 and net
unrealized losses of $7,060 to available-for-sale as of January 1, 2001.
The following is a summary of securities available-for-sale at December 31,
2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Fixed maturity securities: Cost Gains Losses Value
--------- ------ ----- ---------
U.S. Government agency obligations
$ 3,444 $ 130 $ 45 $ 3,529
State and municipal obligations 2,250 18 - 2,268
Corporate bonds and obligations 1,806,644 43,487 34,140 1,815,991
Mortgage-backed securities 1,470,555 18,528 8,118 1,480,965
--------- ------ ----- ---------
Total fixed maturity securities $3,282,893 $62,163 $42,303 $3,302,753
========== ======= ======= ==========
Common stocks $ 172 $ 172 $ - $ 344
========== ======== ======= ==========
The amortized cost and fair value of fixed maturity securities at December
31, 2001 by contractual maturity are as follows:
Amortized Fair
Cost Value
--------- ---------
Due within one year $ 126,891 $ 129,298
Due from one to five years 627,515 651,371
Due from five to ten years 822,833 822,586
Due in more than ten years 235,099 218,533
Mortgage-backed securities 1,470,555 1,480,965
--------- ---------
Total $3,282,893 $3,302,753
========== ==========
The timing of actual receipts may differ from contractual maturities
because issuers may call or prepay obligations.
The following is a summary of held-to-maturity and available-for-sale
securities at December 31, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-maturity Cost Gains Losses Value
--------- ------ ----- ---------
Fixed maturities:
U.S. Government agency obligations $ 6,949 $ 26 $ 55 $ 6,920
State and municipal obligations 2,101 1 - 2,102
Corporate bonds and obligations 773,630 9,876 17,470 766,036
Mortgage-backed securities 151,411 801 239 151,973
------- --- --- -------
Total fixed maturity securities $934,091 $10,704 $17,764 $927,031
======== ======= ======= ========
-27-
2. Investments (continued)
Gross Gross
Available-for-sale Amortized Unrealized Unrealized Fair
Fixed maturities: Cost Gains Losses Value
--------- ------ ----- ---------
U.S. Government agency
obligations $ 5,154 $ 284 $ - $ 5,438
State and municipal obligations 2,250 5 - 2,255
Corporate bonds and obligations 1,319,781 19,103 123,865 1,215,019
Mortgage-backed securities 836,721 10,780 1,726 845,775
------- ------ ----- -------
Total fixed maturity securities $2,163,906 $30,172 $125,591 $2,068,487
========== ======= ======== ==========
Common stocks $ 996 $ - $ 116 $ 880
========== ======= ======== ==========
At December 31, 2001, bonds carried at $3,444 were on deposit with various
states as required by law.
At December 31, 2001, fixed maturity securities comprised approximately 83
percent of the Company's total investments. These securities are rated by
Moody's and Standard & Poor's (S&P), except for approximately $311 million
of securities which are rated by AEFC's internal analysts using criteria
similar to Moody's and S&P. A summary of fixed maturity securities, at
amortized cost, by rating on December 31, is as follows:
Rating 2001 2000
--------- ---------
Aaa/AAA $1,597,815 $ 998,333
Aaa/AA - 1,000
Aa/AA 46,747 34,535
Aa/A 58,419 59,569
A/A 401,604 367,643
A/BBB 145,261 121,028
Baa/BBB 890,603 989,301
Baa/BB 40,316 67,156
Below investment grade 102,128 459,432
------- -------
$3,282,893 $3,097,997
========== ==========
At December 31, 2001, approximately 93 percent of the securities rated
Aaa/AAA were GNMA, FNMA and FHLMC mortgage-backed securities. No holdings
of any other issuer were greater than ten percent of stockholder's equity.
During the years ended December 31, 2000 and 1999, fixed maturities
classified as held-to-maturity were sold with amortized cost of $5,128 and
$8,466, respectively. Net gains and losses on these sales were not
significant. The sales of these fixed maturities were due to significant
deterioration in the issuers' creditworthiness.
Available-for-sale securities were sold during 2001 with proceeds of
$803,034 and gross realized gains and losses of $18,575 and $105,929
respectively. Available-for-sale securities were sold during 2000 with
proceeds of $176,296 and gross realized gains and losses of $3,488 and
$1,516, respectively. Available-for-sale securities were sold during 1999
with proceeds of $469,126 and gross realized gains and losses of $10,374
and $4,147 respectively.
-28-
2. Investments (continued)
The net unrealized gain (loss) on available-for-sale securities as of
December 31, 2001 and 2000, was $20,032 and ($95,535), respectively, with
the $115,567 change, net of taxes, reflected as a separate component in
accumulated other comprehensive income for the year ended December 31,
2001. For the year ended December 31, 2000 the change in net unrealized
losses on available-for-sale securities was a decrease of $11,777. For the
year ended December 31, 1999 the change in net unrealized gain on
available-for-sale securities was a decrease of $175,458.
During 2001, the Company recorded pretax losses of $90,151 to recognize the
impact of higher default rate assumptions on certain structured
investments; to write down lower rated securities (most of which were sold
during 2001) in connection with Company's decision to lower its risk
profile by reducing the level of its high-yield portfolio, allocating
holdings toward stronger credits, and reducing the concentration of
exposure to individual companies and industry sectors; to write down
certain other investments; and, to adopt eitf Issue 99-20, as previously
discussed. Within the Consolidated Statements of Income, approximately
$83,663 of these losses are included in Net realized (losses) gains on
investments and approximately $6,488 are included in Net investment income.
During 2001, the Company placed a majority of its rated Collateralized Debt
Obligation (CDO) (obligations that are backed primarily by high-yield
bonds) securities and related accrued interest, (collectively referred to
as transferred assets), having an aggregate book value of $53,615, into a
securitization trust. In return, the company received $7,108 in cash
relating to sales to unaffiliated investors and retained interests with
allocated book amounts aggregating $46,507. The book amount is determined
by allocating the previous carrying value of the transferred assets between
assets sold and the retained interests based on their relative fair values.
Fair values are based on the estimated present value of future cash flows.
There was no cash flow related to this transaction other than the receipt
of the initial $7,108. Cash flows on the assets sold to investors and
retained interests are not scheduled to begin until March 31, 2002 in
accordance with governing documents.
Fair values of security investments 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, estimated future cash flows and market data from
independent brokers.
-29-
2. Investments (continued)
Mortgages loans on real estate
At December 31, 2001, approximately 17 percent of the Company's invested
assets were mortgage loans on real estate. Concentration of credit risk by
region of the United States and by type of real estate are as follows:
December 31, 2001 December 31, 2000
On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
---------- ----------- ---------- -----------
South Atlantic $161,912 $1,940 $172,349 $-
Middle Atlantic 93,771 - 106,376 -
East North Central 114,292 - 122,354 -
Mountain 81,520 27 100,208 -
West North Central 106,432 - 110,669 -
New England 34,896 - 39,877 -
Pacific 31,836 - 38,559 -
West South Central 27,421 - 30,172 -
East South Central 6,361 - 6,749 -
---------- --------- --------- -------
658,441 1,967 727,313 -
Less allowance for losses 4,232 - 3,304 -
---------- --------- --------- -------
Total $654,209 $1,967 $724,009 $-
========== ========= ========= =======
December 31, 2001 December 31, 2000
On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
---------- ----------- ---------- -----------
Department/retail stores $179,890 $ - $214,927 $-
Apartments 143,430 1,940 152,906 -
Office buildings 185,925 - 191,767 -
Industrial buildings 72,745 - 80,330 -
Hotels/Motels 37,569 - 41,977 -
Medical buildings 28,360 - 29,173 -
Nursing/retirement homes 2,787 - 6,471 -
Mixed Use 7,735 27 9,762 -
---------- --------- --------- -------
658,441 1,967 727,313 -
Less allowance for losses 4,232 - 3,304 -
---------- --------- --------- -------
Total $654,209 $1,967 $724,009 $-
========== ========= ========= =======
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 fund mortgages are made in the ordinary course of business.
The fair value of the mortgage commitments is $nil.
At December 31, 2001, 2000 and 1999, the Company's recorded investment in
impaired loans was $3,632, $9,014 and $5,200, respectively, with allowances
of $835, $500 and $1,250, respectively. During 2001, 2000 and 1999, the
average recorded investment in impaired loans was $6,394, $4,684 and
$5,399, respectively.
-30-
2. Investments (continued)
The Company recognized $271, $221 and $136 of interest income related to
impaired loans for the years ended December 31, 2001, 2000 and 1999,
respectively.
The following table presents changes in the reserve for mortgage loan
losses:
2001 2000 1999
------ ------- -------
Balance, January 1 $3,304 $ 6,650 $ 8,500
Provision (reduction) for mortgage loan losses 928 (3,346) (1,850)
--- ------ ------
Balance, December 31 $4,232 $ 3,304 $ 6,650
====== ======= =======
Sources of investment income and realized (losses) gains on investments
Net investment income for the years ended December 31 is summarized as
follows:
2001 2000 1999
------ ------- -------
Interest on fixed maturities $211,920 $237,201 $265,199
Interest on mortgage loans 54,723 59,686 63,721
Interest on cash equivalents 43 1,136 534
Other 6,455 5,693 (1,755)
----- ----- ------
273,141 303,716 327,699
Less investment expenses 1,423 3,957 4,953
----- ----- -----
Total $271,718 $299,759 $322,746
======== ======== ========
Net realized (losses) gains on investments for the years ended December 31
is summarized as follows:
2001 2000 1999
------ ------- -------
Available-for-sale securities $(85,147) $(2,877) $4,715
Mortgage loans on real estate (4,773) 3,346 1,850
------ ----- -----
Total $(89,920) $ 469 $6,565
======== ======= ======
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 (benefit) expense for the years ended December 31 consists
of the following:
2001 2000 1999
------ ------- -------
Federal income taxes:
Current $ 11,803 $ 6,170 $15,531
Deferred (34,562) 7,029 711
------- ----- ---
(22,759) 13,199 16,242
State income taxes-current 551 888 433
--- --- ---
Income tax expense $(22,208) $14,087 $16,675
======== ======= =======
-31-
3. Income taxes (continued)
Income tax (benefit) expense differs from that computed by using the United
States statutory rate of 35%. The principal causes of the difference in
each year are shown below:
2001 2000 1999
-------------------------- -------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
--------- ----- --------- ---- --------- ----
Federal income taxes based
on the statutory rate
($22,378) (35.0)% $13,458 35.0% $17,731 35.0%
Tax-excluded interest and
dividend income (3) - (4) - (14) -
State taxes, net of federal
benefit 358 0.6 578 1.5 281 0.5
Other, net (185) (0.3) 55 0.1 (1,323) (2.6)
---- ---- -- --- ------ ----
Total income taxes ($22,208) (34.7)% $14,087 36.6% $16,675 32.9%
======== ===== ======= ==== ======= ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
Deferred income tax assets: 2001 2000
------- -------
Policy reserves $46,263 $40,242
Unrealized losses on investments 47,560 31,441
Other 4,009 6,208
----- -----
Total deferred income tax assets 97,832 77,891
------ ------
Deferred income tax liabilities:
Deferred policy acquisition costs 58,688 51,541
Investments 7,012 -
------ ------
Total deferred income tax liabilities 65,700 51,541
------ ------
Net deferred income tax assets $32,132 $26,350
======= =======
The Company is required to establish a valuation allowance for any portion
of the deferred income 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 income tax assets and,
therefore, no such valuation allowance has been established.
-32-
4. Stockholder's equity
Retained earnings available for distribution as dividends to IDS Life are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
The Company had a statutory unassigned deficit of $41,371 as of December
31, 2001 and a statutory unassigned surplus of $31,508 as of December 31,
2000. Any dividend distributions in 2002 would require approval by the
Insurance Department of the State of Indiana.
Statutory net (loss) income for the years ended December 31 and statutory
capital and surplus as of December 31, are summarized as follows:
2001 2000 1999
-------- -------- -------
Statutory net (loss) income ($ 81,461) ($ 11,928) $ 15,241
Statutory capital and surplus 303,501 315,930 343,094
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised regulations took effect January 1, 2001. The
state of Indiana has adopted the provisions of the revised manual without
modification. The revised manual has changed, to some extent, prescribed
statutory accounting practices and will result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. The impact of implementing these changes was a decrease of
$44,786 to the Company's statutory-basis capital and surplus as of January
1, 2001.
5. Related party transactions
The Company has purchased interest rate floors from IDS Life and entered
into an interest rate swap with IDS Life to manage its exposure to interest
rate risk. The interest rate floors had a carrying amount of $7,020 and
$6,489 at December 31, 2001 and 2000, respectively. The interest rate swaps
had a carrying amount of $28,868 and $nil at December 31, 2001 and 2000,
respectively. See Notes 8 and 9 for additional disclosure.
The Company has no employees. Charges by IDS Life for the use of joint
facilities, marketing services and other services aggregated $34,681,
$45,191 and $38,931 for the years ended December 31, 2001, 2000 and 1999,
respectively. Certain of these costs are included in deferred policy
acquisition costs. Expenses allocated to the Company may not be reflective
of expenses that would have been incurred by the Company on a stand-alone
basis.
Included in other liabilities at December 31, 2001 and 2000 are $28,919 and
$9,944, respectively, payable to and receivable from IDS Life for federal
income taxes.
6. Lines of credit
The Company has an available line of credit with AEFC aggregating $50,000.
The rate for the line of credit is established by reference to various
indices plus 20 to 45 basis points, depending on the term. There were no
borrowings outstanding under this agreement at December 31, 2001 or 2000.
-33-
7. Commitments and contingencies
In January 2000, AEFC reached an agreement in principle to settle three
class-action lawsuits related to the sales of insurance and annuity
products anticipated to provide for approximately $215 million of benefits.
The Company had been named as a co-defendant in one of these lawsuits. In
September 2000, both state and federal courts gave preliminary approval to
the proposed settlement and AEFC mailed notices to all of the over two
million class members. In May 2001 the courts entered orders approving the
settlement. The orders became final in August 2001 and in October 2001 the
settlement was implemented. The anticipated costs of settlement remain
unchanged from prior years.
The settlement as approved provides for release by class members of all
insurance and annuity market conduct claims dating back to 1985. Some class
members opted out of the settlement and therefore did not release their
claims against AEFC or the Company. Some of these class members who opted
out were represented by counsel and presented separate claims to AEFC or
the Company. Most of their claims have been settled.
At December 31, 2001, the Company had no commitments to purchase
investments other than to fund mortgage loans (see Note 2).
8. Derivative financial instruments
The Company maintains an overall risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned
fluctuations in earnings that are caused by interest rate and equity market
volatility. The Company does not enter into derivative instruments for
speculative purposes. As prescribed per SFAS No. 133, derivative
instruments that are designated and qualify as hedging instruments are
classified as a cash flow hedge, fair value hedge, or a hedge of a net
investment in a foreign operation, based upon the exposure being hedged.
The Company currently has economic hedges that either do not qualify or are
not designated for hedge accounting treatment under SFAS No. 133. For the
year ended December 31, 2001, the net effect on earnings of accounting for
the net changes in fair value of the following undesignated derivatives
under SFAS No. 133 compared with prior rules was not significant.
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. 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.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are primarily used to
protect the margin between interest rates earned on investments and the
interest rates credited to related annuity contract holders. The values of
derivative financial instruments are based on market values, dealer quotes
or pricing models. The fair value of the interest rate caps and floors are
included in Other assets. The fair value of the interest rate swaps is
included in Other liabilities. Changes in value of the derivatives are
included in Other operating expenses. The derivatives expire at various
dates between 2002 and 2006.
-34-
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 value of life insurance obligations, receivables and all
non-financial instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets 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.
2001 2000
-------- --------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
--------- --------- --------- ---------
Fixed maturities:
Held-to-maturity securities $ $ $ 934,091 $ 927,031
- -
Available-for-sale securities 3,302,753 3,302,753 2,068,487 2,068,487
Common stocks 344 344 880 880
Mortgage loans on real estate 654,209 684,566 724,009 740,992
Derivative financial assets 7,354 7,354 8,526 13,599
Cash and cash equivalents 260,214 260,214 34,852 34,852
Separate account assets 708,240 708,240 589,310 589,310
2001 2000
-------- --------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Liabilities --------- --------- --------- ---------
Future policy benefits for fixed annuities 3,745,846 3,668,111 3,567,085 3,480,270
Derivative financial liabilities 28,868 28,868 - 51,369
Separate account liabilities 708,240 685,607 589,310 567,989
At December 31, 2001 and 2000, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $19,833 and $17,699, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 2001
and 2000. The fair values of deferred annuities is estimated as the
carrying amount less applicable surrender charges. 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 2001 and 2000.
At December 31, 2001 and 2000, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less applicable
surrender charges and less variable insurance contracts carried at $281 and
$nil, respectively.
-35-