UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
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.)
AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
- ------------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
--------------
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
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE PERMITTED
ABBREVIATED NARRATIVE DISCLOSURE.
IDS LIFE INSURANCE COMPANY
FORM 10-Q
For the Quarter Ended September 30, 2002
Table of Contents
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and
December 31, 2001 3 - 4
Consolidated Statements of Income for the
three and nine months ended September 30, 2002
and 2001 (unaudited) 5 - 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001
(unaudited) 7 - 8
Notes to Consolidated Financial Statements
(unaudited) 9 - 11
Item 2. Management's Discussion and Analysis of
Consolidated Financial Condition and
Results of Operations 12 - 16
PART II - OTHER INFORMATION 17 - 21
SIGNATURES 22
EXHIBITS 23 - 28
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2002 2001
- ------
(unaudited)
---------------- ---------------
Investments:
Available for sale:
Fixed maturities, at fair value (Amortized cost:
2002, $21,182,407; 2001, $20,022,072) $22,018,437 $20,157,137
Common stocks, at fair value (Cost: 2002,
$21,451; 2001, $805) 22,133 1,704
Mortgage loans on real estate 3,497,425 3,680,394
Policy loans 595,880 619,571
Other investments 734,489 621,897
----------- -----------
Total investments 26,868,364 25,080,703
Cash and cash equivalents 1,900,655 1,150,251
Amounts recoverable from reinsurers 602,035 529,166
Amounts due from brokers 899,623 90,794
Other accounts receivable 53,513 46,349
Accrued investment income 268,521 278,199
Deferred policy acquisition costs 3,267,436 3,107,187
Deferred income taxes -- 156,308
Other assets 113,609 123,246
Separate account assets 21,069,961 27,333,697
----------- -----------
Total assets $55,043,717 $57,895,900
=========== ===========
See accompanying notes.
-3-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(continued)
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
- ------------------------------------
(unaudited)
----------------- ------------------
Liabilities:
Future policy benefits:
Fixed annuities $22,316,337 $19,592,273
Universal life-type insurance 3,485,140 3,433,904
Traditional life insurance 245,158 241,165
Disability income and
long-term care insurance 1,401,701 1,227,172
Policy claims and other
policyholders' funds 97,242 71,879
Amounts due to brokers 1,203,998 1,740,031
Deferred income taxes 130,420 --
Other liabilities 373,942 437,017
Separate account liabilities 21,069,961 27,333,697
------------ ------------
Total liabilities 50,323,899 54,077,138
------------ ------------
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 938,327 688,327
Accumulated other comprehensive income,
net of tax:
Net unrealized securities gains 517,880 85,549
Net unrealized derivative gains (losses) 1,821 (774)
------------ ------------
Total accumulated other comprehensive income 519,701 84,775
Retained earnings 3,258,790 3,042,660
------------ ------------
Total stockholder's equity 4,719,818 3,818,762
------------ ------------
Total liabilities and stockholder's equity $55,043,717 $57,895,900
============ ============
See accompanying notes.
-4-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(unaudited)
Three months ended
September 30,
2002 2001
Revenues:
Premiums:
Traditional life insurance $ 17,549 $ 14,939
Disability income and
long-term care insurance 69,893 64,914
------ ------
Total premiums 87,442 79,853
------ -------
Policyholder and contractholder charges 126,068 121,849
Management and other fees 93,723 113,906
Net investment income 385,491 390,826
Net realized gain (loss) on investments 11,619 (47,530)
------- --------
Total revenues 704,343 658,904
-------- -------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 9,247 7,059
Universal life-type insurance
and investment contracts 58,425 58,259
Disability income and
long-term care insurance 13,636 11,717
Increase (decrease) in liabilities for
future policy benefits:
Traditional life insurance (2,407) 1,515
Disability income and
long-term care insurance 34,104 36,832
Interest credited on universal life-type
insurance and investment contracts 280,840 280,817
Amortization of deferred policy
acquisition costs 78,930 75,729
Other insurance and operating expenses 129,716 105,721
-------- -------
Total benefits and expenses 602,491 577,649
-------- -------
Income before income tax expense 101,852 81,255
Income tax expense 15,681 6,899
Net income $86,171 $74,356
======= =======
-5-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(unaudited)
Nine months ended
September 30,
2002 2001
---------------- ------------------
Revenues:
Premiums:
Traditional life insurance $ 50,213 $ 44,399
Disability income and
long-term care insurance 201,613 187,599
----------- -----------
Total premiums 251,826 231,998
Policyholder and contractholder charges 380,883 362,953
Management and other fees 313,728 359,422
Net investment income 1,167,344 1,064,770
Net realized loss on investments (33,695) (662,736)
----------- -----------
Total revenues 2,080,086 1,356,407
----------- -----------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 27,434 24,528
Universal life-type insurance
and investment contracts 156,144 134,578
Disability income and
long-term care insurance 38,414 33,173
Increase in liabilities for
future policy benefits:
Traditional life insurance 2,018 4,776
Disability income and
long-term care insurance 98,121 90,697
Interest credited on universal life-type
insurance and investment contracts 834,760 849,318
Amortization of deferred policy
acquisition costs 244,604 303,103
Other insurance and operating expenses 330,199 319,405
----------- -----------
Total benefits and expenses 1,731,694 1,759,578
----------- -----------
Income (loss) before income tax expense (benefit) 348,392 (403,171)
Income tax expense (benefit) 62,262 (198,682)
----------- -----------
Net income (loss) before cumulative effect of accounting change 286,130 (204,489)
Cumulative effect of accounting change (net of tax of $11,647) -- (21,410)
----------- -----------
Net income (loss) $ 286,130 $ (225,899)
========== ===========
See accompanying notes.
-6-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended
September 30,
2002 2001
----------------- ---------------
Cash flows from operating activities:
Net income (loss) $(225,899) $286,130
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cumulative effect of accounting change, net of
Tax -- 21,410
Policy loans, excluding universal
life-type insurance:
Issuance (28,126) (35,977)
Repayment 37,939 41,446
Change in amounts recoverable from reinsurers (72,869) (78,256)
Change in other accounts receivable (7,164) 31,466
Change in accrued investment income 9,678 47,626
Change in deferred policy
acquisition costs, net (195,873) (98,787)
Change in liabilities for future policy
benefits for traditional life,
disability income and
long-term care insurance 178,522 162,561
Change in policy claims and other
policyholders' funds 25,363 12,959
Change in deferred income taxes 53,671 (51,897)
Change in other assets 9,637 (88,934)
Change in other liabilities (63,075) (220,183)
Accretion of discount, net 48,874 90,538
Net realized loss on investments 33,695 662,736
Contractholder charges, non-cash (172,811) (159,857)
Other, net (8,449) 22,739
---------- ----------
Net cash provided by operating activities $ 135,142 $133,691
---------- ----------
-7-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(continued)
Nine months ended
September 30,
2002 2001
---------------- -------------------
Cash flows from investing activities:
Fixed maturities available for sale:
Purchases $(10,031,715) $ (5,773,000)
Maturities, sinking fund payments and calls 2,276,303 1,896,793
Sales 6,581,196 3,015,367
Other investments, excluding policy loans:
Purchases (362,979) (335,523)
Sales 355,323 273,411
Change in amounts due from broker (808,829) 6,113
Change in amounts due to broker (536,033) 42,164
-------------- -------------
Net cash used in investing activities (2,526,734) (874,675)
--------------- --------------
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 3,315,296 1,513,678
Surrenders and death benefits (1,205,070) (2,201,427)
Interest credited to account balances 837,893 850,158
Universal life-type insurance policy loans:
Issuance (57,875) (75,764)
Repayment 71,752 66,066
Cash dividends to parent (70,000) --
Capital contribution from parent 250,000 400,000
-------------- -------------
Net cash provided by financing activities 3,141,996 552,711
-------------- --------------
Net increase (decrease) in cash and cash equivalents 750,404 (188,273)
Cash and cash equivalents at beginning of period 1,150,251 316,974
-------------- -------------
Cash and cash equivalents at end of period $1,900,655 $128,701
============== =============
See accompanying notes.
-8-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(In thousands)
(unaudited)
1. General
The interim financial information in this report has not been audited.
In the opinion of the management of IDS Life Insurance Company (the
Company), the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly its balance sheet as of September 30, 2002,
statements of income for the three and nine months ended September 30,
2002 and 2001 and statements of cash flows for the nine months ended
September 30, 2002 and 2001. Results of operations reported for the
interim periods are not necessarily indicative of results for the
entire year. The consolidated financial statements should be read in
conjunction with the financial statements in the Annual Report on Form
10-K of the Company for the year ended December 31, 2001. Certain prior
year amounts have been reclassified to conform to the current year's
presentation.
The Company is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly-owned subsidiary of American
Express Company. The accompanying unaudited consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, IDS Life Insurance Company of New York, American
Enterprise Life Insurance Company, American Centurion Life Assurance
Company, American Partners Life Insurance Company, American Express
Corporation and IDS REO 1, LLC. All material intercompany accounts and
transactions have been eliminated in consolidation.
2. Comprehensive Income
Total comprehensive income was $401,929 and $336,313 for the three
months and $721,056 and $459,890 for the nine months ended September
30, 2002 and 2001, respectively. The significant difference between net
income and total other comprehensive income is a result of unrealized
gains that arose during the year on fixed maturity holdings.
3. Statements of cash flows
Cash paid for interest on borrowings totaled $6,277 and $17,734 for the
nine months ended September 30, 2002, and 2001, respectively. Cash paid
for income taxes totaled $80,372 for the nine months ended September
30, 2002 compared to cash received of $69,751 for the nine months ended
September 30, 2001.
-9-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
(continued)
4. Accounting developments
In July 2000, the Financial Accounting Standards Board's (FASB)
Emerging Issues Task Force (EITF) 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 procedures for recording interest income and measuring
impairment on retained and purchased beneficial interests. The
consensus primarily affects certain high-yield investments contained in
structured securities. Adoption of the consensus required the Company
to adjust the carrying amount of these investments downward by $21,410,
net of tax, upon adoption.
The FASB is currently considering rules that could affect the future
accounting for special purpose vehicles. Such vehicles could
potentially include collateralized debt obligations, structured loan
trusts, mutual funds, hedge funds and limited partnerships. The effect
could include adjustments to current carrying values and/or
consolidation of underlying assets and liabilities. While such rules
would not change the economic value inherent in these operations, the
financial statement effect of any changes cannot be determined until
the rules are finalized.
5. Commitments and contingencies
Commitments to fund mortgage loan investments in the ordinary course of
business at September 30, 2002 aggregated $86,240.
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. The Company retains only 20% of the
mortality risk on new variable universal life insurance policies and
10% of the mortality risk on new term insurance policies. Risk not
retained is reinsured with other life insurance companies. Universal
life and variable universal life policies are primarily reinsured on a
yearly renewable basis. New term insurance and long-term care policies
are primarily reinsured on a coinsurance basis. The Company retains all
accidental death benefit, disability income and waiver of premium risk.
-10-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
(continued)
5. Commitments and contingencies (continued)
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a
material adverse affect on the Company.
In recent years, life insurance companies have been named as
defendants in lawsuits, including class action lawsuits, alleging
improper life insurance sales practices, alleged agent misconduct,
failure to properly supervise agents and other matters relating to
life insurance policies and annuity contracts. The Company and its
affiliates were named defendants in three purported class-action
lawsuits alleging 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. A fourth lawsuit was filed against the
Company and its affiliates in federal court. In January 2000, we
reached an agreement in principle to settle the three class action
lawsuits 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
state and federal market conduct claims dating back to 1985. The
settlement received court approval. 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 Company. 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
have a material impact on the Company's financial position or operating
results.
6. Stockholder's equity
During the third quarter of 2002, the Company received a $250 million
capital contribution from AEFC to further strengthen its equity
position.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001:
Consolidated net income was $286 million for the nine months ended September 30,
2002, compared to a net loss of $226 million in 2001. 2001 results reflect
approximately $615 million of pretax losses from the recognition of impairment
losses and sale of certain high-yield securities and a $67 million pretax
increase in the amortization of deferred policy acquisition costs (DAC's). The
favorable relative impact in 2002 of these 2001 items was partially offset by
lower management and other fees, primarily reflecting continued weakness in
equity markets in 2002.
Premiums and investment contract deposits increased to $6.1 billion compared to
$4.3 billion for the nine months ended September 30, 2001. The increase was
primarily due to an increase in fixed annuity sales.
Management and other fees decreased to $314 million for the nine months ended
September 30, 2002 compared with $359 million a year ago. This was primarily due
to a decrease in average separate account assets outstanding, resulting
primarily from market depreciation of equity securities as weak equity markets
continue. The Company provides investment management services for many of the
mutual funds which are 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 based on the level of assets.
Net investment income increased to $1,167 million for the nine months ended
September 30, 2002 compared to $1,065 million a year ago. This increase was
primarily due to the credit-related yield adjustments on fixed maturity
investments in 2001 and higher invested asset levels in 2002, which were
partially offset by lower portfolio yields in 2002.
Net realized loss on investments decreased to $34 million for the nine months
ended September 30, 2001 compared to $663 million a year ago. The 2002 net
realized losses include $45 million from direct losses on WorldCom debt
holdings. The 2001 loss was primarily due to the write-down and sale of certain
high-yield investments.
Total benefits and expenses were $1.7 billion for the nine months ended
September 30, 2002, a decrease of 2 percent from a year ago. The largest
component of expenses, interest credited on universal life-type insurance and
investment contracts, decreased 2 percent to $835 million. This was primarily
due to lower interest credited rates. Total death and other benefits increased
$30 million. This increase is primarily due to business growth, although $12
million of this increase is due to greater guaranteed minimum death benefits
paid this year ($22 million) versus last year ($10 million).
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Amortization of deferred policy acquisition costs decreased 19 percent for the
nine months ended September 30, 2002 compared to the same period in 2001, due
primarily to a $67 million increase in the first quarter of 2001 to the
amortization of DAC's for variable annuity and insurance products as a result of
the decline in equity markets. Current quarter's results also include a net
expense increase related to DAC that is further described below.
Other insurance and operating expenses increased 3 percent, primarily due to the
increased DAC expenses described below.
Deferred Acquisition Costs
The Company's DAC represents the cost of acquiring new business, principally
sales and other distribution and underwriting costs, that have been deferred on
the sale of annuity and insurance products. DAC's are amortized over periods
approximating the lives of the business, generally as a percentage of premiums
or estimated gross profits or as a percentage of the liabilities associated with
the products. The projections underlying the amortization of DAC require the use
of certain assumptions, including interest margins, mortality rates, persistency
rates, maintenance expense levels and customer asset value growth rates for
variable products. 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 customer asset value growth rates 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 DAC can be either
positive or negative in any particular period, and is reflected in the period in
which such changes are made.
During the third quarter, the Company completed a comprehensive review of its
DAC related practices. This review, which included benchmarking assistance from
an industry specialist, analyzed various historical DAC dynamics in addition to
the industry benchmarks. The specific areas reviewed included costs deferred,
customer asset value growth rates, including reversion to mean assumptions, DAC
amortization periods, mortality rates and product persistency. As a result of
this review, the Company made certain revisions related to DAC that resulted in
a net $37 million increase in expenses this quarter. This net expense increase
reflected revisions within three key drivers of DAC.
o The Company reset its customer asset value growth rate assumptions for
variable annuity and variable life products to anticipate near-term
and long-term market performance consistent with long-term historical
averages. The customer asset value growth rate is the rate at which
contract values are assumed to appreciate in the future. The Company
is now projecting growth in customer contract values at 7%. This rate
is net of asset fees, and anticipates a blend of equity and fixed
income investments. Prior to resetting these assumptions, the Company
was projecting long-term customer asset value growth at 7.5% and
near-term growth at approximately twice that rate. The impact of
resetting these assumptions, along
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
with the impact of unfavorable third quarter equity market
performance, was an acceleration of $173 million pretax of DAC
amortization.
Going forward, the Company intends to continue to use a mean reversion
method as a guideline in setting the near-term customer asset value
growth rate, also referred to as the mean reversion rate. In periods
when market performance results in actual contract value growth at a
rate different than that assumed, the Company will reassess the
near-term rate in order to continue to project its best estimate of
long-term growth. For example, if actual contract value growth during
the fourth quarter is less than 7% on an annualized basis, the Company
would increase the mean reversion rate assumed over the near-term to
the rate needed to achieve the long-term growth rate of 7% by the end
of that period, assuming this long-term view is still appropriate.
o The Company also revised its persistency assumptions for certain
annuity products and persistency and mortality assumptions for
universal and variable universal life insurance products, to better
reflect actual experience and future expectations. As part of this,
the Company observed that the persistency of advisor-distributed fixed
annuity business supported an amortization period longer than the 10
years the Company had been using as the approximate life of this
business. As a result, the Company extended the amortization period to
15 years and increased the DAC balance accordingly. This change, along
with revised assumptions projecting more favorable persistency and
mortality rates, resulted in a decrease in DAC expense of $155 million
pretax in the quarter.
o Finally, the Company reviewed its acquisition costs to clarify those
costs that vary with and are primarily related to the acquisition of
new and renewable annuity and insurance contracts. The Company revised
the types and amounts of costs deferred, in part to reflect the impact
of advisor platform changes and the effects of related reengineering.
This resulted in an increase in expense of $19 million pretax
recognized during the quarter.
The first two categories of revised assumptions relating to customer asset value
growth rates, DAC amortization periods, mortality rates and insurance and
annuity lapse rates should reduce the risk of adverse DAC adjustments going
forward. The third revised category, relating to the types and amounts of costs
deferred, will somewhat increase ongoing expenses, although these additional
expenses should be offset to some extent as reengineering and other cost control
initiatives are expected to mitigate their impact.
Impact of Recent Market Volatility on Results of Operations
Various aspects of the Company's business can be significantly impacted by
equity levels and other market-based factors. One of these items is the
management fee revenue which is based on the market value of separate account
assets. Other areas impacted by market volatility involve deferred acquisitions
costs (as noted above), structured investments and the variable annuity
guaranteed minimum death benefit feature. The value of the Company's structured
investment portfolio is impacted by various market factors. These investments
include collateralized debt obligations and structured loan trusts (backed by
high-yield bonds and bank loans), which are
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
held by the Company through interests in special purpose entities. The carrying
value of these investments is based on cash flow projections, which are affected
by factors such as default rates, persistency of defaults, recovery rates and
interest rates, among others. The current valuation of these investments assumes
high levels of near-term defaults, relative to historical default rates.
Persistency of or increases in these default rates could result in negative
adjustments to the market values of these investments in the future, which would
adversely impact results of operations. Conversely, a decline in the default
rates would result in higher values and would benefit future results of
operations.
The majority of the variable annuity contracts offered by the Company contain
guaranteed minimum death benefit (GMDB) provisions. At time of issue, these
contracts typically guarantee the death benefit payable will not be less than
the amount invested, regardless of the performance of the customer's account.
Most contracts also provide for some type of periodic adjustment of the
guaranteed amount based on the change in the value of the contract. A large
portion of the Company's contracts containing a GMDB provision adjust once every
six years. The periodic adjustment of these contracts can either increase or
decrease the guaranteed amount though not below the amount invested adjusted for
withdrawals. When market values of the customer's accounts decline, the death
benefit payable on a contract with a GMDB may exceed the accumulated contract
value. Currently, the amount paid in excess of contract value is expensed in the
period the payment occurs.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided from
operations and investment activity. The primary components of the funds provided
are 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, new investment purchases and dividends to parent.
The Company has an available line of credit with its parent of $200 million
($100 million committed and $100 million uncommitted). This line of credit is
used strictly as a short-term source of funds. At September 30, 2002,
outstanding borrowings under this agreement totaled $nil. The Company also uses
reverse repurchase agreements for short-term liquidity needs. Outstanding
reverse repurchase agreements totaled $225 million at September 30, 2002.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
At September 30, 2002, approximately 6 percent of the Company's invested assets
were below-investment-grade bonds, compared to 5 percent at September 30, 2001.
These investments may be subject to a higher degree of risk than higher-rated
issues because of the borrowers' 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 September 30, 2002, the Company had a reserve for losses on mortgage loans of
$40 million.
Forward-Looking Statements
Certain statements in the management's discussion and analysis of consolidated
financial condition and results of operations section of this Form 10-Q 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, fluctuations
in the equity and interest rate environment and 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.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 5 of the Notes to Consolidated
Financial Statements (unaudited) contained in the Report filed
on Form 10-Q for the quarterly period ended September 30,
2002.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
-17-
PART II - OTHER INFORMATION (continued)
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.
-18-
PART II - OTHER INFORMATION (continued)
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 Form 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.
-19-
PART II - OTHER INFORMATION (continued)
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
22 to Post-Effective Amendment No. 8 to Registration
Statement No. 33-28976 is herein incorporated by reference.
-20-
PART II - OTHER INFORMATION (continued)
27. Financial data schedule is filed electronically herewith.
(b) Reports on Form 8-K.
Form 8-K, dated September 6, 2002, Item 5, reporting that
Moody's Investor Services has changed its outlook on the Aa3
insurance financial strength rating to negative from stable.
Item 7. Exhibits 99.1 and 99.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibits 99.3 and 99.4
Certification pursuant to 15 U.S.C. as adopted pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
-21-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT IDS LIFE INSURANCE COMPANY
BY /s/ Philip C. Wentzel
-----------------------
NAME AND TITLE Philip C. Wentzel
Vice President and Controller
BY /s/ Barbara H. Fraser
------------------------
NAME AND TITLE Barbara H. Fraser
Chief Executive Officer
DATE November 14, 2002
-22-