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, 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 333-65080
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
INDIANA 94-2786905
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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"), a
Minnesota corporation. IDS Life is a wholly owned subsidiary of American Express
Financial Corporation ("AEFC"). AEFC is a wholly owned subsidiary of American
Express Company. The Company provides financial institution clients American
Express branded financial products and services to support their retail
insurance and annuity operations. It issues variable life insurance and fixed
and variable annuity contracts, primarily through regional and national
financial institutions and regional and/or independent broker-dealers, in all
states except New York and New Hampshire. During the year, the Company continued
to expand its network of third-party distributors and its range of variable
annuity products offered through them, resulting in strong third-party sales
efforts. The Company improved its competitive position during the year,
increasing market share, substantially adding to its client base, and further
broadening its variable annuity product lineup. The Company also expanded and
strengthened its distribution and technology capability. The Company competes
directly with several other insurers in the third-party distribution channel.
The Company achieved record sales during the year. In a period during which
overall industry sales have remained flat, the Company's sales increased
substantially over the prior year and exceeded $2 billion for the first time.
American Enterprise REO 1, LLC is a wholly owned subsidiary of the Company. This
subsidiary holds real estate investments and/or mortgage loans on real estate.
Regulation
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 also
regulates such matters as the licensing of sales personnel and, in some cases,
the marketing and contents of insurance policies and annuity contracts. The
primary purpose of such regulation and supervision is to protect the interests
of contract owners.
Regulatory scrutiny of market conduct practices of insurance companies,
including sales, marketing and replacements of life insurance and annuities and
"bonus" annuities, has increased significantly in recent years and is affecting
the manner in which companies approach various operational issues, including
compliance. The number of private lawsuits alleging violations of laws in
connection with insurance and annuity market conduct has increased (see Legal
Proceedings on page 7). Virtually all states mandate participation in insurance
guaranty associations, which assess insurance companies in order to fund claims
of contract owners of insolvent insurance companies.
On the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuities and life insurance policies, 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.
More specifically, recent federal legislative proposals aimed at promoting
tax-advantaged savings through Lifetime Savings Accounts and Retirement Savings
Account and the dividend exclusion proposal may adversely impact the Company's
sales of annuity and life insurance products if enacted.
Ratings
The Company had consolidated assets at December 31, 2002 of approximately $8
billion, based on generally accepted accounting principles and had total
statutory capital and surplus as of December 31, 2002 of $493 million.
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The Company receives ratings from independent rating agencies. Generally, the
Company does not receive an individual rating, but receives the same rating as
its parent, IDS Life. These agencies evaluate the financial soundness and
claims-paying ability of insurance companies based on a number of different
factors. The ratings reflect each agency's estimation of the Company's ability
to meet its contractual obligations such as making annuity payouts and paying
death benefits and other distributions from the contracts. As such, the ratings
relate to the Company's general account and not to the variable accounts. This
information generally does not relate to the management or performance of the
variable subaccounts of the contracts.
Ratings are important to maintaining public confidence in the Company and its
ability to market annuity and life insurance products. Lowering of the
Company ratings could have a material adverse effect on the Company's ability to
market its products and could lead to increased surrenders of the Company's
products. Rating agencies continually review the financial performance and
condition of insurers. Also, the rating agencies have a variety of policies and
practices regarding the relationships among ratings of affiliated entities. As
such, the ratings of the Company could be affected by changes in ratings of IDS
Life and/or American Express Company. As of the end of 2002, the Company was
rated "A+" (Superior) by A.M. Best Company, Inc. and its claims-paying
ability/financial strength was rated "Aa3" (Excellent) by Moody's Investors
Service, Inc. (Moody's), and "AA" (Very Strong) by Fitch. In light of the
Company's desire to maintain these ratings, the Company's parent contributed
$250 million of capital to the Company in 2002.
The foregoing ratings reflect each rating agency's opinion of the Company's
financial strength, operating performance and ability to meet its obligations to
contract owners. Such factors are of primary concern to contract owners, agents
and intermediaries, but also may be of interest to investors.
Risk Based Capital
The National Association of Insurance Commissioners ("NAIC") adopted Risk Based
Capital ("RBC") requirements for life insurance companies. The RBC requirements
are to be used as minimum capital requirements by the NAIC and states to
identify companies that merit further regulatory action. At December 31, 2002,
the Company had total adjusted capital of approximately $523 million. As defined
by the NAIC, total adjusted capital includes certain asset valuation reserves
excluded from the $493 million of statutory capital and surplus referred to
above. The Indiana Department of Insurance, the Company's insurance regulator,
requires insurance companies to maintain a minimum RBC called the "authorized
control level". If total adjusted capital fell below the authorized control
level, the Indiana Department of Insurance would be authorized to exercise
management control over the Company. For the Company, authorized control level
capital was $80 million at December 31, 2002.
In addition, insurance companies are expected to maintain capital at a level
above that which would require a company to file an action plan with the
Department. This is referred to as the "company action level". For the Company,
company action level capital was approximately $160 million at December 31,
2002.
As described above, the Company maintains levels of risk-based capital far in
excess of the authorized control and company action levels required by the
Indiana Department of Insurance. The level of capital maintained in the Company
is thought to be appropriate by management and is more commensurate with
standards necessary to maintain the Company's ratings with the various credit
and claims-paying rating agencies.
The General Account
Assets supporting the contract values associated with fixed account annuity
products, as well as those associated with fixed account options under variable
insurance and annuity products (collectively, the "fixed accounts") are part of
an insurer's "general account." Under fixed accounts, the insurer bears the
investment risk. In investing its general account assets, the Company seeks to
maintain
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a dependable and targeted difference or "spread" between the interest rate
earned on general account assets and the interest rate the insurer credits to
contract owners' fixed accounts. This spread is a major driver of net income for
the Company.
In the general account, the Company primarily invests in fixed income securities
over a broad range of maturities for the purpose of providing a targeted rate of
return on its investments while controlling risk. The majority of these fixed
income securities are interest bearing investments such as government
obligations, mortgage-backed obligations and various corporate debt instruments.
The Company has the discretion to set the rate of interest credited to contract
owners' fixed accounts. However, this discretion is limited by the contract's
guaranteed minimum interest rate. This rate varies among fixed accounts and is
as low as 3% and as high as 4.5%. (Approximately ten states have adopted
regulations providing for a guaranteed minimum interest rate that is less than
3%. In some states it is as low as 1.5%; in other states it is tied to an index.
The NAIC recently adopted a model regulation providing for an indexed guaranteed
minimum interest rate, and it is anticipated that a number of states will follow
this model.) The interest rates credited to contract owners' fixed 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. In a low interest rate environment, such as
that experienced recently, margins may be negatively impacted as the interest
rates available on the Company's investments approaches the guaranteed minimum
interest rates on the annuity contracts. The Company's investment committee
deploys several strategies to help manage risk. See the Risk Management section
that follows for more details on the investment committee and the specific
strategies employed.
The Variable Accounts
Variable insurance and annuity products offer variable account investment
options in addition to the fixed account options described above. Under variable
accounts, contract owners bear the investment risk. The variable accounts are
registered as unit investment trusts under the Investment Company Act of 1940.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund.
Contract owners can allocate their payments among variable subaccounts that
invest in underlying mutual funds. The underlying funds are managed both by
affiliated and third-party money managers. Internally managed funds for the
Company's variable annuities include the nineteen AXP Variable Portfolio Funds.
The Company also retains third-party money managers AIM Advisors Inc., Alliance
Capital Management, L.P., American Century Investment Management, Inc., BAMCO,
INC., Credit Suisse Asset Management, LLC, Columbia Management Co., The Dreyfus
Corporation, Evergreen Investment Management Company, LLC, Fidelity Management &
Research Company, Fleet Investments Advisor Inc., Franklin/ Advisors, Inc.,
Franklin Mutual Advisors, LLC, Franklin Advisory Servies, LLC, Templeton Asset
Management Ltd., Templeton Investment Counsel, LLC, Goldman Sachs Asset
Management L.P., Goldman Sachs Asset Management International, Janus Capital,
J.P. Morgan Investment Management Inc., Lazard Asset Management, LLC, Liberty
Wanger Asset Management, L.P., MFS Investment Management(R), MFS Institutional
Advisors, Inc., Morgan Stanley Investment Management Inc., OpCap Advisors LLC,
OppenheimerFunds, Inc., Putnam Investment Management, LLC, Royce & Associates,
LLC, Stein Roe & Farnham Incorporated, Third Avenue Management LLC, Trustco
Capital Management, Inc., Van Kampen Asset Management Inc. and Wells Fargo Funds
Management, LLC. These funds invest in portfolios containing a variety of
securities including common stocks, bonds, managed assets and/or short-term
securities. The value of these subaccounts fluctuates with the investment return
of the funds in which the subaccounts invest. The Company's major source of
revenue from the variable accounts is the fees it receives. These fees may
include revenues from underlying non-proprietary mutual funds and mortality and
expense risk fees from variable subaccounts.
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Variable annuities are "separate account" products rather than general account
products. State insurance law prohibits charging variable accounts
with liabilities of the general account business. Under the subaccounts of each
variable account, the Company credits or charges income, capital gains and
capital losses only to that subaccount.
Annuities: Product Features and Risks
The Company's principal products are variable and fixed deferred annuities,
which are issued to a broad range of individual consumers through third-party
distribution channels. The Company offers single premium and flexible premium
deferred fixed annuities as well as flexible premium deferred variable
annuities. American Express financial advisors, the IDS Life retail sales force,
can offer the Company's variable annuities only in limited circumstances. With
deferred annuities, assets accumulate until the contract is surrendered, the
contract owner dies, or the contract owner begins receiving benefits under an
annuity payout option.
Variable Annuities
Variable annuities provide contract owners with investment returns linked to the
underlying investments the contract owner chooses. These products also offer a
fixed account with a guaranteed minimum interest rate of 3%.
Fixed Annuities
The Company's fixed annuities provide cash value that increases by a fixed
interest rate. The rate is periodically reset according to the terms of the
contract at the discretion of the issuer. The contracts provide a guaranteed
minimum interest rate, generally 3% to 4%.
Annuity Risks
The relative proportion between fixed and variable annuities sales is generally
driven by the relative performance of the equity and fixed income markets. In
times of lackluster performance in equity markets, fixed sales are generally
stronger. In times of superior performance in equity markets, variable sales are
generally stronger. In addition, investment management performance is critical
to the profitability of annuity business.
In past years, innovative features for variable annuity contracts have been
continually evolving. These features include minimum income guarantees and death
benefit guarantees that protect against a drop in benefits due to performance of
the related underlying investments. The Company issues annuity contracts with
guaranteed death and income benefit features. These guarantees are supported by
general account assets. The Company's exposure to risk from these guarantees
will generally increase when equity markets decline.
The Company issues certain variable annuity contracts that contain a guaranteed
minimum income benefit ("GMIB") feature which, if elected by the contract owner
and after a stipulated waiting period from contract issuance, guarantees a
minimum lifetime annuity based on predetermined annuity purchase rates that may
be in excess of what the contract account value can purchase at then-current
annuity purchase rates. The Company bears the risk that protracted
under-performance of the financial markets could result in GMIB benefits being
higher than what accumulated contract owner account balances would support.
The Company also issues variable annuity contracts with guaranteed minimum death
benefit ("GMDB") features. The Company's standard guaranteed minimum death
benefit for annuities provides that the beneficiary receives the greater of 1)
contract value; or 2) purchase payments minus adjusted partial
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surrenders. For additional protection, contract owners may purchase optional
benefits including a maximum anniversary value death benefit and enhanced
earnings death benefits. These are optional benefits available for an additional
charge. The maximum anniversary value death benefit guarantees the death benefit
will not be less than the highest contract value achieved on a contract
anniversary before the contract owner reaches the age of 81, adjusted for
partial withdrawals. The enhanced earnings death benefit riders are intended to
provide additional benefits to a beneficiary to offset expenses after the
contract owner's death. The Company bears the risk that protracted
under-performance of the financial markets could result in GMDB benefits being
higher than what accumulated contract owner account balances would support.
To the extent that the guaranteed minimum death benefit is higher than the
current account value at the time of death, a cost is incurred by the issuer of
the policy. Current accounting literature does not prescribe advance recognition
of the projected future net costs associated with these guarantees, and
accordingly, the Company currently does not record a liability corresponding to
these future obligations for death benefits in excess of annuity account value.
At present, the amount paid in excess of contract value is expensed when
payable. Amounts expensed in 2002 and 2001 were $6 million and $1 million,
respectively. A proposed AICPA Statement of Position, "Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and
for Separate Accounts" (the "Proposed SOP"), would require the recording of a
liability for the expected net costs associated with these guarantees under
certain circumstances, if adopted as proposed. The impact of the Proposed SOP is
currently being evaluated.
For long-term profitability, it is crucial to ensure adequate pricing to cover
risks, and to accumulate adequate reserves. Reserves are a measure of the assets
the Company estimates are needed now to adequately provide for future benefits
and expenses. These reserves are discussed in more detail in the Critical
Accounting policies section that follows.
Insurance: Product Features and Risks
The Company issues a variable life insurance product. The Company has no
short-duration life insurance liabilities. The Company issues only
non-participating contracts.
Variable Life Insurance
The Company's only life insurance sales are from variable life insurance
policies sold by third- party distributors. Variable life insurance provides
life insurance coverage along with investment returns linked to the underlying
investments the policyholder chooses. The Company's variable life insurance
product is American Express Signature Variable Universal Life(R) an individual
flexible premium policy. This product also offers a fixed account with a
guaranteed minimum interest rate of 4%.
Insurance Risks
The insurance business is highly competitive, and the Company's competitors
consist of both stock and mutual insurance companies. Competitive factors
applicable to the insurance business include product features, interest rates
credited to products, charges deducted from the cash values of such products,
investment performance, financial strength of the organization, distribution and
management expenses, claims-paying ratings and services provided to
policyholders.
For long-term profitability, it is crucial to ensure adequate pricing to cover
insurance risks and to accumulate adequate reserves. Reserves are a measure of
the assets the Company estimates are needed now to adequately provide for future
benefits and expenses. These reserves are discussed in more detail in the
Critical Accounting policies section that follows.
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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 owned or 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
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 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's parent, IDS Life, was named a defendant in three purported
class-action lawsuits. A fourth lawsuit alleging the same allegation was also
filed in federal court. The Company is a named defendant in one of the state
filed lawsuits (Thoresen v. IDS Life Insurance Company, et. al.; filed Minnesota
State Court 10/13/1998) and the federal lawsuit (Benacquisto, et. al. v. IDS
Life Insurance Company, et. al.; filed United States District Court-Minnesota
8/2000). 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 reached an agreement in principle to
settle the four 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.
The settlement received court approval. Implementation of the settlement
commenced October 15, 2001 and is substantially complete. Claim review payments
have been made. Numerous individuals opted out of the settlement described above
and therefore did not release their claims against AEFC and its subsidiaries.
Some of these class members who opted out were represented by counsel and
presented separate claims to AEFC and 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
2002 Compared to 2001:
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The Company's net loss was $34 million in 2002, compared to a net loss of $42
million in 2001. Loss before income taxes totaled $52 million in 2002, compared
with a loss of $64 million in 2001. The change primarily reflects the write-down
and sale of certain high-yield securities in 2001, as described below. In
addition, the significant growth in annuity sales during 2002 drove higher
levels of both investment income and interest credited to contractholders. Other
operating expenses increased in 2002 due primarily to higher expenses related to
interest rate swaps.
Total revenues increased to $311 million in 2002, compared with $198 million in
2001. The increase is primarily due to a net realized gain on investments of $3
thousand in 2002 compared to a net realized loss on investments of $90 million
in 2001.
Total investment contract deposits received increased to $2.2 billion in 2002,
compared with $922 million in 2001. This growth is due to a significant increase
in annuity sales, both fixed and variable, particularly in the fixed account
portion of the Company's variable annuities.
Net investment income, the largest component of revenues, increased 7% from the
prior year, primarily due to the significant growth in average invested assets
in 2002 and to credit related yield adjustments on fixed maturity investments in
2001. Partially offsetting this was the impact of lower average yields in 2002,
primarily due to portfolio repositioning, as discussed below.
Contractholder charges increased 8 percent to $6.5 million in 2002, compared
with $6.0 million in 2001, due primarily to an increase in variable annuity
surrender charges. The Company also receives mortality and expense risk fees
from the separate accounts. Mortality and expense risk fees increased to $12.5
million in 2002, compared with $10.2 million in 2001, reflecting an increase in
average separate account assets outstanding as favorable sales in 2002 more than
offset market depreciation.
Net realized gains on investments were $3 thousand in 2002, compared to net
realized losses on investments of $90 million in 2001. Included in the current
years' net gains are impairment charges of $15 million from other-than-temporary
impairments of fixed maturity investments. 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 other
investments.
Total benefits and expenses increased 39 percent to $363 million in 2002
compared to $262 million in 2001. The largest component of expenses, interest
credited on investment contracts, increased 19 percent to $216 million in 2002.
This increase is primarily due to higher aggregate amounts of fixed annuities
inforce driven by the significant increases in sales, partially offset by a
decrease in interest crediting rates to annuity contracts due to declining
interest rates. The lower level of interest rates also resulted in a significant
decrease in the market value of interest rate swaps, which is the primary reason
for the significant increase in other operating expenses. The Company enters
into pay-fixed, receive-variable interest rate swaps to protect the margin
between interest rates earned on investments and the interest rates credited to
annuity contract holders (interest margins). The swaps are economic hedges that
are not designated for hedge accounting treatment under SFAS No. 133. If
interest rates remain at current levels, the decrease in the value of the
interest rate swaps recognized currently will be approximately offset in the
future by increases in interest margins. Other operating expenses also include
an increase of $5 million due to greater guaranteed minimum death benefits paid
this year ($6 million) versus last year ($1 million).
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Deferred acquisition costs (DAC) of $261 million and $218 million are on the
Company's balance sheet at December 31, 2002 and 2001, respectively. These
balances relate to the Company's annuity business. Amortization of DAC increased
to $48 million in 2002, compared to $45 million in 2001. The growth was
primarily due to an increase in the amortization due to favorable sales volumes
and due to a net expense increase related to DAC that is further discussed
below.
The costs of acquiring new business, including, for example, direct sales
commissions, related sales incentive bonuses and awards, policy issue costs and
other related costs have been deferred on the sale of annuity contracts. The DAC
for certain annuities are amortized as a percentage of the estimated gross
profits expected to be realized on the policies. DAC for other annuities are
amortized using the interest method.
Amortization of DAC requires the use of certain assumptions including interest
margins, persistency rates, maintenance expense levels and customer asset value
growth rates for variable annuities. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. This rate
is net of asset fees, and anticipates a blend of equity and fixed income
investments. Management routinely monitors a wide variety of trends in the
business, including comparisons of actual and assumed experience. Management
reviews and, where appropriate, adjusts its assumptions with respect to customer
asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest margins and maintenance expense levels, each quarter.
Unless management identifies a material deviation over the course of the
quarterly monitoring process, management reviews and updates these DAC
assumptions annually in the third quarter of each year. When assumptions are
changed, the percentage of estimated gross profits or portion of interest
margins used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in amortization
percentage will result in an acceleration of DAC amortization while a decrease
in amortization percentage will result in a deceleration of DAC amortization.
The impact on results of operations of changing assumptions with respect to the
amortization of DAC can be either positive or negative in any particular period,
and is reflected in the period that such changes are made. In 2002, excluding
the third quarter, the impact of resetting these assumptions, along with the
impact of unfavorable equity market performance, was an acceleration of $1
million pretax of DAC amortization. Third quarter impacts are described below.
During the third quarter of 2002, the Company completed a comprehensive review
of its DAC related practices. The specific areas reviewed included costs
deferred, DAC amortization periods, customer asset value growth rate assumptions
(which are typically reviewed on a quarterly basis) and other assumptions,
including mortality rates and product persistency (which are typically updated
on an annual basis in the third quarter). As a result of this review, the
Company took certain actions that resulted in a net $6 million increase in
expenses in the third quarter of 2002.
The Company reset its customer asset value growth rate assumptions for variable
annuities to anticipate near-term and long-term growth at an annual rate of 7%.
The customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. This rate is net of asset fees, and
anticipates a blend of equity and fixed income investments. 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 with the impact of unfavorable third
quarter 2002 equity market performance, accounted for the majority of the
increase in DAC amortization expense.
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
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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 a 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 annualized growth
rate of 7% by the end of that period, assuming this long-term view is still
appropriate.
The Company also reviewed its acquisition costs to clarify those costs that vary
with and are primarily related to the acquisition of new and renewable deposits.
The Company revised the types and amounts of costs deferred. This resulted in an
increase in expense of $1 million pretax recognized in the third quarter of
2002.
The adjustments made to customer asset value growth rate assumptions should
reduce the risk of adverse DAC adjustments going forward. The changes relating
to the types and amounts of costs deferred will somewhat accelerate the
recognition of ongoing expenses, although the impact of this should be offset to
some extent as reengineering and other cost control initiatives are expected to
mitigate their impact.
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 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 percent from the prior year, primarily due to lower overall
investment yields and credit-related yield adjustments on fixed maturity
investments.
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.
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 DAC 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
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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.
Impact of Market Volatility on Results of Operations
Various aspects of the Company's business can be significantly impacted by
equity market levels and other market-based factors. One of these items is the
mortality and expense risk fees which are based on the market value of separate
account assets. Other areas impacted by market volatility involve DAC (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, which are held by the Company through interests in special
purpose entities. The carrying value of these investments is based on estimated
cash flow projections, which are affected by factors such as default rates,
persistency of defaults, recovery rates and interest rates, among others.
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 that 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 the
guaranteed amount annually. The periodic adjustment of these contracts can
generally only increase the guaranteed amount. 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 when payable.
Certain Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The following provides information about
certain critical accounting policies that are important to the Consolidated
Financial Statements and that involve estimates requiring significant management
assumptions and judgments about the effect of matters that are uncertain. These
policies relate to the recognition of impairment within the investment
portfolio, deferred policy acquisition costs and insurance and annuity reserves.
Investments
All fixed maturity 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 the related deferred
acquisition costs and income taxes. Gains and losses are recognized in the
results of operations upon disposition of the securities using the specific
identification method. In addition, losses are also recognized when management
determines that a decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include, but are not limited
to, issuer downgrade, default or bankruptcy. The Company also considers the
extent to which cost exceeds fair value, the duration of time of that decline,
and management's judgment about the issuer's current and prospective financial
condition. The charges are reflected in net realized gain (loss) on investments
within the Consolidated Statements of Income.
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Fair value of fixed maturity and equity securities 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), which are not readily marketable. As a result, the carrying
values of these structured investments are based on estimated cash flow
projections which require a significant degree of management judgment as to
default and recovery rates of the underlying investments and, as such, are
subject to change. If actual future cash flows are less than projected,
additional losses would be realized.
The reserve for losses on mortgage loans on real estate 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. Additionally, the level of the reserve for
losses considers other factors, including historical experience and current
economic and political conditions. Management regularly evaluates the adequacy
of the reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
Deferred policy acquisition costs
The costs of acquiring new business, including, for example, direct sales
commissions, related sales incentive bonuses and awards, policy issue costs and
other related costs have been deferred on the sale of annuity contracts. The DAC
for certain annuities are amortized as a percentage of the estimated gross
profits expected to be realized on the policies. DAC for other annuities are
amortized using the interest method.
Amortization of DAC requires the use of certain assumptions including interest
margins, persistency rates, maintenance expense levels and customer asset value
growth rates for variable annuities. The customer asset value growth rate is the
rate at which contract values are assumed to appreciate in the future. This rate
is net of asset fees, and anticipates a blend of equity and fixed income
investments. Management routinely monitors a wide variety of trends in the
business including comparisons of actual and assumed experience. Management
reviews and, where appropriate, adjusts its assumptions with respect to customer
asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest margins and maintenance expense levels, each quarter.
Unless management identifies a material deviation over the course of the
quarterly monitoring process, management reviews and updates these DAC
assumptions annually in the third quarter of each year. When assumptions are
changed, the percentage of estimated gross profits or portion of interest
margins used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in amortization
percentage will result in an acceleration of DAC amortization while a decrease
in amortization percentage will result in a deceleration of DAC amortization.
The impact on results of operations of changing assumptions with respect to the
amortization of DAC can be either positive or negative in any particular period,
and is reflected in the period that such changes are made.
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, with an average rate of approximately 6.4%.
Risk Management
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The sensitivity analysis discussed below estimates 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 percent decline in the value of
equity securities held in separate accounts. 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 took place. 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 contractholders with a
competitive rate of return on their investments while controlling 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 short-term trading profits.
The Company has an investment committee that meets periodically. At these
meetings, the committee reviews models projecting different interest rate
scenarios, risk/return measures and their impact on profitability of the
Company. The committee also reviews the distribution of assets in the portfolio
by type and credit risk sector. The objective of the committee is to structure
the investment portfolio based upon the type and expected behavior of products
in the liability portfolio so as to meet contractual obligations and to achieve
targeted levels of profitability within defined risk parameters.
Rates credited to contract owners' 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 investment committee's strategy includes the use of derivatives, such as
interest rate caps, swaps and floors, for risk management purposes. These
derivatives help 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 contract owner's fixed accounts. Conversely, in a
low interest rate environment, such as that experienced recently, margins may be
negatively impacted as the interest rates available on the Company's investments
approaches the guaranteed minimum interest rates on the annuity contracts. This
negative impact may be compounded by the fact that many of the Company's
interest bearing investments are callable or prepayable by the issuer and calls
and prepayments are more likely to occur in low interest rate environments.
Interest rate derivatives with notional amounts totaling approximately $4.3
billion were outstanding at December 31, 2002 to hedge interest rate exposure.
Of this total, $4 billion of the notional par relates to interest rate swaps and
floors the Company has exclusively with its Parent.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
2002 and includes the impact of any derivatives, would be a decrease of
approximately $0.1 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. Another part of
the investment committee's strategy is to use index options to manage the equity
market risk related to fee income. These derivatives help protect fee income by
providing option income when there is a significant decline in the equity
markets. The Company did not have equity-based derivatives outstanding at
December 31, 2002 for this purpose.
The negative effect on the Company's pretax earnings of a 10 percent decline in
equity prices would be approximately $1 million based on separate account assets
as of December 31, 2002.
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Liquidity and Capital Resources
The liquidity requirements of the Company are generally 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. Maturities of the Company's investments is largely matched with the
expected future payments of annuity obligations.
The primary uses of funds are annuity obligations, commissions and operating
expenses and investment purchases.
The Company has an available line of credit with AEFC aggregating $50 million.
No borrowings were outstanding under the agreement at December 31, 2002. At
December 31, 2002, there were no outstanding reverse repurchase agreements. Both
the line of credit and the reverse repurchase agreements are used strictly as
short-term sources of funds.
At December 31, 2002, investments in fixed maturities comprised 90 percent of
the Company's total invested assets and primarily include corporate debt,
mortgage and other asset-backed securities. Approximately 63 percent is invested
in GNMA, FNMA and FHLMC mortgage-backed securities which are considered AAA
quality. The Company's corporate securities comprise a diverse portfolio with
the largest concentrations accounting for approximately 63 percent of the
portfolio, in the following industries: banking and finance, utilities,
communication and media and transportation.
At December 31, 2002, approximately 5 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 a 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 its rated CDO 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 (excluding transaction expenses) relating to sales
to unaffiliated investors and retained interests in the trust with allocated
book amounts aggregating $47 million. As of December 31, 2002, the retained
interests had a carrying value of $45 million, of which $31 million is
considered investment grade. The Company has no obligations, contingent or
otherwise, to such unaffiliated investors. One of the results of this
transaction is that increases or decreases in future cash flows of the
individual CDOs are combined into one overall cash flow for purposes of
determining the carrying value of the retained interests and related impact on
results of operations.
At December 31, 2002, net unrealized gains on available-for-sale fixed maturity
securities included $211 million of gross unrealized gains and $28 million of
gross unrealized losses. The Company does not classify fixed maturity securities
as held-to-maturity.
At December 31, 2002, the Company had a reserve on losses for mortgage loans
totaling $6 million.
In 2002, the Company received $250 million of capital contributions from IDS
Life.
The economy and other factors caused insurance companies to go under regulatory
supervision. These situations 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
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time. The asset is being amortized as premium taxes are reduced. The Company has
also estimated the potential effect of future assessments on the Company's
financial position and results of operations and has established a reserve for
such potential assessments.
The National Association of Insurance Commissioners (NAIC) established
risk-based capital (RBC) standards for life insurance companies to determine
capital requirements based upon the risks inherent in its operations. These
standards require the computation of a RBC amount which is then compared to a
company's actual total adjusted statutory 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 RBC is below
certain levels. As of December 31, 2002, the Company's total adjusted capital
was well in excess of the levels requiring regulatory attention. In 2003, any
dividends would require the approval of the Insurance Department of the State of
Indiana.
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. The words
"believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "should," "could," "likely," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements. Important factors that could cause actual
results to differ materially from the Company's forward-looking statements
include, but are not limited to: fluctuations in external markets, which can
affect the amount and types of investment products sold, the market value of its
managed assets, mortality expense risk and other fees received based on those
assets and the amount of amortization of DAC; potential deterioration in
high-yield and other investments, which could result in further losses in the
Company's investment portfolio; changes in assumptions relating to DAC which
also could impact the amount of DAC amortization; the ability to sell certain
high-yield investments at expected values and within anticipated timeframes and
to maintain its high-yield portfolio at certain levels in the future; the types
and value of certain death benefit features on variable annuity contracts; the
affect of assessments and other surcharges for guaranty funds; the response of
reinsurance companies under reinsurance contracts; the impact of reinsurance
rates and the availability and adequacy of reinsurance to protect the Company
against losses; negative changes in the Company's credit ratings; increasing
competition in all the Company's major businesses; the adoption of recently
issued rules related to the consolidation of variable interest entities,
including those involving CDOs that the Company invests in which could affect
both the Company's balance sheet and results of operations; and outcomes of
litigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Mangement's Discussion and
Analysis of financial condition and results of operations under the section
titled Risk Management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
Index to financial statements
The following consolidated financial statements of American Enterprise
Life Insurance Company are included in Item 8:
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Report of Independent Auditors 23
Consolidated Balance Sheets at December 31, 2002 and 2001 24
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 25
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2002, 2001 and 2000 26-27
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 28-29
Notes to Consolidated Financial Statements 30-43
All information on schedules to the consolidated financial statements required
by Article 7 of Regulation S-X is included in the consolidated financial
statements or is not required. Therefore, all schedules have been omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of its disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. The CEO and CFO also note
that subsequent to the date of their evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
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significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedules.
(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.
3.4 Amended By-Laws of American Enterprise Life, dated
September 11, 2002 filed electronically as Exhibit 6.3
to Post-Effective Amendment No. 10 to the Registration
Statement No. 333-92297, 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.
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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.
4.4(a) Form of Deferred Annuity Contract Data Pages (240343)
filed as Exhibit 4.1(a) to Post-Effective Amendment No.
10 to Registration Statement No. 333-92297, is
incorporated by reference.
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.
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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.
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.
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4.19 Form of Maximum Anniversary Value Death Benefit Rider
for the American Express New Solutions (SM) Variable
Annuity (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.
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.
-20-
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.1 to
Registration Statement No. 333-72777 on form N-4, filed
on or about July 8, 1999, is incorporated by reference.
4.26 Form of Traditional IRA or SEP-IRA Endorsement (form
272108), filed electronically as Exhibit 4.11 to
Post-Effective Amendment No. 10 to Registration
Statement No. 333-92297, is incorporated by reference.
4.27 Form of Roth IRA Endorsement (form 272109), filed
electronically as Exhibit 4.12 to Post-Effective
Amendment No. 10 to Registration Statement No.
333-92297, is incorporated by reference.
4.28 Form of Variable Annuity Unisex Endorsement (form
272110), filed electronically as Exhibit 4.13 to the
Post-Effective Amendment No. 10 to Registration
Statement No. 333-92297, is incorporated by reference.
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.
(b) Reports on Form 8-K filed in the fourth quarter of 2002 - None.
-21-
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
3/27/2003 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.
3/27/2003 By /s/ Gumer C. Alvero
Date ----------------------------------------
Gumer C. Alvero, Chairman of the
Board and Executive Vice President - Annuities
3/27/2003 By /s/ Douglas K. Dunning
-----------------------
Date Douglas K. Dunning, Director
3/27/2003 By /s/ Carol A. Holton
--------------------
Date Carol A. Holton, President
and Chief Executive Officer
3/27/2003 By /s/ Paul S. Mannweiler
----------------------
Date Paul S. Mannweiler, Director
3/27/2003 By /s/ Teresa J. Rasmussen
------------------------
Date Teresa J. Rasmussen, Vice President, General
Counsel and Secretary
3/27/2003 By /s/ Philip C. Wentzel
---------------------
Date Philip C. Wentzel, Vice President and
Controller
-22-
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
January 27, 2003
Minneapolis, Minnesota
-23-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share amounts)
ASSETS 2002 2001
Investments:
Available-for-sale:
Fixed maturities, at fair value (amortized cost: 2002, $5,105,431; 2001,
$3,282,893) $5,288,855 $3,302,753
Common stocks, at fair value (cost: 2002, $--; 2001, $172) -- 344
Mortgage loans on real estate 587,535 654,209
Other investments 2,381 2,400
Total investments 5,878,771 3,959,706
--------- ---------
Cash and cash equivalents 1,118,692 260,214
Amounts due from brokers -- 41,705
Other accounts receivable 1,584 1,812
Accrued investment income 56,448 45,422
Deferred policy acquisition costs 260,577 217,923
Deferred income taxes, net -- 32,132
Other assets 15,887 8,527
Separate account assets 694,771 708,240
------- -------
Total assets $8,026,730 $5,275,681
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities $5,411,938 $3,765,679
Universal life-type insurance 16 3
Policy claims and other policyholders' funds 9,050 2,286
Amounts due to brokers 985,081 225,127
Deferred income taxes, net 17,608 --
Other liabilities 82,453 64,517
Separate account liabilities 694,771 708,240
------- -------
Total liabilities 7,200,917 4,765,852
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 591,872 341,872
Accumulated other comprehensive income (loss), net of tax:
Net unrealized securities gains 104,259 13,021
Net unrealized derivative losses (13,234) (21,670)
------- -------
Total accumulated other comprehensive income (loss) 91,025 (8,649)
Retained earnings 139,916 173,606
------- -------
Total stockholder's equity 825,813 509,829
------- -------
Total liabilities and stockholder's equity $8,026,730 $5,275,681
========== ==========
See accompanying notes to consolidated financial statements.
-24-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(In thousands)
2002 2001 2000
Revenues
Net investment income $292,067 $271,718 $299,759
Contractholder charges 6,454 5,998 6,865
Mortality and expense risk fees 12,452 10,247 5,383
Net realized gain (loss) on investments 3 (89,920) 469
- ------- ---
Total revenues 310,976 198,043 312,476
------- ------- -------
Benefits and expenses
Interest credited on universal life-type insurance and
investment contracts 215,918 180,906 191,040
Amortization of deferred policy acquisition costs 48,469 45,494 47,676
Other operating expenses 98,766 35,579 35,308
------ ------ ------
Total benefits and expenses 363,153 261,979 274,024
------- ------- -------
(Loss) income before income taxes (52,177) (63,936) 38,452
Income tax (benefit) expense (18,487) (22,208) 14,087
------- ------- ------
Net (loss) income $(33,690) $(41,728) $ 24,365
======== ======== ========
See accompanying notes to consolidated financial statements.
-25-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2002
(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, 2000 $2,000 $282,872 ($69,753) $190,969 $406,088
Comprehensive income:
Net income - - - 24,365 24,365
Net unrealized holding gains on
available-for-sale securities arising during
the year, net of income tax expense of $4,812 - - 8,937 - 8,937
Reclassification adjustment for gains on
available-for-sale securities included in net
income, net of income tax expense 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
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)
Net unrealized holdings gains on
available-for-sale securities arising during
the year, net of income tax expense of $73,754 - - 136,972 - 136,972
Reclassification adjustment for gains on
available-for-sale securities included in net
loss, net of income tax expense of $30,811 - - (57,220) - (57,220)
Reclassification adjustment for losses on
derivatives included in net loss, 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 accompanying notes to consolidated financial statements.
-26-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2002
(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, 2001 $ 3,000 $341,872 $(8,649) $173,606 $509,829
Comprehensive income:
Net loss - - - (33,690) (33,690)
Net unrealized holding gains on
available-for-sale securities arising during
the year, net of deferred policy acquisition
costs of ($23,026) and income tax expense of
$51,599 - - 95,827 - 95,827
Reclassification adjustment for gains on
available-for-sale securities included in net
loss, net of income tax expense of $2,471 - - (4,589) - (4,589)
Reclassification adjustment for losses on
derivatives included in net loss, net of income
tax benefit of $4,542 - - 8,436 - 8,436
Other comprehensive income - - 99,674 - 99,674
Comprehensive income - - - - 65,984
Capital contribution - 250,000 - - 250,000
------- -------- ------- -------- --------
Balance, December 31, 2002 $ 3,000 $591,872 $91,025 $139,916 $825,813
======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
-27-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands)
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (33,690) $ (41,728) $ 24,365
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Change in accrued investment income (11,026) 9,519 1,735
Change in other accounts receivable 228 (945) (551)
Change in deferred policy acquisition costs, net (65,680) (19,301) (18,334)
Change in other assets (7,360) 31,411 (9,960)
Change in policy claims and other policyholders' funds 6,764 (7,009) (2,802)
Deferred income tax (benefit) provision (3,725) (34,562) 7,029
Change in other liabilities 17,936 6,553 (11,110)
Amortization of premium (accretion of discount), net 167 (689) 2,682
Net realized (gain) loss on investments (3) 89,920 (469)
Other, net 12,784 (7,796) (233)
------ ------ ----
Net cash (used in) provided by operating activities (83,605) 25,373 (7,648)
Cash flows from investing activities Held-to-maturity securities:
Maturities, sinking fund payments and calls - - 65,716
Sales - - 5,128
Available-for-sale securities:
Purchases (3,409,718) (1,446,157) (101,665)
Maturities, sinking fund payments and calls 500,348 379,281 171,297
Sales 1,092,923 803,034 176,296
Other investments:
Purchases (4,391) (8,513) (1,388)
Sales 64,988 71,110 65,978
Change in amounts due from brokers 41,705 (40,389) (1,316)
Change in amounts due to brokers 759,954 200,740 (828)
------- ------- ----
Net cash (used in) provided by investing activities $ (954,191) $ (40,894) $ 379,218
See accompanying notes to consolidated financial statements.
-28-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
(In thousands)
Cash flows from financing activities 2002 2001 2000
Activity related to universal life-type insurance
and investment contracts:
Considerations received $2,052,002 $ 779,626 $ 398,462
Surrenders and other benefits (621,646) (779,649) (926,220)
Interest credited to account balances 215,918 180,906 191,040
Capital contribution 250,000 60,000 -
------- ------- -------
Net cash provided by (used in) financing activities 1,896,274 240,883 (336,718)
--------- ------- --------
Net increase in cash and cash equivalents 858,478 225,362 34,852
Cash and cash equivalents at beginning of year 260,214 34,852 -
------- ------- -------
Cash and cash equivalents at end of year $1,118,692 $ 260,214 $ 34,852
========== ========= =========
Supplemental disclosures:
Income taxes paid $ 12,761 $ - $ 14,861
Interest on borrowings - 15 1,073
See accompanying notes to consolidated financial statements.
-29-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In 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. This subsidiary holds
mortgage loans on real estate and/or real estate investments.
The Company's principal product is deferred annuities, which are issued
primarily to individuals. It offers single premium and flexible premium
deferred annuities on both a fixed and variable dollar basis. Variable
universal life insurance is offered as well. The Company distributes its
products primarily through financial institutions and regional and/or
independent broker dealers.
The Company's fixed annuity contracts guarantee a minimum interest rate
during the accumulation period (the time before the annuity payments
begin). However, the Company has the option of paying a higher rate set at
its discretion, and has adopted a practice whereby any higher current rate
is guaranteed for a specified period. Under the Company's variable annuity
products, the purchaser may choose among general account and separate
account investment options. Within the general account, many contracts
allow the purchaser to select the number of years a fixed rate will be
guaranteed. If a guarantee term longer than one year is chosen, there may
be a market value adjustment applied if funds are withdrawn before the end
of that term. Separate account options include accounts investing in
equities, bonds, managed funds and/or short term securities.
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.
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.
-30-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
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, certain fee revenues from underlying nonproprietary mutual funds, and
charges for optional benefits 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, certain fee
revenues from underlying nonproprietary mutual funds, 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.
Investments - Fixed maturity and equity securities
All fixed maturity 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 the related deferred policy acquisition costs and income taxes.
Gains and losses are recognized in the results of operations upon
disposition of the securities using the specific identification method. In
addition, losses are also recognized when management determines that a
decline in a security's fair value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for fixed maturity securities include, but
are not limited to, issuer downgrade, default or bankruptcy. The Company
also considers the extent to which cost exceeds fair value, the duration of
time of that decline, and management's judgment about the issuer's current
and prospective financial condition. The charges are reflected in net
realized gain (loss) on investments within the Consolidated Statements of
Income.
Fair value of fixed maturity and equity securities 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), which are not readily marketable.
As a result, the carrying values of these structured investments are based
on estimated cash flow projections which require a significant degree of
management judgment as to default and recovery rates of the underlying
investments and, as such, are subject to change. The Company's CDO
investments are accounted for in accordance with Emerging Issues Task Force
(EITF) Issue 99-20 "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets".
Net investment income, which primarily consists of interest earned on fixed
maturity securities, is generally accrued as earned using the effective
interest method, which makes an adjustment of the yield for security
premiums, discounts and anticipated prepayments on mortgage backed
securities. Prepayment estimates are based on information received from
brokers who deal in mortgage-backed securities.
-31-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
Investments - Mortgage loans on real estate
Mortgage loans on real estate reflect principal amounts outstanding 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.
The reserve for losses 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. Additionally, the level of the reserve for losses considers
other factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the
reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
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, including, for example, direct sales
commissions, policy issue costs and other related costs have been deferred
on the sale of annuity contracts. The deferred acquisition costs (DAC) for
certain annuities are amortized as a percentage of the estimated gross
profits expected to be realized on the policies. DAC for other annuities
are amortized using the interest method.
Amortization of DAC requires the use of certain assumptions including
interest margins, persistency rates, maintenance expense levels and
customer asset value growth rates for variable annuities. The customer
asset value growth rate is the rate at which contract values are assumed to
appreciate in the future. This rate is net of asset fees, and anticipates a
blend of equity and fixed income investments. Management routinely monitors
a wide variety of trends in the business including comparisons of actual
and assumed experience. Management reviews and, where appropriate, adjusts
its assumptions with respect to customer asset value growth rates on a
quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality, interest margin and maintenance expense level assumptions, each
quarter. Unless management identifies a material deviation over the course
of the quarterly monitoring process, management reviews and updates these
DAC assumptions annually in the third quarter of each year.
-32-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change
in the required amortization percentage is applied retrospectively; an
increase in amortization percentage will result in an acceleration of DAC
amortization while a decrease in amortization percentage will result in a
deceleration of DAC amortization. The impact on results of operations of
changing assumptions with respect to the amortization of DAC can be either
positive or negative in any particular period, and is reflected in the
period that such changes are made. These adjustments are collectively
referred to as unlocking adjustments. During 2002, 2001, and 2000 unlocking
adjustments resulted in a net increase in amortization of $5,700, $1,900
and $1,500, respectively.
Guaranteed Minimum Death Benefits
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 that 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 the guaranteed amount annually. The
periodic adjustment of these contracts can generally only increase the
guaranteed amount. 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 when payable. Amounts expensed in 2002, 2001 and
2000 were $6,440, $821 and $40, respectively.
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, with an average rate of approximately
6.4%.
Reinsurance
Reinsurance premiums and benefits paid or provided are accounted for on a
basis consistent with that 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 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. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
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.
-33-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
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 and variable life contract
owners. The Company receives mortality and expense risk fees from the
separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of
the annuitants and beneficiaries from the mortality assumptions implicit in
the annuity contracts. The Company makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are in the benefit payment period.
The Company also guarantees that the rates at which administrative fees are
deducted from contract funds will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds
will not exceed contractual maximums. The Company also guarantees that the
death benefit will continue to be payable at the initial level regardless
of investment performance so long as minimum premium payments are made.
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 the
Company's CDO investments. 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 other
comprehensive income, depending on the instrument's designated use. The
adoption of SFAS No. 133 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 in 2001 to reclass all its
held-to-maturity investments to available-for-sale.
-34-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which superseded
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.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). The accounting
provisions and expanded disclosure requirements of FIN 46 are effective
immediately for VIEs created after January 31, 2003, and are effective for
reporting periods beginning after June 15, 2003, for VIEs created prior to
February 1, 2003. The Company continues to evaluate all relationships and
interests in entities that may be considered VIEs.
2. Investments
Fixed maturity and equity securities
The following is a summary of securities available-for-sale at December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Fixed maturity securities:
U.S. Government agency obligations $ 4,928 $ 389 $ - $ 5,317
State and municipal obligations 2,250 206 - 2,456
Corporate bonds and obligations 1,738,428 108,983 17,927 1,829,484
Structured investments 53,768 - 9,142 44,626
Mortgage and other asset-backed
securities 3,306,057 101,719 804 3,406,972
--------- ------- --- ---------
Total fixed maturity securities $5,105,431 $211,297 $27,873 $5,288,855
========== ======== ======= ==========
The amortized cost and fair value of fixed maturity securities at December
31, 2002 by contractual maturity are as follows:
Amortized Fair
Cost Value
Due within one year $ 148,358 $ 150,744
Due from one to five years 597,557 633,755
Due from five to ten years 887,404 941,358
Due in more than ten years 166,055 156,026
Mortgage and other asset-backed securities 3,306,057 3,406,972
--------- ---------
Total $5,105,431 $5,288,855
========== ==========
The timing of actual receipts will differ from contractual maturities
because issuers may have the right to call or prepay obligations.
-35-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
The following is a summary of securities available-for-sale at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Fixed maturity securities:
U.S. Government agency obligations $ 3,444 $ 130 $ 45 $ 3,529
State and municipal obligations 2,250 18 - 2,268
Corporate bonds and obligations 1,746,620 43,487 19,757 1,770,350
Structured investments 60,024 - 14,383 45,641
Mortgage and other asset-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
========== ======= ======= ==========
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.
At December 31, 2002 and 2001, bonds carried at $3,418 and $3,444,
respectively, were on deposit with various states as required by law.
At December 31, 2002, fixed maturity securities comprised approximately 90
percent of the Company's total investments. These securities are rated by
Moody's and Standard & Poor's (S&P), except for approximately $96 million
of securities which are rated by AEFC's internal analysts using criteria
similar to Moody's and S&P. Ratings are presented using S&P's convention
and if the two agencies' ratings differ, the lower rating is used. A
summary of fixed maturity securities, at fair value, by rating on December
31, is as follows:
Rating 2002 2001
AAA 65% 49%
AA 1 1
A 10 14
BBB 19 32
Below investment grade 5 4
--- ---
Total 100% 100%
=== ===
At December 31, 2002, approximately 97 percent of the securities rated AAA
were GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any
other issuer were greater than ten percent of stockholder's equity.
Available-for-sale securities were sold during 2002 with proceeds of
$1,092,923 and gross realized gains and losses of $38,067 and $16,970,
respectively. Available-for-sale securities were sold during 2001 with
proceeds of $803,034 and gross realized gains and losses of $17,879 and
$72,587, respectively. Available-for-sale securities were sold during 2000
with proceeds of $176,296 and gross realized gains and losses of $4,305 and
$1,748, respectively.
-36-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
During the years ended December 31, 2002, 2001, and 2000, the Company also
recognized losses of $15,029, $30,062, and $5,434, respectively due to
other-than-temporary impairments on structured investments and corporate
debt securities. These amounts are reflected in the net realized gain
(loss) on investments in the Consolidated Statements of Income. The 2001
realized losses and other-than temporary impairments include the effect of
the write-downs and sale of high-yield securities discussed below.
The net unrealized gain (loss) on available-for-sale securities as of
December 31, 2002 and 2001, was $183,424 and $20,032, respectively, with
the $163,392 change, net of taxes and deferred policy acquisition costs,
reflected as a separate component in accumulated other comprehensive income
for the year ended December 31, 2002. For the year ended December 31, 2001
the change in net unrealized losses on available-for-sale securities was an
increase of $115,567. For the year ended December 31, 2000 the change in
net unrealized losses on available-for-sale securities was a decrease of
$11,777.
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, and to write down
certain other investments. Within the Consolidated Statements of Income,
$83,663 of these losses are included in Net realized gains (losses) on
investments and $6,488 are included in Net investment income.
During 2001, the Company placed its rated CDO 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. As of December 31, 2002, the retained interests had a carrying
value of approximately $45,000, of which approximately $31,000 is
considered investment grade. 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. The retained
interests are accounted for in accordance with EITF Issue 99-20.
Fair values of fixed maturity and equity securities 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.
-37-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
Mortgage loans on real estate
At December 31, 2002, approximately 10 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, 2002 December 31, 2001
On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
South Atlantic $145,999 $ - $161,912 $1,940
Middle Atlantic 82,679 - 93,771 -
East North Central 102,483 - 114,292 -
Mountain 75,001 - 81,520 27
West North Central 99,790 - 106,432 -
New England 27,860 - 34,896 -
Pacific 25,759 - 31,836 -
West South Central 26,889 - 27,421 -
East South Central 7,156 - 6,361 -
-------- --------- -------- ------
593,616 - 658,441 1,967
Less reserves for losses 6,081 - 4,232 -
-------- --------- -------- ------
Total $587,535 $ - $654,209 $1,967
======== ========= ======== ======
December 31, 2002 December 31, 2001
On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
Department/retail stores $155,370 $ - $179,890 $ -
Apartments 132,567 - 143,430 1,940
Office buildings 171,298 - 185,925 -
Industrial buildings 67,776 - 72,745 -
Hotels/motels 35,421 - 37,569 -
Medical buildings 24,052 - 28,360 -
Nursing/retirement homes 2,707 - 2,787 -
Mixed use 4,425 - 7,735 27
-------- --------- -------- ------
593,616 - 658,441 1,967
Less reserves for losses 6,081 - 4,232 -
-------- --------- -------- ------
Total $587,535 $ - $654,209 $1,967
======== ========= ======== ======
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, 2002, 2001 and 2000, the Company's investment in impaired
loans was $11,705, $3,632 and $9,014, respectively, with related reserves
of $4,730, $835 and $500, respectively.
During 2002, 2001 and 2000, the average investment in impaired loans was
$9,352, $6,394, and $4,684, respectively.
-38-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
The Company recognized $349, $271 and $221 of interest income related to
impaired loans for the years ended December 31, 2002, 2001 and 2000,
respectively.
The following table presents changes in the reserve for mortgage loan
losses:
2002 2001 2000
Balance, January 1 $4,232 $3,304 $ 6,650
Provision for mortgage loan losses 1,849 928 (3,346)
----- --- ------
Balance, December 31 $6,081 $4,232 $ 3,304
====== ====== =======
Sources of investment income and realized gains (losses) on investments
Net investment income for the years ended December 31 is summarized as
follows:
2002 2001 2000
Income on fixed maturities $239,084 $211,920 $237,201
Income on mortgage loans on real estate 47,697 54,723 59,686
Other 8,874 6,498 6,829
----- ----- -----
295,655 273,141 303,716
Less investment expenses 3,588 1,423 3,957
----- ----- -----
Total $292,067 $271,718 $299,759
======== ======== ========
Net realized gains (losses) on investments for the years ended December 31
is summarized as follows:
2002 2001 2000
Fixed maturities $ 6,068 $(84,770) $(2,877)
Mortgage loans on real estate (5,744) (1,263) 3,346
Other (321) (3,887) -
------- -------- -------
Total $ 3 $(89,920) $ 469
======= ======== =======
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:
2002 2001 2000
Federal income taxes
Current $(15,096) $ 11,803 $ 6,170
Deferred (3,725) (34,562) 7,029
------ ------- -----
(18,821) (22,759) 13,199
State income taxes-current 334 551 888
--- --- ---
Income tax (benefit) expense $(18,487) $(22,208) $14,087
======== ======== =======
-39-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
3. Income taxes (continued)
Income tax (benefit) expense differs from that computed by using the
federal statutory rate of 35%. The principal causes of the difference in
each year are shown below:
2002 2001 2000
-------------------------- -------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
Federal income taxes based
on the statutory rate $(18,262) (35.0)% $(22,378) (35.0)% $13,458 35.0%
Tax-exempt interest and
dividend income (62) (0.1) (3) - (4) -
State taxes, net of federal
benefit 217 0.4 358 0.6 578 1.5
Other, net (380) (0.7) (185) (0.3) 55 0.1
---- ---- ---- ---- -- ---
Total income taxes $(18,487) (35.4)% $(22,208) (34.7)% $14,087 36.6%
======== ===== ======== ===== ======= ====
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: 2002 2001
Policy reserves $ 48,048 $46,263
Net unrealized losses on available-for-sale securities - 36,112
Investments, other 3,154 2,506
Other 6,049 5,939
----- -----
Total deferred income tax assets 57,251 90,820
------ ------
Deferred income tax liabilities:
Deferred policy acquisition costs 73,243 58,688
Net unrealized gains on available-for sale securities 1,616 -
------ ------
Total deferred income tax liabilities 74,859 58,688
------ ------
Net deferred income tax (liabilities) assets $(17,608) $32,132
======== =======
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.
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's statutory unassigned deficit aggregated $101,533 and $41,371
-40-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
4. Stockholder's equity (continued)
as of December 31, 2002 and 2001, respectively. Any dividend distributions
in 2003 would require approval by the Insurance Department of the State of
Indiana.
Statutory net loss for the years ended December 31 and statutory capital
and surplus as of December 31, are summarized as follows:
2002 2001 2000
Statutory net loss $(85,113) $(81,461) $(11,928)
Statutory capital and surplus 493,339 303,501 315,930
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 adopted the provisions of the revised manual without
modification. The revised manual changed, to some extent, prescribed
statutory accounting practices and resulted 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 no employees. Charges by IDS Life for the use of joint
facilities, technology support, marketing services and other services
aggregated $44,500, $34,681 and $45,191 for the years ended December 31,
2002, 2001 and 2000, 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.
The Company has entered into interest rate swaps and interest rate floors
with IDS Life. See Note 8 for more details.
Included in other liabilities at December 31, 2002 and 2001 is $1,506 and
$28,919, respectively, payable to 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, 2002 or 2001.
7. Commitments and contingencies
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 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's parent, IDS Life, was named a defendant in three
purported class-action lawsuits. A fourth lawsuit alleging the same
allegation was also filed in federal court. The Company is a named
defendant in one of the state filed lawsuits and the federal lawsuit. These
class action lawsuits
-41-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
7. Commitments and contingencies (continued)
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 reached an agreement in principle to
settle the four class action lawsuits, including the one described above.
It is expected the settlement will provide $215,000 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. The
settlement received court approval. Implementation of the settlement
commenced October 15, 2001 and is substantially complete. Claim review
payments have been made. Numerous individuals opted out of the settlement
described above and therefore did not release their claims against AEFC and
its subsidiaries. Some of these class members who opted out were
represented by counsel and presented separate claims to AEFC and 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.
At December 31, 2002, the Company had no commitments to purchase
investments or 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 by SFAS No. 133, derivative instruments
that are designated and qualify as hedging instruments are classified as
cash flow hedges, fair value hedges, or hedges 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.
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.
The Company enters into interest rate swaps, floors and caps to manage the
Company's interest rate risk. Specifically, the Company uses the
instruments to protect the margin between interest rates earned on
investments and the interest rates credited to related annuity contract
holders. The interest rate swaps and floors are exclusively with IDS Life.
The values of derivative financial instruments are based on market values,
dealer quotes or pricing models. The interest rate swaps had carrying
amounts of ($72,512) and ($28,868) at December 31, 2002 and 2001,
respectively, and are included in Other liabilities. The interest rate
floors had carrying amounts of $15,852 and $7,020 at December
-42-
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
8. Derivative financial instruments (continued)
31, 2002 and 2001, respectively, and are included in Other assets. The
interest rate caps had carrying amounts of $8 and $333 as of December 31,
2002 and 2001, respectively, and are included in Other assets. The Company
incurred ($56,752) and ($5,190) in derivative losses in 2002 and 2001,
respectively, which are included in Other operating expenses. The increase
in derivative losses in 2002 is primarily due to the impact that decreasing
interest rates had on the market value of the Company's interest rate
swaps. The derivatives expire at various dates through 2006.
9. Fair values of financial instruments
The Company discloses fair value information for 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 DAC, 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.
2002 2001
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
Fixed maturities $5,288,855 $5,288,855 $3,302,753 $3,302,753
Common stocks - - 344 344
Mortgage loans on real estate 587,535 656,200 654,209 684,566
Derivatives 15,852 15,852 7,354 7,354
Cash and cash equivalents 1,118,692 1,118,692 260,214 260,214
Separate account assets 694,771 694,771 708,240 708,240
Financial Liabilities
Future policy benefits for fixed annuities $5,388,765 $5,256,677 $3,745,846 $3,668,111
Derivatives 73,058 73,058 28,868 28,868
Separate account liabilities 694,248 671,315 707,959 685,607
At December 31, 2002 and 2001, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $23,173 and $19,833, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 2002
and 2001. 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 2002 and 2001.
At December 31, 2002 and 2001, 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 $523 and
$281, respectively.
-43-