UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
227 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___X___ No _______
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _______ No ___X___
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE PERMITTED
ABBREVIATED NARRATIVE DISCLOSURE.
-1-
IDS LIFE INSURANCE COMPANY
FORM 10-Q
For the Quarter Ended March 31, 2003
Table of Contents
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and
December 31, 2002 3 - 4
Consolidated Statements of Income for the
three months ended March 31, 2003
and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002
(unaudited) 6 - 7
Notes to Consolidated Financial Statements
(unaudited) 8 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION 19 - 23
SIGNATURES 24
EXHIBITS 25 - 30
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2003 2002
--------------- ---------------
ASSETS (unaudited)
Investments:
Available-for-sale:
Fixed maturity investments, at fair value (Amortized
cost: 2003, $25,268,162; 2002, $23,209,226) $26,156,174 $24,052,104
Common stocks, at fair value (Cost: 2003,
$19; 2002, $19) 21 21
Mortgage loans on real estate 3,345,539 3,417,651
Policy loans 581,648 597,144
Other investments 978,898 752,558
----------- -----------
Total investments 31,062,280 28,819,478
Cash and cash equivalents 419,687 4,424,061
Amounts recoverable from reinsurers 660,577 633,510
Amounts due from brokers 1,301,169 25,835
Other accounts receivable 48,911 56,245
Accrued investment income 280,245 271,261
Deferred policy acquisition costs 3,371,291 3,309,783
Other assets 116,659 117,788
Separate account assets 21,262,333 21,980,674
----------- -----------
Total assets $58,523,152 $59,638,635
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(continued)
March 31, December 31,
2003 2002
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY (unaudited)
Liabilities:
Future policy benefits:
Fixed annuities $24,629,156 $23,411,314
Universal life-type insurance 3,539,969 3,515,010
Traditional life insurance 251,369 247,441
Disability income and
long-term care insurance 1,520,294 1,466,171
Policy claims and other
policyholders' funds 79,432 85,400
Amounts due to brokers 1,556,805 3,342,989
Deferred income taxes 203,688 182,059
Other liabilities 415,473 463,326
Separate account liabilities 21,262,333 21,980,674
----------------- -----------------
Total liabilities 53,458,519 54,694,384
----------------- -----------------
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 1,088,327 1,088,327
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 524,118 497,319
Net unrealized derivative gains 1,705 764
----------------- -----------------
Total accumulated other comprehensive income 525,823 498,083
Retained earnings 3,447,483 3,354,841
----------------- -----------------
Total stockholder's equity 5,064,633 4,944,251
----------------- -----------------
Total liabilities and stockholder's equity $58,523,152 $59,638,635
================= =================
See accompanying notes to consolidated financial statements.
-4-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(unaudited)
Three months ended
March 31,
2003 2002
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Revenues:
Premiums:
Traditional life insurance $15,612 $15,912
Disability income and
long-term care insurance 69,191 65,385
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Total premiums 84,803 81,297
Policyholder and contractholder charges 128,899 125,051
Management and other fees 87,055 111,170
Net investment income 396,127 399,901
Net realized loss on investments 22,119 (4,724)
------------- ------------
Total revenues 719,003 712,695
------------- ------------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 10,432 7,195
Universal life-type insurance
and investment contracts 56,260 46,391
Disability income and
long-term care insurance 13,706 12,168
Increase in liabilities for
future policy benefits:
Traditional life insurance 2,022 1,789
Disability income and
long-term care insurance 30,517 29,074
Interest credited on universal life-type
insurance and investment contracts 299,095 279,280
Amortization of deferred policy
acquisition costs 75,400 75,172
Other insurance and operating expenses 115,877 94,730
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Total benefits and expenses 603,309 545,799
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Income (loss) before income tax expense (benefit) 115,694 166,896
Income tax expense (benefit) 19,506 38,666
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Net income (loss) $96,188 $128,230
============= ============
See accompanying notes to consolidated financial statements.
-5-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three months ended
March 31,
2003 2002
----------- ----------
Cash flows from operating activities:
Net income $96,188 $128,230
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Policy loans, excluding universal
life-type insurance:
Issuance (7,662) (8,431)
Repayment 11,223 12,139
Change in amounts recoverable from reinsurers (27,067) (30,912)
Change in other accounts receivable 7,334 (21,711)
Change in accrued investment income (5,635) 35,205
Change in deferred policy
acquisition costs, net (63,487) (58,053)
Change in liabilities for future policy
benefits for traditional life,
disability income and
long-term care insurance 58,051 60,421
Change in policy claims and other
policyholders' funds (5,968) 27,075
Deferred income taxes 6,647 19,854
Change in other assets 1,127 363
Change in other liabilities (47,853) (13,312)
Amortization of premium, net 45,308 1,266
Net realized (gain) loss on investments (22,119) 4,724
Contractholder charges, non-cash (60,358) (56,306)
Other, net (8,743) (13,703)
------------ ----------
Net cash (used in) provided by operating
activities $(23,014) $86,849
------------- ----------
See accompanying notes to consolidated financial statements.
-6-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(continued)
Three months ended
March 31,
2003 2002
---------------- ------------------
Cash flows from investing activities:
Available-for-sale investments:
Purchases $(7,796,926) $(3,031,142)
Maturities, sinking fund payments and calls 1,067,997 859,125
Sales 4,670,855 2,029,299
Other investments, excluding policy loans:
Purchases (310,575) (151,296)
Sales 139,734 138,556
Change in amounts due from broker (1,275,334) 46,804
Change in amounts due to broker (1,786,184) (1,138,054)
---------------- -----------------
Net cash used in investing activities (5,290,433) (1,246,708)
---------------- ----------------
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 1,301,427 663,318
Surrenders and death benefits (297,364) (563,078)
Interest credited to account balances 299,094 279,280
Universal life-type insurance policy loans:
Issuance (19,227) (18,069)
Repayment 25,143 29,388
---------------- -----------------
Net cash provided by financing activities 1,309,073 390,839
---------------- -----------------
Net decrease in cash and cash equivalents (4,004,374) (769,020)
Cash and cash equivalents at beginning of period 4,424,061 1,150,251
---------------- -----------------
Cash and cash equivalents at end of period $ 419,687 $ 381,231
================ =================
See accompanying notes to consolidated financial statements.
-7-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements in the Annual Report on Form
10-K of IDS Life Insurance Company (the Company) for the year ended
December 31, 2002. Certain reclassifications of prior period amounts
have been made to conform to the current presentation.
The interim financial information in this report has not been audited.
In the opinion of management, all adjustments necessary for a fair
presentation of the consolidated financial position and the
consolidated results of operations for the interim periods have been
made. All adjustments made were of a normal, recurring nature. Results
of operations reported for interim periods are not necessarily
indicative of results for the entire year.
Recently Issued Accounting Standards
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 for VIEs are
effective at inception 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. An entity is subject to
consolidation according to the provisions of FIN 46, if, by design,
either (i) the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional
subordinated financial support from other parties, or (ii) as a group,
the holders of the equity investment at risk lack: (a) direct or
indirect ability to make decisions about an entity's activities; (b)
the obligation to absorb the expected losses of the entity if they
occur; or (c) the right to receive the expected residual return of the
entity if they occur. In general, FIN 46 will require a VIE to be
consolidated when an enterprise has a variable interest that will
absorb a majority of the VIE's expected losses or receive a majority of
the VIE's expected residual return.
Implementation had no effect on results of operations for the first
quarter of 2003. It is likely that the Company will consolidate and
disclose additional information about VIEs when FIN 46 becomes fully
effective in the third quarter of 2003. The entities primarily
impacted by FIN 46 relate to structured investments, including
collateralized debt obligations (CDOs) and secured loan trusts (SLTs),
which are owned by the Company.
-8-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
(unaudited)
1. Basis of Presentation (continued)
The CDO entities contain debt issued to investors which is
non-recourse to the Company and solely supported by portfolios of
high-yield bonds and loans. From time-to-time the Company invests in
the residual and rated debt tranches of the CDO structures that are
either managed by a related party or a third-party. The SLTs provide
returns to investors primarily based on the performance of an
underlying portfolio of high-yield loans which are managed by a
related party. The aggregate fair value of bonds and loans related to
structures owned by the Company and managed by a related party
approximates $4.8 billion at March 31, 2003.
The potential consolidation of these and other VIE entities will
likely result in a cumulative effect of accounting change that will
reduce reported net income at full adoption in the third quarter of
2003 to the extent that newly consolidated liabilities exceed newly
consolidated assets. FIN 46 will likely also impact results of
operations each reporting period thereafter. Take together, over the
lives of the structures subject to FIN 46 through their maturity, the
Company's maximum cumulative exposure to pre-tax loss as a result of
its investment in these entities is represented by the carrying values
at March 31, 2003. These carrying values include CDO residual tranches
having an adjusted cost basis of $6,307 and SLTs having an adjusted
cost basis of $649,589 (see the Company's Liquidity and Capital
Resources section of the Management's Discussion and Analysis for
further discussion of all the Company's CDO and SLT holdings). The
application of FIN 46 for CDOs and SLTs will have no cash flow effect
on the Company.
The Company continues to evaluate other relationships and interests in
entities that may be considered VIEs, including affordable housing
investments. The impact of adopting FIN 46 on the Consolidated
Financial Statements is still being reviewed.
2. Investment Securities
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were
$138,057 and $36,831 for the three months ended March 31, 2003 and
2002, respectively. Gross realized losses on sales of securities
classified as Available-for-Sale were ($46,570) and ($26,370) for the
same periods. The Company also recognized other-than-temporary
impairment losses on Available-for-Sale securities of ($68,101) and
($3,891) for the three months ended March 31, 2003 and 2002,
respectively.
-9-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
(unaudited)
3. Comprehensive Income
Comprehensive income is defined as the aggregate change in
stockholders' equity, excluding changes in ownership interests. It is
the sum of net income and changes in unrealized gains or losses on
available-for-sale securities and unrealized gains or losses on
derivatives.
Total comprehensive income was $123,928 and for the three months ended
March 31, 2003 compared to a total comprehensive net loss of $5,135 for
the three months ended March 31, 2002. The difference between net
income and total comprehensive income for the three months ended March
31, 2003 and 2002 is primarily the result of net unrealized gains and
losses on available-for-sale securities that arose during the periods.
4. Taxes and Interest
Cash paid for income taxes totaled $43,731and $50,329 for the three
months ended March 31, 2003 and 2002, respectively. Cash paid for
interest on borrowings totaled $785 and $3,031 for the three months
ended March 31, 2003 and 2002, respectively.
5. Commitments and contingencies
Commitments to fund mortgage loan investments in the ordinary course of
business at March 31, 2003 aggregated $48,400.
The maximum amount of life insurance risk retained by the Company is
$750 on any policy insuring a single life and $1,500 on any policy
insuring a joint-life combination. The Company generally retains 10% of
the mortality risk on new life insurance policies. Risk not retained is
reinsured with other life insurance companies. Risk on universal life
and variable universal life policies is reinsured on a yearly renewable
term basis. Risk on term insurance and long-term care policies is
reinsured on a coinsurance basis. The Company retains all accidental
death benefit, disability income and waiver of premium risk.
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business. 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.
-10-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
(unaudited)
5. Commitments and contingencies (continued)
The majority of the variable annuity contracts offered by the Company
contain guaranteed minimum death benefit (GMDB) provisions. The
standard guaranteed minimum death benefit in the current "flagship"
annuity offered by the Company, American Express Retirement Advisor
Advantage Variable Annuity, provides that if the contract owner and
annuitant are age 80 or younger on the date of death, the beneficiary
will receive the greatest of (i) the contract value on the date of
death, (ii) purchase payments minus adjusted partial surrenders, or
(iii) the contract value as of the most recent sixth contract
anniversary, plus purchase payment and minus adjusted partial
surrenders since that anniversary.
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 for the three months ended March 31, 2003 and
2002, were $12 million and $6 million, respectively. The Company also
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. To date, the Company has not expensed any amount
related to GMIBs. Management believes that an anticipated American
Institute of Certified Public Accountants (AICPA) Statement of
Position, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate
Accounts" (the "SOP"), would require the recording of a liability for
the expected net costs associated with these guarantees under certain
circumstances. The impact of the SOP, which is currently projected to
be finalized in the second quarter of 2003, is currently being
evaluated.
The Company's life and annuity products all have minimum interest rate
guarantees in their fixed accounts. These guarantees range from 3% to
5%. To the extent interest rates decline below the minimum, the
Company's spread would be negatively affected.
The IRS routinely examines the Company's federal income tax returns and
is currently conducting an audit for the 1993 through 1996 tax years.
Management does not believe there will be a material adverse effect on
the Company's consolidated financial position as a result of these
audits.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IDS Life Insurance Company ("the Company") is a stock life insurance
company organized under the laws of the State of Minnesota. The Company
is a wholly owned subsidiary of American Express Financial Corporation
("AEFC") and serves all states except New York. AEFC is a wholly-owned
subsidiary of American Express Company. The Company distributes its
fixed and variable insurance and annuities products exclusively through
the American Express Financial Advisors' ("AEFA") retail sales force.
The Company has four wholly owned subsidiaries that distribute their
products through the various AEFA distribution channels. IDS Life
Insurance Company of New York ("IDS Life of New York") is a wholly
owned subsidiary of the Company and serves New York State residents.
IDS Life of New York distributes its fixed and variable insurance and
annuity products exclusively through AEFA's retail sales force. The
Company also owns American Enterprise Life Insurance Company ("American
Enterprise Life"), an Indiana corporation, which primarily issues fixed
and variable annuity contracts for sale through non-affiliated
representatives and agents of third party distributors. American
Centurion Life Assurance Company ("American Centurion Life") is also a
subsidiary of the Company. American Centurion Life offers fixed and
variable annuities to American Express(R) Cardmembers and others in New
York, as well as fixed and variable annuities for sale through
non-affiliated representatives and agents of third party distributors,
in New York. The Company owns American Partners Life Insurance Company
("American Partners Life"), an Arizona corporation which offers fixed
and variable annuity contracts to American Express(R) Cardmembers and
others who reside in states other than New York. The Company also owns
IDS REO 1, LLC, IDS REO 2, LLC and American Express Corporation. These
subsidiaries hold real estate, mortgage loans on real estate and/or
affordable housing investments.
The Company follows accounting principles generally accepted in the
United States (GAAP).
Results of Operations for the Three Months Ended March 31, 2003 and
2002
Net income was $96 million for the three months ended March 31, 2003,
compared to $128 million in 2002. The decrease in net income was
primarily due to increases in benefit expenses, including guaranteed
minimum death benefits (GMDB), interest credited to universal life-type
insurance and investment contracts and increased other insurance and
operating expenses. The net realized gain on investments was partially
offset by lower management and other fees, which primarily reflects
continued weakness in equity markets, which contributed to lower
separate account asset balances in 2003.
Premiums and investment contract deposits increased to $2.1 billion
for the three months ended March 31, 2003, compared to $1.5 billion
for the three months ended March 31, 2002. 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.
-12-
Management and other fees decreased to $87 million for the three
months ended March 31, 2003 compared with $111 million for the three
months ended March 31, 2002. This was primarily due to a decrease in
average value of separate account assets outstanding, resulting
primarily from continued weakness in equity markets. The Company
provides investment management services for many of the mutual funds,
which are used as investment options for variable annuities and
variable life insurance. The Company also receives a mortality and
expense risk fee from the separate accounts based on asset levels.
Net investment income decreased slightly to $396 million for the three
months ended March 31, 2003 compared to $400 million for the three
months ended March 31, 2002. This decrease was primarily due to lower
portfolio yields in 2003.
Net realized gain (loss) on investments was $22 million for the three
months ended March 31, 2003 compared to ($5 million) for the three
months ended March 31, 2002. For the quarter ended March 31, 2003, $138
million of total investment gains, primarily resulting from sales of
mortgage-backed securities where the Company repositioned its portfolio
to improve its prepayment risk profile, were partially offset by $115
million of impairments and losses, the majority of which were
airline-related exposures. Included in these total investment gains and
losses are $138 million of gross realized gains and $47 million of
gross realized losses from sales of securities, as well as $68 million
of other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Total benefits and expenses were $603 million for the three months
ended March 31, 2003, an increase of 11 percent from the same period in
2002. The largest component of benefits and expenses, interest credited
on universal life-type insurance and investment contracts, increased 7
percent to $299 million. This was primarily due to increased interest
credited to annuity products due to higher accumulation values in
force, partially offset by lower crediting rates. Total death and other
benefits increased $15 million. This increase is primarily due to
unfavorable death claim experience and higher guaranteed minimum death
benefit expenses.
Amortization of deferred policy acquisition costs (DAC) remained
unchanged at $75 million for the three months ended March 31, 2003 and
2002.
Other insurance and operating expenses increased 22 percent, primarily
due to the impact of fewer capitalized costs, which are the result of
the comprehensive review of the DAC-related practices completed during
the third quarter of 2002.
Deferred Policy Acquisition Costs
The costs of acquiring new business, including for example, direct
sales commissions, related sales incentive bonuses and awards,
underwriting costs, policy issue costs and other related costs, have
been deferred on the sale of insurance and annuity contracts. The
deferred policy acquisition costs (DAC) for
-13-
universal life and variable universal life insurance and certain
installment 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. For traditional
life, disability income and long-term care insurance policies, the
costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including
interest margins, mortality rates, persistency rates, maintenance
expense levels and customer asset value growth rates for variable
products. 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 rates, mortality rate, interest margin and maintenance
expense level assumptions each quarter. Unless management identifies a
material deviation over the course of the quarterly monitoring,
management reviews and updates these DAC assumptions annually in the
third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits
or portion of interest margins used to amortize DAC 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.
DAC of $3.4 billion was on the Company's balance sheet at March 31,
2003. This balance consisted of $1.7 billion related to life and health
insurance and $1.7 billion related to annuities.
Impact of Recent Market-Volatility on Results of Operations
Various aspects of the Company business are impacted by equity market
levels and other market-based events. Three areas in particular involve
DAC, asset management fees and structured investments. The direction
and magnitude of the changes in equity markets can increase or decrease
DAC expense levels and asset management fees and correspondingly affect
results of operations in any particular period. Similarly, the value of
the Company's structured investment portfolio is impacted by various
market factors. Persistency of, or increases in, bond and loan default
rates, among other factors, could result in negative adjustments to the
market values of these investments in the future, which would adversely
impact results of operations. See Liquidity and Capital Resources
section of Management Discussion and Analysis for a further discussion
of structured investments.
-14-
Another area impacted by market-based events is guaranteed minimum
death benefit (GMDB). The majority of the variable annuity contracts
offered by the Company contain GMDB provisions. The standard
guaranteed minimum death benefit in the current "flagship" annuity
offered by the Company, American Express Retirement Advisor Advantage
Variable Annuity, provides that if the contract owner and annuitant
are age 80 or younger on the date of death, the beneficiary will
receive the greatest of (i) the contract value on the date of death,
(ii) purchase payments minus adjusted partial surrenders, or (iii) the
contract value as of the most recent sixth contract anniversary, plus
purchase payment and minus adjusted partial surrenders since that
anniversary.
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 for the three months ended March 31, 2003 and
2002, were $12 million and $6 million, respectively. The Company also
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. To date, the Company has not expensed any amount
related to GMIBs. Management believes that an anticipated American
Institute of Certified Public Accountants (AICPA) Statement of
Position, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate
Accounts" (the "SOP"), would require the recording of a liability for
the expected net costs associated with these guarantees under certain
circumstances. The impact of the SOP, which is currently projected to
be finalized in the second quarter of 2003, is currently being
evaluated.
The Company's life and annuity products all have minimum interest rate
guarantees in their fixed accounts. These guarantees range from 3% to
5%. To the extent interest rates decline below the minimum, the
Company's spread would be negatively affected.
Liquidity and Capital Resources
The liquidity requirements of the Company are generally met by funds
provided by premiums, investment income, proceeds from sales of
investments as well as maturities, periodic repayments of investment
principal and capital contributions. Maturities of the Company's
investments is largely matched with the expected future payments of
insurance and annuity obligations.
The primary uses of funds are policy benefits, commissions and
operating expenses, policy loans, dividends and investment purchases.
-15-
The Company has an available line of credit with AEFC of $200 million
($100 million committed and $100 million uncommitted). This line of
credit is used strictly as a short-term source of funds. There were no
borrowings outstanding at March 31, 2003. The Company also uses reverse
repurchase agreements for short-term liquidity needs. Outstanding
reverse repurchase agreements totaled $10 million at March 31, 2003.
At March 31, 2003, based on amortized costs, approximately 6 percent of
the Company's investments in fixed maturities were
below-investment-grade bonds, compared to 5 percent at March 31, 2002.
These investments may be subject to a higher degree of risk than the
investment grade issues because of the borrowers' generally greater
sensitivity to adverse economic conditions, such as recession or
increasing interest rates, and in certain instances the lack of an
active secondary market. Expected returns on below-investment-grade
bonds reflect consideration of such factors. The Company has identified
those fixed maturities for which a decline in fair value is determined
to be other than temporary, and has written them down to fair value
with a charge to earnings. Additionally, the Company had a reserve for
losses on mortgage loans of $39 million at March 31, 2003.
The Company holds investments in collateralized debt obligations (CDOs)
and secured loan trusts (SLTs) (backed by high-yield bonds and bank
loans), some of which are also managed by a related party. The Company
invested in CDOs and SLTs as part of its investment strategy in order
to pay a competitive rate to contractholders' accounts. The Company's
exposure as an investor is limited solely to its aggregate investment
in the CDOs and SLTs, and it has no obligations or commitments,
contingent or otherwise, that could require any further funding of such
investments. As of March 31, 2003, the carrying values of the CDO
residual tranches and SLT notes were $6 million and $650 million,
respectively. CDOs and SLTs are illiquid investments. As an investor in
the residual tranche of CDOs, the Company's return correlates to the
performance of portfolios of high-yield bonds and/or bank loans. As a
noteholder of SLTs, the Company's return is based on a reference
portfolio of loans. The carrying value of the CDO and SLT investments
and the Company's projected return are based on discounted cash flow
projections that require a significant degree of management judgment as
to assumptions primarily related to default and recovery rates of the
high-yield bonds and/or bank loans either held directly by the CDO or
in the reference portfolio of the SLT and, as such, are subject to
change. Generally, the SLTs are structured such that the principal
amount of the loans in the reference portfolio may be up to five times
that of the par amount of the notes held by the Company. Although the
exposure associated with the Company's investment in CDOs and SLTs is
limited to the carrying value of such investments, they are volatile
investments and have a substantial degree of risk associated with them
because the amount of the initial value of the loans and/or other debt
obligations in the related portfolios is significantly greater than the
Company's exposure. Deterioration in the value of the high-yield bonds
or bank loans would likely result in deterioration of the Company's
investment return with respect to the relevant CDO or SLT, as the case
may be. In the event of significant deterioration of a portfolio, the
relevant CDO or SLT may be subject to early liquidation, which could
result in further
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deterioration of the investment return or, in severe cases, loss of the
carrying amount.
During 2001, the Company placed a majority of its rated CDO securities
and related accrued interest, as well as a relatively minor amount of
other liquid securities, (collectively referred to as transferred
assets), having an aggregate book value of $675 million, into a
securitization trust. In return, the Company received $90 million in
cash (excluding transaction expenses) relating to sales to unaffiliated
investors and retained interests in the trust with allocated book
amounts aggregating $586 million. As of March 31, 2003, the retained
interests had a carrying value of $553 million, of which $386 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.
OTHER REPORTING MATTERS
Accounting Developments
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46), which addresses consolidation by business enterprises of
variable interest entities (VIEs). Certain disclosures are required for
financial statements issued after January 31, 2003 and are addressed in
Note 1 to the Consolidated Financial Statements. The impact of adopting
FIN 46 on the Consolidated Financial Statements is still being
reviewed.
In April 2003, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." This Statement amends and
clarifies accounting for derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. The Statement
is effective for contracts entered into or modified and hedging
relationships designated after June 30, 2003, and to certain
preexisting contracts. The Company is currently evaluating the impact
of adopting SFAS No. 149 on the Consolidated Financial Statements.
The AICPA has issued a proposed Statement of Position, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts." See the Company's
Impact of Recent Market-Volatility on Results of Operations section of
the Management Discussion and Analysis for further discussion.
Forward-Looking Statements
Certain statements in the management's discussion and analysis of
consolidated financial condition and results of operations section of
this Form 10-Q contain forward-looking statements which are subject to
risks and uncertainties that could cause results to differ materially
from such statements. The words "believe,"
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"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, management 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
the value of certain death benefit features on variable annuity
contracts; the affect of assessments and other surcharges for guaranty
funds; the response of reinsurance companies under reinsurance
contracts; the impact of reinsurance rates and the availability and
adequacy of reinsurance to protect the Company against losses;
negative changes in the Company's and its subsidiaries' 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 and SLTs
that the Company invests in which could affect both the Company's
balance sheet and results of operations; and outcomes of litigation.
ITEM 4. 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 significantly affect
the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In November 2002, a suit, captioned HARITOS ET AL. V. AMERICAN
EXPRESS FINANCIAL CORPORATION AND IDS LIFE INSURANCE COMPANY,
was filed in the United States District Court for the District
of Arizona. The suit is filed by plaintiffs who purport to
represent a class of all persons that have purchased financial
plans from AEFA advisors during an undefined class period.
Plaintiffs allege that the sale of the plans violate the
Investment Advisors Act of 1940. The suit seeks an unspecified
amount of damages, rescission and injunction relief. The
Company believes that it has meritorious defenses to this suit
and intends to defend this case vigorously.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Copy of Certificate of Incorporation of IDS Life Insurance
Company filed electronically as Exhibit 3.1 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company
filed electronically as Exhibit 3.2 to Post-Effective
Amendment No. 5 to Registration Statement No. 33-28976 is
incorporated herein by reference.
3.3 Copy of the Amended and Restated By-laws of IDS Life
Insurance Company filed electronically as Exhibit 3.2 to
Post-Effective Amendment No. 17 to Registration Statement
No.33-28976 is incorporated herein by reference.
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PART II - OTHER INFORMATION (continued)
3.4 Copy of Resolution of the Board of Directors of IDS Life
Insurance Company, dated May 5, 1989, establishing IDS Life
Account MGA filed electronically as Exhibit 3.3 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.1 Copy of Non-tax qualified Group Annuity Contract, Form
30363C, filed electronically as Exhibit 4.1 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.2 Copy of Non-tax qualified Group Annuity Certificate, Form
30360C, filed electronically as Exhibit 4.2 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity
Contract filed electronically as Exhibit 4.3 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity
Certificate filed electronically as Exhibit 4.4 to
Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C,
filed electronically as Exhibit 4.5 to Post-Effective
Amendment No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.6 Copy of Tax qualified Group Annuity Certificate, Form
30368C, filed electronically as Exhibit 4.6 to
Post-Effective Amendment No. 10 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed
electronically as Exhibit 4.7 to Post-Effective Amendment
No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed
electronically as Exhibit 4.8 to Post-Effective Amendment
No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
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PART II - OTHER INFORMATION (continued)
4.9 Copy of Non-tax qualified Individual Annuity Contract, Form
30365D, filed electronically as Exhibit 4.9 to
Post-Effective Amendment No. 10 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.10 Copy of Endorsement No. 30379 to the Individual Annuity
Contract, filed electronically as Exhibit 4.10 to Post
Effective Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.11 Copy of Tax qualified Individual Annuity Contract, Form
30370C, filed electronically as Exhibit 4.11 to
Post-Effective Amendment No. 10 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed
electronically as Exhibit 4.12 to Post-Effective Amendment
No. 10 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.13 Copy of Endorsement No. 33007 filed electronically as
Exhibit 4.13 to Post-Effective Amendment No. 12 to
Registration Statement No. 33-28976 is incorporated herein
by reference.
4.14 Copy of Group Annuity Contract, Form 30363D, filed
electronically as Exhibit 4.1 to Post-Effective Amendment
No. 2 to Registration Statement No. 33-50968 is incorporated
herein by reference.
4.15 Copy of Group Annuity Certificate, Form 30360D, filed
electronically as Exhibit 4.2 to Post-Effective Amendment
No. 2 to Registration Statement No. 33-50968 is incorporated
herein by reference.
4.16 Form of Deferred Annuity Contract, Form 30365E, filed
electronically as Exhibit 4.3 to Post-Effective Amendment
No. 2 to Registration Statement No. 33-50968 is incorporated
herein by reference.
4.17 Copy of Group Deferred Variable Annuity Contract, Form
34660, filed electronically as Exhibit 4.1 to Post-Effective
Amendment No. 2 to Registration Statement No. 33-48701 is
incorporated herein by reference.
4.18 Copy of Non-tax qualified Group Annuity Contract, Form
33111, filed electronically as Exhibit 4.1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
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PART II - OTHER INFORMATION (continued)
4.19 Copy of Non-tax qualified Group Annuity Certificate, Form
33114, filed electronically as Exhibit 4.2 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.20 Copy of Tax qualified Group Annuity Contract, Form 33112,
filed electronically as Exhibit 4.3 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115,
filed electronically as Exhibit 4.4 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.22 Copy of Group IRA Annuity Contract, Form 33113, filed
electronically as Exhibit 4.5 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed
electronically as Exhibit 4.6 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.24 Copy of Non-tax qualified Individual Annuity Contract, Form
30484, filed electronically as Exhibit 4.7 to Post-Effective
Amendment No. 1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.25 Copy of Tax qualified Individual Annuity Contract, Form
30485, filed electronically as Exhibit 4.8 to Post-Effective
Amendment No. 1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.26 Copy of Individual IRA Contract, Form 30486, filed
electronically as Exhibit 4.9 to Post-Effective Amendment
No. 1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.27 Form of Traditional IRA or SEP-IRA Annuity Endorsement, Form
131061, filed electronically as Exhibit 4.14 to
Post-Effective Amendment No. 17 to Registration Statement
No. 33-28976 is incorporated herein by reference.
4.28 Form of Roth IRA Annuity Endorsement, Form 131062, filed
electronically as Exhibit 4.15 to Post-Effective Amendment
No. 17 to Registration Statement No. 33-28976 is
incorporated herein by reference.
21. Copy of List of Subsidiaries filed electronically as Exhibit
22 to Post-Effective Amendment No. 8 to Registration
Statement No. 33-28976 is incorporated herein by reference.
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PART II - OTHER INFORMATION (continued)
(b) Reports on Form 8-K.
Form 8-K, filed April 21, 2003, Item 5, reporting that on
April 15, 2003 IDS Life Insurance Company appointed Jeryl A.
Millner Vice President and Controller. Ms. Millner will act
as the Company's Principal Accounting Officer. She succeeds
Philip C. Wentzel, who was recently appointed Vice
President, Business Planning & Analysis for American Express
Financial Corporation, the Company's parent. John T.
Sweeney, Executive Vice President - Finance for the Company
will act as the Company's Principal and Chief Financial
Officer.
Item 7. Exhibits 99.1 and 99.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
Exhibits 99.3 and 99.4
Certification pursuant to 15 U.S.C. as adopted pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT IDS LIFE INSURANCE COMPANY
BY /s/ John T. Sweeney
--------------------------------------------
NAME AND TITLE John T. Sweeney
Executive Vice President - Finance and
Chief Financial Officer
DATE May 15, 2003
BY /s/ Barbara H. Fraser
--------------------------------------------
NAME AND TITLE Barbara H. Fraser
Chief Executive Officer
DATE May 15, 2003
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