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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 June 30, 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
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 REDUCED
DISCLOSURE FORMAT.
IDS LIFE INSURANCE COMPANY
FORM 10-Q
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income -
Three months ended June 30, 2003 and 2002 3
Consolidated Statements of Income -
Six months ended June 30, 2003 and 2002 4
Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(unaudited)
Three months ended
June 30,
2003 2002
Revenues:
Premiums:
Traditional life insurance $ 16,267 $ 16,752
Disability income and long-term care insurance 70,190 66,335
-------- --------
Total premiums 86,457 83,087
Policyholder and contractholder charges 134,419 130,324
Management and other fees 95,395 108,835
Net investment income 422,406 381,953
Net realized gain (loss) on investments 1,201 (40,590)
-------- --------
Total revenues 739,878 663,609
-------- --------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 9,360 10,992
Universal life-type insurance
and investment contracts 41,458 43,048
Disability income and
long-term care insurance 13,641 12,610
Increase (decrease) in liabilities for
future policy benefits:
Traditional life insurance (2,319) 2,636
Disability income and
long-term care insurance 35,322 34,943
Interest credited on universal life-type
insurance and investment contracts 311,309 275,504
Amortization of deferred policy
acquisition costs 68,831 91,407
Other insurance and operating expenses 124,983 112,823
-------- --------
Total benefits and expenses 602,585 583,963
-------- --------
Income before income tax expense 137,293 79,646
Income tax expense 27,060 7,915
-------- --------
Net income $110,233 $71,731
======== ========
See accompanying notes to consolidated financial statements.
- 3 -
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(unaudited)
Six months ended
June 30,
2003 2002
Revenues:
Premiums:
Traditional life insurance $ 32,385 $ 32,664
Disability income and
long-term care insurance 139,381 131,720
---------- ----------
Total premiums 171,766 164,384
Policyholder and contractholder charges 264,723 255,663
Management and other fees 182,450 220,005
Net investment income 818,533 781,854
Net realized gain (loss) on investments 23,320 (45,314)
---------- ----------
Total revenues 1,460,792 1,376,592
---------- ----------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 19,792 18,187
Universal life-type insurance
and investment contracts 98,243 89,617
Disability income and
long-term care insurance 27,347 24,778
Increase (decrease) in liabilities for
future policy benefits:
Traditional life insurance (297) 4,425
Disability income and
long-term care insurance 65,839 64,017
Interest credited on universal life-type
insurance and investment contracts 610,404 555,248
Amortization of deferred policy
acquisition costs 148,574 167,640
Other insurance and operating expenses 237,903 206,138
---------- ----------
Total benefits and expenses 1,207,805 1,130,050
---------- ----------
Income before income tax expense 252,987 246,542
Income tax expense 46,566 46,581
---------- ----------
Net income $ 206,421 $ 199,961
========== ==========
See accompanying notes to consolidated financial statements.
- 4 -
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands)
June 30, December 31,
2003 2002
--------------- ---------------
ASSETS (unaudited)
- ------
Investments:
Available-for-sale:
Fixed maturity investments, at fair value (amortized
cost: 2003, $26,756,706; 2002, $23,209,226) $28,011,855 $24,052,104
Common stocks, at fair value (cost: 2003,
$19; 2002, $19) 99 21
Mortgage loans on real estate (less reserves: 2003,
$47,947; 2002, $30,103) 3,249,853 3,417,651
Policy loans 578,503 591,126
Other investments 1,133,026 752,558
------------ ------------
Total investments 32,973,336 28,813,460
Cash and cash equivalents 101,952 4,424,061
Amounts recoverable from reinsurers 687,259 633,510
Amounts due from brokers 607,138 25,835
Other accounts receivable 36,636 56,245
Accrued investment income 336,689 277,279
Deferred policy acquisition costs 3,447,413 3,309,783
Other assets 118,726 117,788
Separate account assets 24,051,375 21,980,674
------------ ------------
Total assets $62,360,524 $59,638,635
============ ============
See accompanying notes to consolidated financial statements.
- 5 -
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except par value and share amounts)
June 30, December 31,
2003 2002
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY (unaudited)
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $25,891,714 $23,411,314
Universal life-type insurance 3,556,602 3,515,010
Traditional life insurance 251,367 247,441
Disability income and
long-term care insurance 1,586,911 1,466,171
Policy claims and other
policyholders' funds 86,637 85,400
Amounts due to brokers 842,691 3,342,989
Deferred income taxes 326,587 182,059
Other liabilities 371,099 463,326
Separate account liabilities 24,051,375 21,980,674
----------- -----------
Total liabilities 56,964,983 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
Retained earnings 3,561,262 3,354,841
Other comprehensive income, net of tax:
Net unrealized securities gains 741,490 497,319
Net unrealized derivative gains 1,462 764
----------- -----------
Accumulated other comprehensive income 742,952 498,083
----------- -----------
Total stockholder's equity 5,395,541 4,944,251
----------- -----------
Total liabilities and stockholder's equity $62,360,524 $59,638,635
=========== ===========
See accompanying notes to consolidated financial statements.
- 6 -
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Six months ended
June 30,
2003 2002
---------------- ------------
Cash flows from operating activities:
Net income $ 206,421 $ 199,961
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Policy loans, excluding universal life-type insurance:
Issuance (40,664) (18,974)
Repayment 47,131 25,028
Change in amounts recoverable from reinsurers (53,749) (57,572)
Change in other accounts receivable 19,609 (16,735)
Change in accrued investment income (53,080) (665)
Change in deferred policy
acquisition costs, net (172,397) (135,362)
Change in liabilities for future policy
benefits for traditional life,
disability income and
long-term care insurance 124,666 131,156
Change in policy claims and other
policyholders' funds 1,237 7,245
Deferred income taxes 12,631 7,690
Change in other assets (938) 9,101
Change in other liabilities (92,227) (96,345)
Amortization of premium, net 98,240 31,399
Net realized (gain) loss on investments (23,320) 45,314
Contractholder charges, non-cash (118,956) (112,063)
Other, net (28,483) (11,144)
----------- ---------------
Net cash (used in) provided by operating
activities $ (73,879) $ 8,034
----------- ---------------
See accompanying notes to consolidated financial statements.
- 7 -
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Six months ended
June 30,
2003 2002
------------- ------------
Cash flows from investing activities:
Available-for-sale investments:
Purchases $(12,096,165) $(4,894,562)
Maturities, sinking fund payments and calls 2,268,842 1,604,836
Sales 6,260,068 3,226,222
Other investments, excluding policy loans:
Purchases (567,419) (279,229)
Sales 320,940 222,646
Change in amounts due to and from brokers, net (3,081,601) (1,037,584)
------------- ------------
Net cash used in investing activities (6,895,335) (1,157,671)
------------- ------------
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 2,918,726 1,633,285
Interest credited to account balances 610,404 555,248
Surrenders and death benefits (888,181) (1,022,386)
Universal life-type insurance policy loans:
Repayment 22,079 48,882
Issuance (15,923) (39,107)
Cash dividends to parent -- (70,000)
------------- ------------
Net cash provided by financing activities 2,647,105 1,105,922
------------- ------------
Net decrease in cash and cash equivalents (4,322,109) (43,715)
Cash and cash equivalents at beginning of period 4,424,061 1,150,251
------------- ------------
Cash and cash equivalents at end of period $ 101,952 $ 1,106,536
============= ============
See accompanying notes to consolidated financial statements.
- 8 -
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
were 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 returns of the
entity if they occur. In general, FIN 46 requires 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.
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. FIN 46
does not impact the accounting for qualified special purpose entities
as defined by SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Debt," such as the Company's
securitization trust established in 2001 where the Company's retained
interests in the trust had a carrying value of $531 million at June
30, 2003, of which $395 million is considered investment grade.
- 9 -
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The CDO entities impacted by FIN 46 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 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.
Detailed interpretations of FIN 46 continue to emerge and,
accordingly, the Company is still in the process of evaluating its
impact. Preliminary estimates are that the consolidation of these and
other VIE entities could result in a cumulative effect of accounting
change that will reduce reported third quarter 2003 net income through
a non-cash charge with the consolidation of up to $450 million of
related assets. Taken 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 June 30, 2003.
Those carrying values include CDO residual tranches having an adjusted
cost basis of $5 million and SLTs having an adjusted cost basis of
$644 million.
The initial charge related to the application of FIN 46 will have no
cash flow effect on the Company. Future valuation adjustments
specifically related to the application of FIN 46 to the CDOs, if
consolidated, would also be non-cash items, and would be reflected in
the Company's quarterly results until maturity. The Company expects
the aggregate gains or losses, including the July 1, 2003
implementation charge, if CDOs are required to be consolidated, to
reverse themselves over time as the structures mature, because the
debt issued to the investors in the CDOs is non-recourse to the
Company and further reduction in the value of the related assets will
be absorbed by the third party investors. To the extent losses are
incurred in the SLT portfolio, future charges could be incurred under
FIN 46.
In July 2003, the American Institute of Certified Public Accountants
issued Statement of Position 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (SOP 03-1). The Company is
currently evaluating its impact, which, among other provisions,
requires reserves related to guaranteed minimum death benefits (GMDBs)
included within the majority of variable annuity contracts offered by
the Company. SOP 03-1 is required to be adopted on January 1, 2004.
2. Investment Securities
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $53
million and $46 million for the three months ended June 30, 2003 and
2002, respectively. Gross realized losses on sales
- 10 -
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
of securities classified as Available-for-Sale were ($8 million) and
($2 million) for the three months ended June 30, 2003 and 2002,
respectively. The Company also recognized other-than-temporary
impairment losses on Available-for-Sale securities of ($35 million) and
($83 million) for the three months ended June 30, 2003 and 2002,
respectively.
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were $191
million and $83 million for the six months ended June 30, 2003 and
2002, respectively. Gross realized losses on sales of securities
classified as Available-for-Sale were ($55 million) and ($28 million)
for the six months ended June 30, 2003 and 2002, respectively. The
Company also recognized other-than-temporary impairment losses on
Available-for-Sale securities of ($103 million) and ($87 million) for
the six months ended June 30, 2003 and 2002, respectively.
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, net of related tax and applicable
deferred policy acquisition costs, and unrealized gains or losses on
derivatives, net of related tax.
Total comprehensive income was $327 million and $324 million for the
three months ended June 30, 2003 and 2002, respectively. Total
comprehensive income was $451 million and $319 million for the six
months ended June 30, 2003 and 2002, respectively. The difference
between net income and total comprehensive income for these periods is
primarily the result of the change in net unrealized gains on
Available-for-Sale securities.
4. Taxes and Interest
Cash paid for income taxes totaled $73 million and $107 million for the
six months ended June 30, 2003 and 2002, respectively. Cash paid for
interest on borrowings totaled $2 million and $5 million for the six
months ended June 30, 2003 and 2002, respectively.
5. Commitments and contingencies
Commitments to fund mortgage loan investments in the ordinary course
of business at June 30, 2003 aggregated $55 million.
- 11 -
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The maximum amount of life insurance risk retained by the Company is
$750,000 on any policy insuring a single life and $1.5 million 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.
Reinsurance contracts do not relieve the Company from its primary
obligation to policyholders.
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.
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 GMDB 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 six
months ended June 30, 2003 and 2002, were $19 million and $13 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. As discussed in
Note 1, SOP 03-1, which was issued by the AICPA in July 2003 with a
required adoption date of January 1, 2004, will require reserves
related to GMDBs. The impact of that requirement, as well as other
provisions of SOP 03-1, is being evaluated.
- 12 -
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 the yield on the Company's invested asset portfolio
declines below its target spread plus the minimum guarantee, the
Company's profitability 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.
- 13 -
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 June 30, 2003 and 2002
Net income was $110 million for the three months ended June 30, 2003,
compared to $72 million in 2002. The increase in net income reflects
increases in net investment income and realized gains on investments,
partially offset by lower management and other fees and higher overall
benefits and expenses.
Premiums and investment contract deposits increased to $2.5 billion for
the three months ended June 30, 2003 compared to $2.0 billion for the
three months ended June 30, 2002. This growth is due to relatively
strong cash sales of both fixed annuities and fixed account portions of
the Company's variable annuities.
- 14 -
Policyholder and contractholder charges increased $4 million or 3% for
the three months ended June 30, 2003 compared to the three months ended
June 30, 2002. This increase reflects increased cost of insurance
charges due primarily to higher amounts of insurance in force, as well
as an increase in surrender charges.
Management and other fees decreased to $95 million for the three
months ended June 30, 2003 compared with $109 million for the three
months ended June 30, 2002. This was primarily due to a lower average
value of separate account assets. While equity markets rose in the
second quarter of 2003, average asset values remained below 2002
levels. The Company provides investment management services for many
of the mutual funds used as investment options for variable annuities
and variable life insurance. The Company also receives a mortality and
expense risk fee from the separate accounts based on asset levels.
Net investment income increased to $422 million for the three months
ended June 30, 2003 compared to $382 million for the three months ended
June 30, 2002. This increase was primarily due to higher invested asset
amounts in 2003, partially offset by lower investment yields.
Net realized gain (loss) on investments was $1 million for the three
months ended June 30, 2003 compared to ($41 million) for the three
months ended June 30, 2002. For the three months ended June 30, 2003,
$54 million of investment gains, were partially offset by ($53 million)
of impairments and losses. Included in these total investment gains and
losses are $53 million of gross realized gains, ($8 million) of gross
realized losses from sales of securities, as well as ($35 million) of
other-than-temporary investment impairment losses, classified as
Available-for-Sale.
For the three months ended June 30, 2002, $46 million of investment
gains, were partially offset by ($87 million) of impairments and
losses. Included in these total investment gains and losses are $46
million of gross realized gains, ($2 million) of gross realized losses
from sales of securities, as well as ($83 million) of
other-than-temporary investment impairment losses, classified as
Available-for-Sale. The 2002 net realized loss on investments reflects
losses on WorldCom debt holdings.
Total benefits and expenses were $603 million for the three months
ended June 30, 2003, an increase of 3 percent from the same period in
2002. This increase reflects higher interest credited expenses on
universal life-type insurance and investment contracts which increased
13 percent to $311 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 decreased $2 million. The second quarter 2002 benefits
and expenses reflect a $7 million release of reserves related to the
September 11, 2001 terrorist attacks.
Amortization of deferred policy acquisition costs (DAC) decreased to
$69 million for the three months ended June 30, 2003 compared to $91
million for the three months ended June 30, 2002. The decrease in DAC
amortization reflects the
- 15 -
impact of significantly better equity market performance in 2003 than
in 2002. Faster-than-assumed growth in customer asset values
associated with the Company's variable annuity and insurance products
resulted in a deceleration of DAC amortization in 2003, whereas
declines in variable annuity and insurance customer asset values
resulted in an acceleration of DAC amortization in 2002.
Other insurance and operating expenses increased 11 percent, primarily
due to the impact of fewer capitalized costs, which is the result of a
comprehensive review of the DAC-related practices completed during the
third quarter of 2002.
Results of Operations for the Six Months Ended June 30, 2003 and 2002
Net income was $206 million for the six months ended June 30, 2003,
compared to $200 million in 2002. The increase in net income reflects
increases in net investment income and realized gains on investments,
partially offset by lower management and other fees and higher overall
benefits and expenses.
Premiums and investment contract deposits increased to $4.6 billion for
the six months ended June 30, 2003 compared to $3.5 billion for the six
months ended June 30, 2002. This growth is due to relatively strong
cash sales of both fixed annuities and fixed account portions of the
Company's variable annuities.
Policyholder and contractholder charges increased $9 million or 4% for
the six months ended June 30, 2003 compared to the six months ended
June 30, 2002. This increase reflects increased cost of insurance
charges due primarily to higher amounts of insurance in force, as well
as an increase in surrender charges.
Management and other fees decreased to $182 million for the six months
ended June 30, 2003 compared with $220 million for the six months
ended June 30, 2002. This was primarily due to a decrease in average
value of separate account assets. While equity markets rose in the
second quarter of 2003, average asset values remained below 2002
levels. 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 increased to $819 million for the six months
ended June 30, 2003 compared to $782 million for the six months ended
June 30, 2002. This increase was primarily due to higher invested asset
amounts in 2003, partially offset by lower investment yields.
Net realized gain (loss) on investments was $23 million for the six
months ended June 30, 2003 compared to ($45 million) for the six months
ended June 30, 2002. For the six months ended June 30, 2003, $192
million of total investment gains, were partially offset by ($169
million) of impairments and losses. Included in these total investment
gains and losses are $191 million of gross realized gains and ($55
million) of gross realized losses from sales of securities, as well as
($103
- 16 -
million) of other-than-temporary investment impairment losses,
classified as Available-for-Sale.
For the six months ended June 30, 2002, $83 million of investment
gains, were partially offset by ($128 million) of impairments and
losses. Included in these total investment gains and losses are $83
million of gross realized gains, ($28 million) of gross realized losses
from sales of securities, as well as ($87 million) of
other-than-temporary investment impairment losses, classified as
Available-for-Sale. The 2002 net realized loss on investments reflects
losses on WorldCom debt holdings.
Total benefits and expenses were $1.2 billion for the six months ended
June 30, 2003, an increase of 7 percent from the same period in 2002.
This increase reflects higher interest credited expenses on universal
life-type insurance and investment contracts, which increased 10
percent to $610 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 $13 million. The 2002 benefits and expenses include
a $7 million release of reserves related to the September 11, 2001
terrorist attacks.
Amortization of deferred policy acquisition costs (DAC) decreased to
$149 million for the six months ended June 30, 2003 compared to $168
million for the six months ended June 30, 2002. The decrease in DAC
amortization reflects the impact of significantly better equity market
performance in 2003 than in 2002. Faster-than-assumed growth in
customer asset values associated with the Company's variable annuity
and insurance products resulted in a deceleration of DAC amortization
in 2003, whereas declines in variable annuity and insurance customer
asset values resulted in an acceleration of DAC amortization in 2002.
Other insurance and operating expenses increased 15 percent, primarily
due to the impact of fewer capitalized costs, which is the result of a
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 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
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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 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 June 30,
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.
Another area impacted by market-based events is guaranteed minimum
death benefits (GMDBs). 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
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as of the most recent sixth contract anniversary, plus purchase payment
and minus adjusted partial surrenders since that anniversary.
To the extent that the GMDB 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 six
months ended June 30, 2003 and 2002, were $19 million and $13 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. In July 2003, the
American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1) which requires reserves related to
guaranteed minimum death benefits. The impact of that requirement as
well as other provisions of SOP 03-1 are 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 the yield on the Company's invested asset portfolio
declines below its target spread plus the minimum guarantee, the
Company's profitability would be negatively affected.
Liquidity and Capital Resources
The liquidity requirements of the Company are generally met by funds
provided by premiums, investment contract deposits, investment income,
proceeds from sales of investments as well as maturities, periodic
repayments of investment principal and capital contributions. The
primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases. The Company
routinely reviews its sources and uses of funds in order to meet its
ongoing obligations.
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 June 30, 2003. The Company also uses reverse
repurchase agreements for short-term liquidity needs. Outstanding
reverse repurchase agreements totaled $348 million at June 30, 2003.
At June 30, 2003 and 2002, based on amortized cost, approximately 6
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
- 19 -
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 $48 million at June 30, 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 June 30, 2003, the carrying values of the CDO
residual tranches and SLT notes were $5 million and $644 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 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 June 30, 2003,
the retained interests had
- 20 -
a carrying value of $531 million, of which $395 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.
In July 2003, the AICPA issued Statement of Position 03-1, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts." The Company is
currently evaluating its impact, which, among other provisions,
requires reserves related to GMDBs included within the majority of its
variable annuity contracts. The SOP is required to be adopted on
January 1, 2004. See Impact of Recent Market-Volatility on Results of
Operations section of Management's Discussion and Analysis for further
discussion.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, the Company's disclosure controls and procedures are
effective.
- 21 -
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
Forward-Looking Statements
This report includes forward-looking statements, which are subject to
risks and uncertainties. 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 update or revise any forward-looking statements. Factors that could
cause actual results to differ materially from these forward-looking
statements include, but are not limited to: the Company's ability to
successfully implement a business model that allows for significant
earnings growth based on revenue growth that is lower than historical
levels, including the ability to improve its operating expense to
revenue ratio both in the short-term and over time, which will depend
in part on the effectiveness of reengineering and other cost control
initiatives, as well as factors impacting the Company's revenues; the
Company's ability to grow its business over time, which will depend on
the Company's ability to manage its capital needs and the effect of
business mix, and rating agency requirements; the ability to increase
investment spending, which will depend in part on the equity markets
and other factors affecting revenues, and the ability to capitalize on
such investments to improve business metrics; the accuracy of certain
critical accounting estimates, including, the fair value of the assets
in the Company's investment portfolio (including those investments that
are not readily marketable); fluctuation in the equity and fixed income
markets, which can affect the amount and types of investment products
sold, the market value of its managed assets, management, distribution
and other fees received based on the value of those assets, the
Company's ability to recover DAC as well as the timing of such DAC
amortization, in connection with the sale of annuity and insurance
products, and the level of guaranteed minimum death benefits paid to
clients; changes in assumptions relating to DAC, which could impact the
amount of DAC amortization; potential deterioration in the Company's
high-yield and other investments, which could result in further losses
in the investment portfolio; 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; a
downturn in the Company's business and/or negative changes in the
Company's and its subsidiaries' claims-paying ability and other
ratings, which could negatively impact sales; increasing competition in
all of the Company's major lines of business; fluctuations in interest
rates, which impact the
- 22 -
Company's spreads, credit trends and the rate of bankruptcies, which
can affect returns on the Company's investment portfolios; changes in
laws or government regulations, including tax laws affecting the
Company's business or that may affect the sales of the Company's
products, and regulatory activity in the areas of customer privacy,
consumer protection, business continuity and data protection; the
adoption of recently issued accounting 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 and
costs associated with litigation and compliance and regulatory
matters.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page E-1 hereof.
(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.
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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.
IDS LIFE INSURANCE COMPANY
--------------------------
(Registrant)
Date: August 13, 2003 By /s/ John T. Sweeney
---------------------------------
John T. Sweeney
Executive Vice President -Finance
and Chief Financial Officer
Date: August 13, 2003 By /s/ Barbara H. Fraser
---------------------------------
Barbara H. Fraser
Chief Executive Officer
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report:
Exhibit Description
31.1 Certification of Barbara H. Fraser pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of John T. Sweeney pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Barbara H. Fraser pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of John T. Sweeney pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
E-1