UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
- ------------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
227 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTA 55474
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
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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 September 30, 2003 and 2002 1
Consolidated Statements of Income - Nine
months ended September 30, 2003 and 2002 2
Consolidated Balance Sheets - September 30,
2003 and December 31, 2002 3
Consolidated Statements of Cash Flows - Nine
months ended September 30, 2003 and 2002 4-5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-19
Item 4. Controls and Procedures 20
Part II. Other Information 22
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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
September 30,
------------------------------------
2003 2002
----------- ----------
Revenues:
Premiums:
Traditional life insurance $ 16,021 $ 17,549
Disability income and long-term care insurance 71,433 69,893
-------- --------
Total premiums 87,454 87,442
Policyholder and contractholder charges 130,320 132,140
Management and other fees 101,980 93,723
Net investment income 427,603 385,490
Net realized (loss) gain on investments (10,665) 11,619
-------- --------
Total revenues 736,692 710,414
-------- --------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 11,063 9,213
Universal life-type insurance and investment contracts 56,620 54,956
Disability income and long-term care insurance 14,877 13,636
(Decrease) increase in liabilities for future policy benefits:
Traditional life insurance (2,374) (2,373)
Disability income and long-term care insurance 36,398 34,104
Interest credited on universal life-type
insurance and investment contracts 308,675 287,046
Amortization of deferred policy acquisition costs 74,234 96,443
Other insurance and operating expenses 107,627 115,537
--------- --------
Total benefits and expenses 607,120 608,562
--------- --------
Income before income tax (benefit) provision 129,572 101,852
Income tax (benefit) provision (3,592) 15,681
--------- --------
Net income $133,164 $ 86,171
========= ========
See Notes to Consolidated Financial Statements.
-1-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(unaudited)
Nine months ended
September 30,
----------------------------------
2003 2002
----------- ----------
Revenues:
Premiums:
Traditional life insurance $ 48,406 $ 50,213
Disability income and long-term care insurance 210,814 201,613
----------- ----------
Total premiums 259,220 251,826
Policyholder and contractholder charges 397,287 386,969
Management and other fees 284,430 313,728
Net investment income 1,246,136 1,167,344
Net realized gain (loss) on investments 12,655 (33,695)
----------- ----------
Total revenues 2,199,728 2,086,172
----------- ----------
Benefits and expenses:
Death and other benefits:
Traditional life insurance 30,916 27,413
Universal life-type insurance and investment contracts 155,015 143,353
Disability income and long-term care insurance 42,224 38,414
(Decrease) increase in liabilities for future policy benefits:
Traditional life insurance (2,733) 2,039
Disability income and long-term care insurance 102,237 98,121
Interest credited on universal life-type
insurance and investment contracts 919,558 842,647
Amortization of deferred policy acquisition costs 228,292 264,114
Other insurance and operating expenses 341,660 321,679
----------- ----------
Total benefits and expenses $1,817,169 $1,737,780
----------- ----------
Income before income tax provision 382,559 348,392
Income tax provision 42,974 62,262
----------- ----------
Net income $ 339,585 $ 286,130
=========== ==========
See Notes to Consolidated Financial Statements.
-2-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands)
September 30, December 31,
2003 2002
----------------- --------------
(unaudited)
Assets
Investments:
Available-for-sale:
Fixed maturity investments, at fair value (amortized
cost: 2003, $27,149,933; 2002, $23,209,226) $28,073,453 $24,052,104
Mortgage loans on real estate (less reserves: 2003,
$47,947; 2002, $30,103) 3,235,521 3,417,651
Policy loans 579,401 591,126
Other investments 1,112,785 752,579
------------ ------------
Total investments 33,001,160 28,813,460
Cash and cash equivalents 79,970 4,424,061
Amounts recoverable from reinsurers 723,093 633,510
Amounts due from brokers 433,108 25,835
Other accounts receivable 58,503 56,245
Accrued investment income 340,498 277,279
Deferred policy acquisition costs 3,523,189 3,309,783
Other assets 121,905 117,788
Separate account assets 24,996,574 21,980,674
------------ ------------
Total assets $63,278,000 $59,638,635
============ ============
Liabilities and Stockholder's Equity
Liabilities:
Future policy benefits:
Fixed annuities $26,311,665 $23,411,314
Universal life-type insurance 3,566,598 3,515,010
Traditional life insurance 251,344 247,441
Disability income and long-term care insurance 1,653,495 1,466,171
Policy claims and other policyholders' funds 83,230 85,400
Amounts due to brokers 464,918 3,342,989
Deferred income taxes 214,643 182,059
Other liabilities 413,182 463,326
Separate account liabilities 24,996,574 21,980,674
------------ ------------
Total liabilities 57,955,649 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 3,694,426 3,354,841
Other comprehensive income, net of tax:
Net unrealized securities gains 535,380 497,319
Net unrealized derivative gains 1,218 764
------------ ------------
Accumulated other comprehensive income 536,598 498,083
------------ ------------
Total stockholder's equity 5,322,351 4,944,251
------------ ------------
Total liabilities and stockholder's equity $63,278,000 $59,638,635
============ ============
See Notes to Consolidated Financial Statements.
-3-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Nine months ended
September 30,
2003 2002
---------- ----------
Cash Flows from Operating Activities
Net income $ 339,585 $ 286,130
Adjustments to reconcile net income to
net cash provided by operating activities:
Policy loans, excluding universal
life-type insurance
Issuance (25,868) (28,126)
Repayment 33,403 37,939
Change in amounts recoverable from reinsurers (89,583) (72,869)
Change in other accounts receivable (2,258) (7,164)
Change in accrued investment income (72,249) (1,655)
Change in deferred policy acquisition costs, net (233,646) (195,873)
Change in liabilities for future policy benefits
for traditional life, disability income and
long-term care insurance 191,227 178,522
Change in policy claims and other
policyholders' funds (2,170) 25,363
Deferred income taxes 11,800 53,671
Change in other assets (4,117) 9,637
Change in other liabilities (50,144) (63,075)
Amortization of premium, net 136,950 48,874
Net realized (gain) loss on investments (12,655) 33,695
Net realized gains on trading securities (19,079) (6,993)
Contractholder charges, non-cash (175,764) (172,811)
Other, net (4,168) 5,123
---------- ----------
Net cash provided by operating activities 21,264 130,388
---------- ----------
See Notes to Consolidated Financial Statements.
-4-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Nine months ended
September 30,
2003 2002
---------------- -----------------
Cash Flows from Investing Activities
Available-for-Sale investments:
Sales $ 9,205,312 $ 6,581,196
Maturities, sinking fund payments and calls 3,546,041 2,276,303
Purchases (16,738,868) (10,031,715)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 471,588 355,323
Purchases (697,042) (362,979)
Change in amounts due to and from brokers, net (3,285,344) (1,344,862)
-------------- -------------
Net cash used in investing activities (7,498,313) (2,526,734)
-------------- -------------
Cash Flows from Financing Activities
Activity related to universal life-type insurance
and investment contracts:
Considerations received 3,701,940 3,315,296
Interest credited to account balances 919,558 842,647
Surrenders and death benefits (1,492,730) (1,205,070)
Universal life-type insurance policy loans:
Repayment 66,085 71,752
Issuance (61,895) (57,875)
Cash dividends to parent -- (70,000)
Capital contribution from parent -- 250,000
-------------- -------------
Net cash provided by financing activities 3,132,958 3,146,750
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Net (decrease) increase in cash and cash equivalents (4,344,091) 750,404
Cash and cash equivalents at beginning of period 4,424,061 1,150,251
-------------- -------------
Cash and cash equivalents at end of period $ 79,970 $ 1,900,655
============== =============
See Notes to Consolidated Financial Statements.
-5-
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. See Note
4., Taxes and Interest, regarding the Company's third quarter 2003
income tax benefit. 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 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). In October 2003, the FASB issued a
statement delaying the effective date of the consolidation provisions
of FIN 46 from July 1, 2003 to December 31, 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, which the Company may
consolidate, relate to structured investments, including collateralized
debt obligations (CDOs) and secured loan trusts (SLTs), which are
partially 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 CDO-related
securitization trust established in 2001. That trust contains a
majority of the Company's rated CDOs whose retained interests in the
trust had a carrying value of $548 million at
-6-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, 2003, of which $411 million is considered investment
grade. Separately, FIN 46 is not expected to impact the accounting for
an additional $24 million of rated CDO tranches managed by a third
party.
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 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.
Detailed interpretations of FIN 46 continue to emerge and the FASB's
statement delaying its implementation indicated the FASB intends to
issue further interpretations over the next few months. Accordingly,
the Company decided to delay its planned third quarter 2003 adoption of
FIN 46 until the revised effective date of December 31, 2003. The
Company will record a cumulative effect of accounting change with the
consolidation of up to $450 million of additional assets. The impact of
adopting FIN 46 will be dependent upon further interpretations of FIN
46 and market factors at December 31, 2003. 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 September 30, 2003. Those carrying values include CDO residual
tranches having an adjusted cost basis of $4 million and SLTs having an
adjusted cost basis of $652 million.
The initial impact related to the application of FIN 46 will have no
cash flow effect on the Company. Ongoing 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. Subsequent to the
December 31, 2003 FIN 46 adoption, if required, these ongoing valuation
adjustments, which will be reflected in operating results over the then
remaining lives of the structures subject to FIN 46 and which will be
dependent upon market factors during such time, will result in periodic
gains or losses. The Company expects, in the aggregate, such gains or
losses, including the December 31, 2003 implementation amount, 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 the further reductions 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"
-7-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(SOP 03-1). The Company is currently evaluating its impact, which,
among other provisions, requires reserves related to guaranteed minimum
death benefits (GMDBs) and guaranteed minimum income benefits (GMIBs)
included within the 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
$26.3 million and $93.9 million for the three months ended September
30, 2003 and 2002, respectively. Gross realized losses on sales of
securities classified as Available-for-Sale were $36.6 million and
$49.7 million for the three months ended September 30, 2003 and 2002,
respectively. The Company also recognized other-than-temporary
impairment losses on Available-for-Sale securities of $33.1 million for
the three months ended September 30, 2002.
Gross realized gains on sales of securities classified as
Available-for-Sale, using the specific identification method, were
$217.3 million and $176.6 million for the nine months ended September
30, 2003 and 2002, respectively. Gross realized losses on sales of
securities classified as Available-for-Sale were $91.4 million and
$78.0 million for the nine months ended September 30, 2003 and 2002,
respectively. The Company also recognized other-than-temporary
impairment losses on Available-for-Sale securities of $102.6 million
and $119.8 million for the nine months ended September 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 and applicable deferred policy
acquisition costs, net of related tax and unrealized gains or losses on
derivatives, net of related tax.
Total comprehensive (loss) income was ($61) million and $402 million
for the three months ended September 30, 2003 and 2002, respectively.
Total comprehensive income was $390 million and $721 million for the
nine months ended September 30, 2003 and 2002, respectively. The
difference between net income and total comprehensive income for these
periods primarily reflects the change in net unrealized gains on
Available-for-Sale securities.
-8-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Taxes and Interest
Net income taxes paid during the nine months ended September 30, 2003
and 2002, were $58.8 million and $80.4 million, respectively. The
income tax benefit in the third quarter of 2003 reflects a $29 million
reduction in the tax provision resulting from adjustments related to
the finalization of the 2002 tax return filed during the quarter and
publication of favorable technical guidance related to the taxation of
dividend income. Interest paid on borrowings during the nine months
ended September 30, 2003 and 2002, were $2.3 million and $6.3 million,
respectively.
5. Commitments and Contingencies
Commitments to fund mortgage loans on real estate at September 30, 2003
were $86.2 million.
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 percent 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 are 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 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 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
-9-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
value is expensed when payable. Amounts expensed for the three months
ended September 30, 2003 and 2002, were $7 million and $10 million,
respectively. Amounts expensed for the nine months ended September 30,
2003 and 2002, were $26 million and $23 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 all terms on GMIB features are within the
stipulated waiting periods. 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 and GMIBs. The
impact of that requirement, as well as other provisions of SOP 03-1,
is being evaluated. The Company's life and annuity products all have
minimum interest rate guarantees in their fixed accounts. These
guarantees range from 3 percent to 5 percent. 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 information
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.
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-
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"), a New York
corporation, 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"), a New York corporation, 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 September 30, 2003 and
2002
Net income increased 55 percent to $133.2 million from $86.2 million.
This increase reflects: (i) a $29 million reduction in income tax
provision due to adjustments related to the finalization of the 2002
tax return filed during the third quarter of 2003 and the publication
of favorable technical guidance related to the taxation of dividend
income; (ii) net realized loss on investments of $10.7 million in the
third quarter of 2003 compared to a net realized gain on investments of
$11.6 million in the third quarter of 2002; (iii) increased revenues
from management and other fees; and (iv) substantially increased net
investment income.
Management and other fees revenue increased $8.3 million or 9 percent.
This was primarily due to a higher average value of separate account
assets, reflecting the
-11-
recent improvement in equity market conditions. As of September 30,
2003, 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 $42.1 million or 11 percent as higher
levels of invested assets were partially offset by lower average yields
on the investment portfolio.
Net realized (loss) gain on investments was a $10.7 million net loss
for the three months ended September 30, 2003 compared to an $11.6
million net gain for the three months ended September 30, 2002. For the
three months ended September 30, 2003, $26.4 million of investment
gains were more than offset by $37.1 million of impairments and losses.
Included in these total investment gains and losses are $26.3 million
of gross realized gains and $36.6 million of gross realized losses from
sales of securities, classified as Available-for-Sale.
For the three months ended September 30, 2002, $96.9 million of
investment gains were partially offset by $85.3 million of impairments
and losses. Included in these total investment gains and losses are
$93.9 million of gross realized gains and $49.7 million of gross
realized losses from sales of securities, as well as $33.1 million of
other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Interest credited expenses on universal life-type insurance and
investment contracts increased 8 percent due to higher average in force
levels across annuity and life products and the effect of appreciation
in the S&P 500 on equity indexed annuities this period versus
depreciation in the same period a year ago, partially offset by lower
crediting rates on both annuities and life insurance products. Total
death and other benefits increased slightly by $4.8 million. These two
increases were substantially offset by lower DAC amortization expense
together with a 7 percent decrease in other insurance and operating
expenses.
Amortization of deferred policy acquisition costs (DAC) decreased $22.2
million or 23 percent reflecting a net $18 million increase in DAC
amortization expense in the third quarter of 2002, and a net $2 million
decrease in DAC amortization expense in the third quarter of 2003, both
as a result of the Company's annual third quarter review of various DAC
assumptions and practices. See the DAC section below for further
discussion of DAC and related adjustments.
The income tax benefit in the third quarter of 2003 reflects a $29
million reduction in the tax provision resulting from adjustments
related to the finalization of the 2002 tax return filed during the
quarter and publication of favorable technical guidance related to the
taxation of dividend income. Partially offsetting this expense
reduction were realized losses from sales of mortgage-backed
securities as the Company made adjustments in the level of these
investments, such that mortgage-backed securities were 39 percent of
the Company's overall portfolio at September 30, 2003 compared to 44
percent at December 31, 2002.
-12-
Results of Operations for the Nine Months Ended September 30, 2003 and
2002
Net income increased 19 percent to $339.6 million from $286.1 million.
This increase reflects the third quarter 2003 $29 million reduction in
income tax provision discussed above and a net realized gain on
investments of $12.7 million compared to a net realized loss on
investments of $33.7 million in the third quarter of 2002, partially
offset by lower revenues from management and other fees and higher
total benefits and expenses.
Management and other fees decreased to $284 million for the nine
months ended September 30, 2003 compared with $314 million for the
nine months ended September 30, 2002. This was primarily due to a
decrease in average value of separate account assets. While equity
markets rose in the third quarter of 2003, average asset values for
the nine months ended September 30, 2003 remained below 2002 levels.
As of September 30, 2003, 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 7 percent to $1.2 billion for the nine
months ended September 30, 2003 reflecting higher invested asset
amounts in 2003, partially offset by lower average yields on the
investment portfolio as a result of the relatively low interest rate
environment.
Net realized gain (loss) on investments was a $12.7 million net gain
for the nine months ended September 30, 2003 compared to a $33.7
million net loss for the nine months ended September 30, 2002. For the
nine months ended September 30, 2003, $218.4 million of total
investment gains were partially offset by $205.7 million of impairments
and losses. Included in these total investment gains and losses are
$217.3 million of gross realized gains and $91.4 million of gross
realized losses from sales of securities, as well as $102.6 million of
other-than-temporary investment impairment losses, classified as
Available-for-Sale.
For the nine months ended September 30, 2002, $180 million of
investment gains were partially offset by $213.7 million of impairments
and losses. Included in these total investment gains and losses are
$176.6 million of gross realized gains, $78 million of gross realized
losses from sales of securities, as well as $119.8 million of
other-than-temporary investment impairment losses, classified as
Available-for-Sale.
Total benefits and expenses were $1.8 billion for the nine months ended
September 30, 2003, an increase of 5 percent from the same period in
2002. This increase reflects a 9 percent increase in interest credited
expenses on universal life-type insurance and investment contracts,
which was primarily due to higher levels of annuities and insurance
products in force, partially offset by lower crediting rates. Total
death and other benefits increased 9 percent reflecting the $7 million
release of reserves in the 2002 period, which was related to the
September 11, 2001 terrorist attacks.
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DAC amortization expense decreased to $228.3 million for the nine
months ended September 30, 2003 compared to $264.1 million for the nine
months ended September 30, 2002. The decrease in DAC amortization
reflects the impact of annual third quarter DAC-related adjustments
discussed above together with the recently improved equity market
performance in 2003 as compared with 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
during the nine months ended September 30, 2003, whereas declines in
variable annuity and insurance customer asset values resulted in an
acceleration of DAC amortization during the nine months ended September
30, 2002.
Other insurance and operating expenses increased 6 percent, reflecting,
during the six months ended June 30, 2003, the impact of fewer
capitalized costs, which was primarily the result of a comprehensive
review of the DAC-related practices completed during the third quarter
of 2002 and which is more fully described below.
The income tax provision for the nine months ended September 30, 2003
reflects a $29 million reduction in the tax expense during the third
quarter of 2003 resulting from adjustments related to the finalization
of the 2002 tax return filed during the quarter and publication of
favorable technical guidance related to the taxation of dividend
income. Partially offsetting this expense reduction were realized
losses from sales of mortgage-backed securities as the Company made
adjustments in the level of these investments, such that
mortgage-backed securities were 39 percent of the Company's overall
portfolio at September 30, 2003 compared to 44 percent at December 31,
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 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.
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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. As a result of these reviews, the Company took actions in both
2003 and 2002 that impacted the DAC balance and expenses. In the third
quarter 2003, these actions resulted in a net $2 million in DAC
amortization expense reduction reflecting:
o A $106 million DAC amortization reduction resulting from
extending 10 - 15 year amortization periods for certain Flex
Annuity contracts to 20 years. The Flex Annuity is an
advisor-distributed variable annuity product sold from 1986 -
1996. In reviewing the persistency of this business in recent
years, the Company had observed significant volumes persisting
beyond the end of the 10- and 15-year amortization periods. The
Company had maintained these amortization periods, however, due
to uncertainty over the impact of a program launched in April
2002 under which eligible Flex Annuity contracts can be exchanged
for new variable annuity contracts offered by the Company.
Exchange rates to date under this program have been less than
those expected, and the Company concluded in the third quarter it
would be appropriate to measure the meaningful life of this
business without anticipating future exchanges. This is
consistent with the measurement made for other Company products,
and the resulting 20-year period is the same as that used for
other advisor-distributed variable annuity products.
o A $92 million DAC amortization increase resulting from the
recognition of a premium deficiency on the Company's Long-Term
Care (LTC) business. The Company has monitored this business
closely in recent periods as claim and persistency experience
have developed adversely. The Company discontinued sales of its
proprietary LTC product in the first quarter of 2003, and
outsourced claims administration on the existing book in the
second quarter. On the basis of updated analysis completed in the
third quarter, the Company concluded that the associated DAC was
not fully recoverable at current premium levels. The associated
DAC remaining after this $92 million reduction is $162 million.
o A $12 million net DAC amortization increase across the Company's
Universal Life, Variable Universal Life and fixed and variable
annuity products. The Company updated a number of DAC assumptions
resulting in increases in amortization totaling $26 million and
decreases in amortization totaling $14
-15-
million. The largest single item was a $16 million increase in
amortization from reflecting lower than previously assumed spreads
on fixed contract values.
In the third quarter 2002, these actions resulted in a net $37 million
increase in expenses reflecting:
o A $173 million DAC amortization expense increase resulting from
resetting the customer asset value growth rate assumptions for
variable annuity and variable life products to anticipate
near-term and long-term growth at an annual rate of 7 percent;
and
o A $155 million DAC amortization expense reduction from revising
certain mortality and persistency assumptions for universal and
variable universal life insurance products and fixed and variable
annuity products to better reflect actual experience and future
expectations.
o These two items resulted in a net increase in expenses of $18
million as compared to the net decrease in expenses of $2 million
in 2003.
o In addition, 2002 expenses increased $19 million from the
revision of the types and amounts of costs deferred, in part to
reflect the impact of advisor platform changes and the effects of
related reengineering. This revision, which resulted in an
increase in ongoing expenses, continues to impact the 2003
quarterly results.
DAC of $3.5 billion was on the Company's balance sheet at September 30,
2003. This balance consisted of $1.6 billion related to life and health
insurance and $1.9 billion related to annuities. The DAC balance at
December 31, 2002 was $3.3 billion and consisted of $1.7 billion
related to life and health insurance and $1.6 billion related to
annuities.
Impact of 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
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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 three
months ended September 30, 2003 and 2002, were $7 million and $10
million, respectively. Amounts expensed for the nine months ended
September 30, 2003 and 2002, were $26 million and $23 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 all terms on
GMIB features are within the stipulated waiting periods. 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 GMDBs
and GMIBs. 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
percent to 5 percent. 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 under this line of credit at September 30, 2003.
The Company also uses reverse
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repurchase agreements for short-term liquidity needs. Reverse
repurchase agreements outstanding at September 30, 2003 were $130
million.
At September 30, 2003 and 2002, based on amortized cost, approximately
7 percent of the Company's fixed maturity investments were
below-investment-grade bonds. 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
$48 million at September 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 September 30, 2003, the carrying values of the CDO
residual tranches and SLT notes were $4 million and $652 million,
respectively. The Company also has an interest in a CDO securitization
trust described below as well as $24 million in rated CDO tranches
managed by a third party. 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
have additional 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. See Note 1 to the Consolidated Financial Statements.
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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 September 30, 2003, the
retained interests had a carrying value of $548 million, of which $411
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). In October 2003, the FASB issued a
statement delaying the effective date of the consolidation provisions
of FIN 46 from July 31, 2003 to December 31, 2003 for VIEs created
prior to February 1, 2003. Certain disclosures are addressed in Note 1
to the Consolidated Financial Statements. The impact of adopting FIN 46
on the Consolidated Financial Statements is dependent upon further
interpretations of FIN 46 and market conditions at December 31, 2003.
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" (SOP 03-1). The
Company is currently evaluating its impact, which, among other
provisions, requires reserves related to guaranteed minimum death
benefits and guaranteed minimum income benefits included within its
variable annuity contracts. SOP 03-1 is required to be adopted on
January 1, 2004. See Impact of Recent Market-Volatility on Results of
Operations section of MD&A for further discussion.
-19-
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.
(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
-20-
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 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.
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PART II - OTHER INFORMATION
IDS LIFE INSURANCE COMPANY
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 was 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.
There were no reports on Form 8-K filed by
the Company during the quarterly period
ended September 30, 2003.
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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: November 14, 2003 By /s/ Barbara H. Fraser
-----------------------
Barbara H. Fraser
Chief Executive Officer
Date: November 14, 2003 By /s/ John T. Sweeney
-------------------
John T. Sweeney
Executive Vice President - Finance
and Chief Financial Officer
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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 and 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