UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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.)
829 AXP Financial Center
Minneapolis, Minnesota 55474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
---------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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.
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PART I. Financial Information:
Item 1. Financial Statement 1
Consolidated Balance Sheets--March 31, 2004 and
December 31, 2003 1
Consolidated Statements of Income--Three months ended
March 31, 2004 and 2003 2
Consolidated Statements of Cash Flows--Three months
ended March 31, 2004 and 2003 3
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 4. Controls and Procedures 14
PART II. Other Information 15
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index E-1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(thousands, except share data)
March 31, December 31,
2004 2003
---------------- -------------------
Assets (Unaudited)
- ------
Investments:
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2004, $26,992,712;
2003, $26,626,709) $ 28,232,644 $ 27,324,491
Common stocks, at fair value (cost: 2004, $25; 2003, $19) 116 120
Mortgage loans on real estate, at cost (less reserves: 2004, $48,697;
2003, $47,197) 3,083,006 3,180,020
Policy loans 575,696 578,000
Other investments 799,994 801,871
---------------- -------------------
Total investments 32,691,456 31,884,502
Cash and cash equivalents 364,808 400,294
Restricted cash 825,201 834,448
Amounts recoverable from reinsurers 773,244 754,514
Amounts due from brokers 3,832 1,792
Other accounts receivable 74,820 68,422
Accrued investment income 351,093 355,374
Deferred policy acquisition costs 3,362,089 3,336,208
Deferred sales inducements costs 271,128 278,971
Other assets 261,450 253,858
Separate account assets 29,000,569 27,774,319
---------------- -------------------
Total assets $ 67,979,690 $ 65,942,702
================ ===================
Liabilities and Stockholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $ 26,414,719 $ 26,376,944
Variable annuity guarantees 31,526 -
Universal life insurance 3,664,944 3,569,882
Traditional life insurance 256,755 254,641
Disability income and long-term care insurance 1,759,156 1,724,204
Policy claims and other policyholders' funds 79,489 67,911
Amounts due to brokers 303,276 228,707
Deferred income taxes 268,412 139,814
Other liabilities 455,589 408,444
Separate account liabilities 29,000,569 27,774,319
---------------- -------------------
Total liabilities 62,234,435 60,544,866
---------------- -------------------
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 1,370,388 1,370,388
Retained earnings 3,701,066 3,624,837
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 684,227 405,456
Net unrealized derivative losses (13,426) (5,845)
---------------- -------------------
Total accumulated other comprehensive income 670,801 399,611
---------------- -------------------
Total stockholder's equity 5,745,255 5,397,836
---------------- -------------------
Total liabilities and stockholder's equity $ 67,979,690 $ 65,942,702
================ ===================
See Notes to Consolidated Financial Statements.
-1-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(thousands)
(Unaudited)
Three months ended
March 31,
------------------------------------------
2004 2003
--------------- ---------------
Revenues:
Premiums:
Traditional life insurance $ 17,051 $ 16,118
Disability income and long-term care insurance 68,098 69,191
--------------- ---------------
Total premiums 85,149 85,309
Net investment income 415,173 396,127
Contractholder and policyholder charges 136,203 130,901
Mortality and expense risk and other fees 107,242 87,055
Net realized gain on investments 8,646 22,119
--------------- ---------------
Total 752,413 721,511
--------------- ---------------
Benefits and Expenses:
Death and other benefits:
Traditional life insurance 10,562 10,455
Investment contracts and universal life-type insurance 58,233 59,669
Disability income and long-term care insurance 15,358 13,706
(Decrease) increase in liabilities for future policy benefits:
Traditional life insurance (1,265) 2,001
Disability income and long-term care insurance 20,120 30,517
Interest credited on investment contracts and universal
life-type insurance 283,071 294,795
Amortization of deferred policy acquisition costs 23,578 81,772
Other insurance and operating expenses 125,588 112,902
--------------- ---------------
Total 535,245 605,817
--------------- ---------------
Pre-tax income before accounting change 217,168 115,694
Income tax provision 70,371 19,506
--------------- ---------------
Income before accounting change 146,797 96,188
Cumulative effect of accounting change, net of tax (Note 1) (70,568) -
--------------- ---------------
Net income $ 76,229 $ 96,188
=============== ===============
See Notes to Consolidated Financial Statements.
-2-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(Unaudited)
Three months ended
March 31,
2004 2003
----------------- -----------------
Cash Flows from Operating Activities
Net income $ 76,229 $ 96,188
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Policy loans, excluding universal life-type insurance
Repayment 9,761 11,223
Issuance (8,475) (7,662)
Change in amounts recoverable from reinsurers (18,730) (27,067)
Change in other accounts receivable (6,398) 7,334
Change in accrued investment income 2,080 (5,635)
Change in deferred policy acquisition costs, net (62,631) (51,235)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term care
insurance 37,066 58,051
Change in policy claims and other policyholders' funds 11,578 (5,968)
Deferred income taxes 25,431 6,647
Change in other assets and liabilities, net 21,955 (60,939)
Amortization of premium, net 25,408 45,308
Net realized gain on investments (8,646) (22,119)
Net realized gains on trading securities (21,056) (2,483)
Policyholder and contractholder charges, non-cash (57,277) (60,358)
Cumulative effect of accounting change, net of tax (Note 1) 70,568 -
----------------- -----------------
Net cash provided by (used in) operating activities 96,863 (18,715)
----------------- -----------------
Cash Flows from Investing Activities
Available-for-Sale securities:
Sales 263,213 4,670,855
Maturities, sinking fund payments and calls 479,186 1,067,997
Purchases (1,121,743) (7,796,926)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 163,560 139,734
Purchases (80,992) (310,575)
Change in amounts due to and from brokers, net 72,529 (3,061,518)
----------------- -----------------
Net cash used in investing activities (224,247) (5,290,433)
Cash Flows from Financing Activities
Activity related to investment contracts and universal life-type insurance:
Considerations received 563,139 1,301,427
Interest credited to account balances 285,284 294,795
Surrenders and other benefits (757,542) (297,364)
Universal life-type insurance policy loans:
Repayment 24,438 25,143
Issuance (23,421) (19,227)
----------------- -----------------
Net cash provided by financing activities 91,898 1,304,774
Net decrease in cash and cash equivalents (35,486) (4,004,374)
Cash and cash equivalents at beginning of period 400,294 4,424,061
----------------- -----------------
Cash and cash equivalents at end of period $ 364,808 $ 419,687
================= =================
See Notes to Consolidated Financial Statements.
-3-
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 (IDS Life) for the year ended December 31,
2003. 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 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) effective for fiscal years beginning after
December 15, 2003. SOP 03-1 provides guidance on separate account
presentation and accounting for interests in separate accounts.
Additionally, SOP 03-1 provides clarifying guidance as to the recognition
of bonus interest and other sales inducement benefits and the presentation
of any deferred amounts in the financial statements. Lastly, SOP 03-1
requires insurance enterprises to establish additional liabilities for
benefits that may become payable under variable annuity death benefit
guarantees or other insurance or annuity contract provisions. Where an
additional liability is established, the recognition of this liability will
then be considered in amortizing deferred policy acquisition costs (DAC)
and any deferred sales inducement costs associated with those insurance or
annuity contracts.
The adoption of SOP 03-1 as of January 1, 2004, resulted in a cumulative
effect of accounting change that reduced first quarter 2004 results by $71
million ($109 million pretax). The cumulative effect of accounting change
consisted of: (i) $43 million pretax from establishing additional
liabilities for certain variable annuity guaranteed benefits and from
considering these liabilities in valuing DAC and deferred sales inducement
assets associated with those contracts and (ii) $66 million pretax from
establishing additional liabilities for certain variable universal life and
single pay universal life insurance contracts under which contractual cost
of insurance charges are expected to be less than future death benefits and
from considering these liabilities in valuing DAC associated with those
contracts. Prior to the adoption of SOP 03-1, amounts paid in excess of
contract value were expensed when payable.
IDS Life's current accounting for separate accounts was already consistent
with the provisions of SOP 03-1 and, therefore, there was no impact related
to this requirement.
The additional liabilities for guaranteed benefits established under SOP
03-1 are supported by general account assets. Changes in these liabilities
are included in death and other benefits in the Consolidated Statements of
Income.
The majority of the variable annuity contracts offered by IDS Life contain
guaranteed minimum death benefits (GMDB) provisions. When market values of
the customer's
-4-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
accounts decline, the death benefit payable on a contract with a GMDB may
exceed the contract accumulation value. IDS Life also offers variable
annuities with death benefit provisions that gross up the amount payable by
a certain percentage of contract earnings; these are referred to as gain
gross-up (GGU) benefits. Certain variable annuity contracts offered by IDS
Life also contain guaranteed minimum income benefits (GMIB) provisions. If
elected by the contract owner and after a stipulated waiting period from
contract issuance, a GMIB guarantees a minimum lifetime annuity based on a
specified rate of contract accumulation value growth and predetermined
annuity purchase rates. IDS Life has established additional liabilities for
these variable annuity death and GMIB benefits under SOP 03-1. IDS Life has
not established additional liabilities for other insurance or annuitization
guarantees for which the risk is currently immaterial.
The variable annuity death benefit liability is determined each period by
estimating the expected value of death benefits in excess of the projected
contract accumulation value and recognizing the excess over the estimated
meaningful life based on expected assessments (e.g., mortality and expense
fees, proprietary fund management fees, 12b-1 fees, contractual
administrative charges and similar fees). Similarly, the GMIB liability is
determined each period by estimating the expected value of annuitization
benefits in excess of the projected contract accumulation value at the date
of annuitization and recognizing the excess over the estimated meaningful
life based on expected assessments. Significant assumptions made in
projecting future benefits and assessments relate to customer asset value
growth rates, mortality, persistency and investment margins and are
consistent with those used for DAC asset valuation for the same contracts.
In determining the additional liabilities for variable annuity death
benefits and GMIB, IDS Life projects these benefits and contract
assessments over 200 randomly generated equity market scenarios. As with
DAC, management will review and, where appropriate, adjust its assumptions
each quarter. Unless management identifies a material deviation over the
course of the quarterly monitoring, management will review and update these
assumptions annually in the third quarter of each year.
The following provides summary information related to variable annuity
contracts for which IDS Life has established additional liabilities for
death benefits and guaranteed minimum income benefits:
-5-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- ----------------------------------------------------------------------- ------------------ ------------------
Variable Annuity GMDB and GMIB by Benefit Type As of As of
March 31, 2004 December 31, 2003
- ----------------------------------------------------------------------- ------------------ ------------------
(Dollar amounts in millions)
- -------------------------- -------------------------------------------- ------------------ ------------------
Contracts with GMDB Total Contract Value $ 2,419.9 $ 2,413.1
Providing for Return of Contract Value in Separate Accounts $ 1,129.8 $ 1,107.0
Premium Net Amount at Risk $ 25.9 $ 27.7
Weighted Average Attained Age 62 62
- -------------------------- -------------------------------------------- ------------------ ------------------
Contracts with GMDB Total Contract Value $ 25,485.7 $ 24,570.6
Providing for Six Year Contract Value in Separate Accounts $ 21,179.3 $ 20,316.1
Reset Net Amount at Risk $ 1,861.6 $ 2,077.5
Weighted Average Attained Age 60 60
- -------------------------- -------------------------------------------- ------------------ ------------------
Contracts with GMDB Total Contract Value $ 2,981.3 $ 2,827.5
Providing for One Year Contract Value in Separate Accounts $ 2,058.8 $ 1,886.3
Ratchet Net Amount at Risk $ 78.4 $ 84.7
Weighted Average Attained Age 60 60
- -------------------------- -------------------------------------------- ------------------ ------------------
Contracts with Other Total Contract Value $ 1,005.8 $ 1,001.1
GMDB Contract Value in Separate Accounts $ 677.2 $ 668.5
Net Amount at Risk $ 19.4 $ 21.1
Weighted Average Attained Age 63 63
- -------------------------- -------------------------------------------- ------------------ ------------------
Contracts with GGU Total Contract Value $ 315.2 $ 276.4
Death Benefit Contract Value in Separate Accounts $ 232.2 $ 193.1
Net Amount at Risk $ 8.3 $ 5.8
Weighted Average Attained Age 61 61
- -------------------------- -------------------------------------------- ------------------ ------------------
Contracts with GMIB Total Contract Value $ 438.1 $ 357.8
Contract Value in Separate Accounts $ 345.9 $ 268.3
Net Amount at Risk $ 22.1 $ 23.0
Weighted Average Attained Age 59 59
- -------------------------- -------------------------------------------- ------------------ ------------------
Net amount at risk under GMDB is current death benefit less total contract value
Net amount at risk under gain gross up death benefit is amount of gross up
Net amount at risk under GMIB is accumulated guaranteed minimum benefit base
less total contract value
- ------------------------------------------------------------------------------ ------------------ ------------------
Additional Liabilities and Incurred Benefits GMDB & GGU GMIB
- ------------------------------------------------------------------------------ ------------------ ------------------
Three months ended Liability balance at January 1 $ 30.6 $ 2.2
March 31, 2004 Reported claims $ 5.3 $ -
Liability balance at March 31 $ 29.2 $ 2.3
Incurred claims (reported + change in liability) $ 3.9 $ 0.1
- ------------------------------------------------------------------------------ ------------------ ------------------
Contract values in separate accounts were invested in various equity, bond
and other funds as directed by the contract holder. No gains or losses were
recognized on assets transferred to separate accounts for the periods
presented.
Sales inducement costs include bonus interest credits and premium credits
added to certain annuity contract values. IDS Life capitalizes these
benefit costs to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. Deferred
sales inducement costs were $271 million and $279 million as of March 31,
2004 and December 31, 2003, respectively, and are included separately on
the balance sheet. The amounts capitalized are amortized using the same
methodology and assumptions used to amortize deferred policy acquisition
costs. IDS Life capitalized $20.0 million and $19.2 million of sales
inducement costs during the three months ended March 31, 2004 and 2003,
respectively, and amortized $8.0 million and $7.0 million of sales
inducement costs during the three months ended March 31, 2004 and 2003,
respectively.
-6-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 2003, the Financial Accounting Standards Board (FASB) ratified
a consensus on the disclosure provisions of Emerging Issues Task Force
(EITF) Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." IDS Life complied with the disclosure
provisions of this rule in Note 2 to the Consolidated Financial Statements
included in its Annual Report on Form 10-K for the year ended December 31,
2003. In March 2004, the FASB reached a consensus regarding the application
of a three-step impairment model to determine whether cost method
investments are other-than-temporarily impaired. The provisions of this
rule are required to be applied prospectively to all current and future
investments accounted for in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and other cost method
investments for reporting periods beginning after June 15, 2004. Assuming
no market changes, IDS Life does not expect EITF 03-1 to have a material
impact on IDS Life's results of operations at the time of adoption.
2. Investment Securities
Gross realized gains and losses on sales and losses recognized for
other-than-temporary impairments of securities classified as
Available-for-Sale, using the specific identification method, were as
follows for the three months ended March 31, 2004 and 2003:
Three Months Ended March 31,
------------------------------------------
2004 2003
------------------ ------------------
(Millions)
Gross realized gains on sales $ 13.2 $ 138.1
Gross realized (losses) on sales $ (3.7) $ (46.6)
Realized (losses) recognized for other-than-temporary $ (0.1) $ (68.1)
impairments
3. Comprehensive Income
Comprehensive income is defined as the aggregate change in stockholder's
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 income was $347.4 million and $123.9 million for the
three months ended March 31, 2004 and 2003, 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.
4. Taxes and Interest
Net income taxes paid during the three months ended March 31, 2004 and
2003, were $11.8 million and $43.7 million, respectively. Interest paid on
borrowings during the three months ended March 31, 2004 and 2003, were $0.3
million and $3.0 million, respectively.
-7-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Commitments and Contingencies
Commitments to fund mortgage loans on real estate at March 31, 2004 and
December 31, 2003 were $104.4 million and $58.5 million, respectively.
The maximum amount of life insurance risk retained by IDS Life is $750,000
on any policy insuring a single life and $1.5 million on any policy
insuring a joint-life combination. IDS Life 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. IDS Life retains all accidental death benefit,
disability income and waiver of premium risk. Reinsurance contracts do not
relieve IDS Life from its primary obligation to policyholders.
Substantially all of IDS Life's life and annuity products have minimum
interest rate guarantees in their fixed accounts. As of March 31, 2004,
these minimum interest rate guarantees ranged from 1.5 percent to 5
percent. To the extent the yield on IDS Life's investment portfolio
declines below its target spread plus the minimum guarantee, IDS Life's
profitability would be negatively affected.
The Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable account financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements and inappropriate sales. IDS
Life Insurance Company has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.
IDS Life Insurance Company and its subsidiaries are involved in other legal
and arbitration proceedings concerning matters arising in connection with
the conduct of their respective business activities. IDS Life believes it
has meritorious defenses to each of these actions and intends to defend
them vigorously. In addition, IDS Life is subject to periodic state
insurance department regulatory action, through examinations or other
proceedings. IDS Life believes that it is not a party to, nor are any of
its properties the subject of, any pending legal, arbitration, or
regulatory proceedings that would have a material adverse effect on its
consolidated financial condition, results of operations or liquidity.
However, it is possible that the outcome of any such proceedings could have
a material impact on results of operations in any particular reporting
period as the proceedings are resolved.
The IRS routinely examines IDS Life'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 IDS
Life's consolidated financial position as a result of these audits.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IDS Life Insurance Company is a stock life insurance company organized
under the laws of the State of Minnesota. IDS Life Insurance Company is a
wholly owned subsidiary of American Express Financial Corporation (AEFC),
which is a wholly owned subsidiary of American Express Company. IDS Life
Insurance Company serves residents of the District of Columbia and all
states except New York. IDS Life Insurance Company distributes its fixed
and variable insurance and annuities products exclusively through the
American Express Financial Advisors Inc.'s (AEFAI) retail sales force. IDS
Life Insurance Company has four wholly owned life insurance company
subsidiaries that distribute their products through various distribution
channels. IDS Life Insurance Company of New York (IDS Life of New York) is
a wholly owned subsidiary of IDS Life Insurance Company and serves New York
State residents. IDS Life of New York distributes its fixed and variable
insurance and annuity products exclusively through AEFAI's retail sales
force. IDS Life Insurance 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 IDS Life Insurance 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. IDS Life Insurance 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. IDS Life Insurance Company
also owns IDS REO 1, LLC and IDS REO II, LLC. These two subsidiaries hold
real estate and mortgage loans on real estate. IDS Life Insurance Company
and its six subsidiaries are referred to collectively herein as "IDS Life".
IDS Life follows accounting principles generally accepted in the United
States (GAAP), and the following discussion is presented on a consolidated
basis consistent with GAAP.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See the
Forward-Looking Statements section.
Results of Operations for the Three Months Ended March 31, 2004 and 2003
Net income for the three months ended 2004 reflects the $71 million ($109
million pretax) impact of IDS Life's adoption of the American Institute of
Certified Public Accountants (AICPA) Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP
03-1). See "Recently Issued Accounting Standards" section of Note 1 to the
Consolidated Financial Statements for discussion regarding the impact of
adoption of SOP 03-1. Net income also reflects favorable deferred policy
acquisition costs (DAC) adjustments of $66 million pretax ($44 million
after-tax). See the Deferred Policy Acquisition Cost section below for a
discussion of these adjustments.
Revenues
Net investment income increased $19.0 million or 5 percent reflecting
higher levels of investments offset by lower average yields on the
investment portfolio and a $49 million charge resulting from management's
decision to further improve the investment portfolio's risk profile through
the early liquidation of a secured loan trust managed by an affiliate.
Additionally, the first quarter of 2003 includes $19.4 million of
amortization expense of certain low income housing investments, whereas
there was no amortization expense of such
-9-
investments in the first quarter of 2004. See effective tax rate discussion
below regarding IDS Life's December 2003 low income housing investment
distribution to AEFC.
Mortality and expense risk and other fees increased $20.2 million or 23
percent, reflecting higher average values of separate account assets, and
the impact of the change from IDS Life to AEFC as investment manager of the
internally managed proprietary funds during the fourth quarter of 2003.
Concurrent with the investment manager change, IDS Life entered into an
agreement with AEFC to receive fees for the services, other than investment
management, that IDS Life continues to provide the underlying proprietary
mutual funds. The administrative service fees will vary with the market
values of these proprietary mutual funds. Previous to this change, IDS Life
received management fees directly from the proprietary funds and was party
to an agreement with AEFC to compensate AEFC for the investment
sub-advisory services AEFC provided these proprietary funds. In addition to
the administrative service fees, IDS Life receives mortality and expense
risk fees from the separate accounts based on the level of assets.
Net realized gain on investments was $8.6 million for the three months
ended March 31, 2004 compared to $22.1 million for the three months ended
March 31, 2003. For the three months ended March 31, 2004, $15.0 million of
investment gains were partially offset by $6.4 million of impairments and
losses. Included in these total investment gains and losses are $13.2
million of gross realized gains and $3.7 million of gross realized losses
from sales of securities, as well as $0.1 million of other-than-temporary
investment impairment losses, classified as Available-for-Sale.
For the three months ended March 31, 2003, $138.3 million of investment
gains were partially offset by $116.2 million of impairments and losses.
Included in these total investment gains and losses are $138.1 million of
gross realized gains and $46.6 million of gross realized losses from sales
of securities, as well as $68.1 million of other-than-temporary investment
impairment losses, classified as Available-for-Sale.
Benefits and Expenses
Interest credited expenses on investment contracts and universal life-type
insurance decreased $11.7 million or 4 percent, primarily reflecting lower
interest crediting rates from the lower interest rate environment compared
to the same period a year ago, partially offset by the impact of S&P 500
appreciation on equity indexed annuities.
Amortization of deferred policy acquisition costs decreased $58.2 million
or 71 percent reflecting a net $56.4 million decrease in expenses from
first quarter DAC adjustments primarily in conjunction with SOP 03-1. See
the DAC section below for discussion of these adjustments.
IDS Life completed a valuation system conversion for its Long-Term Care
insurance business during the first quarter of 2004 which resulted in a
$6.5 million pretax reduction of estimated Long-Term Care liabilities for
future policy benefits and an offsetting estimated increase of $9.6 million
in amortization of deferred policy acquisition costs.
Other insurance and operating expenses increased $12.7 million, or 11
percent reflecting increases in distribution costs and non-deferrable
expenses related to product management and business reinvestment
initiatives. These increases were partially offset by a reduction of $9.8
million related to the change in the investment manager of the proprietary
mutual funds from IDS Life to AEFC, described earlier. Effective with this
change, the previously existing arrangement under which IDS Life
compensated AEFC for investment sub-advisory services was terminated.
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The effective tax rate increased to 32 percent in the first three months of
2004 from 17 percent in the first three months of 2003, reflecting the
December 30, 2003 distribution of substantially all of IDS Life's interests
in low income housing investments to AEFC which caused unfavorable tax
provision impacts. For 2003 and prior years, IDS Life's federal income
taxes were reduced by credits arising from these investments. Such
distribution is more fully discussed in IDS Life's Annual Report on Form
10-K for the year ended December 31, 2003.
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 DAC for universal life and
variable universal life insurance and certain annuities are amortized as a
percentage of the estimated gross profits expected to be realized on the
policies. DAC for other annuities are amortized using the interest method.
For traditional life, disability income and long-term care insurance
policies, the costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including
interest margins, mortality rates, persistency rates, maintenance expense
levels and customer asset value growth rates for variable products. The
customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. This rate is net of asset fees, and
anticipates a blend of equity and fixed income investments. Management
routinely monitors a wide variety of trends in the business, including
comparisons of actual and assumed experience. Management reviews and, where
appropriate, adjusts its assumptions with respect to customer asset value
growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
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.
During the first quarter of 2004 and in conjunction with the adoption of
SOP 03-1, IDS Life extended the time periods over which DAC associated with
certain insurance and annuity products are amortized. In adopting SOP 03-1,
IDS Life established additional liabilities for insurance benefits that may
become payable under variable annuity death benefit guarantees or on single
pay universal life contracts. In order to establish the proper
relationships between these liabilities and DAC associated with the same
contracts, IDS Life changed its estimates of meaningful life for certain
contracts so DAC amortization periods are the same as liability funding
periods. As a result, IDS Life recognized a $66 million valuation benefit
reflecting the lengthening of the amortization periods for the same
contracts impacted by SOP 03-1. The SOP 03-1 valuation benefit above was
partially offset by the pretax $9.6
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million DAC reduction* due to the valuation system conversion discussed in
the Benefits and Expenses section.
DAC balances for various insurance and annuity products sold by IDS Life
are set forth below:
(Millions) March 31, 2004 December 31, 2003
- --------------------------------------------------- ---------------------- ----------------------------
Annuities $ 1,721 $ 1,734
Life and health insurance 1,641 1,602
------------ ------------
Total $ 3,362 $ 3,336
============ ============
In addition to the DAC balances shown above and in conjunction with IDS
Life's adoption of SOP 03-1, IDS Life had $271 million and $279 million of
deferred sales inducements costs at March 31, 2004 and December 31, 2003,
respectively. Sales inducement costs include bonus interest credits and
premium credits added to certain annuity contract values. IDS Life
capitalizes these benefit costs to the extent they are incremental to
amounts that would be credited on similar contracts without the applicable
feature. The amounts capitalized are amortized using the same methodology
and assumptions used to amortize deferred policy acquisition costs.
*This valuation adjustment is an increase to the $92 million estimated
premium deficiency IDS Life recognized in the third quarter of 2003.
Impact of Recent Market Volatility on Results of Operations
Various aspects of IDS Life's business are impacted by equity market levels
and other market-based events. Several areas in particular involve DAC and
deferred sales inducements, recognition of benefits under guaranteed
minimum death benefits (GMDB) and certain other variable annuity benefits,
asset management fees and structured investments. The direction and
magnitude of the changes in equity markets can increase or decrease
amortization of DAC and deferred sales inducement benefits, incurred
benefit amounts under GMDB and other variable annuity benefit provisions
and asset management fees and correspondingly affect results of operations
in any particular period. Similarly, the value of IDS Life's structured
investment portfolio and derivatives arising from the December 31, 2003
Financial Accounting Standards Board (FASB) Interpretation No. 46,
"Consolidation of Variable Interest Entities," revised December 2003 (FIN
46) related consolidation of certain secured loan trusts are 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.
Liquidity and Capital Resources
The liquidity requirements of IDS Life are generally met by funds provided
by premiums, investment income, proceeds from sales of investments as well
as maturities, periodic repayments of investment principal and capital
contributions from AEFC. The primary uses of funds are policy benefits,
commissions, other product-related acquisition costs and operating
expenses, policy loans, dividends and investment purchases. IDS Life
routinely reviews its sources and uses of funds in order to meet its
ongoing obligations.
IDS Life has available lines of credit with AEFC aggregating $200 million
($100 million committed and $100 million uncommitted). There were no line
of credit borrowings
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outstanding with AEFC at March 31, 2004. At March 31, 2004, IDS Life had
outstanding reverse repurchase agreements totaling $70.0 million. Both the
line of credit and the reverse repurchase agreements are used strictly as
short-term sources of funds.
Investments include $2.4 billion, $2.4 billion and $1.6 billion of below
investment grade securities (excluding net unrealized appreciation and
depreciation) at March 31, 2004, December 31, 2003 and March 31, 2003,
respectively. These investments represent 7.6 percent, 7.7 percent and 5.3
percent of IDS Life's investment portfolio at March 31, 2004, December 31,
2003 and March 31, 2003, respectively.
During 2004, IDS Life continued to hold investments in CDOs, some of which
are also managed by an affiliate, and were not consolidated pursuant to the
adoption of FIN 46 as IDS Life was not considered a primary beneficiary.
IDS Life invested in CDOs as part of its investment strategy in order to
offer a competitive rate to contractholders' accounts. IDS Life's exposure
as an investor is limited solely to its aggregate investment in the CDOs,
and it has no obligations or commitments, contingent or otherwise, that
could require any further funding of such investments. As of March 31,
2004, the carrying values of the CDO residual tranches, managed by an
affiliate, were $6 million. IDS Life also has a $520 million interest in a
CDO securitization, as well as an additional $24 million in rated CDO
tranches managed by a third party. CDOs are illiquid investments. As an
investor in the residual tranche of CDOs, IDS Life's return correlates to
the performance of portfolios of high-yield bonds and/or bank loans.
The carrying value of the CDOs, as well as derivatives recorded on the
balance sheet as a result of consolidating three SLTs in accordance with
FIN 46, and IDS Life'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 IDS Life. Although the exposure associated with
IDS Life's investment in CDOs is limited to the carrying value of such
investments, they have additional volatility 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 IDS Life's
exposure. In addition, the derivatives recorded as a result of
consolidating the three SLTs under FIN 46 are valued based on the expected
performance of a reference portfolio of high-yield loans. The exposure to
loss as a result of IDS Life's investment in these SLTs consolidated under
FIN 46 is represented by the net assets of the consolidated SLTs which were
$692 million at March 31, 2004. Deterioration in the value of the
high-yield bonds or bank loans would likely result in deterioration of IDS
Life's investment return with respect to the relevant CDO or consolidated
derivative, as the case may be. In the event of significant deterioration
of a portfolio, the relevant CDO or SLT structure containing the
consolidated derivative may be subject to early liquidation, which could
result in further deterioration of the investment return or, in severe
cases, loss of the CDO or consolidated derivative carrying amount.
OTHER REPORTING MATTERS
Accounting Developments
See "Recently Issued Accounting Standards" section of Note 1 to the
Consolidated Financial Statements.
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ITEM 4. CONTROLS AND PROCEDURES
IDS Life's management, with the participation of IDS Life's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of IDS
Life'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, IDS Life's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period,
IDS Life's disclosure controls and procedures are effective.
Forward-Looking Statements
This report includes forward-looking statements that are subject to risks
and uncertainties that could cause results to differ materially from such
statements. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "should," "could," "likely," and similar
expressions are intended to identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. IDS
Life undertakes no obligation to publicly update or revise any
forward-looking statements. Important factors that could cause actual
results to differ materially from IDS Life's forward-looking statements
include, but are not limited to: fluctuations in external markets, which
can affect the amount and types of investment products sold, the market
value of its separate account assets and related fees received and the
amount of amortization of DAC; potential deterioration in high-yield and
other investments, which could result in further losses in IDS Life's
investment portfolio; changes in assumptions relating to DAC which also
could impact the amount of DAC amortization; the ability to sell certain
high-yield investments at expected values and within anticipated time
frames and to maintain its high-yield portfolio at certain levels in the
future; the types and the value of certain death benefit features on
variable annuity contracts; the affect of assessments and other surcharges
for guaranty funds; the response of reinsurance companies under reinsurance
contracts; the impact of reinsurance rates and the availability and
adequacy of reinsurance to protect IDS Life against losses; negative
changes in IDS Life Insurance Company's and its four life insurance company
subsidiaries' credit ratings; increasing competition in all IDS Life's
major businesses; the adoption of recently issued accounting rules related
to the consolidation of variable interest entities, including those
involving SLTs that IDS Life invests in, and accounting for guarantees
under SOP 03-1, both of which could further affect both IDS Life's balance
sheet and results of operations; and outcomes of litigation. A further
description of these and other risks and uncertainties can be found in IDS
Life's Annual Report on Form 10-K for the year ended December 31, 2003, and
its other reports filed with the SEC.
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PART II - OTHER INFORMATION
IDS LIFE INSURANCE COMPANY
Item 1. Legal Proceedings
The Securities and Exchange Commission (SEC), the National Association
of Securities Dealers (NASD) and several state attorneys general have
brought proceedings challenging several mutual fund and variable
account financial practices, including suitability generally, late
trading, market timing, disclosure of revenue sharing arrangements and
inappropriate sales. IDS Life Insurance Company has received requests
for information and has been contacted by regulatory authorities
concerning its practices and is cooperating fully with these
inquiries.
In November 2002, IDS Life Insurance Company was named in a purported
class action entitled John Haritos, et al. v. American Express
Financial Advisors, Inc. et al., No. 02 2255, United States District
Court, District of Arizona. The complaint originally named IDS Life
Insurance Company as a defendant, but IDS Life Insurance Company was
dismissed when plaintiffs chose to file an Amended Complaint not naming
IDS Life Insurance Company. This action alleges that defendants
violated the Investment Advisors Act of 1940, 15 U.S.C., in the sale of
financial plans and various products including those of IDS Life
Insurance Company. The complaint seeks certification of a nationwide
class, restitution, injunctive relief, and punitive damages. Defendants
have moved to dismiss the action and that motion is pending.
IDS Life Insurance Company and its subsidiaries are involved in other
legal and arbitration proceedings concerning matters arising in
connection with the conduct of their respective business activities.
IDS Life believes it has meritorious defenses to each of these actions
and intends to defend them vigorously. IDS Life believes that it is not
a party to, nor are any of its properties the subject of, any pending
legal or arbitration proceedings that would have a material adverse
effect on IDS Life's consolidated financial condition, results of
operations or liquidity. However, it is possible that the outcome of
any such proceedings could have a material impact on results of
operations in any particular reporting period as the proceedings are
resolved.
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 IDS Life during the
quarterly period ended March 31, 2004.
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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: May 10, 2004 By /s/ Mark E. Schwarzmann
---------------------------------------------
Mark E. Schwarzmann
Director, Chairman of the Board and
Chief Executive Officer
Date: May 10, 2004 By /s/ Arthur H. Berman
---------------------------------------------
Arthur H. Berman
Director and 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 Mark E. Schwarzmann pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Arthur H. Berman pursuant to Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certification of Mark E. Schwarzmann and Arthur H. Berman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
E-1