UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
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(Exact name of registrant as specified in its charter)
Minnesota 41-0823832
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
829 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act).
Yes [ ] No [X]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a)
and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
TABLE OF CONTENTS
Form 10-K
Item Number
PART I Page
1. Business................................................................................. 1
Introduction............................................................................. 1
Asset Accumulation and Investments: Product Features and Risks.......................... 2
Insurance: Product Features and Risks................................................... 3
General and Variable Account Assets...................................................... 5
Competitive Environment.................................................................. 7
Regulation............................................................................... 7
Ratings.................................................................................. 8
Risk-Based Capital....................................................................... 8
Liabilities for Future Policy Benefits................................................... 9
Deferred Policy Acquisition Costs........................................................ 9
2. Properties............................................................................... 9
3. Legal Proceedings........................................................................ 9
4. Submission of Matters to a Vote of Security Holders...................................... 10
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 10
6. Selected Financial Data.................................................................. 10
7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of
Operations............................................................................... 10
7A. Quantitative and Qualitative Disclosures About Market Risk............................... 23
8. Financial Statements and Supplementary Data.............................................. 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................... 24
9A. Controls and Procedures.................................................................. 24
PART III
14. Principal Accountant Fees and Services................................................... 24
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 25
Signatures............................................................................... 26
Index to Financial Statements............................................................ F-1
Exhibit Index............................................................................ E-1
PART I
ITEM 1. BUSINESS
Introduction
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 annuity
products almost exclusively through the American Express Financial Advisors Inc.
(AEFAI) retail sales force. IDS Life Insurance Company has four wholly owned
life insurance company subsidiaries: IDS Life Insurance Company of New York, a
New York stock life insurance company (IDS Life of New York); American Partners
Life Insurance Company, an Arizona stock life insurance company (American
Partners Life); American Enterprise Life Insurance Company, an Indiana stock
life insurance company (American Enterprise Life); and American Centurion Life
Assurance Company, a New York stock life insurance company (American Centurion
Life), that distribute their products through various distribution channels. IDS
Life of New York serves New York State residents and distributes its fixed and
variable insurance and annuity products exclusively through AEFAI's retail sales
force. American Enterprise Life provides clients of financial institutions and
regional and/or independent broker-dealers with American Express branded
financial products and wholesaling services to support its retail insurance and
annuity operations. American Enterprise Life underwrites fixed and variable
annuity contracts primarily through regional and national financial institutions
and regional and/or independent broker-dealers, in all states except New York
and New Hampshire. Effective in December 2004, American Enterprise Life received
a Certificate of Authority to transact business in the State of New Hampshire.
American Centurion Life offers fixed and variable annuity contracts directly to
American Express(R) Cardmembers and others in New York, as well as fixed and
variable annuity contracts for sale through non-affiliated representatives and
agents of third party distributors, in New York. American Partners Life offers
fixed and variable annuity contracts directly 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 2, LLC which hold real estate investments.
See Note 1 to the Consolidated Financial Statements for further discussion. IDS
Life Insurance Company and its six subsidiaries are referred to collectively as
"IDS Life" in this Form 10-K.
Business sold through AEFAI's retail distribution channel for IDS Life Insurance
Company and IDS Life of New York represents the majority of the insurance and
annuity business for IDS Life, whereas business sold through third party
distribution by American Enterprise Life and American Centurion Life and
business sold directly to consumers by American Partners Life and American
Centurion Life represent a smaller portion of the insurance and annuity business
for IDS Life.
On February 1, 2005, the American Express Company announced plans to pursue a
tax-free spin-off of the common stock of American Express Company's AEFC unit
through a special dividend to American Express common shareholders. The final
transaction, which is subject to certain conditions including receipt of a
favorable tax ruling and approval by American Express Company's Board of
Directors, is expected to close in the third quarter of 2005. In connection with
the spin-off, American Express Company intends to provide additional capital to
IDS Life's insurance businesses to confirm its current financial strength
ratings.
1
Asset Accumulation and Investments: Product Features and Risks
IDS Life offers fixed and variable annuities to a broad range of consumers
through multiple distribution channels. Variable and fixed annuities issued by
IDS Life may be deferred, where assets accumulate until the contract is
surrendered, the contract owner dies, or the contract owner begins receiving
benefits under an annuity payout option; or immediate, where payments begin
within one year of issue and continue for life or for a fixed period of time.
IDS Life is one of the largest issuers of annuities in the United States. For
the year ended December 31, 2004, IDS Life, on a consolidated basis, ranked
eleventh in new sales among the top variable annuity writers according to
VARDS(R), an independent annuity rating service. IDS Life posted fixed and
variable annuity cash sales in 2004 of $6.1 billion, a slight decrease from
2003, reflecting increased variable annuity sales, offset by decreased fixed
annuity sales. (See "Annuity Risks" section below for additional discussion).
Variable Annuities
A variable annuity provides a contract owner with investment returns linked to
the underlying investment accounts of the contract owner's choice. Variable
annuity products also offer a fixed account investment option with guaranteed
minimum interest crediting rates ranging from 0% to 4% at December 31, 2004.
Contract owners can also choose among various contract provisions, including
guaranteed minimum death benefit (GMDB) and guaranteed minimum income benefit
(GMIB) riders. The GMDB rider protects contract beneficiaries from a drop in
death benefits due to performance of the underlying subaccounts. The GMIB rider
guarantees, after a stipulated waiting period from contract issuance, minimum
annuity payments based on a specified rate of contract accumulation value growth
and predetermined annuity purchase rates. 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. In addition, IDS Life offers contracts containing guaranteed
minimum withdrawal benefits (GMWB) provisions.
IDS Life's largest-selling variable annuities are the American Express
Retirement Advisor PlusSM series of variable annuities, which include the
American Express Retirement Advisor Advantage PlusSM Variable Annuity and the
American Express Retirement Advisor Select PlusSM Variable Annuity (the
"Retirement Advisor PlusSM Variable Annuities").
Fixed Annuities
IDS Life's fixed annuity products provide cash value that increases by a fixed
interest rate. The rate is periodically reset at the discretion of the issuing
company subject to certain policy terms relative to minimum interest crediting
rates. IDS Life resets interest rates based on a number of factors, including
interest rate scenario models and risk/return measures. The annuity contracts
issued by IDS Life provide guaranteed minimum interest crediting rates ranging
from 1.5% to 5% at December 31, 2004. In 2003 and in response to a declining
interest rate environment, several states adopted an interim regulation allowing
for a guaranteed minimum interest crediting rate of 1.5% and/or a model
regulation providing for a guaranteed rate that was indexed. A number of states
now follow the model regulation. In response, IDS Life filed a number of
contract changes in 2003 and 2004 to begin taking advantage of lower minimum
guarantees. IDS Life will continue to implement contract changes as states
continue to adopt the new model regulation or as the interim regulation sunsets.
Annuity Risks
The relative proportion between fixed and variable annuities sales is generally
driven by the relative performance of the equity and fixed income markets. In
times of lackluster performance in equity markets, fixed annuity sales are
generally stronger. In times of superior performance in equity markets, variable
annuity sales are generally stronger. In addition, investment management
performance is critical to the profitability of an annuity business.
Innovative features for annuity products have continued to evolve. These
features include GMDBs. Under the Retirement Advisor Advantage PlusSM Variable
Annuities, the standard GMDB provides that if the contract owner is
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age 75 or younger on the date the contract is issued, the beneficiary will
receive the greater of (i) contract value less any purchase payment credits
subject to recapture less a pro rata portion of any rider fees, or (ii) purchase
payments minus adjusted partial surrenders. If the contract owner is age 76 or
older at contract issue, the beneficiary will receive the contract value, less
any purchase payment credits subject to recapture and less a pro-rata portion of
any rider fees.
Additional optional GMDBs are also available. For example, American Express
Retirement Advisor Advantage PlusSM Variable Annuity contract owners age 76 or
older at contract issue may purchase the optional Return of Purchase Payment
Death Benefit for an additional charge which adds the return of purchase
payments less adjusted partial surrenders to the standard death benefit.
Contract owners may also purchase a maximum anniversary value death benefit or a
five-year maximum anniversary value death benefit for an additional charge.
These death benefit riders guarantee to pay the beneficiary the maximum account
value on any contract anniversary or any fifth contract anniversary, plus
subsequent purchase payments less adjusted partial surrenders. IDS Life contract
owner's also may purchase an enhanced earnings death benefit or an enhanced
earnings plus death benefit for an additional charge. These death benefit riders
are intended to provide additional benefits to offset expenses after the
contract owner's death.
American Enterprise Life and other subsidiaries of IDS Life Insurance Company
also offer variable annuities with a variety of guaranteed minimum death benefit
features and certain optional benefits. For example, American Enterprise Life
issues certain variable annuity contracts that contain a guaranteed minimum
income benefit (GMIB) feature which, if elected by the contract owner after a
stipulated waiting period from contract issuance, guarantees a minimum lifetime
annuity based on predetermined annuity purchase rates that may be in excess of
what the contract account value can purchase at then-current annuity purchase
rates. American Enterprise Life bears the risk that protracted under-performance
of the financial markets could result in guaranteed minimum income benefits
being higher than what accumulated contract owner account balances would
support.
The general account assets of IDS Life support these GMDBs, GGUs, and GMIBs (see
"General and Variable Account Assets - The General Account" section below). IDS
Life bears the risk that protracted under-performance of the financial markets
could result in GMDBs, GGUs, and GMIBs being higher than what current account
values would support. Actual experience may differ from IDS Life's estimates.
IDS Life's exposure to risk from these guarantees generally will increase when
equity markets decline.
Insurance: Product Features and Risks
IDS Life issues a wide range of insurance products, each described below. IDS
Life's sales of individual life insurance in 2004, as measured by scheduled
annual premiums and excluding lump sum and excess premiums, consisted of 87%
variable life, 3% universal life and 10% term life and whole life, based on
year-end cash sales reports. IDS Life issues only non-participating life
insurance policies, which do not pay dividends to policyholders from the
insurers' earnings.
Variable Life Insurance
IDS Life Insurance Company's and IDS Life of New York's biggest selling life
insurance products are variable life insurance policies. Variable life insurance
provides life insurance coverage along with investment returns linked to
underlying investment accounts of the policyholder's choice. These products also
offer a fixed account investment option with guaranteed minimum interest
crediting rates ranging from 4.0% to 4.5% at December 31, 2004. For the year
ended December 31, 2004, IDS Life ranked second in variable life insurance sales
on the basis of premiums, according to the Value Survey provided by Tillinghast,
a consulting firm that provides research, consulting and other services to
insurance and financial services companies worldwide. IDS Life's major source of
revenue from variable insurance is cost of insurance and other charges.
IDS Life Insurance Company's and IDS Life of New York's variable life insurance
products include American Express(R) Variable Universal Life IV/American
Express(R) Variable Universal Life IV - Estate Series, which are
3
individual flexible premium life insurance policies. The Estate Series policy is
available to policyholders with initial specified insurance coverage of $1
million or more. IDS Life Insurance Company and IDS Life of New York also issue
American Express Succession Select, a flexible premium survivorship variable
life insurance policy that insures two lives. Succession Select is often used
for estate planning purposes. Finally, IDS Life issues American Express(R)
Single Premium Variable Life, an individual single premium variable life
insurance policy.
Universal Life Insurance
IDS Life Insurance Company's and IDS Life of New York's universal life insurance
products provide life insurance coverage and cash value that increases by a
fixed interest rate. The rate is periodically reset at the discretion of the
issuing company subject to certain policy terms relative to minimum interest
crediting rates. Policies provide guaranteed minimum interest crediting rates
ranging from 4% to 5% at December 31, 2004.
IDS Life's universal life insurance products include Life Protection Plus, Life
Protection Select and Life Protection Select Estate Series. The Estate Series
policy is available to policyholders with initial specified insurance coverage
of $1 million or more.
Traditional Life Insurance Products
IDS Life Insurance Company's and IDS Life of New York's traditional life
insurance products include whole life insurance and term life insurance. Whole
life insurance combines a death benefit with a cash value that generally
increases gradually in amount over a period of years and does not pay a dividend
(non-participating). IDS Life Insurance Company and IDS Life of New York have
sold very little traditional whole life insurance in recent years. Term life
insurance provides only a death benefit, does not build up cash value and does
not pay a dividend. The policyholder chooses the term of coverage with
guaranteed premiums at the time of issue. During the chosen term, IDS Life
Insurance Company and IDS Life of New York cannot raise premium rates even if
claims experience were to deteriorate. At the end of the chosen term, coverage
continues with higher premiums until the maximum age is attained, at which point
the policy expires with no value.
Disability Income Insurance
IDS Life Insurance Company and IDS Life of New York also issue disability income
(DI) insurance. DI insurance provides monthly benefits to individuals who are
unable to earn income at either their occupation at time of disability (own
occupation) or at any suitable occupation (any occupation). Depending upon
occupational and medical underwriting criteria, applicants for DI insurance can
choose "own occupation" and "any occupation" coverage for varying benefit
periods up to age 65. Applicants may also choose various benefit riders to help
them integrate individual DI insurance benefits with Social Security or similar
benefit plans and to help them protect their DI insurance benefits from the risk
of inflation. IDS Life believes it has a significant presence in the DI
insurance market.
Long-Term Care Insurance
As of December 31, 2002, IDS Life Insurance Company and IDS Life of New York
generally discontinued underwriting long-term care (LTC) insurance. Although new
product sales were generally discontinued in the fourth quarter of 2002, IDS
Life Insurance Company and IDS Life of New York retained 50% of the risk on
existing contracts and ceded the remaining 50% of the risk to General Electric
Capital Assurance Company, one of the Genworth financial insurance companies. In
addition, in May 2003, IDS Life Insurance Company and IDS Life of New York began
outsourcing claims administration on their existing block of LTC policies to
General Electric Capital Assurance Company.
In 2004, IDS Life filed for approval to implement rate increases on its existing
block of nursing home only indemnity LTC insurance policies. Implementation of
these rate increases began in early 2005 and will continue throughout the year
as regulatory approvals are obtained.
4
Insurance Risks
Competitive factors applicable to the insurance business include product
features, the interest rates credited to products, the charges deducted from the
cash values of such products, investment performance, the financial strength of
the organization, distribution and management expenses, claims paying ratings
and the services provided to policyholders.
Reinsurance
IDS Life Insurance Company and IDS Life of New York reinsure a portion of the
insurance risks associated with their life and LTC insurance products through
reinsurance agreements with unaffiliated insurance companies. Reinsurance is
used in order to limit losses, minimize exposure to large risks, and provide
additional capacity for future growth and to effect business-sharing
arrangements. IDS Life Insurance Company and IDS Life of New York evaluate the
financial condition of reinsurers to minimize exposure to significant losses
from reinsurer insolvencies. IDS Life Insurance Company and IDS Life of New York
remain primarily liable as the direct insurers on all risks reinsured.
Generally, IDS Life Insurance Company and IDS Life of New York reinsure 90% of
the death benefit liability related to variable, universal and term life
insurance products. As a result, IDS Life Insurance Company and IDS Life of New
York retain, and are at risk for only, 10% of each policy's death benefit from
the first dollar of coverage. IDS Life Insurance Company began reinsuring risks
at this level beginning in 2001 for term life insurance and 2002 for variable
and universal life insurance. IDS Life of New York began reinsuring risks at
this level beginning in 2002 for term life insurance and 2003 for variable and
universal life insurance. Policies issued prior to these dates are not subject
to these same reinsurance levels. The maximum amount of life insurance risk
retained by IDS Life Insurance Company and IDS Life of New York is $750,000 on
any policy insuring a single life and $1.5 million on any flexible premium
survivorship variable life policy. For existing LTC policies, IDS Life Insurance
Company and IDS Life of New York retained 50% of the risk and the remaining 50%
of the risk was ceded to General Electric Capital Assurance Company. Risk on
variable life and universal life policies is reinsured on a yearly renewable
term basis. Risk on term life and LTC policies is reinsured on a coinsurance
basis.
IDS Life Insurance Company and IDS Life of New York retain all risk for new
claims on disability income contracts. Risk is currently managed by limiting the
amount of disability insurance written on any one individual. IDS Life Insurance
Company and IDS Life of New York also retain all risk on accidental death
benefit claims and waiver of premium provisions.
General and Variable Account Assets
Depending on the life insurance and annuity product purchased, the assets of IDS
Life policyholders and contractholders may be placed in either the general
account of IDS Life (the "general account") or, in the case of variable life
insurance and variable annuity products, in a separate account that invests in
underlying investment options (the "variable account").
The General Account
Assets supporting contract values associated with fixed account life insurance
and annuity products, as well as those associated with fixed account options
under variable insurance and annuity products (collectively, the "fixed
accounts"), are part of IDS Life's general account. Under fixed accounts, IDS
Life bears the investment risk. In investing their general account assets, IDS
Life seeks to maintain a dependable and targeted difference or "spread" between
the interest rate earned on general account assets and the interest rate IDS
Life credits to contract owners' fixed accounts. Historically, this spread has
been a major component driver of IDS Life's net income.
The general account assets also include funds accumulated through insurance
premiums and cost of insurance charges related to both fixed and variable
insurance products, as well as annuity contract charges. Historically, these
premiums and charges have been major sources of revenue for IDS Life.
5
In the general account, IDS Life through its investment manager, AEFC, primarily
invest in fixed maturity securities over a broad range of maturities for the
purpose of providing a targeted rate of return on their investments while
controlling risk. The majority of these fixed maturity securities are
interest-bearing investments such as government obligations, mortgage backed
obligations and various corporate debt instruments. IDS Life does not invest in
securities to generate trading profits.
IDS Life and its four life insurance company subsidiaries, through their
respective Boards of Directors' investment committees or staff functions, review
models projecting different interest rate scenarios, risk/return measures, and
their effect on profitability. They also review the distribution of assets in
the portfolio by type and credit risk sector. The objective is to structure the
investment security portfolio based upon the type and expected behavior of
products in the liability portfolio to meet contractual obligations and achieve
targeted levels of profitability within defined risk parameters.
IDS Life has the discretion to set the rate of interest credited to contract
owners' accounts subject to each contract's guaranteed minimum interest
crediting rate. As of December 31, 2004, this rate varied among fixed accounts
and was as low as 0% and as high as 6.4%. To the extent the yield on IDS Life's
invested general account asset portfolio declines below its target spread plus
the minimum guarantee, IDS Life's profitability would be negatively affected.
The interest rates credited to contract owners' fixed accounts generally reset
towards new business rates; therefore, margins may be negatively impacted by
increases in the general level of interest rates. Part of IDS Life's strategy
includes the use of derivatives, such as interest rate swaptions, for risk
management purposes. These derivatives help protect margins by increasing
investment returns if there is a sudden and severe rise in interest rates,
thereby lessening the impact of an increase in rates credited to contract
owners' fixed accounts. Conversely, in a low interest rate environment, such as
that experienced recently, margins may be negatively impacted as the interest
rates available on IDS Life's invested assets approach guaranteed minimum
interest rates on the insurance or annuity contracts inforce. This negative
impact may be compounded by the fact that many of these interest-bearing
investments are callable or pre-payable by the issuer and calls and prepayments
are more likely to occur in a low interest rate environment. In light of the
present environment in which interest rates are at historic lows, IDS Life
imposed fixed account allocation and transfer requirements for new variable
annuity sales in 2003. These requirements were relaxed slightly in 2004 with the
introduction of lower guaranteed minimum interest rates.
The Variable Accounts
Variable insurance and annuity products also offer variable account investment
options in addition to fixed account options. Under the variable account option,
contract owners bear the investment risk. The variable accounts are registered
as unit investment trusts under the Investment Company Act of 1940.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund. Contract owners can allocate their
payments among these variable subaccounts. The underlying funds are managed both
by internal and unaffiliated third-party money managers. These funds invest in
portfolios containing a variety of securities including common stocks, bonds,
managed assets and/or short-term securities. The value of the subaccounts
fluctuates with the investment return of the funds in which the subaccounts
invest.
IDS Life's major source of revenue from the variable annuities it sells are the
fees it receives, including mortality and expense risk and other fees. Before
the fourth quarter of 2003, these fees included investment advisory fees for
internally managed mutual funds. In the fourth quarter of 2003, AEFC replaced
IDS Life as the investment manager and assumed these duties for the mutual funds
and retained IDS Life and its non-New York subsidiaries to provide underlying
administrative services. 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. IDS Life's administrative service fees will vary with the
market values of these proprietary mutual funds. In addition to IDS Life's
administrative service fees, IDS Life receives mortality and expense risk fees
from the separate accounts based on the level of assets. In March 2004, a
similar
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structure for the New York subsidiaries was approved by the New York Insurance
Department effective as of February 1, 2004. Fees payable from AEFC to IDS Life
include administrative service fees.
Variable insurance and annuities are "separate account" rather than general
account products. State insurance law prescribes that separate accounts
constitute a separate operation from the general account and as such are only
available to fund the liabilities of the separate accounts. Under the
subaccounts of each variable account, IDS Life credits or charges income,
capital gains and losses only to that subaccount.
Competitive Environment
The insurance and annuity business is highly competitive, and IDS Life's
competitors consist of both stock and mutual insurance companies, as well as
other financial intermediaries marketing insurance products. IDS Life's annuity
business competes with numerous other insurance companies, as well as certain
banks, securities brokerage firms, independent financial advisors and other
financial intermediaries that market annuities, mutual funds and other
retirement-oriented products.
Competitive factors affecting the sale of insurance and annuity products
include:
o cost of insurance and other contract charges;
o mortality, expense and other contract charges;
o the level of premium rates;
o investment performance;
o the level of interest crediting rates;
o financial strength ratings from third party agencies such as A. M. Best;
o the breadth, quality and design of products and services offered;
o the quality of underwriting;
o the effectiveness of advertising and promotion campaigns;
o reputation and recognition in the marketplace;
o distribution capabilities and compensation; and
o the quality of customer service;
With respect to variable annuities, customers also focus on guaranteed payment
features that help to insulate them from equity market risk.
Regulation
The Minnesota Department of Commerce (Insurance Division), the Indiana
Department of Insurance, and the Arizona Department of Insurance, regulate IDS
Life Insurance Company, American Enterprise Life and American Partners Life,
respectively. The New York State Department of Insurance regulates American
Centurion Life and IDS Life of New York.
In addition to being regulated by their domiciliary regulators, IDS Life
Insurance Company and its subsidiaries are also regulated by each of the
insurance regulators in the states where each is authorized to transact the
business of insurance. These other states also regulate such matters as the
licensing of sales personnel and, in some cases, the marketing and contents of
insurance policies and annuity contracts. The primary purpose of such regulation
and supervision is to protect the interests of policyholders and
contractholders. Financial regulation of IDS Life is extensive. IDS Life's
financial and intercompany transactions (such as intercompany dividends, capital
contributions and investment activity) are often subject to pre-notification and
continuing evaluation by the domiciliary regulators. Virtually all states
require participation in insurance guaranty associations, which assess insurance
companies in order to fund claims of policyholders and contractholders of
insolvent insurance companies.
7
Insurance companies have recently been the subject of increasing regulatory,
legislative and judicial scrutiny. Numerous state and federal regulatory
agencies have commenced investigations regarding sales and marketing practices,
compensation arrangements and anticompetitive activities, and market timing and
late trading in connection with insurance, annuity and mutual fund products. IDS
Life has been contacted by regulatory agencies for information relating to some
of these investigations and is cooperating with those inquiries. IDS Life is
reviewing its compensation arrangements and other operations that may be
affected by these regulatory investigations, and the legal precedents and new
industry-wide legislation, rules and regulations that may arise from these
investigations.
At the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuities and life insurance policies, accounting procedures, as well as the
treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an insurance policy. New federal regulation in
any of these areas could potentially have an adverse effect upon IDS Life. Also,
recent federal legislative proposals aimed at the promotion of tax-advantaged
savings through Lifetime Savings Accounts and Retirement Savings Accounts may
adversely impact IDS Life's sales of annuity and life insurance products if
enacted.
Ratings
IDS Life Insurance Company receives ratings from independent rating agencies.
Generally, its four insurance subsidiaries do not receive an individual rating,
but receive the same rating as IDS Life Insurance Company. These agencies
evaluate the financial soundness and claims-paying ability of insurance
companies based on a number of different factors. The ratings reflect each
agency's estimation of IDS Life's ability to meet its contractual obligations
such as making annuity payouts and paying death benefits and other distributions
from the contracts. As such, the ratings relate to IDS Life's general account
and not to the management or performance of the variable accounts of the
contracts.
Ratings are important to maintaining public confidence in IDS Life. Lowering of
IDS Life's ratings could have a material adverse effect on IDS Life Insurance
Company's and its four life insurance company subsidiaries' ability to market
their products and could lead to increased surrenders of their products. Rating
agencies continually review the financial performance and condition of insurers.
As of the end of 2004, IDS Life Insurance Company was rated "A+" (Superior) by
A.M. Best Company, Inc. and its claims-paying ability/financial strength was
rated "Aa3" (Excellent) by Moody's Investors Service, Inc. (Moody's), and "AA"
(Very Strong) by Fitch. On February 1, 2005, A.M. Best placed IDS Life's
financial strength rating of "A+" under review with negative implications,
Moody's affirmed IDS Life's financial strength rating at "Aa3" and Fitch lowered
IDS Life's financial strength rating to "AA-" and placed them on "Rating Watch
Negative" following American Express Company's announcement that it intends to
pursue a spin-off of its full ownership of AEFC, the holding company for IDS
Life. In connection with the spin-off, American Express Company intends to
provide additional capital to IDS Life to confirm its current financial strength
ratings.
The foregoing ratings reflect each rating agency's opinion of IDS Life Insurance
Company's financial strength, operating performance and ability to meet its
obligations to contract owners.
Risk-Based Capital
The National Association of Insurance Commissioners (NAIC) defines Risk-Based
Capital (RBC) requirements for life insurance companies. The RBC requirements
are to be used as minimum capital requirements by the NAIC and states to
identify companies that merit further regulatory action. At December 31, 2004,
IDS Life Insurance Company had total adjusted capital of approximately $2.7
billion on a statutory accounting basis. The Minnesota Department of Commerce,
IDS Life Insurance Company's primary insurance regulator, requires insurance
companies to maintain a minimum RBC called the "authorized control level RBC."
If total adjusted capital fell below the authorized control level RBC, the
Minnesota Department of Commerce would be authorized to exercise
8
management control over IDS Life Insurance Company. For IDS Life Insurance
Company, the authorized control level RBC was $372.9 million at December 31,
2004.
In addition, IDS Life Insurance Company, like other life insurance companies, is
expected to maintain capital at a level above which would require it to file an
action plan with the Minnesota Department of Commerce. This is referred to as
the "company action level RBC." For IDS Life Insurance Company, the company
action level RBC was $745.9 million at December 31, 2004.
As described above, IDS Life Insurance Company maintains levels of RBC far in
excess of the authorized control and company action levels required by the
Minnesota Department of Commerce. The level of capital maintained in IDS Life
Insurance Company is thought to be appropriate by management and is more
commensurate with standards necessary to maintain IDS Life Insurance Company's
ratings with the various credit and claims-paying rating agencies.
Liabilities for Future Policy Benefits
IDS Life must maintain adequate financial reserves to cover the insurance risks
associated with the insurance products it issues. Generally, reserves represent
estimated assets that IDS Life needs to provide adequately for future benefits
and expenses. See "Critical Accounting Policies" within management's discussion
and analysis below for further discussion regarding liabilities for future
policy benefits, which portions of such are incorporated by reference.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of insurance and annuity
products. These costs are deferred to the extent they are recoverable from
future profits. For insurance and annuity products, DAC are amortized over
periods approximating the lives of the business, principally as a percentage of
premiums or estimated gross profits or as a portion of interest margins
associated with the products. See "Critical Accounting Policies" within
management's discussion and analysis below for further discussion of DAC.
ITEM 2. PROPERTIES
IDS Life Insurance Company occupies office space in Minneapolis, Minnesota,
which is leased or owned by AEFC. IDS Life Insurance Company reimburses AEFC for
rent based on direct and indirect allocation methods. IDS Life of New York and
American Centurion Life rent office space in Albany, New York. Facilities
occupied by IDS Life are believed to be adequate for the purposes for which they
are used and are well maintained.
ITEM 3. 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 and
its subsidiaries have received requests for information and have 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 (IAA) of 1940, 15 U.S.C., in the
sale of financial
9
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. In June 2004, the Court denied the Company's
motion to dismiss the action as a matter of law. The Court did indicate,
however, that the plaintiffs may not have a compelling case under the IAA.
Notwithstanding the Court's denial of the Company's motion to dismiss, the
Company believes that the plaintiffs' case suffers from various factual and
legal weaknesses and it intends to continue to defend the case vigorously. The
Company has filed a motion to dismiss the plaintiffs' Second Amended Complaint.
IDS Life and its subsidiaries are involved in a number of 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IDS Life follows United States generally accepted accounting principles (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 of 1995. See the
Forward-Looking Statements section below.
Management's narrative analysis of the results of operations is presented in
lieu of management's discussion and analysis of financial condition and results
of operations, pursuant to General Instructions I(2) (a) of Form 10-K.
Results of Operations for the Years Ended December 31, 2004 and 2003
Pretax income rose 38 percent to $792.4 million for the year ended December 31,
2004. The increase primarily reflects increased net investment income, mortality
and expense risk and other fees, net realized gain on investments, lower
interest credited on investment contracts and universal life-type insurance
costs and lower amortization of deferred policy acquisition costs (DAC),
partially offset by higher other insurance and operating costs. See the DAC
section below for further discussion of DAC and related third quarter 2004 and
2003 adjustments.
10
IDS Life's effective tax rate rose to 29 percent in 2004 from 12 percent in 2003
primarily due to the impact of lower levels of tax-advantaged items in pretax
income during 2004, reduced low income housing credits as a result of the
December 2003 distribution of substantially all of IDS Life's interests in low
income housing investments to AEFC and the one-time effect of favorable
technical guidance related to the taxation of dividend income recognized in
2003. For 2003 and prior years, IDS Life's federal income taxes were reduced by
credits arising from low income housing investments.
Net income for the year ended December 31, 2004 reflects the $70.6 million
($108.6 million pretax) impact of IDS Life's January 1, 2004 adoption of the
American Institute of Certified Public Accountants Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration contracts and for Separate Accounts" (SOP 03-1). SOP 03-1 requires
insurance enterprises to establish liabilities for benefits that may become
payable under variable annuity death benefit guarantees or other insurance or
annuity contract provisions. See "Application of Recent Accounting Standards"
section in Note 1 to the Consolidated Financial Statements regarding the impact
of adoption of SOP 03-1.
Revenues
Total revenues increased $162 million or 5 percent primarily due to higher net
investment income, mortality and expense risk and other fees and net realized
gain on investments compared to 2003.
Net investment income increased $72.3 million or 4 percent. Net investment
income for the year ended December 31, 2003 includes $77.3 million of
amortization expense of certain low income housing investments. See effective
tax rate discussion above.
Contractholder and policyholder charges increased $24.2 million or 5 percent
reflecting increased cost of insurance charges on variable universal life
products as well as an increase in the amount of surrender charges on variable
annuity products.
Mortality and expense risk and other fees increased $39.8 million or 10 percent
reflecting higher average market 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. IDS Life's 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 IDS Life's 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 $27.3 million in 2004 compared to $4.4
million in 2003. For the year ended December 31, 2004, $49.5 million of total
investment gains were partially offset by $22.2 million of impairments and
losses. Included in these total net investment gains and losses are $48.4
million of gross realized gains and $17.5 million of gross realized losses from
sales of securities, as well as $0.1 million of other-than-temporary impairment
losses on investments, classified as Available-for-Sale.
For the year ended December 31, 2003, $257 million of total investment gains
were partially offset by $252.6 million of impairments and losses. Included in
these total net investment gains and losses are $255.3 million of gross realized
gains and $135.5 million of gross realized losses from sales of securities, as
well as $102.6 million of other-than-temporary impairment losses on investments,
classified as Available-for-Sale.
Benefits and Expenses
Total benefits and expenses decreased $55.8 million or 2 percent, reflecting
lower interest crediting rates and the effect on equity indexed annuities of
lower appreciation in the S&P 500 during 2004 versus 2003, a reduction in DAC
11
amortization in conjunction with the adoption of SOP 03-1 and third quarter DAC
adjustments, partially offset by higher other insurance and operating expenses.
Interest credited on investment contracts and universal life-type insurance
decreased $114.1 million or 9 percent, primarily due to lower interest crediting
rates and the effect on equity indexed annuities of lower appreciation in the
S&P 500 during 2004 versus 2003, partially offset by higher average accumulation
values of annuities and inforce levels of life insurance products.
DAC amortization expense decreased to $260.8 million in 2004 from $264.3 million
in 2003. The decrease reflects the first quarter 2004 $65.7 million pretax DAC
valuation benefit reflecting an adjustment associated with the lengthening of
amortization periods for certain insurance and annuity products in conjunction
with the adoption of SOP 03-1, partially offset by an estimated increase in DAC
amortization of $9.6 million, as a result of IDS Life's completed valuation
system conversion for its long-term care (LTC) insurance business during the
first quarter of 2004. In addition, DAC amortization expense was impacted by a
net $22 million DAC valuation benefit from the third quarter review of DAC as
compared to prior year.
Other insurance and operating expenses increased $50.8 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 related to the change in investment manager
of the proprietary mutual funds from IDS Life to AEFC. Effective with this
change, the previously existing arrangement under which IDS Life compensated
AEFC for investment sub-advisory services were terminated.
Results of Operations for the Years Ended December 31, 2003 and 2002
Income before accounting change rose 33 percent to $507.6 million for year ended
December 31, 2003. Net income rose 44 percent to $552.1 million in 2003, up from
$382.2 million in 2002. Among other things described below, IDS Life's 2003
results reflect a $41.3 million reduction in tax expense 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.
Net Income for 2003 also reflects the impact of IDS Life's adoption of Financial
Accounting Standard Board (FASB) Interpretation No. 46, "Consolidation of
Variable Interest Entities," revised December 2003 (FIN 46), which addresses the
consolidation of variable interest entities (VIEs). The impact of the FIN 46
adoption is discussed in more detail below.
Revenues
Total revenues increased $157.2 or 6 percent primarily due to higher net
investment income and disability income premium revenues, together with net
realized gains on investments versus net realized losses in 2002, partially
offset by lower mortality and expense risk and other fees revenues.
Total premium revenue increased $14.5 million or 4 percent reflecting a higher
number of disability income and traditional life insurance policies.
Net investment income increased $142.6 million or 9 percent in 2003 reflecting
higher levels of invested assets and the effect of appreciation in the S&P 500
on the value of options hedging equity indexed annuities this year versus
depreciation last year, which was offset in interest credited expenses. The
positive effects of the foregoing were partially offset by a lower average yield
on invested assets.
Net realized gain (loss) on investments was $4.4 million in 2003 compared to
($5.2 million) in 2002. For the year ended December 31, 2003, $257 million of
total investment gains were partially offset by $252.6 million of impairments
and losses. Included in these total net investment gains and losses were $255.3
million of gross realized gains and $135.5 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.
12
For the year ended December 31, 2002, $299.6 million of total investment gains
were more than offset by $304.8 million of impairments and losses. Included in
these total net investment gains and losses were $297.6 million of gross
realized gains and $137.4 million of gross realized losses from the sales of
securities, as well as $144.1 million of other-than-temporary investment
impairment losses (including $45 million related to directly-held WorldCom debt
holdings), classified as Available-for-Sale.
Mortality and expense risk and other fees decreased $14.3 million or 4 percent
reflecting lower average market values of separate account assets throughout
2003 compared to 2002. While equity markets increased in the second half of
2003, average market values of separate account assets for the full year of 2003
remained below 2002 levels. For 2003 and 2002, IDS Life provided mutual fund
management services for many of the mutual funds available as investment options
within IDS Life's variable annuity and variable life insurance products. IDS
Life also receives mortality and expense risk fees from the separate accounts
based on asset levels.
Benefits and Expenses
Total benefits and expenses increased $52.7 million or 2 percent, reflecting
higher average accumulation value of annuities and inforce levels and the effect
on equity indexed annuities of appreciation in the S&P 500 during 2003 versus
depreciation in 2002 and higher insurance and other operating expense. The 2003
increase also reflects the 2002 benefit of $7 million ($4 million after-tax),
which resulted from a reversal of a portion of the 2001 September 11th related
reserves as a result of lower than previously anticipated insured loss claims.
Disability and long-term care insurance liability for future policy benefit
expenses increased $7.9 million, or 6 percent, reflecting increases in
underlying policies in force.
Interest credited on investment contracts and universal life-type insurance
increased $78.7 million or 7 percent due to higher average accumulation value of
annuities and inforce levels and the effect on equity indexed annuities of
appreciation in the S&P 500 during 2003 versus depreciation in 2002, partially
offset by lower interest crediting rates.
DAC amortization expense decreased to $264.3 million for the year ended December
31, 2003 from $320.6 million for the year ended December 31, 2002. The decrease
reflects a net $18.0 million increase in DAC amortization expense in the third
quarter of 2002, compared to a net $1.8 million DAC amortization expense
reduction in the third quarter of 2003, both as a result of IDS Life's annual
third quarter review of various DAC assumptions and practices. DAC amortization
expense in 2003 was favorably impacted by recently improved equity market
performance during 2003 as compared to 2002. Additionally, faster-than-assumed
growth in customer asset values associated with IDS Life's variable annuity and
insurance products resulted in a reduction in DAC amortization expense during
2003, whereas declines in variable annuity and insurance customer asset values
resulted in an increase in DAC amortization expense during 2002. See the DAC
section below for further discussion of DAC and related third quarter 2003
adjustments.
Other insurance and operating expenses increased $26.4 million or 6 percent
reflecting the unfavorable impact of fewer capitalized costs due to the ongoing
impact of the third quarter 2002 comprehensive review of DAC-related practices.
These increases were partially offset by a reduction related to the change in
the previously existing arrangement between IDS Life and AEFC as noted above.
IDS Life's effective tax rate decreased to 12 percent in 2003 from 19 percent in
2002 reflecting a $41.3 million reduction in tax expense in 2003 related to the
finalization of the 2002 tax return filed during the third quarter of 2003 and
publication of favorable technical guidance related to the taxation of dividend
income. Partially offsetting this reduction in tax expense was the after-tax
impact of realized losses from sales of mortgage-backed securities as a result
of IDS Life's decision to make an adjustment to the level of such investments
during the third quarter of 2003, such that mortgage-backed securities were 32
percent of IDS Life's overall investment portfolio at December 31, 2003 compared
to 43 percent at December 31, 2002.
13
As described more fully in the "Liquidity and Capital Resources" section below,
the consolidation of FIN 46-related entities resulted in a cumulative effect of
accounting change that increased net income through a non-cash gain of $44.5
million ($68.4 million pretax) related to the consolidation of three secured
loan trusts (SLTs).
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of annuity, life and
health insurance products. These costs are deferred to the extent they are
recoverable from future profits. For annuity and insurance products, DAC are
amortized over periods approximating the lives of the business, generally as a
percentage of premiums or estimated gross profits or as a portion of product
interest margins depending on the product's characteristics.
For IDS Life's annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. The customer asset value growth rate is the rate
at which contract values are assumed to appreciate in the future. The rate is
net of asset fees and anticipates a blend of equity and fixed income
investments. Management reviews and, where appropriate, adjusts its assumptions
with respect to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest 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 might also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an increase in DAC amortization expense while a decrease in amortization
percentage will result in a decrease in DAC amortization expense. 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 in which such changes are made. As a result of these
reviews, IDS Life took actions in both 2004 and 2003 that impacted DAC balance
and expenses.
In the third quarter 2004, these actions resulted in a net $24 million DAC
amortization expense reduction reflecting:
o A $27 million DAC amortization reduction reflecting lower than
previously assumed surrender and mortality rates on variable annuity
products, higher surrender charges collected on universal and variable
universal Life products and higher than previously assumed interest
rate spreads on annuity and universal life products. Variable annuity
surrender rates were reduced between 0 and 20%, depending on product
and duration. Additionally, there was an increase in surrender charge
revenue ranging from 60% to 80% for universal life products and 10% to
50% for certain variable annuity products. The mortality assumption was
changed from duration to an attained age basis. Interest rate spreads
were higher by approximately 40 basis points relative to previously
assumed spreads in 2003.
o A $3 million DAC amortization reduction reflecting a change to the
mid-term assumed growth rate on variable annuity and variable universal
life products.
o A $6 million DAC amortization increase primarily reflecting a reduction
in estimated future premiums on variable annuity products.
In the third quarter 2003, these actions resulted in a net $2 million DAC
amortization expense reduction reflecting:
14
o A $106 million DAC amortization reduction resulting from extending 10 -
15 year amortization periods for certain Flex Annuity contracts to 20
years based on current measurements of meaningful life in which
exchanges of Flex Annuity contracts for other IDS Life variable annuity
contracts are treated as continuations rather than terminations. The
Flex Annuity is an advisor-distributed variable annuity product sold
from 1986 - 1996. In reviewing the persistency of this business in
recent years, IDS Life had observed significant volumes persisting
beyond the end of the 10- and 15-year amortization periods. IDS Life
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 IDS Life. Exchange rates to date under
this program were less than those expected, and IDS Life concluded in
the third quarter of 2003 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 IDS Life
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 IDS Life's Long-Term Care (LTC) business.
IDS Life has monitored this business closely in 2003 as claim and
persistency experience developed adversely. IDS Life 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 of 2003. On the basis of updated analysis completed in the
third quarter of 2003, IDS Life concluded that the associated DAC was
not fully recoverable at current premium levels. The associated DAC
remaining after this $92 million reduction was $162 million.
o A $12 million net DAC amortization increase across IDS Life's Universal
Life, Variable Universal Life and annuity products. IDS Life updated a
number of DAC assumptions resulting in increases in amortization
totaling $26 million and decreases in amortization totaling $14
million. The largest single item was a $16 million increase in
amortization from reflecting lower than previously assumed spreads on
fixed contract values.
During the first quarter of 2004 and in conjunction with the adoption of SOP
03-1, IDS Life (1) established additional liabilities for insurance benefits
that may become payable under variable annuity death benefit guarantees or on
single pay universal life contracts, which prior to January 1, 2004, were
expensed when payable; and (2) extended the time periods over which DAC
associated with certain insurance and annuity products are amortized to coincide
with the liability funding periods in order to establish the proper
relationships between these liabilities and DAC associated with the same
contracts. As a result, IDS Life recognized a $108.6 million pretax charge due
to accounting change on establishing the future liability under death benefit
guarantees and recognized a $65.7 million pretax reduction in DAC amortization
expense to reflect the lengthening of the amortization periods for certain
products impacted by SOP 03-1. Additionally, IDS Life completed a valuation
system conversion for its LTC insurance business during the first quarter of
2004 which resulted in a $6.5 million pretax reduction of estimated LTC
liabilities for future policy benefits and an offsetting estimated $9.6 million
pretax increase in DAC amortization expense. This valuation adjustment was an
increase to the $92 million estimated premium deficiency IDS Life recognized in
the third quarter of 2003.
DAC balances for various insurance and annuity products sold by IDS Life are set
forth below:
December 31, (Millions) 2004 2003
----------------------------------------------------------------------
Life and health insurance $ 1,766 $ 1,602
Annuities 1,872 1,734
----------------------------------------------------------------------
Total $ 3,638 $ 3,336
----------------------------------------------------------------------
In addition to the DAC balances shown above and in conjunction with IDS Life's
adoption of SOP 03-1, sales inducement costs previously included in DAC were
reclassified from DAC and presented as a separate line item in the Consolidated
Balance Sheets. Deferred sales inducement costs were $303 million and $279
million at December
15
31, 2004 and 2003, respectively. Sales inducement costs consist of bonus
interest credits and deposit credits added to certain annuity contract values.
These benefits are capitalized 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 DAC.
Certain Critical Accounting Policies
IDS Life's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The following provides information about
certain critical accounting policies that are important to the Consolidated
Financial Statements and that involve estimates requiring significant management
assumptions and judgments about the effect of matters that are uncertain. These
policies relate to investment securities valuation, deferred policy acquisition
costs and liabilities for future policy benefits.
Investment Securities Valuation
Generally, investment securities are carried at fair value on the balance sheet
with unrealized gains (losses) recorded in other accumulated comprehensive
income (loss) within equity, net of income tax provisions (benefits) and net of
adjustments in assets and liability balances, such as deferred policy
acquisition costs (DAC), to reflect the expected impact on their carrying values
had the unrealized gains (losses) been realized immediately. At December 31,
2004, IDS Life had net unrealized pretax gains on Available-for-Sale securities
of $731.8 million. Gains and losses are recognized in results of operations upon
disposition of the securities. Losses are also recognized when management
determines that a decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer downgrade,
default or bankruptcy. IDS Life also considers the extent to which cost exceeds
fair value, the duration and size of that gap, and management's judgment about
the issuer's current and prospective financial condition. Approximately 90% of
the investment portfolio classified as Available-for-Sale is determined by
quoted market prices. As of December 31, 2004, there were $118.5 million in
gross unrealized losses that related to $7.9 billion of securities, of which
$2.2 billion has been in a continuous unrealized loss position for 12 months or
more. As part of IDS Life's ongoing monitoring process, management has
determined that substantially all of the gross unrealized losses on these
securities are attributable to changes in interest rates. Additionally, IDS Life
has the ability and intent to hold these securities for a time sufficient to
recover its amortized cost and has, therefore, concluded that none of these
securities are other-than-temporarily impaired at December 31, 2004.
Included in IDS Life's investment portfolio discussed above are structured
investments of various asset quality, including collateralized debt obligations
(CDOs) (backed by high-yield bonds and bank loans), which are not readily
marketable. The carrying values of these structured investments are based on
future cash flow projections that require management's judgment as to the amount
and timing of cash payments, defaults and recovery rates of the underlying
investments and, as such, are subject to change. The carrying value will vary if
the actual cash flows differ from projected due to actual defaults or changes in
estimated default or recovery rates. As an example, an increase in the near-term
default rate by 100 basis points, in and of itself, would reduce the cash flow
projections by approximately $10 million based on underlying investments as of
December 31, 2004. The level of change in near-term default rates would have to
be significantly higher than 100 basis points to cause a change in carrying
value of IDS Life's structured investments due to previously recognized
impairment losses coupled with subsequent improvement in actual default rates.
See "Application of Recent Accounting Standards" in Note 1 to the Consolidated
Financial Statements for a discussion of Emerging Issues Task Force (EITF) Issue
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" which when finalized by the FASB, may affect IDS Life's
investment securities valuation policy.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
insurance and annuity business, principally direct sales commissions and other
distribution and underwriting costs that have been deferred on the sale of
annuity, life and health insurance products. These costs are deferred to the
extent they are recoverable from future
16
profits. For annuity and insurance products, DAC are amortized over periods
approximating the lives of the business, principally as a percentage of premiums
or estimated gross profits or as a portion of product interest margins depending
on the product's characteristics.
For IDS Life's annuity and life and health insurance products, the DAC balances
at any reporting date are supported by projections that show management expects
there to be adequate premiums, estimated gross profits or interest margins after
that date to amortize the remaining DAC balances. These projections are
inherently uncertain because they require management to make assumptions about
financial markets, anticipated mortality and morbidity levels, and policyholder
behavior over periods extending well into the future. Projection periods used
for IDS Life's annuity business are typically 10 to 25 years, while projection
periods for IDS Life's life and health insurance products are often 50 years or
longer. Management regularly monitors financial market conditions and actual
policyholder behavior experience and compares them to its assumptions. For
annuity and universal life insurance products, the assumptions made in
projecting future results and calculating the DAC balance and DAC amortization
expense are management's best estimates. Management is required to update these
assumptions whenever it appears that, based on actual experience or other
evidence, earlier estimates should be revised. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC might also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in a decrease in DAC balance and an increase in DAC amortization expense while a
decrease in amortization percentage will result in an increase in DAC balance
and a decrease in DAC amortization expense. The impact on results of operations
of changing assumptions can be either positive or negative in any particular
period and is reflected in the period in which such changes are made.
For other life and health insurance products, the assumptions made in
calculating the DAC balance and DAC amortization expense are intended to provide
for adverse deviations in experience and are revised only if management
concludes experience will be so adverse that DAC is not recoverable. If
management concludes that DAC is not recoverable, DAC is reduced to the amount
that is recoverable based on best estimate assumptions.
For annuity and life and health insurance products, key assumptions underlying
these long-term projections include interest rates (both earning rates on
invested assets and rates credited to policyholder accounts), equity market
performance, mortality and morbidity rates and the rates at which policyholders
are expected to surrender their contracts, make withdrawals from their contracts
and make additional deposits to their contracts. Assumptions about interest
rates drive projected interest margins, while assumptions about rates credited
to policyholder accounts and equity market performance drive projected customer
asset value growth rates and assumptions about surrenders, withdrawals and
deposits comprise projected persistency rates. Management must also make
assumptions to project maintenance expenses associated with servicing its
annuity and insurance business during the DAC amortization period.
The customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. The rate is net of asset fees and
anticipates a blend of equity and fixed income investments. Management reviews
and, where appropriate, adjusts its assumptions with respect to customer asset
value growth rates on a quarterly basis. IDS Life uses a mean reversion method
as a monthly guideline in setting near-term customer asset value growth rates
based on a long-term view of financial market performance as well as actual
historical performance. In periods when market performance results in actual
contract value growth at a rate that is different than that assumed, IDS Life
will reassess the near-term rate in order to continue to project its best
estimate of long-term growth. The near-term growth rate is reviewed to ensure
consistency with management's assessment of anticipated equity market
performance. Management is currently assuming a 7 percent long-term customer
asset value growth rate. If IDS Life increased or decreased its assumption
related to this growth rate by 100 basis points, the impact on the DAC
amortization expense would be a decrease or increase of approximately $50
million pretax.
Management monitors other principal DAC assumptions, such as persistency,
mortality, morbidity, interest margin and maintenance expense levels each
quarter and, when assessed independently, could impact IDS Life's DAC balances.
For example, if IDS Life increased or decreased its interest margin on its
universal life and on the fixed
17
portion of its variable universal life insurance products by 10 basis points,
the impact on the DAC amortization expense would be a decrease or increase of
approximately $5 million pretax. Additionally, if IDS Life extended or reduced
the amortization periods one year for variable annuities to reflect changes in
premium paying persistency and/or surrender assumptions, the impact on DAC
amortization expense would be a decrease or increase of approximately $20
million. The amortization impact of extending or reducing the amortization
period any additional years is not linear.
The analysis of DAC balances and the corresponding amortization is a dynamic
process that considers all relevant factors and assumptions discussed above.
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. An assessment of sensitivity
associated with changes in any single assumption would not necessarily be an
indicator of future results.
Liabilities for Future Policy Benefits
Fixed Annuities and Variable Annuity Guarantees
Liabilities for fixed and variable deferred annuities are equal to accumulation
values which are the cumulative gross deposits, credited interest and fund
performance less withdrawals and mortality and expense risk charges.
The majority of the variable annuity contracts offered by IDS Life contain
guaranteed minimum death benefit (GMDB) provisions. When market values of the
customer's 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. In addition, IDS Life offers contracts containing guaranteed
minimum income benefit (GMIB) and guaranteed minimum withdrawal benefit (GMWB)
provisions.
Effective January 1, 2004, liabilities for variable annuity death and GMIB
benefits have been established under SOP 03-1. Actuarial models to simulate
various equity market scenarios are used to project these benefits and contract
assessments and include making significant assumptions related to customer asset
value growth rates, mortality, persistency and investment margins. These
assumptions, as well as their periodic review by management, are consistent with
those used for DAC purposes. Prior to the adoption of SOP 03-1, amounts paid in
excess of contract value were expensed. See "Application of Recent Accounting
Standards" section in Note 1 of the Consolidated Financial Statements regarding
the impact of the adoption of SOP 03-1.
Liabilities for equity indexed deferred annuities issued in 1999 or later are
equal to the accumulation of host contract values covering guaranteed benefits
and the market value of embedded equity options. Liabilities for equity indexed
deferred annuities issued before 1999 are equal to the present value of
guaranteed benefits and the intrinsic value of index-based benefits.
Liabilities for fixed annuities in a benefit or payout status are based on
future estimated payments using established industry mortality tables and
interest rates, ranging from 4.6% to 9.5% at December 31, 2004, depending on
year of issue, with an average rate of approximately 6.1% at December 31, 2004.
Life and Disability Policies
Liabilities for life insurance claims that have been reported but have not yet
been paid (unpaid claim liabilities) are equal to the death benefits payable
under the policies. For disability income and long-term care claims, unpaid
claim liabilities are equal to benefit amounts due and accrued including the
expense of reviewing claims and making benefit payment determinations.
Liabilities for claims that have occurred but have not been reported are
estimated based on periodic analysis of the actual lag between when a claim
occurs and when it is reported. Where applicable, amounts recoverable from other
insurers who share in the risk of the products offered (reinsurers) are
separately recorded as receivables.
18
Liabilities for fixed and variable universal life insurance are equal to
accumulation values which are the cumulative gross premiums, credited interest,
and fund performance less withdrawals and mortality and expense risk charges.
Liabilities for future benefits on term and whole life insurance are based on
the net level premium method, using anticipated premium payments, mortality
rates, policy persistency and interest rates earned on the assets supporting the
liability. Anticipated mortality rates are based on established industry
mortality tables, with modifications based on Company experience. Anticipated
policy premium payments and persistency rates vary by policy form, issue age and
policy duration. Anticipated interest rates range from 4% to 10% at December 31,
2004, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are the amounts
needed to meet obligations for future claims and are based on the net level
premium method, using anticipated premium payments and morbidity, mortality,
policy persistency and discount rates. Anticipated morbidity and mortality rates
are based on established industry morbidity and mortality tables. Anticipated
policy persistency rates vary by policy form, issue age, policy duration and,
for disability income policies, occupation class. Anticipated discount rates for
disability income policy reserves at December 31, 2004 are 7.5% at policy issue
and grade to 5% over 5 years. Anticipated discount rates for long-term care
policy reserves at December 31, 2004 were 5.9% grading up to 8.9% over 30 years.
Claim reserves are the amounts needed to meet obligations for continuing claim
payments on already incurred claims. Claim reserves are calculated based on
claim continuance tables which estimate the likelihood that an individual will
continue to be eligible for benefits and anticipated interest rates earned on
assets supporting the reserves. Anticipated claim continuance rates are based on
established industry tables. Anticipated discount rates for claim reserves for
both disability income and long-term care range from 3% to 8% at December 31,
2004, with an average rate of approximately 5.2% at December 31, 2004. IDS Life
issues only non-participating life insurance policies, which do not pay
dividends to policyholders from the insurers' earnings.
Liquidity and Capital Resources
Capital Strategy
The liquidity requirements of IDS Life are generally met by funds provided by
deposits, premiums, investment income, proceeds from sales of investments as
well as maturities and periodic repayments of investments and capital
contributions from AEFC. The primary uses of funds are policy benefits,
commissions, other product-related acquisition and sales inducement costs,
operating expenses, policy loans, dividends to AEFC and investment purchases.
IDS Life routinely reviews its sources and uses of funds in order to meet its
ongoing obligations. During the second and fourth quarter of 2004, IDS Life
approved and paid dividends to AEFC of $430 million and $500 million,
respectively. IDS Life expects to continue to maintain adequate capital to meet
internal and external Risk-Based Capital requirements.
Funding Strategy
IDS Life, on a consolidated basis, has available lines of credit with AEFC
aggregating $295 million ($195 million committed and $100 million uncommitted).
There were no line of credit borrowings outstanding with AEFC at December 31,
2004 and 2003. At December 31, 2004 and 2003, IDS Life had outstanding reverse
repurchase agreements totaling $47 million and $67.5 million, respectively. Both
the line of credit and the reverse repurchase agreements are used strictly as
short-term sources of funds.
IDS Life's total assets and liabilities increased in 2004 primarily due to
higher investments, client contract reserves and separate account assets and
liabilities, which increased as a result of new client inflows and market
appreciation. Investments primarily include corporate debt and mortgage and
other asset-backed securities. IDS Life's corporate debt securities comprise a
diverse portfolio with the largest concentrations, accounting for approximately
66 percent of the portfolio, in the following industries: banking and finance,
utilities, and communications and media. Investments also include $4.3 billion
and $4.6 billion of mortgage loans on real estate, policy loans and other
19
investments at December 31, 2004 and 2003, respectively. Investments are
principally funded by sales of insurance and annuities and by reinvested income.
Maturities of these investment securities are largely matched with the expected
future payments of insurance and annuity obligations.
Investments include $2.2 billion and $2.4 billion of below investment grade
securities (excluding net unrealized appreciation and depreciation) at December
31, 2004 and 2003, respectively. These investments represent 8 percent and 9
percent of IDS Life's investment portfolio at December 31, 2004 and 2003,
respectively.
Separate account assets represent funds held for the exclusive benefit of
variable annuity contractholders and variable life insurance policyholders.
These assets are generally carried at market value, and separate account
liabilities are equal to separate account assets. IDS Life earns fees from the
related accounts.
Off-Balance Sheet Arrangements and Contractual Obligations
IDS Life has identified arrangements, obligations and other relationships that
may have a material current or future effect on its financial condition, changes
in financial condition, results of operations or liquidity and capital
resources.
Contractual Obligations
The contractual obligations identified in the table below include on-balance
sheet transactions that represent material expected or contractually committed
future obligations of IDS Life.
Payments due by year
- ---------------------------------------------------------------------------------------------------------------------------------
2006- 2008- 2010 and
(Millions) Total 2005 2007 2009 thereafter
- ---------------------------------------------------------------------------------------------------------------------------------
Insurance and annuities (1) $ 54,755 $ 3,366 $ 7,036 $ 6,937 $ 37,416
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 54,755 $ 3,366 $ 7,036 $ 6,937 $ 37,416
- ---------------------------------------------------------------------------------------------------------------------------------
(1) These scheduled payments are represented by reserves of $32.9 billion at
December 31, 2004 and are based on interest credited, mortality, morbidity,
lapse, surrender and premium payment assumptions. Actual payment obligations
may differ if experience varies from these assumptions. Separate account
liabilities have been excluded as associated contractual obligations would
be met by separate account assets.
IDS Life has off-balance sheet arrangements that include retained interests in
assets transferred to unconsolidated entities as more fully described below.
Consolidated Variable Interest Entities
Assets consolidated as a result of the December 31, 2003 adoption of FIN 46 were
$907 million. The newly consolidated assets consisted of $834 million of cash
and $73 million of derivatives, essentially all of which are restricted. The
effect of consolidating these assets on IDS Life's balance sheet was offset by
IDS Life's previously recorded carrying values of its investment in such
structures, which totaled $673 million, and $166 million of newly consolidated
liabilities.
The consolidation of FIN 46-related entities resulted in a cumulative effect of
accounting change that increased 2003 net income through a non-cash gain of
$44.5 million ($68.4 million pretax) related to the consolidation of the three
SLTs. One of the three SLTs originally consolidated was liquidated in 2004 and
the other two are in the process of being liquidated as of December 31, 2004.
The initial gain related to the application of FIN 46 for the SLTs had no cash
flow effect on IDS Life. The expected impact related to the liquidation of the
two remaining SLTs is a $4 million non-cash charge and has been included in the
2004 results of operations. However, further adjustments to that amount could
occur based on market movements and execution of the liquidation process. To the
extent further adjustments are incurred in the liquidation of the remaining SLT
portfolios, IDS Life's maximum cumulative exposure to pretax loss is represented
by the pretax net assets, which is $462 million at December 31, 2004.
20
Retained Interest in Assets Transferred to Unconsolidated Entities
As of December 31, 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 the 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 December 31, 2004, the carrying
values of the CDO residual tranches, managed by an affiliate, were $4.5 million.
IDS Life also has an interest in a CDO securitization with a carrying value of
$526.2 million of which $389.9 million is considered investment grade. 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 comprising the CDOs.
The carrying value of the CDOs, as well as derivatives recorded on the balance
sheet as a result of consolidating the two SLTs, which are in the process of
being liquidated, 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 CDOs or in the reference
portfolio of the SLTs and, as such, are subject to change. Although the exposure
associated with IDS Life's investment in CDOs is limited to the carrying value
of such investments, the CDOs have significant 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 the event of significant deterioration of a portfolio, the relevant
CDO may be subject to early liquidation, which could result in further
deterioration of the investment return or, in severe cases, loss of the CDO
carrying amount. The derivatives recorded as a result of consolidating and now
liquidating certain SLTs under FIN 46 are primarily valued based on the expected
gains and losses from liquidating a reference portfolio of high-yield loans. As
previously mentioned, the exposure to loss related to these derivatives is
represented by the pretax net assets of the SLTs, which is $462 million at
December 31, 2004. Deterioration in the value of the reference portfolio would
likely result in deterioration of the consolidated derivative value. See Note 3
to the Consolidated Financial Statements for further discussion regarding the
consolidated SLTs.
Contingent Liquidity Planning
AEFC has developed a contingent funding plan that enables IDS Life to meet daily
customer obligations during periods in which its customers elect to withdraw
funds from their annuity and insurance contracts. This plan is designed to
ensure that IDS Life could meet these customer withdrawals by selling or
obtaining financing, through reverse repurchase agreements, of portions of its
investment securities portfolio.
Risk Management
IDS Life and its subsidiaries through their respective Board of Directors'
investment committees or staff functions, review models projecting different
interest rate scenarios, risk/return measures, and their effect on
profitability. They also review the distribution of assets in the portfolio by
type and credit risk sector. The objective is to structure the investment
security portfolios based upon the type and behavior of the liabilities
underlying the products, portfolios to achieve targeted levels of profitability
within defined risk parameters and to meet contractual obligations.
IDS Life has developed an asset/liability management approach with separate
investment objectives to support specific product liabilities, such as insurance
and annuity. As part of this approach, IDS Life develops specific investment
guidelines outlining the minimum required investment return and liquidity
requirements to support future benefit payments under its insurance and annuity
obligations. These same objectives must be consistent with management's overall
investment objectives for the general account investment portfolio.
IDS Life's owned investment securities are primarily invested in long-term and
intermediate-term fixed maturity securities to provide clients with a
competitive rate of return on their investments while controlling risk.
Investment in fixed maturity securities is designed to provide IDS Life with a
targeted margin between the yield earned on
21
investments and the interest rate credited to clients' accounts. IDS Life does
not trade in securities to generate short-term profits for its own account.
As part of IDS Life's investment process, management, with the assistance of its
investment advisors, conducts a quarterly review of investment performance. The
review process conducted by IDS Life's Investment Committee involves the review
of certain invested assets which the committee evaluates to determine whether or
not any investments are other than temporarily impaired and/or which specific
interest earning investments should be put on an interest non-accrual basis.
Interest Rate Risk
At IDS Life, interest rate exposures arise primarily within the fixed account
portion of its annuity and insurance products. Rates credited to customers'
accounts generally reset at shorter intervals than the yield on underlying
investments. Therefore, IDS Life's interest spread margins are affected by
changes in the general level of interest rates. The extent to which the level of
interest rates affects spread margins is managed primarily by a combination of
modifying the maturity structure of the investment portfolio and entering into
interest rate swaptions or other derivative instruments that effectively
lengthen the rate reset interval on customer liabilities. IDS Life has entered
into interest rate swaptions with notional amounts totaling $1.2 billion to
hedge the impact of increasing interest rates on forecasted fixed annuity sales.
The negative effect on IDS Life's pretax earnings of a 100 basis point increase
in interest rates, which assumes repricings and customer behavior based on the
application of proprietary models, to the book of business at December 31, 2004
and December 31, 2003 would be approximately $15.4 million and $19.6 million,
respectively.
Equity Market Risk
IDS Life has two primary exposures to the general level of equity markets. One
exposure is that IDS Life earns fees from variable annuity and variable life
insurance products. The amount of such fees is generally based on the value of
the portfolios, and thus is subject to fluctuation with the general level of
equity market values. To reduce the sensitivity of IDS Life's fee revenues to
the general performance of equity markets, IDS Life has from time to time
entered into various combinations of financial instruments that mitigate the
negative effect on fees that would result from a decline in the equity markets.
The second exposure is that IDS Life writes and purchases index options to
manage the margin related to certain annuity products that pay interest based
upon the relative change in a major stock market index between the beginning and
end of the annuity product's term. At December 31, 2004, equity-based
derivatives with a net notional amount of $260.8 million were outstanding to
hedge the margin related to certain annuity products that pay interest based
upon the relative change in a major stock market index.
The negative effect on IDS Life's pretax earnings of a 10 percent decline in
equity markets would be approximately $36.3 million and $39.3 million based on
annuity and insurance business inforce and equity index options as of December
31, 2004 and 2003, respectively.
Impact of Market-Volatility on Results of Operations
As discussed above, 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 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 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 portfolios 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.
22
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," "may," "should," "could," "would," "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 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: fluctuation in the
equity and fixed income markets, which can affect the amount and types of
investment products sold by IDS Life, and other fees received based on the value
of those assets; IDS Life's ability to recover Deferred Policy Acquisition Costs
(DAC), as well as the timing of such DAC amortization, in connection with the
sale of annuity and insurance products; changes in assumptions relating to DAC,
which could impact the amount of DAC amortization; the ability to improve
investment performance in IDS Life's businesses, including attracting and
retaining high-quality personnel; the success, timeliness and financial impact,
including costs, cost savings and other benefits including increased revenues,
of reengineering initiatives being implemented or considered by IDS Life,
including cost management, structural and strategic measures such as vendor,
process, facilities and operations consolidation, outsourcing (including, among
others, technologies operations), relocating certain functions to lower-cost
overseas locations, moving internal and external functions to the Internet to
save costs, and planned staff reductions relating to certain of such
reengineering actions; the ability to control and manage operating,
infrastructure, advertising and promotion and other expenses as business expands
or changes, including balancing the need for longer-term investment spending;
the potential negative effect on IDS Life's businesses and infrastructure,
including information technology, of terrorist attacks, disasters or other
catastrophic events in the future; IDS Life's ability to develop and roll out
new and attractive products to clients in a timely manner; successfully
cross-selling insurance and annuity products and services to AEFC's customer
base; fluctuations in interest rates, which impacts IDS Life's spreads in the
insurance and annuity businesses; credit trends and the rate of bankruptcies
which can affect returns on IDS Life's investment portfolios; lower than
anticipated spreads in the insurance and annuity business; 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 of IDS Life's insurance and annuity business; the adoption of recently
issued rules related to the consolidation of variable interest entities,
including those involving SLTs that IDS Life invests in which could affect both
IDS Life's financial condition and results of operations; changes in laws or
government regulations; outcomes associated with litigation and compliance and
regulatory matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the management's discussion
and analysis of financial condition and results of operations under the section
risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements.
See Index to Financial Statements at page F-1 hereof.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure 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. There have not been any changes in IDS
Life'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 IDS Life's fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, IDS Life's internal control over financial reporting.
PART III
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express Company has
appointed Ernst & Young LLP (Ernst & Young) as independent auditors to audit the
Consolidated Financial Statements of IDS Life for the years ended December 31,
2004 and 2005.
Fees Paid to the Registrant's Independent Auditor
The following table presents fees for professional services rendered by Ernst &
Young, LLP for the audit of IDS Life's financial statements for the years ended
December 31, 2004 and 2003 and other fees billed for other services rendered by
Ernst & Young, LLP during those periods.
(thousands) 2004 2003
- --------------------------------------------------------------------------------
Audit (1) $ 1,434 $ 1,894
Tax (2) - -
All Other (3) - -
- --------------------------------------------------------------------------------
Total $ 1,434 $ 1,894
================================================================================
(1) Audit fees include audit work performed in the review and preparation of
the financial statements, as well as, services that generally only the
independent auditor can be expected to provide, such as comfort letters,
statutory audits, attest services, consents and assistance with and review
of documents filed with the Securities and Exchange Commission.
(2) Tax fees included all services performed by the independent auditor's tax
personnel.
(3) All other fees included miscellaneous out-of-pocket expenses.
Policy on Pre-Approval of Services Provided by Independent Auditor
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the
engagement of Ernst & Young are subject to the specific pre-approval of the
Audit Committee of American Express Company. All audit and permitted non-audit
services to be performed by Ernst & Young for IDS Life required pre-approval by
the Audit Committee of American Express Company in accordance with pre-approval
procedures established by the Audit Committee of American Express Company. The
procedures require all proposed engagements of Ernst & Young for services to IDS
Life of any kind to be directed to the General Auditor of American Express
Company and then submitted for approval to the Audit Committee of American
Express Company prior to the beginning of any services.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement Schedules on
page F-1 hereof.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedules on
page F-1 hereof.
All information on schedules to the Consolidated Financial Statements
required by Rule 7-05 in Article 7 of Regulation S-X is included in the
Consolidated Financial Statements or is not required. Therefore, all
schedules have been omitted.
(3) Exhibits
See Exhibit Index on pages E-1 through E-3 hereof.
(b) Reports on Form 8-K.
Form 8-K, filed November 24, 2004 (as amended by form 8-K/A
filed on December 9, 2004), items 4.01 and 9.01, reporting on
IDS Life Insurance Company's decision to dismiss the firm of
Ernst & Young LLP as IDS Life Insurance Company's independent
registered public accountants and approve the future
engagement of PricewaterhouseCoopers LLP as IDS Life Insurance
Company's independent registered public accountants for the
fiscal year ending December 31, 2005.
In addition, IDS Life Insurance Company filed a Form 8-K on
February 24, 2005, item 4.01, reporting on the American
Express Company's spin-off of AEFC. In view of the spin-off,
the Audit Committee of the Board of Directors of American
Express Company determined to hire Ernst & Young LLP to be the
independent registered public accountants for AEFC and its
subsidiaries, including IDS Life Insurance Company, for the
2005 audit.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IDS LIFE INSURANCE COMPANY
Registrant
March 14, 2005 By /s/ Mark E. Schwarzmann
- -------------- ----------------------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
March 14, 2005 By /s/ Gumer C. Alvero
- -------------- ----------------------------------------
Date Gumer C. Alvero, Director and
Executive Vice President - Annuities
March 14, 2005 By /s/ Timothy V. Bechtold
- -------------- ----------------------------------------
Date Timothy V. Bechtold, Director and
President
March 14, 2005 By /s/ Arthur H. Berman
- -------------- ----------------------------------------
Date Arthur H. Berman, Director and
Executive Vice President - Finance
and Chief Financial Officer
March 14, 2005 By /s/ David K. Stewart
- -------------- ----------------------------------------
Date David K. Stewart, Vice President and
Controller
March 14, 2005 By /s/ Roger Natarajan
- -------------- ----------------------------------------
Date Roger Natarajan, Director
March 14, 2005 By /s/ Mark E. Schwarzmann
- -------------- ----------------------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and Chief
Executive Officer
26
IDS LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Item 14 (a))
Page Number
Consolidated Financial Statements:
Report of Management F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets at December 31, 2004 and 2003 F-4 to F-5
Consolidated Statements of Income for each of the three
years ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2004, 2003 and 2002 F-7 to F-8
Consolidated Statements of Stockholder's Equity for each of
the three years ended December 31, 2004, 2003 and 2002 F-9 to F-11
Notes to Consolidated Financial Statements F-12 to F-37
Schedules:
All information on schedules to the Consolidated Financial Statements required
by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated
Financial Statements and notes thereto or is not required. Therefore, all
schedules have been omitted.
F-1
Report of Management
The management of IDS Life Insurance Company is responsible for the preparation
and fair presentation of its Consolidated Financial Statements, which have been
prepared in conformity with U.S. generally accepted accounting principles, and
include amounts based on the best judgment of management. IDS Life Insurance
Company's management is also responsible for the accuracy and consistency of
other financial information included in this annual report.
In recognition of its responsibility for the integrity and objectivity of data
in the financial statements, IDS Life Insurance Company maintains a system of
internal control over financial reporting which is designed to provide
reasonable, but not absolute, assurance with respect to the reliability of IDS
Life Insurance Company's financial statements. The concept of reasonable
assurance is based on the notion that the cost of the internal control system
should not exceed the benefits derived.
The internal control system is founded on an ethical climate and includes: (i)
an organizational structure with clearly defined lines of responsibility,
policies and procedures; (ii) a Code of Conduct; and (iii) a careful selection
and training of employees. Internal auditors monitor and assess the
effectiveness of the internal control system and report their findings to
management and the Board of Directors throughout the year. IDS Life Insurance
Company's independent auditors are engaged to express an opinion on the year-end
financial statements and, with the coordinated support of the internal auditors,
review the financial records and related data and test the internal control
system over financial reporting to the extent they believed necessary to support
their report.
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the
responsibility of IDS Life Insurance Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IDS Life Insurance Company as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the years in the period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 2004 IDS
Life Insurance Company adopted the provision of the American Institute of
Certified Public Accountants Statement of Position 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" and in 2003 adopted the provisions of
Financial Accounting Standards Board Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities."
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 18, 2005
F-3
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands, except share data)
2004 2003
--------------------- --------------------
ASSETS
Investments: (Note 2)
Available-for-Sale:
Fixed maturities, at fair value (amortized cost: 2004, $27,400,640; 2003,
$26,596,709) $ 28,131,195 $ 27,293,565
Preferred and common stocks, at fair value (cost: 2004, $30,019;
2003, $30,019) 31,256 31,046
Mortgage loans on real estate, at cost (less reserves: 2004, $45,347;
2003, $47,197) 2,923,542 3,180,020
Policy loans 588,574 578,000
Trading securities and other investments 753,298 801,871
--------------------- --------------------
Total investments 32,427,865 31,884,502
Cash and cash equivalents 131,427 400,294
Restricted cash 535,821 834,448
Amounts recoverable from reinsurers 876,408 754,514
Amounts due from brokers 7,109 1,792
Other accounts receivable 52,527 68,422
Accrued investment income 351,522 355,374
Deferred policy acquisition costs (Note 4) 3,637,956 3,336,208
Deferred sales inducement costs (Note 5) 302,997 278,971
Other assets 308,398 253,858
Separate account assets 32,454,032 27,774,319
--------------------- --------------------
Total assets $ 71,086,062 $ 65,942,702
===================== ====================
See Notes to Consolidated Financial Statements.
F-4
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(Thousands, except share data)
2004 2003
--------------------- ------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities $ 26,978,596 $ 26,376,944
Variable annuity guarantees (Note 5) 32,955 -
Universal life-type insurance 3,689,639 3,569,882
Traditional life insurance 271,516 254,641
Disability income and long-term care insurance 1,942,656 1,724,204
Policy claims and other policyholders' funds 69,884 67,911
Amounts due to brokers 162,609 228,707
Deferred income taxes, net 141,202 139,814
Other liabilities 437,418 408,444
Separate account liabilities 32,454,032 27,774,319
--------------------- ------------------
Total liabilities 66,180,507 60,544,866
--------------------- ------------------
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 1,370,388 1,370,388
Retained earnings 3,190,474 3,624,837
Accumulated other comprehensive income (loss), net of tax:
Net unrealized securities gains 370,615 405,456
Net unrealized derivative losses (28,922) (5,845)
--------------------- ------------------
Total accumulated other comprehensive income 341,693 399,611
--------------------- ------------------
Total stockholder's equity 4,905,555 5,397,836
--------------------- ------------------
Total liabilities and stockholder's equity $ 71,086,062 $ 65,942,702
===================== ==================
See Notes to Consolidated Financial Statements.
F-5
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Thousands)
2004 2003 2002
------------------- --------------------- -----------------
Revenues
Premiums:
Traditional life insurance $ 68,335 $ 64,890 $ 60,740
Disability income and long-term care insurance 283,608 284,111 273,737
------------------- --------------------- -----------------
Total premiums 351,943 349,001 334,477
Net investment income 1,777,446 1,705,185 1,562,592
Contractholder and policyholder charges 554,344 530,190 525,497
Mortality and expense risk and other fees 430,320 390,516 404,787
Net realized gain (loss) on investments 27,292 4,445 (5,243)
------------------- --------------------- -----------------
Total 3,141,345 2,979,337 2,822,110
------------------- --------------------- -----------------
Benefits and expenses
Death and other benefits:
Traditional life insurance 36,843 38,870 36,850
Investment contracts and universal life-type insurance 227,664 209,065 214,222
Disability income and long-term care insurance 67,261 57,339 52,972
Increase (decrease) in liabilities for future policy
benefits:
Traditional life insurance 1,381 (2,401) 2,841
Disability income and long-term care insurance 123,289 142,532 134,605
Interest credited on investment contracts and universal
life-type insurance 1,127,875 1,242,020 1,163,351
Amortization of deferred policy acquisition costs 260,778 264,308 320,629
Other insurance and operating expenses 503,872 453,065 426,633
------------------- --------------------- -----------------
Total 2,348,963 2,404,798 2,352,103
------------------- --------------------- -----------------
Income before income tax provision and accounting change 792,382 574,539 470,007
Income tax provision 226,177 66,945 87,826
------------------- --------------------- -----------------
Income before accounting change 566,205 507,594 382,181
Cumulative effect of accounting change, net of tax
benefit (Note 1) (70,568) 44,463 -
------------------- --------------------- -----------------
Net income $ 495,637 $ 552,057 $ 382,181
=================== ================== =====================
See Notes to Consolidated Financial Statements.
F-6
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Thousands)
2004 2003 2002
------------------- ------------------- -------------------
Cash flows from operating activities
Net income $ 495,637 $ 552,057 $ 382,181
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Policy loans, excluding universal life-type insurance:
Repayment 37,592 43,596 49,256
Issuance (39,230) (34,490) (35,345)
Change in amounts recoverable from reinsurers (121,894) (121,004) (104,344)
Change in other accounts receivable 15,895 (12,177) (9,896)
Change in accrued investment income 3,852 (64,359) (5,139)
Change in deferred policy acquisition costs, net (273,291) (252,620) (229,158)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term care
insurance 235,327 265,233 245,275
Change in policy claims and other policyholder's funds 1,973 (17,489) 13,521
Deferred income tax provision (benefit) 70,574 (30,714) 116,995
Change in other assets and liabilities, net 249,054 (177,937) (18,568)
Amortization of premium, net 92,617 160,862 65,869
Net realized (gain) loss on investments (27,292) (4,445) 5,243
Trading securities, net 6,788 (358,200) (126,094)
Net realized (gain) loss on trading securities (37,460) (30,400) 2,480
Policyholder and contractholder charges, non-cash (231,611) (234,098) (232,725)
Cumulative effect of accounting change, net of tax
benefit (Note 1) 70,568 (44,463) -
------------------- ------------------- -------------------
Net cash provided by (used in) operating activities $ 549,099 $ (360,648) $ 119,551
------------------- ------------------- -------------------
See Notes to Consolidated Financial Statements.
F-7
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
(Thousands)
2004 2003 2002
------------------- -------------------- --------------------
Cash flows from investing activities
Available-for-Sale securities:
Sales 1,603,285 12,232,235 10,093,228
Maturities, sinking fund payments and calls 1,931,070 4,152,088 3,078,509
Purchases (4,392,522) (20,527,995) (16,287,891)
Other investments, excluding policy loans:
Sales, maturities, sinking fund payments and calls 690,333 621,163 482,908
Purchases (402,235) (438,336) (390,092)
Change in amounts due to and from brokers, net (71,415) (3,261,601) 1,693,251
------------------- -------------------- --------------------
Net cash used in investing activities (641,484) (7,222,446) (1,330,087)
------------------- -------------------- --------------------
Cash flows from financing activities
Activities related to investment contracts and
universal life-type insurance:
Considerations received 2,350,426 4,267,115 4,638,111
Interest credited to account values 1,127,875 1,242,020 1,163,351
Surrenders and other benefits (2,715,847) (2,235,889) (1,655,631)
Universal life-type insurance policy loans:
Repayment 84,281 85,760 89,346
Issuance (93,217) (81,740) (80,831)
Capital contribution - 282,061 400,000
Cash dividend to American Express Financial Corporation (930,000) - (70,000)
------------------- -------------------- --------------------
Net cash (used in) provided by financing activities (176,482) 3,559,327 4,484,346
------------------- -------------------- --------------------
Net (decrease) increase in cash and cash equivalents (268,867) (4,023,767) 3,273,810
Cash and cash equivalents at beginning of year 400,294 4,424,061 1,150,251
------------------- -------------------- --------------------
Cash and cash equivalents at end of year $ 131,427 $ 400,294 $ 4,424,061
=================== ==================== ====================
Supplemental disclosures:
Income taxes paid $ 196,397 $ 103,034 $ -
Interest on borrowings $ 411 $ 2,926 $ 7,623
Non-cash ownership transfer of net assets of AEC
to AEFC in 2003 (Note 8) $ - $ 282,061 $ -
See Notes to Consolidated Financial Statements.
F-8
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2004
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 3,000 $ 688,327 $ 84,775 $ 3,042,660 $ 3,818,762
Comprehensive income:
Net income 382,181 382,181
Net unrealized holding gains on
Available-for-Sale securities
arising during the year, net of
deferred policy acquisition costs
of ($75,351) and income tax
provision of ($228,502) 424,360 424,360
Reclassification adjustment for
gains on Available-for-Sale
securities included in net
income, net of income tax
provision of ($5,645) (10,484) (10,484)
Reclassification adjustment for
gains on derivatives included
in net income, net of income tax
provision of ($305) (568) (568)
------------
Total comprehensive income 795,489
Capital contribution 400,000 400,000
Cash dividend to American Express Financial
Corporation (Note 8) (70,000) (70,000)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 3,000 $ 1,088,327 $ 498,083 $ 3,354,841 $ 4,944,251
=============================================================================================================================
See Notes to Consolidated Financial Statements.
F-9
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2004
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 3,000 $ 1,088,327 $ 498,083 $ 3,354,841 $ 4,944,251
Comprehensive income:
Net income 552,057 552,057
Net unrealized holding losses on
Available-for-Sale securities
arising during the year, net of
deferred policy acquisition costs
of ($5,594) and income tax
benefit of $46,545 (79,470) (79,470)
Reclassification adjustment for
gains on Available-for-Sale
securities included in net
income, net of income tax
provision of ($6,044) (11,225) (11,225)
Net unrealized holding losses on
derivatives arising during the
year, net of income tax benefit
of $3,663 (6,802) (6,802)
Reclassification adjustment for
gains on derivatives included
in net income, net of income
tax provision of ($525) (975) (975)
--------------
Total comprehensive income 453,585
Capital contribution 282,061 282,061
Non-cash dividend of American Express
Corporation to American Express
Financial Corporation (Note 8) (282,061) (282,061)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 3,000 $ 1,370,388 $ 399,611 $ 3,624,837 $ 5,397,836
================================================================================================================================
See Notes to Consolidated Financial Statements.
F-10
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2004
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 3,000 $ 1,370,388 $ 399,611 $ 3,624,837 $ 5,397,836
Comprehensive income:
Net income 495,637 495,637
Net unrealized holding losses on
Available-for-Sale securities
arising during the year, net of
income tax benefit of $8,222
and net of adjustments to
deferred policy acquisition
costs of $8,857, deferred sales
inducement costs of
($10,109), and fixed annuity
liabilities of ($86,485). (14,848) (14,848)
Reclassification adjustment for
gains on Available-for-Sale
securities included in net
income, net of income tax
provision of ($10,765) (19,993) (19,993)
Net unrealized holding losses on
derivatives arising during the
year, net of income tax benefit
of $11,901 (22,102) (22,102)
Reclassification adjustment for
gains on derivatives included
in net income, net of income
tax provision of ($525) (975) (975)
--------------
Total comprehensive income 437,719
Cash dividends to American Express
Financial Corporation (Note 8) (930,000) (930,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ 3,000 $ 1,370,388 $ 341,693 $ 3,190,474 $ 4,905,555
==============================================================================================================================
See Notes to Consolidated Financial Statements.
F-11
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Nature of business
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 annuity products almost exclusively through the
American Express Financial Advisors Inc. (AEFAI) retail sales force. IDS
Life Insurance Company has four wholly owned life insurance company
subsidiaries: IDS Life Insurance Company of New York, a New York stock life
insurance company (IDS Life of New York); American Partners Life Insurance
Company, an Arizona stock life insurance company (American Partners Life);
American Enterprise Life Insurance Company, an Indiana stock life insurance
company (American Enterprise Life); and American Centurion Life Assurance
Company, a New York stock life insurance company (American Centurion Life),
that distribute their products through various distribution channels. IDS
Life of New York serves New York State residents and distributes its fixed
and variable insurance and annuity products exclusively through AEFAI's
retail sales force. American Enterprise Life provides clients of financial
institutions and regional and/or independent broker-dealers with American
Express branded financial products and wholesaling services to support its
retail insurance and annuity operations. American Enterprise Life
underwrites fixed and variable annuity contracts primarily through regional
and national financial institutions and regional and/or independent
broker-dealers, in all states except New York and New Hampshire. Effective
in December 2004, American Enterprise Life received a Certificate of
Authority to transact business in the State of New Hampshire. American
Centurion Life offers fixed and variable annuity contracts directly to
American Express(R) Cardmembers and others in New York, as well as fixed
and variable annuity contracts for sale through non-affiliated
representatives and agents of third party distributors, in New York.
American Partners Life offers fixed and variable annuity contracts directly
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 2, LLC which hold real estate investments. IDS Life Insurance Company
and its six subsidiaries are referred to collectively as "IDS Life" in
these Consolidated Financial Statements and notes thereto.
IDS Life's principal products are deferred annuities and universal life
insurance which are issued primarily to individuals. It offers single
premium and flexible premium deferred annuities on both a fixed and
variable dollar basis. Immediate annuities are offered as well. IDS Life's
fixed deferred annuities guarantee a relatively low annual interest rate
during the accumulation period (the time before annuity payments begin).
However, IDS Life has the option of paying a higher rate set at its
discretion. In addition, persons owning one type of annuity may have their
interest calculated based on any increase in a broad-based stock market
index. IDS Life also offers variable annuities, including the American
Express Retirement Advisor Advantage(R) Variable Annuity and the American
Express Retirement Advisor Select(R) Variable Annuity. Life insurance
products currently offered by IDS Life include universal life (fixed and
variable, single life and joint life), single premium life and term
products. Waiver of premium and accidental death benefit riders are
generally available with these life insurance products. IDS Life also
markets disability income insurance. Although IDS Life discontinued
issuance of long-term care insurance at the end of 2002, IDS Life retains
risk on a large block of existing contracts, 50% of which are reinsured. In
May 2003, IDS Life began outsourcing claims administration as well.
F-12
Under IDS Life's variable life insurance and variable annuity products
described above, the purchaser may choose among investment options that
include IDS Life's "general account" as well as from a variety of
portfolios including common stocks, bonds, managed assets and/or short-term
securities.
Basis of presentation
The accompanying Consolidated Financial Statements include the accounts of
IDS Life, its wholly owned subsidiaries and certain variable interest
entities. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying Consolidated Financial Statements have been prepared in
conformity with U. S. generally accepted accounting principles (GAAP) which
vary in certain respects from reporting practices prescribed or permitted
by state insurance regulatory authorities as included in Note 7. Certain
prior year amounts have been reclassified to conform to the current year's
presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation
IDS Life consolidates all non-variable interest entities, as defined below,
in which it holds a greater than 50 percent voting interest, except for
immaterial seed money investments in mutual and hedge funds, which are
accounted for as trading securities. Entities in which IDS Life holds a
greater than 20 percent but less than 50 percent voting interest are
accounted for under the equity method. All other investments in
subsidiaries are accounted for under the cost method unless IDS Life
determines that it exercises significant influence over the entity by means
other than voting rights, in which case, these entities are either
accounted for under the equity method or are consolidated, as appropriate.
IDS Life also consolidates all Variable Interest Entities (VIEs) for which
it is considered to be the primary beneficiary pursuant to Financial
Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of
Variable Interest Entities," as revised (FIN 46). The determination as to
whether an entity is a VIE is based on the amount and characteristics of
the entity's equity. In general, FIN 46 requires a VIE to be consolidated
when an enterprise has a variable interest for which it will absorb a
majority of the VIE's expected losses or receive a majority of the VIE's
expected residual return.
Qualifying Special Purpose Entities (QSPEs) under Statement of Financial
Accounting Standards (SFAS) No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," are not
consolidated. Such QSPEs include a securitization trust containing a
majority of the IDS Life's rated collateralized debt obligations (CDOs)
described in Note 2.
Revenues
Premium revenues
Premium revenues include premiums on traditional life, disability income
and long-term care products. Such premiums are recognized as revenue when
due.
Net investment income
Net investment income predominantly consists of interest income earned on
fixed maturity securities classified as Available-for-Sale, structured
securities, mortgage loans on real estate, policy loans and trading
securities and other investments. Interest income is accrued as earned
using the effective interest method, which makes an adjustment of the yield
for security premiums and discounts on all
F-13
performing fixed maturity securities classified as Available-for-Sale,
excluding structured securities, and mortgage loans on real estate so that
the related security or loan recognizes a constant rate of return on the
outstanding balance throughout its term. Interest income on structured
securities is recognized according to Emerging Issues Task Force (EITF)
Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets."
Contractholder and policyholder charges
Contractholder and policyholder charges include certain charges assessed on
annuities and universal and variable universal life insurance.
Contractholder and policyholder charges include cost of insurance,
administrative and surrender charges on annuities and universal and
variable universal life insurance. Cost of insurance charges on universal
and variable universal life insurance are recognized as revenue when
earned, whereas contract charges and surrender charges on annuities and
universal and variable universal life insurance are recognized as revenue
when collected.
Mortality and expense risk and other fees
Mortality and expense risk and other fees include risk fees, management and
administration fees, which are generated directly and indirectly from IDS
Life's separate account assets. IDS Life's management and other fees are
generally computed as a contractual rate based on the underlying asset
values and are generally received monthly.
Net realized gain (loss) on investments
Realized gains and losses are recognized using specific identification, on
a trade date basis, and charges are recorded when securities are determined
to be other-than-temporarily impaired.
Balance Sheet
Investments
Available for sale fixed maturity and equity securities
Available-for-Sale investment securities are carried at fair value on the
balance sheet with unrealized gains (losses) recorded in other accumulated
comprehensive income (loss) within equity, net of income tax provisions
(benefits) and net of adjustments in assets and liability balances, such as
deferred policy acquisition costs (DAC), to reflect the expected impact on
their carrying values had the unrealized gains (losses) been realized
immediately. Gains and losses are recognized in results of operations upon
disposition of the securities. In addition, losses are also recognized when
management determines that a decline in value is other-than-temporary,
which requires judgment regarding the amount and timing of recovery.
Indicators of other-than-temporary impairment for debt securities include
issuer downgrade, default or bankruptcy. IDS Life also considers the extent
to which cost exceeds fair value, the duration and size of that gap, and
management's judgment about the issuer's current and prospective financial
condition. Other-than-temporary impairment charges are recorded in net
realized gains (losses) on investments within the Consolidated Statements
of Income. Fair value is generally based on quoted market prices. However,
IDS Life's investment portfolio also contains structured investments of
various asset quality, including collateralized debt obligations (CDOs)
(backed by high-yield bonds and bank loans), which are not readily
marketable. As a result, the carrying values of these structured
investments are based on future cash flow projections that require a
significant degree of management judgment as to the amount and timing of
cash payments, defaults and recovery rates of the underlying investments
and, as such, are subject to change.
F-14
Mortgage loans on real estate
Mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses. The estimated fair value of the mortgage loans is
determined by discounted cash flow analyses using mortgage interest rates
currently offered for mortgages of similar maturities.
The reserve for losses is measured as the excess of the loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate or the fair value
of collateral. Additionally, the level of the reserve for losses considers
other factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the
reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
IDS Life generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
Policy loans
Policy loans are carried at the aggregate of the unpaid loan balances,
which do not exceed the cash surrender values of the related policies.
Trading securities and other investments
Included in trading securities and other investments are trading
securities, syndicated loans and real estate. Trading securities primarily
include hedge funds and mutual fund seed money investments. Trading
securities are held at fair market value with changes in value recognized
in the Consolidated Statements of Income within net investment income.
Syndicated loans reflect amortized cost less reserves for losses and real
estate is carried at its estimated fair value.
Cash and cash equivalents
IDS Life has defined cash equivalents to include other highly liquid
investments with original maturities of 90 days or less.
Restricted cash
As a result of the adoption of FIN 46 in 2003, IDS Life consolidated
restricted cash held by secured loan trusts (SLTs) where such cash cannot
be utilized for operations. See "Application of Recent Accounting
Standards" below for a description of FIN 46.
Reinsurance
IDS Life reinsures a portion of the insurance risks associated with its
life and long-term care (LTC) insurance products through reinsurance
agreements with unaffiliated insurance companies. Reinsurance is used in
order to limit losses, minimize exposure to large risks, provide additional
capacity for future growth and to effect business-sharing arrangements. IDS
Life evaluates the financial condition of reinsurers to minimize exposure
to significant losses from reinsurer insolvencies. IDS Life remains
primarily liable as the direct insurer on all risks reinsured.
Generally, IDS Life reinsures 90% of the death benefit liability related to
variable, universal and term life insurance product. IDS Life retains, and
is at risk for only, 10% of each policy's death benefit from the first
dollar of coverage. IDS Life began reinsuring risks at this level beginning
in 2001 for term life insurance and 2002 for variable and universal life
insurance. Policies issued prior to these dates are not subject to these
same reinsurance levels. 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 flexible
F-15
premium survivorship variable life policy. For existing LTC policies,
IDS Life retained 50% of the risk and the remaining 50% of the risk was
ceded to General Electric Capital Assurance Company. Risk on variable life
and universal life policies is reinsured on a yearly renewable term basis.
Risk on term life and LTC policies is reinsured on a coinsurance basis.
IDS Life retains all risk for new claims on disability income contracts.
Risk is currently managed by limiting the amount of disability insurance
written on any one individual. IDS Life also retains all accidental death
benefit and waiver of premium risk.
Deferred policy acquisition costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring
new business, principally direct sales commissions and other distribution
and underwriting costs that have been deferred on the sale of annuity and
life and health insurance products. These costs are deferred to the extent
they are recoverable from future profits. For annuity and insurance
products, DAC are amortized over periods approximating the lives of the
business, generally as a percentage of premiums or estimated gross profits
or as a portion of product interest margins depending on the product's
characteristics.
For IDS Life's annuity and insurance products, the projections underlying
the amortization of DAC require the use of certain assumptions, including
interest margins, mortality and morbidity rates, persistency rates,
maintenance expense levels and customer asset value growth rates for
variable products. Management routinely monitors a wide variety of trends
in the business, including comparisons of actual and assumed experience.
The customer asset value growth rate is the rate at which contract values
are assumed to appreciate in the future. The rate is net of asset fees and
anticipates a blend of equity and fixed income investments. 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 and
morbidity rates, 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 might also change. A
change in the required amortization percentage is applied retrospectively;
an increase in amortization percentage will result in an increase of DAC
amortization while a decrease in amortization percentage will result in a
decrease in 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 in which such changes are made.
Deferred sales inducement costs
Sales inducement costs consist of bonus interest credits and deposit
credits added to certain annuity contract values. These benefits are
capitalized to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. These costs
were previously included in DAC and were reclassified as part of the
adoption of the American Institute of Certified Public Accountants
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 amounts capitalized are amortized using
the same methodology and assumptions used to amortize DAC.
F-16
Separate account assets and liabilities
Separate account assets and liabilities are funds held for exclusive
benefit of variable annuity contractholders and variable life insurance
policyholders. IDS Life receives fund administrative fees, mortality and
expense risk fees, minimum death benefit guarantee fees and cost of
insurance charges from the related accounts. Before the fourth quarter of
2003, these fees included investment advisory fees for internally managed
mutual funds. In the fourth quarter of 2003, AEFC replaced IDS Life as the
investment manager and assumed these duties for the mutual funds and
retained IDS Life and its non-New York subsidiaries to provide underlying
administrative services. 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. IDS Life's administrative
service fees will vary with the market values of these proprietary mutual
funds. In addition to IDS Life's administrative service fees, IDS Life
receives mortality and expense risk fees from the separate accounts based
on the level of assets. In March 2004, a similar structure for the New York
subsidiaries was approved by the New York Insurance Department effective as
of February 1, 2004. Fees payable from AEFC to IDS Life include
administrative service fees.
IDS Life provides contractual mortality assurances to variable annuity
contractholders that the net assets of separate accounts will not be
affected by future variations in the actual life expectancy experience of
the annuitants and beneficiaries from the mortality assumptions implicit in
the annuity contracts. IDS Life makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are in the benefit payment period.
IDS Life also guarantees that the rates at which administrative charges are
deducted from contract funds will not exceed contractual maximums.
For variable life insurance, IDS Life guarantees that the rates at which
administrative charges are deducted from contract funds will not exceed
contractual maximums. IDS Life also guarantees that the death benefit will
continue to be payable at the initial level regardless of investment
performance so long as the minimum premium payments are made.
Derivative financial instruments and hedging activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, (SFAS 133) establishes accounting and reporting
requirements for derivative financial instruments, including hedging
activities. SFAS 133 requires that all derivatives are recognized on the
balance sheet at fair value as either assets or liabilities in IDS Life's
Consolidated Balance Sheets. The fair value of IDS Life's derivative
financial instruments are determined using either market quotes or
valuation models that are based upon the net present value of estimated
future cash flows and incorporate current market data inputs. IDS Life
reports its derivative assets and liabilities in other assets and other
liabilities, respectively. The accounting for the change in the fair value
of a derivative instrument depends on its intended use and the resulting
hedge designation, if any.
Derivative financial instrument agreements introduce the possibility of
counterparty credit risk. Counterparty credit risk is the risk that the
counterparty will not fulfill the terms of the agreement. IDS Life attempts
to minimize counterparty credit risk related to derivative financial
instruments through established approval procedures, including setting
concentration limits by counterparty, monitoring credit ratings, and
requiring collateral, where appropriate. A majority of IDS Life's
counterparties are rated A or better by Moody's and Standard & Poor's.
F-17
Cash flow hedges
For derivative financial instruments that qualify as cash flow hedges, the
effective portions of the gain or loss on the derivatives are recorded in
accumulated other comprehensive income (loss) and reclassified into
earnings when the hedged item or transactions impact earnings. The amount
that is reclassified into earnings is presented in the income statement
with the hedged instrument or transaction impact, generally, in net
investment income. Any ineffective portion of the gain or loss is reported
as a component of net investment income. If a hedge is de-designated or
terminated prior to maturity, the amount previously recorded in accumulated
other comprehensive income (loss) is recognized into earnings over the
period that the hedged item impacts earnings. For any hedge relationships
that are discontinued because the forecasted transaction is not expected to
occur according to the original strategy, any related amounts previously
recorded in accumulated other comprehensive income (loss) are recognized
into earnings immediately.
Derivative financial instruments that are entered into for hedging purposes
are designated as such at the time that IDS Life enters into the contract.
As required by SFAS 133, for all derivative financial instruments that are
designated for hedging activities, IDS Life formally documents all of the
hedging relationships between the hedge instruments and the hedged items at
the inception of the relationships. Management also formally documents its
risk management objectives and strategies for entering into the hedge
transactions. IDS Life formally assesses, at inception and on a quarterly
basis, whether derivatives designated as hedges are highly effective in
offsetting the cash flows of hedged items. If it is determined that a
derivative is not highly effective as a hedge, IDS Life will discontinue
the application of hedge accounting. See Note 11 Derivative financial
instruments and hedging activities, which describes the types of cash flow
hedges used by IDS Life.
Non-designated derivatives
IDS Life currently has economic hedges that either do not qualify or are
not designated for hedge accounting treatment under SFAS 133. For
derivative financial instruments that do not qualify for hedge accounting,
or are not designated under SFAS 133 as hedges, changes in fair value are
reported in current period earnings generally as a component of net
investment income. See Note 11 Derivative financial instruments and hedging
activities, which describes the types of economic hedges used by IDS Life.
Liabilities for future policy benefits
Fixed annuities and variable annuity guarantees
Liabilities for fixed and variable deferred annuities are equal to
accumulation values which are the cumulative gross deposits, credited
interest and fund performance less withdrawals and mortality and expense
risk charges.
The majority of the variable annuity contracts offered by IDS Life contain
guaranteed minimum death benefit (GMDB) provisions. When market values of
the customer's 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. In addition, IDS Life offers
contracts containing guaranteed minimum income benefit (GMIB) and
guaranteed minimum withdrawal benefits (GMWB) provisions.
Effective January 1, 2004, liabilities for these variable annuity death and
income benefits have been established under SOP 03-1. Actuarial models to
simulate various equity market scenarios are used to project these benefits
and contract assessments and include making significant assumptions related
to customer asset value growth rates, mortality, persistency and investment
margins. These assumptions,
F-18
as well as their periodic review by management, are consistent with those
used for DAC purposes. Prior to the adoption of SOP 03-1, amounts paid in
excess of contract value were expensed. See Application of Recent
Accounting Standards section below for further discussion on SOP 03-1.
Liabilities for equity indexed deferred annuities issued in 1999 or later
are equal to the accumulation of host contract values covering guaranteed
benefits and the market value of embedded equity options. Liabilities for
equity indexed deferred annuities issued before 1999 are equal to the
present value of guaranteed benefits and the intrinsic value of index-based
benefits.
Liabilities for fixed annuities in a benefit or payout status are based on
future estimated payments using established industry mortality tables and
interest rates, ranging from 4.6% to 9.5% at December 31, 2004, depending
on year of issue, with an average rate of approximately 6.1% at December
31, 2004.
Life and health policies
Liabilities for life insurance claims that have been reported but have not
yet been paid (unpaid claim liabilities) are equal to the death benefits
payable under the policies. For disability income and long-term care
claims, unpaid claim liabilities are equal to benefit amounts due and
accrued including the expense of reviewing claims and making benefit
payment determinations. Liabilities for claims that have occurred but have
not been reported are estimated based on periodic analysis of the actual
lag between when a claim occurs and when it is reported. Where applicable,
amounts recoverable from other insurers who share in the risk of the
products offered (reinsurers) are separately recorded as receivables.
Liabilities for fixed and variable universal life insurance are equal to
accumulation values which are the cumulative gross premiums, credited
interest, and fund performance less withdrawals and mortality and expense
risk charges.
Liabilities for future benefits on term and whole life insurance are based
on the net level premium method, using anticipated premium payments,
mortality rates, policy persistency and interest rates earned on the assets
supporting the liability. Anticipated mortality rates are based on
established industry mortality tables, with modifications based on Company
experience. Anticipated policy premium payments and persistency rates vary
by policy form, issue age and policy duration. Anticipated interest rates
range from 4% to 10% at December 31, 2004, depending on policy form, issue
year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are the
amounts needed to meet obligations for future claims and are based on the
net level premium method, using anticipated premium payments and morbidity,
mortality, policy persistency and discount rates. Anticipated morbidity and
mortality rates are based on established industry morbidity and mortality
tables. Anticipated policy persistency rates vary by policy form, issue
age, policy duration and, for disability income policies, occupation class.
Anticipated discount rates for disability income policy reserves at
December 31, 2004 are 7.5% at policy issue and grade to 5% over 5 years.
Anticipated discount rates for long-term care policy reserves at December
31, 2004 are currently 5.9% grading up to 8.9% over 30 years.
Claim reserves are the amounts needed to meet obligations for continuing
claim payments on already incurred claims. Claim reserves are calculated
based on claim continuance tables which estimate the likelihood that an
individual will continue to be eligible for benefits and anticipated
interest rates earned on assets supporting the reserves. Anticipated claim
continuance rates are based on established industry tables. Anticipated
interest rates for claim reserves for both disability income and long-term
F-19
care range from 3% to 8% at December 31, 2004, with an average rate of
approximately 5.2% at December 31, 2004. IDS Life issues only
non-participating life insurance policies, which do not pay dividends to
policyholders from the insurers' earnings.
Income Taxes
IDS Life's taxable income is included in the consolidated federal income
tax return of American Express Company. IDS Life provides for income taxes
on a separate return basis, except that, under an agreement between AEFC
and American Express Company, tax benefit is recognized for losses to the
extent they can be used on the consolidated tax return. It is the policy of
AEFC and its subsidiaries that AEFC will reimburse subsidiaries for all tax
benefits.
Application of recent accounting standards
In June 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) FAS No. 97-1, "Situations in Which Paragraphs 17(b)
and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments (SFAS No. 97), Permit or Require
Accrual of an Unearned Revenue Liability" (FSP 97-1). The implementation of
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1), raised a question regarding the
interpretation of the requirements of SFAS No. 97 concerning when it is
appropriate to record an unearned revenue liability. FSP 97-1 clarifies
that SFAS No. 97 is clear in its intent and language, and requires the
recognition of an unearned revenue liability for amounts that have been
assessed to compensate insurers for services to be performed over future
periods. SOP 03-1 describes one situation, when assessments result in
profits followed by losses, where an unearned revenue liability is
required. SOP 03-1 does not amend SFAS No. 97 or limit the recognition of
an unearned revenue liability to the situation described in SOP 03-1. The
guidance in FSP 97-1 is effective for financial statements for fiscal
periods beginning after June 18, 2004. The adoption of FSP 97-1 did not
have a material impact on IDS Life's consolidated financial condition or
results of operations. See Note 5 and below for further discussion of SOP
03-1.
In July 2003, the American Institute of Certified Public Accountants issued
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 the first quarter 2004 results by
$70.6 million ($108.6 million pretax). The cumulative effect of accounting
change consisted of: (i) $42.9 million pretax from establishing additional
liabilities for certain variable annuity guaranteed benefits ($32.8
million) and from considering these liabilities in valuing DAC and deferred
sales inducement costs associated with those contracts ($10.1 million) and
(ii) $65.7 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 ($92 million) and from considering these
liabilities in valuing DAC associated with those contracts ($26.3 million
offset). Prior to the adoption of SOP 03-1, amounts paid in excess of
contract value were expensed when
F-20
payable. Amounts expensed in 2004 to establish and maintain additional
liabilities for certain variable annuity guaranteed benefits amounted to
$52.5 million (of which $32.8 million was part of the adoption charge
discussed earlier) as compared to amounts expensed in 2003 and 2002 of
$31.5 million and $37.4 million, respectively. IDS Life's accounting for
separate accounts was already consistent with the provisions of SOP 03-1
and, therefore, there was no impact related to this requirement. See Note 5
for a further discussion regarding SOP 03-1.
The AICPA released a series of technical practice aids (TPAs) in September
2004 which provide additional guidance related to, among other things, the
definition of an insurance benefit feature and the definition of policy
assessments in determining benefit liabilities, as described within SOP
03-1. The TPAs did not have a material effect on IDS Life's calculation of
liabilities that were recorded in the first quarter of 2004 upon adoption
of SOP 03-1.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133. The adoption of this
Statement did not have a material impact on the IDS Life's financial
statements.
In January 2003, the FASB issued FIN 46 as revised, which addresses
consolidation by business enterprises of variable interest entities (VIEs)
and was subsequently revised in December 2003. The variable interest
entities primarily impacted by FIN 46, which IDS Life consolidated as of
December 31, 2003, relate to three securitized loan trusts (SLTs), which
are managed by an affiliate and partially owned by IDS Life. The
consolidation of the three SLTs partially owned by IDS Life and managed by
an affiliate, resulted in a cumulative effect of accounting change that
increased 2003 net income through a non-cash gain of $44.5 million ($68.4
million pretax). See Note 3 for further discussion of consolidated variable
interest entities.
In November 2003, the FASB ratified a consensus on the disclosure
provisions of Emerging Issues Task Force Issue 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
(EITF 03-1). 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 investments accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and other cost method investments are
other-than-temporarily impaired. However, with the issuance of FSP EITF
03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1," on September 30,
2004, the provisions of the consensus relating to the measurement and
recognition of other-than-temporary impairments will be deferred pending
further clarification from the FASB. The remaining provisions of this rule,
which primarily relate to disclosure requirements, are required to be
applied prospectively to all current and future investments accounted for
in accordance with SFAS No. 115 and other cost method investments. IDS Life
will evaluate the potential impact of EITF 03-1 after the FASB completes
its reassessment.
F-21
2. Investments
Available for sale investments
Investments classified as Available-for-Sale at December 31, 2004 are
distributed by type as presented below:
December 31, 2004
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Corporate debt securities $ 13,718,138 $ 531,970 $ (36,990) $ 14,213,118
Mortgage and other asset-backed
securities 9,383,868 143,102 (30,487) 9,496,483
Foreign corporate bonds and
obligations 3,185,592 139,821 (14,178) 3,311,235
Structured investments(a) 563,899 - (33,230) 530,669
U.S. Government and agencies obligations 330,540 15,181 (513) 345,208
State and municipal obligations 114,161 3,493 (2,569) 115,085
Foreign government bonds and obligations 104,442 15,507 (552) 119,397
---------------------------------------------------------------------------------------------------------------------
Total fixed maturities 27,400,640 849,074 (118,519) 28,131,195
Preferred and common stocks 30,019 1,237 - 31,256
---------------------------------------------------------------------------------------------------------------------
Total $ 27,430,659 $ 850,311 $ (118,519) $ 28,162,451
---------------------------------------------------------------------------------------------------------------------
(a) Includes unconsolidated CDOs.
Investments classified as Available-for-Sale at December 31, 2003 are
distributed by type as presented below:
December 31, 2003
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
Fixed maturities:
Corporate debt securities $ 12,716,966 $ 567,940 $ (63,059) $ 13,221,847
Mortgage and other asset-backed
securities 10,187,423 166,679 (54,535) 10,299,567
Foreign corporate bonds and obligations 2,666,626 126,187 (24,923) 2,767,890
Structured investments(a) 593,094 1,784 (47,767) 547,111
U.S. Government and agencies obligations 235,994 13,848 (20) 249,822
State and municipal obligations 114,158 3,711 (3,100) 114,769
Foreign government bonds and obligations 82,448 10,728 (617) 92,559
---------------------------------------------------------------------------------------------------------------------
Total fixed maturities 26,596,709 890,877 (194,021) 27,293,565
Preferred and common stocks 30,019 1,027 - 31,046
---------------------------------------------------------------------------------------------------------------------
Total $ 26,626,728 $ 891,904 $ (194,021) $ 27,324,611
---------------------------------------------------------------------------------------------------------------------
(a) Includes unconsolidated CDOs.
F-22
The following table provides information about Available-for-Sale
investments with gross unrealized losses and the length of time that
individual securities have been in a continuous unrealized loss position as
of December 31, 2004:
------------------------------------------------------------------------------------------------------------------------------
(Thousands) Less than 12 months 12 months or more Total
------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description of securities: Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------------------------
Corporate debt securities $ 2,410,156 $ (20,461) $ 645,898 $ (16,529) $ 3,056,054 $ (36,990)
Mortgage and other
asset-backed securities 2,560,175 (17,686) 550,728 (12,801) 3,110,903 (30,487)
Foreign corporate bonds 641,928 (6,571) 373,312 (7,607) 1,015,240 (14,178)
Structured investments - - 526,190 (33,230) 526,190 (33,230)
U.S. Government and
agencies obligations 159,904 (498) 533 (15) 160,437 (513)
State and municipal
obligations - - 62,454 (2,569) 62,454 (2,569)
Foreign government bonds
and obligations 1,002 (33) 9,008 (519) 10,010 (552)
------------------------------------------------------------------------------------------------------------------------------
Total $ 5,773,165 $ (45,249) $ 2,168,123 $ (73,270) $ 7,941,288 $ (118,519)
------------------------------------------------------------------------------------------------------------------------------
In evaluating potential other-than-temporary impairments, IDS Life
considers the extent to which amortized costs exceeds fair value and the
duration and size of that difference. A key metric in performing this
evaluation is the ratio of fair value to amortized cost. The following
table summarizes the unrealized losses by ratio of fair value to cost as of
December 31, 2004:
(Millions,
except number
of securities) Less than 12 months 12 months or more Total
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of Fair Gross Gross Gross
Value to Number of Unrealized Number of Unrealized Number of Unrealized
Amortized Cost Securities Fair Value Losses Securities Fair Value Losses Securities Fair Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
95% - 100% 319 $ 5,773 $ (45) 87 $ 1,619 $ (38) 406 $ 7,392 $ (83)
90% - 95% - - - 6 545 (34) 6 545 (34)
80% - 90% - - - 1 4 (1) 1 4 (1)
Less than 80% 1 - - 1 - - 2 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 320 $ 5,773 $ (45) 95 $ 2,168 $ (73) 415 $ 7,941 $ (118)
- ------------------------------------------------------------------------------------------------------------------------------------
Substantially all of the gross unrealized losses on the securities are
attributable to changes in interest rates. Credit spreads and specific
credit events associated with individual issuers can also cause unrealized
losses although these impacts are not significant as of December 31, 2004.
As noted in the table above, a significant portion of the unrealized loss
relates to securities that have a fair value to cost ratio of 95% or above
resulting in an overall 99% ratio of fair value to cost for all securities
with an unrealized loss. The holding with the largest unrealized loss
relates to the retained interest in a CDO securitization trust which has
$33.2 million of the $34.3 million in unrealized losses for securities with
an unrealized loss for twelve months or more and a fair value to cost ratio
in the 90-95% category. With regard to this security, IDS Life estimates
future cash flows through maturity (2014) on a quarterly basis using
judgment as to the amount and timing of cash payments and defaults and
recovery rates of the underlying investments. These cash flows support full
recovery of IDS Life's carrying value related to the retained interest in
the CDO securitization trust as of December 31, 2004. All of the unrealized
losses for securities with an unrealized loss for twelve months or more and
a fair value to cost ratio in the 80-90% category primarily relates to a
foreign government bond obligation for which IDS Life expects that all
contractual principal and interest will be received. The unrealized losses
in the other categories are not concentrated in any individual industries
or with any individual securities.
F-23
IDS Life monitors the investments and metrics discussed above on a
quarterly basis to identify and evaluate investments that have indications
of possible other-than-temporary impairment. See the Investments section of
Note 1 for information regarding IDS Life's policy for determining when an
investment's decline in value is other-than-temporary. Additionally, IDS
Life has the ability and intent to hold these securities for a time
sufficient to recover its amortized cost and has, therefore, concluded that
none are other-than-temporarily impaired at December 31, 2004.
The change in net unrealized securities gains (losses) recognized in
accumulated other comprehensive income includes three components: (i)
unrealized gains (losses) that arose from changes in market value of
securities that were held during the period (holding gains (losses)), (ii)
gains (losses) that were previously unrealized, but have been recognized in
current period net income due to sales and other-than-temporary impairments
of Available-for-Sale securities (reclassification for realized (gains)
losses) and (iii) other items primarily consisting of adjustments in assets
and liability balances, such as deferred policy acquisition costs (DAC), to
reflect the expected impact on their carrying values had the unrealized
gains (losses) been realized immediately.
The following is a distribution of investments classified as
Available-for-Sale by maturity as of December 31, 2004:
Amortized Fair
(Thousands) Cost Value
---------------------------------------------------------------------------
Due within 1 year $ 569,953 $ 582,432
Due after 1 through 5 years 3,786,395 3,930,575
Due after 5 through 10 years 11,597,234 11,997,347
Due after 10 years 1,499,291 1,593,689
---------------------------------------------------------------------------
17,452,873 18,104,043
Mortgage and other asset-backed securities 9,383,868 9,496,483
Structured investments 563,899 530,669
Preferred and common stocks 30,019 31,256
---------------------------------------------------------------------------
Total $ 27,430,659 $ 28,162,451
---------------------------------------------------------------------------
The expected payments on mortgage and other asset-backed securities and
structured investments may not coincide with their contractual maturities.
As such, these securities, as well as preferred and common stocks, were not
included in the maturities distribution.
At December 31, 2004 and 2003, fixed maturity securities comprised
approximately 87 and 86 percent of IDS Life's total investments. These
securities are rated by Moody's and Standard & Poor's (S&P), except for
approximately $1.0 billion and $1.6 billion of securities at December 31,
2004 and 2003, which are rated by IDS Life's internal analysts using
criteria similar to Moody's and S&P. Ratings on investment grade securities
(excluding net unrealized appreciation and depreciation) are presented
using S&P's convention and, if the two agencies' ratings differ, the lower
rating is used. A summary by rating on December 31, is as follows:
F-24
Rating 2004 2003
--------------------------------------------------------------------------
AAA 37% 41%
AA 3 2
A 22 21
BBB 30 27
Below investment grade 8 9
--------------------------------------------------------------------------
Total 100% 100%
--------------------------------------------------------------------------
At December 31, 2004 and 2003, approximately 61 and 91 percent of the
securities rated AAA are GNMA, FNMA and FHLMC mortgage-backed securities.
No holdings of any other issuer were greater than ten percent of
stockholder's equity.
The table below includes sales, maturities, and purchases of investments
classified as Available-for-Sale for the years ended December 31:
(Thousands) 2004 2003 2002
--------------------------------------------------------------------------------------------------------
Sales $ 1,603,285 $ 12,232,235 $ 10,093,228
Maturities, sinking fund payments
and calls $ 1,931,070 $ 4,152,088 $ 3,078,509
Purchases $ 4,392,522 $ 20,527,995 $ 16,287,891
--------------------------------------------------------------------------------------------------------
Included in net realized gains and losses are gross realized gains and
losses on sales of securities, as well as other-than-temporary losses on
investments, classified as Available-for-Sale as noted in the following
table for the years ended December 31:
(Thousands) 2004 2003 2002
--------------------------------------------------------------------------------------------------------
Gross realized gains from sales $ 48,412 $ 255,348 $ 297,576
Gross realized losses from sales $ (17,524) $ (135,465) $ (137,384)
Other-than-temporary impairments $ (131) $ (102,614) $ (144,064)
--------------------------------------------------------------------------------------------------------
As of December 31, 2004, IDS Life's structured investments, which are
classified as Available-for-Sale, include interests in CDOs. CDOs are
investments backed by high-yield bonds or loans and are not readily
marketable. IDS Life invested in CDOs as part of its overall investment
strategy in order to offer competitive rates to insurance and annuity
contractholders.
During 2001 IDS Life 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 $675.3 million, into a securitization trust. In
return, IDS Life received $89.5 million in cash (excluding transaction
expenses) relating to sales to unaffiliated investors and retained
interests with allocated book amounts aggregating $585.8 million. As of
December 31, 2004, the retained interests had a carrying value of $526.2
million, of which $389.9 million is considered investment grade, and are
accounted for in accordance with EITF Issue 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." One of the results of this transaction is
that increases and 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.
F-25
At December 31, 2004 and 2003, bonds carried at $16.9 million and $16.3
million, respectively, were on deposit with various states as required by
law.
Mortgage loans on real estate and syndicated loans
Mortgage loans are first mortgages on real estate. IDS Life holds the
mortgage document, which gives it the right to take possession of the
property if the borrower fails to perform according to the terms of the
agreements. Mortgage loan fundings are restricted by state insurance
regulatory authorities to 80 percent or less of the market value of the
real estate at the time of origination of the loan. Commitments to fund
mortgages are made in the ordinary course of business. The estimated fair
value of the mortgage commitments as of December 31, 2004 and 2003 was not
material.
Syndicated loans, which are included as a component of other investments,
represent loans in which a group of lenders provide funds to borrowers.
There is usually one originating lender which retains a small percentage
and syndicates the remainder.
The following is a summary of mortgage loans on real estate and syndicated
loans at December 31:
(Thousands) 2004 2003
------------------------------------------------------------------------------------------------------------
Mortgage loans on real estate $ 2,968,889 $ 3,227,217
Mortgage loans on real estate reserves (45,347) (47,197)
------------------------------------------------------------------------------------------------------------
Net mortgage loans $ 2,923,542 $ 3,180,020
------------------------------------------------------------------------------------------------------------
Syndicated loans $ 139,295 $ 140,792
Syndicated loans reserves (3,500) (3,000)
------------------------------------------------------------------------------------------------------------
Net syndicated loans $ 135,795 $ 137,792
------------------------------------------------------------------------------------------------------------
At December 31, 2004 and 2003, IDS Life's recorded investment in impaired
mortgage loans on real estate was $11.3 million and $11.1 million, with a
reserve of $4.0 million and $2.9 million, respectively. During 2004 and
2003, the average recorded investment in impaired mortgage loans on real
estate was $8.3 million and $26.0 million, respectively. IDS Life
recognized $0.6 million, $0.8 million and $1.1 million of interest income
related to impaired mortgage loans on real estate for the years ended
December 31, 2004, 2003 and 2002, respectively.
The balances of and changes in the total reserve for mortgage loan losses
as of and for the years ended December 31, are as follows:
(Thousands) 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 47,197 $ 44,312 $ 28,173
Provision for mortgage loan losses 9,500 11,687 23,514
Foreclosures, write-offs and other (11,350) (8,802) (7,375)
-----------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 45,347 $ 47,197 $ 44,312
-----------------------------------------------------------------------------------------------------------------
F-26
Concentration of credit risk of mortgage loans on real estate by region at
December 31 were:
December 31, 2004 December 31, 2003
-----------------------------------------------------------------------------------------------------------------------------
(Thousands) On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
-----------------------------------------------------------------------------------------------------------------------------
East North Central $ 509,752 $ 1,400 $ 578,855 $ 6,575
West North Central 433,298 14,550 490,119 8,115
South Atlantic 588,764 24,115 662,121 1,350
Middle Atlantic 270,509 2,600 294,333 4,800
New England 198,297 6,515 197,338 11,474
Pacific 332,764 13,700 342,214 13,900
West South Central 191,410 - 191,886 8,800
East South Central 72,294 9,625 71,566 800
Mountain 371,801 20,025 398,785 2,700
-----------------------------------------------------------------------------------------------------------------------------
2,968,889 92,530 3,227,217 58,514
Less reserves for losses (45,347) - (47,197) -
-----------------------------------------------------------------------------------------------------------------------------
Total $ 2,923,542 $ 92,530 $ 3,180,020 $ 58,514
-----------------------------------------------------------------------------------------------------------------------------
Concentration of credit risk of mortgage loans on real estate by property
type at December 31 were:
December 31, 2004 December 31, 2003
-----------------------------------------------------------------------------------------------------------------------------
(Thousands) On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
-----------------------------------------------------------------------------------------------------------------------------
Department/retail stores $ 734,590 $ 40,075 $ 868,079 $ 18,444
Apartments 505,632 24,875 560,753 21,600
Office buildings 1,087,700 5,840 1,136,034 10,805
Industrial buildings 373,767 15,615 355,497 4,265
Hotels/motels 109,408 - 111,230 1,000
Medical buildings 46,960 - 70,934 -
Nursing/retirement homes 9,875 - 27,253 -
Mixed use 62,424 4,200 60,124 -
Other 38,533 1,925 37,313 2,400
-----------------------------------------------------------------------------------------------------------------------------
2,968,889 92,530 3,227,217 58,514
Less reserves for losses (45,347) - (47,197) -
-----------------------------------------------------------------------------------------------------------------------------
Total $ 2,923,542 $ 92,530 $ 3,180,020 $ 58,514
-----------------------------------------------------------------------------------------------------------------------------
Sources of investment income and realized gains (losses) on investments
Net investment income for the years ended December 31 is summarized as
follows:
(Thousands) 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------
Income on fixed maturities $ 1,450,919 $ 1,423,560 $ 1,331,547
Income on mortgage loans on real estate 221,022 247,001 274,524
Trading securities and other investments 138,468 63,983 (14,906)
-----------------------------------------------------------------------------------------------------------------
1,810,409 1,734,544 1,591,165
Less investment expenses 32,963 29,359 28,573
-----------------------------------------------------------------------------------------------------------------
Total $ 1,777,446 $ 1,705,185 $ 1,562,592
-----------------------------------------------------------------------------------------------------------------
F-27
Net realized gains (losses) on investments for the years ended December 31
is summarized as follows:
(Thousands) 2004 2003 2002
--------------------------------------------------------------------------------------------------------
Fixed maturities $ 30,757 $ 17,269 $ 16,128
Mortgage loans on real estate (3,048) (10,865) (20,552)
Other investments (417) (1,959) (819)
--------------------------------------------------------------------------------------------------------
Total $ 27,292 $ 4,445 $ (5,243)
--------------------------------------------------------------------------------------------------------
3. Variable interest entities
The variable interest entities for which IDS Life is considered the primary
beneficiary and which were consolidated beginning December 31, 2003, relate
to SLTs which are partially owned by IDS Life and managed by an affiliate.
The SLTs consolidated as a result of FIN 46 provide returns to investors
primarily based on the performance of an underlying portfolio of high-yield
loans which are managed by an affiliate. One of the SLTs originally
consolidated was liquidated in 2004 and the remaining two SLTs are in the
process of being liquidated as of December 31, 2004. The 2004 results of
operations (reported in net investment income) include a $24 million
pretax, non-cash charge related to the complete liquidation of one SLT, and
a $4 million pretax, non-cash charge related to the expected impact of
liquidating the two remaining SLTs. However, further adjustments to that
amount could occur based on market movements and execution of the
liquidation process. To the extent further adjustments are included in the
liquidation of the SLT portfolios, the Company's maximum cumulative
exposure to losses was $462 million at December 31, 2004. The following
table presents the consolidated assets, essentially all of which are
restricted, and other balances related to these entities at December 31:
(Millions) 2004 2003
---------------------------------------------------------------------------
Restricted cash $ 536 $ 834
Derivative financial instruments (a) 43 73
---------------------------------------------------------------------------
Total assets $ 579 $ 907
Total liabilities 117 166
---------------------------------------------------------------------------
Net assets $ 462 $ 741
---------------------------------------------------------------------------
(a) Represents the estimated fair market value of the total return swap
derivatives related to the consolidated SLTs which have a notional
amount of $1.8 billion and $3.2 billion as of December 31, 2004 and
2003, respectively.
IDS Life has other significant variable interests for which it is not
considered the primary beneficiary and, therefore, does not consolidate.
These interests are represented by a carrying value of $4.5 million of CDO
residual tranches managed by an affiliate where the Company is not the
primary beneficiary. IDS Life's maximum exposure to loss as a result of its
investment in CDO residual tranches is represented by the carrying values.
FIN 46 does not impact the accounting for QSPEs as defined by SFAS No. 140,
such as the CDO-related securitization trust established in 2001.
F-28
4. Deferred policy acquisition costs
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, were:
(Thousands) 2004 2003 2002
----------------------------------------------------------------------------------------------------------------
Balance, January 1, $ 3,336,208 $ 3,077,994 $ 2,924,187
SOP 03-1 adoption impact 19,600 - -
Capitalization of expenses 534,069 516,928 549,787
Amortization (260,778) (264,308) (320,629)
Change in unrealized investment gains and losses 8,857 5,594 (75,351)
----------------------------------------------------------------------------------------------------------------
Balance, December 31, $ 3,637,956 $ 3,336,208 $ 3,077,994
----------------------------------------------------------------------------------------------------------------
5. Variable annuity guarantees and sales inducement costs
The majority of the variable annuity contracts offered by IDS Life contain
guaranteed minimum death benefit (GMDB) provisions. When market values of
the customer's 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. In addition, IDS Life offers
contracts containing guaranteed minimum income benefit (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, 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.
The majority of the GMDB contracts provide for six year reset contract
values. In determining the additional liabilities for variable annuity
death benefits and GMIB, IDS Life projects these benefits and contract
assessments using actuarial models to simulate various equity market
scenarios. 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. As with DAC, management will
review, and where appropriate, adjust its assumptions each quarter. Unless
management identifies a material deviation over the course of 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 as of December 31:
F-29
--------------------------------------------------------------------- ------------------- ------------------
Variable Annuity GMDB and GMIB by Benefit Type 2004 2003
--------------------------------------------------------------------- ------------------- ------------------
(Dollar amounts in millions)
------------------------- ------------------------------------------- ------------------- ------------------
Contracts with GMDB Total Contract Value $ 3,241.6 $ 3,162.4
Providing for Return of Contract Value in Separate Accounts $ 1,727.4 $ 1,600.7
Premium Net Amount at Risk* $ 110.9 $ 28.0
Weighted Average Attained Age 62 62
------------------------- ------------------------------------------- ------------------- ------------------
Contracts with GMDB Total Contract Value $ 27,453.2 $ 24,570.6
Providing for Six Year Contract Value in Separate Accounts $ 22,787.1 $ 20,316.1
Reset Net Amount at Risk* $ 1,267.2 $ 2,077.5
Weighted Average Attained Age 60 60
------------------------- ------------------------------------------- ------------------- ------------------
Contracts with GMDB Total Contract Value $ 4,039.4 $ 2,827.5
Providing for One Year Contract Value in Separate Accounts $ 3,078.5 $ 1,886.3
Ratchet Net Amount at Risk* $ 55.6 $ 84.7
Weighted Average Attained Age 61 60
------------------------- ------------------------------------------- ------------------- ------------------
Contracts with Other Total Contract Value $ 494.7 $ 251.8
GMDB Contract Value in Separate Accounts $ 397.7 $ 174.8
Net Amount at Risk* $ 11.7 $ 20.8
Weighted Average Attained Age 66 63
------------------------- ------------------------------------------- --- --------------- ---- -------------
Contracts with GGU Total Contract Value $ 450.1 $ 276.4
Death Benefit Contract Value in Separate Accounts $ 363.8 $ 193.1
Net Amount at Risk* $ 18.2 $ 5.8
Weighted Average Attained Age 64 61
------------------------- ------------------------------------------- ------------------- ------------------
Contracts with GMIB Total Contract Value $ 603.3 $ 357.8
Contract Value in Separate Accounts $ 517.6 $ 268.3
Net Amount at Risk* $ 11.9 $ 23.0
Weighted Average Attained Age 59 59
------------------------- ------------------------------------------- ------------------- ------------------
* Represents current death benefit less total contract value for GMDB, amount of gross up for GGU and
accumulated guaranteed minimum benefit base less total contract value for GMIB and assumes the actuarially
remote scenario that all claims become payable on the same day.
---------------------------------------------------------------------------------------------------------
Additional Liabilities and Incurred Benefits GMDB & GGU GMIB
------------------------- ------------------------------------------- ------------------ ----------------
For the year ended Liability balance at January 1 $ 30.6 $ 2.2
December 31, 2004 Reported claims $ 19.6 $ -
Liability balance at December 31 $ 29.9 $ 3.0
Incurred claims (reported + change in
liability) $ 18.9 $ 0.8
------------------------- ------------------------------------------- ------------------ ----------------
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.
Contract values in separate accounts were invested in various equity, bond
and other funds as directed by the contractholder. No gains or losses were
recognized on assets transferred to separate accounts for the periods
presented.
Sales inducement costs consist of bonus interest credits and deposit
credits added to certain annuity contract values. These benefits are
capitalized to the extent they are incremental to amounts that would be
credited on similar contracts without the applicable feature. These costs
were previously included in DAC and were reclassified as part of the
adoption of SOP 03-1. The amounts capitalized are amortized using the same
methodology and assumptions used to amortize DAC. IDS Life capitalized
$70.9 million and $71.8 million for the years ended December 31, 2004 and
2003, respectively. IDS Life amortized $33.8 million and $23.9 million for
the years ended December 31, 2004 and 2003, respectively.
F-30
6. Income taxes
IDS Life qualifies as a life insurance company for federal income tax
purposes. As such, IDS Life is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The components of income tax provision included in the Consolidated
Statements of Income for the years ended December 31 were as follows:
(Thousands) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------
Federal income taxes
Current $ 159,783 $ 91,862 $ (30,647)
Deferred 70,574 (30,714) 116,995
---------------------------------------------------------------------------------------------------------------
230,357 61,148 86,348
State income taxes-current (4,180) 5,797 1,478
---------------------------------------------------------------------------------------------------------------
Income tax provision before accounting change $ 226,177 $ 66,945 $ 87,826
===============================================================================================================
A reconciliation of the expected federal income tax provision using the
U.S. federal statutory rate of 35% to IDS Life's actual income tax
provision for the years ended December 31 were as follows:
(Thousands) 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------
Combined tax at U.S. statutory rate $ 277,334 35.0% $ 201,089 35.0% $ 164,502 35.0%
Changes in taxes resulting from:
Tax-exempt interest and dividend
income (45,199) (5.7) (61,070) (10.6) (5,260) (1.1)
State income taxes, net of federal
benefit (2,717) (0.4) 3,768 0.7 961 0.2
Affordable housing credits - - (73,500) (12.8) (70,000) (14.9)
All other (3,241) (0.4) (3,342) (0.6) (2,377) (0.5)
-----------------------------------------------------------------------------------------------------------------
Income tax provision before accounting
change $ 226,177 28.5% $ 66,945 11.7% $ 87,826 18.7%
=================================================================================================================
A portion of IDS Life's income earned prior to 1984 was not subject to
current taxation but was accumulated, for tax purposes, in a
"policyholders' surplus account." At December 31, 2004, IDS Life had a
policyholders' surplus account balance of $20.1 million. The American Jobs
Creation Act of 2004 which was enacted on October 22, 2004 provided a
two-year suspension of the tax on policyholders' surplus account
distributions. IDS Life is evaluating making distributions which will not
be subject to tax under the two-year suspension. Previously the
policyholders' surplus account was only taxable if dividends to
shareholders exceed the shareholders' surplus account and/or IDS Life is
liquidated. Deferred taxes of $7 million had not been established because
no distributions of such amounts were contemplated.
Deferred income tax provision (benefit) results from differences between
assets and liabilities measured for financial reporting and for income tax
return purposes. The significant components of IDS Life's deferred tax
assets and liabilities as of December 31, 2004 and 2003 are reflected in
the following table:
F-31
(Thousands) 2004 2003
---------------------------------------------------------------------------------------------------------
Deferred tax assets:
Policy reserves $ 1,035,300 $ 798,508
Other investments 139,066 300,888
Other 55,556 30,376
---------------------------------------------------------------------------------------------------------
Total 1,229,922 1,129,772
---------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 1,116,235 1,004,942
Deferred taxes related to net unrealized securities gains 183,988 218,322
Other 70,901 46,322
---------------------------------------------------------------------------------------------------------
Total 1,371,124 1,269,586
---------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 141,202 $ 139,814
---------------------------------------------------------------------------------------------------------
IDS Life is required to establish a valuation allowance for any portion of
the deferred income tax assets that management believes will not be
realized. In the opinion of management, it is more likely than not that
IDS Life will realize the benefit of the deferred income tax assets and,
therefore, no such valuation allowance has been established.
7. Statutory capital and surplus
Statutory capital and surplus available for distribution or dividends to
AEFC are limited to IDS Life Insurance Company's surplus as determined in
accordance with accounting practices prescribed by state insurance
regulatory authorities. IDS Life Insurance Company's statutory unassigned
surplus aggregated $909.7 million and $1.4 billion as of December 31, 2004
and 2003, respectively. In addition, any dividend or distribution paid
prior to December 20, 2005 (one year after IDS Life Insurance Company's
most recent dividend payment) would require pre-notification to the
Commissioner of Commerce of the State of Minnesota, who has the authority
to disapprove and prevent payment thereof. From December 20, 2005 to
December 31, 2005, dividends or distributions in excess of $358.6 million
would be subject to this same pre-notification and potential disapproval.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
(Thousands) 2004 2003 2002
---------------------------------------------------------------------------------------------------------
Statutory net income $ 379,950 $ 432,063 $ 159,794
Statutory capital and surplus 2,276,724 2,804,593 2,408,379
8. Related party transactions
IDS Life loans funds to AEFC under a collateral loan agreement. There was
no balance on the loan at December 31, 2004 and 2003. This loan can be
increased to a maximum of $75 million and pays interest at a rate equal to
the preceding month's effective new money rate for IDS Life's permanent
investments.
In connection with AEFC being named the investment manager for the
proprietary mutual funds used as investment options by IDS Life's variable
annuity and variable life insurance contract owners in the fourth quarter
of 2003, AEFC receives management fees from these funds. IDS Life continues
to provide all fund management services, other than investment management,
and has entered into an
F-32
administrative services agreement with AEFC to be compensated for the
services IDS Life provides. For the years ended December 31, 2004 and 2003
IDS Life received under this arrangement, $81.5 million and $14.1 million,
respectively.
IDS Life participates in the American Express Company Retirement Plan which
covers all permanent employees age 21 and over who have met certain
employment requirements. Company contributions to the plan are based on
participants' age, years of service and total compensation for the year.
Funding of retirement costs for this plan complies with the applicable
minimum funding requirements specified by ERISA. IDS Life's share of the
total net periodic pension cost was $0.5 million in 2004, and $0.3 million
in 2003 and 2002.
IDS Life also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a percent
of either each employee's eligible compensation or basic contributions.
Costs of these plans charged to operations in 2004, 2003 and 2002 were $2.4
million, $2.2 million, and $1.4 million, respectively.
IDS Life participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and
retired financial advisors. The plans include participant contributions and
service related eligibility requirements. Upon retirement, such employees
are considered to have been employees of AEFC. AEFC expenses these benefits
and allocates the expenses to its subsidiaries. The cost of these plans
charged to operations in 2004, 2003 and 2002 was $0.5 million, $2.1
million, and $1.8 million, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $600.6 million, $549.2 million, and
$526.1 million for 2004, 2003 and 2002, respectively. Certain of these
costs are included in DAC. Expenses allocated to IDS Life may not be
reflective of expenses that would have been incurred by IDS Life on a
stand-alone basis.
On December 29, 2003, IDS Life contributed substantially all of its
interests in low income housing investments, net of related payables and
deferred tax assets, to its wholly owned subsidiary, American Express
Corporation (AEC). These investments had a carrying value of $308.6 million
and $381.5 million at December 29, 2003 and December 31, 2002,
respectively. The amount of the contribution to AEC was $272 million. AEC
had a carrying value of approximately $10 million prior to receiving this
contribution.
On December 30, 2003, IDS Life distributed via dividend all of its interest
in AEC to AEFC. This distribution was considered extraordinary, as defined
in Minnesota holding company statutes. On December 30, 2003, IDS Life
received a contribution of cash of approximately $282 million, equal to the
amount of the distribution of AEC.
During the second and fourth quarter of 2004, IDS Life approved and paid
dividends to AEFC of $430 million and $500 million, respectively. IDS Life
expects to continue to maintain adequate capital to meet internal and
external Risk-Based Capital requirements.
Included in other liabilities at December 31, 2004 and 2003 are $30.1
million and $64.4 million, respectively, payable to AEFC for federal income
taxes.
F-33
9. Lines of credit
IDS Life has available lines of credit with AEFC aggregating $295 million
($195 million committed and $100 million uncommitted). The interest rate
for any borrowings is established by reference to various indices plus 20
to 45 basis points, depending on the term. There were no borrowings
outstanding under these line of credit arrangements at December 31, 2004
and 2003.
10. Reinsurance
At December 31, 2004, 2003 and 2002, traditional life and universal life
insurance in force aggregated $147.5 billion, $131.1 billion and $119.2
billion, respectively, of which $70.9 billion, $53.8 billion, and $38.0
billion, was reinsured at the respective year ends. IDS Life also reinsures
a portion of the risks assumed under long-term care policies. Under all
reinsurance agreements, premiums ceded to reinsurers amounted to $159.6
million, $144.7 million and $129.3 million and reinsurance recovered from
reinsurers amounted to $73.3 million, $60.3 million and $60.6 million, for
the years ended December 31, 2004, 2003 and 2002, respectively. Reinsurance
contracts do not relieve IDS Life from its primary obligation to
policyholders. Life insurance inforce was reported on a statutory basis.
11. Derivative financial instruments and hedging activities
Derivative financial instruments enable the end users to manage exposure to
various credit or market risks. The value of such instruments is derived
from an underlying variable or multiple variables, including equity, and
interest rate indices or prices. IDS Life enters into various derivative
financial instruments as part of its ongoing risk management activities.
The following summarizes IDS Life's use of derivative financial
instruments.
Cash flow hedges
IDS Life uses interest rate products, primarily interest rate swaptions to
hedge the risk of increasing interest rates on forecasted fixed annuity
sales. During 2004, 2003 and 2002, no amounts were reclassified into
earnings from accumulated other comprehensive income. Additionally, IDS
Life does not expect to reclassify any material amounts from accumulated
other comprehensive income to earnings during the next twelve months.
Currently, the longest period of time over which the Company is hedging
exposure to the variability in future cash flows is 14 years and relates to
forecasted fixed annuity sales. For the years ended December 31, 2004, 2003
and 2002, there were no gains or losses on derivative transactions or
portions thereof that were ineffective as hedges or excluded from the
assessment of hedge effectiveness.
Non-designated derivatives
IDS Life has economic hedges that either do not qualify or are not
designated for hedge accounting treatment under SFAS 133. Certain of IDS
Life's annuity products have returns tied to the performance of equity
markets. These elements are considered derivatives under SFAS 133. IDS Life
manages this equity market risk by entering into options and futures with
offsetting characteristics.
Derivative financial instruments used to economically hedge IDS Life's
exposure to annuity products include the use of purchased and written index
options, as well as futures contracts. A purchased (written) option conveys
the right (obligation) to buy or sell an instrument at a fixed price for a
set period of time or on a specific date. IDS Life writes and purchases
index options to manage the risks related to annuity products that pay
interest based upon the relative change in a major stock market index
between the beginning and end of the product's term (equity-indexed
annuities). IDS Life views this strategy as a prudent management of equity
market sensitivity, such that earnings are not
F-34
exposed to undue risk presented by changes in equity market levels. The
purchased and written options are carried at fair value on the balance
sheet and included in other assets and other liabilities, respectively. The
purchased and written options expire on various dates through 2009. IDS
Life purchases futures to hedge its obligations under equity indexed
annuities. The futures purchased are marked-to-market daily and exchange
traded, exposing IDS Life to no counterparty risk.
Embedded Derivatives
IDS Life's equity indexed annuities contain embedded derivatives,
essentially the equity based return of the product, which must be separated
from the host contract and accounted for as derivative instruments per SFAS
133. IDS Life managed this equity market risk by entering into options and
futures with offsetting characteristics. As a result of fluctuations in
equity markets and the corresponding changes in value of the embedded
derivatives, the amount of interest credited incurred by IDS Life related
to the annuity product positively or negatively impact reported earnings.
The changes in fair value of the options are recognized in net investment
income and the embedded derivatives are recognized in interest credited on
universal life-type insurance and investment contracts. The fair value of
the embedded options are recognized on the balance sheet in future policy
benefits for fixed annuities. The total fair value of these instruments
were $341.2 million and $304.2 million at December 31, 2004 and 2003,
respectively.
12. Fair values of financial instruments
The following table discloses fair value information for financial
instruments. Certain items, such as life insurance obligations, employee
benefit obligations, investments accounted for under the equity method,
deferred policy acquisition costs and deferred sales inducement costs are
specifically excluded by SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments." The fair values of financial instruments are
estimates based upon market conditions and perceived risks at December 31,
2004 and 2003 and require management judgment. These figures may not be
indicative of their future fair values. Additionally, management believes
the value of excluded assets and liabilities is significant. The fair value
of IDS Life, therefore, cannot be estimated by aggregating the amounts
presented. The following table discloses fair value information for
financial instruments as of December 31:
2004 2003
-------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Thousands) Value Value Value Value
-------------------------------------------------------------------------------------------------------------------
Financial Assets
Available-for-Sale, policy loans,
trading securities and other
investments $ 29,553,121 $ 29,553,121 $ 28,711,183 $ 28,711,183
Mortgage loans on real estate, net $ 2,923,542 $ 3,149,986 $ 3,180,020 $ 3,477,868
Separate account assets $ 32,454,032 $ 32,454,032 $ 27,774,319 $ 27,774,319
Other financial assets $ 1,338,006 $ 1,342,639 $ 1,907,487 $ 1,910,874
Financial Liabilities
Fixed annuities $ 25,469,069 $ 24,759,962 $ 24,873,303 $ 24,113,440
Separate account liabilities $ 28,284,118 $ 27,164,063 $ 24,281,415 $ 23,320,423
Other financial liabilities $ 600,027 $ 600,027 $ 637,151 $ 637,151
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The following methods were used to estimate the fair values of financial
assets and financial liabilities.
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Financial assets
Generally, investments are carried at fair value on the Consolidated
Balance Sheets. Gains and losses are recognized in the results of
operations upon disposition of the securities. In addition, losses are
recognized when management determines that a decline in value is
other-than-temporary. See Note 2 for carrying value and fair value
information regarding investments.
For variable rate loans that reprice within a year where there has been no
significant change in counterparties' creditworthiness, fair values
approximate carrying value.
The fair values of all other loans (including mortgage loans on real estate
and leveraged investment loans), except those with significant credit
deterioration, are estimated using discounted cash flow analysis, based on
current interest rates for loans with similar terms to borrowers of similar
credit quality. For loans with significant credit deterioration, fair
values are based on estimates of future cash flows discounted at rates
commensurate with the risk inherent in the revised cash flow projections,
or for collateral dependent loans on collateral values.
Separate account assets are carried at fair value on the Consolidated
Balance Sheets.
Other financial assets for which carrying values approximate fair values,
include cash and cash equivalents, other accounts receivable and accrued
interest, derivative financial instruments and certain other assets. The
carrying values approximate fair value due to the short term nature of
these investments.
Financial liabilities
The fair values of fixed annuities in deferral status are estimated as the
accumulated value less applicable surrender charges and loans. For
annuities in payout status, fair value is estimated using discounted cash
flows, based on current interest rates. The fair value of these reserves
excludes life insurance related elements of $1.5 billion and $1.4 billion
at December 31, 2004 and 2003, respectively.
The fair values of separate account liabilities, after excluding life
insurance-related elements of $4.2 billion and $3.5 billion at December 31,
2004 and 2003, respectively, are estimated as the accumulated value less
applicable surrender charges.
Other financial liabilities for which carrying values approximate fair
values include derivative financial instruments and certain other
liabilities. The carrying value approximates fair value due to the
short-term nature of these instruments.
13. Commitments and contingencies
At December 31, 2004 and 2003, IDS Life had no commitments to purchase
investments other than mortgage loan fundings (see Note 2).
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 of B
shares. 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.
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IDS Life and its subsidiaries are involved in a number of 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.
The IRS routinely examines IDS Life's federal income tax returns and is
currently conducting an audit for the 1993 through 1996 tax years and in
February of 2005 began the examination of the 1997 through 2002 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.
14. Subsequent events
On February 1, 2005, the American Express Company announced plans to pursue
a tax-free spin-off of the common stock of American Express Company's AEFC
unit through a special dividend to American Express common shareholders.
The final transaction, which is subject to certain conditions including
receipt of a favorable tax ruling and approval by American Express
Company's Board of Directors, is expected to close in the third quarter of
2005.
Also, on February 1, 2005, A.M. Best placed IDS Life's financial strength
rating of "A+" under review with negative implications, Moody's affirmed
IDS Life's financial strength rating at "Aa3" and Fitch lowered IDS Life's
financial strength rating to "AA-" and placed them on "Rating Watch
Negative" following American Express Company's announcement that it intends
to spin-off its full ownership of AEFC. In connection with the spin-off,
American Express Company intends to provide additional capital to IDS Life
to confirm its current financial strength ratings.
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EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report or, where
indicated, were already filed and are hereby incorporated by reference.
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company filed
electronically as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company filed
electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
3.3 Copy of Resolution of the Board of Directors of IDS Life Insurance Company,
dated May 5, 1989, establishing IDS Life Account MGA filed electronically as
Exhibit 3.3 to Post-Effective Amendment No. 5 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.1 Copy of Non-tax qualified Group Annuity Contract, Form 30363C, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.2 Copy of Non-tax qualified Group Annuity Certificate, Form 30360C, filed
electronically as Exhibit 4.2 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract filed
electronically as Exhibit 4.3 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate filed
electronically as Exhibit 4.4 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C, filed
electronically as Exhibit 4.5 to Post-Effective Amendment No. 10 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.6 Copy of Tax qualified Group Annuity Certificate, Form 30368C, filed
electronically as Exhibit 4.6 to Post-Effective Amendment No. 10 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed electronically as
Exhibit 4.7 to Post-Effective Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed electronically as
Exhibit 4.8 to Post-Effective Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
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4.9 Copy of Non-tax qualified Individual Annuity Contract, Form 30365D, filed
electronically as Exhibit 4.9 to Post-Effective Amendment No. 10 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.10 Copy of Endorsement No. 30379 to the Individual Annuity Contract, filed
electronically as Exhibit 4.10 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by reference.
4.11 Copy of Tax qualified Individual Annuity Contract, Form 30370C, filed
electronically as Exhibit 4.11 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by reference.
4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed electronically
as Exhibit 4.12 to Post-Effective Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.13 Copy of Endorsement No. 33007 filed electronically as Exhibit 4.13 to
Post-Effective Amendment No. 12 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.14 Copy of Group Annuity Contract, Form 30363D, filed electronically as
Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No.
33-50968 is incorporated herein by reference.
4.15 Copy of Group Annuity Certificate, Form 30360D, filed electronically as
Exhibit 4.2 to Post-Effective Amendment No. 2 to Registration Statement No.
33-50968 is incorporated herein by reference.
4.16 Form of Deferred Annuity Contract, Form 30365E, filed electronically as
Exhibit 4.3 to Post-Effective Amendment No. 2 to Registration Statement No.
33-50968 is incorporated herein by reference.
4.17 Copy of Group Deferred Variable Annuity Contract, Form 34660, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-48701 is incorporated herein by reference.
4.18 Copy of Non-tax qualified Group Annuity Contract, Form 33111, filed
electronically as Exhibit 4.1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.19 Copy of Non-tax qualified Group Annuity Certificate, Form 33114, filed
electronically as Exhibit 4.2 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.20 Copy of Tax qualified Group Annuity Contract, Form 33112, filed
electronically as Exhibit 4.3 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115, filed
electronically as Exhibit 4.4 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.22 Copy of Group IRA Annuity Contract, Form 33113, filed electronically as
Exhibit 4.5 to Registration Statement No. 333-42793 is incorporated herein by
reference.
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4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed electronically as
Exhibit 4.6 to Registration Statement No. 333-42793 is incorporated herein by
reference.
4.24 Copy of Non-tax qualified Individual Annuity Contract, Form 30484, filed
electronically as Exhibit 4.7 to Post-Effective Amendment No. 1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.25 Copy of Tax qualified Individual Annuity Contract, Form 30485, filed
electronically as Exhibit 4.8 to Post-Effective Amendment No. 1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.26 Copy of Individual IRA Contract, Form 30486, filed electronically as
Exhibit 4.9 to Post-Effective Amendment No. 1 to Registration Statement No.
333-42793 is incorporated herein by reference.
10. Copy of Gross Administrative Charge Agreement by and between American
Express Financial Corporation and IDS Life Insurance Company, dated November 1,
2003 filed electronically as Exhibit 10 to the 2003 Form 10-K is incorporated
herein by reference.
*31.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.
*31.2 Certification of Arthur H. Berman, Chief Financial Officer, pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.
*32.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, and Arthur
H. Berman, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed electronically herewith.
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