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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IDS TOWER 10, MINNEAPOLIS, MINNESOTA 55440-0534
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
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 containedherein, 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]
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 PERMITTED
ABBREVIATED NARRATIVE DISCLOSURE.
PART I
ITEM 1. BUSINESS
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. The Company is the fourteenth largest
life insurance company in the United States, with consolidated assets at
December 31, 1998 of $56.6 billion. IDS Life Insurance Company of New York
and American Centurion Life Assurance Company are wholly owned subsidiaries of
the Company and serve New York State residents. The Company also wholly owns
American Enterprise Life Insurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company'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. The Company's insurance
products include universal life (fixed and variable), whole life, single
premium life and term products (including waiver of premium and accidental
death benefits). The Company also markets disability income and long-term
care insurance.
The Company's fixed annuity contracts guarantee a minimum interest rate during
the accumulation period (the time before annuity payments begin), although the
Company has the option of paying a higher rate reflective of current market
rates. The Company has also adopted a practice whereby the higher current rate
is guaranteed for a specified period. The Company also offers fixed/variable
annuity products offering the purchaser a choice among mutual funds with
portfolios of equities, bonds, managed assets and/or short-term securities, and
the Company's general account, as the underlying investment vehicles. With
respect to funds applied to the variable portion of the annuity, the purchaser,
rather than the Company, assumes the investment risks and receives the rewards
inherent in the ownership of the underlying investment. At December 31, 1998,
the Company had $46.2 billion of fixed and variable annuities in force, an
increase of 6 percent from the prior year end.
The Company's principal insurance product is the flexible-premium,
adjustable-benefit universal life insurance policy. In this type of insurance
policy, premium payments either accumulate interest in a fixed account or
purchase units in one or more variable accounts. The policyholder has access
to the cash surrender value in whole or in part after the first year. The size
of the cash value of the fund can also be controlled by the policyholder by
increasing or decreasing premiums, subject only to maintaining a required
minimum to keep the policy in force. Monthly deductions from the cash value of
the policy are made for the cost of insurance, expense charges and any policy
riders. At December 31, 1998, the Company had $64.2 billion of fixed and
variable universal life-type insurance in force, up 8 percent from
December 31, 1997.
Assets held in segregated accounts which fund the variable annuity and variable
life insurance products totaled $27.3 billion at December 31, 1998, an 18
percent increase from December 31, 1997.
IDS Life Insurance Company, American Enterprise Life Insurance Company and
American Partners Life Insurance Company are subject to comprehensive
regulation by the Minnesota Department of Commerce (Insurance Division), the
Indiana Department of Insurance and the Arizona Department of Insurance,
respectively. IDS Life Insurance Company of New York and American Centurion
Life Assurance Company are both subject to comprehensive regulation by the New
York Department of Insurance. The laws of the other states in which the
Company does business regulate such matters as the licensing of sales personnel
and, in some cases, the marketing and contents of insurance policies and
annuity contracts. The purpose of such regulation and supervision is
primarily to protect the interests of policyholders. Recently there has been
an increased focus on the variable annuity business by regulators. In the
United States, the McCarran-Ferguson Act provides that the primary regulation
of the insurance industry is left to the individual states. Typically, states
regulate such matters as company licensing, agent licensing, cancellation or
nonrenewal of policies, minimum health insurance policy benefits, life
insurance cost disclosure, solicitation and replacement practices, unfair trade
and claims practices, rates, forms, advertising, investment type and quality,
minimum capital and surplus levels and changes in control. Virtually all
states mandate participation in insurance guaranty associations, which assess
insurance companies in order to fund claims of policyholders of insolvent
insurance companies. In addition to state laws, the Company is affected by a
variety of federal laws, and there is periodic federal interest in various
aspects of the insurance industry including taxation of variable annuities and
life insurance policies, solvency and accounting procedures, as well as the
treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an insurance contract. New federal
regulation in any of these areas could potentially have an adverse effect
upon the Company.
As a distributor of variable contracts, the Company is registered as a
broker-dealer and is a member of the National Association of Securities
Dealers, Inc. As the investment manager for various investment companies, the
Company is registered as an investment advisor under applicable federal
requirements.
The insurance and annuity business is highly competitive and the Company's
competitors consist of both stock and mutual insurance companies and other
financial institutions. Competitive factors applicable to the business of
the Company include the interest rates credited to its products, the charges
deducted from the cash values of such products, the financial strength of the
organization and the services provided to policyholders.
ITEM 2. PROPERTIES
The Company occupies office space in Minneapolis, Minnesota, which is leased
by its parent, AEFC. The Company reimburses AEFC for rent based on direct and
indirect allocation methods. IDS Life Insurance Company of New York and
American Centurion Life Assurance Company rent office space in Albany, New
York. Facilities occupied by the Company and its subsidiaries are believed to
be adequate for the purposes for which they are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company and AEFC do business involving insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. The Company and AEFC, like other life and health
insurers, from time to time are involved in such litigation. On December 13,
1996, an action entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life
Insurance Company and American Express Financial Corporation was commenced in
Minnesota state court. The action is brought by individuals who replaced an
existing Company insurance policy with a new Company policy. The plaintiffs
purport to represent a class consisting of all persons who replaced existing
Company policies with new policies from and after January 1, 1985. The
complaint puts at issue various alleged sales practices and misrepresentations,
alleged breaches of fiduciary duties and alleged violations of consumer fraud
statutes. The Company and AEFC filed an answer to the Complaint on February
18, 1997, denying the allegations. A second action, entitled Arnold Mork,
Isabella Mork, Ronald Melchart and Susan Melchart vs. IDS Life Insurance
Company and American Express Financial Corporation was commenced in the same
court on March 21, 1997. In addition to claims that are included in the
Benacquisto lawsuit, the second action includes an allegation of improper
replacement of an existing IDS Life annuity contract. A subsequent class
action, Richard Thoresen and Elizabeth Thoresen vs. AEFC, American Partners
Life Insurance Company, American Enterprise Life Insurance Company, American
Centurion Life Assurance Company, IDS Life Insurance Company and IDS Life
Insurance Company of New York, was filed in the same court on October 13,
1998 alleging that the sale of annuities in tax-deferred contributory
retirement investment plans (e.g. IRA's) was done through deceptive
marketing practices, which the company denies. Plaintiffs in each of the
aforementioned actions seek damages in an unspecified amount and
also seek to establish a claims resolution facility for the determination of
individual issues.
The Company and its parent believe they have meritorious defenses to the claims
raised in the lawsuits. The outcome of any litigation cannot be predicted with
certainty. In the opinion of management, however, the ultimate resolution of
the above lawsuits and others filed against the Company should not have a
material adverse effect on the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1998 Compared to 1997:
Consolidated net income increased 14 percent to $540 million in 1998, compared
to $474 million in 1997. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These
increases reflect higher average insurance and annuities in force during 1998.
Consolidated income before income taxes totaled $776 million in 1998, compared
with $681 million in 1997.
Total premiums and investment contract deposits received decreased to $4.4
billion in 1998, compared with $5.2 billion in 1997. This decrease is
primarily due to a decrease in sales of fixed annuities in 1998, reflecting
the low interest rate environment.
Total revenues increased to $3.0 billion in 1998, compared with $2.9 billion in
1997. The increase is primarily due to increased policyholder and
contractholder charges and management fees. Net investment income, the largest
component of revenues, decreased slightly from the prior year, reflecting
slight decreases in investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 12 percent to $384
million in 1998, compared with $342 million in 1997. This increase reflects
increased total life insurance in force, which grew 8 percent to $81 billion
at December 31, 1998.
Management and other fees increased 18 percent to $401 million in 1998,
compared with $341 million in 1997. This is primarily due to an increase in
separate account assets, which grew 18 percent to $27.3 billion at December
31, 1998, due to market appreciation and sales. The Company provides
investment management services for the mutual funds used as investment options
for variable annuities and variable life insurance. The Company also receives
a mortality and expense risk fee from the separate accounts.
Total benefits and expenses increased slightly to $2.2 billion in 1998. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased to $1.3
billion, reflecting a decrease in fixed annuities in force and lower interest
rates. Amortization of deferred policy acquisition costs increased to $383
million, compared to $323 million in 1997. This increase was due primarily to
increased aggregate amounts in force, as well as accelerating amortization to
reflect actual lapse experience on certain fixed annuities.
1997 Compared to 1996:
Consolidated net income increased 14 percent to $474 million in 1997, compared
to $415 million in 1996. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1997.
Consolidated income before income taxes totaled $681 million in 1997, compared
with $622 million in 1996. In 1997, $179 million was from the life, disability
income and long-term care insurance segment, compared with $161 million in 1996
and $502 million was from the annuity segment, compared with $461 million in
1996.
Total premiums received decreased to $5.2 billion in 1997, compared with $6.1
billion in 1996. This decrease is primarily due to a decrease in sales of
fixed annuities in 1997.
Total revenues increased to $2.9 billion in 1997, compared with $2.7 billion in
1996. The increase is primarily due to increases in net investment income,
policyholder and contractholder charges, and management fees. Net investment
income, the largest component of revenues, increased slightly from the prior
year, reflecting slight increases in investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 13 percent to
$342 million in 1997, compared with $303 million in 1996. This increase
reflects increased total life insurance in force which grew 12 percent to
$75 billion at December 31, 1997.
Management and other fees increased 26 percent to $341 million in 1997,
compared with $271 million in 1996. This is primarily due to an increase in
separate account assets, which grew 25 percent to $23 billion at December 31,
1997, due to market appreciation and sales. The Company provides investment
management services for the mutual funds used as investment options for
variable annuities and variable life insurance. The Company also receives a
mortality and expense risk fee from the separate accounts.
Total benefits and expenses increased slightly to $2.2 billion in 1997. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, remained steady at
$1.4 billion. Amortization of deferred policy acquisition costs increased to
$323 million compared to $279 million in 1996. These increases were due
primarily to increased aggregate amounts in force.
Risk Management
The sensitivity analysis of two different tests of market risk discussed below
estimates the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, are a 100
basis point increase in market interest rates and a 10% decline in equity
prices. Computations of the prospective effects of hypothetical interest rate
and equity price changes are based on numerous assumptions, including relative
levels of market interest rates and equity prices, as well as the levels of
assets and liabilities. The hypothetical changes and assumptions will be
different from what actually occurs in the future. Furthermore, the
computations do not anticipate actions that may be taken by management if the
hypothetical market changes actually occurred over time. As a result, actual
earnings effects in the future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a
competitive rate of return on their investments while minimizing risk, and to
provide a dependable and targeted spread between the interest rate earned on
investments and the interest rate credited to contractholders' accounts. The
Company does not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee
reviews models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the
liability portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may
be negatively impacted by increases in the general level of interest rates.
Part of the committee's strategy includes the purchase of some types of
derivatives, such as interest rate caps, swaps and floors, for hedging
purposes. These derivatives protect margins by increasing investment returns
if there is a sudden and severe rise in interest rates, thereby mitigating the
impact of an increase in rates credited to contractholders' accounts.
The fees earned by the Company for managing fixed income securities in mutual
funds are generally based on the value of the portfolios. To manage the level
of 1999 fee income, the committee's strategy is to enter into a series of swaps
designed to mitigate the negative effect on fees that would result from an
increase in interest rates.
The negative effect on the Company'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, 1998, would be approximately $34 million.
On a certain annuity product, the interest is credited to contractholders'
accounts based upon the relative change in a major stock market index between
the beginning and end of the product's term. As a means of hedging the
Company's obligation under the provisions of this product, the committee's
strategy is to purchase and write options on the major stock market index.
The amount of the fee income the Company receives is based upon the daily
market value of the separate account assets. As a result, the Company's fee
income would be negatively impacted by a decline in the equity markets.
Another part of the committee's strategy is to enter into index option collars
(combination of puts and calls) for hedging purposes. These derivatives
protect fee income by providing option income when there is a significant
decline in the equity markets. The Company finances the cost of this
protection through selling aportion of the upside potential from an increasing
market through written options.
The negative effect on the Company's pretax earnings of the 10% decline in
equity prices would be approximately $32 million based on assets under
management and the index options as of December 31, 1998.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by
premiums, investment income, proceeds from sales of investments as well as
maturities and periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has an available line of credit with its parent aggregating $100
million. The line of credit is used strictly as short-term sources of funds.
No borrowings were outstanding under the agreement at December 31, 1998.
At December 31, 1998, outstanding reverse repurchase agreements totaled $187
million.
At December 31, 1998, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 33 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 1998, approximately 13 percent of the Company's investments in
fixed maturities were below investment grade bonds. These investments may be
subject to a higher degree of risk than the investment grade issues because of
the borrower's generally greater sensitivity to adverse economic conditions,
such as recession or increasing interest rates, and in certain instances, the
lack of an active secondary market. Expected returns on below investment grade
bonds reflect consideration of such factors. The Company has identified those
fixed maturities for which a decline in fair value is determined to be other
than temporary, and has written them down to fair value with a charge to
earnings.
At December 31, 1998, net unrealized appreciation on fixed maturities held to
maturity included $483 million of gross unrealized appreciation and $27 million
of gross unrealized depreciation. Net unrealized appreciation on fixed
maturities available for sale included $427 million of gross unrealized
appreciation and $159 million of gross unrealized depreciation.
At December 31, 1998, the Company had an allowance for losses for mortgage
loans totaling $40 million and for real estate investments totaling $6 million.
The economy and other factors have caused a number of insurance companies to go
under regulatory supervision. This circumstance has resulted in assessments by
state guaranty associations to cover losses to policyholders of insolvent or
rehabilitated companies. Some assessments can be partially recovered through
a reduction in future premium taxes in certain states. The Company established
an asset for guaranty association assessments paid to those states allowing a
reduction in future premium taxes over a reasonable period of time. The asset
is being amortized as premium taxes are reduced. The Company has also
estimated the potential effect of future assessments on the Company's financial
position and results of operations and has established a reserve for such
potential assessments. The Company has not adopted Statement of Position 97-3
providing guidance when an insurer should recognize a liability for guaranty
fund assessments. The SOP is effective for fiscal years beginning after
December 15, 1998. Adoption will not have a material impact on the Company's
results of operations or financial condition.
In the first quarter of 1999, the Company paid a $70 million dividend to its
parent. In 1998, dividends paid to its parent were $240 million.
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards
require the computation of a risk-based capital amount which is then compared
to a company's actual total adjusted capital. The computation involves
applying factors to various statutory financial data to address four primary
risks: asset default, adverse insurance experience, interest rate risk and
external events. These standards provide for regulatory attention when the
percentage of total adjusted capital to authorized control level risk-based
capital is below certain levels. As of December 31, 1998, the Company's total
adjusted capital was well in excess of the levels requiring regulatory
attention.
Year 2000 Issue
The Company is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly owned subsidiary of American Express
Company (American Express). All of the major systems used by the Company are
maintained by AEFC and are utilized by multiple subsidiaries and affiliates of
AEFC. American Express is coordinating Year 2000 (Y2K) efforts on behalf of
all of its businesses and subsidiaries. Representatives of AEFC are
participating in these efforts. The Y2K issue is the result of computer
programs having been written using two digits rather than four to define a
year. Some programs may recognize a date using "00" as the year 1900 rather
than 2000. This misinterpretation could result in the failure of major systems
or miscalculations, which could have a material impact on American Express and
its businesses or subsidiaries through business interruption or shutdown,
financial loss, reputation damage and legal liability to third parties.
American Express and AEFC began addressing the Y2K issue in 1995 and have
established a plan for resolution, which involves the remediation,
decommissioning and replacement of relevant systems, including mainframe,
mid-range and desktop computers, application software, operating systems,
systems software, date back-up archival and retrieval services, telephone and
other communications systems, and hardware peripherals and facilities dependent
on embedded technology. As a part of their plan, American Express has generally
followed and utilized the specific policies and guidelines established by the
Federal Financial Institutions Examination Council, as well as other U.S. and
international regulatory agencies. Additionally, American Express continues to
participate in Y2K related industry consortia sponsored by various partners and
suppliers. Progress is reviewed regularly with the Company's senior management
and American Express's senior management and Board of Directors.
American Express' and AEFC's Y2K compliance effort related to information
technology (IT) systems is divided into two initiatives. The first, which is
the much larger initiative, is known internally as "Millenniax," and relates
to mainframe and other technological systems maintained by the American Express
Technologies organization. The second, known as "Business T," relates to the
technological assets that are owned, managed or maintained by American Express'
individual business units, including AEFC. Business T also encompasses the
remediation of non-IT systems. These initiatives involve a substantial number
of employees and external consultants. This multiple sourcing approach is
intended to mitigate the risk of becoming dependent on any one vendor or
resource. While the vast majority of American Express' and AEFC's systems that
require modification are being remediated, in some cases they have chosen to
migrate to new applications that are already Y2K compliant.
American Express' and AEFC's plans for remediation with respect to Millenniax
and Business T include the following program phases: (i) employee awareness and
mobilization, (ii) inventory collection and assessment, (iii) impact analysis,
(iv) remediation/decommission, (v) testing and (vi) implementation. As part of
the first three phases, American Express and AEFC have identified their
mission-critical systems for purposes of prioritization. American Express' and
AEFC's goals are to complete testing of critical systems by early 1999, and
to continue compliance efforts, including but not limited to, the testing of
systems on an integrated basis and independent validation of such testing,
through 1999.** American Express and AEFC are currently on schedule to
meet these goals. With respect to systems maintained by American Express and
AEFC, the first three phases referred to above have been substantially
completed for both Millenniax and Business T. In addition, remediation of
critical systems is substantially complete. As of December 31, 1998, for
Millenniax for American Express, the remediation/decommission, testing and
implementation phases for critical and non-critical systems in total are 82%,
75% and 60% complete, respectively. For Millenniax for AEFC, such phases are
99%, 97% and 97% complete, respectively. For Business T for American Express,
such phases are 85%, 70% and 69% complete, respectively. For Business T for
AEFC, such phases are 74%, 62% and 62% complete, respectively.
American Express' most commonly used methodology for remediation is the sliding
window. Once an application/system has been remediated, American Express
applies specific types of tests, such as stress, regression, unit, future date
and baseline to ensure that the remediation process has achieved Y2K compliance
while maintaining the fundamental data processing integrity of the particular
system. To assist with remediation and testing, American Express is using
various standardized tools obtained from a variety of vendors.
American Express' cumulative costs since inception of the Y2K initiatives were
$383 million through December 31, 1998 and are estimated to be in the range of
$135-$160 million for the remainder through 2000.** AEFC's cumulative costs
since inception of the Y2K initiative were $56 million through December 31,
1998 and are estimated to be in the range of $13-$19 million for the remainder
through 2000.** These include both remediation costs and costs related to
replacements that were or will be required as a result of Y2K. These costs,
which are expensed as incurred, relate to both Millenniax and Business T, and
have not had, nor are they expected to have, a material adverse impact on
American Express', AEFC's, or the Company's results of operations or financial
condition.** Costs related to Milleniax, which represent most of the total Y2K
costs of American Express, are managed by and included in the American Express
corporate level financial results; costs related to Business T are included in
American Express' individual business segment's financial results, including
AEFC's. American Express and AEFC have not deferred other critical technology
projects or investment spending as a result of Y2K. However, because American
Express and AEFC must continually prioritize the allocation of finite
financial and human resources, certain non-critical spending initiatives have
been deferred.
American Express' and AEFC's major businesses are heavily dependent upon
internal computer systems, and all have significant interaction with systems of
third parties, both domestically and internationally. American Express and AEFC
are working with key external parties, including merchants, clients,
counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory
agencies to mitigate the potential risks to American Express and AEFC of Y2K.
The failure of external parties to resolve their own Y2K issues in a timely
manner could result in a material financial risk to American Express or AEFC.
As part of their overall compliance program, American Express and AEFC are
actively communicating with third parties through face-to-face meetings and
correspondence, on an ongoing basis, to ascertain their state of readiness.
Although numerous third parties have indicated to American Express and AEFC in
writing that they are addressing their Y2K issues on a timely basis, the
readiness of third parties overall varies across the spectrum. Because
American Express' and AEFC's Y2K compliance is dependent on key third parties
being compliant on a timely basis, there can be no assurances that American
Express' and AEFC's efforts alone will resolve all Y2K issues.
At this point, American Express and AEFC are in the process of performing an
assessment of reasonably likely Y2K systems failures and related consequences.
American Express is also preparing specific Y2K contingency plans for all key
American Express business units, including AEFC, to mitigate the potential
impact of such failures. This effort is a full-scale initiative that includes
both internal and external experts under the guidance of an American
Express-wide steering committee. The contingency plans, which will be based in
part on an assessment of the magnitude and probability of potential risks, will
primarily focus on proactive steps to prevent Y2K failures from occurring, or
if they should occur, to detect them quickly, minimize their impact and
expedite their repair. The Y2K contingency plans will supplement disaster
recovery and business continuity plans already in place, and are expected to
include measures such as selecting alternative suppliers and channels of
distribution, and developing American Express' and AEFC's own technology
infrastructure in lieu of those provided by third parties. Development of the
Y2K contingency plans is expected to be substantially complete by the end of
the first quarter of 1999, and will continue to be refined throughout 1999 as
additional information related to American Express' and AEFC's exposures is
gathered.**
** Statements in this Y2K discussion marked with two asterisks are
forward-looking statements which are subject to risks and uncertainties.
Important factors that could cause results to differ materially from these
forward-looking statements include, among other things, the ability of American
Express or AEFC to successfully identify systems containing two-digit codes,
the nature and amount of programming required to fix the affected
systems, the costs of labor and consultants related to such efforts, the
continued availability of such resources, and the ability of third parties that
interface with American Express or AEFC to successfully address their Y2K
issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Mangement's Discussion
and Analysis of financial condition and results of operations under the section
titled risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
Index to financial statements
The following consolidated financial statements of IDS Life Insurance
Company are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
All information on schedules to the consolidated financial statements
required by Article 7 of Regulation S-X is included in the consolidated
financial statements or is not required. Therefore, all schedules have
been omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART IV
ITEM 14. 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 14.
(2) Financial Statement Schedules
All information on schedules to the consolidated financial
statements required by 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
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 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 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
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 4.1 to
Post-Effective Amendment No. 2 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 IRA Annuity Certificate, Form 30371C, filed
electronically as Exhibit to Post-Effective
Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
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.
21. Copy of List of Subsidiaries filed electronically as
Exhibit 21 to Post-Effective Amendment No. 7 to
Registration Statement No. 33-28976 is herein
incorporated by reference.
27. Financial data schedule is filed electronically
herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 1998
No reports on Form 8-K were required to be filed by the Company for the quarter
ended December 31, 1998.
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
3/12/99 By /s/ James A. Mitchell
Date James A. Mitchell, Chairman of the
Board and Chief Executive Officer
3/12/99 By /s/ Philip C. Wentzel
Date Philip C. Wentzel, Vice President and
Controller
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.
3/12/99 By /s/ David R. Hubers
Date David R. Hubers, Director
3/12/99 By /s/ Richard W. Kling
Date Richard W. Kling, President
3/12/99 By /s/ Paul F. Kolkman
Date Paul F. Kolkman, Executive Vice
President
3/12/99 By /s/ James A. Mitchell
Date James A. Mitchell, Chairman of the
Board and Chief Executive Officer
3/12/99 By /s/ Paula R. Meyer
Date Paula R. Meyer, Executive Vice
President, Assured Assets
3/12/99 By /s/ Barry J. Murphy
Date Barry J. Murphy, Executive Vice
President, Client Service
Report of Independent Auditors
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, 1998 and 1997, 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, 1998. These financial
statements are the responsibility of the 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as 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 consolidated financial position of IDS Life
Insurance Company at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
February 4, 1999
Minneapolis, Minnesota
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
($ thousands)
ASSETS 1998 1997
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1998, $8,420,035; 1997, $9,743,410) $ 7,964,114 $ 9,315,450
Available for sale, at fair value (amortized cost:
1998, $13,344,949; 1997, $12,515,030) 13,613,139 12,876,694
Mortgage loans on real estate 3,505,458 3,618,647
Policy loans 525,431 498,874
Other investments 366,604 318,591
Total investments 25,974,746 26,628,256
Cash and cash equivalents 22,453 19,686
Amounts recoverable from reinsurers 262,260 205,716
Amounts due from brokers 327 8,400
Other accounts receivable 47,963 37,895
Accrued investment income 366,574 357,390
Deferred policy acquisition costs 2,496,352 2,479,577
Other assets 30,487 22,700
Separate account assets 27,349,401 23,214,504
Total assets $56,550,563 $52,974,124
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
($ thousands, except share amounts)
LIABILITIES AND STOCKHOLDER's EQUITY 1998 1997
Liabilities:
Future policy benefits:
Fixed annuities $21,172,303 $22,009,747
Universal life-type insurance 3,343,671 3,280,489
Traditional life insurance 225,306 213,676
Disability income and long-term care insurance 660,320 533,124
Policy claims and other policyholders' funds 70,309 68,345
Deferred income taxes, net 16,930 61,582
Amounts due to brokers 195,406 381,458
Other liabilities 410,285 345,383
Separate account liabilities 27,349,401 23,214,504
Total liabilities 53,443,931 50,108,308
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 288,327 290,847
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 169,584 226,359
Retained earnings 2,645,721 2,345,610
Total stockholder's equity 3,106,632 2,865,816
Total liabilities and stockholder's equity $56,550,563 $52,974,124
========== ==========
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
1998 1997 1996
Revenues:
Premiums:
Traditional life insurance $ 53,132 $ 52,473 $ 51,403
Disability income and long-term care insurance 176,298 154,021 131,518
Total premiums 229,430 206,494 182,921
Policyholder and contractholder charges 383,965 341,726 302,999
Management and other fees 401,057 340,892 271,342
Net investment income 1,986,485 1,988,389 1,965,362
Net realized gain (loss) on investments 6,902 860 (159)
Total revenues 3,007,839 2,878,361 2,722,465
Benefits and expenses:
Death and other benefits:
Traditional life insurance 29,835 28,951 26,919
Universal life-type insurance
and investment contracts 108,349 92,814 85,017
Disability income and long-term care insurance 27,414 22,333 19,185
Increase in liabilities for
future policy benefits:
Traditional life insurance 6,052 3,946 1,859
Disability income and long-term care insurance 73,305 63,631 57,230
Interest credited on universal life-type
insurance and investment contracts 1,317,124 1,386,448 1,370,468
Amortization of deferred policy
acquisition costs 382,642 322,731 278,605
Other insurance and operating expenses 287,326 276,596 261,468
Total benefits and expenses 2,232,047 2,197,450 2,100,751
Income before income taxes 775,792 680,911 621,714
Income taxes 235,681 206,664 207,138
Net income $ 540,111 $ 474,247 $ 414,576
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER's EQUITY
Three years ended December 31, 1998
($ thousands)
Accumulated Other
Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, December 31, 1995 $2,331,708 $3,000 $278,814 $230,129 $1,819,765
Comprehensive income:
Net income 414,576 -- -- -- 414,576
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $10,325 and taxes of $82,982 (154,111) -- -- (154,111) --
Reclassification adjustment for losses
included in net income, net of tax
of $(5,429) 10,084 -- -- 10,084 --
----------------- --------------------
----------------- --------------------
Other comprehensive loss (144,027) -- -- (144,027) --
-----------------
Comprehensive income 270,549 -- -- -- --
Capital contribution from parent 4,801 -- 4,801 -- --
Other changes 2,022 -- -- -- 2,022
Cash dividends to parent (165,000) -- -- -- (165,000)
----------------------------------------------------------------------------
Balance, December 31, 1996 2,444,080 3,000 283,615 86,102 2,071,363
Comprehensive income:
Net income 474,247 -- -- -- 474,247
Unrealized holding gains arising during
the year, net of effect on deferred policy
acquisition costs of $(7,714) and taxes of
$(75,215) 139,686 -- -- 139,686 --
Reclassification adjustment for losses
included in net income, net of tax of $(308) 571 -- -- 571 --
----------------- --------------------
----------------- --------------------
Other comprehensive income 140,257 -- -- 140,257 --
-----------------
Comprehensive income 614,504 -- -- -- --
Capital contribution from parent 7,232 -- 7,232 -- --
Cash dividends to parent (200,000) -- -- -- (200,000)
----------------------------------------------------------------------------
Balance, December 31, 1997 2,865,816 3,000 290,847 226,359 2,345,610
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER's EQUITY (continued)
Three years ended December 31, 1998
($ thousands)
Accumulated
Other Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, December 31, 1997 $2,865,816 $3,000 $290,847 $226,359 $2,345,610
Comprehensive income:
Net income 540,111 -- -- -- 540,111
Unrealized holding losses arising during
the year, net of effect on deferred policy
acquisition costs of $6,333 and taxes of $32,826
(60,964) -- -- (60,964) --
Reclassification adjustment for losses
included in net income, net of tax
of $(2,254) 4,189 -- -- 4,189 --
----------------- --------------------
----------------- --------------------
Other comprehensive loss (56,775) -- -- (56,775) --
-----------------
Comprehensive income 483,336 -- -- -- --
Other changes (2,520) -- (2,520) -- --
Cash dividends to parent (240,000) -- -- -- (240,000)
----------------------------------------------------------------------------
Balance, December 31, 1998 $3,106,632 $3,000 $288,327 $169,584 $2,645,721
============================================================================
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
1998 1997 1996
Cash flows from operating activities:
Net income $ 540,111 $ 474,247 $ 414,576
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Policy loans, excluding universal
life-type insurance:
Issuance (53,883) (54,665) (49,314)
Repayment 57,902 46,015 41,179
Change in amounts recoverable from reinsurers (56,544) (47,994) (43,335)
Change in other accounts receivable (10,068) 6,194 (4,981)
Change in accrued investment income (9,184) (14,077) 4,695
Change in deferred policy acquisition costs, net (10,443) (156,486) (294,755)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term
care insurance 138,826 112,915 97,479
Change in policy claims and other
policyholders' funds 1,964 (15,289) 27,311
Deferred income tax provision (benefit) (19,122) 19,982 (65,609)
Change in other liabilities 64,902 13,305 46,724
Amortization of premium
(accretion of discount), net 9,170 (5,649) (23,032)
Net realized (gain) loss on investments (6,902) (860) 159
Policyholder and contractholder charges, non-cash (172,396) (160,885) (154,286)
Other, net 10,786 7,161 (10,816)
Net cash provided by (used in) operating
activities $ 485,119 $ 223,914 $ (14,005)
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
($ thousands)
1998 1997 1996
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases $ (1,020) $ (1,996) $ (43,751)
Maturities, sinking fund payments and calls 1,162,731 686,503 759,248
Sales 236,963 236,761 279,506
Fixed maturities available for sale:
Purchases (4,100,238) (3,160,133) (2,299,198)
Maturities, sinking fund payments and calls 2,967,311 1,206,213 1,270,240
Sales 278,955 457,585 238,905
Other investments, excluding policy loans:
Purchases (555,647) (524,521) (904,536)
Sales 579,038 335,765 236,912
Change in amounts due from brokers 8,073 2,647 (11,047)
Change in amounts due to brokers (186,052) 119,471 140,369
Net cash provided by (used in)
investing activities 390,114 (641,705) (333,352)
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 1,873,624 2,785,758 3,567,586
Surrenders and other benefits (3,792,612) (3,736,242) (4,250,294)
Interest credited to account balances 1,317,124 1,386,448 1,370,468
Universal life-type insurance policy loans:
Issuance (97,602) (84,835) (86,501)
Repayment 67,000 54,513 58,753
Capital transaction with parent -- 7,232 4,801
Dividends paid (240,000) (200,000) (165,000)
Net cash (used in) provided by
financing activities (872,466) 212,874 499,813
Net increase (decrease) in cash and cash equivalents 2,767 (204,917) 152,456
Cash and cash equivalents at beginning of year 19,686 224,603 72,147
Cash and cash equivalents at end of year $ 22,453 $ 19,686 $ 224,603
See accompanying notes
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New York
is a wholly owned subsidiary of the Company and serves New York State residents.
The Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company'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. The
Company's insurance products include universal life (fixed and variable),
whole life, single premium life and term products (including waiver of
premium and accidental death benefits). The Company also markets
disability income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities (see Note 4).
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Investments
Fixed maturities that the Company has both the positive intent and the ability
to hold to maturity are classified as held to maturity and carried at amortized
cost. All other fixed maturities and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized gains and
losses on securities classified as available for sale are reported as a separate
component of accumulated other comprehensive income, net of deferred policy
acquisition costs and deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Mortgage loans on real estate are carried at amortized cost less reserves
for mortgage loan losses. The estimated fair value of the mortgage loans
is determined by a discounted cash flow analysis using mortgage interest
rates currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a 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. The amount of the impairment is recorded in a reserve for mortgage
loan losses. The reserve for mortgage loan losses is maintained at a level that
management believes is adequate to absorb estimated losses in the portfolio. The
level of the reserve account is determined based on several factors, including
historical experience, expected future principal and interest payments,
estimated collateral values, and current and anticipated economic and political
conditions. Management regularly evaluates the adequacy of the reserve for
mortgage loan losses.
The Company 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.
The cost of interest rate caps and floors is amortized to investment
income over the life of the contracts and payments received as a result of
these agreements are recorded as investment income when realized. The
amortized cost of interest rate caps and floors is included in other
investments. Amounts paid or received under interest rate swap agreements
are recognized as an adjustment to investment income.
The Company purchases and writes index options to hedge the fee income
earned on the management of equity securities in separate accounts and the
underlying mutual funds. These index options are carried at market
value and are included in other investments or other liabilities, as
appropriate. Gains or losses on index options that qualify as hedges are
deferred and recognized in management and other fees in the same period
as the hedged fee income. Gains or losses on index options that do not
qualify as hedges are marked to market through the income statement.
The Company also uses index options to manage the risks related to a
certain annuity product that pays interest based upon the relative change
in a major stock market index between the beginning and end of the
product's term. Purchased options used in conjunction with this product are
reported in other investments and written options are included in other
liabilities. The amortization of the cost of purchased options, the
proceeds of written options and the changes in intrinsic value of the
contracts are included in net investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which
do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost, which approximates
fair value.
Supplementary information to the consolidated statements of cash flows for
the years ended December 31 is
summarized as follows:
1998 1997 1996
Cash paid during the year for:
Income taxes $215,003 $174,472 $317,283
Interest on borrowings 14,529 8,213 4,119
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over the
lives of the contracts, using primarily the interest method. Profits
represent the excess of investment income earned from investment of
contract considerations over interest credited to contract owners and other
expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. Under this method, profits are recognized over the
lives of the policies in proportion to the estimated gross profits
expected to be realized.
Premiums on traditional life, disability income and long-term care
insurance policies are recognized as revenue when due, and related benefits
and expenses are associated with premium revenue in a manner that results
in recognition of profits over the lives of the insurance policies. This
association is accomplished by means of the provision for future policy
benefits and the deferral and subsequent amortization of policy acquisition
costs.
Policyholder and contractholder charges include the monthly cost of
insurance charges, issue and administrative fees and surrender charges.
These charges also include the minimum death benefit guarantee fees
received from the variable life insurance separate accounts. Management
and other fees include investment management fees from underlying
proprietary mutual funds and mortality and expense risk fees received from
the variable annuity and variable life insurance separate accounts.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most
single premium deferred annuities and installment annuities are amortized
using primarily the interest method. The costs for universal life-type
insurance and certain installment annuities are amortized as a percentage
of the estimated gross profits expected to be realized on the policies. For
traditional life, disability income and long-term care insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Liabilities for future policy benefits
Liabilities for universal life-type insurance and deferred annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates ranging from 5%
to 9.5%, depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on
the net level premium method, using anticipated mortality, policy
persistency and interest earning rates. Anticipated mortality rates are
based on established industry mortality tables. Anticipated policy
persistency rates vary by policy form, issue age and policy duration with
persistency on cash value plans generally anticipated to be better than
persistency on term insurance plans. Anticipated interest rates range
from 4% to 10%, 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 based
on the net level premium method, using anticipated morbidity, mortality,
policy persistency and interest earning 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 interest rates for disability income and long-term care policy
reserves are 3% to 9.5% at policy issue and grade to ultimate rates of 5%
to 7% over 5 to 10 years.
Claim reserves are calculated based on claim continuance tables and
anticipated interest earnings. Anticipated claim continuance rates are
based on established industry tables. Anticipated interest rates
for claim reserves for both disability income and long-term care range
from 6% to 8%.
Reinsurance
The maximum amount of life insurance risk retained by the Company on any
one life is $750 of life benefit plus $50 of accidental death benefits. The
maximum amount of life insurance risk retained on any joint-life
combination is $1,500. The excesses are reinsured with other life insurance
companies, primarily on a yearly renewable term basis. Long-term care
policies are primarily reinsured on a coinsurance basis. Beginning in 1998,
the Company retains all disability income and waiver of premium risk.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company 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.
Included in other liabilities at December 31, 1998 and 1997 are $26,291
payable to and $12,061, receivable from, respectively, AEFC for federal
income taxes.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance
contract owners. The Company receives investment management fees from
the proprietary mutual funds used as investment options for variable
annuities and variable life insurance. The Company receives mortality and
expense risk fees from the separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the 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. The Company 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.
The Company also guarantees that the rates at which administrative fees are
deducted from contract funds will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds
will not exceed contractual maximums. The Company also guarantees that the
death benefit will continue payable at the initial level regardless of
investment performance so long as minimum premium payments are made.
Accounting changes
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and display of
comprehensive income and its components. Comprehensive income is defined as
the aggregate change in stockholder's equity excluding changes in ownership
interests. For the Company, it is net income and the unrealized gains or
losses on available-for-sale securities, net of the effect on deferred
policy acquisition costs, taxes and reclassification adjustment.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." The SOP, which
is effective January 1, 1999, requires the capitalization of certain costs
incurred after the date of adoption to develop or obtain software for
internal use. Software utilized by the Company is owned by AEFC and will be
capitalized by AEFC. As a result, the new rule will not have a material
impact on the Company's results of operations or financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments," providing guidance
for the timing of recognition of liabilities related to guaranty fund
assessments. The Company will adopt the SOP on January 1, 1999. The Company
has historically carried a balance in other liabilities on the balance
sheet for potential guaranty fund assessment exposure. Adoption of the SOP
will not have a material impact on the Company's results of operations or
financial condition.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
1. Summary of significant accounting policies (continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2000.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. Earlier application of all of
the provisions of this Statement is encouraged, but it is permitted only as
of the beginning of any fiscal quarter that begins after issuance of the
Statement. This Statement cannot be applied retroactively. The ultimate
financial impact of the new rule will be measured based on the derivatives
in place at adoption and cannot be estimated at this time.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available.
Estimated values are determined by established procedures involving, among
other things, review of market indices, price levels of current offerings
of comparable issues, price estimates and market data from independent
brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
U.S. Government agency obligations $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations 9,683 491 -- 10,173
Corporate bonds and obligations 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities 1,609,067 30,458 152 1,639,373
$ 7,964,114 $483,161 $27,239 $8,420,035
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations 11,060 1,231 -- 12,291
Corporate bonds and obligations 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities 5,949,502 151,511 3,869 6,097,144
Total fixed maturities 13,344,949 427,240 159,050 13,613,139
Equity securities 158 --
3,000 3,158
$13,347,949 $427,398 $159,050 $13,616,297
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1997
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
U.S. Government agency obligations $ 41,932 $ 2,949 $ -- $ 44,881
State and municipal obligations 9,684 568 -- 10,252
Corporate bonds and obligations 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities 1,983,188 25,976 7,911 2,001,253
$9,315,450 $445,193 $17,233 $9,743,410
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 65,291 $ 4,154 $ -- $ 69,445
State and municipal obligations 11,045 1,348 -- 12,393
Corporate bonds and obligations 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities 7,130,565 160,478 6,879 7,284,164
Total fixed maturities 12,515,030 398,741 37,077 12,876,694
Equity securities 3,000 361 --
3,361
$12,518,030 $399,102 $37,077 $12,880,055
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Held to maturity Cost Value
Due in one year or less $ 354,296 $ 359,020
Due from one to five years 2,111,369 2,249,847
Due from five to ten years 3,012,227 3,189,789
Due in more than ten years 877,155 982,006
Mortgage-backed securities 1,609,067 1,639,373
$ 7,964,114 $ 8,420,035
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 102,463 $ 104,475
Due from one to five years 682,336 725,859
Due from five to ten years 3,904,326 4,044,378
Due in more than ten years 2,718,659 2,654,382
Mortgage-backed securities 5,937,165 6,084,045
$13,344,949 $13,613,139
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $230,036,
$229,848 and $277,527, respectively. Net gains and losses on these sales
were not significant. The sale of these fixed maturities was due to
significant deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1998 with proceeds of
$278,955 and gross realized gains and losses of $15,658 and $22,102,
respectively. Fixed maturities available for sale were sold during 1997
with proceeds of $457,585 and gross realized gains and losses of $6,639
and $7,518, respectively. Fixed maturities available for sale were sold
during 1996 with proceeds of $238,905 and gross realized gains and
losses of $571 and $16,084, respectively.
At December 31, 1998, bonds carried at $14,302 were on deposit with various
states as required by law.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
At December 31, 1998, investments in fixed maturities comprised 83 percent
of the Company's total invested assets. These securities are rated by
Moody's and Standard & Poor's (S&P), except for securities carried at
approximately $3.6 billion which are rated by AEFC's internal analysts
using criteria similar to Moody's and S&P. A summary of investments in
fixed maturities, at amortized cost, by rating on December 31 is as
follows:
Rating 1998 1997
Aaa/AAA $ 7,629,628 $ 9,195,619
Aaa/AA 2,277 --
Aa/AA 308,053 232,451
Aa/A 301,325 246,792
A/A 2,525,283 2,787,936
A/BBB 1,148,736 1,200,345
Baa/BBB 6,237,014 5,226,616
Baa/BB 492,696 475,084
Below investment grade 2,664,051 2,465,637
$21,309,063 $21,830,480
At December 31, 1998, 93 percent of the securities rated Aaa/AAA are GNMA,
FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer
are greater than one percent of the Company's total investments in fixed
maturities.
At December 31, 1998, approximately 13 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
December 31, 1998 December 31, 1997
On Balance Commitments On Balance Commitments
Region Sheet to Purchase_ Sheet to Purchase
East North Central $ 750,705 $ 16,393 $ 748,372 $ 32,462
West North Central 491,006 81,648 456,934 14,340
South Atlantic 839,233 21,020 922,172 14,619
Middle Atlantic 476,448 6,169 545,601 15,507
New England 263,761 2,824 316,250 2,136
Pacific 195,851 16,946 184,917 3,204
West South Central 136,841 1,412 125,227 --
East South Central 46,029 -- 60,274 --
Mountain 345,379 8,473 297,545 28,717
3,545,253 154,885 3,657,292 110,985
Less allowance for losses 39,795 -- 38,645 --
$3,505,458 $154,885 $3,618,647 $110,985
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
December 31, 1998 December 31, 1997
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase_ Sheet to Purchase_
Department/retail stores $1,139,349 $ 59,305 $1,189,203 $ 27,314
Apartments 960,808 9,272 1,089,127 16,576
Office buildings 783,576 50,450 716,729 34,546
Industrial buildings 298,549 13,263 295,889 21,200
Hotels/motels 109,185 14,122 101,052 --
Medical buildings 124,369 -- 99,979 9,748
Nursing/retirement homes 46,696 -- 72,359 --
Mixed Use 65,151 -- 71,007 --
Other 17,570 8,473 21,947 1,601
3,545,253 154,885 3,657,292 110,985
Less allowance for losses 39,795 -- 38,645 --
$3,505,458 $154,885 $3,618,647 $110,985
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. The Company 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 agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1998 and 1997, the Company's recorded investment in
impaired loans was $24,941 and $45,714, respectively, with allowances of
$6,662 and $9,812, respectively. During 1998 and 1997, the average
recorded investment in impaired loans was $37,873 and $61,870,
respectively.
The Company recognized $1,809, $2,981 and $4,889 of interest income related
to impaired loans for the years ended December 31, 1998, 1997 and 1996
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
1998 1997 1996
Balance, January 1 $38,645 $37,495 $37,340
Provision for investment losses 7,582 8,801 10,005
Loan payoffs (800) (3,851) (4,700)
Foreclosures and writeoffs (5,632) (3,800) (5,150)
Balance, December 31 $39,795 $38,645 $37,495
At December 31, 1998, the Company had commitments to purchase investments
other than mortgage loans for $223,011. Commitments to purchase
investments are made in the ordinary course of business. The fair value
of these commitments is $nil.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
2. Investments (continued)
Net investment income for the years ended December 31 is summarized as
follows:
1998 1997 1996
Interest on fixed maturities $1,676,984 $1,692,481 $1,666,929
Interest on mortgage loans 301,253 305,742 283,830
Other investment income 43,518 25,089 43,283
Interest on cash equivalents 5,486 5,914 5,754
2,027,241 2,029,226 1,999,796
Less investment expenses 40,756 40,837 34,434
$1,986,485 $1,988,389 $1,965,362
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
1998 1997 1996
Fixed maturities $ 12,084 $ 16,115 $ 8,736
Mortgage loans (5,933) (6,424) (8,745)
Other investments 751 (8,831) (150)
$ 6,902 $ 860 $ (159)
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
1998 1997 1996
Fixed maturities available for sale $(93,474) $223,441 $(231,853)
Equity securities (203) 53 (52)
3. Income taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists
of the following:
1998 1997 1996
Federal income taxes:
Current $244,946 $176,879 $260,357
Deferred (16,602) 19,982 (65,609)
228,344 196,861 194,748
State income taxes-current 7,337 9,803 12,390
Income tax expense $235,681 $206,664 $207,138
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
3. Income taxes (continued)
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory rate are attributable to:
1998 1997 1996
-------------------------- ------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
Federal income taxes based on
the statutory rate $271,527 35.0% $238,319 35.0% $217,600 35.0%
(Decreases) increases
are
attributable to:
Tax-excluded interest and
dividend income (12,289) (1.6) (10,294) (1.5) (9,636) (1.5)
State taxes, net of federal
benefit 4,769 .6 6,372 .9 8,053 1.3
Affordable housing credits (19,688) (2.5) (20,705) (3.0) (5,090) (.8)
Other, net (8,638) (1.1) (7,028) (1.0) (3,789) (.7)
Federal income taxes $235,681 30.4% $206,664 30.4% $207,138 33.3%
A portion of life insurance company 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, 1998, the Company had a
policyholders' surplus account balance of $20,114. The policyholders'
surplus account is only taxable if dividends to the stockholder exceed the
stockholder's surplus account or if the Company is liquidated. Deferred
income taxes of $7,040 have not been established because no distributions
of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
1998 1997
Deferred tax assets:
Policy reserves $756,769 $748,204
Life insurance guaranty fund assessment reserve 15,289 20,101
Other 4,253 9,589
Total deferred tax assets 776,311 777,894
Deferred tax liabilities:
Deferred policy acquisition costs 698,471 700,032
Unrealized gain on investments 91,315 121,885
Investments, other 3,455 17,559
Total deferred tax liabilities 793,241 839,476
Net deferred tax liabilities $ 16,930 $ 61,582
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
3. Income taxes (continued)
The Company is required to establish a valuation allowance for any portion
of the deferred tax assets that management believes will not be realized.
In the opinion of management, it is more likely than not that the Company
will realize the benefit of the deferred tax assets and, therefore, no
such valuation allowance has been established.
4. Stockholder's equity
Retained earnings available for distribution as dividends to the parent
are limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $1,598,203 as of December 31, 1998
and $1,468,677 as of December 31, 1997 (see Note 3 with respect to the
income tax effect of certain distributions). In addition, any dividend
distributions in 1999 in excess of approximately $353,933 would require
approval of the Department of Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
1998 1997 1996
Statutory net income $ 429,903 $ 379,615 $ 365,585
Statutory capital and surplus 1,883,405 1,765,290 1,565,082
5. Related party transactions
The Company loans funds to AEFC under a collateral loan agreement. The
balance of the loan was $nil at December 31, 1998 and 1997. This loan can
be increased to a maximum of $75,000 and pays interest at a rate equal to
the preceding month's effective new money rate for the Company's permanent
investments. Interest income on related party loans totaled $nil, $103 and
$780 in 1998, 1997 and 1996, respectively.
The Company participates in the American Express Company Retirement Plan
which covers all permanent employees age 21 and over who have met certain
employment requirements. Employer 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. The Company's share of
the total net periodic pension cost was $211, $201 and $174 in 1998, 1997
and 1996, respectively.
The Company 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 1998, 1997 and 1996 were
$1,503, $1,245 and $990, respectively.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
5. Related party transactions (continued)
The Company 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
Company's share of postretirement benefits in 1998, 1997 and 1996 was
$1,352, $1,330 and $1,449, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $411,337, $414,155 and $397,362 for
1998, 1997 and 1996, respectively. Certain of these costs are included in
deferred policy acquisition costs.
6. Commitments and contingencies
At December 31, 1998, 1997 and 1996, traditional life insurance and
universal life-type insurance in force aggregated $81,074,928, $74,730,720
and $67,274,354 respectively, of which $4,912,313, $4,351,904 and
$3,875,921 were reinsured at the respective year ends. The Company also
reinsures a portion of the risks assumed under disability income and
long-term care policies. Under all reinsurance agreements, premiums ceded
to reinsurers amounted to $66,378, $60,495 and $48,250 and reinsurance
recovered from reinsurers amounted to $20,982, $19,042, and $15,612 for the
years ended December 31, 1998, 1997 and 1996, respectively. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
A number of lawsuits have been filed against life and health insurers
in jurisdictions in which the Company, its parent and its subsidiaries
conduct business involving insurers' sales practices, alleged agent
misconduct, failure to properly supervise agents, and other matters.
The Company has been named as a defendant in three of these types of
actions.
The plaintiffs purport to represent a class consisting of all persons
who purchased policies or contracts from the Company and its
subsidiaries. The complaints put at issue various alleged sales
practices and misrepresentations, alleged breaches of fiduciary duties
and alleged violations of consumer fraud statutes. The Company and its
subsidiaries believe they have meritorious defenses to the claims
raised in these lawsuits.
The outcome of any litigation cannot be predicted with certainty. In the
opinion of management, however, the ultimate resolution of these lawsuits,
taken in the aggregate, should not have a material adverse effect on the
Company's consolidated financial position.
The IRS routinely examines the Company's federal income tax returns,
and is currently auditing the Company's returns for the 1990 through
1992 tax years. Management does not believe there will be a material
adverse effect on the Company's consolidated financial position as a
result of this audit.
7. Lines of credit
The Company has available lines of credit with its parent aggregating
$100,000. The interest rate for any borrowings is established by
reference to various indices plus 20 to 45 basis points, depending on
the term. Borrowings outstanding under this agreement were $nil at
December 31, 1998 and 1997.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk and equity market
risk, including hedging specific transactions. The Company does not
hold derivative instruments for trading purposes. The Company manages
risks associated with these instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity
market index. The Company is not impacted by market risk related to
derivatives held for non-trading purposes beyond that inherent in cash
market transactions. Derivatives held for purposes other than trading
are largely used to manage risk and, therefore, the cash flow and income
effects of the derivatives are inverse to the effects of the underlying
transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of the Company's
counterparties are rated A or better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over
the life of the agreement. Notional amounts are not recorded on the
balance sheet. Notional amounts far exceed the related credit risk.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments (continued)
The Company's holdings of derivative financial instruments are as follows:
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
Assets:
Interest rate caps $ 3,400,000 $ 15,985 $ 4,256 $ 4,256
Interest rate floors 1,000,000 1,082 13,971 13,971
Options purchased 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written 265,454 (10,526) (11,062) --
Off balance sheet:
Interest rate swaps 1,667,000 -- (73,477) --
$ 30,635 $(36,859) $47,680
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
Assets:
Interest rate caps $ 4,600,000 $ 24,963 $ 15,665 $ 15,665
Interest rate floors 1,000,000 1,561 4,551 4,551
Options purchased/written 279,737 9,808 10,449 10,449
Liabilities:
Options written 7,373 (89) 114 --
Off balance sheet:
Interest rate swaps 1,267,000 -- (45,799) --
$36,243 $(15,020) $30,665
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps, floors
and swaps expire on various dates from 1999 to 2003. The put and call
options expire on various dates from 1999 to 2005.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the
margin between interest rates earned on investments and the interest rates
credited to related annuity contract holders.
The Company is also using interest rate swaps to manage interest rate
risk related to the level of fee income earned on the management of
fixed income securities in separate accounts and the underlying mutual
funds. The amount of fee income received is based upon the daily
market value of the separate account and mutual fund assets. As a
result, changing interest rate conditions could impact the Company's
fee income significantly. The Company entered into interest rate swaps
to hedge anticipated fee income for 1999 related to separate accounts
and mutual funds which invest in fixed income securities. Interest
will be accrued and reported in accrued investment income and other
liabilities, as appropriate, and management and other fees.
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
8. Derivative financial instruments (continued)
The Company offers a certain annuity product that pays interest based
upon the relative change in a major stock market index between the
beginning and end of the product's term. As a means of hedging its
obligation under the provisions of this product, the Company purchases
and writes options on the major stock market index.
Index options are used to manage the equity market risk related to the
fee income that the Company receives from its separate accounts and
the underlying mutual funds. The amount of the fee income received is
based upon the daily market value of the separate account and mutual
fund assets. As a result, the Company's fee income could be impacted
significantly by changing economic conditions in the equity market.
The Company entered into index option collars (combination of puts and
calls) to hedge anticipated fee income for 1998 and 1999 related to
separate accounts and mutual funds which invest in equity securities.
Testing has demonstrated the impact of these instruments on the income
statement closely correlates with the amount of fee income the Company
realizes. In the event that testing demonstrates that this correlation
no longer exists, or in the event the Company disposes of the index
options collars, the instruments will be marked-to-market through the
income statement. At December 31, 1998 deferred losses on purchased
put and written call index options were $2,933 and $7,435,
respectively. At December 31, 1997 deferred losses on purchased put
index options were $2,428 and deferred gains on written call index
options were $5,275.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair values of life insurance obligations and all non-financial
instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force,
are also excluded. Management believes the value of excluded assets and
liabilities is significant. The fair value of the Company, therefore,
cannot be estimated by aggregating the amounts presented.
1998 1997
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
Investments:
Fixed maturities (Note 2):
Held to maturity $ 7,964,114 $ 8,420,035 $ 9,315,450 $ 9,743,410
Available for sale 13,613,139 13,613,139 12,876,694 12,876,694
Mortgage loans on
real estate (Note 2) 3,505,458 3,745,617 3,618,647 3,808,570
Other:
Equity securities (Note 2) 3,158 3,158 3,361 3,361
Derivative financial
Instruments (Note 8) 41,161 47,680 36,332 30,665
Other 28,872 28,872 82,347 85,383
Cash and cash
equivalents (Note 1) 22,453 22,453 19,686 19,686
Separate account assets (Note 1) 27,349,401 27,349,401 23,214,504 23,214,504
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ thousands)
9. Fair values of financial instruments (continued)
1998 1997
Carrying Fair Carrying Fair
Financial Liabilities Value Value Value Value
Future policy benefits for
fixed annuities $19,855,203 $19,144,838 $20,731,052 $19,882,302
Derivative financial
instruments (Note 8) 10,526 84,539 89 45,685
Separate account liabilities 25,005,732 24,179,115 21,488,282 20,707,620
At December 31, 1998 and 1997, the carrying amount and fair value of
future policy benefits for fixed annuities exclude life
insurance-related contracts carried at $1,226,985 and $1,185,155,
respectively, and policy loans of $90,115 and $93,540, respectively.
The fair value of these benefits is based on the status of the
annuities at December 31, 1998 and 1997. The fair value of deferred
annuities is estimated as the carrying amount less any applicable
surrender charges and related loans. The fair value for annuities in
non-life contingent payout status is estimated as the present value of
projected benefit payments at rates appropriate for contracts issued
in 1998 and 1997.
At December 31, 1998 and 1997, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less any applicable
surrender charges and less variable insurance contracts carried at
$2,343,669 and $1,726,222, respectively.