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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
(Mark One)
[X]________________
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20022003
OR
[ ]|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to________to ________
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
MINNESOTAMinnesota 41-0823832
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
227829 AXP FINANCIAL CENTER, MINNEAPOLIS, MINNESOTAFinancial Center
Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip Code)
(Registrant'sRegistrant's telephone number, including area code)code: (612) 671-3131
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X__X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act). Yes _____ No __X__
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a)
and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE PERMITTED
ABBREVIATED NARRATIVE DISCLOSURE.
-1-REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
Form 10-K
Item Number
Page
PART I
1. Business................................................................1
Introduction.......................................................1
Insurance: Product Features and Risks.............................1
Variable Life Insurance............................................1
Universal Life Insurance...........................................2
Traditional Life Insurance Products................................2
Disability Income Insurance........................................2
Long-term Care Insurance...........................................3
Insurance Risks....................................................3
Annuities: Product Features and Risks.............................3
Variable Annuities.................................................3
Fixed Annuities....................................................3
Annuity Risks......................................................4
The General Account................................................5
The Variable Accounts..............................................6
Regulation.........................................................7
Ratings............................................................7
Risk Based Capital.................................................8
2. Properties..............................................................8
3. Legal Proceedings.......................................................8
4. Submission of Matters to a Vote of Security Holders.....................9
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...9
6. Selected Financial Data.................................................9
7. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.....................................9
7A. Quantitative and Qualitative Disclosures About Market Risk..............21
8. Financial Statements and Supplementary Data.............................21
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................21
9A. Controls and Procedures.................................................21
PART III
14. Principal Accountant Fees and Services..................................21
PART VI
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........22
Signatures..............................................................23
Index to Financial Statements...........................................F-1
Exhibit Index...........................................................E-1
PART I
ITEM 1. BUSINESS
Introduction
IDS Life Insurance Company (the "Company") is a stock life insurance company organized under the
laws of the State of Minnesota. TheIDS Life Insurance Company is a wholly owned
subsidiary of American Express Financial Corporation ("AEFC"), which is a wholly
owned subsidiary of American Express Company. IDS Life Insurance Company serves
residents of the District of Columbia and serves all states except New York. TheIDS Life
Insurance Company distributes its fixed and variable insurance and annuities
products exclusively through the American Express Financial Advisors'Advisors Inc.'s
("AEFA"AEFAI") retail sales force. TheIDS Life Insurance Company has four wholly owned
life insurance company subsidiaries that distribute their products through
the various AEFA distribution channels. IDS Life Insurance Company of New York ("IDS Life
of New York") is a wholly owned subsidiary of theIDS Life Insurance Company and
serves New York State residents. IDS Life of New York distributes its fixed and
variable insurance and annuity products exclusively through AEFA'sAEFAI's retail sales
force. TheIDS Life Insurance Company also owns American Enterprise Life Insurance
Company ("American Enterprise Life"), an Indiana corporation, which primarily
issues fixed and variable annuity contracts for sale through non-affiliated
representatives and agents of third party distributors. American Centurion Life
Assurance Company ("American Centurion Life") is also a subsidiary of theIDS Life
Insurance Company. American Centurion Life offers fixed and variable annuities
to American Express(R) Cardmembers and others in New York, as well as fixed and
variable annuities for sale through non-affiliated representatives and agents of
third party distributors, in New York. TheIDS Life Insurance Company owns American
Partners Life Insurance Company ("American Partners Life"), an Arizona
corporation which offers fixed and variable annuity contracts to American
Express(R) Cardmembers and others who reside in states other than New York. TheIDS
Life Insurance Company also owns IDS REO 1, LLC and American Express Corporation.
TheseIDS REO II, LLC. At December
31, 2003, these two subsidiaries holdheld real estate and mortgage loans on real
estate and/or
affordable housing investments.estate. (IDS Life Insurance Company distributed via dividend all of its interest
in American Express Corporation ("AEC") to AEFC in December 2003. See Note 1 to
the Consolidated Financial Statements for further discussion.) IDS Life
Insurance Company and its six subsidiaries are referred to collectively as "IDS
Life" in this Form 10-K.
Business sold through AEFA'sAEFAI's retail distribution channel for IDS Life Insurance
Company and IDS Life of New York represents the majority of the insurance and
annuity business for the Company.IDS Life. Business sold through third-party distribution
for American Enterprise Life and American Centurion Life ranks second. Business
sold through the direct channel for American Partners Life and American
Centurion Life ranks a distant third.
RegulationInsurance: Product Features and Risks
IDS Life issues a wide range of insurance products including variable life
insurance, universal life insurance, traditional whole life insurance,
traditional term life insurance and disability income insurance. IDS Life issues
only non-participating life insurance contracts and does not issue
short-duration life insurance policies.
Variable Life Insurance
IDS Life Insurance Company's and IDS Life of New York's biggest selling life
insurance products are variable life insurance policies. Variable life insurance
provides life insurance coverage along with investment returns linked to the
underlying investments the policyholder chooses. These products also offer a
fixed account with a guaranteed minimum interest crediting rate ranging from
4.0% to 4.5%. According to LIMRA, IDS Life Insurance Company ranked third in
variable life insurance sales on the basis of premiums in 2003.
-1-
IDS Life Insurance Company's variable life insurance products include American
Express(R) Variable Universal Life IV/American Express(R) Variable Universal
Life IV - Estate Series, which are individual flexible premium policies. The
Estate Series policy is available to policyholders with initial specified
amounts of $1 million or more. IDS Life Insurance Company also issues American
EnterpriseExpress Succession Select, a flexible premium survivorship policy that insures
two lives. Succession Select is often used for estate planning purposes.
Finally, IDS Life Insurance Company issues American Express(R) Single Premium
Variable Life, an individual single premium variable life insurance policy.
Beginning in 1999 and American Partners2000, respectively, IDS Life are subjectInsurance Company and IDS
Life of New York reinsured 80% of the mortality risk attributable to comprehensive regulation by the Minnesota Departmentnew sales
of Commerce (Insurance
Division), the Indiana Department ofindividual flexible premium variable life insurance. This means that on these
product sales, IDS Life Insurance and the Arizona Department of
Insurance, respectively. American Centurion LifeCompany and IDS Life of New York are regulated byat risk
for only 20% of each policy's death benefit from the first dollar of coverage.
Beginning at the end of 2002 for IDS Life Insurance Company and the third
quarter of 2003 for IDS Life of New York, State Departmentthe amount reinsured was increased to
90%, with 10% retained by IDS Life. In contrast and prior to this arrangement,
IDS Life Insurance Company and IDS Life of Insurance. The lawsNew York generally retained risk up
to $750,000 on each insured life and reinsured only those amounts in excess of
$750,000. Generally, the prior arrangement left IDS Life Insurance Company and
IDS Life of New York with more of the other
states in which these companies do businessrisk for the death benefit than the more
recent practice.
Universal Life Insurance
IDS Life Insurance Company's and IDS Life of New York's universal life insurance
products provide life insurance coverage and cash value that increases by a
fixed interest rate. The rate is periodically reset according to the terms of
the policy at the discretion of the issuing company. Policies issued by IDS Life
Insurance Company and IDS Life of New York also regulate such matters as the
licensingprovide a guaranteed minimum
interest crediting rate ranging from 4% to 5%.
IDS Life Insurance Company's universal life insurance products include Life
Protection Plus, Life Protection Select and Life Protection Select Estate
Series. The Estate Series policy is available to policyholders with initial
specified amounts of sales personnel$1 million or more.
Traditional Life Insurance Products
IDS Life Insurance Company's and in some cases, the marketing and contentsIDS Life of New York's traditional life
insurance policies and annuity contracts. The primary purpose of such regulation
and supervision is to protect the interests of policyholders.
Regulatory scrutiny of market conduct practices of insurance companies,
including sales, marketing and replacements ofproducts include whole life insurance and annuitiesterm life insurance. Whole
life insurance combines a death benefit with a cash value that generally
increases gradually in amount over a period of years and "bonus" annuities, has increased significantlydoes not pay a
dividend. IDS Life Insurance Company and IDS Life of New York have sold very
little traditional whole life insurance in recent yearsyears. Term life insurance
provides only a death benefit, does not build up cash value and is affectingdoes not pay a
dividend. The policyholder chooses the mannerguarantee period at the time of
application. During the chosen term, IDS Life Insurance Company and IDS Life of
New York cannot raise premium rates even if claims experience were to
deteriorate. Beginning in which companies approach various operational issues, including
compliance. The number2001 and 2002, respectively, IDS Life Insurance
Company and IDS Life of private lawsuits alleging violations of laws in
connection with insurance and annuity market conduct has increased (see Legal
Proceedings on page 8). Virtually all states mandate participation in insurance
guaranty associations, which assess insurance companies in order to fund claims
of contract owners of insolvent insurance companies.
On the federal level, there is periodic interest in enacting new regulations
relating to various aspectsNew York have reinsured 90% of the mortality risk
attributable to new term insurance industry, including taxation of
annuities and life insurance policies, accounting procedures, as well as the
treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an insurance contract. New federal regulation
in any ofsales. This means that on these areas could potentially have an adverse effect upon themore recent
product sales, IDS Life Insurance Company and itsIDS Life of New York are at risk
for only 10% of each policy's death benefit from the first dollar of coverage.
In contrast and prior to this arrangement, IDS Life Insurance Company and IDS
Life of New York generally retained risk up to $750,000 on each insured life and
reinsured only amounts in excess of $750,000. Generally, the prior arrangement
left IDS Life Insurance Company and IDS Life of New York with more of the risk
for the death benefit than the more recent practice.
Disability Income Insurance
IDS Life Insurance Company and IDS Life of New York also issue disability income
("DI") insurance. DI insurance subsidiaries. More specifically, recent federal legislative
proposals aimedprovides monthly benefits to individuals who are
unable to earn income at promoting tax-advantaged savings through Lifetime Savings
Accountseither their occupation at time of disability ("own
occupation") or at any suitable occupation ("any occupation"). Depending upon
occupational and Retirement Savings Accountmedical underwriting criteria, applicants for DI insurance can
choose "own occupation" and the dividend exclusion proposal"any occupation" coverage for varying benefit
periods up to age 65. Applicants may adversely impact the Company's sales of annuityalso choose various benefit riders to help
them integrate individual DI insurance benefits with Social Security or similar
benefit plans and life insurance products if
enacted.to help them protect their DI
-2-
Ratings
Theinsurance benefits from the risk of inflation. IDS Life Insurance Company
believes it is the 20th largest life insurance companyhas a significant presence in the United
States basedDI insurance market.
Long-Term Care Insurance
IDS Life Insurance Company and IDS Life of New York no longer issue long-term
care ("LTC") insurance, but do retain risk on consolidated assets. Thea large block of existing
contracts, 50% of which is reinsured by General Electric Capital Assurance
Company had consolidated assets at
December 31, 2002 of approximately $60 billion, based on generally accepted
accounting principles and had total statutory capital and surplus as("GECA"). As of December 31, 2002, IDS Life Insurance Company and IDS
Life of $2.4 billion.
TheNew York generally discontinued underwriting LTC insurance. (A small
number of applications were taken in early 2003.) In addition, in May 2003, IDS
Life Insurance Company receives ratingsand IDS Life of New York began outsourcing claims
administration to GECA.
Insurance Risks
IDS Life's sales of individual life insurance in 2003, as measured by scheduled
annual premiums and excluding lump sum premiums, consisted of 82% variable life,
6% universal life and 12% term life.
Competitive factors applicable to the insurance business include product
features, the interest rates credited to products, the charges deducted from independent rating agencies. Generally, its
four insurance subsidiaries do not receive an individual rating, but receive the
same rating as the Company. These agencies evaluatecash values of such products, investment performance, the financial soundness and
claims-paying ability of insurance companies based on a number of different
factors. The ratings reflect each agency's estimationstrength of
the Company's abilityorganization, distribution and management expenses, claims paying ratings
and the services provided to meet its contractual obligations such as making annuity payoutspolicyholders.
For long-term profitability, it is crucial to ensure adequate pricing to cover
insurance risks and paying
deathto accumulate adequate reserves. Reserves are a measure of
the assets that IDS Life estimates are needed to adequately provide for future
benefits and other distributions fromexpenses. These reserves are also discussed in the contracts. As such,"Certain
Critical Accounting Policies" section herein.
Annuities: Product Features and Risks
IDS Life offers variable and fixed annuities to a broad range of consumers
through multiple distribution channels. Annuities may be deferred, where assets
accumulate until the ratings
relate tocontract is surrendered, the Company's general accountcontract owner dies, or the
contract owner begins receiving benefits under an annuity payout option; or
immediate, where payments begin within one year of issue and not to the variable accounts. This
information generally does not relate to the managementcontinue for life
or performancefor a fixed period of time.
IDS Life Insurance Company is one of the variable subaccountslargest issuers of the contracts.
Ratings are important to maintaining public confidenceannuities in the
Company and its
subsidiaries. Lowering of the Company's ratings could have a material adverse
effect on the Company's ability to market products and could lead to increased
surrenders of the Company's products. Rating agencies continually review the
financial performance and condition of insurers. Also, the rating agencies have
a variety of policies and practices regarding the relationships among ratings of
affiliated entities. As such, the ratings of the Company could be affected by
changes in ratings of its subsidiaries and/or American Express Company.United States. As of the end of 2002, the third quarter of 2003, IDS Life Insurance
Company, on a consolidated basis, ranked 11th among the top annuity writers. IDS
Life posted annuity cash sales in 2003 of over $8 billion, a decrease of 2%
across all distribution channels.
Variable Annuities
Like variable life insurance, variable annuities provide contract owners with
investment returns linked to the underlying investments the contract owner
chooses. These products also offer a fixed account with a guaranteed minimum
interest crediting rate ranging from 1.5% to 4%. One of IDS Life Insurance
Company's variable annuities, the American Express Retirement Advisor
Advantage(R) Variable Annuity, was rated "A+" (Superior)the 12th largest-selling annuity in the
country in 2003. In January 2004 IDS Life Insurance Company introduced an
enhanced version of this annuity named American Express Retirement Advisor
Advantage PlusSM Variable Annuity.
Fixed Annuities
IDS Life's fixed annuities provide cash value that increases by A.M. Best Company,
Inc. and its claims-paying ability/financial strength was rated "Aa3"
(Excellent) by Moody's Investors Service, Inc. (Moody's), and "AA" (Very Strong)
by Fitch. In lighta fixed interest
rate. The rate is periodically reset according to the terms of the Company's desire to maintain these ratings,contract at
the Company's parent contributed $400 milliondiscretion of capital to the Company in 2002.
The foregoing ratings reflect each rating agency's opinion of the Company's
financial strength, operating performance and ability to meet its obligations to
contract owners. Such factors are of primary concern to contract owners, agents
and intermediaries, but also may be of interest to investors.
Risk Based Capital
The National Association of Insurance Commissioners ("NAIC") adopted Risk Based
Capital ("RBC") requirements for life insurance companies. The RBC requirements
are to be used as minimum capital requirements by the NAIC and states to
identify companies that merit further regulatory action.IDS Life. At December 31, 2002,2003, the Company had total adjusted capitalcontracts provide a
guaranteed minimum interest crediting rate ranging from 1.5% to 5%. In 2003, a
number of approximately $2.6 billion. As definedstates adopted a model regulation providing for an indexed guaranteed
minimum interest crediting rate, and a number of states now follow this model.
IDS Life filed a number of contract changes to begin taking advantage of the
lower rate guarantee offer on new product sales.
-3-
Annuity Risks
The relative proportion between fixed and variable annuities sales is generally
driven by the NAIC, totalrelative performance of the equity and fixed income markets. In
times of lackluster performance in equity markets, fixed sales are generally
stronger. In times of superior performance in equity markets, variable sales are
generally stronger. In addition, investment management performance is critical
to the profitability of an annuity business.
In past years, innovative features for annuity products have continually been
evolving. These features include guaranteed minimum death benefits ("GMDBs")
that protect beneficiaries from a drop in death benefits due to performance of
the related underlying investments. The standard GMDB in the "flagship" annuity
offered by IDS Life Insurance Company and IDS Life of New York in 2003, the
American Express Retirement Advisor Advantage Variable Annuity, provides that if
the contract owner and annuitant are age 80 or younger on the date of death, the
beneficiary will receive the greatest of (i) the contract value, (ii) purchase
payments minus adjusted capital includespartial surrenders, or (iii) the contract value as of
the most recent sixth contract anniversary, plus purchase payments and minus
adjusted partial surrenders since that anniversary. Under the new American
Express Retirement Advisor Advantage PlusSM Variable Annuity, the standard GMDB
provides that if the contract owner is age 75 or younger on the date of death,
the beneficiary will receive the greater of (i) the contract value less a pro
rata portion of any rider fees, or (ii) purchase payments minus adjusted partial
surrenders.
Additional optional GMDBs are also available. For example, IDS Life Insurance
Company and IDS Life of New York contract owners may purchase a maximum
anniversary value death benefit for an additional charge. This death benefit
rider guarantees that the death benefit will not be less than the highest
contract value achieved on a contract anniversary before the contract owner
reaches the age of 81, adjusted for partial withdrawals. IDS Life Insurance
Company contract owners also may purchase an enhanced earnings death benefit or
an enhanced earnings plus death benefit for an additional charge. These death
benefit riders are intended to provide additional benefits to a beneficiary to
offset expenses after the contract owner's death.
American Enterprise Life and other subsidiaries of IDS Life Insurance Company
also offer variable annuities with a variety of guaranteed minimum death benefit
features and certain asset valuation reserves
excludedoptional benefits. For example, American Enterprise Life
issues certain variable annuity contracts that contain a guaranteed minimum
income benefit feature which, if elected by the contract owner after a
stipulated waiting period from the $2.4 billion of statutory capital and surplus referred to
above. The Minnesota Department of Commerce, the Company's insurance regulator,
requires insurance companies to maintaincontract issuance, guarantees a minimum RBC called the "authorized
control level". If total adjusted capital fell below the authorized control
level, the Minnesota Department of Commerce wouldlifetime
annuity based on predetermined annuity purchase rates that may be authorized to exercise
management control over the Company. For the Company, authorized control level
capital was $435 million at December 31, 2002.
In addition, insurance companies are expected to maintain capital at a level
above that which would require a company to file an action plan with the
Department. This is referred to as the "company action level". For the Company,
company action level capital was approximately $870 million at December 31,
2002.
As described above, the Company maintains levels of risk-based capital far in excess of
what the authorized controlcontract account value can purchase at then-current annuity purchase
rates. American Enterprise Life bears the risk that protracted under-performance
of the financial markets could result in guaranteed minimum income benefits
being higher than what accumulated contract owner account balances would
support.
To the extent a GMDB or GMIB is higher than the current account value at the
time of death, IDS Life incurs a cost. For fiscal years beginning before
December 16, 2003, GAAP did not prescribe advance recognition of the projected
future net costs associated with these guarantees, and company action levels requiredaccordingly, IDS Life did
not record a liability corresponding to these future obligations for death
benefits in excess of annuity account value. Through December 31, 2003, the
amount paid in excess of contract value was expensed when payable. Amounts
expensed in 2003 and 2002 were $31.5 million and $37.4 million, respectively.
In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts"
(SOP 03-1) with an effective date of January 1, 2004. SOP 03-1 requires
insurance enterprises to establish additional liabilities for benefits that may
become payable under variable annuity death benefit guarantees or other
insurance or annuity contract provisions. Where additional liabilities are
established, the Minnesota Departmentrecognition of Commerce. The levelthis liability may also impact the valuation and
amortization of capital maintainedDAC associated with those insurance or annuity contracts. SOP
03-1 also provides clarifying guidance as to the recognition of bonus interest
and other sales inducement benefits and the presentation of any deferred amounts
in the Company
is thoughtfinancial statements
-4-
Detailed interpretations of SOP 03-1 and related implementation guidance
continue to be appropriateemerge and, accordingly, IDS Life continues to evaluate its impact.
Current estimates of applying SOP 03-1, partially offset by management and is more commensurate with
standards necessaryrelated impacts to
maintainDAC balances, would reduce first quarter 2004 net income by approximately $30
million.
The general account assets of IDS Life support these GMDBs (see "The General
Account" section below). IDS Life bears the Company's ratings withrisk that protracted
under-performance of the various credit
and claims-paying rating agencies.financial markets could result in GMDBs being higher
than what current account values would support. Actual experience may differ
from IDS Life's estimates. IDS Life's exposure to risk from these guarantees
generally will increase when equity markets decline.
The General Account
Assets supporting the contract values associated with fixed account life insurance
and annuity products, as well as those associated with the fixed account options
under variable insurance and annuity products (collectively, the -3-
"fixed
accounts"), are part of an insurer'sIDS Life's "general account".account." Under fixed accounts, the insurerIDS
Life bears the investment risk. In investing itstheir general account assets, the CompanyIDS
Life seeks to maintain a dependable and targeted difference or "spread" between
the interest rate earned on general account assets and the interest rate the insurerIDS
Life credits to contract owners' fixed accounts. This spread is a major driver
of net income for the Company.
GeneralIDS Life.
The general account assets also include funds accumulated through insurance
premiums and cost of insurance and annuity product charges. These premiums and
charges are major sources of revenue for the Company.IDS Life.
In the general account, the CompanyIDS Life primarily invests in fixed income securities
over a broad range of maturities for the purpose of providing a targeted rate of
return on itstheir investments while controlling risk. The majority of these fixed
income securities are interest bearinginterest-bearing investments such as government
obligations, mortgage-backedmortgage backed obligations and various corporate debt instruments.
IDS Life does not invest in securities to generate trading profits.
IDS Life Insurance Company and its four life insurance company subsidiaries,
through their respective Boards of Directors' investment committees or staff
functions, reviews models projecting different interest rate scenarios,
risk/return measures, and their effect on profitability. They also review the
distribution of assets in the portfolio by type and credit risk sector. The
Companyobjective is to structure the investment security portfolio based upon the type
and expected behavior of products in the liability portfolio to meet contractual
obligations and achieve targeted levels of profitability within defined risk
parameters.
IDS Life has the discretion to set the rate of interest credited to contract
owners' accounts. However, this discretion is limited by the contract's
guaranteed minimum interest crediting rate. ThisAs of December 31, 2003, this rate
variesvaried among fixed accounts and iswas as low as 3%1.5% and as high as 5%. (Approximately ten states have adopted
regulations providing for a guaranteedTo the
extent the yield on IDS Life's invested general account asset portfolio declines
below its target spread plus the minimum interest rate that is less than
3%. In some states it is as low as 1.5%; in other states it is tied to an index.
The NAIC recently adopted a model regulation providing for an indexed guaranteed
minimum interest rate, and it is anticipated that a number of states will follow
this model.)guarantee, IDS Life's profitability
would be negatively affected.
The interest rates credited to contract owners' fixed 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. InPart of IDS Life's strategy includes the use of derivatives,
such as interest rate caps, swaps and floors, for risk management purposes.
These derivatives help protect margins by increasing investment returns if there
is a sudden and severe rise in interest rates, thereby mitigating the impact of
an increase in rates credited to contract owners' fixed accounts. Conversely, in
a low interest rate environment, such as that experienced recently, margins may
be negatively impacted as the interest rates available on the Company's investments approaches theIDS Life's invested
assets approach guaranteed minimum interest rates on the insurance or annuity
contracts. This negative impact may be compounded by the fact that many of these
interest-bearing investments are callable or pre-payable by the issuer and calls
and prepayments are more likely to occur in a low interest rate environment. In
light of the present environment in which interest rates are at historic lows,
IDS Life imposed fixed account allocation and transfer rules for new variable
annuity sales in the summer of 2003.
-5-
IDS Life sold approximately $16 billion of their invested assets during the
year, on a consolidated basis. In addition, approximately $3 billion in assets
were redeemed during the year. The Company's investment
committee deploys several strategies to help manage risk. See the Risk
Management section that follows for more details on the investment committeecash generated by these sales and the specific strategies employed.redemptions
has been or will be re-invested.
The Variable Accounts
Variable life insurance and annuity products also offer variable account investment
options in addition to the fixed account options described above.options. Under variable accounts, the contract
owners bear the investment risk. The variable accounts are registered as unit
investment trusts under the Investment Company Act of 1940.
IDS Life's major source of revenue from the variable insurance and annuities is
the fees it receives, including mortality and expense fees. Prior to November
2003, these fees included investment advisory fees for internally managed funds.
In the fourth quarter of 2003, AEFC assumed these duties for the funds and
retained IDS Life Insurance Company, and its non-New York subsidiaries, to
provide underlying administrative services. In March 2004, a similar structure
for the New York subsidiaries was approved by the New York Insurance Department
effective as of February 1, 2004. Fees payable from AEFC to IDS Life include
administrative service fees.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund. Contract owners can allocate their
payments among these variable subaccounts that
invest in underlying funds.subaccounts. The underlying funds are managed both
by internal and unaffiliated third-party money managers. Internally managed
proprietary funds for the Company'sIDS Life's variable annuities include the nineteen AXP
Variable Portfolio Funds. Internally managed proprietary funds for the Company'sIDS Life's
variable life business include the AXP Variable Portfolio Funds and the seven
IDS Life Series Fund portfolios.
The Company'sAs noted above and in the fourth quarter of 2003, AEFC replaced IDS Life
Insurance Company as the investment manager of these internally managed
proprietary funds. Concurrent with the investment manager change, IDS Life
Insurance Company entered into an agreement with AEFC to receive administrative
services fees for the fund management services, other than investment
management, that IDS Life Insurance Company provides the underlying proprietary
mutual funds. Previous to this change, IDS Life Insurance Company received
management fees directly from the proprietary funds and was a party to an
agreement with AEFC to compensate AEFC for the investment sub-advisory services
AEFC provided to the proprietary funds.
IDS Life's variable life insurance and annuities also offer funds managed by
third-party money managers. For example, the investment advisers under the
American Express Retirement Advisor Advantage(R) Variable Annuity ("RAVA") and
the American Express(R) Variable Universal Life IV/Variable Universal Life IV -
Estate Series include AIM Advisors Inc., Alliance Capital Management, L.P.,
American Century Investment Management, Inc., Calvert Asset Management Company,
Inc., Evergreen Investment Management Company, LLC., Fidelity Management &
Research Company, Franklin Mutual Advisers, LLC, Franklin Advisers, Inc.,
Franklin Advisory Services, LLC, Goldman Sachs Asset Management, L.P., INVESCO
Funds Group, Inc., Janus Capital, Lazard Asset Management, LLC, MFS Investment
Management(R), Pioneer Investment Management, Inc., Putnam Investment
Management, LLC, Strong Capital Management, Inc., Liberty Wanger Asset
Management, L.P. and Wells Fargo Funds Management, LLC.
These fundsFunds underlying the variable accounts invest in portfolios containing a variety
of securities including common stocks, bonds, managed assets and/or short-term
securities. The value of thesethe subaccounts fluctuates with the investment return
of the funds in which the subaccounts invest.
The Company's major source of
revenueIDS Life earns fee revenues from the variable products isaccounts related to the fees it receives. These fees may
include managementunderlying
proprietary and other fees from underlying internally managed funds,
revenues from underlying non-proprietary mutual funds and mortality and expense risk fees
from variable subaccounts.
-4--6-
Variable life insurance and annuities are "separate account" products rather than general
account products. StateThis means that state insurance law prohibits charging
variable accounts with liabilities of the general account business. Under the
subaccounts of each variable account, the CompanyIDS Life credits or charges income,
capital gains and capital losses only to that subaccount.
Beginning in 2003, AEFA will replace
the Company as the principal underwriter (distributor) of the Company's variable
products. AEFA continues to serve as the principal underwriter (distributor) of
the variable life insurance and annuity products of the Company's four insurance
subsidiaries.
Insurance: Product Features and Risks
The Company and its subsidiaries issue a wide range of insurance products
including variable life insurance, universal life insurance, traditional whole
life and term life insurance products, long-term care insurance and disability
income insurance. The Company has no short-duration life insurance liabilities.
The Company issues only non-participating contracts.
Variable Life Insurance. The Company's biggest-selling life insurance products
are variable life insurance policies. Retail advisors of AEFA sell primarily the
Company's variable life insurance. Variable life insurance provides life
insurance coverage along with investment returns linked to the underlying
investments the policyholder chooses. These products also offer a fixed account
with a guaranteed minimum interest rate of 4% or 4.5%. The Company ranked fourth
in variable life insurance sales in 2002. Beginning in 1999, the Company
reinsured 80% of the mortality risk attributable to individual flexible premium
variable life insurance sales. This means that on these more recent product
sales, the insurer has the risk for only 20% of each policy's death benefit from
the first dollar of coverage. In contrast and prior to this arrangement, the
Company generally retained risk up to $750,000 on each insured life and
reinsured only amounts in excess of $750,000. Generally, the prior arrangement
left the Company with more of the risk for the death benefit limit than the more
recent practice. Beginning in late 2002, the Company began reinsuring 90% of the
mortality risk on new sales of individual flexible premium variable life and
fixed universal life insurance.
The Company's variable life insurance products include American Express(R)
Variable Universal Life IV/Variable Universal Life IV - Estate Series which are
individual flexible premium policies. The Estate Series policy is available to
policyholders with initial specified amounts of $1 million or more. These
policies were introduced in December 2002. The Company also issues American
Express Succession Select(SM), a flexible premium survivorship policy that
insures two lives. Succession Select is often used for estate planning purposes.
Finally, the Company issues American Express(R) Single Premium Variable Life, an
individual single premium variable life insurance policy.
Universal Life Insurance. The Company's universal life insurance products
provide life insurance coverage and cash value that increases by a fixed
interest rate. The rate is periodically reset according to the terms of the
policy at the discretion of the Company. The policies also provide a guaranteed
minimum interest rate, generally 4% or 4.5%, and a few as high as 5%.
The Company's universal life insurance products include Life Protection Plus,
Life Protection - Select and Life Protection Select - Estate Series. The Estate
Series policy is available to policyholders with initial specified amounts of $1
million or more.
TraditionalRegulation
IDS Life Insurance Products. The Company's traditional life insurance
products include whole life insurance and term life insurance. Whole life
insurance combines a death benefit with a cash value that generally increases
gradually in amount over a period of years, and does not pay a dividend. The
Company, has sold very little traditional whole life insurance in recent years.
Term life insurance provides only a death benefit, does not build up cash value
and does not pay a dividend. The policyholder chooses the term of coverage at
the time of issue. During the chosen term, the Company cannot raise premium
rates even if claims experience were to deteriorate. Beginning in 2001, the
Company has reinsured 90% of the mortality risk attributable to new term
insurance sales. This means that on these more recent product sales, the insurer
has the risk for only 10% of each policy's death benefit from the
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first dollar of coverage. In contrast and prior to this arrangement, the Company
generally retained risk up to $750,000 on each insured life and reinsured only
amounts in excess of $750,000. Generally, the prior arrangement left the Company
with more of the risk for the death benefit limit than the more recent practice.
Long-Term Care Insurance. The Company entered the individual long-term care
insurance (LTC) market in 1989 and believes it has a significant presence in
this market. The Company's long-term care insurance products provide benefits
for documented nursing home, assisted living or home or health care expenses.
These products were sold on a guaranteed renewable basis, whereby the owners
retain the right to renew the policies each year as long as premiums are paid,
but the Company has the right to increase premium rates on a going forward
basis.
In recent years, the Company has experienced greater than expected claims and
lower than expected lapse rates with respect to its LTC block. To respond to
this trend, the Company has pursued and is pursuing many courses of action. As
of December 31, 2002, the Company has discontinued offering LTC insurance.
Retail advisors of AEFA will now sell only non-proprietary LTC products offered
by General Electric Capital Assurance Company ("GECA"). The Company is also
expecting to outsource claims administration in May 2003 to GECA.
Disability Income. The Company also issues disability income (DI) insurance. DI
insurance provides monthly benefits to individuals who are unable to earn income
at either their occupation at time of disability ("own occupation") or at any
suitable occupation ("any occupation"). Depending upon the Company's
occupational and medical underwriting criteria, applicants for DI insurance can
choose "own occupation" and "any occupation" coverage for varying benefit
periods up to age 65. Applicants may also choose various benefit riders to help
them integrate individual DI benefits with social security or similar benefit
plans and to help them protect their DI benefits from the risk of inflation. The
Company believes it has a significant presence in the DI market.
Insurance Risks. The Company's sales of individual life insurance in 2002, as
measured by scheduled annual premiums and excluding lump sum premiums, consisted
of 82% variable life, 8% universal life and 10% term life.
The insurance business is highly competitive, and competitors consist of both
stock and mutual insurance companies. Competitive factors applicable to the
insurance business include product features, the interest rates credited to
products, the charges deducted from the cash values of such products, investment
performance, the financial strength of the organization, distribution and
management expenses, claims-paying ratings and the services provided to
policyholders.
For long-term profitability, it is crucial to ensure adequate pricing to cover
insurance risks, and to accumulate adequate reserves. Reserves are a measure of
the assets the Company estimates are needed now to adequately provide for future
benefits and expenses. These reserves are discussed in more detail in the
Critical Accounting Policies section that follows.
Annuities: Product Features and Risks
The Company and its subsidiaries issue variable and fixed annuities, immediate
and deferred, to a broad range of consumers through multiple distribution
channels. Retail advisors of AEFA can only offer the Company's variable and
fixed annuities, and in certain circumstances variable and fixed annuities
offered by American Enterprise Life. Retail advisors do not offer annuity
products of competitors. Annuities may be deferred, where assets accumulate
until the contract is surrendered, the contract owner dies, or the contract
owner begins receiving benefits under an annuity payout option; or immediate,
where payments begin within one year of issue and continue for life or for a
fixed period only.
The Company believes it is one of the largest issuers of annuities in the United
States. In 2002, the Company, on a consolidated basis, ranked eleventh among the
top annuity writers. The Company and its subsidiaries posted annuity sales in
2002 of over $7.3 billion, an increase of 60% over 2001 levels.
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Variable Annuities. Like variable life insurance, variable annuities provide
contract owners with investment returns linked to the underlying investments the
contract owner chooses. These products also offer a fixed account with a
guaranteed minimum interest rate of 3% to 4%. One of the Company's variable
annuities, RAVA, was the fourth largest-selling annuity in the country in 2002.
Fixed Annuities. The Company's fixed annuities provide cash value that increases
by a fixed interest rate. The rate is periodically reset according to the terms
of the contract at the discretion of the issuer. The contracts provide a
guaranteed minimum interest rate, generally 3% to 4%.
Annuity Risks. The relative proportion between fixed and variable annuities
sales is generally driven by the relative performance of the equity and fixed
income markets. In times of lackluster performance in equity markets, fixed
sales are generally stronger. In times of superior performance in equity
markets, variable sales are generally stronger. In addition, investment
management performance is critical to the profitability of annuity business.
In past years, innovative features for annuity products have been continually
evolving. These features include minimum death benefit guarantees that protect
beneficiaries from a drop in death benefits due to performance of the related
underlying investments. The Company and its subsidiaries issue annuity contracts
with a variety of guaranteed minimum death benefit features. These guarantees
are supported by general account assets. The Company's exposure to risk from
these guarantees will generally increase when equity markets decline.
The standard guaranteed minimum death benefit in the Company's current
"flagship" annuity, RAVA provides that if the contract owner and annuitant are
age 80 or younger on the date of death, the beneficiary will receive the greater
of (i) the contract value, (ii) purchase payments minus adjusted partial
surrenders, or (iii) the contract value as of the most recent sixth contract
anniversary plus purchase payments and minus adjusted partial surrenders since
that anniversary.
For additional protection, the Company's contract owners may purchase a maximum
anniversary value death benefit. The Company contract owners also may purchase
an enhanced earnings death benefit and an enhanced earnings plus death benefit.
These are optional benefits available for an additional charge. The maximum
anniversary value death benefit guarantees that the death benefit will not be
less than the highest contract value achieved on a contract anniversary before
the contract owner reaches the age of 81, adjusted for partial withdrawals. The
enhanced earnings death benefit riders are intended to provide additional
benefits to a beneficiary to offset expenses after the contract owner's death.
The Company bears the risk that protracted under-performance of the financial
markets could result in guaranteed minimum death benefits being higher than what
accumulated contract owner account balances would support. American Enterprise Life and other subsidiariesAmerican Partners Life
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 (collectively, and with the New York
Insurance Department, "Domiciliary Regulators"). American Centurion Life and IDS
Life of New York are regulated by the New York State Department of Insurance.
The laws of the Companyother states in which these companies do business also offerregulate
such matters as the licensing of sales personnel and, in some cases, the
marketing and contents of insurance policies and annuity contracts. The primary
purpose of such regulation and supervision is to protect the interests of
contractholders and policyholders. Financial regulation of IDS Life is
extensive. IDS Life's financial and intercompany transactions (such as
intercompany dividends, capital contributions and investment activity) are often
subject to pre-approval and continuing evaluation by the Domiciliary Regulators.
Regulatory and judicial scrutiny of market conduct practices of insurance
companies, including sales, marketing and replacements of life insurance and
annuities, agent practices, "bonus" annuities and market timing and late trading
under variable insurance and annuities, with a varietyincreased significantly in recent years
and continues to affect the manner in which companies approach various
operational issues, including compliance. Virtually all states mandate
participation in insurance guaranty associations, which assess insurance
companies in order to fund claims of guaranteed minimum death benefit features
and certain optional benefits. For example, American Enterprise Life issues
certain variablecontract owners of insolvent insurance
companies.
On the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuity contracts that containand life insurance policies, accounting procedures, as well as
the treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an annuity contract and insurance policy. New
federal regulation in any of these areas could potentially have an adverse
effect upon IDS Life. More specifically, recent federal legislative proposals
aimed at the promotion of tax-advantaged savings through Lifetime Savings
Accounts and Retirement Savings Accounts may adversely impact IDS Life's sales
of annuity and life insurance products if enacted.
Ratings
IDS Life had consolidated assets at December 31, 2003 of approximately $65.9
billion, based on accounting principles generally accepted in the United States
(GAAP), and had total capital and surplus as of December 31, 2003 of $2.8
billion, on a guaranteedstatutory accounting basis.
IDS Life Insurance Company receives ratings from independent rating agencies.
Generally, its four insurance subsidiaries do not receive an individual rating,
but receive the same rating as IDS Life Insurance Company. These agencies
evaluate the financial soundness and claims-paying ability of insurance
companies based on a number of different factors. The ratings reflect each
agency's estimation of IDS Life's ability to meet their contractual obligations
such as making annuity payouts and paying death benefits and other distributions
from the contracts. As such, the ratings relate to IDS Life's general accounts
and not to the management or performance of the variable accounts of the
contracts.
Ratings are important to maintaining public confidence in IDS Life Insurance
Company and its four life insurance company subsidiaries. Lowering of IDS Life
Insurance Company's ratings could have a material adverse effect on IDS Life
Insurance Company's and its four life insurance company subsidiaries' ability to
market their products and could lead to increased surrenders of their products.
Rating agencies continually review the financial performance and condition of
insurers. As of the end of 2003, IDS Life Insurance Company was rated "A+"
(Superior) by A.M. Best Company, Inc. and its claims-paying ability/financial
strength was rated "Aa3" (Excellent) by Moody's Investors Service, Inc.
(Moody's), and "AA" (Very Strong) by Fitch.
-7-
The foregoing ratings reflect each rating agency's opinion of IDS Life's
financial strength, operating performance and ability to meet its obligations to
contract owners. Such factors are of primary concern to contract owners, agents
and intermediaries, but also may be of interest to investors.
Risk Based Capital
The National Association of Insurance Commissioners ("NAIC") adopted Risk Based
Capital ("RBC") requirements for life insurance companies. The RBC requirements
are to be used as minimum income
benefit feature which, if electedcapital requirements by the contract owner afterNAIC and states to
identify companies that merit further regulatory action. At December 31, 2003,
IDS Life Insurance Company had total adjusted capital of approximately $3.1
billion on a stipulated
waiting periodstatutory accounting basis. As defined by the NAIC, total adjusted
capital includes certain asset valuation reserves excluded from contract issuance, guaranteesthe $2.8 billion
of statutory capital and surplus referred to above. The Minnesota Department of
Commerce, IDS Life Insurance Company's insurance regulator, requires insurance
companies to maintain a minimum lifetime annuity
based on predetermined annuity purchase rates that mayRBC called the "authorized control level." If
total adjusted capital fell below the authorized control level, the Minnesota
Department of Commerce would be authorized to exercise management control over
IDS Life Insurance Company. For IDS Life Insurance Company, the authorized
control level capital was $507.1 million at December 31, 2003.
In addition, IDS Life Insurance Company, like other life insurance companies, is
expected to maintain capital at a level above which would require a company to
file an action plan with the Minnesota Department of Commerce. This is referred
to as the "company action level." For IDS Life Insurance Company, the company
action level capital was $1 billion at December 31, 2003.
As described above, IDS Life Insurance Company maintains levels of RBC far in
excess of what the contract account value can purchase at then-current annuity purchase rates.
American Enterprise Life bears the risk that protracted under-performance of the
financial markets could result in guaranteed minimum income benefits being
higher than what accumulated contract owner account balances would support.
To the extent that the guaranteed minimum death benefit is higher than the
current account value at the time of death, a cost is incurredauthorized control and company action levels required by the
issuerMinnesota Department of Commerce. The level of capital maintained in IDS Life
Insurance Company is thought to be appropriate by management and is more
commensurate with standards necessary to maintain IDS Life Insurance Company's
ratings with the policy. Current accounting literature does not prescribe advance recognition
of the projected future net costs associated with these guarantees,various credit and accordingly, the Company currently does not record a liability corresponding to
these future obligations for death benefits in excess of annuity account value.
At present, the amount paid in excess of contract value is expensed when
payable. Amounts expensed in 2002 and 2001 were $37 million and $16 million,
respectively. A proposed AICPA Statement of Position, "Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and
for Separate Accounts"
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(the "Proposed SOP"), would require the recording of a liability for the
expected net costs associated with these guarantees under certain circumstances,
if adopted as proposed. The impact of the Proposed SOP is currently being
evaluated.
For long-term profitability, it is crucial to ensure adequate pricing to cover
risks, and to accumulate adequate reserves. Reserves are a measure of the assets
the Company estimates are needed now to adequately provide for future benefits
and expenses. These reserves are discussed in more detail in the Critical
Accounting Policies section that follows.claims-paying rating agencies.
ITEM 2. PROPERTIES
TheIDS Life Insurance Company occupies office space in Minneapolis, Minnesota,
which is leased or owned by its parent, AEFC. TheIDS Life Insurance Company reimburses AEFC for
rent based on direct and indirect allocation methods. IDS Life Insurance Company of New York and
American Centurion Life rent office space in Albany, New York. Facilities
occupied by the Company and its subsidiariesIDS Life are believed to be adequate for the purposes for which they
are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigationSecurities and arbitrationExchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings in the ordinary
course of its business, none of which is expected to have a material adverse
affect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, alleging improper life insurance
sales practices, alleged agent misconduct, failure to properly supervise agentschallenging several mutual fund and other matters relating to life insurance policies and annuity contracts. The
Company and its affiliates were named defendants in three purported class-action
lawsuits alleging improper insurance and annuity salesvariable account financial
practices, including improper replacementsuitability generally, late trading, market timing,
disclosure of existing annuity contractsrevenue sharing arrangements and insurance policies,
improper use of annuities to fund tax deferred contributory retirement plans,
alleged agent misconduct, failure to properly supervise agents and other matters
relating to life insurance policies and annuity contracts. (Benacquisto v. IDS
Life Insurance Company; filed Minnesota State Court 12/13/1996; Mork, et. al. v.
IDS Life Insurance Company; filed Minnesota State Court 3/21/1997; Thoresen v.inappropriate sales. IDS Life
Insurance Company et. al.; filed Minnesota State Court 10/13/1998). A
fourth lawsuit was filed against the Companyhas received requests for information and has been contacted
by regulatory authorities concerning its affiliates in federal
court. (Benacquisto, et. al. v.practices and is cooperating fully with
these inquiries.
In November 2002, IDS Life Insurance Company et.al.; filed United
States District Court-Minnesota 8/2000). In January 2000, AEFC reached an
agreementwas named in principle to settle the foura purported class
action lawsuits described above.
It is expected the settlement will provide $215 million of benefits to more than
two million participants in exchange for a release by class members of all
insurance and annuity state and federal market conduct claims dating back to
1985.
The settlement received court approval. Implementation of the settlement
commenced October 15, 2001 and is substantially complete. Claim review payments
have been made. Numerous individuals opted out of the settlement described above
and therefore did not release their claims against AEFC and its subsidiaries.
Some of these class members who opted out were represented by counsel and
presented separate claims to AEFC and the Company. Most of their claims have
been settled.
In November 2002, a suit, captionedentitled John Haritos, et.et al. v. American Express Financial Corporation andAdvisors,
Inc. et al., No. 02 2255, United States District Court, District of Arizona. The
complaint originally named IDS Life Insurance Company as a defendant, but IDS
Life Insurance Company was fileddismissed when plaintiffs chose to file an Amended
Complaint not naming IDS Life Insurance Company. This action alleges that
defendants violated the Investment Advisors Act of 1940, 15 U.S.C., in the United
States District Court for the District of Arizona. The suit is filed by the
plaintiffs who purport to represent a class of all persons that have purchased
financial plans from AEFA advisors during an undefined class period. Plaintiffs
allege that the sale
of financial plans and various products including those of IDS Life Insurance
Company. The complaint seeks certification of a
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nationwide class, restitution, injunctive relief, and punitive damages.
Defendants have moved to dismiss the plans violateaction and that motion is pending.
IDS Life Insurance Company and its subsidiaries are involved in a number of
other legal and arbitration proceedings concerning matters arising in connection
with the Investment Advisers Actconduct of 1940.
The suit seeks an unspecified amount of damages, rescission and injunctive
relief. The Companytheir respective business activities. IDS Life believes that it
has meritorious defenses to this suiteach of these actions and intends to defend this casethem
vigorously. -8-
TheIDS Life believes that it is not a party to, nor are any of its
properties the subject of, any pending legal or arbitration proceedings that
would have a material adverse effect on IDS Life's consolidated financial
condition, results of operations or liquidity. However, it is possible that the
outcome of any litigation or threatened litigation cannot be predicted with
any certainty. However, in the aggregate, the Company does not consider any
lawsuits in which it is named as a defendant tosuch proceedings could have a material impact on results of
operations in any particular reporting period as the Company's financial position or operating results.proceedings are resolved.
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
IDS Life follows accounting principles generally accepted in the United States
(GAAP), and the following discussion is presented on a consolidated basis
consistent with GAAP.
Results of Operations for the Years Ended December 31, 2003 and 2002
ComparedIDS Life's 2003 income before accounting change rose 33 percent to 2001:
Consolidated$507.6
million. IDS Life's net income increased 44 percent to $552.1 million in 2003,
up from $382.2 million in 2002. Among other things described below, IDS Life's
2003 results reflect a $41.3 million reduction in tax expense due to adjustments
related to the finalization of the 2002 tax return filed during the third
quarter of 2003 and the publication of favorable technical guidance related to
the taxation of dividend income.
Results for 2003 also reflect the impact of IDS Life's adoption of Financial
Accounting Standard Board (FASB) Interpretation No. 46, "Consolidation of
Variable Interest Entities," revised December 2003 (FIN 46), which addresses the
consolidation of variable interest entities (VIEs). The impact of the FIN 46
adoption is discussed in more detail below.
Revenues
Total revenues increased 6 percent in 2003 primarily due to higher net
investment income and disability income premium revenues, together with net
realized gains on investments versus net realized losses in 2002, partially
offset by lower management and other fee revenues.
Net investment income increased 9 percent in 2003 as higher levels of invested
assets and the effect of appreciation in the S&P 500 on the value of options
hedging equity indexed annuities this year versus depreciation last year,
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which was $382offset in interest credited expenses. The positive effects of the
foregoing were partially offset by a lower average yield on IDS Life's invested
assets.
Total premium revenue increased $14.5 million reflecting a higher number of
disability income and traditional life insurance policies.
Net realized gain (loss) on investments was $4.1 million in 2003 compared to
($4.5 million) in 2002. In 2003, $257.1 million of investment gains, were
partially offset by $253.0 million of impairments and losses. Included in these
total investment gains and losses were $255.3 million of gross realized gains
and $135.5 million of gross realized losses from the sales of securities, as
well as $102.6 million of other-than-temporary investment impairment losses,
classified as Available-for-Sale. In 2002, $300.4 million of investment gains
were more than offset by $304.9 million of impairments and losses. Included in
these total investment gains and losses were $297.6 million of gross realized
gains and $137.4 million of gross realized losses from the sales of securities,
as well as $144.1 million of other-than-temporary investment impairment losses
(including $45 million related to directly-held WorldCom debt holdings),
classified as Available-for-Sale.
Management and other fee revenues decreased $14.3 million, or 4 percent, as a
result of lower average market values of separate account assets throughout the
full year of 2003 compared to 2002. While equity markets increased in the second
half of 2003, average market values of separate account assets for the full year
of 2003 remained below 2002 levels. For 2003 and 2002, IDS Life provided mutual
fund management services for many of the mutual funds available as investment
options within IDS Life's variable annuity and variable life insurance products.
IDS Life also receives mortality and expense risk fees from the separate
accounts based on asset levels.
Expenses
Total death and other benefit expenses increased $3.4 million, or 1 percent,
reflecting increased claims on long-term care and universal-life type policies,
partially offset by lower costs related to GMDBs. The 2003 increase also
reflects the 2002 benefit of $7 million ($4 million after-tax), which resulted
from a reversal of a portion of the 2001 September 11th related reserves as a
result of lower than previously anticipated insured loss claims.
Disability and long-term care insurance liability for future policy benefit
expenses increased $7.9 million, or 6 percent, reflecting increases in
underlying policies in force.
Interest credited on investment contracts and universal-life type insurance
increased $67.3 million, or 6 percent, due to higher average in force levels of
both annuities and insurance products and the effect of appreciation in the S&P
500 on equity indexed annuities in 2003 versus depreciation in 2002, partially
offset by the benefit of lower interest crediting rates on both fixed annuity
and fixed life insurance contract values reflecting the relatively lower
interest rate environment during 2003.
Amortization expense of deferred policy acquisition costs (DAC) decreased $47.5
million, or 14 percent, reflecting a net $18.0 million increase in DAC
amortization expense in the third quarter of 2002, and a net $1.8 million
decrease in DAC amortization expense in the third quarter of 2003, both as a
result of IDS Life's annual third quarter review of various DAC assumptions and
practices. Additionally, DAC amortization expense in 2003 was favorably impacted
by recently improved equity market performance during 2003 as compared with
2002. Faster-than-assumed growth in customer asset values associated with IDS
Life's variable annuity and insurance products resulted in a decrease in DAC
amortization expense during 2003, whereas declines in variable annuity and
insurance customer asset values resulted in an increase in DAC amortization
expense during 2002. See the DAC section below for further discussion of DAC and
related adjustments.
Other insurance and operating expenses increased $26.4 million, or 6 percent,
due to the unfavorable impact of fewer capitalized costs due to the ongoing
impact of the third quarter 2002 comprehensive review of DAC-related practices.
The change in investment manager of the proprietary mutual funds underlying IDS
Life's separate account products, more fully described above, has the effect of
reducing operating expenses as the agreement to compensate AEFC for
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investment sub-advisory services was terminated at the same time the investment
manager change was put into effect.
IDS Life's 2003 income tax provision reflects a $41.3 million reduction in tax
expense resulting from adjustments related to the finalization of the 2002 tax
return filed during the third quarter of 2003 and publication of favorable
technical guidance related to the taxation of dividend income. Partially
offsetting this reduction in tax expenses was the after-tax impact of realized
losses from sales of mortgage-backed securities as IDS Life made adjustments to
the level of such investments during the third quarter of 2003, such that
mortgage-backed securities were 32 percent of IDS Life's overall investment
portfolio at December 31, 2003 compared to 43 percent at December 31, 2002.
As described more fully in the "Liquidity and Capital Resources" section below,
the consolidation of FIN 46-related entities resulted in a cumulative effect of
accounting change that increased net income through a non-cash gain of $44.5
million ($68.4 million pretax) related to the consolidation of three secured
loan trusts (SLTs).
Results of Operations for the Years Ended December 31, 2002 and 2001
Net income was $382.2 million in 2002, compared to consolidateda net loss of $65 million($65.2 million)
in 2001. Consolidated incomeIncome before income tax expense
totaled $470provision was $470.0 million in 2002, compared
with a consolidated loss before income tax benefit and cumulative effect of accounting change
of $189 million($189.0 million) in 2001. The significant increase in net incomeThis favorable change from 2001 to 2002 was
primarily a result of the 2001 writedown and sale of high-yield securities that
reduced risk within the investment portfolio, as explained below.
Revenues
Total revenues increased by 34%33 percent to $2.8 billion in 2002, compared with
$2.1 billion in 2001. The increase was primarily due to higher net investment
income and lower levels of realized losses, primarily reflecting the impact of
the 2001 high-yield securities' realized losses. In addition, invested assets
were higher in 2002. Insurance premiums and policyholder and contractholder
charges also increased. Partially offsetting were declines in management and
other fees, as separate account assets dropped 20%20 percent from 2001 levels.
Insurance and investment contract considerations received increased to $8.3
billion in 2002, compared with $5.8 billion in 2001. The increase is primarily
due to higher fixed annuity sales in both the advisor distribution channel and
through third parties.
Net investment income, the largest component of revenues, increased by $76$76.2
million from the prior year.2001. This increase primarily reflects the effect of credit related
yield adjustments on fixed maturity investments in 2001 and higher invested
asset levels in 2002, which were somewhat offset by lower portfolio yields in
2002, driven by investment portfolio repositioning as described below.
Investment income also benefited from the effect of less depreciation in the S&P
500 this yearin 2002 on the value of options hedging outstanding equity indexed
annuities, which is offset in the related provisions for losses and benefits.
PolicyholderContractholder and contractholderpolicyholder charges which consist primarily of cost of
insurance charges on universal life-type policies, increased 7%7 percent to $523$525.7 million in
2002, compared with $490$492.4 million in 2001. This increase relates to the 10%10
percent growth in total life insurance inforce, which grew to $119 billion at
December 31, 2002.
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Management and other fees decreased 14 percent to $405$404.8 million in 2002,
compared with $473$473.4 million in 2001. This decrease was primarily due to lower
levels of average separate account assets, resulting primarily from market
depreciation of equity securities as weak equity markets continued throughout
the year. The
Company provides2002. For 2002 and 2001, IDS Life provided investment management services for
many of the mutual funds that are available as investment options for variable
annuities and variable life insurance.
The Company also receives mortality and expense risk fees from
the separate accounts based on the level of assets.
Net realized losses on investments were $5 million($4.5 million) in 2002, compared to net
realized losses of $650 million($649.8 million) in 2001. The 2002 net realized losses include
$146 millionon
investments reflect ($146 million) from impairments recognized on
available-for-saleAvailable-for-Sale securities during
the year (including $45 million related to directly-held
WorldCom debt holdings). The Company sold approximately $10.5 billion of its invested assets
on a consolidated basis during 2002. In addition, approximately $3 billion in
investments were redeemed during the year. The cash generated by these sales and
redemptions has been or will be invested. The net realized loss for 2001 was comprised of a $143 million($143
million) pretax net loss in the first quarter resulting primarily from the
recognition of impairment losses and the sale of certain high-yield securities;
a $227 million($227 million) writedown in the second quarter to recognize the impact of
higher default rate assumptions on certain structured investments; a $262 million($262
million) writedown of lower-rated securities (most of which were sold during
2001) in the second quarter of 2001 primarily in
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connection with the
Company'sIDS Life's decision to lower its risk profile by reducing the
level of its high-yield fixed maturity investment portfolio, allocating holdings
toward stronger credits, and reducing the concentration of exposure to
individual companies and industry sectors; and $18 million($18 million) of other net losses
primarily related to the sale and write-down of other investments.
Expenses
Total benefits and expenses increased towere $2.4 billion in 2002 fromand $2.3 billion in 2001.
The largest component of expenses, interest credited to policyholder accounts
for universal life-type insurance and investment contracts, increased 2%1 percent
to $1.2 billion, reflecting the growth in fixed annuities in force and the
effect of less depreciation in the S&P 500 on equity indexed annuities,
despitepartially offset by lower interest crediting rates from the lower interest rate
environment. The $56$39.9 million increase in total death and other benefits
reflects higher insurance claims and a significant increase in guaranteed
minimum death benefits on variable annuity contracts with $37$37.4 million expensed
in 2002 versus $16$16.2 million in 2001. 2001's results also include an $11 million
charge for anticipated insured loss claims from the September 11th terrorist
attacks while 2002 results include a $7 million reversal of a portion of these
reserves as a result of lower than anticipated insured loss claims. Deferred acquisition costs (DAC) of
$3.3 billion and $3.1 billion are on the Company's balance sheet at December 31,
2002 and 2001, respectively. These balances are approximately $1.7 billion
related to life and health insurance and $1.6 billion to annuities. In 2001,
approximately $1.6 billion related to life and health insurance and $1.5 billion
to annuities. Amortization
of DAC decreased to $312$335.7 million in 2002, compared to $371$376.0 million in 2001.
The decrease in 2002's amortization was primarily from the $67 million
amortization increase in the first quarter of 2001 of DAC for variable annuity
and insurance products as a result of the significant decline in equity-based
separate account values and the associated fee revenues. In addition, during the
third quarter of 2002 the CompanyIDS Life completed a comprehensive review of its DAC
related practices that resulted in a net increase in DAC amortization, as
described below.
Other insurance and operating expenses increased to $438$426.5 million in 2002,
compared to $408$397.2 million in 2001. This increase was primarily due to lower
levels of expenses deferred in 2002 as described below and from business growth
and technology costs related to growth initiatives.
TheDeferred policy acquisition costs
of acquiring new business, including for example, direct sales
commissions, related sales incentive bonusesFor IDS Life's annuity and awards, underwriting costs,
policy issue costs and other related costs, have been deferred oninsurance products, the sale of
insurance and annuity contracts. The DAC for universal life and variable
universal life insurance and certain installment annuities are amortized as a
percentage ofprojections underlying the
estimated gross profits expected to be realized on the
policies. DAC for other annuities are amortized using the interest method. For
traditional life, disability income and long-term care insurance policies, the
costs are amortized in proportion to premium revenue.
Amortizationamortization of DAC requiresrequire the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. The customer asset value growth rate is the rate
at which contract values are assumed to appreciate in the future. ThisThe rate is
net of asset
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fees and anticipates a blend of equity and fixed income
investments. Management reviews and, where appropriate, adjusts its assumptions
with respect to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest margin and maintenance expense level assumptions, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC might also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an increase in DAC amortization expense while a decrease in amortization
percentage will result in a decrease in DAC amortization expense. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period and is
reflected in the period in which such changes are made. As a result of these
reviews, IDS Life took actions in both 2003 and 2002 that impacted DAC balance
and expenses.
In the third quarter of 2003, based on its detailed review, IDS Life took
certain actions that resulted in a net $1.8 million DAC amortization expense
reduction reflecting:
o A $106 million DAC amortization reduction resulting from extending 10-15
year amortization periods for certain Flex Annuity contracts to 20 years.
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o A $92 million DAC amortization increase resulting from the recognition of a
premium deficiency on IDS Life's Long-Term Care (LTC) business.
o A $12 million net DAC amortization increase across IDS Life's universal
life, variable universal life and fixed and variable annuity products.
In the third quarter of 2002, IDS Life completed a comprehensive review of its
DAC-related practices and took actions that resulted in a net $44 million
increase in expenses reflecting:
o A $173 million DAC amortization increase resulting from resetting the
customer asset value growth rate assumptions for variable annuity and
variable life products to anticipate near-term and long-term growth at an
annual rate of 7%.
o A $155 million DAC amortization reduction from revising certain mortality
and persistency assumptions for universal and variable universal life
insurance products and fixed and variable annuity products to better
reflect actual experience and future expectations.
o A $26 million operating expense increase from the revision of the types and
amounts of costs deferred, in part to reflect the impact of advisor
platform changes and the effects of related reengineering. This revision,
which resulted in an increase in ongoing expenses, continued to impact 2003
results.
DAC balances for various insurance and annuity products sold by IDS Life are set
forth below:
December 31, (Millions) 2003 2002
------------------------------------------------------------------------------
Life and health insurance $ 1,602 $ 1,654
Annuities 2,013 1,655
------------------------------------------------------------------------------
Total $ 3,615 $ 3,309
==============================================================================
Certain Critical Accounting Policies
IDS Life's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The following provides information about
certain critical accounting policies that are important to the Consolidated
Financial Statements and that involve estimates requiring significant management
assumptions and judgments about the effect of matters that are uncertain. These
policies relate to reserves for investment securities valuation, deferred
acquisition costs and liabilities for future policy benefits.
Investment securities valuation
Generally, investment securities are carried at fair value on the balance sheet
with unrealized gains and losses recorded in other comprehensive income (loss)
within equity, net of income tax provisions (benefits). At December 31, 2003,
IDS Life had net unrealized pretax gains on Available-for-Sale securities of
$697.8 million. Gains and losses are recognized in results of operations upon
disposition of the securities. In addition, losses are also recognized when
management determines that a decline in value is other-than-temporary, which
requires judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer downgrade,
default or bankruptcy. IDS Life also considers the extent to which cost exceeds
fair value, the duration and size of that gap, and management's judgment about
the issuer's current and prospective financial condition. Fair value is
generally based on quoted market prices. As of December 31, 2003, there were
$146.3 million in gross unrealized losses that related to $8.2 billion of
securities (excluding structured investments), of which only $3.4 million has
been in a continuous unrealized loss position for 12 months or more. IDS Life
does not believe that the unrealized loss on any individual security at December
31, 2003 represents an other-than-temporary impairment, and IDS Life has the
ability and intent to hold these securities for a time sufficient to recover its
amortized cost.
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IDS Life's investment portfolio also contains structured investments of various
asset quality, including collateralized debt obligations (CDOs) (backed by
high-yield bonds and bank loans), which are not readily marketable. As a result,
the carrying values of these structured investments are based on future cash
flow projections that require a significant degree of management judgment as to
the amount and timing of cash payments, defaults and recovery rates of the
underlying investments and, as such, are subject to change. The carrying value
will vary if the actual cash flows differ from projected due to actual defaults
or an increase in the near-term default rate. As an example, an increase in the
near-term default rate by 100 basis points, in and of itself, would reduce the
cash flow projections by approximately $12 million based on underlying
investments as of December 31, 2003.
Deferred policy acquisition costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of annuity and life and
health insurance products. For annuity and life and health insurance products,
DAC are amortized over periods approximating the lives of the business,
generally as a percentage of premiums or estimated gross profits or as a portion
of the interest margins associated with the products.
For annuity and life and health insurance products, the DAC balances at any
reporting date are supported by projections that show management expects there
to be adequate premiums, estimated gross profits or interest margins after that
date to amortize the remaining balances. These projections are inherently
uncertain because they require management to make assumptions about financial
markets and policyholder behavior over periods extending well into the future.
Projection periods used for IDS Life's annuity business are typically 10 to 25
years, while projection periods for IDS Life's life and health insurance
products are often 50 years or longer. Management regularly monitors financial
market conditions and compares actual policyholder behavior experience to its
assumptions. For annuity and universal life insurance products, the assumptions
made in projecting future results and calculating the DAC balance and DAC
amortization expense are management's best estimates. Management is required to
update these assumptions whenever it appears that, based on actual experience or
other evidence, earlier estimates should be revised. When assumptions are
changed, the percentage of estimated gross profits or portion of interest
margins used to amortize DAC might also change. A change in the required
amortization percentage is applied retrospectively; an increase in amortization
percentage will result in a decrease in DAC balance and increase in DAC
amortization expense while a decrease in amortization percentage will result in
an increase in DAC balance and a decrease in DAC amortization expense. The
impact on results of operations of changing assumptions can be either positive
or negative in any particular period and is reflected in the period in which
such changes are made.
For other life and health insurance products, the assumptions made in
calculating the DAC balance and DAC amortization expense are intended to provide
for adverse deviations in experience and are revised only if management
concludes experience will be so adverse that DAC is not recoverable.
For annuity and life and health insurance products, key assumptions underlying
these long-term projections include interest rates, equity market performance,
mortality and morbidity rates and the rates at which policyholders are expected
to surrender their contracts, make withdrawals from their contracts and make
additional deposits to their contracts. Assumptions about interest rates drive
projected interest margins, while assumptions about equity market performance
drive projected customer asset value growth rates and assumptions about
surrenders, withdrawals and deposits comprise projected persistency rates.
Management must also make assumptions to project maintenance expenses associated
with servicing its annuity and insurance business during the DAC amortization
period.
-14-
The customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. The rate is net of asset fees and
anticipates a blend of equity and fixed income investments. Management reviews
and, where appropriate, adjusts its assumptions with respect to customer asset
value growth rates on a quarterly basis. IDS Life uses a mean reversion method
as a guideline in setting near-term customer asset value growth rates based on a
long-term view of financial market performance. In periods when market
performance results in actual contract value growth at a rate that is different
than that assumed, IDS Life will reassess the near-term rate in order to
continue to project its best estimate of long-term growth. Management is
currently assuming a 7 percent long-term customer asset value growth rate. If
IDS Life increased or decreased its assumption related to this growth rate by
100 basis points, the impact on the DAC balance would be an increase or decrease
of approximately $40 million.
Management monitors other principal DAC assumptions, such as persistency,
mortality, morbidity, interest margin and maintenance expense levels each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year.
The analysis of DAC balances and the corresponding amortization is a dynamic
process that considers all relevant factors and assumptions discussed above.
Therefore, an assessment of sensitivity associated with changes in any single
assumption would not necessarily be an indicator of future results.
Liabilities for Future Policy Benefits
Liabilities for reported and unpaid life insurance claims are equal to the death
benefits payable. For disability income and long-term care claims, unpaid claim
liabilities are equal to benefit amounts due and accrued. Liabilities for
incurred but not reported claims are estimated based on periodic analysis of the
actual reported claim lag. Where applicable, amounts recoverable from reinsurers
are separately recorded as receivables. For life insurance, no claim adjustment
expense reserve is held. The claim adjustment expense reserves for disability
income and long-term care are based on the claim reserves.
Liabilities for fixed and variable universal life insurance and fixed and
variable deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities issued in 1999 or later are
equal to the accumulation of host contract values covering guaranteed benefits
and the market value of embedded equity options. Liabilities for equity indexed
deferred annuities issued before 1999 are equal to the present value of
guaranteed benefits and the intrinsic value of index-based benefits.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates, ranging from 4.6% to 9.5%,
depending on year of issue, with an average rate of approximately 6.3%.
Liabilities for future benefits on term and whole 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, with modifications based on IDS Life's experience.
Anticipated policy persistency rates vary by policy form, issue age and policy
duration with persistency on level term and cash value plans generally
anticipated to be better than persistency on yearly renewable 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 policy reserves
-15-
are 7.5% at policy issue and grade to 5% over 5 years. Anticipated interest
rates for long-term care policy reserves are currently 5.9% grading up to 8.9%
over 30 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 5% to 8%, with an average rate
of approximately 5.7%. IDS Life issues only non-participating life insurance
contracts and does not issue short duration life insurance liabilities.
Impact of Recent Market-Volatility on Results of Operations
Various aspects of IDS Life's business are impacted by equity market levels and
other market-based events. Several areas in particular, as of December 31, 2003,
involve DAC, management and other fee revenues, structured investments and
GMDBs. The direction and magnitude of the changes in equity markets can increase
or decrease DAC amortization expense levels and management and other fee
revenues and correspondingly affect results of operations in any particular
period. Similarly, the value of IDS Life's structured investment portfolio and
derivatives resulting from the consolidation of certain secured loan trusts are
impacted by various market factors. Persistency of, or increases in, bond and
loan default rates, among other factors, could result in negative adjustments to
the market values of these investments in the future, which would adversely
impact results of operations. See discussion of structured investments and
consolidated derivatives below.
The majority of the variable annuity contracts offered by IDS Life contain GMDB
provisions. The standard GMDB provision in the "flagship" variable annuity
product offered by IDS Life Insurance Company and IDS Life of New York
throughout 2003, American Express Retirement Advisor Advantage(R) Variable
Annuity, provides that if the contract owner and annuitant are age 80 or younger
on the date of death, the beneficiary will receive the greatest of (i) the
contract value on the date of death, (ii) purchase payments minus adjusted
partial surrenders, or (iii) the contract value as of the most recent sixth
contract anniversary, plus purchase payment and minus adjusted partial
surrenders since that anniversary.
To the extent that the GMDB is higher than the current account value at the time
of death, IDS Life incurs a benefit cost. For the results through December 31,
2003, GAAP did not prescribe advance recognition of the projected future net
costs associated with these guarantees, and accordingly, IDS Life did not record
a liability corresponding to these future obligations for death benefits in
excess of annuity account value. The amount paid in excess of contract value was
expensed when payable. Amounts expensed for the years ended December 31, 2003
and 2002 were $31.5 million and $37.4 million, respectively. IDS Life also
issues certain variable annuity contracts that contain a guaranteed minimum
income benefit (GMIB) feature which, if elected by the contract owner and after
a stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates. To date, IDS
Life has not expensed any amount related to GMIBs as all terms on GMIB features
are within the stipulated waiting periods.
In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises
for Certain Nontraditional Long-Duration Contracts and for Separate Accounts"
(SOP 03-1) with an effective date of January 1, 2004. SOP 03-1 requires
insurance enterprises to establish additional liabilities for benefits that may
become payable under variable annuity death benefit guarantees or other
insurance or annuity contract provisions. Where additional liabilities are
established, the recognition of this liability may also impact the valuation and
amortization of DAC associated with those insurance or annuity contracts. SOP
03-1 also provides clarifying guidance as to the recognition of bonus interest
and other sales inducement benefits and the presentation of any deferred amounts
in the financial statements.
Detailed interpretations of SOP 03-1 and related implementation guidance
continue to emerge and, accordingly, IDS Life continues to evaluate its impact.
Current estimates of applying SOP 03-1, partially offset by related impacts to
DAC balances, would reduce first quarter 2004 net income by approximately $30
million.
-16-
IDS Life's annuity and life products all have minimum interest rate guarantees
in their fixed accounts. These guarantees range from 1.5% to 5%. To the extent
the yield on IDS Life's invested asset portfolio declines below its target
spread plus the minimum guarantee, IDS Life's profitability would be negatively
affected.
For long-term profitability, it is crucial to ensure adequate pricing to cover
risks, and to accumulate adequate reserves. Reserves are a measure of the assets
IDS Life estimates are needed to adequately provide for future benefits and
expenses. Such reserves are discussed in more detail in the "Certain Critical
Accounting Policies" section below.
Liquidity and Capital Resources
The liquidity requirements of IDS Life are generally met by funds provided by
premiums, investment income, proceeds from sales of investments as well as
maturities, periodic repayments of investment principal and capital
contributions from AEFC. The primary uses of funds are policy benefits,
commissions and operating expenses, policy loans, dividends and investment
purchases. IDS Life routinely reviews its sources and uses of funds in order to
meet its ongoing obligations.
IDS Life has available lines of credit with AEFC aggregating $200 million ($100
million committed and $100 million uncommitted). There were no line of credit
borrowings outstanding with AEFC at December 31, 2003. At December 31, 2003, IDS
Life had outstanding reverse repurchase agreements totaling $67.5 million. Both
the line of credit and the reverse repurchase agreements are used strictly as
short-term sources of funds.
IDS Life's total assets and liabilities increased in 2003 primarily due to
higher investments, client contract reserves and separate account assets and
liabilities, which increased mainly as a result of market appreciation.
Investments primarily include corporate bonds and obligations and mortgage and
other asset-backed securities. IDS Life's corporate bonds and obligations
securities comprise a diverse portfolio with the largest concentrations,
accounting for approximately 65 percent of the portfolio, in the following
industries: banking and finance, utilities, and communications and media.
Investments also include $4.6 billion and $4.8 billion of mortgage loans on real
estate, policy loans and other investments at December 31, 2003 and 2002,
respectively. Investments are principally funded by sales of annuities and
insurance and by reinvested income.
At December 31, 2003 and based on amortized costs, approximately 9 percent of
IDS Life's investments in Available-for-Sale fixed maturity securities were
below investment grade. These investments may be subject to a higher degree of
risk than investment grade issues because of the borrower's generally greater
sensitivity to adverse economic conditions, such as a 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. IDS Life has identified certain Available-for-Sale fixed
maturity securities for which a decline in fair value has been determined to be
other-than-temporary, and has written them down to fair value with a charge to
net income.
Assets consolidated as a result of the December 31, 2003 adoption of FIN 46 were
$907 million. The newly consolidated assets consisted of $834 million of cash
and $73 million of derivatives, essentially all of which are restricted. The
effect of consolidating these assets on IDS Life's balance sheet was offset by
IDS Life's previously recorded carrying values of its investment in the three
secured loan trusts ("SLTs"), which totaled $673 million and $166 million of
newly consolidated liabilities.
-17-
The consolidation of FIN 46-related entities resulted in a cumulative effect of
accounting change that increased 2003 net income through a non-cash gain of
$44.5 million ($68.4 million pretax) related to the consolidation of the three
SLTs.
The initial gain related to the application of FIN 46 for the three SLTs had no
cash flow effect on IDS Life. To the extent losses are incurred on the three
SLTs, charges could be incurred that may or may not be reversed. Taken together
over the lives of the structures through their maturity, IDS Life's maximum
cumulative exposure to pretax loss as a result of its investment in these
entities is represented by the carrying value prior to adoption of FIN 46, which
was $673 million for the three SLTs, as well as the $68.4 million pretax
non-cash gain recorded upon consolidation of the three SLTs.
During 2003, IDS Life continued to hold investments in CDOs, some of which are
also managed by an affiliate, and were not consolidated pursuant to the adoption
of FIN 46 as IDS Life was not considered a primary beneficiary. IDS Life
invested in CDOs as part of its investment strategy in order to offer a
competitive rate to contractholders' accounts. IDS Life's exposure as an
investor is limited solely to its aggregate investment in the CDOs, and it has
no obligations or commitments, contingent or otherwise, that could require any
further funding of such investments. As of December 31, 2003, the carrying
values of the CDO residual tranches, managed by an affiliate, were $5 million.
IDS Life also has an interest in a CDO securitization described below, as well
as an additional $24 million in rated CDO tranches managed by a third party.
CDOs are illiquid investments. As an investor in the residual tranche of CDOs,
IDS Life's return correlates to the performance of portfolios of high-yield
bonds and/or bank loans.
The carrying value of the CDOs, as well as derivatives recorded on the balance
sheet as a result of consolidating the three SLTs, and IDS Life's projected
return are based on discounted cash flow projections that require a significant
degree of management judgment as to assumptions primarily related to default and
recovery rates of the high-yield bonds and/or bank loans either held directly by
the CDO or in the reference portfolio of the SLT and, as such, are subject to
change. Although the exposure associated with IDS Life's investment in CDOs is
limited to the carrying value of such investments, they have significant
volatility associated with them because the amount of the initial value of the
loans and/or other debt obligations in the related portfolios is significantly
greater than IDS Life's exposure. In addition, the derivatives recorded as a
result of consolidating certain SLTs under FIN 46 are valued based on the
expected performance of a reference portfolio of high-yield loans. As previously
mentioned, the exposure to loss related to these derivatives is represented by
the $673 million carrying value of the SLTs prior to adoption of FIN 46 and the
$68.4 million pretax non-cash gain recorded upon consolidation. Deterioration in
the value of the high-yield bonds or bank loans would likely result in
deterioration of IDS Life's investment return with respect to the relevant CDO
or consolidated derivative, as the case may be. In the event of significant
deterioration of a portfolio, the relevant CDO or SLT structure containing the
consolidated derivative may be subject to early liquidation, which could result
in further deterioration of the investment return or, in severe cases, loss of
the CDO or consolidated derivative carrying amount. See Note 1 to the
Consolidated Financial Statements.
During 2001, IDS Life placed a majority of its rated CDO securities and related
accrued interest, as well as a relatively minor amount of other liquid
securities (collectively referred to as transferred assets), having an aggregate
book value of $675.3 million, into a securitization trust. In return, IDS Life
received $89.5 million in cash (excluding transaction expenses) relating to
sales to unaffiliated investors and retained interests in the trust with
allocated book amounts aggregating $585.8 million. As of December 31, 2003, the
retained interests had a carrying value of $518.0 million, of which $381.7
million is considered investment grade. IDS Life has no obligations, contingent
or otherwise, to such unaffiliated investors. One of the results of this
transaction is that increases and decreases in future cash flows of the
individual CDOs are combined into one overall cash flow for purposes of
determining the carrying value of the retained interests and related impact on
results of operations.
-18-
IDS Life holds reserves for current and future obligations related to fixed
annuities and life and health insurance. Reserves for fixed annuities and
universal life contracts are equal to the underlying contract accumulation
values. Reserves for other life and health insurance products are based on
various assumptions, including mortality rates, morbidity rates and policy
persistency.
Separate account assets represent funds held for the exclusive benefit of
variable annuity and variable life insurance contract holders. These assets are
generally carried at market value, and separate account liabilities are equal to
separate account assets. IDS Life earns fees from the related accounts.
The National Association of Insurance Commissioners (NAIC) has prescribed
Risk-Based Capital (RBC) requirements for insurance companies. The RBC
requirements are to be used as minimum capital and surplus requirements by the
NAIC and state insurance regulators to identify companies that merit further
regulatory attention. At December 31, 2003, each of IDS Life's insurance
companies had adjusted capital and surplus in excess of amounts requiring such
attention.
State insurance statutes also contain limitations as to the amount of dividends
and distributions that insurers may make without providing prior notification to
state regulators. For IDS Life, any dividends or distributions in 2004, whose
amount, together with that of other distributions made within the preceding 12
months, exceeds IDS Life's 2003 statutory net gain from operations, would
require notification to the Minnesota Commissioner of Commerce who would have
the option to disapprove the proposed distribution based on consideration of
general solvency as well as RBC results.
Contingent Liquidity Planning
AEFC has developed a contingent funding plan that enables IDS Life to meet daily
customer obligations during periods in which its customers do not roll over
maturing certificate contracts and elect to withdraw funds from their annuity
and insurance contracts. This plan is designed to ensure that IDS Life could
meet these customer withdrawals by selling or obtaining financing, through
repurchase agreements, of portions of its investment securities portfolio.
Risk Management
At IDS Life, interest rate exposures arise primarily within the fixed account
portion of its annuity and insurance products. Rates credited to customers'
accounts generally reset at shorter intervals than the yield on underlying
investments. Therefore, IDS Life's interest spread margins are affected by
changes in the general level of interest rates. The extent to which the level of
interest rates affects spread margins is managed primarily by a combination of
modifying the maturity structure of the investment portfolio and entering into
swaps or other derivative instruments that effectively lengthen the interest
crediting rate reset interval on customer liabilities. Additionally, IDS Life
has entered into interest rate swaptions with notional amounts totaling $1.2
billion to hedge the impact of increasing interest rates.
The negative effect on IDS Life's pretax earnings of a 100 basis point increase
in interest rates, which assumes repricings and customer behavior based on the
application of proprietary models, to the book of business at December 31, 2003
and 2002 would be approximately $19.6 million and $10.7 million for 2003 and
2002, respectively.
-19-
IDS Life has two primary exposures to the general level of equity markets. One
exposure is that IDS Life earns fees from variable annuity and variable life
insurance products. The amount of such fees is generally based on the value of
the portfolios, and thus is subject to fluctuation with the general level of
equity market values. To reduce the sensitivity of IDS Life's fee revenues to
the general performance of equity markets, IDS Life has from time to time
entered into various combinations of financial instruments that mitigate the
negative effect on fees that would result from a decline in the equity markets.
The second exposure is that IDS Life writes and purchases index options to
manage the margin related to certain annuity products that pay interest based
upon the relative change in a major stock market index between the beginning and
end of the annuity product's term. At December 31, 2003, equity-based
derivatives with a net notional amount of $257.6 million were outstanding to
hedge the margin related to certain annuity products that pay interest based
upon the relative change in a major stock market index.
The negative effect on IDS Life's pretax earnings of a 10 percent decline in
equity markets would be approximately $39.3 million and $23.0 million based on
annuity and insurance business inforce and equity index options as of December
31, 2003 and 2002, respectively.
IDS Life's owned investment securities are primarily invested in long-term and
intermediate-term fixed maturity securities to provide clients with a
competitive rate of return on their investments while controlling risk.
Investment in fixed maturity securities is designed to provide IDS Life with a
targeted margin between the yield earned on investments and the interest rate
credited to clients' accounts. IDS Life does not trade in securities to generate
short-term profits for its own account.
AEFC's Balance Sheet Management Committee along with American Express Company's
Enterprisewide Risk Management Committee regularly review models projecting
various interest rate scenarios and risk/return measures and their effect on the
profitability of IDS Life. The committees' objectives are to structure their
investment security portfolios based upon the type and behavior of the products
in the liability portfolios to achieve targeted levels of profitability within
defined risk parameters and to meet contractual obligations. Part of the
committees' strategies include the use of derivatives, such as equity
market-related derivatives and interest rate caps, swaps and floors, for risk
management purposes.
Forward-Looking Statements
Certain statements in Item 7. of this Form 10-K Annual Report contain
forward-looking statements that are subject to risks and uncertainties that
could cause results to differ materially from such statements. The words
"believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "should," "could," "likely," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. IDS Life undertakes no obligation to publicly update or
revise any forward-looking statements. Important factors that could cause actual
results to differ materially from IDS Life's forward-looking statements include,
but are not limited to: fluctuations in external markets, which can affect the
amount and types of investment products sold, the market value of its managed
assets, fees received based on those assets and the amount of amortization of
DAC; potential deterioration in high-yield and other investments, which could
result in further losses in IDS Life's investment portfolio; changes in
assumptions relating to DAC which also could impact the amount of DAC
amortization; the ability to sell certain high-yield investments at expected
values and within anticipated timeframes and to maintain its high-yield
portfolio at certain levels in the future; the types and the value of certain
death benefit features on variable annuity contracts; the affect of assessments
and other surcharges for guaranty funds; the response of reinsurance companies
under reinsurance contracts; the impact of reinsurance rates and the
availability and adequacy of reinsurance to protect IDS Life against losses;
negative changes in IDS Life Insurance Company's and its four life insurance
company subsidiaries' credit ratings; increasing competition in all IDS Life's
major businesses; the adoption of recently issued rules related to the
consolidation of variable interest entities, including those involving SLTs that
IDS Life invests in which could affect both IDS Life's balance sheet and results
of operations; and outcomes of litigation.
-20-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Management's Discussion
and Analysis of financial condition and results of operations under the section
titled Risk Management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements.
See Index to Financial Statements at page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
IDS Life's management, with the participation of IDS Life's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of IDS
Life's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report. Based
on such evaluation, IDS Life's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, IDS Life's disclosure
controls and procedures are effective. There have not been any changes in IDS
Life's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during IDS Life's fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, IDS Life's internal control over financial reporting.
PART III
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express Company has
appointed Ernst & Young LLP as independent auditors to audit the consolidated
financial statements of IDS Life for the year ended December 31, 2003.
Audit Fees
The aggregated fees billed or to be billed by Ernst & Young for each of the last
two years for professional services rendered for the audit of IDS Life's annual
financial statements and services that were provided in connection with
statutory and regulatory filings or engagements and other attest services were
$1,894,000 for 2003 and $1,219,000 for 2002.
Audit-Related Fees
IDS Life was not billed by Ernst & Young for any fees for audit-related services
for 2003 or 2002.
Tax Fees
IDS Life was not billed by Ernst & Young for any tax fees for 2003 or 2002.
-21-
All Other Fees
IDS Life was not billed by Ernst & Young for any other fees for 2003 or 2002.
Policy on Pre-Approval of Services Provided by Independent Auditor
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the
engagement of Ernst & Young are subject to the specific pre-approval of the
Audit Committee of American Express Company. All audit and permitted non-audit
services to be performed by Ernst & Young for IDS Life required pre-approval by
the Audit Committee of American Express Company in accordance with pre-approval
procedures established by the Audit Committee of American Express Company. The
procedures require all proposed engagements of Ernst & Young for services to IDS
Life of any kind to be directed to the General Auditor of American Express
Company and then submitted for approval to the Audit Committee of American
Express Company prior to the beginning of any services.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedules on page F-1 hereof.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement
Schedules on page F-1 hereof.
All information on schedules to the consolidated financial
statements required by Article 7 of Regulation S-X is included
in the consolidated financial statements or is not required.
Therefore, all schedules have been omitted.
(3) Exhibits
See Exhibit Index on pages E-1 through E-3 hereof.
(b) Reports on Form 8-K filed in the fourth quarter of 2003.
Form 8-K, dated November 15, 2003, Item 5, reporting that, on November
15, 2003, IDS Life Insurance Company appointed Arthur H. Berman as
Chief Financial Officer. He succeeds John T. Sweeney, who was recently
appointed Vice President, Brokerage and Banking at AEFC.
-22-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IDS LIFE INSURANCE COMPANY
Registrant
March 29, 2004 By /s/ Mark E. Schwarzmann
- -------------- ------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
March 29, 2004 By /s/ Gumer C. Alvero
- -------------- -------------------
Date Gumer C. Alvero, Director and
Executive Vice President - Annuities
March 29, 2004 By /s/ Timothy V. Bechtold
- -------------- -----------------------
Date Timothy V. Bechtold, Director and
President
March 29, 2004 By /s/ Arthur H. Berman
- -------------- --------------------
Date Arthur H. Berman, Director and
Executive Vice President - Finance
and Chief Financial Officer
March 29, 2004 By /s/ Jeryl A. Millner
- -------------- --------------------
Date Jeryl A. Millner, Vice President and
Controller
March 29, 2004 By /s/ Roger Natarajan
- -------------- -------------------
Date Roger Natarajan, Director
March 29, 2004 By /s/ Mark E. Schwarzmann
- -------------- ------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and
Chief Executive Officer
-23-
IDS LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT AUDITORS
(Item 14 (a))
Page Number
Consolidated Financial Statements:
Report of Management F-2
Report of Independent Auditors F-3
Consolidated Balance Sheets at December 31, 2003 and 2002 F-4 to F-5
Consolidated Statements of Operations for each of the three
years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2003, 2002 and 2001 F-7 to F-8
Consolidated Statements of Stockholder's Equity for each of
the three years ended December 31, 2003, 2002 and 2001 F-9 to F-11
Notes to Consolidated Financial Statements F-12 to F-32
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 and notes thereto or is not required. Therefore, all schedules have
been omitted.
F-1
Report of Management
The management of IDS Life Insurance Company is responsible for the preparation
and fair presentation of its Consolidated Financial Statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States, and include amounts based on the best judgment of management. IDS
Life Insurance Company's management is also responsible for the accuracy and
consistency of other financial information included in this annual report.
In recognition of its responsibility for the integrity and objectivity of data
in the financial statements, IDS Life Insurance Company maintains a system of
internal control over financial reporting which is designed to provide
reasonable, but not absolute, assurance with respect to the reliability of IDS
Life Insurance Company's financial statements. The concept of reasonable
assurance is based on the notion that the cost of the internal control system
should not exceed the benefits derived.
The internal control system is founded on an ethical climate and includes: (i)
an organizational structure with clearly defined lines of responsibility,
policies and procedures; (ii) a Code of Conduct; and (iii) a careful selection
and training of employees. Internal auditors monitor and assess the
effectiveness of the internal control system and report their findings to
management and the Board of Directors throughout the year. IDS Life Insurance
Company's independent auditors are engaged to express an opinion on the year-end
financial statements and, with the coordinated support of the internal auditors,
review the financial records and related data and test the internal control
system over financial reporting to the extent they believed necessary to support
their report.
F-2
Report of Ernst & Young LLP 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, 2003 and 2002, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of IDS Life Insurance Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 to the consolidated financial statements, in 2003 IDS
Life Insurance Company adopted the provisions of Financial Accounting Standards
Board Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities."
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 26, 2004
F-3
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands, except share amounts)
2003 2002
----------- -----------
ASSETS
Investments: (Note 2)
Available-for-sale:
Fixed maturities, at fair value (amortized cost: 2003, $26,626,709; 2002,
$23,209,226) $27,324,491 $24,052,104
Common stocks, at fair value (cost: 2003,
$19; 2002, $19) 120 21
Mortgage loans on real estate 3,180,020 3,417,651
Policy loans 578,000 597,144
Other investments 801,871 753,247
----------- -----------
Total investments 31,884,502 28,820,167
Cash and cash equivalents 400,294 4,424,061
Restricted cash 834,448 --
Amounts recoverable from reinsurers 754,514 633,510
Amounts due from brokers 1,792 501
Other accounts receivable 68,422 56,245
Accrued investment income 355,374 296,595
Deferred policy acquisition costs (Note 3) 3,615,179 3,309,094
Other assets 253,858 117,788
Separate account assets 27,774,319 21,980,674
----------- -----------
Total assets $65,942,702 $59,638,635
=========== ===========
See Notes to Consolidated Financial Statements.
F-4
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(Thousands, except share amounts)
2003 2002
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits:
Fixed annuities $26,376,944 $23,411,314
Universal life-type insurance 3,569,882 3,515,010
Traditional life insurance 254,641 247,441
Disability income and long-term care insurance 1,724,204 1,466,171
Policy claims and other policyholders' funds 67,911 85,400
Amounts due to brokers 228,707 3,342,989
Deferred income taxes, net 139,814 182,059
Other liabilities 408,444 463,326
Separate account liabilities 27,774,319 21,980,674
----------- -----------
Total liabilities 60,544,866 54,694,384
----------- -----------
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 1,370,388 1,088,327
Retained earnings 3,624,837 3,354,841
Accumulated other comprehensive income (loss), net of tax:
Net unrealized securities gains 405,456 497,319
Net unrealized derivative (losses) gains (5,845) 764
----------- -----------
Total accumulated other comprehensive income 399,611 498,083
Total stockholder's equity 5,397,836 4,944,251
----------- -----------
Total liabilities and stockholder's equity $65,942,702 $59,638,635
=========== ===========
See Notes to Consolidated Financial Statements.
F-5
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
(Thousands)
2003 2002 2001
---------- ---------- ----------
REVENUES
Premiums:
Traditional life insurance $ 64,890 $ 60,740 $ 59,415
Disability income and long-term care insurance 284,111 273,737 255,428
---------- ---------- ----------
Total premiums 349,001 334,477 314,843
Net investment income 1,705,530 1,561,856 1,485,688
Contractholder and policyholder charges 530,101 525,708 492,441
Management and other fees 390,516 404,787 473,406
Net realized gain (loss) on investments 4,100 (4,507) (649,752)
---------- ---------- ----------
Total revenues 2,979,248 2,822,321 2,116,626
---------- ---------- ----------
BENEFITS AND EXPENSES
Death and other benefits:
Traditional life insurance 38,870 36,850 35,492
Investment contracts and universal life-type insurance 202,205 205,147 174,868
Disability income and long-term care insurance 57,339 52,972 44,743
(Decrease) increase in liabilities for future policy
benefits:
Traditional life insurance (2,401) 2,841 7,167
Disability income and long-term care insurance 142,532 134,605 123,227
Interest credited on investment contracts and universal
life-type insurance 1,224,910 1,157,636 1,146,866
Amortization of deferred policy acquisition costs 288,276 335,729 375,984
Other insurance and operating expenses 452,978 426,534 397,236
---------- ---------- ----------
Total benefits and expenses 2,404,709 2,352,314 2,305,583
---------- ---------- ----------
Income (loss) before income tax provision (benefit) and
cumulative effect of accounting change 574,539 470,007 (188,957)
Income tax provision (benefit) 66,945 87,826 (145,222)
---------- ---------- ----------
Income (loss) before cumulative effect of accounting change 507,594 382,181 (43,735)
Cumulative effect of accounting change (net of income tax
provision of $23,942 for 2003 and income tax benefit of
$11,532 for 2001) (Note 1) 44,463 -- (21,416)
---------- ---------- ----------
Net income (loss) $ 552,057 $ 382,181 $ (65,151)
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-6
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Thousands)
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 552,057 $ 382,181 $ (65,151)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of accounting change, net of tax
(Note 1) (44,463) -- 21,416
Policy loans, excluding universal life-type insurance:
Issuance (34,490) (35,345) (43,687)
Repayment 43,596 49,256 54,004
Change in amounts recoverable from reinsurers (121,004) (104,344) (112,686)
Change in other accounts receivable (12,177) (9,896) (4,025)
Change in accrued investment income (64,359) (5,139) 56,729
Change in deferred policy acquisition costs, net (300,491) (277,258) (175,723)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term care
insurance 265,233 245,275 223,177
Change in policy claims and other policyholder's funds (17,489) 13,521 19,812
Deferred income tax (benefit) provision (30,714) 116,995 (246,205)
Change in other assets and liabilities, net (95,537) 26,309 (24,509)
Amortization of premium, net 160,862 65,869 108,958
Net realized (gain) loss on investments (4,100) 4,507 649,752
Net realized (gain) loss on trading securities (30,400) 2,480 --
Policyholder and contractholder charges, non-cash (234,098) (232,725) (217,496)
Other, net (7,561) 10,651 (92,253)
--------- --------- ---------
Net cash provided by operating activities $ 24,865 $ 252,337 $ 152,113
See Notes to Consolidated Financial Statements.
F-7
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
(Thousands)
2003 2002 2001
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Available-for-sale securities:
Sales $ 12,232,235 $ 10,093,228 $ 5,493,141
Maturities, sinking fund payments and calls 4,152,088 3,078,509 2,706,147
Purchases (20,527,995) (16,287,891) (9,477,740)
Other investments, excluding policy loans:
Sales 668,071 509,588 370,636
Purchases (853,647) (543,843) (442,876)
Change in amounts due from brokers (1,291) 90,293 (75,492)
Change in amounts due to brokers (3,260,310) 1,602,958 1,293,684
------------ ------------ -----------
Net cash used in investing activities (7,590,849) (1,457,158) (132,500)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activities related to investment contracts and universal
life-type insurance:
Considerations received 4,267,115 4,638,111 2,088,114
Interest credited to account balances 1,224,910 1,157,636 1,146,866
Surrenders and other benefits (2,235,889) (1,655,631) (2,810,401)
Universal life-type insurance policy loans:
Repayment 85,760 89,346 72,805
Issuance (81,740) (80,831) (83,720)
Capital contribution 282,061 400,000 400,000
Dividends paid -- (70,000) -
------------ ------------ -----------
Net cash provided by financing activities 3,542,217 4,478,631 813,664
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents (4,023,767) 3,273,810 833,277
Cash and cash equivalents at beginning of year 4,424,061 1,150,251 316,974
------------ ------------ -----------
Cash and cash equivalents at end of year $ 400,294 $ 4,424,061 $ 1,150,251
============ ============ ===========
Supplemental disclosures:
Income taxes paid $ 103,034 $ - $ -
Interest on borrowings $ 2,647 $ 7,906 $ 23,688
Non-cash ownership transfer of net assets of AEC to AEFC
in 2003 (Note 1) $ 282,061 $ - $ -
See Notes to Consolidated Financial Statements.
F-8
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2003
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
------- --------- ---------- ---------- -----------
Balance, January 1, 2001 $ 3,000 $ 288,327 $ (333,734) $3,107,811 $ 3,065,404
Comprehensive income:
Net loss - - - (65,151) (65,151)
Cumulative effect of adopting SFAS
No. 133, net of income tax
benefit of $626 - - (1,162) - (1,162)
Net unrealized holding losses on
available-for-sale securities
arising during the year, net of
deferred policy acquisition costs
of ($20,191) and income tax
benefit of $6,064 - - (11,262) - (11,262)
Reclassification adjustment for
losses on available-for-sale
securities included in net loss, net
of income tax benefit of
$228,003 - - 423,434 - 423,434
Reclassification adjustment for
losses on derivatives included in
net loss, net of income tax
benefit of $4,038 - - 7,499 - 7,499
-----------
Total comprehensive income - - - - 353,358
Capital contribution - 400,000 - - 400,000
------- --------- ---------- ---------- -----------
Balance, December 31, 2001 $ 3,000 $ 688,327 $ 84,775 $3,042,660 $ 3,818,762
See Notes to Consolidated Financial Statements.
F-9
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2003
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
------- ----------- ------------ ---------- ----------
Balance, December 31, 2001 $3,000 $ 688,327 $ 84,775 $3,042,660 $3,818,762
Comprehensive income:
Net income - - - 382,181 382,181
Net unrealized holding gains on
available-for-sale securities
arising during the year, net of
deferred policy acquisition costs
of ($75,351) and income tax
provision of ($228,502) - - 424,360 - 424,360
Reclassification adjustment for gains
on available-for-sale securities
included in net income, net of
income tax provision of ($5,645) - - (10,484) - (10,484)
Reclassification adjustment for gains
on derivatives included in net
income, net of income tax
provision of ($305) - - (568) - (568)
----------
Total comprehensive income 795,489
Cash dividends - - - (70,000) (70,000)
Capital contribution - 400,000 - - 400,000
------ ---------- -------- ---------- ----------
Balance, December 31, 2002 $3,000 $1,088,327 $498,083 $3,354,841 $4,944,251
See Notes to Consolidated Financial Statements.
F-10
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
For the three years ended December 31, 2003
(Thousands)
Accumulated
Other
Additional Comprehensive Total
Capital Paid-in Income (Loss), Retained Stockholder's
Stock Capital Net of Tax Earnings Equity
------- ----------- ------------ ---------- ----------
Balance, December 31, 2002 $3,000 $1,088,327 $498,083 $3,354,841 $4,944,251
Comprehensive income:
Net income - - - 552,057 552,057
Net unrealized holding losses on
available-for-sale securities
arising during the year, net of
deferred policy acquisition costs
of ($5,594) and income tax benefit
of $46,545 - - (79,470) - (79,470)
Reclassification adjustment for
gains on available-for-sale
securities included in net income,
net of income tax provision of
($6,044) - - (11,225) - (11,225)
Net unrealized holding losses on
derivatives arising during the
year, net of income tax benefit of
$3,663 - - (6,802) - (6,802)
Reclassification adjustment for
gains on derivatives included in
net income, net of income tax
provision of ($525) - - (975) - (975)
----------
Total comprehensive income 453,585
Non-cash dividend of AEC to AEFC
(Note 1) - - - (282,061) (282,061)
Capital contribution - 282,061 - - 282,061
------ ---------- -------- ---------- ----------
Balance, December 31, 2003 $3,000 $1,370,388 $399,611 $3,624,837 $5,397,836
======= ========== ======== ========== ==========
See Notes to Consolidated Financial Statements.
F-11
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company is a stock life insurance company organized
under the laws of the State of Minnesota whose products are primarily
distributed through branded financial advisors. IDS Life Insurance Company
is a wholly owned subsidiary of American Express Financial Corporation
(AEFC), which is a wholly owned subsidiary of American Express Company. IDS
Life Insurance Company distributes its fixed and variable insurance and
annuity products exclusively through the American Express Financial
Advisors Inc.'s (AEFAI) retail sales force. IDS Life Insurance Company has
four wholly owned subsidiaries that distribute their products through
various distribution channels. IDS Life Insurance Company serves residents
of the District of Columbia and all states except New York. IDS Life
Insurance Company of New York is a wholly owned subsidiary of IDS Life
Insurance Company and serves New York State residents. IDS Life of New York
distributes its fixed and variable insurance and annuity products
exclusively through AEFAI's retail sales force. IDS Life Insurance Company
also wholly owns American Enterprise Life Insurance Company, which issues
fixed and variable annuity contracts for sale through insurance agencies
and broker-dealers who may also be associated with financial institutions,
such as banks. American Centurion Life Assurance Company is a wholly owned
subsidiary that offers fixed and variable annuities to American Express(R)
Cardmembers and others in New York and through insurance agencies and
broker-dealers who may also be associated with financial institutions, such
as banks, in New York. American Partners Life Insurance Company is a wholly
owned subsidiary that offers fixed and variable annuities to American
Express(R) Cardmembers and others who reside in states other than New York.
IDS Life Insurance Company also wholly owns IDS REO 1, LLC and IDS REO II,
LLC. At December 31, 2003, these two subsidiaries held real estate and
mortgage loans on real estate. IDS Life Insurance Company and its six
subsidiaries are referred to collectively as "IDS Life" in these
consolidated financial statements and notes thereto.
On December 29, 2003, IDS Life contributed substantially all of its
interests in low income housing investments, net of related payables and
deferred tax assets, to its wholly owned subsidiary, American Express
Corporation ("AEC"). These investments had a carrying value of $308.6
million and $381.5 million at December 29, 2003 and December 31, 2002,
respectively. The amount of the contribution to AEC was $272 million. AEC
had a carrying value of approximately $10 million prior to receiving this
contribution.
On December 30, 2003, IDS Life distributed via dividend all of its interest
in AEC to AEFC. This distribution was considered extraordinary, as defined
in Minnesota holding company statutes. On December 30, 2003, IDS Life
received a contribution of cash of approximately $282 million, equal to the
amount of the distribution of AEC.
IDS Life's principal products are deferred annuities and universal life
insurance which are issued primarily to individuals. It offers single
premium and flexible premium deferred annuities on both a fixed and
variable dollar basis. Immediate annuities are offered as well. IDS Life's
fixed deferred annuities guarantee a relatively low annual interest rate
during the accumulation period (the time before annuity payments begin).
However, IDS Life has the option of paying a higher rate set at its
discretion. In addition, persons owning one type of annuity may have their
interest calculated based on any increase in a broad-based stock market
index. IDS Life also offers variable annuities, including the American
Express Retirement Advisor Advantage(R) Variable Annuity and the American
Express Retirement Advisor Select(R) Variable Annuity. Life insurance
products currently offered by IDS Life include universal life (fixed and
variable, single life and joint life), single
F-12
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
premium life and term products. Waiver of premium and accidental death
benefit riders are generally available with these life insurance products.
IDS Life also markets disability income insurance. Although IDS Life
discontinued issuance of long-term care insurance at the end of 2002, IDS
Life retains risk on a large block of existing contracts, 50% of which are
reinsured. In May 2003, IDS Life began outsourcing claims administration as
well.
Under IDS Life's variable life insurance and variable annuity products
described above, the purchaser may choose among investment options that
include IDS Life's "general account" as well as from a variety of
portfolios including common stocks, bonds, managed assets and/or short-
term securities.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
IDS Life, its wholly owned subsidiaries and certain variable interest
entities. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States (GAAP) which vary in certain respects from reporting practices
prescribed or permitted by state insurance regulatory authorities as
included in Note 5. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation
As of December 31, 2003, pursuant to IDS Life's adoption of Financial
Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of
Variable Interest Entities," as revised (FIN 46), IDS Life consolidates all
variable interest entities for which it is considered to be the primary
beneficiary. In addition, IDS Life generally consolidates all entities in
which it holds a greater than 50% interest, except for immaterial seed
money investments in mutual and hedge funds. Entities in which IDS Life
holds a greater than 20% but less than 50% equity interest are accounted
for under the equity method. All other investments are accounted for under
the cost method unless IDS Life determines that it exercises significant
influence over the entity by means other than voting rights.
Qualifying Special Purpose Entities (QSPEs) under Statement of Financial
Accounting Standards (SFAS) No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," are not
consolidated. Such QSPEs include a securitization trust containing a
majority of IDS Life's rated collateralized debt obligations (CDOs)
described in "Recently issued accounting standards" section below. Other
entities are evaluated using the control, risk and reward criteria as
outlined under GAAP in determining whether to consolidate other entities
where IDS Life has an interest, is the sponsor or transferor. See "Recently
issued accounting standards" section below for further information
regarding IDS Life's December 31, 2003 adoption of FIN 46.
Revenue Recognition
Premium revenues
Premium revenues include premiums on traditional life, disability income
and long-term care products. Such premiums are recognized as revenue when
due.
F-13
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net investment income
Net investment income predominantly consists of interest income earned on
fixed maturity securities classified as Available-for-Sale, mortgage loans
on real estate, policy loans and other investments. Interest income is
accrued as earned using the effective interest method, which makes an
adjustment of the yield for security premiums and discounts on all
performing fixed maturity securities classified as Available-for-Sale,
excluding structured securities, and mortgage loans on real estate so that
the related security or loan recognizes a constant rate of return on the
outstanding balance throughout its term. Interest income on structured
securities is recognized according to Emerging Issues Task Force (EITF)
Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets" or EITF Issue No. 96-12, "Recognition of Interest Income and
Balance Sheet Classification of Structured Notes" depending upon the
instrument.
Contractholder and policyholder charges
Contractholder and policyholder charges include certain charges assessed on
annuities and universal and variable universal life insurance.
Contractholder and policyholder charges include cost of insurance charges,
administrative charges and surrender charges on annuities, universal and
variable universal life insurance. Cost of insurance charges on universal
and variable universal life insurance are recognized as revenue when
earned, whereas contract charges and surrender charges on annuities,
universal and variable universal life insurance are recognized as revenue
when collected.
Management and other fees
Management and other fees include risk fees, management and administration
fees, which are generated directly and indirectly from IDS Life's separate
account assets. IDS Life's management and other fees are generally computed
as a contractual rate generally based on the underlying asset values and
are generally received monthly.
Net realized gain (loss) on investments
Realized gains and losses are recognized on a trade date basis, and charges
are recorded when securities are determined to be other-than-temporarily
impaired.
Investments - Fixed maturity and equity securities
All fixed maturity securities and 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 carried
as a separate component of accumulated other comprehensive income (loss),
net of the related deferred policy acquisition costs and income taxes.
Gains and losses are recognized in the results of operations upon
disposition of the securities using the specific identification method. In
addition, losses are also recognized when management determines that a
decline in a security's fair value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery.
Indicators of other-than-temporary impairment for fixed maturity securities
include issuer downgrade, default, or bankruptcy. IDS Life also considers
the extent to which cost exceeds fair value, the duration and size of that
gap, and management's judgment about the issuer's current and prospective
financial condition. The charges are reflected in net realized loss on
investments within the Consolidated Statements of Income.
Fair value of fixed maturity and equity securities is generally based on
quoted market prices. However, IDS Life's investment portfolio also
contains structured investments of various asset quality, including
collateralized debt obligations (CDOs) (backed by high-yield bonds and bank
loans), which are not readily marketable. As a result, the carrying values
of these structured investments are based on future cash flow projections
that require a significant degree of management judgment as to the amount
and timing of cash payments, default and recovery rates of the underlying
F-14
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments and, as such, are subject to change. IDS Life's CDO investments
are accounted for in accordance with Emerging Issues Task Force (EITF)
Issue 99-20 "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets".
Net investment income, which primarily consists of interest earned on fixed
maturity securities, is generally accrued as earned using the effective
interest method, which makes an adjustment of the yield for security
premiums, discounts and anticipated prepayments on mortgage-backed
securities. Prepayment estimates are based on information received from
brokers who deal in mortgage-backed securities.
Investments - Mortgage loans on real estate
Mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses. The estimated fair value of the mortgage loans is
determined by discounted cash flow analyses using mortgage interest rates
currently offered for mortgages of similar maturities.
The reserve for losses is measured as the excess of the loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate or the fair value
of collateral. Additionally, the level of the reserve for losses considers
other factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the
reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
IDS Life generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
Investments - Policy loans
Policy loans are carried at the aggregate of the unpaid loan balances,
which do not exceed the cash surrender values of the related policies.
Investment - Other investments
Included in other investments are affordable housing investments, trading
securities, syndicated loans and real estate. Affordable housing
investments are carried at amortized cost as IDS Life has no influence over
the operating or financial policies of the general partner. Trading
securities are held at fair market value with changes in value recognized
in the Consolidated Statements of Income within Net investment income.
Syndicated loans reflect amortized cost less reserves for losses and real
estate is carried at its estimated fair value.
Cash and cash equivalents
IDS Life 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.
Deferred policy acquisition costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring
new business, principally direct sales commissions and other distribution
and underwriting costs that have been deferred on the sale of annuity and
life and health insurance. For annuity and insurance products, DAC are
F-15
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amortized over periods approximating the lives of the business, generally
as a percentage of premiums or estimated gross profits or as a portion of
the interest margins associated with the products.
For insurance and annuity products, the projections underlying the
amortization of DAC require the use of certain assumptions, including
interest margins, mortality rates, persistency rates, maintenance expense
levels and customer asset value growth rates for variable products.
Management routinely monitors a wide variety of trends in the business,
including comparisons of actual and assumed experience. Management reviews
and, where appropriate, adjusts its assumptions, with respect to customer
asset value growth rates on a quarterly basis. Management monitors other
principalprinciple DAC assumptions, such as persistency, rates,
mortality rates,rate, interest
marginsmargin and maintenance expense levelslevel assumptions, each quarter. Unless
management identifies a material deviation over the course of the quarterly
monitoring process, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed,
the percentage of estimated gross profits or portion of interest margins
used to amortize DAC may also change. A change in the required amortization
percentage is applied retrospectively; an increase in amortization
percentage will result in an acceleration of DAC amortization while a
decrease in amortization percentage will result in a deceleration of DAC
amortization. The impact on results of operations of changing assumptions
with respect to the amortization of DAC can either be either positive or negative
in any particular period and is reflected in the period thatin which such
changes are made.
In 2002, excluding
the third quarter, the impact of resetting these assumptions, along with the
impact of unfavorable equity market performance, was an acceleration of $22
million pretax of DAC amortization. Third quarter impacts are described below.
During the third quarter of 2002, the Company completed a comprehensive review
of its DAC related practices. The specific areas reviewed included costs
deferred, DAC amortization periods, customer asset value growth rate assumptions
(which are typically reviewed on a quarterly basis) and other assumptions,
including mortality rates and product persistency (which are typically updated
on an annual basis in the third quarter). As a result of this review, the
Company took certain actions that resulted in a net $37 million increase in
expenses in the third quarter of 2002.
The Company reset its customer asset value growth rate assumptions for variable
annuity and variable life products to anticipate near-term and long-term growth
at an annual rate of 7%. The customer asset value growth rate is the rate at
which contract values are assumed to appreciate in the future. This rate is net
of asset fees, and anticipates a blend of equity and fixed income investments.
Prior to resetting these assumptions, the Company was projecting long-term
customer asset value growth at 7.5% and near-term growth at approximately twice
that rate. The impact of resetting these assumptions, along with the impact of
unfavorable third quarter 2002 equity market performance, was an acceleration of
$173 million pretax of DAC amortization.
Going forward, the Company intends to continue to use a mean reversion method as
a guideline in setting the near-term customer asset value growth rate, also
referred to as the mean reversion rate. In periods when market performance
results in actual contract value growth at a rate different than that assumed,
the Company will reassess the near-term rate in order to continue to project its
best estimate of long-term growth. For example, if actual contract value growth
during a quarter is less than 7% on an annualized basis, the Company would
increase the mean reversion rate assumed over the near term to the rate needed
to achieve the long-term annualized growth rate of 7% by the end of that period,
assuming this long-term view is still appropriate.
The Company revised certain mortality and persistency assumptions for universal
and variable universal life insurance products and fixed and variable annuity
products to better reflect actual experience and future expectations. The
Company updated the mortality table used in pricing universal and variable
universal life products and in valuing the associated DAC. The most recently
published life insurance industry mortality table was used as a starting point,
and was then modified based on the Company's experience. The Company also
observed that recent persistency of its universal life products was consistently
better than expected, and determined the trend justified an improvement in
assumed persistency rates. Additionally, the Company reviewed and updated
persistency assumptions for fixed and variable deferred annuity products. The
Company also reviewed the periods over which DAC is amortized for fixed and
variable deferred annuity products. Analysis showed that significant volumes of
advisor-distributed fixed annuities were expected to persist beyond the
Company's ten-year DAC amortization period. As a result, the Company extended
the amortization period from 10 to 15 years to be more consistent with the
period over which significant profits were expected and that would result in a
more appropriate matching of revenues and expense. Similarly, the Company made
slight increases in the amortization periods used for certain blocks of
advisor-distributed variable annuities. These changes, along with revised
assumptions projecting more favorable persistency and mortality rates, resulted
in a decrease in DAC expense of $155 million pretax.
-11-
Finally, the Company reviewed its acquisition costs to clarify those costs that
vary with and are primarily related to the acquisition of new and renewable
annuity and insurance contracts. The Company revised the types and amounts of
costs deferred, in part to reflect the impact of advisor platform changes and
the effects of related reengineering. This resulted in an increase in expense of
$19 million pretax recognized in the third quarter of 2002.
The adjustments made to customer asset value growth rate assumptions should
reduce the risk of adverse DAC adjustments going forward, while changes made to
mortality and persistency assumptions and DAC amortization periods somewhat
increase the risk of adverse adjustments. Overall, the Company believes it is
less exposed to the risk of adverse DAC adjustments as a result of these
changes. The changes relating to the types and amounts of costs deferred will
somewhat accelerate the recognition of ongoing expenses, although the impact of
this should be offset to some extent as reengineering and other cost control
initiatives are expected to mitigate their impact.
2001 Compared to 2000:
Consolidated net loss was $65 million in 2001, compared to consolidated net
income of $586 million in 2000. Consolidated loss before income tax benefit and
cumulative effect of accounting change totaled $189 million in 2001, compared
with consolidated income before income tax expense of $807 million in 2000. This
decline was primarily the result of a $633 million increase in net realized loss
on investments and a $245 million decrease in investment income.
Total revenues decreased to $2.1 billion in 2001, compared with $3.0 billion in
2000. The decrease was primarily due to decreases in net investment income and
from the realized investments losses. Net investment income, the largest
component of revenues, decreased by $245 million from the prior year, primarily
reflecting credit related yield adjustments on fixed maturity investments and
overall lower investment yields.
Total premiums and investment contract deposits received decreased to $5.8
billion in 2001, compared with $6.9 billion in 2000. The reduction is primarily
due to lower variable annuity sales.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 12 percent to $490
million in 2001, compared with $438 million in 2000. This increase reflects
increased total life insurance in force, which grew 10 percent to $108 billion
at December 31, 2001.
Management and other fees decreased 21 percent to $473 million in 2001, compared
with $598 million in 2000. This decrease reflects lower average separate account
assets outstanding, resulting primarily from equity market depreciation. The
Company provides investment management services for many of the mutual funds
that are available as investment options for variable annuities and variable
life insurance. The Company also receives a mortality and expense risk fee from
the separate accounts.
Net realized losses on investments were $650 million in 2001, compared to net
realized losses of $17 million in 2000. The net loss for the year was comprised
of a $143 million pretax net loss in the first quarter resulting primarily from
the recognition of impairment losses and the sale of certain high-yield
securities; a $227 million writedown in the second quarter to recognize the
impact of higher default rate assumptions on certain structured investments; a
$262 million writedown of lower-rated securities (most of which were sold during
2001) in the second quarter primarily in connection with the Company's decision
to lower its risk profile by reducing the level of its high-yield fixed maturity
investment portfolio, allocating holdings toward stronger credits, and reducing
the concentration of exposure to individual companies and industry sectors; and
$18 million of other net losses primarily related to the sale and write-down of
other investments.
Total benefits and expenses increased slightly to $2.3 billion in 2001 from $2.2
billion in 2000. The largest component of expenses, interest credited to
policyholder accounts for universal life-type insurance and investment
contracts, decreased slightly to $1.1 billion, reflecting a slight decrease in
fixed annuities in force and lower interest
-12-
crediting rates due to the lower interest rate environment. Amortization of DAC
increased to $371 million in 2001, compared to $362 million in 2000. The
increase was primarily due to DAC unlocking adjustments (see footnote one of the
attached financial statements for the definition of unlocking adjustments),
which resulted in a net increase in amortization of $33.6 million in 2001 and a
net decrease in amortization of $12.3 million in 2000. Amortization, excluding
unlocking adjustments, was significantly less in 2001 than in 2000, due
primarily to the significant drop in equity-based separate account values and
associated fee revenue.
Other insurance and operating expenses increased to $408 million in 2001,
compared to $379 million in 2000. This increase was primarily a result of
business growth and technology costs related to growth initiatives.
Impact of Market Volatility on Results of Operations
Various aspects of the Company's business can be significantly impacted by
equity market levels and other market-based factors. One of these items is the
management fee revenue which is based on the market value of separate account
assets. Other areas impacted by market volatility involve DAC (as noted above),
structured investments and the variable annuity guaranteedGuaranteed minimum death benefit
feature. The value of the Company's structured investment portfolio is impacted
by various market factors. These investments include collateralized debt
obligations and secured loan trusts (backed by high-yield bonds and bank loans),
which are held by the Company through interests in special purpose entities. The
carrying value of these investments is based on estimated cash flow projections,
which are affected by factors such as default rates, persistency of defaults,
recovery rates and interest rates, among others. Persistency of, or increases
in, these default rates could result in negative adjustments to the market
values of these investments in the future, which would adversely impact results
of operations. Conversely, a decline in the default rates would result in higher
values and would benefit future results of operations.benefits
The majority of the variable annuity contracts offered by the CompanyIDS Life contain
guaranteed minimum death benefit (GMDB) provisions. At time of issue, these
contracts typically guarantee the death benefit payable will not be less
than the amount invested, regardless of the performance of the customer's
account. Most contracts also provide for some type of periodic adjustment
of the guaranteed amount based on the change in the value of the contract. A
large portion of the Company'sIDS Life's contracts containing a GMDB provision adjust
once every six years. The periodic adjustment of these contracts can either
increase or decrease the guaranteed amount though not below the amount
invested adjusted for withdrawals. When market values of the customer's
accounts decline, the death benefit payable on a contract with a GMDB may
exceed the accumulated contract value. Currently,Through December 31, 2003, the
amount paid in excess of contract value iswas expensed when payable. Certain Critical Accounting Policies
The Company's significantAmounts
expensed in 2003, 2002, and 2001 were $31.5 million, $37.4 million, and
$16.2 million respectively. IDS Life also issues certain variable annuity
contracts that contain a guaranteed minimum income benefit (GMIB) feature
which, if elected by the contract owner and after a stipulated waiting
period from contract issuance, guarantees a minimum lifetime annuity based
on predetermined annuity purchase rates. To date, IDS Life has not expensed
any amount related to GMIBs as all terms on GMIB features are within the
stipulated waiting periods. See "Recently issued accounting policiesstandards"
section herein for a description of Statement of Position 03-1.
Liabilities for future policy benefits
Liabilities for reported and unpaid life insurance claims are described in Note 1equal to the
Consolidated Financial Statements. The following provides information about
certain critical accounting policies that are important to the Consolidated
Financial Statements and that involve estimates requiring significant management
assumptions and judgments about the effect of matters that are uncertain. These
policies relate to the recognition of impairment within the investment
portfolio, deferred policy acquisition costs and insurance and annuity reserves.
Investments
All fixed maturity securities and 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 carried as a separate component
of accumulated other comprehensive income (loss), net of the related deferred
policy acquisition costs and income taxes. Gains and losses are recognized in
the results of operations upon disposition of the securities using the specific
identification method. In addition, losses are also recognized when management
determines that a decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for fixed maturity securities include, but are
not limited to, issuer downgrade, default or bankruptcy. The Company also
considers the extent to which cost exceeds fair value, the duration of time
-13-
of that decline, and management's judgment about the issuer's current and
prospective financial condition. The charges are reflected in net realized gain
(loss) on investments within the Consolidated Statements of Income.
Fair value of fixed maturity and equity securities is generally based on quoted
market prices. However, the Company's investment portfolio also contains
structured investments of various asset quality, including collateralized debt
obligations (CDOs) and secured loan trusts (SLTs) (backed by high-yield bonds
and bank loans), which are not readily marketable. As a result, the carrying
values of these structured investments are based on estimated cash flow
projections which require a significant degree of management judgment as to
default and recovery rates of the underlying investments and, as such, are
subject to change. If actual future cash flows are less than projected,
additional losses would be realized.
The reserve for losses on mortgage loans on real estate is measured as the
excess of the loan's recorded investment over its present value of expected
principal and interest payments discounted at the loan's effective interest rate
or the fair value of collateral. Additionally, the level of the reserve for
losses considers other factors, including historical experience and current
economic and political conditions. Management regularly evaluates the adequacy
of the reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
Deferred policy acquisition costs
The costs of acquiring new business, including for example, direct sales
commissions, related sales incentive bonuses and awards, underwriting costs,
policy issue costs and other related costs, have been deferred on the sale of
insurance and annuity contracts. The DAC for universal life and variable
universal life insurance and certain installment annuities are amortized as a
percentage of the estimated gross profits expected to be realized on the
policies. DAC for other annuities are amortized using the interest method.death benefits payable. For
traditional life, disability income and long-term care insurance policies, the
costsclaims,
unpaid claim liabilities are amortized in proportionequal to premium revenue.
Amortization of DAC requires the use of certain assumptions including interest
margins, mortality rates, persistency rates, maintenance expense levelsbenefit amounts due and customer asset value growth ratesaccrued.
Liabilities for variable products. The customer asset
value growth rate is the rate at which contract valuesincurred but not reported claims are assumed to appreciate
in the future. This rate is net of asset fees, and anticipates a blend of equity
and fixed income investments. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed experience.
Management reviews and, where appropriate, adjusts its assumptions with respect
to customer asset value growth ratesestimated based on
a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency rates,
mortality rates, interest margins and maintenance expense levels each quarter.
Unless management identifies a material deviation over the courseperiodic analysis of the quarterly monitoring, management reviewsactual reported claim lag. Where applicable,
amounts recoverable from reinsurers are separately recorded as receivables.
For life insurance, no claim adjustment expense reserve is held. The claim
adjustment expense reserves for disability income and updates these DAC assumptions
annually inlong-term care are
based on the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC may also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an acceleration of DAC amortization while a decrease in amortization
percentage will result in a deceleration of DAC amortization. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period, and is
reflected in the period that such changes are made.
Liabilities for future policy benefitsclaim reserves.
F-16
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liabilities for fixed and variable universal life insurance and fixed and
variable deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities issued before 1999 are equal
to the present value of guaranteed benefits and the intrinsic value of
index-based benefits.
Liabilities for equity indexed deferred annuities issued in 1999 or later
are equal to the accumulation of host contract values covering guaranteed
benefits and the market value of embedded equity options. -14-
Liabilities for
equity indexed deferred annuities issued before 1999 are equal to the
present value of guaranteed benefits and the intrinsic value of index-based
benefits.
Liabilities for fixed annuities in a benefit status are based on
established industry mortality tables and interest rates, ranging from 5%4.6%
to 9.5%, depending on year of issue, with an average rate of approximately
6.5%6.3%.
Liabilities for future benefits on traditional life insurance, principally term and whole 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, with modifications based on
Company experience. Anticipated policy persistency rates vary by policy
form, issue age and policy duration with persistency on level term and cash
value plans generally anticipated to be better than persistency on yearly
renewable 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%7.5%
at policy issue and grade to ultimate rates of 5% to 7% over 5 years. Anticipated interest rates
for long-term care policy reserves are currently 5.9% grading up to 108.9%
over 30 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 5% to 8%,
with an average rate of approximately 5.7%. Liabilities for reported and unpaidIDS Life issues only
non-participating life insurance claimscontracts and does not issue
short-duration life insurance policies.
Reinsurance
Reinsurance premiums and benefits paid or provided are equal toaccounted for on a
basis consistent with that used in accounting for original policies issued
and with the terms of the reinsurance contracts.
The maximum amount of life insurance risk retained by IDS Life is $750,000
on any policy insuring a single life and $1.5 million on any policy
insuring a joint-life combination. IDS Life generally retains 10% of the
mortality risk on new life insurance policies. Risk not retained is
reinsured with other life insurance companies. Risk on universal life and
variable universal life policies is reinsured on a yearly renewable term
basis. Risk on term insurance and long-term care policies is reinsured on a
coinsurance basis. IDS Life retains all accidental death benefits payable. Forbenefit,
disability income and long-term care claims, unpaid claimswaiver of premium risk.
Federal income taxes
IDS Life's taxable income is included in the consolidated federal income
tax return of American Express Company. IDS Life provides for income taxes
on a separate return basis, except that, under an agreement between AEFC
and American Express Company, tax benefit is recognized for
F-17
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Separate account business
The separate account assets and liabilities are equal torepresent funds held for the
exclusive benefit amounts due and accrued. Liabilities for
incurred but not reported claims are estimated based on periodic analysis of the actual reported claim lag. Where applicable, amounts recoverable from reinsurers
are separately recorded as receivables. Forvariable annuity and variable life insurance
no claim adjustmentcontract owners. Through the year ended December 31, 2003, IDS Life
received fees related to the proprietary mutual funds used as investment
options for variable annuities and variable life insurance directly from
the separate accounts. In the fourth quarter of 2003, AEFC replaced IDS
Life Insurance Company as the investment manager of these proprietary
mutual funds. In connection with this change and through an agreement with
AEFC, IDS Life receives fund administrative services fees for the fund
management services, other than investment management services, IDS Life
provides these proprietary mutual funds. Prior to this change, IDS Life
received management fees from the funds. IDS Life receives mortality and
expense reserverisk fees directly from the separate accounts.
IDS Life 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. IDS Life makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are in the benefit payment period.
IDS Life also guarantees that the rates at which administrative fees are
deducted from contract funds will not exceed contractual maximums.
For variable life insurance, IDS Life guarantees that the rate at which
insurance charges and administrative fees are deducted from contract funds
will not exceed contractual maximums. IDS Life also guarantees that the
death benefit will continue to be payable at the current level, less
outstanding loans, regardless of investment performance so long as the
policy owner pays the contractual premium requirements for the death
benefit guarantee provision.
Recently issued accounting standards
In January 2003, the FASB issued FIN 46, which addresses consolidation by
business enterprises of variable interest entities (VIEs) and was
subsequently revised in December 2003. An entity is held.subject to
consolidation according to the provisions of FIN 46, if, by design, either
(i) the total equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support from other parties, or, (ii) as a group, the holders of the equity
investment at risk lack: (a) direct or indirect ability to make decisions
about an entity's activities; (b) the obligation to absorb the expected
losses of the entity if they occur; or (c) the right to receive the
expected residual returns of the entity if they occur. In general, FIN 46
requires a VIE to be consolidated when an enterprise has a variable
interest for which it is deemed to be the primary beneficiary which means
that it will absorb a majority of the VIE's expected losses or receive a
majority of the VIE's expected residual return.
The claim adjustment expense reserves for disability
incomevariable interest entities primarily impacted by FIN 46, which IDS Life
consolidated as of December 31, 2003, relate to three securitized loan
trusts (SLTs), which are managed by an affiliate and long-term care arepartially owned by IDS
Life. The three SLTs consolidated as a result of FIN 46 provide returns to
investors primarily based on the claim reserves.
Risk Managementperformance of an underlying portfolio of
high-yield loans which are managed by IDS Life. FIN 46 does not impact the
accounting for QSPEs as defined by SFAS No. 140, such as IDS Life's
CDO-related securitization trust established in 2001. That trust contains a
majority of IDS Life's rated CDOs whose retained interest in the trust had
a carrying value of $518.0 million at December 31, 2003, of which $381.7
million is considered investment grade. In addition, FIN 46 did not impact
the accounting for an additional $24 million in rated CDO tranches, which
are
F-18
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
managed by third parties, $5 million of CDO residual tranches managed
by an affiliate and $0.3 million of affordable housing investments as IDS
Life is not the primary beneficiary. IDS Life's maximum exposure to loss as
a result of its investment in these entities is represented by the carrying
values.
The sensitivity analysis discussed below estimatesconsolidation of the effectsthree SLTs partially owned by IDS Life and managed
by an affiliate, resulted in a cumulative effect of hypothetical
sudden and sustained changesaccounting change that
increased 2003 net income through a non-cash gain of $44.5 million ($68.4
million pretax). In addition, the consolidation of these VIEs resulted in
the elimination of IDS Life's investment in the applicable market conditionsVIEs, which was
$673 million for the three SLTs. IDS Life consolidated new assets of two
different types$907
million. The newly consolidated assets consist of market risk$834 million of cash and
$73 million of derivatives, essentially all of which are restricted. The
effect of consolidating these assets on IDS Life's balance sheet was offset
by IDS Life's previously recorded carrying values of its investments in the
three SLTs, which totaled $673 million and $166 million of newly
consolidated liabilities.
The initial gain related to the application of FIN 46 for the three SLTs
had no cash flow effect on IDS Life. To the extent losses are incurred on
the ensuing year's earnings, based on year-end
positions. The market changes, assumedthree SLTs, charges could be incurred that may or may not be reversed.
Taken together over the lives of the structures through their maturity, IDS
Life's maximum cumulative exposure to occurpretax loss as a result of year-end, are a 100 basis
point increase in market interest rates and a 10 percent declineits
investment in the three SLTs is represented by the carrying value prior to
adoption of equity securities held in separate accounts. Computations ofFIN 46, which was $673 million for the prospective
effects of hypothetical interest rate and equity market changes are based on
numerous assumptions, including relative levels of market interest rates and
equity prices,three SLTs, as well as
the levels$68.4 million pretax non-cash gain recorded upon consolidation of assetsthe
SLTs.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and liabilities.Hedging Activities." The hypothetical
changesStatement amends and
assumptionsclarifies accounting for derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133. The adoption of this
Statement did not have a material impact on IDS Life's financial
statements.
In July 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (SOP 03-1). IDS Life is currently evaluating its impact,
which, among other provisions, requires reserves related to guaranteed
minimum death benefits included within the majority of variable annuity
contracts offered by IDS Life. SOP 03-1 is required to be adopted on
January 1, 2004, and any impact will be different from what actually occur. Furthermore,recognized in IDS Life's 2004
results of operations.
In November 2003, the computations doFASB ratified a consensus on the disclosure
provisions of EITF Issue 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The disclosure
provisions of this rule, which are addressed in Note 2, require tabular
presentation of certain information regarding investment securities with
gross unrealized losses.
In July 2000, the FASB's EITF issued a consensus on Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." IDS Life adopted the
consensus as of January 1, 2001. Issue No. 99-20 prescribed new procedures
for recording interest income and measuring impairment on retained and
purchased beneficial interests. The consensus primarily affected CDOs.
Adoption of the consensus resulted in a cumulative after-tax effect of
accounting change that reduced 2001 net income by $21.4 million, net of
tax.
Effective January 1, 2001, IDS Life adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended (SFAS No. 133),
which required an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair
value. Changes in the fair value of a derivative are recorded in earnings
or directly to equity, depending on the instrument's designated use. The
adoption of SFAS No. 133 on January 1, 2001,
F-19
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
resulted in cumulative after-tax reductions to other comprehensive income
of $1.2 million. The cumulative impact to earnings was not incorporate actions that management could take if the
hypothetical market changes actually took place. As a result, actual earnings
consequences will differ from those quantified below.significant.
2. Investments
Fixed maturity and equity securities
Available-for-sale securities at December 31, 2003 are distributed by type
as presented below:
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
----------- -------- --------- -----------
Fixed maturities:
Corporate bonds and obligations $12,746,966 $568,866 $ (63,059) $13,252,773
Mortgage and other asset-backed
securities 10,187,423 166,679 (54,535) 10,299,567
Foreign corporate bonds and
obligations 2,666,626 126,187 (24,923) 2,767,890
Structured investments 593,094 1,784 (47,767) 547,111
U.S. Government agency obligations 235,994 13,848 (20) 249,822
State and municipal obligations 114,158 3,711 (3,100) 114,769
Foreign government bonds and
obligations 82,448 10,728 (617) 92,559
----------- -------- --------- -----------
Total fixed maturities 26,626,709 891,803 (194,021) 27,324,491
Common stocks 19 101 - 120
----------- -------- --------- -----------
Total fixed maturities and equity securities $26,626,728 $891,904 $(194,021) $27,324,611
=========== ======== ========= ===========
Available-for-sale securities at December 31, 2002 are distributed by type
as presented below:
Gross Gross
Amortized Unrealized Unrealized Fair
(Thousands) Cost Gains Losses Value
----------- -------- --------- -----------
Fixed maturities:
Corporate bonds and obligations $ 8,137,626 $ 509,870 $(112,540) $ 8,534,956
Mortgage and other asset-backed
securities 12,145,797 393,342 (10,067) 12,529,072
Foreign corporate bonds and
obligations 1,476,670 101,190 (3,805) 1,574,055
Structured investments 1,306,245 2,112 (59,101) 1,249,256
U.S. Government agency obligations 84,075 12,015 (687) 95,403
State and municipal obligations 29,202 2,522 - 31,724
Foreign government bonds and
obligations 29,611 8,027 - 37,638
----------- ---------- --------- -----------
Total fixed maturities 23,209,226 1,029,078 (186,200) 24,052,104
Common stocks 19 2 - 21
----------- ---------- --------- -----------
Total fixed maturities and equity securities $23,209,245 $1,029,080 $(186,200) $24,052,125
=========== ========== ========= ===========
F-20
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company primarily invests in fixed incomefollowing table provides information about available-for-sale
securities over a broad range of
maturities for the purpose of providing fixed annuity and fixed universal life
contractholders with a competitive rate of return on their investments while
controlling risk, and to provide a dependable and targeted spread between the
interest rate earned on investmentsgross unrealized losses and the interest rate creditedlength of time that
individual securities have been in a continuous unrealized loss position as
of December 31, 2003:
Less than 12 months 12 months or more Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
(Thousands) Value Losses Value Losses Value Losses
----------------- ---------- --------- ------- ------- ---------- ---------
Description of securities:
Corporate bonds and
obligations $3,145,975 $ (59,691) $40,125 $(3,368) $3,186,100 $ (63,059)
Mortgage and other
asset-backed securities 4,154,632 (54,524) 144 (11) 4,154,776 (54,535)
Foreign corporate bonds and
obligations 740,943 (24,923) - - 740,943 (24,923)
U.S. Government and agencies
obligations 8,250 (20) - - 8,250 (20)
State and municipal
obligations 61,926 (3,100) - - 61,926 (3,100)
Foreign government bonds and
obligations 8,242 (617) - - 8,242 (617)
Other - - 3 (1) 3 (1)
---------- --------- ------- ------- ---------- ---------
Total $8,119,968 $(142,875) $40,272 $(3,380) $8,160,240 $(146,255)
========== ========== ======= ======== ========== ==========
Note: Excludes structured investments that are accounted for pursuant to
contractholders' accounts.EITF 99-20, and are therefore outside the scope of EITF 03-1. At December
31, 2003, such investments had gross unrealized losses of $47.8 million.
Approximately 751 investment positions were in an unrealized loss position
as of December 31, 2003. The Company does not invest ingross unrealized losses on these securities
are attributable to generate
short-term trading profits.
IDS Life and eacha number of its insurance subsidiaries' investment committees meet
periodically. With respect to IDS Life of New York and American Centurion Life,
the full Board acts as the investment committee. At these meetings, the
committee or Board reviews models projecting different interest rate scenarios,
risk/return measures, and their effect on profitability. The committee or Board
also reviews the distribution of assets in the portfolio by type and credit risk
sector. The objective of the committee or Board is to structure the investment
security portfolio based upon the type and expected behavior of products in the
liability portfolio so as to meet contractual obligations and to achieve
targeted levels of profitability within defined risk parameters.
-15-
Rates credited to contract owners' 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 investment committee's or Board's strategy includes the use of derivatives,
such as interest rate caps, swaps and floors, for risk management purposes.
These derivatives help protect margins by increasing investment returns if there
is a sudden and severe risefactors including changes in interest rates
thereby mitigating the impactand credit spreads and specific credit events associated with individual
issuers. As part of an increase in rates credited to contract owner's fixed accounts. Conversely, in
a low interest rate environment, such asits ongoing monitoring process, management has
concluded that experienced recently, margins may
be negatively impacted as the interest rates available on the Company's
investments approaches the guaranteed minimum interest rates on insurance or
annuity contracts. This negative impact may be compounded by the fact that manynone of the Company's interest bearing investmentsthese securities are callable or prepayable by the
issuer and calls and prepayments are more likely to occur in a low interest rate
environment.
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 businessother-than-temporarily impaired
at December 31, 2002, would be approximately $11 million.
On2003. IDS Life has the ability and intent to hold these
securities for a certain annuity product,time sufficient to recover its amortized cost. See the
interestAvailable-for-sale Securities section of Note 1 for information regarding
IDS Life's policy for determining when an investment's decline in value is
creditedother-than-temporary.
The following is a distribution of available-for-sale securities by
maturity at December 31, 2003:
Amortized Fair
(Thousands) Cost Value
-------------- ----------- -----------
Due within one year $ 329,607 $ 337,004
Due from one to contractholders'
accounts based uponfive years 3,682,678 3,904,191
Due from five to ten years 10,287,297 10,627,059
Due in more than ten years 2,139,704 2,156,670
Mortgage and other asset-backed securities 10,187,423 10,299,567
----------- -----------
Total $26,626,709 $27,324,491
=========== ===========
The timing of actual receipts may differ from contractual maturities
because issuers may have 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 isright to purchase and write options on a major stock market index, and to purchase
futures which are marked to market daily and exchange traded, exposing the
Company to no counterparty risk.call or prepay obligations.
At December 31, 2002, equity-based derivatives
with a net notional amountfixed maturity securities comprised approximately 86
percent of $225 million were outstandingIDS Life's total investments. These securities are rated by
Moody's and Standard & Poor's (S&P), except for
F-21
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $1.6 billion of securities which are rated by AEFC's internal
analysts using criteria similar to hedge these
equity market exposures.
The amountMoody's and S&P. Ratings are presented
using S&P's convention and, if the two agencies' ratings differ, the lower
rating is used. A summary of the fee income the Company receives is based upon the daily marketfixed maturity securities, at fair 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 investment committee's strategy is to use index options to manage the equity
market risk related to fee income. These derivatives help protect fee income by
providing option income when there is a significant decline in the equity
markets. The Company did not have equity-based derivatives outstanding atrating on December 31, is as follows:
Rating 2003 2002
for this purpose.
The negative effect on the Company's pretax earnings of a 10 percent decline in
equity prices would be approximately $23 million based on separate account
assets under management as of December 31, 2002.
Liquidity and Capital Resources
The liquidity requirements of the Company are generally met by funds provided by
premiums,-------- ------ ------
AAA 41% 53%
AA 2 1
A 21 14
BBB 27 25
Below investment income, proceeds from sales of investments as well as
maturities, periodic repayments of investment principal and capital
contributions. Maturities of the Company's investments is largely matched with
the expected future payments of insurance and annuity obligations.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has available lines of credit with AEFC aggregating $200 million
($100 million committed and $100 million uncommitted). There were no borrowings
outstanding at December 31, 2002.grade 9 7
--- ---
Total 100% 100%
=== ===
At December 31, 2002, the Company had
outstanding reverse repurchase agreements totaling $225 million. Both the line
of credit and the reverse repurchase agreements are used strictly as short-term
sources of funds.
At December 31, 2002, investments in fixed maturities comprised 842003, approximately 91 percent of the Company's total invested assets and primarily include corporate debt,
mortgage and other asset-backed securities. Approximately 49 percent is invested
insecurities rated AAA
are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any
other issuer were greater than ten percent of stockholder's equity.
The table below includes sales, maturities and purchases of investments
classified as available-for-sale for the years ended December 31:
(Thousands) 2003 2002 2001
---------------------------------------------------------------------------
Sales $12,232,235 $10,093,228 $5,493,141
Maturities $ 4,152,088 $ 3,078,509 $2,706,147
Purchases $20,527,995 $16,287,891 $9,477,740
---------------------------------------------------------------------------
Gross realized gains on sales of securities classified as
available-for-sale securities, using the specific identification method,
were approximately $255.3 million, $297.5 million and $116.6 million for
the years ended December 31, 2003, 2002 and 2001, respectively. Gross
realized (losses) on sales of available-for-sale securities were
approximately ($135.5 million), ($137.4 million) and ($390.7 million) for
the same periods. IDS Life also recognized (losses) of approximately
($102.6 million), ($144.1 million) and ($348.7 million) in
other-than-temporary impairments on available-for-sale securities for the
years ended December 31, 2003, 2002 and 2001, respectively. The 2001 losses
include the effect of the write-down and sale of high-yield securities
discussed below.
During 2001, IDS Life recognized pretax losses of $828.2 million to
recognize the impact of higher default rate assumptions on certain
structured investments, to write down lower-rated securities (most of which
were sold in 2001) in connection with IDS Life's decision to lower its risk
profile by reducing the level of its high-yield portfolio, allocating
holdings toward stronger credits, and reducing the concentration of
exposure to individual companies and industry sectors; to write down
certain other investments, and to adopt EITF Issue No. 99-20. Of the total
charge of $828.2 million, approximately $624.0 million of these losses are
considered AAA
quality. The Company's corporate securities comprise a diverse portfolioincluded in net realized losses on investments and $171.3 million are
included in net investment income, with the largest concentrations accounting for
-16-
approximately 63 percent of the portfolio, in the following industries: banking
and finance, utilities, communication and media and transportation.
At December 31, 2002, approximately 7 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,
suchremaining losses recorded as a
recession or increasing interest rates, and in certain instances, the
lackcumulative effect 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.
During 2002, the Company continued to hold investments in CDOs and SLTs, some of
which are also managed by a related party. The Company invested in CDOs and SLTs
as part of its investment strategy in order to pay a competitive rate to
contractholders' accounts. The Company's exposure as an investor is limited
solely to its aggregate investment in the CDOs and SLTs, and it has no
obligations or commitments, contingent or otherwise, that could require any
further funding of such investments. As of December 31, 2002, the carrying
values of the CDO residual tranches and SLT notes were $13 million and $657
million, respectively. CDOs and SLTs are illiquid investments. As an investor in
the residual tranche of CDOs, the Company's return correlates to the performance
of portfolios of high-yield bonds and/or bank loans. As a noteholder of SLTs,
the Company's return is based on a reference portfolio of loans. The carrying
value of the CDO and SLT investments and the Company's projected return are
based on discounted cash flow projections that require a significant degree of
management judgment as to assumptions primarily related to default and recovery
rates of the high-yield bonds and/or bank loans either held directly by the CDO
or in the reference portfolio of the SLT and, as such, are subject toaccounting change.
Generally, the SLTs are structured such that the principal amount of the loans
in the reference portfolio may be up to five times that of the par amount of the
notes held by the Company. Although the exposure associated with the Company's
investment in CDOs and SLTs is limited to the carrying value of such
investments, they are volatile investments and have a substantial degree of risk
associated with them because the amount of the initial value of the loans and/or
other debt obligations in the related portfolios is significantly greater than
the Company's exposure. Deterioration in the value of the high-yield bonds or
bank loans would likely result in deterioration of the Company's investment
return with respect to the relevant CDO or SLT, as the case may be. In the event
of significant deterioration of a portfolio, the relevant CDO or SLT may be
subject to early liquidation, which could result in further deterioration of the
investment return or, in severe cases, loss of the carrying amount.
DuringAlso during 2001 the CompanyIDS Life placed a majority of its rated CDO securities and
related accrued interest, as well as a relatively minor amount of other
liquid securities (collectively referred to as transferred assets), having
an aggregate book value of $675$675.3 million, into a securitization trust. In
return, the CompanyIDS Life received $90 million$89.5 in cash (excluding transaction expenses)
relating to sales to unaffiliated investors and retained interests in the
trust with allocated book amounts aggregating $586$585.8 million. As of
December 31, 2002,2003, the retained interests had a carrying value of $562$518.0
million, of which $388$381.7 million is considered investment grade. The Company has no obligations,
contingent or otherwise, to such unaffiliated investors. One ofbook
amount is determined by allocating the results of
this transaction is that increases or decreases in future cash flows of the
individual CDOs are combined into one overall cash flow for purposes of
determining theprevious carrying value of the
transferred assets between assets sold and the retained interests based on
their
F-22
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
relative fair values. Fair values are based upon the estimated present
value of future cash flows. The retained interests are accounted for in
accordance with EITF Issue No. 99-20.
The change in net unrealized securities gains (losses) recognized in other
comprehensive income includes two components: (i) unrealized gains (losses)
that arose from changes in market value of securities that were held during
the period (holding gains (losses)), and related impact(ii) gains (losses) that were
previously unrealized, but have been recognized in current period net
income due to sales of available-for-sale securities (reclassification for
realized gains (losses)). This reclassification has no effect on resultstotal
comprehensive income or shareholders' equity.
The following table presents these components of operations.other comprehensive income
net of tax:
(Thousands) 2003 2002 2001
-------------------------------------------------------- -------- -------- --------
Holding (losses) gains, net of deferred policy
acquisition costs $(79,470) $424,360 $(11,262)
Reclassification for realized securities losses (gains) (11,225) (10,484) 423,434
-------- -------- --------
Increase in net unrealized securities (losses) gains
recognized in other comprehensive income $(90,695) $413,876 $412,172
======== ======== ========
At December 31, 2003 and 2002, bonds carried at $16.3 million and $14.5
million, respectively, were on deposit with various states as required by
law.
Pursuant to adoption of SFAS No. 133, IDS Life reclassified all
Held-to-Maturity securities with a carrying value of $6.5 billion and net
unrealized gains of $8.2 million to Available-for-Sale as of January 1,
2001.
Mortgage loans on available-for-sale fixed maturity
securities included $1,029 millionreal estate and syndicated loans
The following is a summary of gross unrealized gainsmortgage loans on real estate and $186 millionsyndicated
loans at December 31:
(Thousands) 2003 2002
----------- ----------- ----------
Mortgage loans on real estate $ 3,227,217 $3,461,963
Mortgage loans on real estate reserves (47,197) (44,312)
----------- ----------
Net mortgage loans $ 3,180,020 $3,417,651
=========== ==========
Syndicated loans $ 140,792 $ 111,574
Syndicated loans reserves (3,000) (1,000)
----------- ----------
Net syndicated loans $ 137,792 $ 110,574
=========== ==========
Mortgage loans are first mortgages on real estate. IDS Life holds the
mortgage document, which gives it the right to take possession of gross unrealized losses. The Company does not classify fixed maturity securities
as held-to-maturity.the
property if the borrower fails to perform according to the terms of the
agreements.
At December 31, 2003 and 2002, the Company had a reserve for losses onIDS Life's recorded investment in impaired
mortgage loans
totaling $35 million and on real estate investments totaling $nil.
Inwas $11.1 million and $33.1 million, with a
reserve of $2.9 million and $9.1 million, respectively. During 2003 and
2002, the Company received capital contributions from AEFC totaling $400average recorded investment in impaired mortgage loans on real
estate was $26.0 million and paid dividends$36.6 million, respectively. IDS Life
recognized $0.8 million, $1.1 million and $1.3 million of $70 millioninterest income
related to AEFC.
-17-impaired mortgage loans on real estate for the years ended
December 31, 2003, 2002 and 2001, respectively.
F-23
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The economybalances of and other factors cause insurance companies to go under regulatory
supervision. These situations resultchanges 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 atotal reserve for such potential
assessments.mortgage loan losses
as of and for the years ended December 31, are as follows:
(Thousands) 2003 2002 2001
----------- ------- ------- --------
Balance, January 1 $44,312 $28,173 $ 11,489
Provision for mortgage loan losses 11,687 23,514 19,934
Foreclosures, write-offs and other (8,802) (7,375) (3,250)
------- ------- --------
Balance, December 31 $47,197 $44,312 $ 28,173
======= ======= ========
Concentration of credit risk of mortgage loans on real estate by region at
December 31 were:
December 31, 2003 December 31, 2002
------------------------ ---------------------
(Thousands) On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
------------- ---------- ------- ---------- -------
East North Central $ 578,855 $ 6,575 $ 615,886 $ -
West North Central 490,119 8,115 493,310 25,500
South Atlantic 662,121 1,350 765,443 2,800
Middle Atlantic 294,333 4,800 321,699 19,100
New England 197,338 11,474 228,400 5,800
Pacific 342,214 13,900 355,622 5,250
West South Central 191,886 8,800 211,285 1,000
East South Central 71,566 800 63,859 -
Mountain 398,785 2,700 406,459 -
---------- ------- ---------- -------
3,227,217 58,514 3,461,963 59,450
Less reserves for losses (47,197) - (44,312) -
---------- ------- ---------- -------
Total $3,180,020 $58,514 $3,417,651 $59,450
========== ======= ========== =======
Concentration of credit risk of mortgage loans on real estate by property
type at December 31 were:
December 31, 2003 December 31, 2002
--------------------- -----------------------
(Thousands) On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
------------- ---------- ------- ---------- -------
Department/retail stores $ 868,079 $18,444 $ 998,234 $20,722
Apartments 560,753 21,600 622,185 -
Office buildings 1,136,034 10,805 1,178,934 25,628
Industrial buildings 355,497 4,265 344,604 13,100
Hotels/motels 111,230 1,000 103,034 -
Medical buildings 70,934 - 96,689 -
Nursing/retirement homes 27,253 - 35,873 -
Mixed use 60,124 - 54,512 -
Other 37,313 2,400 27,898 -
---------- ------- ---------- -------
3,227,217 58,514 3,461,963 59,450
Less reserves for losses (47,197) - (44,312) -
---------- ------- ---------- -------
Total $3,180,020 $58,514 $3,417,651 $59,450
========== ======= ========== =======
Commitments to fund mortgages are made in the ordinary course of business.
The National Associationestimated fair value of Insurance Commissioners (NAIC) established
risk-based capital (RBC) standards for life insurance companies to determine
capital requirements based upon the risks inherent in its operations. These
standards require the computation of a RBC amount which is then compared to a
company's actual total adjusted statutory 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 RBC is below
certain levels. Asmortgage commitments as of December 31,
2003 and 2002 was not material.
Syndicated loans, which are included as a component of other investments,
represent loans in which a group of lenders provide funds to borrowers.
There is usually one originating lender which retains a small percentage
and syndicates the Company's total adjusted capital
was well in excessremainder.
F-24
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the levels requiringmarket value of the real estate at
the time of origination of the loan. IDS Life holds the mortgage document,
which gives it the right to take possession of the property if the borrower
fails to perform according to the terms of the agreement.
Sources of investment income and realized gains (losses) on investments
Net investment income for the years ended December 31 is summarized as
follows:
(Thousands) 2003 2002 2001
----------- ---------- ---------- ----------
Income on fixed maturities $1,423,560 $1,331,547 $1,276,966
Income on mortgage loans on real estate 247,001 274,524 290,608
Other 64,328 (15,642) (41,927)
---------- ---------- ----------
1,734,889 1,590,429 1,525,647
Less investment expenses 29,359 28,573 39,959
---------- ---------- ----------
Total $1,705,530 $1,561,856 $1,485,688
========== ========== ==========
Net realized gains (losses) on investments for the years ended December 31
is summarized as follows:
(Thousands) 2003 2002 2001
----------- ---------- ---------- ----------
Fixed maturities $ 17,271 $ 16,129 $(622,897)
Mortgage loans on real estate (3,437) (15,586) (17,834)
Other (9,734) (5,050) (9,021)
---------- ---------- ----------
Total $ 4,100 $ (4,507) $(649,752)
========== ========== ==========
3. Deferred policy acquisition costs
The balances of and changes in deferred policy acquisition costs as of and
for the years ended December 31, were:
(Thousands) 2003 2002 2001
----------- ---------- ---------- ----------
Balance, beginning of year $3,309,094 $3,107,187 $2,951,655
Capitalization of expenses 588,767 612,987 551,707
Amortization (288,276) (335,729) (375,984)
Change in unrealized investment gains and losses 5,594 (75,351) (20,191)
---------- ---------- ----------
Balance, end of year $3,615,179 $3,309,094 $3,107,187
========== ========== ==========
F-25
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Income taxes
IDS Life qualifies as a life insurance company for federal income tax
purposes. As such, IDS Life is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax provision (benefit) for the years ended December 31 consists
of the following:
(Thousands) 2003 2002 2001
----------- --------- -------- ---------
Federal income taxes
Current $ 91,862 $(30,647) $ 88,121
Deferred (30,714) 116,995 (234,673)
--------- ------- ---------
61,148 86,348 (146,552)
State income taxes-current 5,797 1,478 1,330
--------- -------- ---------
Income tax provision (benefit) before cumulative
effect of accounting change $ 66,945 $ 87,826 $(145,222)
========= ======== =========
Income tax provision (benefit) before the cumulative effect of accounting
change differs from that computed by using the federal statutory rate of
35%. The principal causes of the difference in each year are shown below:
2003 2002 2001
------------------------- -------------------------- ------------------------------
(Dollars in Thousands) Provision Rate Provision Rate Provision Rate
---------------------- ------------ ------------ -------------- ----------- ---------------- -------------
Federal income taxes based
on the statutory rate $201,089 35.0% $164,502 35.0% ($66,136) (35.0)%
Tax-exempt interest and
dividend income (61,070) (10.6) (5,260) (1.1) (4,663) (2.5)
State taxes, net of federal
benefit 3,768 0.7 961 0.2 865 0.4
Affordable housing credits (73,500) (12.8) (70,000) (14.9) (73,200) (38.7)
Other, net (3,342) (0.6) (2,377) (0.5) (2,088) (1.1)
-------- ---- -------- ---- --------- -----
Total income taxes $ 66,945 11.7% $ 87,826 18.7% ($145,222) (76.9)%
======== ==== ======== ==== ========= =====
IDS Life's 2003 income tax provision reflects a $41.3 million reduction in
tax expense due to adjustments related to the finalization to the 2002 tax
return filed during the third quarter of 2003 and the publication of
favorable technical guidance related to the taxation of dividend income.
A portion of IDS Life's income earned prior to 1984 was not subject to
current taxation but was accumulated, for tax purposes, in a
"policyholders' surplus account". At December 31, 2003, IDS Life had a
policyholders' surplus account balance of $20.1 million. The policyholders'
surplus account is only taxable if dividends to the stockholder exceed the
stockholder's surplus account or if IDS Life is liquidated. Deferred income
taxes of $7.0 million have not been established because no distributions of
such amounts are contemplated.
F-26
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of IDS Life's deferred income tax assets and
liabilities as of December 31 are as follows:
(Thousands) 2003 2002
----------- ------------------ ----------------
Deferred income tax assets:
Policy reserves $ 798,508 $ 683,144
Other investments 300,888 319,829
Other 30,376 29,789
------------------ ----------------
Total deferred income tax assets 1,129,772 1,032,762
------------------ ----------------
Deferred income tax liabilities:
Deferred policy acquisition costs 1,004,942 929,751
Net unrealized gain - available-for-sale securities 218,322 267,113
Other 17,957
46,322
------------------ ----------------
Total deferred income tax liabilities 1,269,586 1,214,821
------------------ ----------------
Net deferred income tax liability $ (139,814) $ (182,059)
================== ================
IDS Life is required to establish a valuation allowance for any portion of
the deferred income tax assets that management believes will not be
realized. In the opinion of management, it is more likely than not that IDS
Life will realize the benefit of the deferred income tax assets and,
therefore, no such valuation allowance has been established.
5. Stockholder's equity
Retained earnings available for distribution as dividends to AEFC are
limited to IDS Life's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory attention.authorities. IDS Life's
statutory unassigned surplus aggregated $1.4 billion and $1.3 billion as of
December 31, 2003 and 2002, respectively. In 2003,addition, any dividend
distributions in 2004 in excess of 10 percent of the statutory capital of the
Company$280.5 million would require approval of
the Department of Commerce of the State of Minnesota.
Forward-Looking Statements
Certain statements in item #7 of this Form 10-K Annual Report contain
forward-looking statements which are subject to risks and uncertainties that
could cause results to differ materially from such statements. The words
"believe," "expect," "anticipate," "optimistic," "intend," "plan," "aim,"
"will," "should," "could," "likely," and similar expressions are intended to
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements. Important factors that could cause actual
results to differ materially from the Company's forward-looking statements
include, but are not limited to: fluctuations in external markets, which can
affect the amount and types of investment products sold, the market value of its
managed assets, management and other fees received based on those assets and the
amount of amortization of DAC; potential deterioration in high-yield and other
investments, which could result in further losses in the Company's investment
portfolio; changes in assumptions relating to DAC which also could impact the
amount of DAC amortization; the ability to sell certain high-yield investments
at expected values and within anticipated timeframes and to maintain its
high-yield portfolio at certain levels in the future; the types and the value of
certain death benefit features on variable annuity contracts; the affect of
assessments and other surcharges for guaranty funds; the response of reinsurance
companies under reinsurance contracts; the impact of reinsurance rates and the
availability and adequacy of reinsurance to protect the Company against losses;
negative changes in the Company's and its subsidiaries' credit ratings;
increasing competition in all the Company's major businesses; the adoption of
recently issued rules related to the consolidation of variable interest
entities, including those involving CDOs and SLTs that the Company invests in
which could affect both the Company's balance sheet and results of operations;
and outcomes of litigation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Management's Discussion
and Analysis of financial condition and results of operations under the section
titled Risk Management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
Index to financial statements
-18-
The following consolidated financial statements of IDS Life Insurance
Company are included in Item 8:
Report of Independent Auditors 24
Consolidated Balance Sheets at December 31, 2002 and 2001 25-26
Consolidated Statements of IncomeStatutory net income (loss) for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
(Thousands) 2003 2002 2001
----------- ------------ ------------ ------------
Statutory net income (loss) $ 432,063 $ 159,794 $ (317,973)
Statutory capital and surplus 2,804,593 2,408,379 1,947,350
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised regulations took effect January 1, 2001. The
domiciliary states of IDS Life Insurance Company and its four life
insurance company subsidiaries adopted the provisions of the revised
manual, with the exception of certain provisions not adopted by its
subsidiaries organized in the state of New York. The revised manual
changed, to some extent, prescribed statutory accounting practices and
resulted in changes to the accounting practices that IDS Life uses to
prepare its statutory-basis financial statements. The impact of
implementing these changes was a decrease of $40.0 million to IDS Life's
statutory-basis capital and surplus as of January 1, 2001. Effective
January 1, 2002 IDS Life's subsidiaries organized in the state of New York
adopted additional provisions of the manual which resulted in an increase
of $5.6 million to IDS Life's statutory-basis capital and surplus as of
January 1, 2002.
F-27
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Related party transactions
IDS Life loans funds to AEFC under a collateral loan agreement. The balance
of the loan was $nil at December 31, 2003 and 2002. This loan can be
increased to a maximum of $75 million and pays interest at a rate equal to
the preceding month's effective new money rate for IDS Life's permanent
investments. Interest income on related party loans totaled $nil in 2003,
2002 and 2001.
In connection with AEFC being named the investment manager for the
proprietary mutual funds used as investment options by IDS Life's variable
annuity and variable life insurance contract owners in the fourth quarter
of 2003 and as discussed in the "Separate account business" section of Note
1 herein, AEFC receives management fees from these funds. IDS Life
continues to provide all fund management services, other than investment
management, and has entered into an administrative services agreement with
AEFC to be compensated for the services IDS Life provides. During the
fourth quarter of 2003, $14.1 million was received by IDS Life under this
arrangement.
IDS Life participates in the American Express Company Retirement Plan which
covers all permanent employees age 21 and over who have met certain
employment requirements. Company contributions to the plan are based on
participants' age, years of service and total compensation for the year.
Funding of retirement costs for this plan complies with the applicable
minimum funding requirements specified by ERISA. IDS Life's share of the
total net periodic pension cost was $0.3 million in 2003, 2002 and 2001.
IDS Life also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a percent
of either each employee's eligible compensation or basic contributions.
Costs of these plans charged to operations in 2003, 2002 and 2001 were $2.2
million, $1.4 million, and 2000 27
Consolidated Statements$0.7 million, respectively.
IDS Life participates in defined benefit health care plans of Stockholder's EquityAEFC that
provide health care and life insurance benefits to retired employees and
retired financial advisors. The plans include participant contributions and
service related eligibility requirements. Upon retirement, such employees
are considered to have been employees of AEFC. AEFC expenses these benefits
and allocates the expenses to its subsidiaries. The cost of these plans
charged to operations in 2003, 2002 and 2001 was $2.1 million, $1.8
million, and $1.0 million, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $549.2 million, $526.1 million, and
$505.5 million for 2003, 2002 and 2001, respectively. Certain of these
costs are included in DAC. Expenses allocated to IDS Life may not be
reflective of expenses that would have been incurred by IDS Life on a
stand-alone basis.
Included in other liabilities at December 31, 2003 and 2002 are $64.4
million and $55.6 million, respectively, payable to AEFC for federal income
taxes.
7. Lines of credit
IDS Life has available lines of credit with AEFC aggregating $200 million
($100 million committed and $100 million uncommitted). The interest rate
for any borrowings is established by reference to various indices plus 20
to 45 basis points, depending on the term. There were no borrowings
outstanding under these line of credit arrangements at December 31, 2003
and 2002.
F-28
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and contingencies
At December 31, 2003, 2002 and 2001, traditional life and universal
life-type insurance in force aggregated $131.1 billion, $119.2 billion, and
$108.3 billion, respectively, of which $53.8 billion, $38.0 billion, and
$26.0 billion was reinsured at the respective year ends. IDS Life also
reinsures a portion of the risks assumed under long-term care policies.
Under all reinsurance agreements, premiums ceded to reinsurers amounted to
$144.7 million, $129.3 million, and $114.5 million and reinsurance
recovered from reinsurers amounted to $60.3 million, $60.6 million, and
$43.4 million, for the years ended December 31, 2003, 2002 and 2001,
respectively. Reinsurance contracts do not relieve IDS Life from its
primary obligation to policyholders.
At December 31, 2003, IDS Life had no commitments to purchase investments
other than mortgage loan fundings (see Note 2).
The Securities and 2000 28-29
Consolidated StatementsExchange Commission (SEC), the National Association of
Cash FlowsSecurities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable account financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements and inappropriate sales. IDS
Life Insurance Company has received requests for information and has been
contacted by regulatory authorities concerning its practices and is
cooperating fully with these inquiries.
IDS Life Insurance Company and its subsidiaries are involved in a number of
other legal and arbitration proceedings concerning matters arising in
connection with the conduct of their respective business activities. IDS
Life believes it has meritorious defenses to each of these actions and
intends to defend them vigorously. IDS Life believes that it is not a party
to, nor are any of its properties the subject of, any pending legal or
arbitration proceedings that would have a material adverse effect on IDS
Life's consolidated financial condition, results of operations or
liquidity. However, it is possible that the outcome of any such proceedings
could have a material impact on results of operations in any particular
reporting period as the proceedings are resolved.
The IRS routinely examines IDS Life's federal income tax returns and is
currently conducting an audit for the 1993 through 1996 tax years.
Management does not believe there will be a material adverse effect on IDS
Life's consolidated financial position as a result of these audits.
9. Derivative financial instruments
IDS Life maintains an overall risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned
fluctuations in earnings caused by interest rate and equity market
volatility. IDS Life does not enter into derivative instruments for
speculative purposes. As prescribed by SFAS No. 133, derivative instruments
that are designated and qualify as hedging instruments are classified as
cash flow hedges, fair value hedges, or hedges of a net investment in a
foreign operation, based upon the exposure being hedged.
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. IDS Life 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. IDS Life monitors credit risk related to derivative financial
instruments through established approval procedures, including setting
F-29
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
concentration limits by counterparty, and requiring collateral, where
appropriate. A vast majority of IDS Life's counterparties are rated A or
better by Moody's and Standard & Poor's.
As prescribed by SFAS No. 133, derivative instruments that are designated
and qualify as hedging instruments are classified as cash flow hedges, fair
value hedges, or hedges of a net investment in a foreign operation, based
upon the exposure being hedged. IDS Life currently has derivatives that are
considered cash flows hedges and also has economic hedges that either do
not qualify or are not designated for hedge accounting treatment under SFAS
No. 133. For derivative instruments that are designated and qualify as a
cash flow hedge, the portion of the gain or loss on the derivative
instrument effective at offsetting changes in the hedged item is reported
as a component of other comprehensive income (loss) and reclassified into
earnings when the hedged transaction affects earnings. Any ineffective
portion of the gain or loss on the derivative instrument is recognized
currently in earnings. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized currently in earnings.
For the years ended December 31, 2003, 2002 2001 and 2000 30-31
Notes to Consolidated Financial Statements 32-51
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.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of its disclosure controls and
procedures. Based on that evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time
-19-
periods specified in Securities and Exchange Commission rules and forms. The CEO
and CFO also note that subsequent to the date of their evaluation,2001, there were no
significant changesgains or losses on derivative transactions or portions thereof
that were ineffective as hedges, excluded from the assessment of hedge
effectiveness or reclassified into earnings as a result of the
discontinuance of cash flow hedges.
Cash Flow Hedges
IDS Life uses interest rate swaptions to manage interest crediting rates
related to IDS Life's fixed annuity business. IDS Life uses interest rate
swaptions to hedge the risk of increasing interest rates. The fair values
of the interest rate swaptions are included in other assets in the
Company's internal controlsConsolidated Balance Sheets.
No amounts were reclassified out of accumulated other comprehensive income
and into earnings during 2003, 2002 or 2001, as IDS Life entered into the
interest rate swaptions in late-2003. Additionally, IDS Life does not
expect to reclassify any material amounts from accumulated other
factorscomprehensive income to earnings during the next twelve months as the hedge
period covered by the interest rate swaptions begins in 2007. The impacts
of the interest rate swaptions will be recognized in earnings at the same
time that could significantly affectIDS Life realizes the internal controls, including any corrective
actions with regardimpacts of increased interest crediting
rates. In the event that cash flow hedge accounting is no longer applied as
the derivative is de-designated as a hedge by IDS Life, the hedge is not
considered to significant deficienciesbe highly effective, or the forecasted transaction being
hedged is no longer likely to occur, the reclassification from accumulated
other comprehensive income into earnings may be accelerated and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedules.
(2) Financial Statement Schedules
See index to Financial Statements and Financial Statement Schedules.
All information on schedulesall future
market value fluctuations will be reflected in income. There were no cash
flow hedges for which hedge accounting was terminated for these reasons
during 2003, 2002 or 2001.
Currently, the longest period of time over which IDS Life is hedging
exposure to the consolidatedvariability in future cash flows is 15 years.
Derivatives Not Designated as Hedges
IDS Life enters into interest rate swaps, caps and floors to manage IDS
Life's interest rate risk and options and futures to manage equity-based
risk. The values of derivative financial statements required by Article 7instruments are based on market
values, dealer quotes or pricing models. Interest rate caps, swaps and
floors are primarily used to protect the margin between interest rates
earned on investments and the interest rates credited to related annuity
contract holders. No interest rate swaps or floors were outstanding as of
Regulation S-XDecember 31, 2003. The interest rate caps expired in January 2003. The fair
value of the interest rate caps is included in other assets. Changes in the
consolidatedvalue of the interest rate caps are included in other insurance and
operating expenses.
F-30
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A purchased (written) option conveys the right (obligation) to buy or sell
an instrument at a fixed price for a set period of time or on a specific
date. IDS Life writes and purchases index options to manage the risks
related to annuity products that pay interest based upon the relative
change in a major stock market index between the beginning and end of the
product's term (equity-indexed annuities). IDS Life views this strategy as
a prudent management of equity market sensitivity, such that earnings are
not exposed to undue risk presented by changes in equity market levels.
The equity indexed annuities contain embedded derivatives, essentially the
equity based return of the product, which must be separated from the host
contract and accounted for as derivative instruments per SFAS No. 133. As a
result of fluctuations in equity markets and the corresponding changes in
value of the embedded derivatives, the amount of interest credited incurred
by IDS Life related to the annuity product will positively or negatively
impact reported earnings.
The purchased and written options are carried at fair value and included in
other assets and other liabilities, respectively. The fair value of the
embedded options are included in future policy benefits for fixed
annuities. The changes in fair value of the options are recognized in net
investment income and the embedded derivatives are recognized in interest
credited on universal life-type insurance and investment contracts. The
purchased and written options expire on various dates through 2009.
IDS Life also purchases futures to hedge its obligations under equity
indexed annuities. The futures purchased are marked-to-market daily and
exchange traded, exposing IDS Life to no counterparty risk. The futures
contracts mature in 2003.
Index options may be used to manage the equity market risk related to the
fee income that IDS Life 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, IDS Life's fee income could be impacted significantly by
fluctuations in the equity market. There are no index options outstanding
as of December 31, 2003 related to this strategy.
F-31
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Fair values of financial statementsinstruments
IDS Life discloses fair value information for financial instruments for
which it is practicable to estimate that value. Fair values of life
insurance obligations and all non-financial instruments, such as DAC, are
excluded. Off-balance sheet intangible assets, such as the value of the
field force, are also excluded. The fair values of financial instruments
are estimates based upon market conditions and perceived risks at December
31, 2003 and 2002 and require management judgment. These figures may not be
indicative of their future fair values. Management believes the value of
excluded assets and liabilities is significant. The fair value of IDS Life,
therefore, cannot be estimated by aggregating the amounts presented.
2003 2002
--------------------------- ----------------------------
Carrying Fair Carrying Fair
(Thousands) Value Value Value Value
----------- ----------- ----------- ----------- -----------
Financial Assets
----------------
Fixed maturities $27,324,491 $27,324,491 $24,052,104 $24,052,104
Common stocks $ 120 $ 120 $ 21 $ 21
Mortgage loans on real estate $ 3,180,020 $ 3,477,868 $ 3,417,651 $ 3,815,362
Cash and cash equivalents $ 1,234,742 $ 1,234,742 $ 4,424,061 $ 4,424,061
Other investments $ 137,792 $ 141,179 $ 110,574 $ 108,813
Derivatives $ 163,237 $ 163,237 $ 24,016 $ 24,016
Separate account assets $27,774,319 $27,774,319 $21,980,674 $21,980,674
Financial Liabilities
---------------------
Future policy benefits for fixed
annuities $24,873,303 $24,113,440 $21,911,497 $21,282,750
Derivatives $ 2,563 $ 2,563 $ 9,099 $ 9,099
Separate account liabilities $24,281,415 $23,320,423 $19,391,316 $18,539,425
At December 31, 2003 and 2002, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $1.4 billion and $1.4 billion, respectively, and
policy loans of $55.8 million and $67.5 million, respectively. The fair
value of these benefits is based on the status of the annuities at December
31, 2003 and 2002. 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 2003 and 2002.
At December 31, 2003 and 2002, 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 $3.5
billion and $2.6 billion, respectively.
F-32
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report or, is not required.
Therefore, all schedules have been omitted.
(3) Exhibitswhere
indicated, were already filed and are hereby incorporated by reference.
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company
filed electronically as Exhibit 3.1 to Post-Effective Amendment No.
5 to Registration Statement No. 33-28976 is incorporated herein by
reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company filed
electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
3.3 Copy of Resolution of the Board of Directors of IDS Life Insurance
Company, dated May 5, 1989, establishing IDS Life Account MGA filed
electronically as Exhibit 3.3 to Post-Effective Amendment No. 5 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.1 Copy of Non-tax qualified Group Annuity Contract, Form 30363C, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 5 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.2 Copy of Non-tax qualified Group Annuity Certificate, Form 30360C,
filed electronically as Exhibit 4.2 to Post-Effective Amendment No.
5 to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract
filed electronically as Exhibit 4.3 to Post-Effective Amendment No.
5 to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate
filed electronically as Exhibit 4.4 to Post-Effective Amendment No.
5 to Registration Statement No. 33-28976 is incorporated herein by
reference.
-20-
4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C, filed
electronically as Exhibit 4.5 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.6 Copy of Tax qualified Group Annuity Certificate, Form 30368C, filed
electronically as Exhibit 4.6 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed
electronically as Exhibit 4.7 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed
electronically as Exhibit 4.8 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
E-1
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
EffectivePost-Effective Amendment No.
10 to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.11 Copy of Tax qualified Individual Annuity Contract, Form 30370C,
filed electronically as Exhibit 4.11 to Post-Effective Amendment No.
10 to Registration Statement No. 33-28976 is incorporated herein by
reference.
4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed
electronically as Exhibit 4.12 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
4.13 Copy of Endorsement No. 33007 filed electronically as Exhibit 4.13
to Post-Effective Amendment No. 12 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.14 Copy of Group Annuity Contract, Form 30363D, filed electronically as
Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-50968 is incorporated herein by reference.
4.15 Copy of Group Annuity Certificate, Form 30360D, filed electronically
as Exhibit 4.2 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-50968 is incorporated herein by reference.
4.16 Form of Deferred Annuity Contract, Form 30365E, filed electronically
as Exhibit 4.3 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-50968 is incorporated herein by reference.
4.17 Copy of Group Deferred Variable Annuity Contract, Form 34660, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to
Registration Statement No. 33-48701 is incorporated herein by
reference.
-21-
4.18 Copy of Non-tax qualified Group Annuity Contract, Form 33111, filed
electronically as Exhibit 4.1 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.19 Copy of Non-tax qualified Group Annuity Certificate, Form 33114,
filed electronically as Exhibit 4.2 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.20 Copy of Tax qualified Group Annuity Contract, Form 33112, filed
electronically as Exhibit 4.3 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115, filed
electronically as Exhibit 4.4 to Registration Statement No.
333-42793 is incorporated herein by reference.
4.22 Copy of Group IRA Annuity Contract, Form 33113, filed electronically
as Exhibit 4.5 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed
electronically as Exhibit 4.6 to Registration Statement No.
333-42793 is incorporated herein by reference.
E-2
4.24 Copy of Non-tax qualified Individual Annuity Contract, Form 30484,
filed electronically as Exhibit 4.7 to Post-Effective Amendment No.
1 to Registration Statement No. 333-42793 is incorporated herein by
reference.
4.25 Copy of Tax qualified Individual Annuity Contract, Form 30485, filed
electronically as Exhibit 4.8 to Post-Effective Amendment No. 1 to
Registration Statement No. 333-42793 is incorporated herein by
reference.
4.26 Copy of Individual IRA Contract, Form 30486, filed electronically as
Exhibit 4.9 to Post-Effective Amendment No. 1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
21.*10. Copy of ListGross Administrative Charge Agreement by and between
American Express Financial Corporation and IDS Life Insurance
Company, dated November 1, 2003.
*31.1Certification of Subsidiaries filed electronicallyMark E. Schwarzmann, Chief Executive Officer,
pursuant to Rule 13a-14(a) promulgated under the Securities Exchange
Act of 1934, as Exhibit
22amended.
*31.2 Certification of Arthur H. Berman, Chief Financial Officer,
pursuant to Post-Effective Amendment No. 8 to Registration
Statement No. 33-28976 is incorporated herein by reference.
27.Rule 13a-14(a) promulgated under the Securities Exchange
Act of 1934, as amended.
*32.1 Certification of Mark E. Schwarzmann, Chief Executive Officer, and
Arthur H. Berman, Chief Financial data schedule is filed electronically herewith.
Exhibits 99.1 and 99.2
CertificationOfficer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to sectionSection 906 of the
Sarbanes-Oxley Act of 2002.
Exhibits 99.3 and 99.4
Certification pursuant to 15 U.S.C. as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed in the fourth quarter of 2002.
Form 8-K, dated November 20, 2002, Item 5, reporting that the Company
has entered into an agreement with an outside party to become the
primary provider of long-term care insurance policies effective
January 1, 2003.
-22-
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
3/27/2003 By /s/ Timothy V. Bechtold
----------------------------------------
Date Timothy V. Bechtold, President
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.
3/27/2003 By /s/ Gumer C. Alvero
----------------------------------------
Date Gumer C. Alvero, Director and Executive Vice
President - Annuities
3/27/2003 By /s/ Timothy V. Bechtold
----------------------------------------
Date Timothy V. Bechtold, President
3/27/2003 By /s/ Barry J. Murphy
----------------------------------------
Date Barry J. Murphy, Director
3/27/2003 By /s/ Stephen W. Roszell,
----------------------------------------
Date Stephen W. Roszell, Director
3/27/2003 By /s/ Bridget M. Sperl
----------------------------------------
Date Bridget M. Sperl, Executive Vice President -
Client Services
3/27/2003 By /s/ John T. Sweeney
----------------------------------------
Date John T. Sweeney, Executive Vice
President - Finance
3/27/2003 By /s/ Philip C. Wentzel
----------------------------------------
Date Philip C. Wentzel, Vice President and
Controller
-23-
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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted
in the United States. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
January 27, 2003
Minneapolis, Minnesota
-24-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share amounts)
ASSETS 2002 2001
Investments:
Available-for-sale:
Fixed maturities, at fair value (amortized cost: 2002, $23,209,226; 2001,
$20,022,072) $24,052,104 $20,157,137
Common stocks, at fair value (cost: 2002,
$19; 2001, $805) 21 1,704
Mortgage loans on real estate 3,417,651 3,680,394
Policy loans 597,144 619,571
Other investments 752,558 621,897
-------------- --------------
Total investments 28,819,478 25,080,703
Cash and cash equivalents 4,424,061 1,150,251
Amounts recoverable from reinsurers 633,510 529,166
Amounts due from brokers 501 90,794
Other accounts receivable 56,245 46,349
Accrued investment income 296,595 278,199
Deferred policy acquisition costs 3,309,783 3,107,187
Deferred income taxes, net -- 156,308
Other assets 117,788 123,246
Separate account assets 21,980,674 27,333,697
------------ ------------
Total assets $59,638,635 $57,895,900
=========== ===========
See accompanying notes to consolidated financial statements.
-25-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
Liabilities:
Future policy benefits:
Fixed annuities $23,411,314 $19,592,273
Universal life-type insurance 3,515,010 3,433,904
Traditional life insurance 247,441 241,165
Disability income and long-term care insurance 1,466,171 1,227,172
Policy claims and other policyholders' funds 85,400 71,879
Amounts due to brokers 3,342,989 1,740,031
Deferred income taxes, net 182,059 --
Other liabilities 463,326 437,017
Separate account liabilities 21,980,674 27,333,697
------------- -------------
Total liabilities 54,694,384 54,077,138
------------- -------------
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 1,088,327 688,327
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 497,319 83,443
Net unrealized derivative gains (losses) 764 1,332
-------------- ----------------
Total accumulated other comprehensive income 498,083 84,775
Retained earnings 3,354,841 3,042,660
------------- -------------
Total stockholder's equity 4,944,251 3,818,762
------------- -------------
Total liabilities and stockholder's equity $59,638,635 $57,895,900
=========== ===========
See accompanying notes to consolidated financial statements.
-26-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(In thousands)
2002 2001 2000
------------ ------------- ---------
REVENUES
Premiums:
Traditional life insurance $ 67,978 $ 59,415 $ 56,187
Disability income and long-term care insurance 273,737 255,428 231,311
--------- --------- ---------
Total premiums 341,715 314,843 287,498
Net investment income 1,561,856 1,485,688 1,730,605
Policyholder and contractholder charges 522,777 489,583 438,127
Management and other fees 404,787 473,406 598,168
Net realized loss on investments (4,507) (649,752) (16,975)
---------- ---------- ----------
Total revenues 2,826,628 2,113,768 3,037,423
--------- --------- ---------
BENEFITS AND EXPENSES
Death and other benefits:
Traditional life insurance 36,881 35,519 29,042
Universal life-type insurance and investment contracts 221,544 175,247 131,467
Disability income and long-term care insurance 52,962 44,725 40,246
Increase in liabilities for future policy benefits:
Traditional life insurance 2,768 7,231 5,765
Disability income and long-term care insurance 134,605 123,227 113,239
Interest credited on universal life-type insurance and
investment contracts 1,157,636 1,137,636 1,169,641
Amortization of deferred policy acquisition costs 312,402 371,342 362,106
Other insurance and operating expenses 437,823 407,798 378,653
--------- --------- ---------
Total benefits and expenses 2,356,621 2,302,725 2,230,159
--------- --------- ---------
Income (loss) before income tax expense (benefit) and
cumulative effect of accounting change 470,007 (188,957) 807,264
Income tax expense (benefit) 87,826 (145,222) 221,627
--------- ---------- ---------
Income (loss) before cumulative effect of accounting change
382,181 (43,735) 585,637
Cumulative effect of accounting change (net of income tax
benefit of $11,532) -- (21,416) --
--------- ---------- ---------
Net income (loss) $ 382,181 $ (65,151) $ 585,637
========== =========== ==========
See accompanying notes to consolidated financial statements.
-27-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the three years ended December 31, 2002
(In thousands)
Accumulated
other
Additional comprehensive Total
Capital paid-in income (loss), Retained stockholder's
stock capital net of tax earnings equity
Balance, January 1, 2000 $3,000 $288,327 $(411,230) $2,932,174 $2,812,271
Comprehensive income:
Net income - - - 585,637 585,637
Net unrealized holding gains on
available-for-sale securities arising
during the year, net of deferred
policy acquisition costs of ($5,154)
and income tax expense of ($46,921) - - 87,138 - 87,138
Reclassification adjustment for
gains included in net income, net
of income tax expense of $5,192 - - (9,642) - (9,642)
------ ------
Other comprehensive income - - 77,496 - 77,496
------ ------
Comprehensive income - - - - 663,133
Cash dividends - - - (410,000) (410,000)
------ -------- --------- ---------- -----------
Balance, December 31, 2000 3,000 288,327 (333,734) 3,107,811 3,065,404
Comprehensive income:
Net loss - - - (65,151) (65,151)
Cumulative effect of adopting SFAS No.
133, net of income tax benefit of $626
- - (1,162) - (1,162)
Net unrealized holding losses on
available-for-sale securities
arising during the year, net of
deferred policy acquisition costs
of ($20,191) and income tax
benefit of $6,064 - - (11,262) - (11,262)
Reclassification adjustment for losses on
available-for-sale securities included
in net loss, net of income tax benefit
of $228,003 - - 423,434 - 423,434
Reclassification adjustment for losses on
derivatives included in net loss, net
of income tax benefit of $4,038
- - 7,499 - 7,499
--------- -----------
Other comprehensive income - - 418,509 - 418,509
-------- ----------
Comprehensive income - - - - 353,358
Capital contribution - 400,000 - 400,000
------ -------- --------- ----------- ----------
Balance, December 31, 2001 $3,000 $688,327 $ 84,775 $3,042,660 $3,818,762
See accompanying notes to consolidated financial statements.
-28-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(continued) For the three years ended December 31, 2002
(In thousands)
Accumulated
other
Additional comprehensive Total
Capital paid-in income (loss), Retained stockholder's
stock capital net of tax earnings equity
Balance, December 31, 2001 $3,000 $ 688,327 $ 84,775 $3,042,660 $3,818,762
Comprehensive income:
Net income - - - 382,181 382,181
Net unrealized holding gains on
available-for-sale securities arising
during the year, net of deferred
policy acquisition costs of ($75,351)
and income tax expense of ($228,502) - - 424,360 - 424,360
Reclassification adjustment for gains on
available-for-sale securities included
in net income, net of income tax
expense of $5,645 - - (10,484) - (10,484)
Reclassification adjustment for gains on
derivatives included in net income,
net of income tax expense of $305 - - (568) - (568)
-------- ----------
Other comprehensive income - - 413,308 - 413,308
-------- ----------
Comprehensive income - - - - 795,489
Cash dividends - - (70,000) (70,000)
Capital contribution - 400,000 - - 400,000
------ ---------- -------- ----------- -----------
Balance, December 31, 2002 $3,000 $1,088,327 $498,083 $3,354,841 $4,944,251
====== ========== ======== ========== ==========
See accompanying notes to consolidated financial statements.
-29-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(In thousands)
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 382,181 $ (65,151) $ 585,637
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of accounting change, net of tax -- 21,416 --
Policy loans, excluding universal life-type insurance:
Issuance (35,345) (43,687) (61,313)
Repayment 49,256 54,004 56,088
Change in amounts recoverable from reinsurers (104,344) (112,686) (89,312)
Change in other accounts receivable (9,896) (4,025) 6,254
Change in accrued investment income (5,139) 56,729 8,521
Change in deferred policy acquisition costs, net (277,947) (175,723) (291,634)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term care
insurance 245,275 223,177 206,377
Change in policy claims and other policyholder's funds 13,521 19,812 27,467
Deferred income tax provision (benefit) 116,995 (246,205) 37,704
Change in other liabilities 26,309 (24,509) (120,256)
Amortization of premium, net 65,869 108,958 37,909
Net realized loss on investments 4,507 649,752 16,975
Policyholder and contractholder charges, non-cash (232,725) (217,496) (151,745)
Other, net 13,820 (83,023) (9,279)
--------- --------- ---------
Net cash provided by operating activities $ 252,337 $ 161,343 $ 259,393
See accompanying notes to consolidated financial statements.
-30-
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
(In thousands)
2002 2001 2000
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
Purchases $ - $ - $ (4,487)
Maturities, sinking fund payments and calls - - 589,742
Sales - - 50,067
Available-for-sale securities:
Purchases (16,287,891) (9,477,740) (1,454,010)
Maturities, sinking fund payments and calls 3,078,509 2,706,147 1,019,403
Sales 10,093,228 5,493,141 1,237,116
Other investments, excluding policy loans:
Purchases (543,843) (442,876) (706,082)
Sales 509,588 370,636 435,633
Change in amounts due from brokers 90,293 (75,492) (15,157)
Change in amounts due to brokers 1,602,958 1,293,684 298,236
------------ ---------- -----------
Net cash (used in) provided by investing activities (1,457,158) (132,500) 1,450,461
------------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Activities related to universal life-type insurance and
investment contracts:
Considerations received 4,638,111 2,088,114 1,842,026
Surrenders and other benefits (1,655,631) (2,810,401) (3,974,966)
Interest credited to account balances 1,157,636 1,137,636 1,169,641
Universal life-type insurance policy loans:
Issuance (80,831) (83,720) (134,107)
Repayment 89,346 72,805 82,193
Capital contribution 400,000 400,000 -
Dividends paid (70,000) - (410,000)
------- ---------- -----------
Net cash provided by (used in) financing activities 4,478,631 804,434 (1,425,213)
------------ ---------- -----------
Net increase in cash and cash equivalents 3,273,810 833,277 284,641
Cash and cash equivalents at beginning of year 1,150,251 316,974 32,333
------------ ---------- -----------
Cash and cash equivalents at end of year $ 4,424,061 $ 1,150,251 $ 316,974
============ =========== ===========
Supplemental disclosures:
Income taxes paid $ - $ - $ 225,704
Interest on borrowings 7,906 23,688 3,299
See accompanying notes to consolidated financial statements.
-31-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 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 whose products are
primarily distributed through branded financial advisors. 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, which issues fixed and variable annuity contracts for
sale through insurance agencies and broker-dealers who may also be
associated with financial institutions, such as banks. American Centurion
Life Assurance Company is a wholly-owned subsidiary that offers fixed and
variable annuities to American Express(R) Cardmembers and others in New
York and through insurance agencies and broker-dealers who may also be
associated with financial institutions, such as banks, in New York.
American Partners Life Insurance Company is a wholly-owned subsidiary that
offers fixed and variable annuities to American Express(R) Cardmembers and
others who reside in states other than New York. The Company also
wholly-owns IDS REO 1, LLC and American Express Corporation. These
subsidiaries hold real estate, mortgage loans on real estate and/or
affordable housing investments.
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 fixed deferred annuities guarantee a relatively low annual
interest rate during the accumulation period (the time before annuity
payments begin). However, the Company has the option of paying a higher
rate set at its discretion. In addition, persons owning one type of annuity
may have their interest calculated based on any increase in a broad-based
stock market index. The Company also offers variable annuities, including
the American Express Retirement Advisor AdvantageSM Variable Annuity and
the American Express Retirement Advisor SelectSM Variable Annuity. Life
insurance products currently offered by the Company include universal life
(fixed and variable, single life and joint life), single premium life and
term products. Waiver of premium and accidental death benefit riders are
generally available with these life insurance products. The Company also
markets disability income insurance. Although the Company discontinued
marketing proprietary long-term care insurance at the end of 2002,
long-term care insurance is available through a non-proprietary product
distributed by an affiliate.
Under the Company's variable life insurance and variable annuity products
described above, the purchaser may choose among investment options that
include the Company's "general account" as well as from a variety of
portfolios including common stocks, bonds, managed assets and/or short-
term securities.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
-32-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States which vary in certain respects from reporting practices prescribed
or permitted by state insurance regulatory authorities (see Note 4).
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Revenue Recognition
Profits on fixed deferred annuities are the excess of contractholder
charges and investment income earned from investment of contract
considerations over interest credited to contract values, amortization of
deferred acquisition costs, and other expenses. Profits on variable
deferred annuities also include the excess of management and other fees
over the costs of guaranteed benefits provided. Policyholder and
contractholder charges include policy fees and surrender charges.
Management and other fees include investment management fees from
underlying proprietary mutual funds, certain fee revenues from underlying
nonproprietary mutual funds and mortality and expense risk fees from the
variable annuity separate accounts.
Profits on fixed universal life insurance are the excess of contractholder
charges and investment income earned from investment of contract
considerations over interest credited to contract values, death and other
benefits paid in excess of contract values, amortization of deferred
acquisition costs, and other expenses. Profits on variable universal life
insurance also include management and other fees. 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, certain fee
revenues from underlying nonproprietary mutual funds and mortality and
expense risk fees from the variable life insurance separate accounts.
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.
Investments - Fixed maturity and equity securities
All fixed maturity securities and 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 carried
as a separate component of accumulated other comprehensive income (loss),
net of the related deferred policy acquisition costs and income taxes.
Gains and losses are recognized in the results of operations upon
disposition of the securities using the specific identification method. In
addition, losses are also recognized when management determines that a
decline in a security's fair value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery.
-33-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
Indicators of other-than-temporary impairment for fixed maturity securities
include, but are not limited to, issuer downgrade, default, or bankruptcy.
The Company also considers the extent to which cost exceeds fair value, the
duration of time of that decline, and management's judgment about the
issuer's current and prospective financial condition. The charges are
reflected in net realized loss on investments within the Consolidated
Statements of Income.
Fair value of fixed maturity and equity securities is generally based on
quoted market prices. However, the Company's investment portfolio also
contains structured investments of various asset quality, including
collateralized debt obligations (CDOs) and secured loan trusts (backed by
high-yield bonds and bank loans), which are not readily marketable. As a
result, the carrying values of these structured investments are based on
estimated cash flow projections which require a significant degree of
management judgment as to default and recovery rates of the underlying
investments and, as such, are subject to change. The Company's CDO
investments are accounted for in accordance with Emerging Issues Task Force
(EITF) Issue 99-20 "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets". The Company's secured loan trusts are accounted for in accordance
with EITF Issue 96-12 "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes".
Net investment income, which primarily consists of interest earned on fixed
maturity securities, is generally accrued as earned using the effective
interest method, which makes an adjustment of the yield for security
premiums, discounts and anticipated prepayments on mortgage-backed
securities. Prepayment estimates are based on information received from
brokers who deal in mortgage-backed securities.
Investments - Mortgage loans on real estate
Mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses. The estimated fair value of the mortgage loans is
determined by discounted cash flow analyses using mortgage interest rates
currently offered for mortgages of similar maturities.
The reserve for losses is measured as the excess of the loan's recorded
investment over its present value of expected principal and interest
payments discounted at the loan's effective interest rate or the fair value
of collateral. Additionally, the level of the reserve for losses considers
other factors, including historical experience and current economic and
political conditions. Management regularly evaluates the adequacy of the
reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
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.
Investments - Policy loans
Policy loans are carried at the aggregate of the unpaid loan balances,
which do not exceed the cash surrender values of the related policies.
-34-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
Investment - Other investments
Included in Other investments are affordable housing investments, trading
securities, syndicated loans and real estate. Affordable housing
investments are carried at amortized cost as the Company has no influence
over the operating or financial policies of the general partner. Trading
securities are held at fair market value with changes in value recognized
in the Consolidated Statements of Income within Net investment income.
Syndicated loans reflect principal amounts outstanding less reserves for
losses and real estate is carried at its estimated fair value.
Cash and cash equivalents
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.
Deferred policy acquisition costs
The costs of acquiring new business, including for example, direct sales
commissions, related sales incentive bonuses and awards, underwriting
costs, policy issue costs and other related costs, have been deferred on
the sale of insurance and annuity contracts. The deferred acquisition costs
(DAC) for universal life and variable universal life insurance and certain
installment annuities are amortized as a percentage of the estimated gross
profits expected to be realized on the policies. DAC for other annuities
are amortized using the interest method. For traditional life, disability
income and long-term care insurance policies, the costs are amortized in
proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including
interest margins, mortality rates, persistency rates, maintenance expense
levels and customer asset value growth rates for variable products. The
customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. This rate is net of asset fees, and
anticipates a blend of equity and fixed income investments. Management
routinely monitors a wide variety of trends in the business, including
comparisons of actual and assumed experience. Management reviews and, where
appropriate, adjusts its assumptions with respect to customer asset value
growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency
rates, mortality rate, interest margin and maintenance expense level
assumptions each quarter. Unless management identifies a material deviation
over the course of the quarterly monitoring, management reviews and updates
these DAC assumptions annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change
in the required amortization percentage is applied retrospectively; an
increase in amortization percentage will result in an acceleration of DAC
amortization while a decrease in amortization percentage will result in a
deceleration of DAC amortization. The impact on results of operations of
changing assumptions with respect to the amortization of DAC can be either
positive or negative in any particular period, and is reflected in the
period that such changes are made. These adjustments are collectively
referred to as unlocking
-35-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
adjustments. Unlocking adjustments resulted in net increases in
amortization of $40,000 in 2002 and $33,600 in 2001, with a net decrease in
amortization of $12,300 in 2000.
Guaranteed Minimum Death Benefits
The majority of the variable annuity contracts offered by the Company
contain guaranteed minimum death benefit (GMDB) provisions. At time of
issue, these contracts typically guarantee that the death benefit payable
will not be less than the amount invested, regardless of the performance of
the customer's account. Most contracts also provide for some type of
periodic adjustment of the guaranteed amount based on the change in value
of the contract. A large portion of the Company's contracts containing a
GMDB provision adjust once every six years. The periodic adjustment of
these contracts can either increase or decrease the guaranteed amount,
though not below the amount invested, adjusted for withdrawals. When market
values of the customer's accounts decline, the death benefit payable on a
contract with a GMDB may exceed the accumulated contract value. Currently,
the amount paid in excess of contract value is expensed when payable.
Amounts expensed in 2002, 2001 and 2000 were $37,361, $16,202 and $835,
respectively.
Liabilities for future policy benefits
Liabilities for fixed and variable universal life insurance and fixed and
variable deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities issued before 1999 are
equal to the present value of guaranteed benefits and the intrinsic value
of index-based benefits. Liabilities for equity indexed deferred annuities
issued in 1999 or later are equal to the accumulation of host contract
values covering guaranteed benefits and the market value of embedded equity
options.
Liabilities for 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, with an average rate of approximately
6.5%.
Liabilities for future benefits on traditional life insurance, principally
term and whole 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, with modifications based on Company experience. Anticipated policy
persistency rates vary by policy form, issue age and policy duration with
persistency on level term and cash value plans generally anticipated to be
better than persistency on yearly renewable 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,
-36-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
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 5% to 8%.
Liabilities for reported and unpaid life insurance claims are equal to the
death benefits payable. For disability income and long-term care claims,
unpaid claims liabilities are equal to benefit amounts due and accrued.
Liabilities for incurred but not reported claims are estimated based on
periodic analysis of the actual reported claim lag. Where applicable,
amounts recoverable from reinsurers are separately recorded as receivables.
For life insurance, no claim adjustment expense reserve is held. The claim
adjustment expense reserves for disability income and long-term care are
based on the claim reserves.
The Company does not issue participating insurance contracts and has no
short-duration life insurance liabilities.
Reinsurance
Reinsurance premiums and benefits paid or provided are accounted for on a
basis consistent with that used in accounting for original policies issued
and with the terms of the reinsurance contracts.
The maximum amount of life insurance risk retained by the Company is $750
on any policy insuring a single life and $1,500 on any policy insuring a
joint-life combination. The Company generally retains 10% of the mortality
risk on new life insurance policies. Risk not retained is reinsured with
other life insurance companies. Risk on universal life and variable
universal life policies is reinsured on a yearly renewable term basis. Risk
on term insurance and long-term care policies is reinsured on a coinsurance
basis. The Company retains all accidental death benefit, disability income
and waiver of premium risk.
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.
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.
-37-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
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 to be payable at the initial level regardless
of investment performance so long as minimum premium payments are made.
Accounting developments
In July 2000, the Financial Accounting Standards Board's (FASB's) Emerging
Issues Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets." The Company adopted the
consensus as of January 1, 2001. Issue 99-20 prescribes procedures for
recording interest income and measuring impairment on retained and
purchased beneficial interests. The consensus primarily affects the
Company's CDO investments. Adoption of the consensus required the Company
to adjust the carrying amount of these investments downward by $21,416, net
of tax, which is reflected as a cumulative effect of accounting change in
the Consolidated Statement of Income.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended (SFAS No. 133), which requires an entity to
recognize all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. Changes in the fair
value of a derivative are recorded in earnings or directly to other
comprehensive income, depending on the instrument's designated use.
The adoption of SFAS No. 133 resulted in a cumulative after-tax reduction
to other comprehensive income of $1,162. The cumulative impact to earnings
was not significant. See Note 8 for further discussion of the Company's
derivative and hedging activities.
SFAS No. 133 also provided a one-time opportunity to reclassify
held-to-maturity security investments to available-for-sale without
tainting the remaining securities in the held-to-maturity portfolio. The
Company elected to take the opportunity in 2001 to reclass all its
held-to-maturity investments to available-for-sale.
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," which superseded
SFAS No. 125. The Statement was effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. The Statement was effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. The impact
on the Company's financial position or results of operations of adopting
the Statement was not significant.
-38-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
1. Summary of significant accounting policies (continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities (VIEs). The accounting
provisions and expanded disclosure requirements for VIEs existing at
December 31, 2002, are fully effective for reporting periods beginning
after June 15, 2003. An entity shall be subject to consolidation according
to the provisions of FIN 46, if, by design, either (i) the total equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support from other
parties, or (ii) as a group, the holders of the equity investment at risk
lack: (a) direct or indirect ability to make decisions about an entity's
activities; (b) the obligation to absorb the expected losses of the entity
if they occur; or (c) the right to receive the expected residual return of
the entity if they occur. In general, FIN 46 will require a VIE to be
consolidated when an enterprise has a variable interest that will absorb a
majority of the VIE's expected losses or receive a majority of the VIE's
expected residual return.
It is likely that the Company will consolidate or disclose information
about VIEs when FIN 46 becomes effective in the third quarter of 2003. The
entities primarily impacted by FIN 46 relate to structured investments,
including CDOs and secured loan trusts (SLTs), which are owned by the
Company. The application of FIN 46 for CDOs and SLTs will have no effect on
the cash flows of the Company. The CDO entities contain debt issued to
investors, which are non-recourse to the Company and are solely supported
by portfolios of high-yield bonds and loans. The Company often invests in
the residual and rated debt tranches of the CDO structures that are either
managed by a related party or a third-party. With regards to those CDOs in
which the Company owns a residual tranche and which a related party
manages, the portfolios of high-yield bonds and loans have a fair value at
December 31, 2002 of approximately $2.0 billion for the benefit of the $2.7
billion in CDO debt investors.
Substantially all of the Company's interest in the rated debt tranches
along with rated tranches owned by AEFC were placed in a securitization
trust described in Note 2. The SLTs provide returns to investors primarily
based on the performance of an underlying portfolio of up to $3.3 billion
in high-yield loans. Currently, the underlying portfolio consists of $2.9
billion in high-yield loans with a market value of $2.6 billion, which are
managed by a related party.
While the potential consolidation of these entities may impact the results
of operations at adoption and for each reporting period thereafter, the
Company's maximum exposure to economic loss as a result of its investment
in these entities is represented by the carrying values at December 31,
2002 because any further reduction in the value of the assets will be
absorbed by the non-recourse debt or other unrelated entities. The CDO
residual tranches have an adjusted cost basis of $13,363 and the SLTs have
an adjusted cost basis of $656,565.
The Company continues to evaluate other relationships and interests in
entities that may be considered VIEs, including affordable housing
investments. The impact of adopting FIN 46 on the Consolidated Financial
Statements is still being reviewed.
-39-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments
Fixed maturity and equity securities
The following is a summary of securities available-for-sale at December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Fixed maturities: Cost Gains Losses Value
U.S. Government agency obligations $ 84,075 $ 12,015 $ 687 $ 95,403
State and municipal obligations 29,202 2,522 - 31,724
Corporate bonds and obligations 9,614,296 611,060 116,345 10,109,011
Mortgage and other asset-backed
securities 12,145,797 393,342 10,067 12,529,072
Structured investments 1,306,245 2,112 59,101 1,249,256
Foreign government bonds and obligations 29,611 8,027 - 37,638
----------- ---------- -------- -----------
Total fixed maturity securities $23,209,226 $1,029,078 $186,200 $24,052,104
=========== ========== ======== ===========
Common stocks $ 19 $ 2 $ - $ 21
=========== ========== ======== ===========
The amortized cost and fair value of fixed maturity securities at December
31, 2002 by contractual maturity are as follows:
Amortized Fair
Cost Value
Due within one year $ 768,066 $ 779,833
Due from one to five years 2,740,513 2,887,899
Due from five to ten years 5,865,084 6,165,165
Due in more than ten years 1,689,766 1,690,135
Mortgage and other asset-backed securities 12,145,797 12,529,072
----------- -----------
Total $23,209,226 $24,052,104
=========== ===========
The timing of actual receipts may differ from contractual maturities
because issuers may have the right to call or prepay obligations.
-40-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
The following is a summary of securities available-for-sale at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Fixed maturities: Cost Gains Losses Value
U.S. Government agency obligations $ 31,074 $ 2,190 $ 56 $ 33,208
State and municipal obligations 7,826 149 - 7,975
Corporate bonds and obligations 10,281,693 272,539 113,061 10,441,171
Mortgage and other asset-backed
securities 8,292,576 103,109 32,801 8,362,884
Structured investments 1,377,195 3,793 105,304 1,275,684
Foreign government bonds and obligations
31,708 4,507 - 36,215
----------- ------- -------- -----------
Total fixed maturity securities $20,022,072 $386,287 $251,222 $20,157,137
=========== ======== ======== ===========
Common stocks $ 805 $ 899 $ - $ 1,704
=========== ======== ======== ===========
Pursuant to the adoption of SFAS No. 133 the Company reclassified all
held-to-maturity securities with a carrying value of $6,463,613 and net
unrealized gains of $8,185 to available-for-sale as of January 1, 2001.
At December 31, 2002 and 2001, bonds carried at $14,523 and $14,639,
respectively, were on deposit with various states as required by law.
At December 31, 2002, fixed maturity securities comprised approximately 84
percent of the Company's total investments. These securities are rated by
Moody's and Standard & Poor's (S&P), except for approximately $1.4 billion
of securities which are rated by AEFC's internal analysts using criteria
similar to Moody's and S&P. Ratings are presented using S&P's convention
and if the two agencies' ratings differ, the lower rating is used. A
summary of fixed maturity securities, at fair value, by rating on December
31, is as follows:
Rating 2002 2001
AAA 53% 45%
AA 1 1
A 14 15
BBB 25 34
Below investment grade 7 5
--- ---
Total 100% 100%
=== ===
At December 31, 2002, approximately 93 percent of the securities rated AAA
are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any
other issuer were greater than ten percent of stockholder's equity.
-41-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
Available-for-sale securities were sold during 2002 with proceeds of
$10,093,228 and gross realized gains and losses of $297,477 and $135,824,
respectively. Available-for-sale securities were sold during 2001 with
proceeds of $5,493,141 and gross realized gains and losses of $116,565 and
$390,732, respectively. Available-for-sale securities were sold during 2000
with proceeds of $1,237,116 and gross realized gains and losses of $25,101
and $21,147, respectively.
During the years ended December 31, 2002, 2001, and 2000, the Company also
recognized losses of $145,524, $348,730, and $38,816 respectively due to
other-than-temporary impairments on structured investments and corporate
debt securities. These amounts are reflected in the net realized loss on
investments in the Consolidated Statements of Income. The 2001 realized
losses and other-than temporary impairments include the effect of the
write-downs and sale of high-yield securities discussed below.
The net unrealized gain on available-for-sale securities as of December 31,
2002 and 2001, was $842,880 and $135,964, respectively, with the $706,916
change, net of taxes and deferred policy acquisition costs, reflected as a
separate component in accumulated other comprehensive income for the year
ended December 31, 2002. For the years ended December 31, 2001 and 2000 the
change in net unrealized losses on available-for-sale securities was a
decrease of $667,340 and $122,196, respectively.
During 2001, the Company recorded pretax losses of $828,175 to recognize
the impact of higher default rate assumptions on certain structured
investments; to write down lower rated securities (most of which were sold
during 2001) in connection with Company's decision to lower its risk
profile by reducing the level of its high-yield portfolio, allocating
holdings toward stronger credits, and reducing the concentration of
exposure to individual companies and industry sectors; to write down
certain other investments; and, to adopt EITF Issue 99-20, as previously
discussed. Within the Consolidated Statements of Income, $623,958 of these
losses are included in Net realized losses on investments and $171,269 are
included in Net investment income, with the remaining losses recorded as a
cumulative effect of accounting change.
During 2001, the Company placed a majority of its rated CDO securities and
related accrued interest, (collectively referred to as transferred assets),
having an aggregate book value of $675,347, into a securitization trust. In
return, the Company received $89,535 in cash relating to sales to
unaffiliated investors and retained interests with allocated book amounts
aggregating $585,812. As of December 31, 2002, the retained interests had a
carrying value of approximately $562,000, of which approximately $388,000
is considered investment grade. The book amount is determined by allocating
the previous carrying value of the transferred assets between assets sold
and the retained interests based on their relative fair values. Fair values
are based on the estimated present value of future cash flows. The retained
interests are accounted for in accordance with EITF Issue 99-20.
Fair values of fixed maturity and equity securities 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, estimated future cash flows and market
data from independent brokers.
-42-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
Mortgage loans on real estate
At December 31, 2002, approximately 12 percent of the Company's investments
were mortgage loans on real estate. Concentration of credit risk by region
of the United States and by type of real estate are as follows:
December 31, 2002 December 31, 2001
On Balance Funding On Balance Funding
Region Sheet Commitments Sheet Commitments
East North Central $ 611,886 $ - $ 670,387 $ 1,873
West North Central 493,310 25,500 549,015 -
South Atlantic 765,443 2,800 815,837 9,490
Middle Atlantic 318,699 19,100 352,821 9,363
New England 227,150 5,800 274,486 8,700
Pacific 355,622 5,250 355,945 14,618
West South Central 210,435 1,000 214,000 600
East South Central 63,859 - 55,798 -
Mountain 406,459 - 413,053 27
---------- ------- ---------- -------
3,452,863 59,450 3,701,342 44,671
Less reserves for losses 35,212 - 20,948 -
---------- ------- ---------- -------
Total $3,417,651 $59,450 $3,680,394 $44,671
========== ======= ========== =======
December 31, 2002 December 31, 2001
On Balance Funding On Balance Funding
Property type Sheet Commitments Sheet Commitments
Department/retail stores $ 991,984 $20,722 $1,117,195 $13,200
Apartments 622,185 - 694,214 11,531
Office buildings 1,178,434 25,628 1,203,090 7,650
Industrial buildings 344,604 13,100 333,713 2,263
Hotels/motels 102,184 - 108,019 -
Medical buildings 95,189 - 106,927 6,000
Nursing/retirement homes 35,873 - 39,590 -
Mixed use 54,512 - 86,972 27
Other 27,898 - 11,622 4,000
---------- ------- ---------- -------
3,452,863 59,450 3,701,342 44,671
Less reserves for losses 35,212 - 20,948 -
---------- ------- ---------- -------
Total $3,417,651 $59,450 $3,680,394 $44,671
========== ======= ========== =======
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 fund mortgages are made in the ordinary course of business.
The fair value of the mortgage commitments is $nil.
-43-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
2. Investments (continued)
At December 31, 2002, 2001 and 2000, the Company's investment in impaired
loans was $33,130, $39,601 and $24,999, respectively, with related reserves
of $9,100, $7,225 and $4,350, respectively.
During 2002, 2001 and 2000, the average recorded investment in impaired
loans was $36,583, $24,498 and $27,063, respectively.
The Company recognized $1,090, $1,285 and $1,033 of interest income related
to impaired loans for the years ended December 31, 2002, 2001 and 2000,
respectively.
The following table presents changes in the reserves for mortgage loan
losses:
2002 2001 2000
Balance, January 1 $20,948 $11,489 $28,283
Provision for mortgage loan losses 14,264 14,959 (14,894)
Loan payoffs - - (1,200)
Foreclosures and write-offs - (5,500) (700)
------- ------- -------
Balance, December 31 $35,212 $20,948 $11,489
======= ======= =======
Sources of investment income and realized losses on investments
Net investment income for the years ended December 31 is summarized as
follows:
2002 2001 2000
Income on fixed maturities $1,331,547 $1,276,966 $1,473,560
Income on mortgage loans 274,524 290,608 286,611
Other (15,642) (41,927) 9,834
----------- ----------- ----------
1,590,429 1,525,647 1,770,005
Less investment expenses 28,573 39,959 39,400
---------- ---------- ----------
Total $1,561,856 $1,485,688 $1,730,605
========== ========== ==========
Net realized losses on investments for the years ended December 31 is
summarized as follows:
2002 2001 2000
Fixed maturities $ 16,129 $(622,897) $(34,862)
Mortgage loans (15,586) (17,834) 16,794
Other investments (5,050) (9,021) 1,093
--------- ---------- --------
Total $ (4,507) $(649,752) $(16,975)
========= ========== =========
-44-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
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:
2002 2001 2000
Federal income taxes
Current $(30,648) $ 88,121 $176,397
Deferred 116,996 (234,673) 37,704
------- ---------- --------
86,348 (146,552) 214,101
State income taxes-current 1,478 1,330 7,526
-------- --------- --------
Income tax expense (benefit) before cumulative effect of
accounting change 87,826 (145,222) 221,627
Cumulative effect of accounting change income tax benefit
- (11,532) -
-------- ---------- --------
Income tax expense (benefit) $ 87,826 $(156,754) $221,627
======== ========== ========
Income tax expense (benefit) before the cumulative effect of accounting
change differs from that computed by using the federal statutory rate of
35%. The principal causes of the difference in each year are shown below:
2002 2001 2000
Provision Rate Provision Rate Provision Rate
Federal income taxes based
on the statutory rate $164,502 35.0% ($66,136) (35.0)% $282,542 35.0%
Tax-exempt interest and
dividend income (5,260) (1.1) (4,663) (2.5) (3,788) (0.5)
State taxes, net of federal
benefit 961 0.2 865 0.4 4,892 0.6
Affordable housing credits (70,000) (14.9) (73,200) (38.7) (54,569) (6.8)
Other, net (2,377) (0.5) (2,088) (1.1) (7,450) (0.8)
--------- -------- ---------- ------- --------- -----
Total income taxes $ 87,826 18.7% ($145,222) (76.9)% $221,627 27.5%
======== ======= ========== ======= ======== =====
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, 2002, 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.
-45-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
3. Income taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
2002 2001
Deferred income tax assets:
Policy reserves $ 683,144 $ 705,637
Other investments 319,829 333,857
Other 29,789 24,640
----------- ----------
Total deferred income tax assets 1,032,762 1,064,134
---------- ---------
Deferred income tax liabilities:
Deferred policy acquisition costs 929,751 861,892
Net unrealized gain - available-for-sale securities 267,787 45,934
Other 17,283 -
---------- ----------
Total deferred income tax liabilities 1,214,821 907,826
---------- ----------
Net deferred income tax (liability) asset $ (182,059) $ 156,308
========== ==========
The Company is required to establish a valuation allowance for any portion
of the deferred income tax assets that management believes will not be
realized. In the opinion of management, it is more likely than not that the
Company will realize the benefit of the deferred income tax assets and,
therefore, no such valuation allowance has been established.
4. Stockholder's equity
Retained earnings available for distribution as dividends to AEFC are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
The Company's statutory unassigned surplus aggregated $1,323,324 and
$1,262,335 as of December 31, 2002 and 2001, respectively (see Note 3 with
respect to the income tax effect of certain distributions). In addition,
any dividend distributions in 2003 in excess of $240,838 would require
approval of the Department of Commerce of the State of Minnesota.
Statutory net income (loss) for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
2002 2001 2000
Statutory net income (loss) $ 159,794 $ (317,973) $ 344,973
Statutory capital and surplus 2,408,379 1,947,350 1,778,306
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised regulations took effect January 1, 2001. The
domiciliary states of the Company and its insurance subsidiaries adopted
the provisions of the revised manual, with the exception of certain
provisions not adopted by its subsidiaries organized in the state of New
York. The revised manual changed, to some extent, prescribed statutory
accounting practices and resulted in changes to the accounting practices
that the Company uses to prepare its statutory-basis financial statements.
The impact of implementing these changes was a decrease of $39,997 to the
Company's statutory-basis capital and surplus as of January 1, 2001.
Effective January 1, 2002 the Company's subsidiaries organized in the state
of New York
-46-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
4. Stockholder's equity (continued)
adopted additional provisions of the manual which resulted in an increase
of $5,597 to the Company's statutory-basis capital and surplus as of
January 1, 2002.
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, 2002 and 2001. 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 in 2002,
2001 and 2000.
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. Company contributions to the plan are based on
participants' age, years of service and total compensation for the year.
Funding of retirement costs for this plan complies with the applicable
minimum funding requirements specified by ERISA. The Company's share of the
total net periodic pension cost was $294, $263 and $250 in 2002, 2001 and
2000, 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 2002, 2001 and 2000 were
$1,411, $662 and $1,707, respectively.
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 cost of these plans
charged to operations in 2002, 2001 and 2000 was $1,835, $1,011 and $1,136,
respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $526,081, $505,526 and $582,836 for
2002, 2001 and 2000, respectively. Certain of these costs are included in
DAC. Expenses allocated to the Company may not be reflective of expenses
that would have been incurred by the Company on a stand-alone basis.
Included in other liabilities at December 31, 2002 and 2001 are $55,602 and
$68,919, respectively, payable to AEFC for federal income taxes.
6. Lines of credit
The Company has available lines of credit with AEFC aggregating $200,000
($100,000 committed and $100,000 uncommitted). The interest rate for any
borrowings is established by reference to various indices plus 20 to 45
basis points, depending on the term. There were no borrowings outstanding
under this agreement at December 31, 2002 and 2001.
-47-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
7. Commitments and contingencies
At December 31, 2002, 2001 and 2000, traditional life and universal
life-type insurance in force aggregated $119,173,734, $108,255,014 and
$98,060,472 respectively, of which $38,008,734, $25,986,706 and $17,429,851
was reinsured at the respective year ends. The Company also reinsures a
portion of the risks assumed under long-term care policies. Under all
reinsurance agreements, premiums ceded to reinsurers amounted to $129,345,
$114,534 and $89,506 and reinsurance recovered from reinsurers amounted to
$60,567, $43,388, and $32,500 for the years ended December 31, 2002, 2001
and 2000, respectively. Reinsurance contracts do not relieve the Company
from its primary obligation to policyholders.
At December 31, 2002, the Company had no commitments to purchase
investments other than mortgage loan fundings (see Note 2).
The Company is a party to litigation and arbitration proceedings in the
ordinary course of its business, none of which is expected to have a
material adverse affect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, alleging improper life insurance
sales practices, alleged agent misconduct, failure to properly supervise
agents and other matters relating to life insurance policies and annuity
contracts. The Company and its affiliates were named defendants in three
purported class-action lawsuits alleging improper insurance and annuity
sales practices including improper replacement of existing annuity
contracts and insurance policies, improper use of annuities to fund tax
deferred contributory retirement plans, alleged agent misconduct, failure
to properly supervise agents and other matters relating to life insurance
policies and annuity contracts. A fourth lawsuit was filed against the
Company and its affiliates in federal court. In January 2000, AEFC reached
an agreement in principle to settle the four class action lawsuits
described above. It is expected the settlement will provide $215,000 of
benefits to more than two million participants in exchange for a release by
class members of all insurance and annuity state and federal market conduct
claims dating back to 1985. The settlement received court approval.
Implementation of the settlement commenced October 15, 2001 and is
substantially complete. Claim review payments have been made. Numerous
individuals opted out of the settlement described above and therefore did
not release their claims against AEFC and its subsidiaries. Some of these
class members who opted out were represented by counsel and presented
separate claims to AEFC and the Company. Most of their claims have been
settled.
The outcome of any litigation or threatened litigation cannot be predicted
with any certainty. However, in the aggregate, the Company does not
consider any lawsuits in which it is named as a defendant to have a
material impact on the Company's financial position or operating results.
The IRS routinely examines the Company's federal income tax returns and is
currently conducting an audit for the 1993 through 1996 tax years.
Management does not believe there will be a material adverse effect on the
Company's consolidated financial position as a result of these audits.
-48-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
8. Derivative financial instruments
The Company maintains an overall risk management strategy that incorporates
the use of derivative instruments to minimize significant unplanned
fluctuations in earnings caused by interest rate and equity market
volatility. The Company does not enter into derivative instruments for
speculative purposes. As prescribed by SFAS No. 133, derivative instruments
that are designated and qualify as hedging instruments are classified as
cash flow hedges, fair value hedges, or hedges of a net investment in a
foreign operation, based upon the exposure being hedged. The Company
currently has economic hedges that either do not qualify or are not
designated for hedge accounting treatment under SFAS No. 133.
The Company enters into interest rate swaps, caps and floors to manage the
Company's interest rate risk and options and futures to manage equity-based
risk. The values of derivative financial instruments are based on market
values, dealer quotes or pricing models.
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.
Interest rate caps, swaps and floors are primarily used to protect the
margin between interest rates earned on investments and the interest rates
credited to related annuity contract holders. No interest rate swaps or
floors were outstanding as of December 31, 2002. The interest rate caps
expire in January 2003. The fair value of the interest rate caps is
included in Other assets. Changes in the value of the interest rate caps
are included in Other insurance and operating expenses.
A purchased (written) option conveys the right (obligation) to buy or sell
an instrument at a fixed price for a set period of time or on a specific
date. The Company writes and purchases index options to manage the risks
related to annuity products that pay interest based upon the relative
change in a major stock market index between the beginning and end of the
product's term (equity-indexed annuities). The Company views this strategy
as a prudent management of equity market sensitivity, such that earnings
are not exposed to undue risk presented by changes in equity market levels.
The equity indexed annuities contain embedded derivatives, essentially the
equity based return of the product, which must be separated from the host
contract and accounted for as derivative instruments per SFAS No. 133. As a
result of fluctuations in equity markets, and the corresponding changes in
value of the embedded derivatives, the amount of interest credited incurred
by the Company related to the annuity product will positively or negatively
impact reported earnings.
-49-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
8. Derivative financial instruments (continued)
The purchased and written options are carried at fair value and included in
Other assets and Other liabilities, respectively. The fair value of the
embedded options are included in Future policy benefits for fixed
annuities. The changes in fair value of the options are recognized in Other
insurance and operating expenses and the embedded derivatives are
recognized in Interest credited on universal life-type insurance and
investment contracts. The purchased and written options expire on various
dates through 2009.
The Company also purchases futures to hedge its obligations under equity
indexed annuities. The futures purchased are marked-to-market daily and
exchange traded, exposing the Company to no counterparty risk. The futures
contracts mature in 2003.
Index options may be 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
fluctuations in the equity market. There are no index options outstanding
as of December 31, 2002 related to this strategy.
9. Fair values of financial instruments
The Company discloses fair value information for financial instruments for
which it is practicable to estimate that value. Fair values of life
insurance obligations and all non-financial instruments, such as DAC, 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.
2002 2001
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
Fixed maturities $24,052,104 $24,052,104 $20,157,137 $20,157,137
Common stocks 21 21 1,704 1,704
Mortgage loans on real estate 3,417,651 3,815,362 3,680,394 3,845,950
Cash and cash equivalents 4,424,061 4,424,061 1,150,251 1,150,251
Other investments 110,574 108,813 75,721 75,721
Derivatives 24,016 24,016 34,477 34,477
Separate account assets 21,980,674 21,980,674 27,333,697 27,333,697
Financial Liabilities
Future policy benefits for fixed annuities $21,911,497 $21,282,750 $18,139,462 $17,671,777
Derivatives 9,099 9,099 2,506 2,506
Separate account liabilities 19,391,316 18,539,425 24,280,092 23,716,854
-50-
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands)
9. Fair values of financial instruments
At December 31, 2002 and 2001, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $1,432,294 and $1,368,254, respectively, and policy
loans of $67,523 and $84,557, respectively. The fair value of these
benefits is based on the status of the annuities at December 31, 2002 and
2001. 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 2002 and 2001.
At December 31, 2002 and 2001, 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
$2,589,358 and $3,053,605, respectively.
-51-* Filed electronically herewith.
E-3