We inadvertently filed Accession Number 0000820027-00-000280 on March 30, 2000,
under the wrong CIK Number 0000926266 and the wrong File Number 811-07195.
Attached is the 10-K filed under the correct CIK Number 0001093644 and the
correct File Number 333-86297.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-86297
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
INDIANA 94-2786905
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 SOUTH EIGHTH STREET, MINNEAPOLIS, MINNESOTA 55440-0534
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not 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] THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTIONS I(1) (a) and (b) OF FORM 10-K AND IS THEREFORE FILING THIS
FORM WITH THE PERMITTED ABBREVIATED NARRATIVE DISCLOSURE.
PART I
ITEM 1. BUSINESS
American Enterprise Life Insurance Company (the Company) is a stock life
insurance company organized under the laws of the State of Indiana. The Company
is a wholly owned subsidiary of IDS Life Insurance Company (IDS Life) which is a
wholly owned subsidiary of American Express Financial Corporation (AEFC). AEFC
is a wholly owned subsidiary of American Express Company. The Company serves
residents of 48 states. The Company has assets at December 31, 1999 of $4.6
billion.
The Company's principal product is deferred annuities, which are issued
primarily to individuals, primarily through banks and financial institutions. It
offers single premium and annual premium deferred annuities on both a fixed and
variable dollar basis. Immediate annuities are offered as well.
The Company's fixed annuity contracts guarantee a minimum interest rate during
the accumulation period (the time before annuity payments begin), although the
Company has the option of paying a higher rate reflective of current market
rates. The Company has also adopted a practice whereby the higher current rate
is guaranteed for a specified period. The Company also offers fixed/variable
annuity products offering the purchaser a choice among mutual funds with
portfolios of equities, bonds, managed assets and/or short-term securities, and
the Company's general account, as the underlying investment vehicles. With
respect to funds applied to the variable portion of the annuity, the purchaser,
rather than the Company, assumes the investment risks and receives the rewards
inherent in the ownership of the underlying investment. At December 31, 1999,
the Company had $4.1 billion of fixed and variable annuities in force, a
decrease of 3 percent from the prior year end.
Assets held in separate accounts which fund the variable annuity product totaled
$221 million at December 31, 1999, a 79 percent increase from December 31, 1998.
American Enterprise Life Insurance Company is subject to comprehensive
regulation by the Indiana Department of Insurance. The laws of the other states
in which the Company does business regulate such matters as the licensing of
sales personnel and, in some cases, the marketing and contents of annuity
contracts. The purpose of such regulation and supervision is primarily to
protect the interests of policyholders. Recently there has been an increased
focus on the variable annuity business by regulators. In the United States, the
McCarran-Ferguson Act provides that the primary regulation of the insurance
industry is left to the individual states. Typically, states regulate such
matters as company licensing, agent licensing, cancellation or nonrenewal of
policies, minimum health insurance policy benefits, life insurance cost
disclosure, solicitation and replacement practices, unfair trade and claims
practices, rates, forms, advertising, investment type and quality, minimum
capital and surplus levels and changes in control. Virtually all states mandate
participation in insurance guaranty associations, which assess insurance
companies in order to fund claims of policyholders of insolvent insurance
companies. In addition to state laws, the Company is affected by a variety of
federal laws, and there is periodic federal interest in various aspects of the
insurance industry including taxation of variable annuities and life insurance
policies, solvency and accounting procedures, as well as the treatment of
persons differently because of gender, with respect to terms, conditions, rates
or benefits of an insurance contract. New federal regulation in any of these
areas could potentially have an adverse effect upon the Company.
The annuity business is highly competitive and the Company's competitors consist
of both stock and mutual insurance companies and other financial institutions.
Competitive factors applicable to the business of the Company include the
interest rates credited to its products, the charges deducted from the cash
values of such products, product features, compensation to distributors, the
financial strength of the organization and the services provided to
policyholders.
ITEM 2. PROPERTIES
The Company occupies office space in Minneapolis, Minnesota, which is leased by
AEFC. The Company reimburses AEFC for rent based on direct and indirect
allocation methods. Facilities occupied by the Company are believed to be
adequate for the purposes for which they are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company and its affiliates do business involving
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. IDS Life is a defendant in three class
action lawsuits of this nature. The Company is a named defendant in one of these
suits, Richard Thoreson and Elizabeth Thoresen vs. AEFC, American Partners Life
Insurance Company, American Enterprise Life Insurance Company, American
Centurion Life Assurance Company, IDS Life Insurance Company and IDS Life
Insurance Company of New York which was filed in Minnesota state court in
October 1998. The action was brought by individuals who purchased an annuity in
a qualified plan. The plaintiffs allege that the sale of annuities in
tax-deferred contributory retirement investment plans (e.g. IRA's) is never
appropriate. The plaintiffs purport to represent a class consisting of all
persons who made similar purchases. The plaintiffs seek damages in an
unspecified amount.
The Company is included as a party to preliminary settlement of all three class
action lawsuits. The Company believes this approach will put these cases behind
it and provide a fair outcome for its clients. The Company's decision to settle
does not include any admission of wrongdoing. The settlement did not have a
material impact on the Company's financial position or results from operations.
Further, the Company does not anticipate that any other lawsuits in which the
Company is a defendant will have a material adverse effect on its financial
condition.
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 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1999 Compared to 1998:
Net income increased 54 percent to $34 million in 1999, compared to $22 million
in 1998. Earnings growth resulted primarily net realized gains of $6.6 million
in 1999, compared to net realized losses of $4.8 in 1998.
Income before income taxes totaled $51 million in 1999, compared with $36
million in 1998.
Total investment contract deposits received decreased to $336 million in 1999,
compared with $348 million in 1998. This decrease is primarily due to a decrease
in sales of variable annuities in 1999.
Total revenues decreased to $338 million in 1999, compared with $343 million in
1998. The decrease is primarily due to decreased net investment income which was
partially offset by an increase in realized gain on investments. Net investment
income, the largest component of revenues, decreased 5 percent from the prior
year, reflecting decreases in investments owned and investment yields.
Contractholder charges decreased 5 percent to $6.1 million in 1999, compared
with $6.4 million in 1998, reflecting a decrease in fixed annuities inforce. The
Company receives mortality and expense risk fees from the separate accounts.
Mortality and expense risk fees increased 77 percent to $2.3 million in 1999,
compared with $1.3 million in 1998, this reflects the increase in separate
account assets.
Net realized gain on investments was $6.6 million in 1999, compared to a net
realized loss on investments of $4.8 million in 1998. The net realized gains
were primarily due to the sale of available for sale fixed maturity investments
at a gain as well as a decrease in the allowance for mortgage loan losses based
on management's regular evaluation of allowance adequacy.
Total benefits and expenses decreased slightly to $287 million in 1999. The
largest component of expenses, interest credited on investment contracts,
decreased to $209 million, reflecting a decrease in fixed annuities in force and
lower interest rates. Amortization of deferred policy acquisition costs
decreased to $43 million, compared to $54 million in 1998. This decrease was due
primarily to decreased aggregate amounts in force, as well as the impact of
changing prospective assumptions in 1998 based on actual lapse experience on
certain fixed annuities.
Other operating expenses increased 46 percent to $35 million in 1999, compared
to $24 million in 1998. This increase primarily reflects technology costs
related to growth initiatives.
1998 Compared to 1997:
Net income decreased 22 percent to $22 million in 1998, compared to $28 million
in 1997. The decrease in earnings resulted primarily from increases in
amortization of deferred policy acquisition costs.
Income before income taxes totaled $36 million in 1998, compared with $45
million in 1997.
Total premiums and investment contract deposits received decreased to $348
million in 1998, compared with $802 million in 1997. This decrease is primarily
due to a decrease in sales of fixed annuities in 1998, reflecting the low
interest rate environment.
Total revenues increased to $343 million in 1998, compared with $338 million in
1997. The increase is primarily due to increases in net investment income and
contractholder charges. Net investment income, the largest component of
revenues, increased 2 percent from the prior year, reflecting increases in
investments owned and investment yields.
Contractholder charges, increased 12 percent to $6.4 million in 1998, compared
with $5.7 million in 1997. The Company receives mortality and expense risk fees
from the separate accounts.
Total benefits and expenses increased 4.6 percent to $307 million in 1998,
compared with 293 million in 1997. The largest component of expenses, interest
credited on contractholders investment contracts, decreased to $229 million,
reflecting a decrease in fixed annuities in force and lower interest rates.
Amortization of deferred policy acquisition costs increased to $54 million,
compared to $37 million in 1997. This increase was due primarily to the impact
of changing prospective assumptions based on actual lapse experience on certain
fixed annuities.
Risk Management
The sensitivity analysis of the test of market risk discussed below estimates
the effects of hypothetical sudden and sustained changes in the applicable
market conditions on the ensuing year's earnings based on year-end positions.
The market changes, assumed to occur as of year-end, is a 100 basis point
increase in market interest rates. Computations of the prospective effects of
hypothetical interest rate change based on numerous assumptions, including
relative levels of market interest rates as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by management if the hypothetical market
changes actually occurred over time. As a result, actual earnings effects in the
future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a competitive
rate of return on their investments while minimizing risk, and to provide a
dependable and targeted spread between the interest rate earned on investments
and the interest rate credited to contractholders' accounts. The Company does
not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1999, would be appoximately $4.2 million.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by annuity
considerations, investment income, proceeds from sales of investments as well as
maturities and periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, and investment purchases.
The Company has an available line of credit with American Express Financial
Corporation aggregating $50 million. The line of credit is used strictly as a
short-term source of funds. No borrowings were outstanding under the agreement
at December 31, 1999. At December 31, 1999, outstanding reverse repurchase
agreements totaled $26 million.
At December 31, 1999, investments in fixed maturities comprised 81 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 32 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 1999, approximately 14 percent of the Company's investments in
fixed maturities were below investment grade bonds. These investments may be
subject to a higher degree of risk than the investment grade issues because of
the borrower's generally greater sensitivity to adverse economic conditions,
such as recession or increasing interest rates, and in certain instances, the
lack of an active secondary market. Expected returns on below investment grade
bonds reflect consideration of such factors. The Company has identified those
fixed maturities for which a decline in fair value is determined to be other
than temporary, and has written them down to fair value with a charge to
earnings.
At December 31, 1999, net unrealized depreciation on fixed maturities held to
maturity included $6.3 million of gross unrealized appreciation and $29 million
of gross unrealized depreciation. Net unrealized depreciation on fixed
maturities available for sale included $9.3 million of gross unrealized
appreciation and $117 million of gross unrealized depreciation.
At December 31, 1999, the Company had an allowance for losses for mortgage loans
totaling $6.7 million.
The economy and other factors have caused a number of insurance companies to go
under regulatory supervision. This circumstance has resulted in assessments by
state guaranty associations to cover losses to policyholders of insolvent or
rehabilitated companies. Some assessments can be partially recovered through a
reduction in future premium taxes in certain states. The Company established an
asset for guaranty association assessments paid to those states allowing a
reduction in future premium taxes over a reasonable period of time. The asset is
being amortized as premium taxes are reduced. The Company has also estimated the
potential effect of future assessments on the Company's financial position and
results of operations and has established a reserve for such potential
assessments. The Company has adopted Statement of Position 97-3 providing
guidance when an insurer should recognize a liability for guaranty fund
assessments. The SOP is effective for fiscal years beginning after December 15,
1998. Adoption did not have a material impact on the Company's results of
operations or financial condition.
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. The computation involves applying
factors to various statutory financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards provide for regulatory attention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. As of December 31, 1999, the Company's total adjusted capital was well
in excess of the levels requiring regulatory attention.
Year 2000 Issue
The Company is a wholly owned subsidiaryIDS Life, which is a wholly owned
subsidiary of American Express Financial Corporation (AEFC), which is a wholly
owned subsidiary of American Express Company (American Express). All of the
major systems used by the Company are maintained by AEFC and are utilized by
multiple subsidiaries and affiliates of AEFC. American Express coordinated the
Year 2000 (Y2K) efforts on behalf of all of its businesses and subsidiaries.
Representatives of AEFC participated in these efforts.
The Company, to date, has not experienced any material systems failures related
to the Y2K rollover. American Express' and AEFC's remediation plan for the Y2K
issue is discussed in detail in American Express' 1998 10-K report and 1999 10-Q
reports. American Express and AEFC will continue their Y2K monitoring and
address any issues that may arise from internal systems or those of third
parties. American Express' and AEFC's cumulative costs since inception of the
Y2K initiative were $505 million and $67.7 million, respectively, through
December 31, 1999, and are expected to be approximately $10 million and $0.8
million, respectively, in 2000. The majority of these costs are managed by and
included in American Express' Corporate and Other segment, as most remediation
efforts are related to systems that are maintained by the American Express
Technologies organization. Costs related to Y2K have not had a material adverse
effect on the Company's results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Mangement's Discussion and
Analysis of financial condition and results of operations under the section
titled risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
Index to financial statements
The following financial statements of American Enterprise Life
Insurance Company are included in Item 8:
Report of Independent Auditors 17
Balance Sheets at December 31, 1999 and 1998 18
Statements of Income for the years ended
December 31, 1999, 1998 and 1997 19
Statements of Stockholder's Equity for the years ended
December 31, 1999, 1998 and 1997 20
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 21
Notes to Financial Statements 22-34
All information on schedules to the financial statements required by Article 7
of Regulation S-X is included in the financial statements or is not required.
Therefore, all schedules have been omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement
Schedules on page 11.
(2) Financial Statement Schedules
See index to Financial Statements and Financial Statement
Schedules. All information on schedules to the financial
statements required by Article 7 of Regulation S-X is included in
the financial statements or is not required. Therefore, all
schedules have been omitted.
(3) Exhibits
3.1 Amendment and Restatement of Articles of Incorporation
of American Enterprise Life dated July 29, 1986, filed
electronically as Exhibit 6.1 to the Initial
Registration Statement No. 33-54471, filed on or about
July 5, 1994, is incorporated by reference.
3.2 Amended By-laws of American Enterprise Life, filed
electronically as Exhibit 6.2 to the Initial
Registration Statement No. 33-54471, filed on or about
July 5, 1994, is incorporated by reference.
3.3 Consent in writing in lieu of a meeting of the Board of
Directors of American Enterprise Life Insurance Company
establishing the American Enterprise MVA Account dated
Aug. 18, 1999, filed electronically as Exhibit 3.3 to
Initial Registration Statement No. 333-86297, filed on
or about Aug. 31, 1999, is incorporated by reference.
4.1 Form of Deferred Annuity Contract for the American
Express Signature One Variable AnnuitySM (form 240180),
filed electronically as Exhibit 4.1 to American
Enterprise Variable Annuity Account's Post-Effective
Amendment No. 1 to Registration Statement No. 333-85567
on form N-4, filed on or about Dec. 7, 1999, is
incorporated by reference.
4.2 Form of Deferred Annuity Contract for the Wells Fargo
AdvantageSM Variable Annuity (form 44209), filed
electronically as Exhibit 4.1 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No.
1 to Registration Statement No. 333-85567, filed on or
about November 4, 1999, is incorporated by reference.
4.3 Form of Deferred Annuity Contract for the Wells Fargo
AdvantageSM Credit Variable Annuity (form 44210), filed
electronically as Exhibit 4.2 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No.
1 to Registration Statement No. 333-85567, filed on or
about November 4, 1999, is incorporated by reference.
4.4 Form of Deferred Annuity Contract for the American
Enterprise Variable Annuity filed electronically as
Exhibit 4.1 to American Enterprise Variable Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-92297 on Form N-4, filed on or about Feb. 11,
2000, is incorporated by reference.
4.5 Form of Enhanced Death Benefit Rider for the Wells
Fargo AdvantageSM Variable Annuity and the Wells Fargo
AdvantageSM Credit Variable Annuity (form 44213), filed
electronically as Exhibit 4.3 to American Enterprise
Variable Annuity Account's Pre-Effective Amendment No.
1 to Registration Statement No. 333-85567 on form N-4,
filed on or about Nov. 4, 1999, is incorporated by
reference.
4.6 Form of Guaranteed Minimum Income Benefit Rider for the
American Express Signature One Variable AnnuitySM (6%
Accumulation Benefit Base) (form 240186), filed
electronically as Exhibit 4.2 to American Enterprise
Variable Annuity Account's Post-Effective Amendment No.
3 to Registration Statement No. 333-85567 on form N-4,
filed on or about Feb. 11, 2000, is incorporated by
reference.
4.7 Form of Guaranteed Minimum Income Benefit Rider for the
American Express Variable Annuity, filed electronically
as Exhibit 4.4 to American Enterprise Variable
Account's Pre-Effective Amendment No. 1 to Registration
Statement No. 333-92297 on Form N-4, filed on or about
Feb. 11, 2000, is incorporated by reference.
4.8 Form of Guaranteed Minimum Income Benefit Rider for the
Wells Fargo AdvantageSM Variable Annuity and the Wells
Fargo AdvantageSM Credit Variable Annuity (form 44214),
filed electronically as Exhibit 4.4 to American
Enterprise Variable Annuity Account's Pre-Effective
Amendment No. 1 to Registration Statement No. 333-85567
on form N-4, filed on or about Nov. 4, 1999, is
incorporated by reference.
4.9 Form of 5% Accumulation Death Benefit Rider for the
American Express Signature One Variable AnnuitySM (form
240183), filed electronically as Exhibit 4.3 to
American Enterprise Variable Annuity Account's
Post-Effective Amendment No. 1 to Registration
Statement No. 333-85567 on form N-4, filed on or about
Dec. 8, 1999, is incorporated by reference.
4.10 Form of 8% Performance Credit Rider for the American
Express Signature One Variable AnnuitySM (form 240187),
filed electronically as Exhibit 4.4 to American
Enterprise Variable Annuity Account's Post-Effective
Amendment No. 2 to Registration Statement No. 333-85567
on form N-4, filed on or about Dec. 30, 1999, is
incorporated by reference.
4.11 Form of Performance Credit Rider for the American
Express Variable Annuity, filed electronically as
Exhibit 4.2 to American Enterprise Variable Account's
Pre-Effective amendment No. 1 to Registration Statement
No. 333-92297 on Form N-4, filed on or about Feb. 11,
2000, is incorporated by reference.
4.12 Form of Roth IRA Endorsement for the Wells Fargo
AdvantageSM Variable Annuity, Wells Fargo AdvantageSM
Credit Variable Annuity, American Express Signature One
Variable AnnuitySM and American Express Variable
Annuity (form 43094), filed electronically as Exhibit
4.2 to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-74865, filed on or about Aug. 4,
1999, are incorporated by reference.
4.13 Form of SEP-IRA for the Wells Fargo AdvantageSM
Variable Annuity, Wells Fargo AdvantageSM Credit
Variable Annuity, and American Express Signature One
Variable AnnuitySM (form 43412), filed electronically
as Exhibit 4.3 to Pre-Effective Amendment No. 1 to
Registration Statement No. 333-72777, filed on or about
July 8, 1999, is incorporated by reference.
4.14 Form of SEP-IRA for American Express Variable Annuity
(form 43433) filed electronically as Exhibit 4.3 to
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-74865 filed on or about Aug. 4, 1999, is
incorporated by reference.
4.15 Form of Disability Waiver of Withdrawal Charge Rider
for the Wells Fargo AdvantageSM Variable Annuity and
the Wells Fargo AdvantageSM Credit Variable Annuity
(form 44215), filed electronically as Exhibit 4.5 to
American Enterprise Variable Annuity Account's
Pre-Effective Amendment No. 1 to Registration Statement
No. 333-85567 on form N-4, filed on or about Nov. 4,
1999, is incorporated by reference.
4.16 Form of Unemployment Waiver of Withdrawal Charges Rider
for the Wells Fargo AdvantageSM Variable Annuity and
the Wells Fargo AdvantageSM Credit Variable Annuity
(form 44216), to American Enterprise Variable Annuity
Account's Pre-Effective No. 1 Amendment to Registration
Statement No. 333-85567 on form N-4, filed on or about
Nov. 4, 1999, is incorporated by reference.
4.17 Form of TSA Endorsement for the Wells Fargo AdvantageSM
Variable Annuity and the Wells Fargo AdvantageSM Credit
Variable Annuity (form 43413), filed electronically as
Exhibit 4.4 to Pre-Effective Amendment No. 1 to
Registration Statement No. 333-72777, filed on or about
July 8, 1999, is incorporated by reference.
27. Financial data schedule is filed electronically
herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 1999
No reports on Form 8-K were required to be filed by the Company for the quarter
ended December 31, 1999.
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.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
Registrant
3/12/2000 By /s/ James E. Choat
Date James E. Choat, President
and Chief Executive Officer
3/12/2000 By /s/ Philip C. Wentzel
Date Philip C. Wentzel, Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
3/12/2000 By /s/ James E. Choat
Date James E. Choat, President
and Chief Executive Officer
3/12/2000 By /s/ Richard W. Kling
Date Richard W. Kling, Chairman of the
Board
3/12/2000 By /s/ Paula R. Meyer
Date Paula R. Meyer, Executive Vice
President, Assured Assets
3/12/2000 By /s/ William A. Stoltzmann
Date William A. Stoltzmann, Vice President
and Secretary
Report of Independent Auditors
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying balance sheets of American Enterprise Life
Insurance Company (a wholly owned subsidiary of IDS Life Insurance Company) as
of December 31, 1999 and 1998, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 financial position of American Enterprise Life
Insurance Company at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
February 3, 2000
Minneapolis, Minnesota
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31,
($ thousands, except share amounts)
ASSETS 1999 1998
- ------ ----------- -----------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1999, $984,103; 1998, $1,126,732) $1,006,349 $1,081,193
Available for sale, at fair value (amortized cost:
1999, $2,411,799; 1998, $2,526,712) 2,304,487 2,594,858
----------- -----------
3,310,836 3,676,051
Mortgage loans on real estate 785,253 815,806
Other investments 11,470 12,103
----------- -----------
Total investments 4,107,559 4,503,960
Accounts receivable 316 214
Accrued investment income 56,676 61,740
Deferred policy acquisition costs 180,288 196,479
Deferred income taxes 37,501 --
Other assets 9 43
Separate account assets 220,994 123,185
----------- -----------
Total assets $4,603,343 $4,885,621
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $3,921,513 $4,166,852
Policy claims and other policyholders' funds 12,097 7,389
Deferred income taxes -- 23,199
Amounts due to brokers 25,215 54,347
Other liabilities 17,436 24,500
Separate account liabilities 220,994 123,185
----------- -----------
Total liabilities 4,197,255 4,399,472
Stockholder's equity:
Capital stock, $100 par value per share;
100,000 shares authorized,
20,000 shares issued and outstanding 2,000 2,000
Additional paid-in capital 282,872 282,872
Accumulated other comprehensive (loss) income:
Net unrealized securities (losses) gains (69,753) 44,295
Retained earnings 190,969 156,982
----------- -----------
Total stockholder's equity 406,088 486,149
----------- -----------
Total liabilities and stockholder's equity $4,603,343 $4,885,621
========== ==========
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
1999 1998 1997
--------- --------- ---------
Revenues:
Net investment income $322,746 $340,219 $332,268
Contractholder charges 6,069 6,387 5,688
Mortality and expense risk fees 2,269 1,275 641
Net realized gain (loss) on investments 6,565 (4,788) (509)
--------- --------- ---------
Total revenues 337,649 343,093 338,088
--------- --------- ---------
Benefits and expenses:
Interest credited on investment contracts 208,583 228,533 231,437
Amortization of deferred policy acquisition costs 43,257 53,663 36,803
Other operating expenses 35,147 24,476 24,890
--------- --------- ---------
Total benefits and expenses 286,987 306,672 293,130
--------- --------- ---------
Income before income taxes 50,662 36,421 44,958
Income taxes 16,675 14,395 16,645
--------- --------- ---------
Net income $ 33,987 $ 22,026 $ 28,313
========= ========= =========
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1999
($ thousands)
Accumulated
Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
------------- -------- ------------ ------------ -------------
Balance, December 31, 1996 $363,858 $2,000 $242,872 $ 12,343 $106,643
Comprehensive income:
Net income 28,313 -- -- -- 28,313
Unrealized holding gains arising
during the year, net of taxes of
($19,891) 36,940 -- -- 36,940 --
Reclassification adjustment for losses
included in net income, net of tax
of ($126) 233 -- -- 233 --
------------- ------------
Other comprehensive income 37,173 -- -- 37,173 --
-------------
Comprehensive income 65,486
Capital contribution from IDS Life 40,000 -- 40,000 -- --
------------- -------- ------------ ------------ -------------
Balance, December 31, 1997 469,344 2,000 282,872 49,516 134,956
Comprehensive income:
Net income 22,026 -- -- -- 22,026
Unrealized holding losses arising
during the year, net of taxes of $3,400 (6,314) -- -- (6,314) --
Reclassification adjustment for losses
included in net income, net of tax
of ($588) 1,093 -- -- 1,093 --
------------- ------------
Other comprehensive loss (5,221) -- -- (5,221) --
-------------
Comprehensive income 16,805
------------- -------- ------------ ------------ -------------
Balance, December 31, 1998 486,149 2,000 282,872 44,295 156,982
Comprehensive loss:
Net income 33,987 -- -- -- 33,987
Unrealized holding losses arising
during the year, net of taxes of $(59,231) (110,001) -- -- (110,001) --
Reclassification adjustment for gains
included in net income, net of tax (4,047) (4,047) --
of $(2,179) ------------- ------------
Other comprehensive loss (114,048) -- -- (114,048) --
-------------
Comprehensive loss (80,061)
------------- -------- ------------ ------------ -------------
Balance, December 31, 1999 $406,088 $2,000 $282,872 $(69,753) $190,969
============= ======== ============ ============ =============
See accompanying notes.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 33,987 $ 22,026 $ 28,313
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income 5,064 (2,152) (8,017)
Change in accounts receivable (102) 349 9,304
Change in deferred policy acquisition costs, net 16,191 28,022 (21,276)
Change in other assets 34 74 4,840
Change in policy claims and other policyholders' funds 4,708 (3,939) (16,099)
Deferred income tax (benefit) provision 711 (9,591) (2,485)
Change in other liabilities (7,064) 7,595 1,255
Amortization of premium (accretion of discount), net 2,315 122 (2,316)
Net realized (gain) loss on investments (6,565) 4,788 509
Other, net (1,562) 2,544 959
----------- ----------- -----------
Net cash provided by (used in) operating activities 47,717 49,838 (5,013)
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases -- -- (1,996)
Maturities 65,705 73,601 41,221
Sales 8,466 31,117 30,601
Fixed maturities available for sale:
Purchases (593,888) (298,885) (688,050)
Maturities 248,317 335,357 231,419
Sales 469,126 48,492 73,366
Other investments:
Purchases (28,520) (161,252) (199,593)
Sales 57,548 78,681 29,139
Change in amounts due to brokers (29,132) 19,412 (53,796)
----------- ----------- ------------
Net cash provided by (used in) investing activities 197,622 126,523 (537,689)
Cash flows from financing activities:
Activity related to investment contracts:
Considerations received 299,899 302,158 783,339
Surrenders and other benefits (753,821) (707,052) (552,903)
Interest credited to account balances 208,583 228,533 231,437
Capital contribution from parent -- -- 40,000
----------- ----------- -----------
Net cash (used in) provided by financing activities (245,339) (176,361) 501,873
----------- ----------- -----------
Net decrease in cash and cash equivalents -- -- (40,829)
Cash and cash equivalents at beginning of year -- -- 40,829
----------- ----------- -----------
Cash and cash equivalents at end of year $ -- $ -- $ --
=========== =========== ==========
See accompanying notes.
1. Summary of significant accounting policies
Nature of business
American Enterprise Life Insurance Company (the Company) is a stock life
insurance company that is domiciled in Indiana and is licensed to transact
insurance business in 48 states. The Company's principal product is
deferred annuities, which are issued primarily to individuals. It offers
single premium and annual premium deferred annuities on both a fixed and
variable dollar basis.
Immediate annuities are offered as well.
Basis of presentation
The Company is a wholly-owned subsidiary of IDS Life Insurance Company (IDS
Life), which is a wholly owned subsidiary of American Express Financial
Corporation (AEFC). AEFC is a wholly owned subsidiary of American Express
Company. The accompanying 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 the Indiana Department of Insurance (see Note 4).
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.
Investments
Fixed maturities that the Company has both the positive intent and the
ability to hold to maturity are classified as held to maturity and carried
at amortized cost. All other fixed maturities are classified as available
for sale and carried at fair value. Unrealized gains and losses on
securities classified as available for sale are reported as a separate
component of accumulated other comprehensive (loss) income, net of deferred
income taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
Mortgage loans on real estate are carried at amortized cost less an
allowance for mortgage loan losses. The estimated fair value of the
mortgage loans is determined by a discounted cash flow analysis using
mortgage interest rates currently offered for mortgages of similar
maturities.
1. Summary of significant accounting policies (continued)
Impairment of mortgage loans 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. The amount of the impairment is recorded in an
allowance for mortgage loan losses. The allowance for mortgage loan losses
is maintained at a level that management believes is adequate to absorb
estimated losses in the portfolio. The level of the allowance account is
determined based on several factors, including historical experience,
expected future principal and interest payments, estimated collateral
values, and current and anticipated economic and political conditions.
Management regularly evaluates the adequacy of the allowance for mortgage
loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment income
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized
cost of interest rate caps and floors is included in other investments.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost which approximates
fair value.
Supplementary information to the statements of cash flows for the years
ended December 31, is summarized as follows:
1999 1998 1997
---- ----- ----
Cash paid during the year for:
Income taxes $22,007 $19,035 $19,456
Interest on borrowings 2,187 5,437 1,832
Contractholder charges
Contractholder charges include surrender charges and fees collected
regarding the issue and administration of annuity contracts.
1. Summary of significant accounting policies (continued)
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, and certain sales expenses, have been deferred on annuity
contracts. These costs are amortized using primarily the interest method.
Amortization of deferred policy acquisition costs requires the use of
assumptions including interest margins, mortality margins, persistency
rates, maintenance expense levels and, for variable products, separate
account performance. For universal life-type insurance and deferred
annuities, actual experience is reflected in the Company's amortization
models monthly. As actual experience differs from the current assumptions,
management considers the need to change key assumptions underlying the
amortization models prospectively. The impact of changing prospective
assumptions is reflected in the period that such changes are made and is
generally referred to as an unlocking adjustment. During 1998, unlocking
adjustments resulted in a net increase in amortization of $11 million. Net
unlocking adjustments in 1999 and 1997 were not significant.
Liabilities for future policy benefits
Liabilities for universal-life type insurance and fixed and variable
deferred annuities are accumulation values.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company provides for income
taxes on a separate return basis, except that, under an agreement between
AEFC and American Express Company, tax benefit is recognized for losses to
the extent they can be used on the consolidated tax return. It is the
policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries
for all tax benefits.
Included in other liabilities at December 31, 1999 and 1998 are $2,147 and
$3,504, respectively, payable to IDS Life for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity contract owners. The Company
receives mortality and expense risk fees from the variable annuity separate
accounts.
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.
Accounting changes
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" became effective January 1, 1999. The SOP
requires the capitalization of certain costs incurred after the date of
adoption to develop or obtain software for internal use. Software utilized
by the Company is owned by AEFC and capitalized by AEFC. As a result, the
new rule did not have a material impact on the Company's results of
operations or financial condition.
Effective January 1, 1999, the Company adopted AICPA SOP 97-3, "Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments,"
providing guidance for the timing of recognition of liabilities related to
guaranty fund assessments. The Company had historically carried balance in
other liabilities on the balance sheet for potential guaranty fund
assessment exposure. Adoption of the SOP did not have a material impact on
the Company's results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2001.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. The ultimate financial effect
of the new rule will be measured based on the derivatives in place at
adoption and cannot be estimated at this time.
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers
and financial files.
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1999 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---------- -------- -------- ----------
U.S. Government agency obligations $ 7,514 $ 23 $ 431 $ 7,106
State and municipal obligations 3,002 44 -- 3,046
Corporate bonds and obligations 816,826 5,966 23,311 799,482
Mortgage-backed securities 179,007 296 4,834 174,469
---------- -------- -------- ----------
$1,006,349 $ 6,329 $ 28,576 $ 984,103
========== ======== ======== ==========
Available for sale
U.S. Government agency obligations $ 2,047 $ -- $ 47 $ 1,999
State and municipal obligations 2,250 -- 190 2,060
Corporate bonds and obligations 1,419,150 7,445 90,703 1,335,892
Mortgage-backed securities 988,352 1,929 25,746 964,536
------------ -------- -------- ----------
$2,411,799 $ 9,374 $116,686 $2,304,487
========== ======== ======== ==========
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---------- -------- -------- ----------
U.S. Government agency obligations $ 8,652 $ 423 $ -- $ 9,075
State and municipal obligations 3,003 149 -- 3,152
Corporate bonds and obligations 877,140 48,822 6,670 919,292
Mortgage-backed securities 192,398 2,844 29 195,213
---------- -------- -------- ----------
$1,081,193 $ 52,238 $ 6,699 $1,126,732
========== ======== ======== ==========
Available for sale
U.S. Government agency obligations $ 2,062 $ 116 $ -- $ 2,178
Corporate bonds and obligations 1,472,814 69,990 34,103 1,508,701
Mortgage-backed securities 1,051,836 32,232 89 1,083,979
---------- -------- -------- ----------
$2,526,712 $102,338 $34,192 $2,594,858
========== ======== ======= ==========
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Held to maturity Cost Value
Due in one year or less $ 26,214 $ 26,334
Due from one to five years 412,533 408,638
Due from five to ten years 331,187 320,146
Due in more than ten years 57,408 54,516
Mortgage-backed securities 179,007 174,469
------------- -------------
$ 1,006,349 $ 984,103
=========== ============
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 46,937 $ 47,236
Due from one to five years 75,233 73,525
Due from five to ten years 1,037,001 980,633
Due in more than ten years 264,276 238,557
Mortgage-backed securities 988,352 964,536
------------ ------------
$2,411,799 $2,304,487
During the years ended December 31, 1999, 1998 and 1997, fixed maturities
classified as held to maturity were sold with amortized cost of $8,466,
$31,117 and $29,561, respectively. Net gains and losses on these sales were
not significant. The sales of these fixed maturities were due to
significant deterioration in the issuers' creditworthiness.
In addition, fixed maturities available for sale were sold during 1999 with
proceeds of $469,126 and gross realized gains and losses of $10,374 and
$4,147 respectively. Fixed maturities available for sale were sold during
1998 with proceeds of $48,492 and gross realized gains and losses of $2,835
and $4,516, respectively. Fixed maturities available for sale were sold
during 1997 with proceeds of $73,366 and gross realized gains and losses of
$1,081 and $1,440, respectively.
At December 31, 1999, bonds carried at $3,277 were on deposit with various
states as required by law.
2. Investments (continued)
At December 31, 1999, investments in fixed maturities comprised 81 percent
of the Company's total invested assets. These securities are rated by
Moody's and Standard & Poor's (S&P), except for securities carried at
approximately $486 million which are rated by AEFC internal analysts using
criteria similar to Moody's and S&P. A summary of investments in fixed
maturities, at amortized cost, by rating on December 31 is as follows:
Rating 1999 1998
---------------------- ----------- -----------
Aaa/AAA $1,168,144 $1,242,301
Aa/AA 42,859 45,526
Aa/A 52,416 60,019
A/A 422,668 422,725
A/BBB 189,072 228,656
Baa/BBB 995,152 1,030,874
Baa/BB 64,137 79,687
Below investment grade 483,700 498,117
------------ ------------
$3,418,148 $3,607,905
At December 31, 1999, approximately 94 percent of the securities rated
Aaa/AAA were GNMA, FNMA and FHLMC mortgage-backed securities. No holdings
of any other issuer were greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1999, approximately 19 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
December 31, 1999 December 31, 1998
------------------------------- --------------------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
---------------------------------- ----------- ----------- ---------- -----------
South Atlantic $194,325 $ -- $198,552 $ 651
Middle Atlantic 118,699 -- 129,284 520
East North Central 126,243 -- 134,165 2,211
Mountain 103,751 -- 113,581 --
West North Central 125,891 513 119,380 9,626
New England 43,345 802 46,103 --
Pacific 41,396 -- 43,706 --
West South Central 31,153 -- 32,086 --
East South Central 7,100 -- 7,449 --
----------- ------------ ----------- ------------
791,903 1,315 824,306 13,008
Less allowance for losses 6,650 -- 8,500 --
----------- ------------ ----------- ------------
$785,253 $ 1,315 $815,806 $13,008
======== ======== ======== =======
2. Investments (continued)
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
---------- -------------- ---------- ------------
Department/retail stores $232,449 $ 1,315 $253,380 $ 781
Apartments 181,346 -- 186,030 2,211
Office buildings 202,132 -- 206,285 9,496
Industrial buildings 83,186 -- 82,857 520
Hotels/Motels 43,839 -- 45,552 --
Medical buildings 32,284 -- 33,103 --
Nursing/retirement homes 6,608 -- 6,731 --
Mixed Use 10,059 -- 10,368 --
---------- -------------- ---------- ------------
791,903 1,315 824,306 13,008
Less allowance for losses 6,650 -- 8,500 --
----------- -------------- ----------- ------------
$785,253 $ 1,315 $815,806 $13,008
======== ========== ======== =======
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. The Company holds the mortgage
document, which gives it the right to take possession of the property if
the borrower fails to perform according to the terms of the agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1999, the Company's recorded investment in impaired loans
was $5,200 with an allowance of $1,250. At December 31, 1998, the Company's
recorded investment in impaired loans was $1,932 with an allowance of $500.
During 1999 and 1998, the average recorded investment in impaired loans was
$5,399 and $2,736, respectively.
The Company recognized $136, $251 and $nil of interest income related to
impaired loans for the years ended December 31, 1999, 1998 and 1997,
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
1999 1998 1997
---- ---- ----
Balance, January 1 $8,500 $3,718 $2,370
Provision (reduction) for investment losses (1,850) 4,782 1,805
Loan payoffs -- -- (457)
------ --------- -------
Balance, December 31 $6,650 $8,500 $3,718
====== ====== ======
Net investment income for the years ended December 31 is summarized as
follows:
1999 1998 1997
----- ----- ----
Interest on fixed maturities $265,199 $285,260 $278,736
Interest on mortgage loans 63,721 65,351 55,085
Interest on cash equivalents 534 137 704
Other (1,755) (2,493) 1,544
---------- ---------- ----------
327,699 348,255 336,069
Less investment expenses 4,953 8,036 3,801
--------- ---------- ----------
$322,746 $340,219 $332,268
======== ======== ========
2. Investments (continued)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
1999 1998 1997
---- ---- ----
Fixed maturities $ 6,534 $ 863 $ 1,638
Mortgage loans (1,650) (4,816) (1,348)
Other investments (1,819) (835) (799)
--------- -------- -------
$ 3,065 $(4,788) $ (509)
========= ======= =======
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
1999 1998 1997
----- ----- ----
Fixed maturities available for sale $(175,458) $(8,032) $57,188
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:
1999 1998 1997
---- ---- ----
Federal income taxes:
Current $ 15,531 $ 23,227 $17,668
Deferred 711 (9,591) (2,485)
-------- -------- -------
16,242 13,636 15,183
State income taxes-current 433 759 1,462
-------- -------- -------
Income tax expense $ 16,675 $ 14,395 $16,645
======== ======== =======
Increases (decreases) to the federal income tax provision applicable to
pretax income based on the statutory rate, for the years ended December 31,
are attributable to:
1999 1998 1997
------------------ ------------------ ---------------------
Provision Rate Provision Rate Provision Rate
--------- ----- --------- ----- --------- -----
Federal income taxes based
on the statutory rate $17,731 35.0% $13,972 35.0% $15,735 35.0%
Increases (decreases) are
attributable to:
Tax-excluded interest (14) -- (35) (0.1) (41) (0.1)
State tax, net of federal benefit 281 0.5 493 1.2 956 2.1
Reduction of mortgage loss
reserve (1,225) (2.4) -- -- -- --
Other, net (98) (0.2) (35) -- (5) --
------ ----- -------- ------ ---- ------
Total income taxes $16,675 32.9 % $14,395 36.1% $16,645 37.0%
======= ===== ======= ==== ======= ====
3. Income taxes (continued)
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
Deferred income tax assets: 1999 1998
------- -------
Policy reserves $46,243 $51,298
Unrealized losses on investments 39,678 --
Other 1,070 2,214
-------- --------
Total deferred income tax assets 86,991 53,512
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs 49,490 52,908
Unrealized gains on investments -- 23,803
-------- --------
Total deferred income tax liabilities 49,490 76,711
-------- --------
Net deferred income tax assets (liabilities) $37,501 ($23,199)
======= ========
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 IDS Life are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $58,223 and $45,716 as of December
31, 1999 and 1998, respectively. In addition, dividends in excess of
$15,241 would require approval by the Insurance Department of the state of
Indiana.
Statutory net income and stockholder's equity as of December 31, are
summarized as follows:
1999 1998 1997
--------- --------- -------
Statutory net income $ 15,241 $ 37,902 $ 23,589
Statutory stockholder's equity 343,094 330,588 302,264
5. Related party transactions
The Company has purchased interest rate floors from IDS Life and entered
into an interest rate swap with IDS Life to manage its exposure to interest
rate risk. The interest rate floors had a carrying amount of $8,258 and
$6,651 at December 31, 1999 and 1998, respectively. The interest rate swap
is an off balance sheet transaction.
The Company has no employees. Charges by IDS Life for services and use of
other joint facilities aggregated $38,931, $28,482 and $24,535 for the
years ended December 31, 1999, 1998 and 1997, respectively. Certain of
these costs are included in deferred policy acquisition costs.
6. Lines of credit
The Company has an available line of credit with AEFC aggregating $50,000.
The rate for the line of credit 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, 1999 or 1998.
7. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk, including hedging
specific transactions. The Company does not hold derivative instruments for
trading purposes. The Company manages risks associated with these
instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate. The Company is
not impacted by market risk related to derivatives held for non-trading
purposes beyond that inherent in cash market transactions. Derivatives are
largely used to manage risk and, therefore, the cash flow and income
effects of the derivatives are inverse to the effects of the underlying
transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of the Company's
counterparties are rated A or better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors is measured by
replacement cost of the contracts. The replacement cost represents the fair
value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over
the life of the agreement. Notional amounts are not recorded on the balance
sheet. Notional amounts far exceed the related credit exposure.
The Company's holdings of derivative financial instruments are as follows:
Notional Carrying Fair Total Credit
December 31, 1999 Amount Amount Value Exposure
----------------- -------- -------- ------ ------------
Assets:
Interest rate caps $ 900,000 $ 3,212 $ 4,437 $ 4,437
Interest rate floors 2,000,000 8,258 2,251 2,251
Off balance sheet assets:
Interest rate swaps 2,000,000 -- 18,274 18,274
--------- -------- --------
$11,470 $24,962 $24,962
======= ======= =======
7. Derivative financial instruments (continued)
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
----------------- -------- -------- ------ ------------
Assets:
Interest rate caps $ 900,000 $ 5,452 $ 1,518 $ 1,518
Interest rate floors 1,000,000 6,651 17,798 17,798
Off balance sheet liabilities:
Interest rate swaps 1,000,000 -- (33,500) --
--------- ---------- --------
$12,103 ($ 14,184) $19,316
======= =========== =======
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. All interest rate caps, floors and
swaps will expire on various dates from 2000 to 2006.
Interest rate caps, floors and swaps are used to manage the Company's
exposure to interest rate risk. These instruments are used primarily to
protect the margin between interest rates earned on investments and the
interest rates credited to related annuity contract holders.
8. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair value of life insurance obligations, receivables and all
non-financial instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets 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.
December 31,
1999 1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
---------------- ---------- --------- ---------- ----------
Investments:
Fixed maturities (Note 2):
Held to maturity $1,006,349 $984,103 $1,081,193 $1,126,732
Available for sale 2,304,487 2,304,487 2,594,858 2,594,858
Mortgage loans on real estate (Note 2) 785,253 770,095 815,806 874,064
Derivative financial instruments (Note 7) 11,470 24,962 12,103 19,316
Separate account assets (Note 1) 220,994 220,994 123,185 123,185
Financial Liabilities
Future policy benefits for fixed annuities $3,905,849 $3,778,945 $4,152,059 $4,000,789
Separate account liabilities 220,994 209,942 123,185 115,879
Derivative financial instruments (Note 7) -- -- -- 33,500
At December 31, 1999 and 1998, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $15,633 and $14,793, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 1999
and 1998.
8. Fair values of financial instruments (continued)
The fair values of deferred annuities and separate account liabilities are
estimated as the carrying amount less applicable surrender charges. 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 1999 and 1998.
9. Commitments and contingencies
In January 2000, AEFC reached an agreement in principle to settle three
class-action lawsuits. The Company had been named as a co-defendant in one
of these lawsuits. It is expected the settlement will provide $215 million
of benefits to more than 2 million participants. The agreement in principle
to settle also provides for release by class members of all insurance and
annuity market conduct claims dating back to 1985 and is subject to a
number of contingencies including a definitive agreement and court
approval. The portion of the settlement allocated to the Company did not
have a material impact on the Company's financial position or results from
operations.