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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0823832
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IDS TOWER 10, MINNEAPOLIS, MINNESOTA 55440-0534 (Address of
principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (612) 671-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not 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
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. The Company is the fourteenth largest
life insurance company in the United States, with consolidated assets at
December 31, 2000 of $60.4 billion. IDS Life Insurance Company of New York and
American Centurion Life Assurance Company are wholly owned subsidiaries of the
Company and serve New York State residents. The Company also wholly owns
American Enterprise Life Insurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's insurance products
include universal life (fixed and variable), whole life, single premium life and
term products (including waiver of premium and accidental death benefits). The
Company also markets disability income and long-term care insurance.
The Company's fixed annuity contracts guarantee a minimum interest rate
during the accumulation period (the time before annuity payments begin),
although the Company has the option of paying a higher rate reflective of
current market rates. The Company has also adopted a practice whereby the higher
current rate is guaranteed for a specified period. The Company also offers
fixed/variable annuity products offering the purchaser a choice among mutual
funds with portfolios of equities, bonds, managed assets and/or short-term
securities, and the Company's general account, as the underlying investment
vehicles. With respect to funds applied to the variable portion of the annuity,
the purchaser, rather than the Company, assumes the investment risks and
receives the rewards inherent in the ownership of the underlying investments. At
December 31, 2000, the Company had $48.2 billion of fixed and variable annuities
in force, a decrease of 8 percent from the prior year end.
The Company's principal insurance product is the flexible-premium,
adjustable-benefit universal life insurance policy. In this type of insurance
policy, premium payments either accumulate interest in a fixed account or
purchase units in one or more variable accounts. The policyholder has access to
the cash surrender value in whole or in part after the first year. The size of
the cash value of the fund can also be controlled by the policyholder by
increasing or decreasing premiums, subject only to maintaining a required
minimum to keep the policy in force. Monthly deductions from the cash value of
the policy are made for the cost of insurance, expense charges and any policy
riders. At December 31, 2000, the Company had $79.1 billion of fixed and
variable universal life-type insurance in force, up 11 percent from December 31,
1999.
Assets held in separate accounts which fund the variable annuity and
variable life insurance products totaled $32.3 billion at December 31, 2000, a
10 percent decrease from December 31, 1999.
IDS Life Insurance Company, American Enterprise Life Insurance Company and
American Partners Life Insurance Company are subject to comprehensive regulation
by the Minnesota Department of Commerce (Insurance Division), the Indiana
Department of Insurance and the Arizona Department of Insurance, respectively.
IDS Life Insurance Company of New York and American Centurion Life Assurance
Company are both subject to comprehensive regulation by the New York Department
of Insurance. The laws of the other states in which the Company does business
regulate such matters as the licensing of sales personnel and, in some cases,
the marketing and contents of insurance policies and annuity contracts. The
purpose of such regulation and supervision is primarily to protect the interests
of policyholders. Recently there has been an increased focus on the variable
annuity business by regulators. In the United States, the McCarran-Ferguson Act
provides that the primary regulation of the insurance industry is left to the
individual states. Typically, states regulate such matters as company licensing,
agent licensing, cancellation or nonrenewal of policies, minimum health
insurance policy benefits, life insurance cost disclosure, solicitation and
replacement practices, unfair trade and claims practices, rates, forms,
advertising, investment type and quality, minimum capital and surplus levels and
changes in control. Virtually all states mandate participation in insurance
guaranty associations, which assess insurance companies in order to fund claims
of policyholders of insolvent insurance companies. In addition to state laws,
the Company is affected by a variety of federal laws, and there is periodic
federal interest in various aspects of the insurance industry including taxation
of variable annuities and life insurance policies, solvency and accounting
procedures, as well as the treatment of persons differently because of gender,
with respect to terms, conditions, rates or benefits of an insurance contract.
New federal regulation in any of these areas could potentially have an adverse
effect upon the Company.
As a distributor of variable contracts, the Company is registered as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. As the investment manager for various investment companies, the Company is
registered as an investment advisor under applicable federal requirements.
The insurance and annuity business is highly competitive and the Company's
competitors consist of both stock and mutual insurance companies and other
financial institutions. Competitive factors applicable to the business of the
Company include the interest rates credited to its products, the charges
deducted from the cash values of such products, the financial strength of the
organization and the services provided to policyholders.
ITEM 2. PROPERTIES
The Company occupies office space in Minneapolis, Minnesota, which is
leased by its parent, AEFC. The Company reimburses AEFC for rent based on direct
and indirect allocation methods. IDS Life Insurance Company of New York and
American Centurion Life Assurance Company rent office space in Albany, New York.
Facilities occupied by the Company and its subsidiaries are believed to be
adequate for the purposes for which they are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life and AEFC do business involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. IDS Life and AEFC, like other life and health insurers, from time
to time are involved in such litigation. On December 13, 1996, an action
entitled Lesa Benacquisto and Daniel Benacquisto v. IDS Life Insurance Company
and American Express Financial Corporation was commenced in Minnesota state
court. The action is brought by individuals who replaced an existing IDS Life
insurance policy with a new IDS Life policy. The plaintiffs purport to represent
a class consisting of all persons who replaced existing IDS Life policies with
new IDS Life policies from and after January 1, 1985.
The complaint puts at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged violations
of consumer fraud statutes. Plaintiffs seek damages in an unspecified amount and
also seek to establish a claims resolution facility for the determination of
individual issues. IDS Life and AEFC filed an answer to the complaint on
February 18, 1997, denying the allegations. A second action, entitled Arnold
Mork, Isabella Mork, Ronald Melchert and Susan Melchert v. IDS Life Insurance
Company and American Express Financial Corporation was commenced in the same
court on March 21, 1997. In addition to claims that are included in the
Benacquisto lawsuit, the second action includes an allegation of improper
replacement of an existing IDS Life annuity contract. It seeks similar relief to
the initial lawsuit.
On October 13, 1998, an action entitled Richard W. and Elizabeth J.
Thoresen v. American Express Financial Corporation, American Centurion Life
Assurance Company, American Enterprise Life Insurance Company, American Partners
Life Insurance Company, IDS Life Insurance Company and IDS Life Insurance
Company of New York was also commenced in Minnesota state court. The action was
brought by individuals who purchased an annuity in a qualified plan. They allege
that the sale of annuities in tax-deferred contributory retirement investment
plans (e.g., IRAs) 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, including restitution of allegedly lost
investment earnings and restoration of contract values.
In January 2000, AEFC reached an agreement in principle to settle the three
class-action lawsuits described above. It is expected the settlement will
provide $215 million of benefits to more than two million participants and for
release by class members of all insurance and annuity market conduct claims
dating back to 1985.
In August, 2000 an action entitled Lesa Benacquisto, Daniel Benacquisto,
Richard Thoresen, Elizabeth Thoresen, Arnold Mork, Isabella Mork, Ronald
Melchert and Susan Melchert v. American Express Financial Corporation, American
Express Financial Advisors, American Centurion Life Assurance Company, American
Enterprise Life Insurance Company, American Partners Life Insurance Company, IDS
Life Insurance Company and IDS Life Insurance Company of New York was commenced
in the United States District Court for the District of Minnesota. The complaint
put at issue various alleged sales practices and misrepresentations and
allegations of violations of federal laws.
In September, 2000 the plaintiffs filed a consolidated complaint in State
Court alleging the same claims as the previous actions.
On October 2, 2000 the District Court, Fourth Judicial District for the
State of Minnesota, County of Hennepin and the United States District Court for
the District of Minnesota entered an order conditionally certifying a class for
settlement purposes, preliminarily approving the class settlement, directing the
issuance of a class notice to the class and scheduling a hearing to determine
the fairness of settlement for March, 2001.
On March 6, 2001 the District Court, Fourth Judicial District for the State
of Minnesota, County of Hennepin and the United States District Court for the
District of Minnesota heard oral arguments on plaintiffs' motions for final
approval of the class action settlement. Six motions to intervene were filed
together with objections to the proposed settlement. We are awaiting a final
order from the court.
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
2000 Compared to 1999:
Consolidated net income decreased 8 percent to $586 million in 2000,
compared to $636 million in 1999. The decrease resulted primarily from a
decrease in net investment income. This reflects decreases in investments owned
and decreased investment yields during 2000.
Consolidated income before income taxes totaled $807 million in 2000,
compared with $904 million in 1999.
Total premiums and investment contract deposits received increased to $6.9
billion in 2000, compared with $5.0 billion in 1999. This increase is primarily
due to an increase in variable annuity deposits in 2000.
Total revenues decreased to $3.0 billion in 2000, compared with $3.1
billion in 1999. Decreases in net investment income and net realized gains
(losses) on investments were partially offset by increases in insurance
premiums, policy and contractholder charges and management and other fees. Net
investment income, the largest component of revenues, decreased by $189 million
from the prior year, reflecting decreases in investments owned and investment
yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 6 percent to $438
million in 2000, compared with $412 million in 1999. This increase reflects
increased total life insurance in force, which grew 10 percent to $98 billion at
December 31, 2000.
Net realized loss on investments was $17 million in 2000, compared to a net
realized gain of $27 million in 1999. The loss was primarily due to the loss on
sales and writedowns of fixed maturity investments.
Management and other fees increased 26 percent to $598 million in 2000,
compared with $473 million in 1999. This is primarily due to an increase in
separate account fees, which grew 25 percent to $543 million at December 31,
2000, due to market appreciation and sales. The Company provides investment
management services for mutual funds used as investment options for variable
annuities and variable life insurance. The Company also receives a mortality and
expense risk fee from the separate accounts.
Total benefits and expenses increased slightly to $2.2 billion in 2000. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased slightly to
$1.2 billion, reflecting a decrease in fixed annuities in force. Amortization of
deferred policy acquisition costs increased to $404 million, compared to $333
million in 1999. This increase was due primarily to the impact of changing
prospective separate account investment performance assumptions.
Other insurance and operating expenses increased slightly to $337 million
in 2000, compared to $335 million in 1999.
1999 Compared to 1998:
Consolidated net income increased 18 percent to $636 million in 1999,
compared to $540 million in 1998. Earnings growth resulted primarily from
increases in management fees and policyholder and contractholder charges. These
increases reflect higher average insurance and annuities in force during 1999.
Consolidated income before income taxes totaled $904 million in 1999,
compared with $776 million in 1998.
Total premiums and investment contract deposits received increased to $5.0
billion in 1999, compared with $4.4 billion in 1998. This increase is primarily
due to an increase in variable annuity deposits in 1999.
Total revenues increased to $3.1 billion in 1999, compared with $3.0
billion in 1998. The increase is primarily due to increased policyholder and
contractholder charges and management fees. Net investment income, the largest
component of revenues, decreased slightly from the prior year, reflecting
decreases in investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 7 percent to $412
million in 1999, compared with $384 million in 1998. This increase reflects
increased total life insurance in force, which grew 10 percent to $89 billion at
December 31, 1999.
Net realized gain on investments increased to $27 million in 1999, compared
to $7 million in 1998. The increase was 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.
Management and other fees increased 18 percent to $473 million in 1999,
compared with $401 million in 1998. This is primarily due to an increase in
separate account assets, which grew 31 percent to $35.9 billion at December 31,
1999, due to market appreciation and sales. The Company provides investment
management services for mutual funds used as investment options for variable
annuities and variable life insurance. The Company also receives a mortality and
expense risk fee from the separate accounts.
Total benefits and expenses decreased slightly to $2.2 billion in 1999. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased to $1.2
billion, reflecting a decrease in fixed annuities in force. Amortization of
deferred policy acquisition costs decreased to $333 million, compared to $383
million in 1998. This decrease was due primarily to the impact of changing
prospective separate account investment performance assumptions.
Other insurance and operating expenses increased 17 percent to $335 million
in 1999, compared to $287 million in 1998. This increase is primarily a result
of business growth and technology costs related to growth initiatives.
Risk Management
The sensitivity analysis of two different tests of market risk discussed
below estimates the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, are a 100 basis
point increase in market interest rates and a 10% decline in equity prices.
Computations of the prospective effects of hypothetical interest rate and equity
price changes are based on numerous assumptions, including relative levels of
market interest rates and equity prices, as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by management if the hypothetical market
changes actually occurred over time. As a result, actual earnings effects in the
future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range
of maturities for the purpose of providing fixed annuity clients with a
competitive rate of return on their investments while minimizing risk, and to
provide a dependable and targeted spread between the interest rate earned on
investments and the interest rate credited to contractholders' accounts. The
Company does not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled
meetings and, when necessary, special meetings. At these meetings, the committee
reviews models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The 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,
2000, would be approximately $17 million.
On a certain annuity product, the interest is credited to contractholders'
accounts based upon the relative change in a major stock market index between
the beginning and end of the product's term. As a means of hedging the Company's
obligation under the provisions of this product, the committee's strategy is to
purchase and write options on the major stock market index.
The amount of the fee income the Company receives is based upon the daily
market value of the separate account assets. As a result, the Company's fee
income would be negatively impacted by a decline in the equity markets. Another
part of the committee's strategy is to enter into index option collars
(combination of puts and calls) for hedging purposes. These derivatives protect
fee income by providing option income when there is a significant decline in the
equity markets. The Company finances the cost of this protection through selling
a portion of the upside potential from an increasing market through written
options.
The negative effect on the Company's pretax earnings of the 10% decline in
equity prices would be approximately $45 million based on assets under
management as of December 31, 2000.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by
premiums, investment income, proceeds from sales of investments as well as
maturities and periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has available lines of credit with its parent aggregating $200
million ($100 million committed and $100 million uncommitted). The line of
credit is used strictly as a short-term source of funds. Borrowings outstanding
were $50,000 uncommitted at December 31, 2000. At December 31, 2000, outstanding
reverse repurchase agreements totaled $30 million.
At December 31, 2000, investments in fixed maturities comprised 79 percent
of the Company's total invested assets. Of the fixed maturity portfolio,
approximately 30 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 2000, approximately 15 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. In recent months, the industry-wide default rate on
below-investment-grade bonds has increased significantly and this trend is
expected to continue over the next several months and possibly beyond.*
Additional investment security losses throughout the remainder of 2000 are
likely but the amount of these losses is dependent on a number of factors and
cannot be estimated at this time.* Management believes that there will not be a
significant adverse impact on the Company's consolidated financial position.*
* Statements in this discussion of the Company's liquidity and capital
resources marked with an asterisk are forward-looking statements which are
subject to risks and uncertainties. Important factors that could cause results
to differ materially from these forward-looking statements include, among other
things, changes in the ability of issuers of investment securities held by the
Company to meet their debt obligations.
At December 31, 2000, net unrealized depreciation on fixed maturities held
to maturity included $124 million of gross unrealized appreciation and $116
million of gross unrealized depreciation. Net unrealized depreciation on fixed
maturities available for sale included $188 million of gross unrealized
appreciation and $719 million of gross unrealized depreciation.
At December 31, 2000, the Company had an allowance for losses for mortgage
loans totaling $11 million and for real estate investments totaling $nil.
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.
In 2000, dividends paid to its parent were $410 million.
The National Association of Insurance Commissioners has established
risk-based capital standards to determine the capital requirements of a life
insurance company based upon the risks inherent in its operations. These
standards require the computation of a risk-based capital amount which is then
compared to a company's actual total adjusted capital. The computation involves
applying factors to various statutory financial data to address four primary
risks: asset default, adverse insurance experience, interest rate risk and
external events. These standards provide for regulatory attention when the
percentage of total adjusted capital to authorized control level risk-based
capital is below certain levels. As of December 31, 2000, the Company's total
adjusted capital was well in excess of the levels requiring regulatory
attention.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the Mangement's
Discussion and Analysis of financial condition and results of operations under
the section titled risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements and Schedules Required under Regulation S-X.
Index to financial statements
The following consolidated financial statements of IDS Life Insurance Company
are included in Item 8:
Report of Independent Auditors 18
Consolidated Balance Sheets at December 31, 2000 and 1999 19-20
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998 21
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2000, 1999 and 1998 22-23
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 24-25
Notes to Consolidated Financial Statements 26-43
All information on schedules to the consolidated financial statements
required by Article 7 of Regulation S-X is included in the consolidated
financial statements or is not required. Therefore, all schedules have been
omitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement Schedules on page 11.
(2) Financial Statement Schedules
See index to Financial Statements and Financial Statement Schedules. All
information on schedules to the consolidated financial statements required by
Article 7 of Regulation S-X is included in the consolidated financial statements
or is not required. Therefore, all schedules have been omitted.
(3) Exhibits
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company
filed electronically as Exhibit 3.1 to Post-Effective Amendment No. 5 to
Registration Statement No. 33-28976 is incorporated herein by reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company filed
electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
3.3 Copy of Resolution of the Board of Directors of IDS Life Insurance
Company, dated May 5, 1989, establishing IDS Life Account MGA filed
electronically as Exhibit 3.3 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.1 Copy of Non-tax qualified Group Annuity Contract, Form 30363C, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.2 Copy of Non-tax qualified Group Annuity Certificate, Form 30360C, filed
electronically as Exhibit 4.2 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract filed
electronically as Exhibit 4.3 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate filed
electronically as Exhibit 4.4 to Post-Effective Amendment No. 5 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C, filed
electronically as Exhibit 4.5 to Post-Effective Amendment No. 10 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.6 Copy of Tax qualified Group Annuity Certificate, Form 30368C, filed
electronically as Exhibit 4.6 to Post-Effective Amendment No. 10 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed electronically
as Exhibit 4.7 to Post-Effective Amendment No. 10 to Registration Statement No.
33-28976 is incorporated herein by reference.
4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed
electronically as Exhibit 4.8 to Post-Effective Amendment No. 10 to Registration
Statement No. 33-28976 is incorporated herein by reference.
4.9 Copy of Non-tax qualified Individual Annuity Contract, Form 30365D,
filed electronically as Exhibit 4.9 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by reference.
4.10 Copy of Endorsement No. 30379 to the Individual Annuity Contract,
filed electronically as Exhibit 4.10 to Post Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by reference.
4.11 Copy of Tax qualified Individual Annuity Contract, Form 30370C, filed
electronically as Exhibit 4.11 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by reference.
4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed
electronically as Exhibit 4.12 to Post-Effective Amendment No. 10 to
Registration Statement No. 33-28976 is incorporated herein by reference.
4.13 Copy of Endorsement No. 33007 filed electronically as Exhibit 4.13 to
Post-Effective Amendment No. 12 to Registration Statement No. 33-28976 is
incorporated herein by reference.
4.14 Copy of Group Annuity Contract, Form 30363D, filed electronically as
Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No.
33-50968 is incorporated herein by reference.
4.15 Copy of Group Annuity Certificate, Form 30360D, filed electronically
as Exhibit 4.2 to Post-Effective Amendment No. 2 to Registration Statement No.
33-50968 is incorporated herein by reference.
4.16 Form of Deferred Annuity Contract, Form 30365E, filed electronically
as Exhibit 4.3 to Post-Effective Amendment No. 2 to Registration Statement No.
33-50968 is incorporated herein by reference.
4.17 Copy of Group Deferred Variable Annuity Contract, Form 34660, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-48701 is incorporated herein by reference.
4.18 Copy of Non-tax qualified Group Annuity Contract, Form 33111, filed
electronically as Exhibit 4.1 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.19 Copy of Non-tax qualified Group Annuity Certificate, Form 33114, filed
electronically as Exhibit 4.2 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.20 Copy of Tax qualified Group Annuity Contract, Form 33112, filed
electronically as Exhibit 4.3 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115, filed
electronically as Exhibit 4.4 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.22 Copy of Group IRA Annuity Contract, Form 33113, filed electronically
as Exhibit 4.5 to Registration Statement No. 333-42793 is incorporated herein by
reference.
4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed
electronically as Exhibit 4.6 to Registration Statement No. 333-42793 is
incorporated herein by reference.
4.24 Copy of Non-tax qualified Individual Annuity Contract, Form 30484,
filed electronically as Exhibit 4.7 to Post-Effective Amendment No. 1 to
Registration Statement No. 333-42793 is incorporated herein by reference.
4.25 Copy of Tax qualified Individual Annuity Contract, Form 30485, filed
electronically as Exhibit 4.8 to Post-Effective Amendment No. 1 to Registration
Statement No. 333-42793 is incorporated herein by reference.
4.26 Copy of Individual IRA Contract, Form 30486, filed electronically as
Exhibit 4.9 to Post-Effective Amendment No. 1 to Registration Statement No.
333-42793 is incorporated herein by reference.
21. Copy of List of Subsidiaries filed electronically as Exhibit 21 to
Post-Effective Amendment No. 7 to Registration Statement No. 33-28976 is herein
incorporated by reference.
27. Financial data schedule is filed electronically herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 2000
No reports on Form 8-K were required to be filed by the Company for the
quarter ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IDS LIFE INSURANCE COMPANY
Registrant
3/12/2001 By /s/Richard W. Kling
Date Richard W. Kling, President
and Chief Executive Officer
3/12/2001 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.
3/12/2001 By /s/Stuart A. Sedlacek
Date Stuart A. Sedlacek, Executive Vice President
3/12/2001 By /s/Richard W. Kling
Date Richard W. Kling, President
and Chief Executive Officer
3/12/2001 By /s/Paul F. Kolkman
Date Paul F. Kolkman, Executive Vice
President
3/12/2001 By /s/Pamela J. Moret
Date Pamela J. Moret, Chairman of the
Board
3/12/2001 By /s/Paula R. Meyer
Date Paula R. Meyer, Executive Vice
President, Assured Assets
3/12/2001 By /s/Barry J. Murphy
Date Barry J. Murphy, Executive Vice
President, Client Service
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly-owned subsidiary of American Express Financial
Corporation) as of December 31, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young
February 8, 2001
Minneapolis, Minnesota
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
December 31,
($ thousands)
ASSETS 2000 1999
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
2000, $6,471,798; 1999, $7,105,743) $ 6,463,613 $ 7,156,292
Available for sale, at fair value (amortized cost:
2000, $12,929,870; 1999, $13,703,137) 12,399,990 13,049,549
18,863,603 20,205,841
Mortgage loans on real estate 3,738,091 3,606,377
Policy loans 618,973 561,834
Other investments 635,880 506,797
Total investments 23,856,547 24,880,849
Cash and cash equivalents 316,974 32,333
Amounts recoverable from reinsurers 416,480 327,168
Amounts due from brokers 15,302 145
Other accounts receivable 42,324 48,578
Accrued investment income 334,928 343,449
Deferred policy acquisition costs 2,951,655 2,665,175
Deferred income taxes, net 136,588 216,020
Other assets 25,919 33,089
Separate account assets 32,349,347 35,894,732
Total assets $60,446,064 $64,441,538
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
December 31,
($ thousands, except share amounts)
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
Liabilities:
Future policy benefits:
Fixed annuities $19,417,446 $20,552,159
Universal life-type insurance 3,410,871 3,391,203
Traditional life insurance 232,913 226,842
Disability income and long-term care insurance 1,012,247 811,941
Policy claims and other policyholders' funds 52,067 24,600
Amounts due to brokers 446,347 148,112
Other liabilities 459,422 579,678
Separate account liabilities 32,349,347 35,894,732
Total liabilities 57,380,660 61,629,267
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 288,327 288,327
Accumulated other comprehensive loss, net of tax:
Net unrealized securities losses (333,734) (411,230)
Retained earnings 3,107,811 2,932,174
Total stockholder's equity 3,065,404 2,812,271
Total liabilities and stockholder's equity $60,446,064 $64,441,538
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
2000 1999 1998
Revenues:
Premiums:
Traditional life insurance $ 56,187 $ 53,790 $ 53,132
Disability income and long-term care insurance 231,311 201,637 176,298
Total premiums 287,498 255,427 229,430
Policyholder and contractholder charges 438,127 411,994 383,965
Management and other fees 598,168 473,108 401,057
Net investment income 1,730,605 1,919,573 1,986,485
Net realized (loss) gain on investments (16,975) 26,608 6,902
Total revenues 3,037,423 3,086,710 3,007,839
Benefits and expenses:
Death and other benefits:
Traditional life insurance 29,042 29,819 29,835
Universal life-type insurance
and investment contracts 131,467 118,561 108,349
Disability income and long-term care insurance 40,246 30,622 27,414
Increase in liabilities for future policy benefits:
Traditional life insurance 5,765 7,311 6,052
Disability income and long-term care insurance 113,239 87,620 73,305
Interest credited on universal life-type
insurance and investment contracts 1,169,641 1,240,575 1,317,124
Amortization of deferred policy
acquisition costs 403,968 332,705 382,642
Other insurance and operating expenses 336,791 335,180 287,326
Total benefits and expenses 2,230,159 2,182,393 2,232,047
Income before income taxes 807,264 904,317 775,792
Income taxes 221,627 267,864 235,681
Net income $ 585,637 $ 636,453 $ 540,111
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 2000
($ thousands)
Accumulated Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, January 1, 1998 $2,865,816 $3,000 $290,847 $226,359 $2,345,610
Comprehensive income:
Net income 540,111 -- -- -- 540,111
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $6,333 and taxes of $32,826 (60,964) -- -- (60,964) --
Reclassification adjustment for losses
included in net income, net of tax
of 4,189 -- -- 4,189
($2,254) --
-----------------
Other comprehensive loss (56,775) -- -- (56,775) --
----------------- -----------------
Comprehensive income 483,336 -- -- -- --
Other changes (2,520) -- (2,520) -- --
Cash dividends to parent (240,000) -- -- -- (240,000)
----------------------------------------------------------------------------
Balance, December 31, 1998 3,106,632 3,000 288,327 169,584 2,645,721
Comprehensive income:
Net income 636,453 -- -- -- 636,453
Unrealized holding losses arising during
the year, net of deferred policy acquisition
costs of $28,444 and taxes of $304,936 (566,311) -- -- (566,311) --
Reclassification adjustment for gains
included in net income, net of tax
of $7,810 (14,503) -- -- (14,503) --
----------------- --------------------
Other comprehensive loss (580,814) -- -- (580,814) --
-----------------
Comprehensive income 55,639 -- -- -- --
Cash dividends to parent (350,000) -- -- -- (350,000)
----------------------------------------------------------------------------
Balance, December 31, $2,812,271 $3,000 $288,327 $(411,230) $2,932,174
1999
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued)
Three years ended December 31, 2000
($ thousands)
Accumulated
Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, December 31, 1999 $2,812,271 $3,000 $288,327 $(411,230) $2,932,174
Comprehensive income:
Net income 585,637 -- -- -- 585,637
Unrealized holding gains arising during
the year, net of deferred policy acquisition
costs of $(5,154) and taxes of $(46,921) 87,138 -- -- 87,138 --
Reclassification adjustment for gains
included in net income, net of tax
of $5,192 (9,642) -- -- (9,642) --
-----------------
----------------- -------------------
Other comprehensive income 77,496 -- -- 77,496 --
-----------------
Comprehensive income 663,133 -- -- -- --
Cash dividends to parent (410,000) -- -- -- (410,000)
-----------------------------------------------------------------------------
Balance, December 31, 2000 $3,065,404 $3,000 $288,327 $(333,734) $3,107,811
=============================================================================
=============================================================================
See accompanying notes.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
2000 1999 1998
Cash flows from operating activities:
Net income $ 585,637 $ 636,453 $ 540,111
Adjustments to reconcile net income to net cash
provided by operating activities:
Policy loans, excluding universal
life-type insurance:
Issuance (61,313) (56,153) (53,883)
Repayment 56,088 54,105 57,902
Change in amounts recoverable from reinsurers (89,312) (64,908) (56,544)
Change in other accounts receivable 6,254 (615) (10,068)
Change in accrued investment income 8,521 23,125 (9,184)
Change in deferred policy acquisition costs, net (291,634) (140,379) (10,443)
Change in liabilities for future policy benefits for
traditional life, disability income and long-term
care insurance 206,377 153,157 138,826
Change in policy claims and other
policyholders' funds 27,467 (45,709) 1,964
Deferred income tax provision (benefit) 37,704 79,796 (19,122)
Change in other liabilities (120,256) 169,395 64,902
Amortization of premium,
(accretion of discount), net 37,909 (17,907) 9,170
Net realized loss (gain) on investments 16,975 (26,608) (6,902)
Policyholder and contractholder charges, non-cash (151,745) (175,059) (172,396)
Other, net (9,279) (5,324) 10,786
Net cash provided by operating
activities $ 259,393 $ 583,369 $ 485,119
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended December 31,
($ thousands)
2000 1999 1998
Cash flows from investing activities: Fixed maturities held to maturity:
Purchases $ (4,487) $ (3,030) $ (1,020)
Maturities, sinking fund payments and calls 589,742 741,949 1,162,731
Sales 50,067 66,547 236,963
Fixed maturities available for sale:
Purchases (1,454,010) (3,433,128) (4,100,238)
Maturities, sinking fund payments and calls 1,019,403 1,442,507 2,967,311
Sales 1,237,116 1,691,389 278,955
Other investments, excluding policy loans:
Purchases (706,082) (657,383) (555,647)
Sales 435,633 406,684 579,038
Change in amounts due from brokers (15,157) 182 8,073
Change in amounts due to brokers 298,236 (47,294) (186,052)
Net cash provided by investing activities 1,450,461 208,423 390,114
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 1,842,026 2,031,630 1,873,624
Surrenders and other benefits (3,974,966) (3,669,759) (3,792,612)
Interest credited to account balances 1,169,641 1,240,575 1,317,124
Universal life-type insurance policy loans:
Issuance (134,107) (102,239) (97,602)
Repayment 82,193 67,881 67,000
Dividends paid (410,000) (350,000) (240,000)
Net cash used in financing activities (1,425,213) (781,912) (872,466)
Net increase in cash and cash equivalents 284,641 9,880 2,767
Cash and cash equivalents at beginning of year 32,333 22,453 19,686
Cash and cash equivalents at end of year $ 316,974 $ 32,333 $ 22,453
See accompanying notes
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a
wholly-owned subsidiary of American Express Financial Corporation (AEFC), which
is a wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New York
is a wholly owned subsidiary of the Company and serves New York State residents.
The Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's insurance products
include universal life (fixed and variable), whole life, single premium life and
term products (including waiver of premium and accidental death benefits). The
Company also markets disability income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All 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
which vary in certain respects from reporting practices prescribed or permitted
by state insurance regulatory authorities (see Note 4).
The preparation of financial statements in conformity with 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 and all marketable equity securities
are classified as available for sale and carried at fair value. Unrealized gains
and losses on securities classified as available for sale are reported as a
separate component of accumulated other comprehensive income (loss), net of the
related deferred policy acquisition costs effect and deferred taxes.
The retrospective interest method is used for income recognition on
investments in structured notes and residual beneficial interests in securitized
financial assets.
Realized investment gain or loss is determined on an identified cost basis.
1. Summary of significant accounting policies (continued)
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.
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.
Mortgage loans on real estate are carried at amortized cost less reserves
for mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of a loan's recorded
investment over its present value of expected principal and interest payments
discounted at the loan's effective interest rate, or the fair value of
collateral. The amount of the impairment is recorded in a reserve for mortgage
loan losses. The reserve for mortgage loan losses is maintained at a level that
management believes is adequate to absorb estimated losses in the portfolio. The
level of the reserve account is determined based on several factors, including
historical experience, expected future principal and interest payments,
estimated collateral values, and current economic and political conditions.
Management regularly evaluates the adequacy of the reserve for mortgage loan
losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on management's
judgment as to the ultimate collectibility of principal, interest payments
received are either recognized as income or applied to the recorded investment
in the loan.
The cost of interest rate caps and floors is amortized to investment income
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized cost
of interest rate caps and floors is included in other investments. Amounts paid
or received under interest rate swap agreements are recognized as an adjustment
to investment income.
The Company may purchase and write index options to hedge the fee income
earned on the management of equity securities in separate accounts and the
underlying mutual funds. These index options are carried at market value and are
included in other investments or other liabilities, as appropriate. Gains or
losses on index options that qualify as hedges are deferred and recognized in
management and other fees in the same period as the hedged fee income.
The Company also uses index options to manage the risks related to a
certain annuity product that pays interest based upon the relative change in a
major stock market index between the beginning and end of the product's term.
Purchased options used in conjunction with this product are reported in other
investments and written options are included in other liabilities. The
amortization of the cost of purchased options, the proceeds of written options
and the changes in intrinsic value of the contracts are included in net
investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which
do not exceed the cash surrender values of the related policies.
1. Summary of significant accounting policies (continued)
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost, which approximates fair value.
Supplementary information to the consolidated statements of cash flows for
the years ended December 31 is summarized as follows:
2000 1999 1998
Cash paid during the year for:
Income taxes $225,704 $214,940 $215,003
Interest on borrowings 3,299 4,521 14,529
Recognition of profits on annuity contracts and insurance policies
Profits on fixed and variable deferred annuities are recognized by the
Company over the lives of the contracts, using primarily the interest method.
Profits on fixed annuities represent the excess of investment income earned from
investment of contract considerations over interest credited to contract owners
and other expenses. Profits on variable annuities represent the excess of
contractholder charges over the costs of benefits provided and other expenses.
The retrospective deposit method is used in accounting for fixed and
variable universal life-type insurance. Under this method, profits are
recognized over the lives of the policies in proportion to the estimated gross
profits expected to be realized.
Premiums on traditional life, disability income and long-term care
insurance policies are recognized as revenue when due, and related benefits and
expenses are associated with premium revenue in a manner that results in
recognition of profits over the lives of the insurance policies. This
association is accomplished by means of the provision for future policy benefits
and the deferral and subsequent amortization of policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of
insurance charges, issue and administrative fees and surrender charges. These
charges also include the minimum death benefit guarantee fees received from the
variable life insurance separate accounts. Management and other fees include
investment management fees from underlying proprietary mutual funds and
mortality and expense risk fees received from the variable annuity and variable
life insurance separate accounts.
1. Summary of significant accounting policies (continued)
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most single
premium deferred annuities and installment annuities are amortized using
primarily the interest method. The costs for universal life-type insurance and
certain installment annuities are amortized as a percentage of the estimated
gross profits expected to be realized on the policies. For traditional life,
disability income and long-term care insurance policies, the costs are amortized
over an appropriate period in proportion to premium revenue.
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
2000 and 1999, unlocking adjustments resulted in a net decrease in amortization
of $12,300 and $56,800, respectively. Net unlocking adjustments in 1998 were not
significant.
Liabilities for future policy benefits
Liabilities for universal-life type insurance and fixed and variable
deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities are determined as 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% to
9.5%, depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on
the net level premium method, using anticipated mortality, policy persistency
and interest earning rates. Anticipated mortality rates are based on established
industry mortality tables. Anticipated policy persistency rates vary by policy
form, issue age and policy duration with persistency on cash value plans
generally anticipated to be better than persistency on term insurance plans.
Anticipated interest rates range from 4% to 10%, depending on policy form, issue
year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
1. Summary of significant accounting policies (continued)
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%.
Reinsurance
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 retains only 20% of the mortality risk on
new variable universal life insurance policies. Risk not retained is reinsured
with other life insurance companies, primarily on a yearly renewable term basis.
Long-term care policies are primarily 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.
Included in other liabilities at December 31, 2000 and 1999 are $41,059 and
$852 receivable from, respectively, AEFC for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners. The Company receives investment management fees from the proprietary
mutual funds used as investment options for variable annuities and variable life
insurance. The Company receives mortality and expense risk fees from the
separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
1. Summary of significant accounting policies (continued)
Accounting changes
In June 1998, the Financial Accounting Standards Board (FASB) issued, and
subsequently amended, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," which the
company adopted on January 1, 2001. This Statement establishes accounting and
reporting standards for derivative instruments, including some embedded in other
contracts, and hedging activities. It requires that an entity 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 will
be recorded in income or directly to equity, depending on the instrument's
designated use.
A one-time opportunity to reclassify held-to-maturity investments to
available-for-sale is allowed without tainting the remaining securities in the
held-to-maturity portfolio. The Company has elected to take this opportunity to
reclass its held-to-maturity investments to available-for-sales.
As of January 1, 2001, the cumulative impact of applying the Statement's
accounting requirements will not have a material impact on the Company's
financial position or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,"
superceding SFAS Statement No. 125. The Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The Statement is 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 company does not
expect SFAS No. 140 to have a material impact on the company's financial
position or results of operations.
In July 2000, the FASB's Emerging Issues Task Force (EITF) issued a
consensus on Issue 99-20, "Recognition of Interest Income and Impairment on
Purchased Beneficial Interests in Securitized Financial Assets." The consensus
must be adopted for fiscal quarters beginning after March 15, 2001, with earlier
adoption permitted. Issue 99-20 prescribes new procedures for recording interest
income and measuring impairment on retained and purchased beneficial interests.
The rule primarily affects certain AEFA high-yield investments contained in
off-balance sheet trusts whose cash flows have been negatively effected by
credit experience. As of January 1, 2001, the rule would require AEFA to adjust
the carrying amount of these investments downward by approximately $30 milllion
through recognition of an impairment charge.
Reclassifications
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
presentations.
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other things,
review of market indices, price levels of current offerings of comparable
issues, price estimates and market data from independent brokers and financial
files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 2000 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
U.S. Government agency obligations $ 38,302 $ 3,455 $ 80 $ 41,677
State and municipal obligations 7,678 16 -- 7,694
Corporate bonds and obligations 5,248,517 111,466 114,330 5,245,653
Mortgage-backed securities 1,169,116 9,130 1,472 1,176,774
$ 6,463,613 $ 124,067 $ 115,882 $6,471,798
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 96,408 $ 6,134 $ 268 $ 102,274
State and municipal obligations 12,848 247 -- 13,095
Corporate bonds and obligations 7,586,423 123,691 693,303 7,016,811
Mortgage-backed securities 5,234,191 57,697 24,078 5,267,810
Total fixed maturities 12,929,870 187,769 717,649 12,399,990
Equity securities -- 1,496 10,333
11,829
$12,941,699 $ 187,769 $ 719,145 $12,410,323
2. Investments (continued)
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities 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 $ 37,613 $ 236 $ 2,158 $ 35,691
State and municipal obligations 9,681 150 -- 9,831
Corporate bonds and obligations 5,713,475 91,571 113,350 5,691,696
Mortgage-backed securities 1,395,523 4,953 31,951 1,368,525
$ 7,156,292 $ 96,910 $147,459 $7,105,743
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 46,325 $ 612 $ 2,231 $ 44,706
State and municipal obligations 13,226 519 191 13,554
Corporate bonds and obligations 7,960,352 60,120 560,450 7,460,022
Mortgage-backed securities 5,683,234 9,692 161,659 5,531,267
Total fixed maturities 13,703,137 70,943 724,531 13,049,549
Equity securities 16 --
3,000 3,016
$13,706,137 $ 70,959 $724,531 $13,052,565
The amortized cost and fair value of investments in fixed maturities at
December 31, 2000 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 from one to five years $ 2,930,737 $ 2,935,736
Due from five to ten years 1,807,979 1,800,940
Due in more than ten years 555,781 558,348
Mortgage-backed securities 1,169,116 1,176,774
$ 6,463,613 $ 6,471,798
Amortized Fair
Available for sale Cost Value
Due from one to five years $ 420,233 $ 464,106
Due from five to ten years 4,675,249 4,266,932
Due in more than ten years 2,600,197 2,401,142
Mortgage-backed securities 5,234,191 5,267,810
$12,929,870 $12,399,990
2. Investments (continued)
During the years ended December 31, 2000, 1999 and 1998, fixed maturities
classified as held to maturity were sold with amortized cost of $53,169, $68,470
and $230,036, respectively. Net gains and losses on these sales were not
significant. The sale of these fixed maturities was due to significant
deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 2000 with proceeds of
$1,237,116 and gross realized gains and losses of $25,101 and $10,267,
respectively. Fixed maturities available for sale were sold during 1999 with
proceeds of $1,691,389 and gross realized gains and losses of $36,568 and
$14,255, respectively. Fixed maturities available for sale were sold during 1998
with proceeds of $278,955 and gross realized gains and losses of $15,658 and
$22,102, respectively.
At December 31, 2000, bonds carried at $14,472 were on deposit with various
states as required by law.
At December 31, 2000, investments in fixed maturities comprised 79 percent
of the Company's total invested assets. These securities are rated by Moody's
and Standard & Poor's (S&P), except for securities carried at approximately $3.5
billion which are rated by AEFC's internal analysts using criteria similar to
Moody's and S&P. A summary of investments in fixed maturities, at amortized
cost, by rating on December 31 is as follows:
Rating 2000 1999
Aaa/AAA $ 6,559,188 $ 7,144,280
Aaa/AA 32,001 1,920
Aa/AA 220,446 301,728
Aa/A 327,147 314,168
A/A 2,494,621 2,598,300
A/BBB 747,636 1,014,566
Baa/BBB 5,828,847 6,319,549
Baa/BB 287,583 348,849
Below investment grade 2,896,014 2,816,069
$19,393,483 $20,859,429
At December 31, 2000, 88 percent of the securities rated Aaa/AAA are GNMA,
FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than one percent of the Company's total investments in fixed maturities.
2. Investments (continued)
At December 31, 2000, approximately 16 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, 2000 December 31, 1999
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
East North Central $ 691,694 $ 18,868 $ 715,998 $ 10,380
West North Central 564,576 7,621 555,635 42,961
South Atlantic 884,723 7,667 867,838 23,317
Middle Atlantic 378,702 13,813 428,051 1,806
New England 279,147 4,604 259,243 4,415
Pacific 318,727 921 238,299 3,466
West South Central 173,158 28,548 144,607 4,516
East South Central 49,176 2,763 43,841 --
Mountain 409,677 10,209 381,148 9,380
3,749,580 95,014 3,634,660 100,241
Less allowance for losses 11,489 -- 28,283 --
$3,738,091 $ 95,014 $3,606,377 $100,241
December 31, 2000 December 31, 1999
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
Department/retail stores $1,174,763 $ 11,130 $1,158,712 $ 33,829
Apartments 780,228 -- 887,538 11,343
Office buildings 1,085,948 59,941 931,234 26,062
Industrial buildings 323,766 23,943 309,845 5,525
Hotels/motels 100,680 -- 103,625 --
Medical buildings 128,101 -- 114,045 --
Nursing/retirement homes 49,822 -- 45,935 --
Mixed use 87,537 -- 66,893 --
Other 18,735 -- 16,833 23,482
3,749,580 95,014 3,634,660 100,241
Less allowance for losses 11,489 -- 28,283 --
$3,738,091 $ 95,014 $3,606,377 $100,241
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.
2. Investments (continued)
At December 31, 2000 and 1999, the Company's recorded investment in
impaired loans was $24,999 and $21,375, respectively, with allowances of $4,350
and $5,750, respectively. During 2000 and 1999, the average recorded investment
in impaired loans was $27,063 and $23,815, respectively.
The Company recognized $1,033, $1,190 and $1,809 of interest income related
to impaired loans for the years ended December 31, 2000, 1999 and 1998
respectively.
The following table presents changes in the allowance for losses related to
all loans:
2000 1999 1998
Balance, January 1 $28,283 $39,795 $38,645
Provision (reduction) for investment losses (14,894) (9,512) 7,582
Loan payoffs (1,200) (500) (800)
Foreclosures and writeoffs (700) (1,500) (5,632)
Balance, December 31 $11,489 $28,283 $39,795
At December 31, 2000, the Company had no commitments to purchase
investments other than mortgage loans.
Net investment income for the years ended December 31 is summarized as
follows:
2000 1999 1998
Interest on fixed maturities $1,473,560 $1,598,059 $1,676,984
Interest on mortgage loans 286,611 285,921 301,253
Other investment income 1,750 70,892 43,518
Interest on cash equivalents 8,084 5,871 5,486
1,770,005 1,960,743 2,027,241
Less investment expenses 39,400 41,170 40,756
$1,730,605 $1,919,573 $1,986,485
Net realized (loss) gain on investments for the years ended December 31 is
summarized as follows:
2000 1999 1998
Fixed maturities $ (34,857) $ 8,802 $ 9,946
Mortgage loans 15,845 10,211 (5,933)
Other investments 2,037 7,596 2,889
$ (16,975) $ 26,608 $ 6,902
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
2000 1999 1998
Fixed maturities available for sale $99,706 $(921,778) $(93,474)
Equity securities (1,428) (142) (203)
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:
2000 1999 1998
Federal income taxes:
Current $176,397 $178,444 $244,946
Deferred 37,704 79,796 (16,602)
214,101 258,240 228,344
State income taxes-current 7,526 9,624 7,337
Income tax expense $221,627 $267,864 $235,681
Increases (decreases) to the income tax provision applicable to pretax
income based on the statutory rate are attributable to:
2000 1999 1998
-------------------------- ------------------------- -------------------------
Provision Rate Provision Rate Provision Rate
Federal income taxes based on
the statutory rate $282,542 35.0% $316,511 35.0% $271,527 35.0%
Tax-excluded interest and
dividend income (3,788) (0.5) (9,626) (1.1) (12,289) (1.6)
State taxes, net of federal
benefit 4,892 0.6 6,256 0.7 4,769 0.6
Affordable housing credits (54,569) (6.8) (31,000) (3.4) (19,688) (2.5)
Other, net (7,450) (0.8) (14,277) (1.6) (8,638) (1.1)
Total income taxes $221,627 27.5% $267,864 29.6% $235,681 30.4%
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, 2000, 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.
3. Income taxes (continued)
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
2000 1999
Deferred tax assets:
Policy reserves $ 730,239 $ 733,647
Unrealized loss on available for sale investments 179,702 221,431
Investments, other 34,600 1,873
Life insurance guaranty fund assessment reserve 1,365 4,789
Total deferred tax assets 945,906 961,740
Deferred tax liabilities:
Deferred policy acquisition costs 796,292 740,837
Other 13,026 4,883
Total deferred tax liabilities 809,318 745,720
Net deferred tax assets $ 136,588 $ 216,020
The Company is required to establish a valuation allowance for any portion
of the deferred tax assets that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established.
4. Stockholder's equity
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory authorities. Statutory
unassigned surplus aggregated $1,527,543 as of December 31, 2000 and $1,693,356
as of December 31, 1999 (see Note 3 with respect to the income tax effect of
certain distributions). In addition, any dividend distributions in 2001 in
excess of approximately $344,973 would require approval of the Department of
Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
2000 1999 1998
Statutory net income $ 344,973 $ 478,173 $ 429,903
Statutory capital and surplus 1,778,306 1,978,406 1,883,405
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised manual will be effective January 1, 2001. The
domiciliary states of the Company and its insurance subsidiaries have adopted
the provisions of the revised manual. The revised manual has changed, to some
extent, prescribed statutory accounting practices and will result in changes to
the accounting practices that the Company and its insurance subsidiaries use to
prepare their statutory-basis financial statements. Management believes the
impact of these changes to the Company's and its subsidiaries' statutory-basis
capital and surplus as of January 1, 2001 will not be significant.
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, 2000 and 1999. 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 2000, 1999
and 1998.
The Company participates in the American Express Company Retirement Plan
which covers all permanent employees age 21 and over who have met certain
employment requirements. Employer contributions to the plan are based on
participants' age, years of service and total compensation for the year. Funding
of retirement costs for this plan complies with the applicable minimum funding
requirements specified by ERISA. The Company's share of the total net periodic
pension cost was $250, $223 and $211 in 2000, 1999 and 1998, 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 2000, 1999 and 1998 were $1,707, $1,906 and
$1,503, 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 Company's share of postretirement benefits in
2000, 1999 and 1998 was $1,136, $1,147 and $1,352, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $582,836, $485,177 and $411,337 for 2000,
1999 and 1998, respectively. Certain of these costs are included in deferred
policy acquisition costs.
6. Commitments and contingencies
At December 31, 2000, 1999 and 1998, traditional life insurance and
universal life-type insurance in force aggregated $98,060,472, $89,271,957 and
$81,074,928 respectively, of which $17,429,851, $8,281,576 and $4,912,313 were
reinsured at the respective year ends. The Company also reinsures a portion of
the risks assumed under disability income and long-term care policies. Under all
reinsurance agreements, premiums ceded to reinsurers amounted to $89,506,
$76,970 and $66,378 and reinsurance recovered from reinsurers amounted to
$32,500, $27,816, and $20,982 for the years ended December 31, 2000, 1999 and
1998, respectively. Reinsurance contracts do not relieve the Company from its
primary obligation to policyholders.
6. Commitments and contingencies (continued)
In January 2000, AEFC reached an agreement in principle to settle three
class-action lawsuits related to the sales of insurance and annuity products,
anticipated to provide for approximately $215 million of benefits. The Company
had been named as a co-defendant in all three of these lawsuits. In September
2000, the court gave preliminary approval to the proposed settlement and AEFC
has mailed notices to all of the over two million class members. A fairness
hearing is scheduled for March 2001, with final approval anticipated in the
second quarter, pending any legal appeals. The anticipated costs of settlement
remain unchanged from 1999. The portion of the settlement allocated to the
Company did not have a material impact on the Company's financial position or
results of operations. The agreement 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 final court approval.
The Company is named as a defendant in various other lawsuits. The outcome
of any litigation cannot be predicted with certainty. In the opinion of
management, however, the ultimate resolution of these lawsuits, taken in
aggregate should not have a material adverse effect on the Company's
consolidated financial position.
The IRS routinely examines the Company's federal income tax returns and is
currently 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.
7. Lines of credit
The Company has available lines of credit with its parent 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. Borrowings outstanding under this agreement
were $50,000 uncommitted at December 31, 2000 and 1999, respectively.
8. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk and equity market risk,
including hedging specific transactions. The Company does not hold derivative
instruments for trading purposes. The Company manages risks associated with
these instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market index.
The Company is not impacted by market risk related to derivatives held for
non-trading purposes beyond that inherent in cash market transactions.
Derivatives held for purposes other than trading are largely used to manage risk
and, therefore, the cash flow and income effects of the derivatives are inverse
to the effects of the underlying transactions.
8. Derivative financial instruments (continued)
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to derivative
financial instruments through established approval procedures, including setting
concentration limits by counterparty, and requiring collateral, where
appropriate. A vast majority of the Company's counterparties are rated A or
better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over the
life of the agreement. Notional amounts are not recorded on the balance sheet.
Notional amounts far exceed the related credit risk.
The Company's holdings of derivative financial instruments are as follows:
Notional or
Contract Carrying Fair Total Credit
December 31, 2000 Amount Amount Value Exposure
Assets:
Interest rate caps $ 1,500,000 $ 6,127 $ 1,174 $ 1,174
Interest rate floors 1,000,000 121 531 531
Options purchased 265,848 44,139 51,701 51,701
Financial futures purchased 5 -- 7,209 --
Liabilities:
Options written 104,324 (3,098) (4,138) --
Financial futures sold 7 -- 9,011 --
Off balance sheet:
Interest rate swaps 1,000,000 -- (10,942) --
$ 47,289 $ 54,546 $ 53,406
Notional or
Contract Carrying Fair Total Credit
December 31, 1999 Amount Amount Value Exposure
Assets:
Interest rate caps $ 2,500,000 $ 9,685 $ 12,773 $ 12,773
Interest rate floors 1,000,000 602 319 319
Options purchased 180,897 49,789 61,745 61,745
Liabilities:
Options purchased/written 43,262 (1,677) (2,402) --
Off balance sheet:
Interest rate swaps 1,267,000 -- (17,582) --
$ 58,399 $ 54,853 $74,837
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps, floors and
swaps expire on various dates from 2001 to 2003. The purchased and written
options expire on various dates from 2001 to 2006.
8. Derivative financial instruments (continued)
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the margin
between interest rates earned on investments and the interest rates credited to
related annuity contract holders.
The Company also uses interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount of
fee income received is based upon the daily market value of the separate account
and mutual fund assets. As a result, changing interest rate conditions could
impact the Company's fee income significantly. The Company entered into interest
rate swaps to hedge anticipated fee income for 2000 related to separate accounts
and mutual funds which invest in fixed income securities. Interest was reported
in management and other fees.
The Company offers an annuity product that pays interest based upon the
relative change in a major stock market index between the beginning and end of
the product's term. As a means of hedging its obligation under the provisions of
this product, the Company purchases and writes options on the major stock market
index.
The Company also writes financial futures and purchases and writes options
to manage the equity market risk related to seed money the Company has invested
in certain separate accounts and the underlying mutual funds.
Index options are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the underlying
mutual funds. The amount of the fee income received is based upon the daily
market value of the separate account and mutual fund assets. As a result, the
Company's fee income could be impacted significantly by fluctuations in the
equity market. The Company entered into index option collars (combination of
puts and calls) to hedge anticipated fee income for 2000 and 1999 related to
separate accounts and mutual funds which invest in equity securities. Testing
demonstrated the impact of these instruments on the income statement closely
correlates with the amount of fee income the Company realizes. At December 31,
2000 , deferred gains on purchased put and written call index options were
$1,005 and $449, respectively. At December 31, 1999, there were no deferred
gains or losses on purchased put or written call index options.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that value.
Fair values of life insurance obligations and all non-financial instruments,
such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force,
are also excluded. Management believes the value of excluded assets and
liabilities is significant. The fair value of the Company, therefore, cannot be
estimated by aggregating the amounts presented.
9. Fair values of financial instruments (continued)
2000 1999
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
Investments:
Fixed maturities (Note 2):
Held to maturity $ 6,463,613 $ 6,471,798 $ 7,156,292 $ 7,105,743
Available for sale 12,399,990 12,399,990 13,049,549 13,049,549
Mortgage loans on
real estate (Note 2) 3,738,091 3,821,825 3,606,377 3,541,958
Other:
Equity securities (Note 2) 10,333 10,333 3,016 3,016
Derivative financial
Instruments (Note 8) 50,387 60,615 60,076 74,837
Other 1,130 1,130 2,258 2,258
Cash and cash
equivalents (Note 1) 316,974 316,974 32,333 32,333
Separate account assets (Note 1) 32,349,347 32,349,347 35,894,732 35,894,732
2000 1999
Carrying Fair Carrying Fair
Financial Liabilities Value Value Value Value
Future policy benefits for
fixed annuities $18,020,824 $17,479,187 $19,189,170 $18,591,859
Derivative financial
instruments (Note 8) 3,098 6,069 1,677 19,984
Separate account liabilities 28,791,949 27,822,667 31,869,184 31,016,081
At December 31, 2000 and 1999, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related contracts
carried at $1,300,018 and $1,270,094, respectively, and policy loans of $96,603
and $92,895, respectively. The fair value of these benefits is based on the
status of the annuities at December 31, 2000 and 1999. 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 2000 and 1999.
At December 31, 2000 and 1999, 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 $3,557,398
and $4,025,548, respectively.