UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 17
TO REGISTRATION STATEMENT NO. 33-28976
ON FORM S-2 TO FORM S-1 ON FORM S-2
Under
The Securities Act of 1933
IDS Life Insurance Company
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(Exact name of registrant as specified in its charter)
Minnesota
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
41-0823832
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(I.R.S. Employer Identification No.)
70100 AXP Financial Center, Minneapolis, MN 55474
(800) 862-7919
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Mary Ellyn Minenko
IDS Life Insurance Company
50607 AXP Financial Center, Minneapolis, Minnesota 55474
(612) 671-3678
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Name, address, including zip code, and telephone number,
including area code, of agent for service)
It is proposed that this filing become effective on May 1, 2003.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
Calculation of Registration Fee
- ----------------------- --------------------- -------------------- --------------------- --------------------
Title of Each Class Amount to be Proposed Maximum Proposed Maximum Amount of
of Securities to be Registered Offering Price Per Aggregate Offering Registration Fee
Registered Unit Price
- ----------------------- --------------------- -------------------- --------------------- --------------------
Interests in a group N/A
market value annuity
contract and
individual market
value annuity
contracts for non-tax
qualified purchases.
PART I.
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus.
PROSPECTUS
MAY 1, 2003
AMERICAN EXPRESS
GUARANTEED TERM ANNUITY
IDS Life Insurance Company (IDS Life) issues this annuity and offers it in two
ways:
- - A Group Market Value Annuity Contract, and
- - Individual Market Value Annuity Contracts.
To buy this annuity, you must send IDS Life a purchase payment of at least
$5,000 with an application for a contract.
GROUP AND INDIVIDUAL MARKET VALUE ANNUITY CONTRACTS
ISSUED BY: IDS LIFE INSURANCE COMPANY
70100 AXP Financial Center
Minneapolis, MN 55474
Telephone: (800) 862-7919
IDS LIFE ACCOUNT MGA
If you choose not to hold these securities until the end of a guarantee period,
they may be subject to a substantial surrender charge or market value
adjustment. As a result, you could get less than your purchase payment back.
Interest rates for renewal guarantee periods may be higher or lower than the
previous guaranteed interest rate. The minimum guaranteed renewal interest rate
is 3%. IDS Life guarantees this rate.
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THIS ANNUITY IS NOT A DEPOSIT OF A BANK OR FINANCIAL
INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THIS ANNUITY
INVOLVES INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
Before you invest, be sure to ask your sales representative about the annuity's
features, benefits, risks and fees, and whether the annuity is appropriate for
you, based upon your financial situation and objectives.
The contract may not be available in all jurisdictions. This prospectus
constitutes an offering or solicitation only in those jurisdictions where such
offering or solicitation may lawfully be made. State variations are covered in a
special contract form used in that state. This prospectus provides a general
description of the contract. Your actual contract and any riders or endorsements
are the controlling documents.
IDS Life has not authorized any person to give any information or to make any
representations regarding the contract other than those contained in this
prospectus. Do not rely on any such information or representations.
IDS Life and its affiliated insurance companies offer several different
annuities which your sales representative may be authorized to offer to you.
Each annuity has different features and benefits that may be appropriate for you
based on your financial situation and needs, your age and how you intend to use
the annuity. The different features and benefits may include the investment and
fund manager options, variations in interest rate amount and guarantees,
credits, surrender charge schedules and access to annuity account values. The
fees and charges may also be different between each annuity.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
1
<Page>
TABLE OF CONTENTS
THE GUARANTEED TERM ANNUITY IN BRIEF 3
KEY TERMS 4
DESCRIPTION OF CONTRACTS 5
General 5
Application and Purchase Payment 5
Right to Cancel 5
Guarantee Periods 5
Surrenders 7
Surrender Charge 8
MARKET VALUE ADJUSTMENT 9
PREMIUM TAXES 11
DEATH BENEFIT PRIOR TO SETTLEMENT 11
THE ANNUITY PAYMENT PERIOD 12
AMENDMENT, DISTRIBUTION AND ASSIGNMENT OF CONTRACTS 13
TAXES 13
THE COMPANY 15
ADDITIONAL INFORMATION 24
EXPERTS 24
IDS LIFE INSURANCE COMPANY FINANCIAL INFORMATION 25
APPENDIX A -- PARTIAL SURRENDER ILLUSTRATION 43
APPENDIX B -- MARKET VALUE ADJUSTMENT ILLUSTRATION 45
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
2
<Page>
THE GUARANTEED TERM ANNUITY IN BRIEF
In this prospectus, "we," "us" and "IDS Life" refer to IDS Life Insurance
Company and "you" and "yours" refer to an owner who has been issued a contract.
This summary is incomplete. Do not rely on it as a description of your contract.
For more complete information, you must read the entire prospectus. You can find
more information about a topic in the summary by turning to the discussion
beginning at the page listed after that topic in the summary.
CONTRACTS: We are offering qualified and nonqualified group and individual
market value annuities to the general public. As is the case of other annuities,
it may not be advantageous for you to purchase this contract as a replacement
for, or in addition to, an existing annuity or life insurance policy.
Most annuities have a tax deferred feature. So do many retirement plans under
the Internal Revenue Code (Code). As a result, when you use the contract to fund
a retirement plan that is tax deferred, your contract will not provide any
necessary or additional tax deferral for that retirement plan. But the contract
has features other than tax deferral that may help you reach your retirement
goals. You should consult your tax advisor prior to making a purchase for an
explanation of the tax implications to you.
These market value annuity contracts have a guaranteed interest rate that we
credit to the purchase payment when it is held to the end of the guarantee
period (the renewal date). Surrenders before the renewal date are subject to a
market value adjustment and, if it applies, a surrender charge.
GUARANTEE PERIODS: When you make a payment under an application, you select a
guarantee period from among those that we offer when we receive your application
and payment. During this guarantee period, the purchase payment earns interest
at the interest rate that we have guaranteed for your contract. We credit
interest daily. Credited interest earns interest at the applicable guaranteed
interest rate we establish. (p. 5)
RENEWAL GUARANTEE PERIODS: At the end of each guarantee period, a renewal
guarantee period of one year will begin, unless you choose a different period.
You must choose the length of a renewal guarantee period during the 30 days
before the end of the previous guarantee period. Beginning on the first day of
each renewal guarantee period, the renewal value will earn interest at the
renewal interest rate that we have guaranteed for your contract and the interest
credited will earn interest at that interest rate. (p. 6)
SURRENDERS: With some restrictions, we permit partial or total surrenders. We
may delay payment of any surrender for up to six months from the date we receive
notice of surrender or the period permitted by state law, if less. A delay of
payment will not be for more than seven days except under extraordinary
circumstances. If we choose to exercise this right, then during this delay, we
will pay annual interest of at least 3% of any amounts delayed for more than
thirty days. (p. 7)
SURRENDER CHARGE: If you surrender before the eighth contract anniversary, a
surrender charge beginning at a maximum of 8% of the market adjusted value
surrendered will be subtracted from your account. No surrender charge applies if
you surrender on the last day of a guarantee period. We will waive the surrender
charge in certain instances. A surrender charge also applies to payments under
certain annuity payment plans (see "Description of Contracts -- Surrender
Charge" p. 8 and "The Annuity Payment Period -- Annuity Payment Plans" p. 12).
MARKET VALUE ADJUSTMENT: The market value adjustment is the increase or decrease
in the value of any early surrender you make from your contract. A market value
adjustment applies when the surrender occurs before the renewal date. No market
value adjustment applies to any surrender at the end of a guarantee period. The
amount of the actual adjustment is determined by a formula that is based on the
difference between the guaranteed interest rate on your annuity and a current
interest rate determined by IDS Life. That current interest rate will be the
rate that IDS Life pays on a new Guaranteed Term Annuity that has a guaranteed
period equal to the time remaining on the term of your annuity. The formula also
includes a 0.25% charge that will reduce the value of your surrender regardless
of the current interest rate then in effect. The amount you receive on surrender
could be less than your original purchase payment if interest rates increase. If
interest rates decrease, the amount you receive on surrender may be more than
your original purchase payment and accrued interest. The market adjusted value
also affects settlements under an annuity payment plan. (p. 9)
PREMIUM TAXES: We may deduct premium taxes that may be imposed on us by state or
local governments from the accumulation value of your contract. State premium
taxes range from 0 to 3.5% of your gross purchase payments. (p. 11)
DEATH BENEFIT PRIOR TO SETTLEMENT: The contract provides for a guaranteed death
benefit. If the annuitant or owner dies before the settlement date, we will pay
to the owner or beneficiary the death benefit in place of any other payment
under the contract. The amount of the death benefit will equal the accumulation
value. (p. 11)
THE ANNUITY PAYMENT PERIOD: Beginning at a specified time in the future, we will
pay the owner a lump sum payment or start to pay a series of payments. You may
choose a series of payments under some annuity plans. (p. 12)
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
3
<Page>
KEY TERMS
THESE TERMS CAN HELP YOU UNDERSTAND DETAILS ABOUT YOUR CONTRACT:
ACCUMULATION VALUE: The value of the purchase payment plus interest credited,
adjusted for any surrenders.
ANNUITANT: The person on whose life monthly annuity payments depend.
ANNUITY: A contract purchased from an insurance company that offers tax-deferred
growth of the purchase payment until earnings are withdrawn.
CASH SURRENDER VALUE: The market adjusted value less any applicable surrender
charge. On the last day of a guarantee period, the cash surrender value is the
accumulation value.
CONTRACT: A deferred annuity contract, or a certificate showing your interest
under a group annuity contract, that permits you to accumulate money for
retirement by making a purchase payment. A contract provides for a lifetime or
other forms of payments beginning at a specified time in the future.
CONTRACT ANNIVERSARY: The same day and month as the contract date each year that
the contract remains in force.
CONTRACT DATE: The effective date of the contract as designated in the contract.
CURRENT INTEREST RATE: The applicable interest rate contained in a schedule of
rates established by us at our discretion from time to time for various
guarantee periods.
INITIAL GUARANTEE PERIOD: The period during which the initial guarantee rate
will be credited.
INITIAL GUARANTEE RATE: The rate of interest credited to the purchase payment
during the initial guarantee period.
MARKET ADJUSTED VALUE: The accumulation value increased or decreased by the
market adjusted value formula, on any date before the end of the guarantee
period.
MARKET VALUE ADJUSTMENT: The market adjusted value minus the accumulation value.
OWNER: The person or entity to whom the contract is issued.
PURCHASE PAYMENT: Payment made to IDS Life for a contract.
QUALIFIED ANNUITY: A contract that you purchase to fund one of the following
tax-deferred retirement plans that is subject to applicable federal law and any
rules of the plan itself:
- - Individual Retirement Annuities (IRAs) under Section 408(b) of the Internal
Revenue Code of 1986, as amended (the Code)
- - Roth IRAs under Section 408A of the Code
- - Simplified Employee Pension (SEP) plans under Section 408(k) of the Code
- - Plans under Section 401(k) of the Code
- - Custodial and trusteed plans under Section 401(a) of the Code
- - Tax-Sheltered Annuities (TSAs) under Section 403(b) of the Code
A qualified annuity will not provide any necessary or additional tax deferral if
it is used to fund a retirement plan that is already tax deferred.
All other contracts are considered NONQUALIFIED ANNUITIES.
RENEWAL DATE: The first day of a renewal guarantee period. It will always be on
a contract anniversary.
RENEWAL GUARANTEE PERIOD: A renewal guarantee period will begin at the end of
each guarantee period.
RENEWAL GUARANTEE RATE: The rate of interest credited to the renewal value
during the renewal guarantee period as set at our discretion.
RENEWAL VALUE: The accumulation value at the end of the current guarantee
period.
SETTLEMENT: The application of contract value to provide annuity payments. If
the settlement date is not the last day of a guarantee period, we apply the
market adjusted value of the contract. On the last day of a guarantee period, we
apply the accumulation value of the contract.
SETTLEMENT DATE: The date on which annuity payments are to begin.
WRITTEN REQUEST: A request in writing signed by you and delivered to us at our
office.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
4
<Page>
DESCRIPTION OF CONTRACTS
GENERAL
This prospectus describes interests in qualified and nonqualified group and
individual market value annuity contracts offered by IDS Life to the general
public.
As described in this prospectus, the contracts have an interest rate
guaranteed by IDS Life that we credit to a purchase payment in the contract when
the purchase payment stays in the contract to its renewal date. We credit
(compound) interest daily to achieve a stated annual effective rate, based on a
365-day year. We do not pay interest on leap days (Feb. 29). Surrenders prior to
the renewal date are subject to a market value adjustment, a surrender charge
(if applicable), income taxes, and a 10% IRS tax penalty if withdrawn prior to
age 59 1/2.
APPLICATION AND PURCHASE PAYMENT
To apply for a contract, you must complete an application and make a minimum
purchase payment of $5,000. For individuals age 90 and younger, the maximum
purchase payment is $1,000,000 without prior approval. This limit applies in
total to all IDS Life annuities you own. If you purchase the contract to fund a
tax-deferred retirement plan, that plan's limit on contributions also will
apply. Once we apply a purchase payment to a contract, we do not permit any
additional purchase payment under the contract.
We will return an improperly completed application, along with the corresponding
purchase payment, five business days after we receive it.
A payment is credited to a contract on the date we receive a properly completed
application at our office along with the purchase payment. Interest is earned
the next day. IDS Life then issues a contract and confirms the purchase payment
in writing.
RIGHT TO CANCEL
State or federal law may give you the right to cancel the contract within a
specific period of time after receipt of the contract and receive a refund of
the entire purchase payment. For revocation to be effective, mailing or delivery
of notice of cancellation must be made in writing to our office at the following
address: IDS Life Insurance Company, Attn: Transactions, 70100 AXP Financial
Center, Minneapolis, MN 55474.
GUARANTEE PERIODS
You select the duration of the guarantee period from among those durations we
offer when we receive your application and payment. As of the date of this
prospectus, we are offering guarantee periods with annual durations from five to
10 years; however, the guarantee periods we offer in the future could be
different. The duration selected will determine the guaranteed interest rate and
the purchase payment (less surrenders made and less applicable premium taxes, if
any) will earn interest at this guaranteed interest rate during the entire
guarantee period. Interest is credited to your annuity daily. All interest rates
we quote are effective annual interest rates. This refers to the rate that
results after interest has compounded daily for a full year. In other words, the
interest you earn each day earns interest itself the next day, assuming you do
not withdraw it. (At the end of a year, assuming you have made no withdrawals,
your interest earnings will equal your guaranteed rate multiplied by your
contract value at the beginning of the year.)
The example below shows how we will credit interest during the guarantee period.
For the purpose of this example, we have made the assumptions as indicated.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
5
<Page>
EXAMPLE OF GUARANTEED RATE OF ACCUMULATION
<Table>
Beginning account value: $50,000
Guaranteed period: 10 years
Guaranteed rate: 6% annual effective rate
</Table>
<Table>
<Caption>
INTEREST CREDITED TO THE CUMULATIVE INTEREST
YEAR ACCOUNT DURING YEAR CREDITED TO THE ACCOUNT ACCUMULATION VALUE
1 $ 3,000.00 $ 3,000.00 $ 53,000.00
2 3,180.00 6,180.00 56,180.00
3 3,370.80 9,550.80 59,550.80
4 3,573.05 13,123.85 63,123.85
5 3,787.43 16,911.28 66,911.28
6 4,014.68 20,925.96 70,925.96
7 4,255.55 25,181.51 75,181.51
8 4,510.89 29,692.40 79,692.40
9 4,781.55 34,473.95 84,473.95
10 5,068.43 39,542.38 89,542.38
</Table>
Guaranteed accumulation value at the end of 10 years is:
$50,000 + $39,542.38 = $89,542.38
NOTE: THIS EXAMPLE ASSUMES NO SURRENDERS OF ANY AMOUNT DURING THE ENTIRE
TEN-YEAR PERIOD. A MARKET VALUE ADJUSTMENT APPLIES AND A SURRENDER CHARGE MAY
APPLY TO ANY INTERIM SURRENDER (SEE "SURRENDERS"). THE HYPOTHETICAL INTEREST
RATES ARE ONLY ILLUSTRATIONS. THEY DO NOT PREDICT FUTURE INTEREST RATES TO BE
DECLARED UNDER THE CONTRACT. ACTUAL INTEREST RATES DECLARED FOR ANY GIVEN TIME
MAY BE MORE OR LESS THAN THOSE SHOWN.
RENEWAL GUARANTEE PERIODS: At the end of any guarantee period, a renewal
guarantee period will begin. We will notify you in writing about the renewal
guarantee periods available before the renewal date. This written notification
will not specify the interest rate for the renewal value. You may elect in
writing, during the 30-day period before the end of the guarantee period, a
renewal guarantee period of a different duration from among those we offer at
that time. If you do not make an election, we will automatically apply the
renewal value to a guarantee period of one year. In no event may renewal
guarantee periods extend beyond the settlement date then in effect for the
contract. For example, if the annuitant is age 82 at the end of a guarantee
period and the settlement date for the annuitant is age 85, a three-year
guarantee period is the maximum guarantee period that you may choose under the
contract. The renewal value will then earn interest at a guaranteed interest
rate that we have declared for this duration. We may declare new schedules of
guaranteed interest rates as often as daily.
At the beginning of any renewal guarantee period, the renewal value will be the
accumulation value at the end of the guarantee period just ending. We guarantee
the renewal value with our general assets. This amount will earn interest for
the renewal guarantee period at the then applicable guaranteed interest rate for
the period selected. This rate may be higher or lower than the previous
guaranteed interest rate.
At your written request, we will notify you of the renewal guarantee rates for
the periods then available. You also may call us to ask about renewal guarantee
rates.
ESTABLISHMENT OF GUARANTEED INTEREST RATES: We will know the guaranteed interest
rate for a chosen guarantee period at the time we receive a purchase payment or
you renew an accumulation value. We will send a confirmation that will show the
amount and the applicable guaranteed interest rate. The minimum guaranteed
interest rate for renewal values is 3% per year. The rate on renewal values will
be equal to or greater than the rate credited on new comparable purchase
payments at that time.
The interest rates that IDS Life will declare as guaranteed rates in the future
are determined by us at our discretion. We will determine the rates based on
various factors including, but not limited to, the interest rate environment,
returns earned on investments backing these annuities (see "Investments by IDS
Life"), product design, competition, and IDS Life's revenues and expenses. WE
CANNOT PREDICT NOR CAN WE GUARANTEE FUTURE GUARANTEED INTEREST RATES ABOVE THE
3% RATE.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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SURRENDERS
GENERAL: Subject to certain tax law and retirement plan restrictions noted
below, you may make total and partial surrenders under a contract at any time.
For all surrenders, we will reduce the accumulation value by the amount
surrendered on the surrender date and that amount will be payable to the owner.
We will also reduce the accumulation value by any applicable surrender charge.
We will either reduce or increase the accumulation value by any market value
adjustment applicable to the surrender. IDS Life will, on request, inform you of
the amount payable in a total or partial surrender.
Any total or partial surrender may be subject to tax and tax penalties.
Surrenders from certain tax qualified annuities also may be subject to 20%
income tax withholding. (See "Taxes".)
TAX-SHELTERED ANNUITIES: The Code imposes certain restrictions on your right to
receive early distributions from a TSA:
- - Distributions attributable to salary reduction contributions (plus earnings)
made after Dec. 31, 1988, or to transfers or rollovers from other contracts,
may be made from the TSA only if:
- you are at least age 59 1/2;
- you are disabled as defined in the Code;
- you severed employment with the employer who purchased the contract; or
- the distribution is because of your death.
- - If you encounter a financial hardship (as provided by the Code), you may be
eligible to receive a distribution of all contract values attributable to
salary reduction contributions made after Dec. 31, 1988, but not the
earnings on them.
- - Even though a distribution may be permitted under the above rules, it may be
subject to IRS taxes and penalties (see "Taxes").
- - The above restrictions on distributions do not affect the availability of
the amount credited to the contract as of Dec. 31, 1988. The restrictions
also do not apply to transfers or exchanges of contract value within the
contract, or to another registered variable annuity contract or investment
vehicle.
PARTIAL SURRENDERS: Unless we agree otherwise, the minimum amount you may
surrender is $250. You cannot make a partial surrender if it would reduce the
accumulation value of your annuity to less than $2,000.
You may request the net check amount you wish to receive. We will determine how
much accumulation value needs to be surrendered to yield the net check amount
after any applicable market value adjustments and surrender charge deductions.
You may make a partial surrender request not exceeding $100,000 by telephone. We
have the authority to honor any telephone partial surrender request believed to
be authentic and will use reasonable procedures to confirm that they are. This
includes asking identifying questions and tape recording calls. As long as
reasonable procedures are followed, neither IDS Life nor its affiliates will be
liable for any loss resulting from fraudulent requests. At times when the volume
of telephone requests is unusually high, we will take special measures to ensure
that your call is answered as promptly as possible. We will not allow a
telephone surrender request within 30 days of a phoned-in address change.
TOTAL SURRENDERS: We will compute the value of your contract at the next close
of business after we receive your request for a complete surrender. We may ask
you to return the contract.
PAYMENT ON SURRENDER: We may defer payment of any partial or total surrender for
a period not exceeding six months from the date we receive your notice of
surrender or the period permitted by state insurance law, if less. Only under
extraordinary circumstances will we defer a surrender payment more than seven
days, and if we defer payment for more than 30 days, we will pay annual interest
of at least 3% on the amount deferred. While all circumstances under which we
could defer payment upon surrender may not be foreseeable at this time, such
circumstances could include, for example, our inability to liquidate assets due
to a general financial crisis. If we intend to withhold payment more than 30
days, we will notify you in writing.
NOTE: We will charge you a fee if you request express mail delivery or that
payment be wired to your bank. For instructions, please contact your sales
representative.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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SURRENDER CHARGE
We may assess a surrender charge on any total or partial surrender taken prior
to the eighth contract anniversary unless the surrender occurs on the last day
of a guarantee period. We will base the amount of the surrender charge on the
length of the guarantee period. The table below shows the maximum amount of the
surrender charge.
SURRENDER CHARGE PERCENTAGE:
<Table>
<Caption>
GUARANTEE CONTRACT YEARS AS MEASURED FROM THE BEGINNING OF A GUARANTEE PERIOD
PERIOD 1 2 3 4 5 6 7 8
1 year 1%
2 years 2 1%
3 years 3 2 1%
4 years 4 3 2 1%
5 years 5 4 3 2 1%
6 years 6 5 4 3 2 1%
7 years 7 6 5 4 3 2 1%
8 years 8 7 6 5 4 3 2 1%
9 years 8 7 6 5 4 3 2 1
10 years 8 7 6 5 4 3 2 1
</Table>
To determine the surrender charge on the initial guarantee period, in the
"Guarantee period" column find the number of years for the guarantee period you
have chosen. The row that period is in reflects the schedule of surrender
charges during that period. For example, a 5-year guarantee period has a 5%
surrender charge in the first contract year, a 4% charge in the second, a 3%
charge in the third, a 2% charge in the fourth, and a 1% charge in the fifth.
For renewal guarantee periods, we will base the surrender charge on the lesser
of:
- - the length of the new guarantee period, or
- - the number of years remaining until the eighth contract anniversary.
In our example, if a contract owner chose an initial guarantee period of five
years and later a renewal guarantee period of four years, the surrender charge
schedule for that renewal guarantee period would be three years long. That is
because there are only three years remaining until the eighth contract
anniversary (8 - 5 = 3), and three years is less than the four-year length of
the new guarantee period. The surrender charge percentages would be:
<Table>
<Caption>
CONTRACT YEAR SURRENDER CHARGE
1 5%
2 4
3 3
4 2
5 1*
6 3
7 2
8 1
9+ 0
</Table>
* 0% on last day of fifth contract year.
There will never be any surrender charges after the eighth contract anniversary.
Also, after the first contract anniversary, surrender charges will not apply to
surrenders of amounts totalling up to 10% of the accumulation value as of the
last contract anniversary.
AMERICAN EXPRESS GUARANTEED TERM ANNUIT -- PROSPECTUS
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SURRENDER CHARGE CALCULATION: If there is a surrender charge, we calculate it
as:
(A - B) x P
where: A = market adjusted value surrendered
B = the lesser of A or 10% of accumulation value on last contract
anniversary not already taken as a partial surrender this
contract year. (Before the first contract anniversary, B does
not apply.)
P = applicable surrender charge percentage
For an illustration of a partial surrender and applicable surrender charges, see
Appendix A.
SURRENDER CHARGE UNDER ANNUITY PAYMENT PLAN E: Under this payment plan, you can
choose to take a full surrender at any time after one year of payments. The
amount you can surrender is the present value of any remaining payments. The
discount rate we use in calculating the present value is based on the annual
effective interest rate for then-current payment amounts for immediate annuities
with the same purchase amount and remaining term length plus 1.5%. The surrender
charge equals the net present value of the remaining payments (determined after
we apply the discount rate) multiplied by a surrender charge percentage. This
percentage is 5% in payment year two decreasing by 1% per year until it is 0% in
payment year seven and thereafter. This feature is not available in all states.
Please contact your sales representative for availability.
WAIVER OF SURRENDER CHARGE: We will assess no surrender charge:
- - on the last day of a guarantee period;
- - after the eighth contract anniversary;
- - after the first contract anniversary for surrenders of amounts totalling up
to 10% of the contract accumulation value as of the last contract
anniversary;
- - upon the death of the annuitant or owner; or
- - upon the application of the market adjusted value to provide annuity
payments under an annuity payment plan, unless an Annuity Payment Plan E is
later surrendered. (If the application occurs on a renewal date, there will
be no surrender charge or market value adjustment, and the full accumulation
value will be applied under an annuity payment plan.)
In some cases, such as when an employer makes this annuity available to
employees, we may expect to incur lower sales and administrative expenses or
perform fewer services due to the size of the group, the average contribution
and the use of group enrollment procedures. Then we may be able to reduce or
eliminate surrender charges. However, we expect this to occur infrequently.
MARKET VALUE ADJUSTMENT
We guarantee the accumulation value, including the interest credited, if the
contract is held until the end of the guarantee period. However, we will apply a
market value adjustment if a surrender occurs prior to the end of the guarantee
period.
The market adjusted value also affects settlements under an annuity payment plan
occurring at any time other than the last day of a guarantee period. The market
adjusted value is your accumulation value (purchase payment plus interest
credited minus surrenders and surrender charges) adjusted by a formula. The
market adjusted value reflects the relationship between the guaranteed interest
rate on your contract and the interest rate we are crediting on new or renewal
Guaranteed Term Annuity contracts with guarantee periods that are the same as
the time remaining in your guarantee period.
The market adjusted value is sensitive to changes in current interest rates. The
difference between your accumulation value and market adjusted value on any day
will depend on our current schedule of guaranteed interest rates on that day,
the time remaining in your guarantee period and your guaranteed interest rate.
Upon surrender your market adjusted value may be greater than your contract's
accumulation value, equal to it or less than it depending on how the guaranteed
interest rate on your contract compares to the interest rate of a new Guaranteed
Term Annuity for the same number of years as the guarantee period remaining on
your contract.
Before we look at the market adjusted value formula, it may help to look in a
general way at how comparing your contract's guaranteed rate and the rate for a
new contract affects your market adjusted value.
RELATIONSHIP BETWEEN YOUR CONTRACT'S GUARANTEED RATE AND NEW CONTRACT FOR THE
SAME NUMBER OF YEARS AS THE GUARANTEED PERIOD REMAINING ON YOUR CONTRACT:
IF YOUR ANNUITY RATE IS: YOUR MARKET ADJUSTED VALUE WILL BE:
less than the new annuity rate +.25% less than your accumulation value
equal to the new annuity rate +.25% equal to your accumulation value
greater than the new annuity rate +.25% greater than your accumulation value
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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GENERAL EXAMPLES
ASSUME:
- - You purchase a contract and choose a guarantee period of 10 years.
- - We guarantee an interest rate of 4.5% annually for your 10-year guarantee
period.
- - After three years you decide to surrender your contract. In other words, you
decide to surrender your contract when you have seven years left in your
guarantee period.
Remember that your market adjusted value depends partly on the interest rate of
a new Guaranteed Term Annuity for the same number of years as the guarantee
period remaining on your contract. In this case, that is seven years.
EXAMPLE 1: Remember that your contract is earning 4.5%. Assume that new
contracts that we offer with a seven-year guarantee period are earning 5.0%. We
add 0.25% to the 5.0% rate to get 5.25%. Your contract's 4.5% rate is less than
the 5.25% rate and, as reflected in the table above, your market adjusted value
will be less than your accumulation value.
EXAMPLE 2: Remember again that your contract is earning 4.5%, and assume that
new contracts that we offer with a seven-year guarantee period are earning 4.0%.
We add 0.25% to the 4.0% rate we are paying on new contracts, which equals
4.25%, and compare that number to the 4.5% you are earning on your contract. In
this example, your contract's 4.5% rate is greater than the 4.25% rate, and, as
reflected in the table above, your market adjusted value will be greater than
your accumulation value. To determine that adjustment precisely, you will have
to use the formula described below.
As shown in the table headed "Surrender charge percentage," when your guarantee
period is 10 years and you have begun your fourth contract year from the
beginning of the guarantee period, your surrender charge percentage is 5%. In
either of our two examples, a 5% surrender charge would be deducted from the
market adjusted value.
The precise market adjusted value formula is as follows:
(RENEWAL VALUE)
MARKET ADJUSTED VALUE = -----------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF (N + t))
Renewal value = The accumulation value at the end of the current guarantee
period
i SUB(Mvi) = The current interest rate offered for a new Guaranteed Term
Annuity +.0025
N = The number of complete contract years to the end of the
current guarantee period
t = The fraction of the contract year remaining to the end of
the contract year (for example, if 180 days remain in a
365-day contract year, it would be .493)
The current interest rate we offer on the Guaranteed Term Annuity will change
periodically at our discretion. It is the rate we are then paying on purchase
payments and renewals paid under this class of contracts for guarantee period
durations equaling the remaining guarantee period of the contract to which the
formula is being applied. If the remaining guarantee period is a number of
complete years, we will use the specific complete year guarantee rate. If the
remaining guarantee period is less than one year, we will use the one year
guarantee rate. If the remaining guarantee period is a number of complete years
plus fractional years, we will determine the rate by straight line interpolation
between the two years' rates. For example, if the remaining guarantee period
duration is 8.5 years, and the current guaranteed interest rate for eight years
is 4% and nine years is 5%, IDS Life will use a guaranteed interest rate of
4.5%.
MARKET VALUE ADJUSTMENT FORMULA:
Market value adjustment = Market adjusted value less accumulation value
For an illustration showing an upward and downward adjustment, see Appendix B.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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PREMIUM TAXES
Certain state and local governments impose premium taxes on us (up to 3.5%).
These taxes depend upon the state of residence or the state in which the
contract was sold. Currently, we deduct any applicable premium taxes when
annuity payments begin, but we reserve the right to deduct this tax at other
times such as when you make purchase payments or when you surrender your
contract.
DEATH BENEFIT PRIOR TO SETTLEMENT
If the annuitant or owner dies before the settlement date, the death claim will
be processed on the valuation date our death claim requirements are fulfilled.
We will determine the contract's value at the next accumulation unit value
calculated after our death claim requirements are fulfilled. We pay interest, if
any, at a rate no less than required by law. We will mail payment to the named
beneficiary within seven days after our death claim requirements are fulfilled.
If there is no named beneficiary, then you or your estate will be the
beneficiary.
NONQUALIFIED ANNUITIES
If your spouse is sole beneficiary and you die before the settlement date, your
spouse may keep the contract as owner. To do this your spouse must, within 60
days after we receive proof of death, give us written instructions to keep the
contract in force.
If your beneficiary is not your spouse, we will pay the beneficiary in a single
sum unless you give us other written instructions. We must fully distribute the
death benefit within five years of your death. However, the beneficiary may
receive payments under any annuity payment plan available under this contract
if:
- - the beneficiary asks us in writing within 60 days after we receive proof of
death; and
- - payments begin no later than one year after your death, or other date
permitted by the Code; and
- - the payment period does not extend beyond the beneficiary's life or life
expectancy.
QUALIFIED ANNUITIES
- - SPOUSE BENEFICIARY: If you have not elected an annuity payment plan, and if
your spouse is the sole beneficiary, your spouse may either elect to treat
the contract as his or her own or elect an annuity payment plan or another
plan agreed to by us. If your spouse elects a payment plan, the payments
must begin no later than the year in which you would have reached age
70 1/2. If you attained age 70 1/2 at the time of death, payments must begin
no later than Dec. 31 of the year following the year of your death.
- - NON-SPOUSE BENEFICIARY: If you have not elected an annuity payment plan, and
if death occurs prior to the year you would have attained age 70 1/2, the
beneficiary may elect to receive payments from the contract over a five year
period. If your death occurs after attaining age 70 1/2, we will pay the
beneficiary in a single sum unless the beneficiary elects to receive
payments under any payment plan available under this contract if:
- the beneficiary asks us in writing within 60 days after we receive proof
of death; and
- payments begin no later than one year following the year of your death;
and
- the payment period does not extend beyond the beneficiary's life or life
expectancy.
- - ANNUITY PAYMENT PLAN: If you elect an annuity payment plan, the payments to
your beneficiary will continue pursuant to the annuity payment plan you
elect.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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THE ANNUITY PAYMENT PERIOD
ELECTING THE SETTLEMENT DATE AND FORM OF ANNUITY
When we process your application, we will establish the settlement date to the
maximum age or date as specified below. You can also select a date within the
maximum limits. This date can be aligned with your actual retirement from a job,
or it can be a different future date, depending on your needs and goals and on
certain restrictions. You can also change the date, provided you send us written
instructions at least 30 days before annuity payments begin.
FOR NONQUALIFIED ANNUITIES AND ROTH IRAS, the settlement date cannot be later
than the latest of:
- - the contract anniversary nearest the annuitant's 85th birthday; or
- - the 10th contract anniversary.
FOR QUALIFIED ANNUITIES EXCEPT ROTH IRAS, to avoid IRS penalty taxes, the
settlement date generally must be:
- - on or after the date the annuitant reaches age 59 1/2;
- - for IRAs and SEPs, by April 1 of the year following the calendar year when
the annuitant reaches age 70 1/2; or
- - for all other qualified annuities, by April 1 of the year following the
calendar year when the annuitant reaches age 70 1/2 or, if later, retires
(except that 5% business owners may not select a settlement date that is
later than April 1 of the year following the calendar year when they reach
age 70 1/2).
If you take the minimum IRA or TSA distributions as required by the Code from
another tax qualified investment, or in the form of partial surrenders from this
contract, annuity payments can start as late as the annuitant's 85th birthday or
the 10th contract anniversary, if later.
ANNUITY PAYMENTS: The first payment will be made as of the settlement date. Once
annuity payments have started for an annuitant, no surrender of the annuity
benefit can be made for the purpose of receiving a lump sum in lieu of payments
except under Annuity Payment Plan E.
DEATH AFTER SETTLEMENT DATE: If you or the annuitant dies after the settlement
date, the amount payable to the beneficiary, if any, will continue as provided
in the annuity payment plan then in effect.
ANNUITY PAYMENT PLANS
There are different ways to receive annuity payments. We call these plans. You
may select one of these plans, or another payment arrangement to which we agree,
by giving us written notice at least 30 days before the settlement date.
You may ask us to apply the market adjusted value (less applicable premium
taxes, if any) on the settlement date under any of the annuity plans described
below, but in the absence of an election, we will apply the market adjusted
value on the settlement date under Plan B to provide a life annuity with 120
monthly payments certain.
If the amount to be applied to an annuity plan is not at least $2,000 or if
payments are to be made to other than a natural person, we have the right to
make a lump sum payment of the cash surrender value. If a lump sum payment is
from a qualified annuity (except an IRA, Roth IRA or SEP), 20% income tax
withholding may apply.
- - PLAN A: This provides monthly annuity payments for the lifetime of the
annuitant. We will not make payments after the annuitant dies.
- - PLAN B: This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a period of
at least five, ten or 15 years. You must select the period.
- - PLAN C: This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by us that payments will be made for a certain
number of months. We determine the number of months by dividing the market
adjusted value applied under this plan by the amount of the monthly annuity
payment.
- - PLAN D: We call this a joint and survivor life annuity. Monthly payments
will be paid while both the annuitant and a joint annuitant are living. When
either the annuitant or joint annuitant dies, we will continue to make
monthly payments until the death of the surviving annuitant. We will not
make payments after the death of the second annuitant.
- - PLAN E: This provides monthly fixed dollar annuity payments for a period of
years that you elect. The period of years may be no less than 10 nor more
than 30. At any time after one year of payments, you can elect to have us
determine the present value of any remaining payments and pay it to you in a
lump sum. The discount rate we use in the calculation is based on the annual
effective interest rate for then-current payment amounts for immediate
annuities with the same purchase amount and remaining term length plus 1.5%
(see "Description of Contracts -- Surrender Charge -- Surrender charge under
Annuity Payment Plan E"). A 10% IRS penalty tax could apply if you make a
surrender (see "Taxes"). This feature is not available in all states. Please
contact your sales representative for availability.
Other income plan options may be available.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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The contract provides for annuity payment plans on a fixed basis only. The
amount of the annuity payment will depend on:
- - the market adjusted value (less any applicable premium tax not previously
deducted) on the settlement date;
- - the annuity table we are then using for annuity settlements (never less than
the table guaranteed in the contract);
- - the annuitant's age; and
- - the annuity payment plan selected.
The tables for Plans A, B, C and D are based on the "1983 Individual Annuitant
Mortality Table A" and an assumed rate of 4% per year. The table for Plan E is
based on an interest rate of 4%. IDS Life may, at our discretion, if mortality
appears more favorable and interest rates justify, apply other tables that will
result in higher monthly payments.
ANNUITY PAYMENT PLAN REQUIREMENTS FOR QUALIFIED ANNUITIES: If you elect an
annuity payment plan from your qualified annuity, it must comply with certain
IRS regulations governing required minimum distributions. In general, your
annuity payment plan will meet these regulations if payments are made:
- - in equal or substantially equal payments over a period not longer than the
life of the annuitant or over the life of the annuitant or designated
beneficiary; or
- - in equal or substantially equal payments over a period not longer than the
life expectancy of the annuitant or over the life expectancy of the
annuitant and designated beneficiary; or
- - over a period certain not longer than the life expectancy of the annuitant
or over the life expectancy of the annuitant and designated beneficiary.
AMENDMENT, DISTRIBUTION AND ASSIGNMENT OF CONTRACTS
AMENDMENT OF CONTRACTS
We reserve the right to amend the contracts to meet the requirements of
applicable federal or state laws or regulations. We will notify you in writing
of any such amendments.
DISTRIBUTION OF CONTRACTS
IDS Life is the principal underwriter for the contracts. IDS Life is registered
as a broker-dealer with the SEC under the Securities Exchange Act of 1934 (the
1934 Act) and is a member of the National Association of Securities Dealers,
Inc. (NASD). IDS Life's sales representatives are licensed insurance and annuity
agents and are registered with the NASD as our representatives. IDS Life may
enter into selling agent agreements with certain broker-dealers registered under
the 1934 Act. IDS Life pays commissions for sales of the contracts of up to 6%
of the purchase payment received. In the future, we may pay a commission on an
election of a subsequent guarantee period by an owner.
ASSIGNMENT OF CONTRACTS
You may change ownership of your annuity at any time by completing a change of
ownership form we approve and sending it to our office. No change of ownership
will be binding on us until we receive and record it. If you have a qualified
annuity, the contract may not be sold, assigned, transferred, discounted or
pledged as collateral for a loan or as security for the performance of an
obligation or for any other purpose except as required or permitted by the Code;
provided, however, that if the owner is a trust or custodian, or an employer
acting in a similar capacity, ownership of a contract may be transferred to the
annuitant.
TAXES
Generally, under current law, your contract has a tax-deferral feature. This
means any increase in the value of your contract is taxable to you only when you
receive a payment or surrender (see detailed discussion below). Any portion of
the annuity payments and any surrenders you request that represent ordinary
income normally are taxable. We will send you a tax information reporting form
for any year in which we made a taxable distribution according to our records.
Roth IRAs may grow and be distributed tax free if you meet certain distribution
requirements.
NONQUALIFIED ANNUITIES: Tax law requires that all nonqualified deferred annuity
contracts issued by the same company (and possibly its affiliates) to the same
owner during a calendar year be taxed as a single, unified contract when you
take distributions from any one of those contracts.
QUALIFIED ANNUITIES: When your contract is used to fund a retirement plan that
is already tax deferred under the Code, the contract will not provide any
necessary or additional tax deferral for that retirement plan. If your contract
is used to fund a 401(k) plan, your rights to benefits may be subject to the
terms and conditions of the plan regardless of the terms of the contract.
Adverse tax consequences may result if you do not ensure that contributions,
distributions and other transactions under the contract comply with the law.
Qualified annuities have minimum distribution rules that govern the timing and
amount of distributions. You should refer to your retirement plan or adoption
agreement, or consult a tax advisor for more information about these
distribution rules.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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ANNUITY PAYMENTS FROM NONQUALIFIED ANNUITIES: A portion of each payment will be
ordinary income and subject to tax, and a portion of each payment will be
considered a return of part of your investment and will not be taxed. Under
Annuity Payment Plan A: where the annuitant dies before your investment in the
contract is fully recovered, the remaining portion of the unrecovered investment
may be available as a federal income tax deduction to the owner for the last
taxable year of the annuitant. Under all other annuity payment plans, where the
annuity payments end before your investment in the contract is fully recovered,
the remaining portion of the unrecovered investment may be available as a
federal income tax deduction to the taxpayer for the tax year in which the
payments end. (See "Annuity Payment Plans.") All amounts you receive after your
investment in the contract is fully recovered will be subject to tax.
ANNUITY PAYMENTS FROM QUALIFIED ANNUITIES (EXCEPT ROTH IRAS): Under a qualified
annuity, the entire payment generally is includable as ordinary income and is
subject to tax unless: (1) the contract is an IRA to which you made
non-deductible contributions; or (2) you rolled after-tax dollars from a
retirement plan into your IRA, or (3) the contract is used to fund a retirement
plan and you or your employer have contributed after-tax dollars.
ANNUITY PAYMENTS FROM ROTH IRAS: In general, the entire payment from a Roth IRA
can be free from income and penalty taxes if you have attained age 59 1/2 and
met the five year holding period.
SURRENDERS FROM NONQUALIFIED ANNUITIES: If you surrender part or all of your
nonqualified contract before your annuity payments begin, your surrender payment
will be taxed to the extent that the value of your contract immediately before
the surrender exceeds your investment. You also may have to pay a 10% IRS
penalty for surrenders you make before reaching age 59 1/2 unless certain
exceptions apply.
SURRENDERS FROM QUALIFIED ANNUITIES (EXCEPT ROTH IRAS): Under a qualified
annuity, the entire surrender will generally be includable as ordinary income
and is subject to tax unless: (1) the contract is an IRA to which you made
non-deductible contributions; or (2) you rolled after-tax dollars from a
retirement plan into your IRA, or (3) the contract is used to fund a retirement
plan and you or your employer have contributed after-tax dollars.
SURRENDERS FROM ROTH IRAS: In general, the entire payment from a Roth IRA can be
free from income and penalty taxes if you have attained age 59 1/2 and met the
five year holding period.
DEATH BENEFITS TO BENEFICIARIES UNDER NONQUALIFIED ANNUITIES: The death benefit
under a contract is not tax exempt. Any amount your beneficiary receives that
represents previously deferred earnings within the contract is taxable as
ordinary income to the beneficiary in the year he or she receives the payments.
DEATH BENEFITS TO BENEFICIARIES UNDER QUALIFIED ANNUITIES: The entire death
benefit generally is taxable as ordinary income to the beneficiary in the year
he or she receives the payments from the qualified annuity. If, under your
401(k) plan the purchase payment was made by you or on your behalf with
after-tax contributions to your contract or if you made non-deductible
contributions to a traditional IRA, the portion of any distribution from the
annuity that represents after-tax contributions is not taxable as ordinary
income to your beneficiary. Death benefits under a Roth IRA generally are not
taxable as ordinary income to the beneficiary if certain distribution
requirements are met.
ANNUITIES OWNED BY CORPORATIONS, PARTNERSHIPS OR TRUSTS: For nonqualified
annuities, any annual increase in the value of annuities held by such entities
generally will be treated as ordinary income received during that year. This
provision is effective for purchase payments made after Feb. 28, 1986. However,
if the trust was set up for the benefit of a natural person only, the income
will remain tax deferred.
PENALTIES: In general, if you receive amounts from your contract (or, if
applicable, from the plan) before reaching age 59 1/2, you may have to pay a 10%
IRS penalty on the amount includable in your ordinary income. However, this
penalty will not apply to any amount received:
- - because of your death;
- - because you become disabled (as defined in the Code);
- - if the distribution is part of a series of substantially equal periodic
payments, made at least annually, over your life or life expectancy (or
joint lives or life expectancies of you and your beneficiary); or
- - if it is allocable to an investment before Aug. 14, 1982 (except for
qualified annuities).
For qualified annuities under 401(a) and 401(k) plans or TSAs, other exceptions
may apply if you surrender your contract before your plan specifies that
payments can be made.
WITHHOLDING, GENERALLY: If you receive all or part of the contract value, we may
deduct withholding against the taxable income portion of the payment. Any
withholding represents a prepayment of your tax due for the year. You take
credit for these amounts on your annual income tax return.
If the payment is part of an annuity payment plan, we generally compute the
amount of withholding using payroll tables. You may provide us with a statement
of how many exemptions to use in calculating the withholding. As long as you've
provided us with a valid Social Security Number or Taxpayer Identification
Number, you can elect not to have any withholding occur.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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If the distribution is any other type of payment (such as a partial or full
surrender) we compute withholding using 10% of the taxable portion. Similar to
above, as long as you have provided us with a valid Social Security Number or
Taxpayer Identification Number, you can elect not to have this withholding
occur.
The withholding requirements may differ if we are making payment to a non-U.S.
citizen or if we deliver the payment outside the United States.
Some states also may impose withholding requirements similar to the federal
withholding described above. If this should be the case, we may deduct state
withholding from any payment from which we deduct federal withholding.
WITHHOLDING FROM QUALIFIED ANNUITIES: If you receive directly all or part of the
contract value from a qualified annuity (except an IRA, Roth IRA or SEP),
mandatory 20% federal income tax withholding (and possibly state income tax
withholding) generally will be imposed at the time the payment is made from the
plan. This mandatory withholding is in place of the elective withholding
discussed above. This mandatory withholding will not be imposed if:
- - instead of receiving the distribution check, you elect to have the
distribution rolled over directly to an IRA or another eligible plan;
- - the payment is one in a series of substantially equal periodic payments,
made at least annually, over your life or life expectancy (or the joint
lives or life expectancies of you and your designated beneficiary) or over a
specified period of ten years or more;
- - the payment is a minimum distribution required under the Code;
- - the payment is made on account of an eligible hardship; or
- - the payment is a corrective distribution.
Payments made to a surviving spouse instead of being directly rolled over to an
IRA also may be subject to mandatory 20% income tax withholding.
State withholding also may be imposed on taxable distributions.
TRANSFER OF OWNERSHIP OF A NONQUALIFIED ANNUITY: If you transfer a nonqualified
annuity without receiving adequate consideration, the transfer is a gift and
also may be treated as a withdrawal for federal income tax purposes. If the gift
is a currently taxable event for income tax purposes, the original owner will be
taxed on the amount of deferred earnings at the time of the transfer and also
may be subject to the 10% IRS penalty discussed earlier. In this case, the new
owner's investment in the contract will be the value of the contract at the time
of the transfer. In general, this rule does not apply to transfers between
spouses. Please consult your tax advisor for further details.
COLLATERAL ASSIGNMENT OF A NONQUALIFIED ANNUITY: If you collaterally assign or
pledge your contract, earnings on purchase payments you made after Aug. 13, 1982
will be taxed to you like a surrender and you may have to pay a 10% IRS penalty.
You may not collaterally assign or pledge your qualified contracts.
IMPORTANT: Our discussion of federal tax laws is based upon our understanding of
current interpretations of these laws. Federal tax laws or current
interpretations of them may change. For this reason and because tax consequences
are complex and highly individual and cannot always be anticipated, you should
consult a tax advisor if you have any questions about taxation of your contract.
TAX QUALIFICATION: We intend that the contract qualify as an annuity for federal
income tax purposes. To that end, the provisions of the contract are to be
interpreted to ensure or maintain such tax qualification, in spite of any other
provisions of the contract. We reserve the right to amend the contract to
reflect any clarifications that may be needed or are appropriate to maintain
such qualification or to conform the contract to any applicable changes in the
tax qualification requirements. We will send you a copy of any amendments.
THE COMPANY
BUSINESS
IDS Life is a stock life insurance company organized in 1957 under the laws of
the State of Minnesota. Its headquarters is 70100 AXP Financial Center,
Minneapolis, MN 55474. IDS Life is a wholly owned subsidiary of American Express
Financial Corporation (AEFC), which is a wholly owned subsidiary of American
Express Company, a financial services company headquartered in New York City.
IDS Life conducts a conventional life insurance business. It acts as a direct
writer of fixed and variable insurance policies and annuities and is licensed in
49 states and the District of Columbia. IDS Life has four wholly owned
subsidiaries, two which serve New York residents and two which serve residents
in states other than New York. IDS Life and its subsidiaries offer fixed and
variable insurance policies and annuities through individual sales
representatives, through insurance agencies and broker-dealers who may also be
associated with financial institutions such as banks and directly to American
Express(R) Cardmembers.
IDS Life's primary products include fixed and variable universal life insurance
and fixed and variable single premium and flexible premium deferred annuities.
IDS Life also offers single premium life insurance, whole life insurance, term
insurance and disability income insurance as well as immediate annuities.
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INVESTMENTS BY IDS LIFE
IDS Life must invest its assets in its general account in accordance with
requirements established by applicable state laws regarding the nature and
quality of investments that life insurance companies may make and the percentage
of their assets that they may commit to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, asset-backed securities, preferred and common stocks, real estate
mortgages, real estate and certain other investments. All claims by purchasers
of the contracts, and other general account products, will be funded by the
general account.
We intend to construct and manage the investment portfolio relating to these
market value annuity contracts using a strategy known as "immunization."
Immunization seeks to lock in a defined return on the pool of assets versus the
pool of liabilities over a specified time horizon. Since the return on the
assets versus the liabilities is locked in, it is "immune" to any potential
fluctuations in interest rates during the given time. We achieve immunization by
constructing a portfolio of assets with a price sensitivity to interest rate
changes (i.e., price duration) that is essentially equal to the price duration
of the corresponding portfolio of liabilities. Portfolio immunization provides
us with flexibility and efficiency in creating and managing the asset portfolio,
while still assuring safety and soundness for funding liability obligations.
Our investment strategy will incorporate the use of a variety of debt
instruments having price durations tending to match the applicable guaranteed
interest periods. These instruments include, but are not necessarily limited to,
the following:
- - Securities issued by the U.S. government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the U.S.
government;
- - Debt securities that have an investment grade, at the time of purchase,
within the four highest grades assigned by the nationally recognized rating
agencies or are rated in the two highest grades by the National Association
of Insurance Commissioners;
- - Debt instruments that are unrated, but which are deemed by IDS Life to have
an investment quality within the four highest grades;
- - Other debt instruments, which are rated below investment grade, limited to
15% of assets at the time of purchase; and
- - Real estate mortgages, limited to 30% of portfolio assets at the time of
acquisition.
In addition, options and futures contracts on fixed income securities will be
used from time to time to achieve and maintain appropriate investment and
liquidity characteristics on the overall asset portfolio.
While this information generally describes our investment strategy, we are not
obligated to follow any particular strategy except as may be required by federal
law and Minnesota and other state insurance laws.
STATE REGULATION
IDS Life is subject to the laws of the State of Minnesota governing insurance
companies and to the regulations of the Minnesota Department of Commerce. An
annual statement in the prescribed form is filed with the Minnesota Department
of Commerce each year covering our operation for the preceding year and its
financial condition at the end of such year. Regulation by the Minnesota
Department of Commerce includes periodic examination to determine IDS Life's
contract liabilities and reserves so that the Minnesota Department of Commerce
may certify that these items are correct. IDS Life's books and accounts are
subject to review by the Minnesota Department of Commerce at all times. In
addition, IDS Life is subject to regulation under the insurance laws of other
jurisdictions in which it operates. Under insurance guaranty fund laws, in most
states, insurers doing business therein can be assessed up to prescribed limits
for policyholder losses incurred by insolvent companies. Most of these laws do
provide, however, that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength.
LEGAL PROCEEDINGS
We are a party to litigation and arbitration proceedings in the ordinary course
of our business, none of which is expected to have a material adverse effect on
us.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, alleging improper life insurance
sales practices, alleged agent misconduct, failure to properly supervise agents
and other matters relating to life insurance policies and annuity contracts. We
and our affiliates were named defendants in three purported class-action
lawsuits alleging improper insurance and annuity sales practices including
improper replacement of existing annuity contracts and insurance policies,
improper use of annuities to fund tax deferred contributory retirement plans,
alleged agent misconduct, failure to properly supervise agents and other matters
relating to life insurance policies and annuity contracts (BENACQUISTO V. IDS
LIFE INSURANCE COMPANY filed in Minnesota State Court 12/13/96; MORK, ET. AL. V.
IDS LIFE INSURANCE COMPANY filed in Minnesota State Court 3/21/97; THORESEN V.
IDS LIFE INSURANCE COMPANY, ET. AL. filed in Minnesota State Court 10/13/98). A
fourth lawsuit was filed against us and our affiliates in federal court
(BENACQUISTO, ET. AL. V. IDS LIFE INSURANCE COMPANY, ET. AL. filed in United
States District Court -- Minnesota 8/00). In January 2000, AEFC reached an
agreement in principle to settle the four class action lawsuits described above.
It is expected the settlement will provide $215 million of benefits to more than
two million participants in exchange for a release by class members of all
insurance and annuity state and federal market conduct claims dating back to
1985.
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The settlement received court approval. Implementation of the settlement
commenced October 15, 2001 and is substantially complete. Claim review payments
have been made. Numerous individuals opted out of the settlement described above
and therefore did not release their claims against AEFC and its subsidiaries.
Some of these class members who opted out were represented by counsel and
presented separate claims to AEFC and us. Most of their claims have been
settled.
In November 2002, a suit, captioned HARITOS ET. AL. V. AMERICAN EXPRESS
FINANCIAL CORPORATION AND IDS LIFE INSURANCE COMPANY, was filed in the United
States District Court for the District of Arizona. The suit is filed by the
plaintiffs who purport to represent a class of all persons that have purchased
financial plans from AEFA advisors during an undefined class period. Plaintiffs
allege that the sale of the plans violate the Investment Advisers Act of 1940.
The suit seeks an unspecified amount of damages, rescission and injunctive
relief. We believe that we have meritorious defenses to this suit and intend to
defend this case vigorously.
The outcome of any litigation or threatened litigation cannot be predicted with
any certainty. However, in the aggregate, we do not consider any lawsuits in
which we are named as a defendant to have a material impact on our financial
position or operating results.
SELECTED FINANCIAL DATA
The following selected financial data for IDS Life and its subsidiaries should
be read in conjunction with the consolidated financial statements and notes.
<Table>
<Caption>
YEARS ENDED DEC. 31, (THOUSANDS) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums $ 341,715 $ 314,843 $ 287,498 $ 255,427 $ 229,430
Net investment income 1,561,856 1,485,688 1,730,605 1,919,573 1,986,485
Net realized (loss) gain on investments (4,507) (649,752) (16,975) 26,608 6,902
Other 927,564 962,989 1,036,295 885,102 785,022
TOTAL REVENUES $ 2,826,628 $ 2,113,768 $ 3,037,423 $ 3,086,710 $ 3,007,839
INCOME (LOSS) BEFORE INCOME TAXES $ 470,007 $ (188,957) $ 807,264 $ 904,317 $ 775,792
Income (loss) before cumulative effect of accounting change 382,181 (43,735) 585,637 636,453 540,111
Cumulative effect of accounting change (net of income taxes) -- (21,416) -- -- --
NET INCOME (LOSS) $ 382,181 $ (65,151) $ 585,637 $ 636,453 $ 540,111
TOTAL ASSETS $ 59,638,635 $ 57,895,900 $ 60,450,203 $ 64,441,538 $ 56,550,563
</Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2002 COMPARED TO 2001:
Consolidated net income was $382 million in 2002, compared to consolidated net
loss of $65 million in 2001. Consolidated income before income tax expense
totaled $470 million in 2002, compared with a consolidated loss before income
tax benefit and cumulative effect of accounting change of $189 million in 2001.
The significant increase in net income was primarily a result of the 2001
writedown and sale of high-yield securities that reduced risk within the
investment portfolio, as explained below.
Total revenues increased by 34% to $2.8 billion in 2002, compared with $2.1
billion in 2001. The increase was primarily due to higher net investment income
and lower levels of realized losses, primarily reflecting the impact of the 2001
high-yield securities' realized losses. In addition, invested assets were higher
in 2002. Insurance premiums and policyholder and contractholder charges also
increased. Partially offsetting were declines in management and other fees, as
separate account assets dropped 20% from 2001 levels.
Insurance and investment contract considerations received increased to $8.3
billion in 2002, compared with $5.8 billion in 2001. The increase is primarily
due to higher fixed annuity sales in both the advisor distribution channel and
through third parties.
Net investment income, the largest component of revenues, increased by $76
million from the prior year. This increase primarily reflects the effect of
credit related yield adjustments on fixed maturity investments in 2001 and
higher invested asset levels in 2002, which were somewhat offset by lower
portfolio yields in 2002, driven by investment portfolio repositioning as
described below. Investment income also benefited from the effect of less
depreciation in the S&P 500 this year on the value of options hedging
outstanding equity indexed annuities, which is offset in the related provisions
for losses and benefits.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 7% to $523 million
in 2002, compared with $490 million in 2001. This increase relates to the 10%
growth in total life insurance inforce, which grew to $119 billion at Dec. 31,
2002.
Management and other fees decreased 14% to $405 million in 2002, compared with
$473 million in 2001. This decrease was primarily due to lower levels of average
separate account assets, resulting primarily from market depreciation of equity
securities as weak equity markets continued throughout the year. We provide
investment management services for many of the mutual funds that are available
as investment options for variable annuities and variable life insurance. We
also receive mortality and expense risk fees from the separate accounts based on
the level of assets.
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Net realized losses on investments were $5 million in 2002, compared to net
realized losses of $650 million in 2001. The 2002 net realized losses include
$146 million from impairments recognized on available-for-sale securities during
the year (including $45 million related to directly-held WorldCom debt
holdings). We sold approximately $10.5 billion of our invested assets on a
consolidated basis during 2002. In addition, approximately $3 billion in
investments were redeemed during the year. The cash generated by these sales and
redemptions has been or will be invested. The net realized loss for 2001 was
comprised of a $143 million pretax net loss in the first quarter resulting
primarily from the recognition of impairment losses and the sale of certain
high-yield securities; a $227 million writedown in the second quarter to
recognize the impact of higher default rate assumptions on certain structured
investments; a $262 million writedown of lower-rated securities (most of which
were sold during 2001) in the second quarter primarily in connection with our
decision to lower our risk profile by reducing the level of our high-yield fixed
maturity investment portfolio, allocating holdings toward stronger credits, and
reducing the concentration of exposure to individual companies and industry
sectors; and $18 million of other net losses primarily related to the sale and
write-down of other investments.
Total benefits and expenses increased to $2.4 billion in 2002 from $2.3 billion
in 2001. The largest component of expenses, interest credited to policyholder
accounts for universal life-type insurance and investment contracts, increased
2% to $1.2 billion, reflecting the growth in fixed annuities in force and the
effect of less depreciation in the S&P 500 on equity indexed annuities, despite
lower interest crediting rates from the lower interest rate environment. The $56
million increase in total death and other benefits reflects higher insurance
claims and a significant increase in guaranteed minimum death benefits on
variable annuity contracts with $37 million expensed in 2002 versus $16 million
in 2001. 2001's results also include an $11 million charge for anticipated
insured loss claims from the September 11th terrorist attacks while 2002 results
include a $7 million reversal of a portion of these reserves as a result of
lower than anticipated insured loss claims. Deferred acquisition costs (DAC) of
$3.3 billion and $3.1 billion are on our balance sheet at Dec. 31, 2002 and
2001, respectively. These balances are approximately $1.7 billion related to
life and health insurance and $1.6 billion to annuities. In 2001, approximately
$1.6 billion related to life and health insurance and $1.5 billion to annuities.
Amortization of DAC decreased to $312 million in 2002, compared to $371 million
in 2001. The decrease in 2002's amortization was primarily from the $67 million
amortization increase in the first quarter of 2001 of DAC for variable annuity
and insurance products as a result of the significant decline in equity-based
separate account values and the associated fee revenues. In addition, during the
third quarter of 2002 we completed a comprehensive review of our DAC related
practices that resulted in a net increase in DAC amortization, as described
below.
Other insurance and operating expenses increased to $438 million in 2002,
compared to $408 million in 2001. This increase was primarily due to lower
levels of expenses deferred in 2002 as described below and from business growth
and technology costs related to growth initiatives.
The costs of acquiring new business, including for example, direct sales
commissions, related sales incentive bonuses and awards, underwriting costs,
policy issue costs and other related costs, have been deferred on the sale of
insurance and annuity contracts. The DAC for universal life and variable
universal life insurance and certain installment annuities are amortized as a
percentage of the estimated gross profits expected to be realized on the
policies. DAC for other annuities are amortized using the interest method. For
traditional life, disability income and long-term care insurance policies, the
costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. The customer asset
value growth rate is the rate at which contract values are assumed to appreciate
in the future. This rate is net of asset fees, and anticipates a blend of equity
and fixed income investments. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed experience.
Management reviews and, where appropriate, adjusts its assumptions with respect
to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency rates,
mortality rates, interest margins and maintenance expense levels each quarter.
Unless management identifies a material deviation over the course of the
quarterly monitoring process, management reviews and updates these DAC
assumptions annually in the third quarter of each year. When assumptions are
changed, the percentage of estimated gross profits or portion of interest
margins used to amortize DAC may also change. A change in the required
amortization percentage is applied retrospectively; an increase in amortization
percentage will result in an acceleration of DAC amortization while a decrease
in amortization percentage will result in a deceleration of DAC amortization.
The impact on results of operations of changing assumptions with respect to the
amortization of DAC can be either positive or negative in any particular period,
and is reflected in the period that such changes are made. In 2002, excluding
the third quarter, the impact of resetting these assumptions, along with the
impact of unfavorable equity market performance, was an acceleration of $22
million pretax of DAC amortization. Third quarter impacts are described below.
During the third quarter of 2002, we completed a comprehensive review of our DAC
related practices. The specific areas reviewed included costs deferred, DAC
amortization periods, customer asset value growth rate assumptions (which are
typically reviewed on a quarterly basis) and other assumptions, including
mortality rates and product persistency (which are typically updated on an
annual basis in the third quarter). As a result of this review, we took certain
actions that resulted in a net $37 million increase in expenses in the third
quarter of 2002.
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We reset our customer asset value growth rate assumptions for variable annuity
and variable life products to anticipate near-term and long-term growth at an
annual rate of 7%. The customer asset value growth rate is the rate at which
contract values are assumed to appreciate in the future. This rate is net of
asset fees, and anticipates a blend of equity and fixed income investments.
Prior to resetting these assumptions, we were projecting long-term customer
asset value growth at 7.5% and near-term growth at approximately twice that
rate. The impact of resetting these assumptions, along with the impact of
unfavorable third quarter 2002 equity market performance, was an acceleration of
$173 million pretax of DAC amortization.
Going forward, we intend to continue to use a mean reversion method as a
guideline in setting the near-term customer asset value growth rate, also
referred to as the mean reversion rate. In periods when market performance
results in actual contract value growth at a rate different than that assumed,
we will reassess the near-term rate in order to continue to project our best
estimate of long-term growth. For example, if actual contract value growth
during a quarter is less than 7% on an annualized basis, we would increase the
mean reversion rate assumed over the near term to the rate needed to achieve the
long-term annualized growth rate of 7% by the end of that period, assuming this
long-term view is still appropriate.
We revised certain mortality and persistency assumptions for universal and
variable universal life insurance products and fixed and variable annuity
products to better reflect actual experience and future expectations. We updated
the mortality table used in pricing universal and variable universal life
products and in valuing the associated DAC. The most recently published life
insurance industry mortality table was used as a starting point, and was then
modified based on our experience. We also observed that recent persistency of
our universal life products was consistently better than expected, and
determined the trend justified an improvement in assumed persistency rates.
Additionally, we reviewed and updated persistency assumptions for fixed and
variable deferred annuity products. We also reviewed the periods over which DAC
is amortized for fixed and variable deferred annuity products. Analysis showed
that significant volumes of advisor-distributed fixed annuities were expected to
persist beyond our ten-year DAC amortization period. As a result, we extended
the amortization period from 10 to 15 years to be more consistent with the
period over which significant profits were expected and that would result in a
more appropriate matching of revenues and expense. Similarly, we made slight
increases in the amortization periods used for certain blocks of
advisor-distributed variable annuities. These changes, along with revised
assumptions projecting more favorable persistency and mortality rates, resulted
in a decrease in DAC expense of $155 million pretax.
Finally, we reviewed our acquisition costs to clarify those costs that vary with
and are primarily related to the acquisition of new and renewable annuity and
insurance contracts. We revised the types and amounts of costs deferred, in part
to reflect the impact of advisor platform changes and the effects of related
reengineering. This resulted in an increase in expense of $19 million pretax
recognized in the third quarter of 2002.
The adjustments made to customer asset value growth rate assumptions should
reduce the risk of adverse DAC adjustments going forward, while changes made to
mortality and persistency assumptions and DAC amortization periods somewhat
increase the risk of adverse adjustments. Overall, we believe we are less
exposed to the risk of adverse DAC adjustments as a result of these changes. The
changes relating to the types and amounts of costs deferred will somewhat
accelerate the recognition of ongoing expenses, although the impact of this
should be offset to some extent as reengineering and other cost control
initiatives are expected to mitigate their impact.
2001 COMPARED TO 2000:
Consolidated net loss was $65 million in 2001, compared to consolidated net
income of $586 million in 2000. Consolidated loss before income tax benefit and
cumulative effect of accounting change totaled $189 million in 2001, compared
with consolidated income before income tax expense of $807 million in 2000. This
decline was primarily the result of a $633 million increase in net realized loss
on investments and a $245 million decrease in investment income.
Total revenues decreased to $2.1 billion in 2001, compared with $3.0 billion in
2000. The decrease was primarily due to decreases in net investment income and
from the realized investments losses. Net investment income, the largest
component of revenues, decreased by $245 million from the prior year, primarily
reflecting credit related yield adjustments on fixed maturity investments and
overall lower investment yields.
Total premiums and investment contract deposits received decreased to $5.8
billion in 2001, compared with $6.9 billion in 2000. The reduction is primarily
due to lower variable annuity sales.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 12% to $490 million
in 2001, compared with $438 million in 2000. This increase reflects increased
total life insurance in force, which grew 10% to $108 billion at Dec. 31, 2001.
Management and other fees decreased 21% to $473 million in 2001, compared with
$598 million in 2000. This decrease reflects lower average separate account
assets outstanding, resulting primarily from equity market depreciation. We
provide investment management services for many of the mutual funds that are
available as investment options for variable annuities and variable life
insurance. We also receive a mortality and expense risk fee from the separate
accounts.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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Net realized losses on investments were $650 million in 2001, compared to net
realized losses of $17 million in 2000. The net loss for the year was comprised
of a $143 million pretax net loss in the first quarter resulting primarily from
the recognition of impairment losses and the sale of certain high-yield
securities; a $227 million writedown in the second quarter to recognize the
impact of higher default rate assumptions on certain structured investments; a
$262 million writedown of lower-rated securities (most of which were sold during
2001) in the second quarter primarily in connection with our decision to lower
our risk profile by reducing the level of our high-yield fixed maturity
investment portfolio, allocating holdings toward stronger credits, and reducing
the concentration of exposure to individual companies and industry sectors; and
$18 million of other net losses primarily related to the sale and write-down of
other investments.
Total benefits and expenses increased slightly to $2.3 billion in 2001 from $2.2
billion in 2000. The largest component of expenses, interest credited to
policyholder accounts for universal life-type insurance and investment
contracts, decreased slightly to $1.1 billion, reflecting a slight decrease in
fixed annuities in force and lower interest crediting rates due to the lower
interest rate environment. Amortization of DAC increased to $371 million in
2001, compared to $362 million in 2000. The increase was primarily due to DAC
unlocking adjustments (see footnote one of the financial statements for the
definition of unlocking adjustments), which resulted in a net increase in
amortization of $33.6 million in 2001 and a net decrease in amortization of
$12.3 million in 2000. Amortization, excluding unlocking adjustments, was
significantly less in 2001 than in 2000, due primarily to the significant drop
in equity-based separate account values and associated fee revenue.
Other insurance and operating expenses increased to $408 million in 2001,
compared to $379 million in 2000. This increase was primarily a result of
business growth and technology costs related to growth initiatives.
IMPACT OF MARKET VOLATILITY ON RESULTS OF OPERATIONS
Various aspects of our business can be significantly impacted by equity market
levels and other market-based factors. One of these items is the management fee
revenue which is based on the market value of separate account assets. Other
areas impacted by market volatility involve DAC (as noted above), structured
investments and the variable annuity guaranteed minimum death benefit feature.
The value of our structured investment portfolio is impacted by various market
factors. These investments include collateralized debt obligations and secured
loan trusts (backed by high-yield bonds and bank loans), which are held by us
through interests in special purpose entities. The carrying value of these
investments is based on estimated cash flow projections, which are affected by
factors such as default rates, persistency of defaults, recovery rates and
interest rates, among others. Persistency of, or increases in, these default
rates could result in negative adjustments to the market values of these
investments in the future, which would adversely impact results of operations.
Conversely, a decline in the default rates would result in higher values and
would benefit future results of operations.
The majority of the variable annuity contracts offered by us contain guaranteed
minimum death benefit (GMDB) provisions. At time of issue, these contracts
typically guarantee the death benefit payable will not be less than the amount
invested, regardless of the performance of the customer's account. Most
contracts also provide for some type of periodic adjustment of the guaranteed
amount based on the change in the value of the contract. A large portion of our
contracts containing a GMDB provision adjust once every six years. The periodic
adjustment of these contracts can either increase or decrease the guaranteed
amount though not below the amount invested adjusted for withdrawals. When
market values of the customer's accounts decline, the death benefit payable on a
contract with a GMDB may exceed the accumulated contract value. Currently, the
amount paid in excess of contract value is expensed when payable.
CERTAIN CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Note 1 to the Consolidated
Financial Statements. The following provides information about certain critical
accounting policies that are important to the Consolidated Financial Statements
and that involve estimates requiring significant management assumptions and
judgments about the effect of matters that are uncertain. These policies relate
to the recognition of impairment within the investment portfolio, deferred
policy acquisition costs and insurance and annuity reserves.
INVESTMENTS
All fixed maturity securities and marketable equity securities are classified as
available-for-sale and carried at fair value. Unrealized gains and losses on
securities classified as available-for-sale are carried as a separate component
of accumulated other comprehensive income (loss), net of the related deferred
policy acquisition costs and income taxes. Gains and losses are recognized in
the results of operations upon disposition of the securities using the specific
identification method. In addition, losses are also recognized when management
determines that a decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for fixed maturity securities include, but are
not limited to, issuer downgrade, default or bankruptcy. We also consider the
extent to which cost exceeds fair value, the duration of time of that decline,
and management's judgment about the issuer's current and prospective financial
condition. The charges are reflected in net realized gain (loss) on investments
within the Consolidated Statements of Income.
Fair value of fixed maturity and equity securities is generally based on quoted
market prices. However, our investment portfolio also contains structured
investments of various asset quality, including collateralized debt obligations
(CDOs) and secured loan trusts (SLTs) (backed by high-yield bonds and bank
loans), which are not readily marketable. As a result, the carrying values of
these structured investments are based on estimated cash flow projections which
require a significant degree of management judgment as to default and recovery
rates of the underlying investments and, as such, are subject to change. If
actual future cash flows are less than projected, additional losses would be
realized.
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The reserve for losses on mortgage loans on real estate is measured as the
excess of the loan's recorded investment over its present value of expected
principal and interest payments discounted at the loan's effective interest rate
or the fair value of collateral. Additionally, the level of the reserve for
losses considers other factors, including historical experience and current
economic and political conditions. Management regularly evaluates the adequacy
of the reserve for mortgage loan losses and believes it is adequate to absorb
estimated losses in the portfolio.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, including for example, direct sales
commissions, related sales incentive bonuses and awards, underwriting costs,
policy issue costs and other related costs, have been deferred on the sale of
insurance and annuity contracts. The DAC for universal life and variable
universal life insurance and certain installment annuities are amortized as a
percentage of the estimated gross profits expected to be realized on the
policies. DAC for other annuities are amortized using the interest method. For
traditional life, disability income and long-term care insurance policies, the
costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. The customer asset
value growth rate is the rate at which contract values are assumed to appreciate
in the future. This rate is net of asset fees, and anticipates a blend of equity
and fixed income investments. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed experience.
Management reviews and, where appropriate, adjusts its assumptions with respect
to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency rates,
mortality rates, interest margins and maintenance expense levels each quarter.
Unless management identifies a material deviation over the course of the
quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC may also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an acceleration of DAC amortization while a decrease in amortization
percentage will result in a deceleration of DAC amortization. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period, and is
reflected in the period that such changes are made.
LIABILITIES FOR FUTURE POLICY BENEFITS
Liabilities for fixed and variable universal life insurance and fixed and
variable deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities issued before 1999 are equal
to the present value of guaranteed benefits and the intrinsic value of
index-based benefits. Liabilities for equity indexed deferred annuities issued
in 1999 or later are equal to the accumulation of host contract values covering
guaranteed benefits and the market value of embedded equity options.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates ranging from 5% to 9.5%, depending
on year of issue, with an average rate of approximately 6.5%.
Liabilities for future benefits on traditional life insurance, principally term
and whole life insurance, are based on the net level premium method, using
anticipated mortality, policy persistency and interest earning rates.
Anticipated mortality rates are based on established industry mortality tables,
with modifications based on our experience. Anticipated policy persistency rates
vary by policy form, issue age and policy duration with persistency on level
term and cash value plans generally anticipated to be better than persistency on
yearly renewable term insurance plans. Anticipated interest rates range from 4%
to 10%, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
Claim reserves are calculated based on claim continuance tables and anticipated
interest earnings. Anticipated claim continuance rates are based on established
industry tables. Anticipated interest rates for claim reserves for both
disability income and long-term care range from 5% to 8%.
Liabilities for reported and unpaid life insurance claims are equal to the death
benefits payable. For disability income and long-term care claims, unpaid claims
liabilities are equal to benefit amounts due and accrued. Liabilities for
incurred but not reported claims are estimated based on periodic analysis of the
actual reported claim lag. Where applicable, amounts recoverable from reinsurers
are separately recorded as receivables. For life insurance, no claim adjustment
expense reserve is held. The claim adjustment expense reserves for disability
income and long-term care are based on the claim reserves.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
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RISK MANAGEMENT
The sensitivity analysis discussed below estimates the effects of hypothetical
sudden and sustained changes in the applicable market conditions of two
different types of market risk 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 the value of equity
securities held in separate accounts. Computations of the prospective effects of
hypothetical interest rate and equity market changes are based on numerous
assumptions, including relative levels of market interest rates and equity
prices, as well as the levels of assets and liabilities. The hypothetical
changes and assumptions will be different from what actually occur. Furthermore,
the computations do not incorporate actions that management could take if the
hypothetical market changes actually took place. As a result, actual earnings
consequences will differ from those quantified below.
We primarily invest in fixed income securities over a broad range of maturities
for the purpose of providing fixed annuity and fixed universal life
contractholders with a competitive rate of return on their investments while
controlling risk, and to provide a dependable and targeted spread between the
interest rate earned on investments and the interest rate credited to
contractholders' accounts. We do not invest in securities to generate short-term
trading profits.
IDS Life and each of its insurance subsidiaries' investment committees meet
periodically. With respect to IDS Life of New York and American Centurion Life,
the full Board acts as the investment committee. At these meetings, the
committee or Board reviews models projecting different interest rate scenarios,
risk/return measures, and their effect on profitability. The committee or Board
also reviews the distribution of assets in the portfolio by type and credit risk
sector. The objective of the committee or Board is to structure the investment
security portfolio based upon the type and expected behavior of products in the
liability portfolio so as to meet contractual obligations and to achieve
targeted levels of profitability within defined risk parameters.
Rates credited to contract owners' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the investment committee's or Board's strategy includes the use of derivatives,
such as interest rate caps, swaps and floors, for risk management purposes.
These derivatives help protect margins by increasing investment returns if there
is a sudden and severe rise in interest rates, thereby mitigating the impact of
an increase in rates credited to contract owner's fixed accounts. Conversely, in
a low interest rate environment, such as that experienced recently, margins may
be negatively impacted as the interest rates available on our investments
approaches the guaranteed minimum interest rates on insurance or annuity
contracts. This negative impact may be compounded by the fact that many of our
interest bearing investments are callable or prepayable by the issuer and calls
and prepayments are more likely to occur in a low interest rate environment.
The negative effect on our 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 Dec. 31, 2002,
would be approximately $11 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 our
obligation under the provisions of this product, the committee's strategy is to
purchase and write options on a major stock market index, and to purchase
futures which are marked to market daily and exchange traded, exposing us to no
counterparty risk. At Dec. 31, 2002 equity-based derivatives with a net notional
amount of $225 million were outstanding to hedge these equity market exposures.
The amount of the fee income we receive is based upon the daily market value of
the separate account assets. As a result, our fee income would be negatively
impacted by a decline in the equity markets. Another part of the investment
committee's strategy is to use index options to manage the equity market risk
related to fee income. These derivatives help protect fee income by providing
option income when there is a significant decline in the equity markets. We did
not have equity-based derivatives outstanding at Dec. 31, 2002 for this purpose.
The negative effect on our pretax earnings of a 10% decline in equity prices
would be approximately $23 million based on separate account assets under
management as of Dec. 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements are generally met by funds provided by premiums,
investment income, proceeds from sales of investments as well as maturities,
periodic repayments of investment principal and capital contributions.
Maturities of our investments are largely matched with the expected future
payments of insurance and annuity obligations.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
We have available lines of credit with AEFC aggregating $200 million ($100
million committed and $100 million uncommitted). There were no borrowings
outstanding at Dec. 31, 2002. At Dec. 31, 2002, we had outstanding reverse
repurchase agreements totaling $225 million. Both the line of credit and the
reverse repurchase agreements are used strictly as short-term sources of funds.
At Dec. 31, 2002, investments in fixed maturities comprised 84% of our total
invested assets and primarily include corporate debt, mortgage and other
asset-backed securities. Approximately 49% is invested in GNMA, FNMA and FHLMC
mortgage-backed securities which are considered AAA quality. Our corporate
securities comprise a diverse portfolio with the largest concentrations
accounting for approximately 63% of the portfolio, in the following industries:
banking and finance, utilities, communication and media and transportation.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
22
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At Dec. 31, 2002, approximately 7% of our 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 a
recession or increasing interest rates, and in certain instances, the lack of an
active secondary market. Expected returns on below investment grade bonds
reflect consideration of such factors. We have identified those fixed maturities
for which a decline in fair value is determined to be other-than-temporary, and
have written them down to fair value with a charge to earnings.
During 2002, we continued to hold investments in CDOs and SLTs, some of which
are also managed by a related party. We invested in CDOs and SLTs as part of our
investment strategy in order to pay a competitive rate to contractholders'
accounts. Our exposure as an investor is limited solely to our aggregate
investment in the CDOs and SLTs, and we have no obligations or commitments,
contingent or otherwise, that could require any further funding of such
investments. As of Dec. 31, 2002, the carrying values of the CDO residual
tranches and SLT notes were $13 million and $657 million, respectively. CDOs and
SLTs are illiquid investments. As an investor in the residual tranche of CDOs,
our return correlates to the performance of portfolios of high-yield bonds
and/or bank loans. As a noteholder of SLTs, our return is based on a reference
portfolio of loans. The carrying value of the CDO and SLT investments and our
projected return are based on discounted cash flow projections that require a
significant degree of management judgment as to assumptions primarily related to
default and recovery rates of the high-yield bonds and/or bank loans either held
directly by the CDO or in the reference portfolio of the SLT and, as such, are
subject to change. Generally, the SLTs are structured such that the principal
amount of the loans in the reference portfolio may be up to five times that of
the par amount of the notes held by us. Although the exposure associated with
our investment in CDOs and SLTs is limited to the carrying value of such
investments, they are volatile investments and have a substantial degree of risk
associated with them because the amount of the initial value of the loans and/or
other debt obligations in the related portfolios is significantly greater than
our exposure. Deterioration in the value of the high-yield bonds or bank loans
would likely result in deterioration of our investment return with respect to
the relevant CDO or SLT, as the case may be. In the event of significant
deterioration of a portfolio, the relevant CDO or SLT may be subject to early
liquidation, which could result in further deterioration of the investment
return or, in severe cases, loss of the carrying amount.
During 2001, we placed a majority of our rated CDO securities and related
accrued interest, as well as a relatively minor amount of other liquid
securities (collectively referred to as transferred assets), having an aggregate
book value of $675 million, into a securitization trust. In return, we received
$90 million in cash (excluding transaction expenses) relating to sales to
unaffiliated investors and retained interests in the trust with allocated book
amounts aggregating $586 million. As of Dec. 31, 2002, the retained interests
had a carrying value of $562 million, of which $388 million is considered
investment grade. We have no obligations, contingent or otherwise, to such
unaffiliated investors. One of the results of this transaction is that increases
or decreases in future cash flows of the individual CDOs are combined into one
overall cash flow for purposes of determining the carrying value of the retained
interests and related impact on results of operations.
At Dec. 31, 2002, net unrealized gains on available-for-sale fixed maturity
securities included $1,029 million of gross unrealized gains and $186 million of
gross unrealized losses. We do not classify fixed maturity securities as
held-to-maturity.
At Dec. 31, 2002, we had a reserve for losses on mortgage loans totaling $35
million and on real estate investments totaling $nil.
In 2002, we received capital contributions from AEFC totaling $400 million and
paid dividends of $70 million to AEFC.
The economy and other factors cause insurance companies to go under regulatory
supervision. These situations result 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. We 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. We have also estimated the potential effect of future
assessments on our financial position and results of operations and have
established a reserve for such potential assessments.
The National Association of Insurance Commissioners (NAIC) established
risk-based capital (RBC) standards for life insurance companies to determine
capital requirements based upon the risks inherent in its operations. These
standards require the computation of a RBC amount which is then compared to a
company's actual total adjusted statutory capital. The computation involves
applying factors to various statutory financial data to address four primary
risks: asset default, adverse insurance experience, interest rate risk and
external events. These standards provide for regulatory attention when the
percentage of total adjusted capital to authorized control level RBC is below
certain levels. As of Dec. 31, 2002, our total adjusted capital was well in
excess of the levels requiring regulatory attention. In 2003, any dividend
distributions in excess of 10% of our statutory capital would require approval
of the Department of Commerce of the State of Minnesota.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
23
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FORWARD-LOOKING STATEMENTS
Certain statements in the Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations contain forward-looking statements
which are subject to risks and uncertainties that could cause results to differ
materially from such statements. The words "believe," "expect," "anticipate,"
"optimistic," "intend," "plan," "aim," "will," "should," "could," "likely," and
similar expressions are intended to identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date on which they are made. We undertake no
obligation to publicly update or revise any forward-looking statements.
Important factors that could cause actual results to differ materially from our
forward-looking statements include, but are not limited to: fluctuations in
external markets, which can affect the amount and types of investment products
sold, the market value of our managed assets, management and other fees received
based on those assets and the amount of amortization of DAC; potential
deterioration in high-yield and other investments, which could result in further
losses in our investment portfolio; changes in assumptions relating to DAC which
also could impact the amount of DAC amortization; the ability to sell certain
high-yield investments at expected values and within anticipated timeframes and
to maintain our high-yield portfolio at certain levels in the future; the types
and the value of certain death benefit features on variable annuity contracts;
the affect of assessments and other surcharges for guaranty funds; the response
of reinsurance companies under reinsurance contracts; the impact of reinsurance
rates and the availability and adequacy of reinsurance to protect us against
losses; negative changes in our and our subsidiaries' credit ratings; increasing
competition in all our major businesses; the adoption of recently issued rules
related to the consolidation of variable interest entities, including those
involving CDOs and SLTs that we invest in which could affect both our balance
sheet and results of operations; and outcomes of litigation.
ADDITIONAL INFORMATION
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
To the extent and only to the extent that any statement in a document
incorporated by reference into this prospectus is modified or superseded by a
statement in this prospectus or in a later-filed document, such statement is
hereby deemed so modified or superseded and not part of this prospectus. The
Annual Report on Form 10-K for the year ended Dec. 31, 2002 previously filed by
IDS Life with the SEC under the 1934 Act is incorporated by reference into this
prospectus.
IDS Life will furnish you without charge a copy of any or all of the documents
incorporated by reference into this prospectus, including any exhibits to such
documents which have been specifically incorporated by reference. We will do so
upon receipt of your written or oral request. You can contact IDS Life at the
telephone number and address listed on the first page of this prospectus.
AVAILABLE INFORMATION
This prospectus is part of a registration statement we file with the SEC.
Additional information on IDS Life and on this offering is available in the
registration statement. You can obtain copies of these materials at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site. This prospectus,
other information about the contract and other information incorporated by
reference are available on the EDGAR Database on the SEC's Internet site at
(http://www.sec.gov).
INDEMNIFICATION Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (1933 Act) may be permitted to directors and officers or
persons controlling IDS Life pursuant to the foregoing provisions, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is therefore unenforceable.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated financial
statements of IDS Life Insurance Company at Dec. 31, 2002 and 2001, and for each
of the three years in the period ended Dec. 31, 2002, as set forth in their
report. We've included our consolidated financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
24
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IDS Life Insurance Company
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
IDS LIFE INSURANCE COMPANY
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly-owned subsidiary of American Express Financial
Corporation) as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
January 27, 2003
Minneapolis, Minnesota
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
December 31, (In thousands, except share amounts) 2002 2001
Assets
Investments:
Available-for-sale:
Fixed maturities, at fair value (amortized cost: 2002, $23,209,226; 2001, $20,022,072) $24,052,104 $20,157,137
Common stocks, at fair value (cost: 2002, $19; 2001, $805) 21 1,704
Mortgage loans on real estate 3,417,651 3,680,394
Policy loans 597,144 619,571
Other investments 752,558 621,897
------- -------
Total investments 28,819,478 25,080,703
Cash and cash equivalents 4,424,061 1,150,251
Amounts recoverable from reinsurers 633,510 529,166
Amounts due from brokers 501 90,794
Other accounts receivable 56,245 46,349
Accrued investment income 296,595 278,199
Deferred policy acquisition costs 3,309,783 3,107,187
Deferred income taxes, net -- 156,308
Other assets 117,788 123,246
Separate account assets 21,980,674 27,333,697
---------- ----------
Total assets $59,638,635 $57,895,900
=========== ===========
Liabilities and stockholder's equity
Liabilities:
Future policy benefits:
Fixed annuities $23,411,314 $19,592,273
Universal life-type insurance 3,515,010 3,433,904
Traditional life insurance 247,441 241,165
Disability income and long-term care insurance 1,466,171 1,227,172
Policy claims and other policyholders' funds 85,400 71,879
Amounts due to brokers 3,342,989 1,740,031
Deferred income taxes, net 182,059 --
Other liabilities 463,326 437,017
Separate account liabilities 21,980,674 27,333,697
---------- ----------
Total liabilities 54,694,384 54,077,138
---------- ----------
Commitments and contingencies
Stockholder's equity:
Capital stock, $30 par value per share; 100,000 shares authorized, issued and outstanding 3,000 3,000
Additional paid-in capital 1,088,327 688,327
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains 497,319 83,443
Net unrealized derivative gains (losses) 764 1,332
--- -----
Total accumulated other comprehensive income 498,083 84,775
Retained earnings 3,354,841 3,042,660
--------- ---------
Total stockholder's equity 4,944,251 3,818,762
--------- ---------
Total liabilities and stockholder's equity $59,638,635 $57,895,900
=========== ===========
See accompanying notes to consolidated financial statements.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Consolidated Statements of Income
Years ended December 31, (In thousands) 2002 2001 2000
Revenues
Premiums:
Traditional life insurance $ 67,978 $ 59,415 $ 56,187
Disability income and long-term care insurance 273,737 255,428 231,311
------- ------- -------
Total premiums 341,715 314,843 287,498
Net investment income 1,561,856 1,485,688 1,730,605
Policyholder and contractholder charges 522,777 489,583 438,127
Management and other fees 404,787 473,406 598,168
Net realized loss on investments (4,507) (649,752) (16,975)
------ -------- -------
Total revenues 2,826,628 2,113,768 3,037,423
--------- --------- ---------
Benefits and expenses
Death and other benefits:
Traditional life insurance 36,881 35,519 29,042
Universal life-type insurance and investment contracts 221,544 175,247 131,467
Disability income and long-term care insurance 52,962 44,725 40,246
Increase in liabilities for future policy benefits:
Traditional life insurance 2,768 7,231 5,765
Disability income and long-term care insurance 134,605 123,227 113,239
Interest credited on universal life-type insurance and investment contracts 1,157,636 1,137,636 1,169,641
Amortization of deferred policy acquisition costs 312,402 371,342 362,106
Other insurance and operating expenses 437,823 407,798 378,653
------- ------- -------
Total benefits and expenses 2,356,621 2,302,725 2,230,159
--------- --------- ---------
Income (loss) before income tax expense (benefit) and
cumulative effect of accounting change 470,007 (188,957) 807,264
Income tax expense (benefit) 87,826 (145,222) 221,627
------ -------- -------
Income (loss) before cumulative effect of accounting change 382,181 (43,735) 585,637
Cumulative effect of accounting change (net of income tax benefit of $11,532) -- (21,416) --
---------- ---------- ----------
Net income (loss) $ 382,181 $ (65,151) $ 585,637
========== ========== ==========
See accompanying notes to consolidated financial statements.
IDS Life Insurance Company
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Consolidated Statements of Stockholder's Equity
Accumulated
other
Additional comprehensive Total
Capital paid-in income (loss), Retained stockholder's
For the three years ended December 31, 2002 (In thousands) stock capital net of tax earnings equity
Balance, January 1, 2000 $3,000 $ 288,327 $(411,230) $2,932,174 $2,812,271
Comprehensive income:
Net income -- -- -- 585,637 585,637
Net unrealized holding gains on available-for-sale
securities arising during the year, net of deferred
policy acquisition costs of ($5,154)
and income tax expense of ($46,921) -- -- 87,138 -- 87,138
Reclassification adjustment for gains included in
net income, net of income tax expense of $5,192 -- -- (9,642) -- (9,642)
------ ----------- --------- ---------- ----------
Other comprehensive income -- -- 77,496 -- 77,496
------ ----------- --------- ---------- ----------
Comprehensive income -- -- -- -- 663,133
Cash dividends -- -- -- (410,000) (410,000)
------ ----------- --------- ---------- ----------
Balance, December 31, 2000 3,000 288,327 (333,734) 3,107,811 3,065,404
Comprehensive income:
Net loss -- -- -- (65,151) (65,151)
Cumulative effect of adopting SFAS No. 133, net of
income tax benefit of $626 -- -- (1,162) -- (1,162)
Net unrealized holding losses on available-for-sale
securities arising during the year, net of deferred
policy acquisition costs of ($20,191)
and income tax benefit of $6,064 -- -- (11,262) -- (11,262)
Reclassification adjustment for losses on
available-for-sale securities included in net loss,
net of income tax benefit of $228,003 -- -- 423,434 -- 423,434
Reclassification adjustment for losses on derivatives
included in net loss, net of income tax benefit of $4,038 -- -- 7,499 -- 7,499
------ ----------- --------- ---------- ----------
Other comprehensive income -- -- 418,509 -- 418,509
------ ----------- --------- ---------- ----------
Comprehensive income -- -- -- -- 353,358
Capital contribution -- 400,000 -- -- 400,000
------ ----------- --------- ---------- ----------
Balance, December 31, 2001 3,000 688,327 84,775 3,042,660 3,818,762
Comprehensive income:
Net income -- -- -- 382,181 382,181
Net unrealized holding gains on available-for-sale
securities arising during the year, net of deferred
policy acquisition costs of ($75,351)
and income tax expense of ($228,502) -- -- 424,360 -- 424,360
Reclassification adjustment for gains on available-for-sale
securities included in net income, net of income tax
expense of $5,645 -- -- (10,484) -- (10,484)
Reclassification adjustment for gains on derivatives
included in net income, net of income tax expense of $305 -- -- (568) -- (568)
------ ----------- --------- ---------- ----------
Other comprehensive income -- -- 413,308 -- 413,308
------ ----------- --------- ---------- ----------
Comprehensive income -- -- -- -- 795,489
Cash dividends -- -- -- (70,000) (70,000)
Capital contribution -- 400,000 -- -- 400,000
------ ----------- --------- ---------- ----------
Balance, December 31, 2002 $3,000 $1,088,327 $ 498,083 $3,354,841 $4,944,251
====== ========== ========= ========== ==========
See accompanying notes to consolidated financial statements.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Years ended December 31, (In thousands) 2002 2001 2000
Cash flows from operating activities
Net income (loss) $ 382,181 $ (65,151) $ 585,637
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax -- 21,416 --
Policy loans, excluding universal life-type insurance:
Issuance (35,345) (43,687) (61,313)
Repayment 49,256 54,004 56,088
Change in amounts recoverable from reinsurers (104,344) (112,686) (89,312)
Change in other accounts receivable (9,896) (4,025) 6,254
Change in accrued investment income (5,139) 56,729 8,521
Change in deferred policy acquisition costs, net (277,947) (175,723) (291,634)
Change in liabilities for future policy benefits for traditional life,
disability income and long-term care insurance 245,275 223,177 206,377
Change in policy claims and other policyholder's funds 13,521 19,812 27,467
Deferred income tax provision (benefit) 116,995 (246,205) 37,704
Change in other liabilities 26,309 (24,509) (120,256)
Amortization of premium, net 65,869 108,958 37,909
Net realized loss on investments 4,507 649,752 16,975
Policyholder and contractholder charges, non-cash (232,725) (217,496) (151,745)
Other, net 13,820 (83,023) (9,279)
------- ------- -------
Net cash provided by operating activities 252,337 161,343 259,393
------- ------- -------
Cash flows from investing activities
Held-to-maturity securities:
Purchases -- -- (4,487)
Maturities, sinking fund payments and calls -- -- 589,742
Sales -- -- 50,067
Available-for-sale securities:
Purchases (16,287,891) (9,477,740) (1,454,010)
Maturities, sinking fund payments and calls 3,078,509 2,706,147 1,019,403
Sales 10,093,228 5,493,141 1,237,116
Other investments, excluding policy loans:
Purchases (543,843) (442,876) (706,082)
Sales 509,588 370,636 435,633
Change in amounts due from brokers 90,293 (75,492) (15,157)
Change in amounts due to brokers 1,602,958 1,293,684 298,236
--------- --------- -------
Net cash (used in) provided by investing activities (1,457,158) (132,500) 1,450,461
---------- -------- ---------
Cash flows from financing activities
Activities related to universal life-type insurance and investment contracts:
Considerations received 4,638,111 2,088,114 1,842,026
Surrenders and other benefits (1,655,631) (2,810,401) (3,974,966)
Interest credited to account balances 1,157,636 1,137,636 1,169,641
Universal life-type insurance policy loans:
Issuance (80,831) (83,720) (134,107)
Repayment 89,346 72,805 82,193
Capital contribution 400,000 400,000 --
Dividends paid (70,000) -- (410,000)
--------- ------- ----------
Net cash provided by (used in) financing activities 4,478,631 804,434 (1,425,213)
--------- ------- ----------
Net increase in cash and cash equivalents 3,273,810 833,277 284,641
Cash and cash equivalents at beginning of year 1,150,251 316,974 32,333
--------- ------- ----------
Cash and cash equivalents at end of year $ 4,424,061 $ 1,150,251 $ 316,974
============ =========== ===========
Supplemental disclosures:
Income taxes paid $ -- $ -- $ 225,704
Interest on borrowings 7,906 23,688 3,299
--------- ------- ----------
See accompanying notes to consolidated financial statements.
IDS Life Insurance Company
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Notes to Consolidated Financial Statements
(In thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota whose products are primarily
distributed through branded financial advisors. The Company is a wholly-owned
subsidiary of American Express Financial Corporation (AEFC), which is a
wholly-owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New York
is a wholly-owned subsidiary of the Company and serves New York State residents.
The Company also wholly-owns American Enterprise Life Insurance Company, which
issues fixed and variable annuity contracts for sale through insurance agencies
and broker-dealers who may also be associated with financial institutions, such
as banks. American Centurion Life Assurance Company is a wholly-owned subsidiary
that offers fixed and variable annuities to American Express(R) Cardmembers and
others in New York and through insurance agencies and broker-dealers who may
also be associated with financial institutions, such as banks, in New York.
American Partners Life Insurance Company is a wholly-owned subsidiary that
offers fixed and variable annuities to American Express(R) Cardmembers and
others who reside in states other than New York. The Company also wholly-owns
IDS REO 1, LLC and American Express Corporation. These subsidiaries hold real
estate, mortgage loans on real estate and/or affordable housing investments.
The Company's principal products are deferred annuities and universal life
insurance which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's fixed deferred
annuities guarantee a relatively low annual interest rate during the
accumulation period (the time before annuity payments begin). However, the
Company has the option of paying a higher rate set at its discretion. In
addition, persons owning one type of annuity may have their interest calculated
based on any increase in a broad-based stock market index. The Company also
offers variable annuities, including the American Express Retirement Advisor
Advantage(R) Variable Annuity and the American Express Retirement Advisor
Select(R) Variable Annuity. Life insurance products currently offered by the
Company include universal life (fixed and variable, single life and joint life),
single premium life and term products. Waiver of premium and accidental death
benefit riders are generally available with these life insurance products. The
Company also markets disability income insurance. Although the Company
discontinued marketing proprietary long-term care insurance at the end of 2002,
long-term care insurance is available through a non-proprietary product
distributed by an affiliate.
Under the Company's variable life insurance and variable annuity products
described above, the purchaser may choose among investment options that include
the Company's "general account" as well as from a variety of portfolios
including common stocks, bonds, managed assets and/or short- term securities.
Basis of presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
which vary in certain respects from reporting practices prescribed or permitted
by state insurance regulatory authorities (see Note 4). Certain prior year
amounts have been reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Profits on fixed deferred annuities are the excess of contractholder charges and
investment income earned from investment of contract considerations over
interest credited to contract values, amortization of deferred acquisition
costs, and other expenses. Profits on variable deferred annuities also include
the excess of management and other fees over the costs of guaranteed benefits
provided. Policyholder and contractholder charges include policy fees and
surrender charges. Management and other fees include investment management fees
from underlying proprietary mutual funds, certain fee revenues from underlying
nonproprietary mutual funds and mortality and expense risk fees from the
variable annuity separate accounts.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Profits on fixed universal life insurance are the excess of contractholder
charges and investment income earned from investment of contract considerations
over interest credited to contract values, death and other benefits paid in
excess of contract values, amortization of deferred acquisition costs, and other
expenses. Profits on variable universal life insurance also include management
and other fees. Policyholder and contractholder charges include the monthly cost
of insurance charges, issue and administrative fees and surrender charges. These
charges also include the minimum death benefit guarantee fees received from the
variable life insurance separate accounts. Management and other fees include
investment management fees from underlying proprietary mutual funds, certain fee
revenues from underlying nonproprietary mutual funds and mortality and expense
risk fees from the variable life insurance separate accounts.
Premiums on traditional life, disability income and long-term care insurance
policies are recognized as revenue when due, and related benefits and expenses
are associated with premium revenue in a manner that results in recognition of
profits over the lives of the insurance policies. This association is
accomplished by means of the provision for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
Investments -- Fixed maturity and equity securities
All fixed maturity securities and marketable equity securities are classified as
available-for-sale and carried at fair value. Unrealized gains and losses on
securities classified as available-for-sale are carried as a separate component
of accumulated other comprehensive income (loss), net of the related deferred
policy acquisition costs and income taxes. Gains and losses are recognized in
the results of operations upon disposition of the securities using the specific
identification method. In addition, losses are also recognized when management
determines that a decline in a security's fair value is other-than-temporary,
which requires judgment regarding the amount and timing of recovery. Indicators
of other-than-temporary impairment for fixed maturity securities include, but
are not limited to, issuer downgrade, default, or bankruptcy. The Company also
considers the extent to which cost exceeds fair value, the duration of time of
that decline, and management's judgment about the issuer's current and
prospective financial condition. The charges are reflected in net realized loss
on investments within the Consolidated Statements of Income.
Fair value of fixed maturity and equity securities is generally based on quoted
market prices. However, the Company's investment portfolio also contains
structured investments of various asset quality, including collateralized debt
obligations (CDOs) and secured loan trusts (backed by high-yield bonds and bank
loans), which are not readily marketable. As a result, the carrying values of
these structured investments are based on estimated cash flow projections which
require a significant degree of management judgment as to default and recovery
rates of the underlying investments and, as such, are subject to change. The
Company's CDO investments are accounted for in accordance with Emerging Issues
Task Force (EITF) Issue 99-20 "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets."
The Company's secured loan trusts are accounted for in accordance with EITF
Issue 96-12 "Recognition of Interest Income and Balance Sheet Classification of
Structured Notes."
Net investment income, which primarily consists of interest earned on fixed
maturity securities, is generally accrued as earned using the effective interest
method, which makes an adjustment of the yield for security premiums, discounts
and anticipated prepayments on mortgage-backed securities. Prepayment estimates
are based on information received from brokers who deal in mortgage-backed
securities.
Investments -- Mortgage loans on real estate
Mortgage loans on real estate reflect principal amounts outstanding less
reserves for losses. The estimated fair value of the mortgage loans is
determined by discounted cash flow analyses using mortgage interest rates
currently offered for mortgages of similar maturities.
The reserve for losses is measured as the excess of the loan's recorded
investment over its present value of expected principal and interest payments
discounted at the loan's effective interest rate or the fair value of
collateral. Additionally, the level of the reserve for losses considers other
factors, including historical experience and current economic and political
conditions. Management regularly evaluates the adequacy of the reserve for
mortgage loan losses and believes it is adequate to absorb estimated losses in
the portfolio.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on management's
judgment as to the ultimate collectibility of principal, interest payments
received are either recognized as income or applied to the recorded investment
in the loan.
Investments -- Policy loans
Policy loans are carried at the aggregate of the unpaid loan balances, which do
not exceed the cash surrender values of the related policies.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Investments -- Other investments
Included in Other investments are affordable housing investments, trading
securities, syndicated loans and real estate. Affordable housing investments are
carried at amortized cost as the Company has no influence over the operating or
financial policies of the general partner. Trading securities are held at fair
market value with changes in value recognized in the Consolidated Statements of
Income within Net investment income. Syndicated loans reflect principal amounts
outstanding less reserves for losses and real estate is carried at its estimated
fair value.
Cash and cash equivalents
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost, which approximates fair value.
Deferred policy acquisition costs
The costs of acquiring new business, including for example, direct sales
commissions, related sales incentive bonuses and awards, underwriting costs,
policy issue costs and other related costs, have been deferred on the sale of
insurance and annuity contracts. The deferred acquisition costs (DAC) for
universal life and variable universal life insurance and certain installment
annuities are amortized as a percentage of the estimated gross profits expected
to be realized on the policies. DAC for other annuities are amortized using the
interest method. For traditional life, disability income and long-term care
insurance policies, the costs are amortized in proportion to premium revenue.
Amortization of DAC requires the use of certain assumptions including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. The customer asset
value growth rate is the rate at which contract values are assumed to appreciate
in the future. This rate is net of asset fees, and anticipates a blend of equity
and fixed income investments. Management routinely monitors a wide variety of
trends in the business, including comparisons of actual and assumed experience.
Management reviews and, where appropriate, adjusts its assumptions with respect
to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency rates,
mortality rate, interest margin and maintenance expense level assumptions each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year.
When assumptions are changed, the percentage of estimated gross profits or
portion of interest margins used to amortize DAC may also change. A change in
the required amortization percentage is applied retrospectively; an increase in
amortization percentage will result in an acceleration of DAC amortization while
a decrease in amortization percentage will result in a deceleration of DAC
amortization. The impact on results of operations of changing assumptions with
respect to the amortization of DAC can be either positive or negative in any
particular period, and is reflected in the period that such changes are made.
These adjustments are collectively referred to as unlocking adjustments.
Unlocking adjustments resulted in net increases in amortization of $40,000 in
2002 and $33,600 in 2001, with a net decrease in amortization of $12,300 in
2000.
Guaranteed minimum death benefits
The majority of the variable annuity contracts offered by the Company contain
guaranteed minimum death benefit (GMDB) provisions. At time of issue, these
contracts typically guarantee that the death benefit payable will not be less
than the amount invested, regardless of the performance of the customer's
account. Most contracts also provide for some type of periodic adjustment of the
guaranteed amount based on the change in value of the contract. A large portion
of the Company's contracts containing a GMDB provision adjust once every six
years. The periodic adjustment of these contracts can either increase or
decrease the guaranteed amount, though not below the amount invested, adjusted
for withdrawals. When market values of the customer's accounts decline, the
death benefit payable on a contract with a GMDB may exceed the accumulated
contract value. Currently, the amount paid in excess of contract value is
expensed when payable. Amounts expensed in 2002, 2001 and 2000 were $37,361,
$16,202 and $835, respectively.
Liabilities for future policy benefits
Liabilities for fixed and variable universal life insurance and fixed and
variable deferred annuities are accumulation values.
Liabilities for equity indexed deferred annuities issued before 1999 are equal
to the present value of guaranteed benefits and the intrinsic value of
index-based benefits. Liabilities for equity indexed deferred annuities issued
in 1999 or later are equal to the accumulation of host contract values covering
guaranteed benefits and the market value of embedded equity options.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates ranging from 5% to 9.5%, depending
on year of issue, with an average rate of approximately 6.5%.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Liabilities for future benefits on traditional life insurance, principally term
and whole life insurance, are based on the net level premium method, using
anticipated mortality, policy persistency and interest earning rates.
Anticipated mortality rates are based on established industry mortality tables,
with modifications based on Company experience. Anticipated policy persistency
rates vary by policy form, issue age and policy duration with persistency on
level term and cash value plans generally anticipated to be better than
persistency on yearly renewable term insurance plans. Anticipated interest rates
range from 4% to 10%, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
Claim reserves are calculated based on claim continuance tables and anticipated
interest earnings. Anticipated claim continuance rates are based on established
industry tables. Anticipated interest rates for claim reserves for both
disability income and long-term care range from 5% to 8%.
Liabilities for reported and unpaid life insurance claims are equal to the death
benefits payable. For disability income and long-term care claims, unpaid claims
liabilities are equal to benefit amounts due and accrued. Liabilities for
incurred but not reported claims are estimated based on periodic analysis of the
actual reported claim lag. Where applicable, amounts recoverable from reinsurers
are separately recorded as receivables. For life insurance, no claim adjustment
expense reserve is held. The claim adjustment expense reserves for disability
income and long-term care are based on the claim reserves.
The Company does not issue participating insurance contracts and has no
short-duration life insurance liabilities.
Reinsurance
Reinsurance premiums and benefits paid or provided are accounted for on a basis
consistent with that used in accounting for original policies issued and with
the terms of the reinsurance contracts.
The maximum amount of life insurance risk retained by the Company is $750 on any
policy insuring a single life and $1,500 on any policy insuring a joint-life
combination. The Company generally retains 10% of the mortality risk on new life
insurance policies. Risk not retained is reinsured with other life insurance
companies. Risk on universal life and variable universal life policies is
reinsured on a yearly renewable term basis. Risk on term insurance and long-term
care policies is reinsured on a coinsurance basis. The Company retains all
accidental death benefit, disability income and waiver of premium risk.
Federal income taxes
The Company's taxable income is included in the consolidated federal income tax
return of American Express Company. The Company provides for income taxes on a
separate return basis, except that, under an agreement between AEFC and American
Express Company, tax benefit is recognized for losses to the extent they can be
used on the consolidated tax return. It is the policy of AEFC and its
subsidiaries that AEFC will reimburse subsidiaries for all tax benefits.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners. The Company receives investment management fees from the proprietary
mutual funds used as investment options for variable annuities and variable life
insurance. The Company receives mortality and expense risk fees from the
separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue to be payable at the initial level regardless of
investment performance so long as minimum premium payments are made.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Accounting developments
In July 2000, the Financial Accounting Standards Board's (FASB's) Emerging
Issues Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." The Company adopted the consensus as of January
1, 2001. Issue 99-20 prescribes procedures for recording interest income and
measuring impairment on retained and purchased beneficial interests. The
consensus primarily affects the Company's CDO investments. Adoption of the
consensus required the Company to adjust the carrying amount of these
investments downward by $21,416, net of tax, which is reflected as a cumulative
effect of accounting change in the Consolidated Statement of Income.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (SFAS No. 133), which requires an entity to recognize
all derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. Changes in the fair value of a derivative are
recorded in earnings or directly to other comprehensive income, depending on the
instrument's designated use. The adoption of SFAS No. 133 resulted in a
cumulative after-tax reduction to other comprehensive income of $1,162. The
cumulative impact to earnings was not significant. See Note 8 for further
discussion of the Company's derivative and hedging activities.
SFAS No. 133 also provided a one-time opportunity to reclassify held-to-maturity
security investments to available-for-sale without tainting the remaining
securities in the held-to-maturity portfolio. The Company elected to take the
opportunity in 2001 to reclass all its held-to-maturity investments to
available-for-sale.
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which superseded SFAS No.
125. The Statement was effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. The Statement
was effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The impact on the Company's financial
position or results of operations of adopting the Statement was not significant.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by business
enterprises of variable interest entities (VIEs). The accounting provisions and
expanded disclosure requirements for VIEs existing at December 31, 2002, are
fully effective for reporting periods beginning after June 15, 2003. An entity
shall be subject to consolidation according to the provisions of FIN 46, if, by
design, either (i) the total equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties, or (ii) as a group, the holders of the
equity investment at risk lack: (a) direct or indirect ability to make decisions
about an entity's activities; (b) the obligation to absorb the expected losses
of the entity if they occur; or (c) the right to receive the expected residual
return of the entity if they occur. In general, FIN 46 will require a VIE to be
consolidated when an enterprise has a variable interest that will absorb a
majority of the VIE's expected losses or receive a majority of the VIE's
expected residual return.
It is likely that the Company will consolidate or disclose information about
VIEs when FIN 46 becomes effective in the third quarter of 2003. The entities
primarily impacted by FIN 46 relate to structured investments, including CDOs
and secured loan trusts (SLTs), which are owned by the Company. The application
of FIN 46 for CDOs and SLTs will have no effect on the cash flows of the
Company. The CDO entities contain debt issued to investors, which are
non-recourse to the Company and are solely supported by portfolios of high-yield
bonds and loans. The Company often invests in the residual and rated debt
tranches of the CDO structures that are either managed by a related party or a
third-party. With regards to those CDOs in which the Company owns a residual
tranche and which a related party manages, the portfolios of high-yield bonds
and loans have a fair value at December 31, 2002 of approximately $2.0 billion
for the benefit of the $2.7 billion in CDO debt investors.
Substantially all of the Company's interest in the rated debt tranches along
with rated tranches owned by AEFC were placed in a securitization trust
described in Note 2. The SLTs provide returns to investors primarily based on
the performance of an underlying portfolio of up to $3.3 billion in high-yield
loans. Currently, the underlying portfolio consists of $2.9 billion in
high-yield loans with a market value of $2.6 billion, which are managed by a
related party.
While the potential consolidation of these entities may impact the results of
operations at adoption and for each reporting period thereafter, the Company's
maximum exposure to economic loss as a result of its investment in these
entities is represented by the carrying values at December 31, 2002 because any
further reduction in the value of the assets will be absorbed by the
non-recourse debt or other unrelated entities. The CDO residual tranches have an
adjusted cost basis of $13,363 and the SLTs have an adjusted cost basis of
$656,565.
The Company continues to evaluate other relationships and interests in entities
that may be considered VIEs, including affordable housing investments. The
impact of adopting FIN 46 on the Consolidated Financial Statements is still
being reviewed.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
2. INVESTMENTS
Fixed maturity and equity securities
The following is a summary of securities available-for-sale at December 31,
2002:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Fixed maturities:
U.S. Government agency obligations $ 84,075 $ 12,015 $ 687 $ 95,403
State and municipal obligations 29,202 2,522 -- 31,724
Corporate bonds and obligations 9,614,296 611,060 116,345 10,109,011
Mortgage and other asset-backed securities 12,145,797 393,342 10,067 12,529,072
Structured investments 1,306,245 2,112 59,101 1,249,256
Foreign government bonds and obligations 29,611 8,027 -- 37,638
----------- ---------- -------- -----------
Total fixed maturity securities $23,209,226 $1,029,078 $186,200 $24,052,104
=========== ========== ======== ===========
Common stocks $ 19 $ 2 $ -- $ 21
=========== ========== ======== ===========
The amortized cost and fair value of fixed maturity securities at December 31,
2002 by contractual maturity are as follows:
Amortized Fair
cost value
Due within one year $ 768,066 $ 779,833
Due from one to five years 2,740,513 2,887,899
Due from five to ten years 5,865,084 6,165,165
Due in more than ten years 1,689,766 1,690,135
Mortgage and other asset-backed securities 12,145,797 12,529,072
---------- ----------
Total $23,209,226 $24,052,104
=========== ===========
The timing of actual receipts may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
The following is a summary of securities available-for-sale at December 31,
2001:
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
Fixed maturities:
U.S. Government agency obligations $ 31,074 $ 2,190 $ 56 $ 33,208
State and municipal obligations 7,826 149 -- 7,975
Corporate bonds and obligations 10,281,693 272,539 113,061 10,441,171
Mortgage and other asset-backed securities 8,292,576 103,109 32,801 8,362,884
Structured investments 1,377,195 3,793 105,304 1,275,684
Foreign government bonds and obligations 31,708 4,507 -- 36,215
----------- -------- -------- -----------
Total fixed maturity securities $20,022,072 $386,287 $251,222 $20,157,137
----------- -------- -------- -----------
Common stocks $ 805 $ 899 $ -- $ 1,704
=========== ======== ========= ===========
Pursuant to the adoption of SFAS No. 133 the Company reclassified all
held-to-maturity securities with a carrying value of $6,463,613 and net
unrealized gains of $8,185 to available-for-sale as of January 1, 2001.
At December 31, 2002 and 2001, bonds carried at $14,523 and $14,639,
respectively, were on deposit with various states as required by law.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
At December 31, 2002, fixed maturity securities comprised approximately 84
percent of the Company's total investments. These securities are rated by
Moody's and Standard & Poor's (S&P), except for approximately $1.4 billion of
securities which are rated by AEFC's internal analysts using criteria similar to
Moody's and S&P. Ratings are presented using S&P's convention and if the two
agencies' ratings differ, the lower rating is used. A summary of fixed maturity
securities, at fair value, by rating on December 31, is as follows:
Rating 2002 2001
AAA 53% 45%
AA 1 1
A 14 15
BBB 25 34
Below investment grade 7 5
--- ---
Total 100% 100%
=== ===
At December 31, 2002, approximately 93% of the securities rated AAA are GNMA,
FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer were
greater than ten percent of stockholder's equity.
Available-for-sale securities were sold during 2002 with proceeds of $10,093,228
and gross realized gains and losses of $297,477 and $135,824, respectively.
Available-for-sale securities were sold during 2001 with proceeds of $5,493,141
and gross realized gains and losses of $116,565 and $390,732, respectively.
Available-for-sale securities were sold during 2000 with proceeds of $1,237,116
and gross realized gains and losses of $25,101 and $21,147, respectively.
During the years ended December 31, 2002, 2001, and 2000, the Company also
recognized losses of $145,524, $348,730, and $38,816 respectively due to
other-than-temporary impairments on structured investments and corporate debt
securities. These amounts are reflected in the net realized loss on investments
in the Consolidated Statements of Income. The 2001 realized losses and
other-than temporary impairments include the effect of the write-downs and sale
of high-yield securities discussed below.
The net unrealized gain on available-for-sale securities as of December 31, 2002
and 2001, was $842,880 and $135,964, respectively, with the $706,916 change, net
of taxes and deferred policy acquisition costs, reflected as a separate
component in accumulated other comprehensive income for the year ended December
31, 2002. For the years ended December 31, 2001 and 2000 the change in net
unrealized losses on available-for-sale securities was a decrease of $667,340
and $122,196, respectively.
During 2001, the Company recorded pretax losses of $828,175 to recognize the
impact of higher default rate assumptions on certain structured investments; to
write down lower rated securities (most of which were sold during 2001) in
connection with Company's decision to lower its risk profile by reducing the
level of its high-yield portfolio, allocating holdings toward stronger credits,
and reducing the concentration of exposure to individual companies and industry
sectors; to write down certain other investments; and, to adopt EITF Issue
99-20, as previously discussed. Within the Consolidated Statements of Income,
$623,958 of these losses are included in Net realized losses on investments and
$171,269 are included in Net investment income, with the remaining losses
recorded as a cumulative effect of accounting change.
During 2001, the Company placed a majority of its rated CDO securities and
related accrued interest, (collectively referred to as transferred assets),
having an aggregate book value of $675,347, into a securitization trust. In
return, the Company received $89,535 in cash relating to sales to unaffiliated
investors and retained interests with allocated book amounts aggregating
$585,812. As of December 31, 2002, the retained interests had a carrying value
of approximately $562,000, of which approximately $388,000 is considered
investment grade. The book amount is determined by allocating the previous
carrying value of the transferred assets between assets sold and the retained
interests based on their relative fair values. Fair values are based on the
estimated present value of future cash flows. The retained interests are
accounted for in accordance with EITF Issue 99-20.
Fair values of fixed maturity and equity securities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other things,
review of market indices, price levels of current offerings of comparable
issues, price estimates, estimated future cash flows and market data from
independent brokers.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Mortgage loans on real estate
At December 31, 2002, approximately 12% of the Company's investments were
mortgage loans on real estate. Concentration of credit risk by region of the
United States and by type of real estate are as follows:
December 31, 2002 December 31, 2001
On balance Funding On balance Funding
Region sheet commitments sheet commitments
East North Central $ 611,886 $ -- $ 670,387 $ 1,873
West North Central 493,310 25,500 549,015 --
South Atlantic 765,443 2,800 815,837 9,490
Middle Atlantic 318,699 19,100 352,821 9,363
New England 227,150 5,800 274,486 8,700
Pacific 355,622 5,250 355,945 14,618
West South Central 210,435 1,000 214,000 600
East South Central 63,859 -- 55,798 --
Mountain 406,459 -- 413,053 27
---------- ------- ---------- -------
3,452,863 59,450 3,701,342 44,671
Less reserves for losses 35,212 -- 20,948 --
---------- ------- ---------- -------
Total $3,417,651 $59,450 $3,680,394 $44,671
========== ======= ========== =======
December 31, 2002 December 31, 2001
On balance Funding On balance Funding
Property type sheet commitments sheet commitments
Department/retail stores $ 991,984 $20,722 $1,117,195 $13,200
Apartments 622,185 -- 694,214 11,531
Office buildings 1,178,434 25,628 1,203,090 7,650
Industrial buildings 344,604 13,100 333,713 2,263
Hotels/motels 102,184 -- 108,019 --
Medical buildings 95,189 -- 106,927 6,000
Nursing/retirement homes 35,873 -- 39,590 --
Mixed use 54,512 -- 86,972 27
Other 27,898 -- 11,622 4,000
---------- ------- ---------- -------
3,452,863 59,450 3,701,342 44,671
Less reserves for losses 35,212 -- 20,948 --
---------- ------- ---------- -------
Total $3,417,651 $59,450 $3,680,394 $44,671
========== ======= ========== =======
Mortgage loan fundings are restricted by state insurance regulatory authorities
to 80 percent or less of the market value of the real estate at the time of
origination of the loan. The Company holds the mortgage document, which gives it
the right to take possession of the property if the borrower fails to perform
according to the terms of the agreement. Commitments to fund mortgages are made
in the ordinary course of business. The fair value of the mortgage commitments
is $nil.
At December 31, 2002, 2001 and 2000, the Company's investment in impaired loans
was $33,130, $39,601 and $24,999, respectively, with related reserves of $9,100,
$7,225 and $4,350, respectively.
During 2002, 2001 and 2000, the average recorded investment in impaired loans
was $36,583, $24,498 and $27,063, respectively.
The Company recognized $1,090, $1,285 and $1,033 of interest income related to
impaired loans for the years ended December 31, 2002, 2001 and 2000,
respectively.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
The following table presents changes in the reserves for mortgage loan losses:
2002 2001 2000
Balance, January 1 $20,948 $11,489 $ 28,283
Provision for mortgage loan losses 14,264 14,959 (14,894)
Loan payoffs -- -- (1,200)
Foreclosures and write-offs -- (5,500) (700)
------- ------- --------
Balance, December 31 $35,212 $20,948 $ 11,489
======= ======= ========
Sources of investment income and realized losses on investments
Net investment income for the years ended December 31 is summarized as follows:
2002 2001 2000
Income on fixed maturities $1,331,547 $1,276,966 $1,473,560
Income on mortgage loans 274,524 290,608 286,611
Other (15,642) (41,927) 9,834
---------- ---------- ----------
1,590,429 1,525,647 1,770,005
Less investment expenses 28,573 39,959 39,400
---------- ---------- ----------
Total $1,561,856 $1,485,688 $1,730,605
========== ========== ==========
Net realized losses on investments for the years ended December 31 is summarized
as follows:
2002 2001 2000
Fixed maturities $ 16,129 $(622,897) $(34,862)
Mortgage loans (15,586) (17,834) 16,794
Other investments (5,050) (9,321) 1,093
-------- --------- --------
Total $ (4,507) $(649,752) $(16,975)
======== ========= ========
3. INCOME TAXES
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists of the
following:
2002 2001 2000
Federal income taxes
Current $(30,648) $ 88,121 $176,397
Deferred 116,996 (234,673) 37,704
-------- --------- --------
86,348 (146,552) 214,101
State income taxes -- current 1,478 1,330 7,526
-------- --------- --------
Income tax expense (benefit) before cumulative effect of accounting change 87,826 (145,222) 221,627
Cumulative effect of accounting change income tax benefit -- (11,532) --
-------- --------- --------
Income tax expense (benefit) $ 87,826 $(156,754) $221,627
======== ========= ========
Income tax expense (benefit) before the cumulative effect of accounting change
differs from that computed by using the federal statutory rate of 35%. The
principal causes of the difference in each year are shown below:
2002 2001 2000
Provision Rate Provision Rate Provision Rate
Federal income taxes based on the statutory rate $164,502 35.0% $ (66,136) (35.0)% $282,542 35.0%
Tax-exempt interest and dividend income (5,260) (1.1) (4,663) (2.5) (3,788) (0.5)
State taxes, net of federal benefit 961 0.2 865 0.4 4,892 0.6
Affordable housing credits (70,000) (14.9) (73,200) (38.7) (54,569) (6.8)
Other, net (2,377) (0.5) (2,088) (1.1) (7,450) (0.8)
-------- ---- --------- ----- -------- ----
Total income taxes $ 87,826 18.7% $(145,222) (76.9)% $221,627 27.5%
======== ==== ========= ===== ======== ====
A portion of life insurance company income earned prior to 1984 was not subject
to current taxation but was accumulated, for tax purposes, in a "policyholders'
surplus account." At December 31, 2002, the Company had a policyholders' surplus
account balance of $20,114. The policyholders' surplus account is only taxable
if dividends to the stockholder exceed the stockholder's surplus account or if
the Company is liquidated. Deferred income taxes of $7,040 have not been
established because no distributions of such amounts are contemplated.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities as of December 31 are
as follows:
2002 2001
Deferred income tax assets:
Policy reserves $ 683,144 $ 705,637
Other investments 319,829 333,857
Other 29,789 24,640
--------- ---------
Total deferred income tax assets 1,032,762 1,064,134
--------- ---------
Deferred income tax liabilities:
Deferred policy acquisition costs 929,751 861,892
Net unrealized gain -- available-for-sale securities 267,787 45,934
Other 17,283 --
--------- ---------
Total deferred income tax liabilities 1,214,821 907,826
--------- ---------
Net deferred income tax (liability) asset $ (182,059) $ 156,308
========== ==========
The Company is required to establish a valuation allowance for any portion of
the deferred income tax assets that management believes will not be realized. In
the opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred income tax assets and, therefore, no such
valuation allowance has been established.
4. STOCKHOLDER'S EQUITY
Retained earnings available for distribution as dividends to AEFC are limited to
the Company's surplus as determined in accordance with accounting practices
prescribed by state insurance regulatory authorities. The Company's statutory
unassigned surplus aggregated $1,323,324 and $1,262,335 as of December 31, 2002
and 2001, respectively (see Note 3 with respect to the income tax effect of
certain distributions). In addition, any dividend distributions in 2003 in
excess of $240,838 would require approval of the Department of Commerce of the
State of Minnesota.
Statutory net income (loss) for the years ended December 31 and capital and
surplus as of December 31 are summarized as follows:
2002 2001 2000
Statutory net income (loss) $ 159,794 $ (317,973) $ 344,973
Statutory capital and surplus 2,408,379 1,947,350 1,778,306
--------- --------- ---------
The National Association of Insurance Commissioners (NAIC) revised the
Accounting Practices and Procedures Manual in a process referred to as
Codification. The revised regulations took effect January 1, 2001. The
domiciliary states of the Company and its insurance subsidiaries adopted the
provisions of the revised manual, with the exception of certain provisions not
adopted by its subsidiaries organized in the state of New York. The revised
manual changed, to some extent, prescribed statutory accounting practices and
resulted in changes to the accounting practices that the Company uses to prepare
its statutory-basis financial statements. The impact of implementing these
changes was a decrease of $39,997 to the Company's statutory-basis capital and
surplus as of January 1, 2001. Effective January 1, 2002 the Company's
subsidiaries organized in the state of New York adopted additional provisions of
the manual which resulted in an increase of $5,597 to the Company's
statutory-basis capital and surplus as of January 1, 2002.
5. RELATED PARTY TRANSACTIONS
The Company loans funds to AEFC under a collateral loan agreement. The balance
of the loan was $nil at December 31, 2002 and 2001. This loan can be increased
to a maximum of $75,000 and pays interest at a rate equal to the preceding
month's effective new money rate for the Company's permanent investments.
Interest income on related party loans totaled $nil in 2002, 2001 and 2000.
The Company participates in the American Express Company Retirement Plan which
covers all permanent employees age 21 and over who have met certain employment
requirements. Company contributions to the plan are based on participants' age,
years of service and total compensation for the year. Funding of retirement
costs for this plan complies with the applicable minimum funding requirements
specified by ERISA. The Company's share of the total net periodic pension cost
was $294, $263 and $250 in 2002, 2001 and 2000, respectively.
The Company also participates in defined contribution pension plans of American
Express Company which cover all employees who have met certain employment
requirements. Company contributions to the plans are a percent of either each
employee's eligible compensation or basic contributions. Costs of these plans
charged to operations in 2002, 2001 and 2000 were $1,411, $662 and $1,707,
respectively.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and retired
financial advisors. The plans include participant contributions and service
related eligibility requirements. Upon retirement, such employees are considered
to have been employees of AEFC. AEFC expenses these benefits and allocates the
expenses to its subsidiaries. The cost of these plans charged to operations in
2002, 2001 and 2000 was $1,835, $1,011 and $1,136, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $526,081, $505,526 and $582,836 for 2002,
2001 and 2000, respectively. Certain of these costs are included in DAC.
Expenses allocated to the Company may not be reflective of expenses that would
have been incurred by the Company on a stand-alone basis.
Included in other liabilities at December 31, 2002 and 2001 are $55,602 and
$68,919, respectively, payable to AEFC for federal income taxes.
6. LINES OF CREDIT
The Company has available lines of credit with AEFC aggregating $200,000
($100,000 committed and $100,000 uncommitted). The interest rate for any
borrowings is established by reference to various indices plus 20 to 45 basis
points, depending on the term. There were no borrowings outstanding under this
agreement at December 31, 2002 and 2001.
7. COMMITMENTS AND CONTINGENCIES
At December 31, 2002, 2001 and 2000, traditional life and universal life-type
insurance in force aggregated $119,173,734, $108,255,014 and $98,060,472
respectively, of which $38,008,734, $25,986,706 and $17,429,851 was reinsured at
the respective year ends. The Company also reinsures a portion of the risks
assumed under long-term care policies. Under all reinsurance agreements,
premiums ceded to reinsurers amounted to $129,345, $114,534 and $89,506 and
reinsurance recovered from reinsurers amounted to $60,567, $43,388, and $32,500
for the years ended December 31, 2002, 2001 and 2000, respectively. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
At December 31, 2002, the Company had no commitments to purchase investments
other than mortgage loan fundings (see Note 2).
The Company is a party to litigation and arbitration proceedings in the ordinary
course of its business, none of which is expected to have a material adverse
affect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, alleging improper life insurance
sales practices, alleged agent misconduct, failure to properly supervise agents
and other matters relating to life insurance policies and annuity contracts. The
Company and its affiliates were named defendants in three purported class-action
lawsuits alleging improper insurance and annuity sales practices including
improper replacement of existing annuity contracts and insurance policies,
improper use of annuities to fund tax deferred contributory retirement plans,
alleged agent misconduct, failure to properly supervise agents and other matters
relating to life insurance policies and annuity contracts. A fourth lawsuit was
filed against the Company and its affiliates in federal court. In January 2000,
AEFC reached an agreement in principle to settle the four class action lawsuits
described above. It is expected the settlement will provide $215,000 of benefits
to more than two million participants in exchange for a release by class members
of all insurance and annuity state and federal market conduct claims dating back
to 1985. The settlement received court approval. Implementation of the
settlement commenced October 15, 2001 and is substantially complete. Claim
review payments have been made. Numerous individuals opted out of the settlement
described above and therefore did not release their claims against AEFC and its
subsidiaries. Some of these class members who opted out were represented by
counsel and presented separate claims to AEFC and the Company. Most of their
claims have been settled.
The outcome of any litigation or threatened litigation cannot be predicted with
any certainty. However, in the aggregate, the Company does not consider any
lawsuits in which it is named as a defendant to have a material impact on the
Company's financial position or operating results.
The IRS routinely examines the Company's federal income tax returns and is
currently conducting an audit for the 1993 through 1996 tax years. Management
does not believe there will be a material adverse effect on the Company's
consolidated financial position as a result of these audits.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company maintains an overall risk management strategy that incorporates the
use of derivative instruments to minimize significant unplanned fluctuations in
earnings caused by interest rate and equity market volatility. The Company does
not enter into derivative instruments for speculative purposes. As prescribed by
SFAS No. 133, derivative instruments that are designated and qualify as hedging
instruments are classified as cash flow hedges, fair value hedges, or hedges of
a net investment in a foreign operation, based upon the exposure being hedged.
The Company currently has economic hedges that either do not qualify or are not
designated for hedge accounting treatment under SFAS No. 133.
The Company enters into interest rate swaps, caps and floors to manage the
Company's interest rate risk and options and futures to manage equity-based
risk. The values of derivative financial instruments are based on market values,
dealer quotes or pricing models.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market index.
The Company is not impacted by market risk related to derivatives held for non-
trading purposes beyond that inherent in cash market transactions. Derivatives
held for purposes other than trading are largely used to manage risk and,
therefore, the cash flow and income effects of the derivatives are inverse to
the effects of the underlying transactions. Credit risk is the possibility that
the counterparty will not fulfill the terms of the contract. The Company
monitors credit risk related to derivative financial instruments through
established approval procedures, including setting concentration limits by
counterparty, and requiring collateral, where appropriate. A vast majority of
the Company's counterparties are rated A or better by Moody's and Standard &
Poor's.
Interest rate caps, swaps and floors are primarily used to protect the margin
between interest rates earned on investments and the interest rates credited to
related annuity contract holders. No interest rate swaps or floors were
outstanding as of December 31, 2002. The interest rate caps expire in January
2003. The fair value of the interest rate caps is included in Other assets.
Changes in the value of the interest rate caps are included in Other insurance
and operating expenses.
A purchased (written) option conveys the right (obligation) to buy or sell an
instrument at a fixed price for a set period of time or on a specific date. The
Company writes and purchases index options to manage the risks related to
annuity products that pay interest based upon the relative change in a major
stock market index between the beginning and end of the product's term
(equity-indexed annuities). The Company views this strategy as a prudent
management of equity market sensitivity, such that earnings are not exposed to
undue risk presented by changes in equity market levels.
The equity indexed annuities contain embedded derivatives, essentially the
equity based return of the product, which must be separated from the host
contract and accounted for as derivative instruments per SFAS No. 133. As a
result of fluctuations in equity markets, and the corresponding changes in value
of the embedded derivatives, the amount of interest credited incurred by the
Company related to the annuity product will positively or negatively impact
reported earnings.
The purchased and written options are carried at fair value and included in
Other assets and Other liabilities, respectively. The fair value of the embedded
options are included in Future policy benefits for fixed annuities. The changes
in fair value of the options are recognized in Other insurance and operating
expenses and the embedded derivatives are recognized in Interest credited on
universal life-type insurance and investment contracts. The purchased and
written options expire on various dates through 2009.
The Company also purchases futures to hedge its obligations under equity indexed
annuities. The futures purchased are marked-to-market daily and exchange traded,
exposing the Company to no counterparty risk. The futures contracts mature in
2003.
Index options may be used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the underlying
mutual funds. The amount of the fee income received is based upon the daily
market value of the separate account and mutual fund assets. As a result, the
Company's fee income could be impacted significantly by fluctuations in the
equity market. There are no index options outstanding as of December 31, 2002
related to this strategy.
IDS Life Insurance Company
- -------------------------------------------------------------------------------
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company discloses fair value information for financial instruments for which
it is practicable to estimate that value. Fair values of life insurance
obligations and all non-financial instruments, such as DAC, are excluded.
Off-balance sheet intangible assets, such as the value of the field force, are
also excluded. Management believes the value of excluded assets and liabilities
is significant. The fair value of the Company, therefore, cannot be estimated by
aggregating the amounts presented.
2002 2001
Carrying Fair Carrying Fair
Financial Assets value value value value
Fixed maturities $24,052,104 $24,052,104 $20,157,137 $20,157,137
Common stocks 21 21 1,704 1,704
Mortgage loans on real estate 3,417,651 3,815,362 3,680,394 3,845,950
Cash and cash equivalents 4,424,061 4,424,061 1,150,251 1,150,251
Other investment 110,574 108,813 75,721 75,721
Derivatives 24,016 24,016 34,477 34,477
Separate account assets 21,980,674 21,980,674 27,333,697 27,333,697
---------- ---------- ---------- ----------
Financial Liabilities
Future policy benefits for fixed annuities $21,911,497 $21,282,750 $18,139,462 $17,671,777
Derivatives 9,099 9,099 2,506 2,506
Separate account liabilities 19,391,316 18,539,425 24,280,092 23,716,854
---------- ---------- ---------- ----------
At December 31, 2002 and 2001, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related contracts
carried at $1,432,294 and $1,368,254, respectively, and policy loans of $67,523
and $84,557, respectively. The fair value of these benefits is based on the
status of the annuities at December 31, 2002 and 2001. The fair value of
deferred annuities is estimated as the carrying amount less any applicable
surrender charges and related loans. The fair value for annuities in non-life
contingent payout status is estimated as the present value of projected benefit
payments at rates appropriate for contracts issued in 2002 and 2001.
At December 31, 2002 and 2001, the fair value of liabilities related to separate
accounts is estimated as the carrying amount less any applicable surrender
charges and less variable insurance contracts carried at $2,589,358 and
$3,053,605, respectively.
APPENDIX A
PARTIAL SURRENDER ILLUSTRATION
Involving a surrender charge and a market value adjustment
<Table>
<Caption>
ANNUITY ASSUMPTIONS
Single payment $10,000
Guarantee period 10 years
Guarantee rate (ig) 6% effective annual yield
</Table>
<Table>
<Caption>
END OF CONTRACT YEAR
ACCUMULATION VALUES
CONTRACT YEAR SURRENDER CHARGE % IF NO SURRENDERS
1 8% $ 10,600.00
2 7 11,236.00
3 6 11,910.16
4 5 12,624.77
5 4 13,382.26
6 3 14,185.19
7 2 15,036.30
8 1 15,938.48
9 0 16,894.79
10 0 17,908.48
</Table>
PARTIAL SURRENDER ASSUMPTIONS
On the first day of your fourth contract year you request a partial surrender
of:
Example I -- $2,000 of your accumulation value
Example II -- A $2,000 net surrender check
You may surrender 10% of $11,910.16 (end of third contract year accumulation
value) without surrender charge but subject to a market value adjustment -- this
is $1,191.02
The excess market adjusted value surrendered is subject to both a 5% (fourth
contract year) surrender charge and a market value adjustment.
The current rate applicable for new sales and renewals = 5.5%
The current rate applicable for new sales and renewals +.0025(i SUB(Mvi)) =
5.75%
The number of full years left in your guarantee period (N) = 7
The number of fractional years left in your guarantee period (t) = 0
EXAMPLE I -- $2,000 of accumulation value surrendered
WHAT WILL BE YOUR MARKET VALUE ADJUSTMENT AMOUNT?
The market adjusted value of your $2,000 partial surrender will be:
RENEWAL VALUE OF ACCUMULATION VALUE SURRENDERED
-----------------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF (N + t))
$2,000 (1 + ig)(TO THE POWER OF 7)
= ----------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF 7)
$2,000 (1.06)(TO THE POWER Of 7)
= --------------------------------
(1.0575)(TO THE POWER OF 7)
= $2,033.33
The market value adjustment = the market adjusted value surrendered less the
accumulation value surrendered
$2,033.33 - $2,000 = $33.33
(NOTE: THIS MARKET VALUE ADJUSTMENT IS POSITIVE. IN OTHER CASES THE MARKET VALUE
ADJUSTMENT MAY BE NEGATIVE.)
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
43
<Page>
WHAT WILL BE YOUR SURRENDER CHARGE AMOUNT?
The surrender charge will be 5% multiplied by the excess of the market adjusted
value over the accumulation value that may be surrendered without surrender
charge:
($2,033.33 - $1,191.02) x .05 = $42.12
WHAT NET AMOUNT WILL YOU RECEIVE?
Your contract's accumulation value will decrease by $2,000 and we will send you
a check for:
<Table>
<Caption>
Accumulation value surrendered $ 2,000.00
Market value adjustment 33.33
Less surrender charge (42.12)
-----------
Net surrender amount $ 1,991.21
</Table>
EXAMPLE II -- $2,000 net surrender check requested
WHAT WILL BE THE ACCUMULATION VALUE SURRENDERED?
Tell us if you want a specific net surrender check amount. We will work
backwards using an involved formula to determine how much accumulation value
must be surrendered to result in a net check to you for a specific amount. For a
$2,000 net check to you, the formula results in $2,009.09 of accumulation value
to be surrendered.
WHAT WILL BE YOUR MARKET VALUE ADJUSTMENT AMOUNT?
The market adjusted value is:
RENEWAL VALUE OF ACCUMULATION VALUE SURRENDERED
-----------------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF (N + t))
$2,009.09 (1 + ig)(TO THE POWER OF 7)
= -------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF 7)
$2,009.09 (1.06)(TO THE POWER OF 7)
= -----------------------------------
(1.0575)(TO THE POWER OF 7)
= $2,042.58
The market value adjustment = the market adjusted value surrendered less the
accumulation value surrendered
$2,042.58 - $2,009.09 = $33.49
(NOTE: THIS MARKET VALUE ADJUSTMENT IS POSITIVE. IN OTHER CASES THE MARKET VALUE
ADJUSTMENT MAY BE NEGATIVE.) WHAT WILL BE YOUR SURRENDER CHARGE AMOUNT?
The surrender charge will be 5% multiplied by the excess of the market adjusted
value over the accumulation value that may be surrendered without surrender
charge:
($2,042.58 - $1,191.02) x .05 = $42.58
WHAT NET AMOUNT WILL YOU RECEIVE?
Your contract's accumulation value will decrease by $2,009.09 and we will send
you a check for:
<Table>
<Caption>
Accumulation value surrendered $ 2,009.09
Market value adjustment 33.49
Less surrender charge (42.58)
-----------
Net surrender amount $ 2,000.00
</Table>
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
44
<Page>
APPENDIX B
MARKET VALUE ADJUSTMENT ILLUSTRATION
ANNUITY ASSUMPTIONS
<Table>
Single payment $50,000
Guarantee period 10 years
Guarantee rate 6% effective annual yield
</Table>
MARKET ADJUSTMENT ASSUMPTIONS: These examples show how the market value
adjustment may affect your contract values. The surrenders in these examples
occur one year after the contract date. There are no previous surrenders.
The accumulation value at the end of one year is $53,000. If there aren't any
surrenders, the renewal value at the end of the 10-year guarantee period will be
$89,542.38.
We base the market value adjustment on the rate we are crediting (at the time of
your surrender) on new contracts with the same length guarantee period as the
time remaining in your guarantee period. After one year, you have nine years
left of your 10-year guarantee period.
Example I shows a downward market value adjustment. Example II shows an upward
market value adjustment. These examples do not show the surrender charge (if
any) that would be calculated separately after the market value adjustment.
Surrender charge calculations are shown in Appendix A.
MARKET ADJUSTED VALUE FORMULA:
RENEWAL VALUE
MARKET ADJUSTED VALUE = ----------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF (N + t))
Renewal value = The accumulation value at the end of the current guarantee
period
i SUB(Mvi) = The current interest rate offered for new contract sales
and renewals for the number of years remaining in the
guarantee period +.0025
N = The number of complete contract years to the end of the
current guarantee period
t = The fraction of the contract year remaining to the end of
the contract year
EXAMPLE I-- Downward market value adjustment
A surrender results in a downward market value adjustment when interest rates
have increased. Assume after one year, we are now crediting 6.5% for a new
contract with a nine-year guarantee period. If you fully surrender, the market
adjusted value would be:
RENEWAL VALUE
----------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF (N + t))
$89,542.38
= ------------------------------
(1 + .0675)(TO THE POWER OF 9)
= $49,741.36
The market value adjustment is a $3,258.64 reduction of the accumulation value:
($3,258.64) = $49,741.36 - $53,000
If you surrendered half of your contract instead of all, the market adjusted
value of the surrendered portion would be one-half that of the full surrender:
$44,771.19
$24,870.68 = ------------------------------
(1 + .0675)(TO THE POWER OF 9)
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
45
<Page>
EXAMPLE II-- Upward market value adjustment
A surrender results in an upward market value adjustment when interest rates
have decreased more than .25%. Assume after one year, we are now crediting 5.5%
for a new contract with a nine-year guarantee period. If you fully surrender,
the market adjusted value would be:
RENEWAL VALUE
----------------------------------------
(1 + i SUB(Mvi))(TO THE POWER OF (N + t))
$89,542.38
= -----------------------------
(1 + .0575)(TO THE POWER OF 9)
= $54,138.38
The market value adjustment is a $1,138.38 increase of the accumulation value:
$1,138.38 = $54,138.38 - $53,000
If you surrendered half of your contract instead of all, the market adjusted
value of the surrendered portion would be one-half that of the full surrender:
$44,771.19
$27,069.19 = ------------------------------
(1 + .0575)(TO THE POWER OF 9)
AMERICAN EXPRESS GUARANTEED TERM ANNUITY -- PROSPECTUS
46
<Page>
[AMERICAN EXPRESS (R) LOGO]
IDS LIFE INSURANCE COMPANY
70100 AXP FINANCIAL CENTER
MINNEAPOLIS, MN 55474
(800) 862-7919
S-6401 R (5/03)
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses of the issuance and distribution of the interests in the IDS Life
Account MGA of IDS Life Insurance Company to be registered, other than
commissions on sales of the Contracts, are to be borne by the registrant.
Item 15. Indemnification of Directors and Officers
The amended and restated By-Laws of the depositor provide that the depositor
will indemnify, to the fullest extent now or hereafter provided for or permitted
by law, each person involved in, or made or threatened to be made a party to,
any action, suit, claim or proceeding, whether civil or criminal, including any
investigative, administrative, legislative, or other proceeding, and including
any action by or in the right of the depositor or any other corporation, or any
partnership, joint venture, trust, employee benefit plan, or other enterprise
(any such entity, other than the depositor, being hereinafter referred to as an
"Enterprise"), and including appeals therein (any such action or process being
hereinafter referred to as a "Proceeding"), by reason of the fact that such
person, such person's testator or intestate (i) is or was a director or officer
of the depositor, or (ii) is or was serving, at the request of the depositor, as
a director, officer, or in any other capacity, or any other Enterprise, against
any and all judgments, amounts paid in settlement, and expenses, including
attorney's fees, actually and reasonably incurred as a result of or in
connection with any Proceeding, except as provided below.
No indemnification will be made to or on behalf of any such person if a judgment
or other final adjudication adverse to such person establishes that such
person's acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action so adjudicated,
or that such person personally gained in fact a financial profit or other
advantage to which such person was not legally entitled. In addition, no
indemnification will be made with respect to any Proceeding initiated by any
such person against the depositor, or a director or officer of the depositor,
other than to enforce the terms of this indemnification provision, unless such
Proceeding was authorized by the Board of Directors of the depositor. Further,
no indemnification will be made with respect to any settlement or compromise of
any Proceeding unless and until the depositor has consented to such settlement
or compromise.
The depositor may, from time to time, with the approval of the Board of
Directors, and to the extent authorized, grant rights to indemnification, and to
the advancement of expenses, to any employee or agent of the depositor or to any
person serving at the request of the depositor as a director or officer, or in
any other capacity, of any other Enterprise, to the fullest extent of the
provisions with respect to the indemnification and advancement of expenses of
directors and officers of the depositor.
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the depositor or the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 16. Exhibits
1. - 2. Not applicable.
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 and Restated By-laws of IDS Life Insurance
Company is filed electronically herewith.
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 Form of Traditional IRA or SEP-IRA Annuity Endorsement
(form 131061) is filed electronically herewith.
4.15 Form of Roth IRA Annuity Endorsement (form 131062) is filed
electronically herewith.
5. Opinion of Counsel regarding legality of Contracts is filed
electronically herewith.
6.-20. Not applicable.
21. Copy of List of Subsidiaries filed electronically as Exhibit
22 to Post-Effective Amendment No. 8 to Registration Statement
No. 33-28976 is incorporated herein by reference.
22. Not applicable.
23. Consent of Independent Auditors is filed electronically
herewith.
24.1 Power of Attorney, dated April 9, 2002, filed electronically
as Exhibit 24 to Post-Effective Amendment No. 16 to
Registration Statement No. 33-28976 is incorporated herein by
reference.
24.2 Power of Attorney, dated Sept. 11, 2002, is filed
electronically herewith.
24.3 Power of Attorney, dated April 16, 2003, is filed
electronically herewith.
25.-27. Not applicable.
Item 17. Undertakings
A. The Registrant undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933,
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement,
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement,
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such
securities at that time may be deemed to be the initial bona
fide offering thereof,
(3) that all post-effective amendments will comply with the
applicable forms, rules and regulations of the Commission in
effect at the time such post-effective amendments are filed,
and
(4) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
B. The Registrant represents that it is relying upon the no-action
assurance given to the American Council of Life Insurance (pub. avail.
Nov. 28, 1988). Further, the Registrant represents that it has complied
with the provisions of paragraphs (1) - (4) of the no-action letter.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, IDS
Life Insurance Company, certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Minneapolis, and State of Minnesota on the 23rd
day of April, 2003.
IDS Life Insurance Company
--------------------------
(Registrant)
By /s/ Timothy V. Bechtold*
------------------------------------
Timothy V. Bechtold
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 23rd day of April, 2003.
Signature Title
/s/ Gumer C. Alvero* Director
- ------------------------------------
Gumer C. Alvero
/s/ Timothy V. Bechtold* Director and President
- ------------------------------------
Timothy V. Bechtold
/s/ Barbara H. Fraser** Chairman of the Board of Directors
- ------------------------------------ and Chief Executive Officer
Barbara H. Fraser (Chief Executive Officer)
/s/ Jeryl A. Millner*** Vice President and Controller
- ------------------------------------ (Principal Accounting Officer)
Jeryl A. Millner
/s/ Barry J. Murphy* Director
- ------------------------------------
Barry J. Murphy
/s/ Stephen W. Roszell* Director
- -----------------------------------
Stephen W. Roszell
/s/ John T. Sweeney* Director and Executive
- ------------------------------------ Vice President - Finance
John T. Sweeney (Principal Financial Officer)
* Signed pursuant to Power of Attorney, dated April 9, 2002, filed
electronically as Exhibit 24 to Post-Effective Amendment No. 16 to
Registration Statement No. 33-28976, by:
** Signed pursuant to Power of Attorney, dated Sept. 11, 2002, filed
electronically herewith as Exhibit 24.2, by:
*** Signed pursuant to Power of Attorney, dated April 16, 2003, filed
electronically herewith as Exhibit 24.3, by:
/s/ Mary Ellyn Minenko
- ------------------------
Mary Ellyn Minenko