<PAGE>
PROSPECTUS
May 1, 2000
AMERICAN EXPRESS NEW SOLUTIONS VARIABLE ANNUITY(SM)
INDIVIDUAL OR GROUP FLEXIBLE PREMIUM DEFERRED COMBINATION FIXED/VARIABLE ANNUITY
AMERICAN ENTERPRISE VARIABLE ANNUITY ACCOUNT
Issued by: American Enterprise Life Insurance Company (American Enterprise Life)
829 AXP Financial Center
Minneapolis, MN 55474
Telephone: 1-800-333-3437
This prospectus contains information that you should know before investing. You
also will receive the prospectuses for:
- American Express(R) Variable Portfolio Funds
- AIM Variable Insurance Funds
- Alliance Variable Products Series Fund
- Evergreen Variable Annuity Trust
- Fidelity Variable Insurance Products - Service Class
- Franklin Templeton Variable Insurance Products Trust (FTVIPT)
- MFS(R) Variable Insurance Trust(SM)
- Putnam Variable Trust - Class IB Shares
Please read the prospectuses carefully and keep them for future reference.
The contract provides for purchase payment credits which we may reverse up to
the maximum withdrawal charge under certain circumstances. Expense charges for
contracts with purchase payment credits may be higher than expenses for
contracts without such credits. The amount of the credit may be more than offset
by any additional fees and charges associated with the credit.
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 CONTRACT 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 CONTRACT
INVOLVES INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information (SAI), dated the same date as this
prospectus, is incorporated by reference into this prospectus. It is filed with
the SEC and is available without charge by contacting American Enterprise Life
at the telephone number above or by completing and sending the order form on the
last page of this prospectus. The table of contents of the SAI is on the last
page of this prospectus.
1
<PAGE>
TABLE OF CONTENTS
-----------------
KEY TERMS
THE CONTRACT IN BRIEF
EXPENSE SUMMARY
CONDENSED FINANCIAL INFORMATION (UNAUDITED)
FINANCIAL STATEMENTS
PERFORMANCE INFORMATION
THE VARIABLE ACCOUNT AND THE FUNDS
THE FIXED ACCOUNTS
BUYING YOUR CONTRACT
CHARGES
VALUING YOUR INVESTMENT
MAKING THE MOST OF YOUR CONTRACT
WITHDRAWALS
CHANGING OWNERSHIP
BENEFITS IN CASE OF DEATH
THE ANNUITY PAYOUT PERIOD
TAXES
VOTING RIGHTS
SUBSTITUTION OF INVESTMENTS
ABOUT THE SERVICE PROVIDERS
ADDITIONAL INFORMATION ABOUT AMERICAN ENTERPRISE LIFE
DIRECTORS AND EXECUTIVE OFFICERS
EXPERTS
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY FINANCIAL INFORMATION
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
2
<PAGE>
KEY TERMS
THESE TERMS CAN HELP YOU UNDERSTAND DETAILS ABOUT YOUR CONTRACT.
ACCUMULATION UNIT -- A measure of the value of each subaccount before annuity
payouts begin.
ANNUITANT -- The person on whose life or life expectancy the annuity payouts are
based.
ANNUITY PAYOUTS -- An amount paid at regular intervals under one of several
plans.
BENEFICIARY -- The person you designate to receive annuity benefits in case of
the owner's or annuitant's death while the contract is in force and before
annuity payouts begin.
CLOSE OF BUSINESS -- When the New York Stock Exchange (NYSE) closes, normally 4
p.m. Eastern time.
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 one or more purchase payments. It provides for lifetime or
other forms of payouts beginning at a specified time in the future.
CONTRACT VALUE -- The total value of your contract before we deduct any
applicable charges.
CONTRACT YEAR -- A period of 12 months, starting on the effective date of your
contract and on each anniversary of the effective date.
FIXED ACCOUNTS - The one-year fixed account is an account to which you may
allocate purchase payments. Amounts you allocate to this account earn interest
at rates that we declare periodically. Guarantee Period Accounts are fixed
accounts to which you may also allocate purchase payments. These accounts have
guaranteed interest rates declared for periods ranging from two to ten years.
Withdrawals from these accounts prior to the end of the term specified will
receive a Market Value Adjustment, which may result in a gain or loss of
principal.
FUNDS -- Investment options under your contract. You may allocate your purchase
payments into subaccounts investing in shares of any or all of these funds.
GUARANTEE PERIOD -- The number of years that a guaranteed interest rate is
credited.
MARKET VALUE ADJUSTMENT (MVA) -- A positive or negative adjustment assessed if
any portion of a Guarantee Period Account is withdrawn or transferred prior to
the end of its Guarantee Period.
OWNER (YOU, YOUR) -- The person who controls the contract (decides on investment
allocations, transfers, payout options, etc.). Usually, but not always, the
owner is also the annuitant. The owner is responsible for taxes, regardless of
whether he or she receives the contract's benefits.
PURCHASE PAYMENT CREDITS -- An addition we make to your contract value. We base
the amount of the credit on total net payments (total payments less total
withdrawals). We apply the credit to your contract based on your current
payment.
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
3
<PAGE>
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.
RETIREMENT DATE -- The date when annuity payouts are scheduled to begin.
VALUATION DATE -- Any normal business day, Monday through Friday, that the NYSE
is open. Each valuation date ends at the close of business. We calculate the
value of each subaccount at the close of business on each valuation date.
VARIABLE ACCOUNT -- Consists of separate subaccounts to which you may allocate
purchase payments; each invests in shares of one fund. The value of your
investment in each subaccount changes with the performance of the particular
fund.
WITHDRAWAL VALUE -- The amount you are entitled to receive if you make a full
withdrawal from your contract. It is the contract value minus any applicable
charges.
4
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THE CONTRACT IN BRIEF
---------------------
PURPOSE: The purpose of the contract is to allow you to
accumulate money for retirement. You do this by
making one or more purchase payments; you may
allocate your purchase payments to the fixed
accounts and/or subaccounts under the contract.
These accounts in turn, may earn returns that
increase the value of the contract. Beginning at a
specified time in the future called the retirement
date, the contract provides lifetime or other
forms of payouts of your contract value (less any
applicable premium tax). As in 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.
A qualified annuity will not provide any necessary
or additional tax deferral if it is used to fund a
retirement plan that is tax-deferred. However, the
contract has features other than tax deferral that
may make it an appropriate investment for your
retirement plan. You should compare these features
and their costs with other investment options
before deciding to purchase this contract.
FREE LOOK PERIOD: You may return your contract to your sales
representative or to our office within the time
stated on the first page of your contract and
receive a full refund of the contract value, less
any purchase payment credits up to the maximum
withdrawal charges. (See "Buying Your Contract -
Purchase payment credits.") However, you bear the
investment risk from the time of purchase until
you return the contract; the refund amount may be
more or less than the payment you made.
(Exception: If the law requires, we will refund
all of your purchase payments.)
ACCOUNTS: Currently, you may allocate your purchase payments
among any or all of:
- the subaccounts, each of which invests in a
fund with a particular investment objective.
The value of each subaccount varies with the
performance of the particular fund in which
it invests. We cannot guarantee that the
value at the retirement date will equal or
exceed the total purchase payments you
allocate to the subaccounts. (p. 19)
- the fixed accounts, which earn interest at
rates that we adjust periodically. (p. 25)
BUYING YOUR CONTRACT: Your sales representative will help you complete
and submit an application. Applications are
subject to acceptance at our office. You may buy a
nonqualified annuity or a qualified annuity. After
your initial purchase payment, you have the option
of making additional purchase payments in the
future.
- Minimum initial purchase payment (not
including Systematic Investment Plans (SIPs))
-- $5,000 for contracts sold in Pennsylvania,
Texas, Washington and South Carolina; and
$2,000 for contracts sold in other states.
5
<PAGE>
- Minimum additional purchase payment -- $100
($50 for SIPs).
- Maximum total purchase payments (without
prior approval) -- $1,000,000. (p. 27)
TRANSFERS: Subject to certain restrictions you currently may
redistribute your money among the accounts without
charge at any time until annuity payouts begin,
and once per contract year among the subaccounts
after annuity payouts begin. Transfers out of the
Guarantee Period Accounts before the end of the
Guarantee Period will be subject to a MVA. You may
establish automated transfers among the accounts.
Fixed account transfers are subject to special
restrictions. (p. 38)
WITHDRAWALS: You may withdraw all or part of your contract
value at any time before the retirement date. You
also may establish automated partial withdrawals.
Withdrawals may be subject to charges and tax
penalties (including a 10% IRS penalty if you make
withdrawals prior to your reaching age 59 1/2) and
may have other tax consequences; also, certain
restrictions apply. (p. 44)
CHANGING OWNERSHIP: You may change ownership of a nonqualified annuity
by written instruction, but this may have federal
income tax consequences. Restrictions apply to
changing ownership of a qualified annuity. (p. 45)
BENEFITS IN CASE
OF DEATH: If you or the annuitant die before annuity payouts
begin, we will pay the beneficiary an amount at
least equal to the contract value. (p. 45)
ANNUITY PAYOUTS: You can apply your contract value to an annuity
payout plan that begins on the retirement date.
You may choose from a variety of plans to make
sure that payouts continue as long as you like. If
you purchased a qualified annuity, the payout
schedule must meet the requirements of the
qualified plan. We can make payouts on a fixed or
variable basis, or both. Total monthly payouts may
include amounts from each subaccount and the
one-year fixed account. During the annuity payout
period, your choices for subaccounts may be
limited. The Guarantee Period Accounts are not
available during the payout period. (p. 48)
TAXES: Generally, your contract grows tax-deferred until
you make withdrawals from it or begin to receive
payouts. (Under certain circumstances, IRS penalty
taxes may apply.) Even if you direct payouts to
someone else, you will be taxed on the income if
you are the owner. However, Roth IRAs may grow and
be distributed tax free if you meet certain
distribution requirements. (p. 50)
CHARGES: We assess certain charges in connection with your
contract (p. 30):
- $40 annual contract administrative charge;
- a 0.15% variable account administrative
charge;
- a 0.85% mortality and expense risk fee
applies (if you allocate money to one or more
subaccounts) for qualified annuities;
6
<PAGE>
- a 1.10% mortality and expense risk fee
applies (if you allocate money to one or more
subaccounts) for nonqualified annuities;
- if you select the Maximum Anniversary Value
Death Benefit Rider*, an additional 0.10%
mortality and expense risk fee applies (if
you allocate money to one or more
subaccounts);
- if you select the Guaranteed Minimum Income
Benefit Rider**, an annual fee based on the
adjusted contract value (currently at 0.30%);
- if you select the Performance Credit Rider**,
an annual fee of 0.15% of the contract value;
- withdrawal charge;
- any premium taxes that may be imposed on us
by state or local governments (currently, we
deduct any applicable premium tax when you
make a total withdrawal or when annuity
payouts begin, but we reserve the right to
deduct this tax at other times such as when
you make purchase payments or when you make a
total withdrawal); and
- the operating expenses of the funds in which
the subaccounts invest.
* Available if both you and the annuitant are age 79 or younger. May not be
available in all states.
** You may select either the Guarantee Minimum Income Benefit Rider or the
Performance Credit Rider, but not both. Riders may not be available in all
states. The Guaranteed Minimum Income Benefit Rider is available if the
annuitant is age 75 or younger.
EXPENSE SUMMARY
The purpose of the following information is to help you understand the various
costs and expenses associated with your contract.
You pay no sales charge when you purchase your contract. We show all costs that
we deduct directly from your contract or indirectly from the subaccounts and
funds below. Some expenses may vary as we explain under "Charges." Please see
the funds' prospectuses for more information on the operating expenses of each
fund.
CONTRACT OWNER EXPENSES
WITHDRAWAL CHARGE: contingent deferred sales charge as a percentage of
purchase payment withdrawn.
<TABLE>
<CAPTION>
YEARS FROM PURCHASE WITHDRAWAL CHARGE
PAYMENT RECEIPT PERCENTAGE
<S> <C>
1 8%
2 8
3 7
4 7
5 6
6 5
7 3
Thereafter 0
</TABLE>
WITHDRAWAL CHARGE UNDER ANNUITY PAYOUT PLAN E - PAYOUTS FOR A SPECIFIED
PERIOD: The amount equal to the difference in the present value of
remaining payments using the assumed investment rate and such present value
using the assumed investment rate plus 1.36% under a qualified annuity and
1.61% under a nonqualified annuity. This withdrawal charge cannot be
greater than 9% of the amount available for payouts under the Plan.
7
<PAGE>
ANNUAL CONTRACT ADMINISTRATIVE CHARGE $40*
* We will waive this charge when your contract value is $50,000 or more on the
current contract anniversary.
GUARANTEED MINIMUM INCOME BENEFIT RIDER** FEE:
as a percentage of the adjusted contract value
charged annually. This is an optional expense. 0.30%
PERFORMANCE CREDIT RIDER** FEE:
as a percentage of the contract value. 0.15%
** You may select either the Guarantee Minimum Income Benefit Rider or the
Performance Credit Rider, but not both. Riders may not be available in all
states. The Guaranteed Minimum Income Benefit Rider is available if the
annuitant is age 75 or younger.
ANNUAL VARIABLE ACCOUNT EXPENSES (as a percentage of average subaccount value)
You can choose the death benefit guarantee provided. The combination you choose
determines the fees you pay. The table below shows the combinations available to
you and their cost.
<TABLE>
<CAPTION>
------------------------------------------------------------- ------------------------- ---------------------------
QUALIFIED ANNUITIES NON-QUALIFIED
ANNUITIES
------------------------------------------------------------- ------------------------- ---------------------------
<S> <C> <C>
VARIABLE ACCOUNT ADMINISTRATIVE CHARGE 0.15% 0.15%
------------------------------------------------------------- ------------------------- ---------------------------
MORTALITY AND EXPENSE RISK FEE 0.85% 1.10%
------------------------------------------------------------- ------------------------- ---------------------------
MAXIMUM ANNIVERSARY VALUE DEATH BENEFIT RIDER FEE AS
PART OF THE MORTALITY AND EXPENSE RISK FEE (OPTIONAL) 0.10% 0.10%
------------------------------------------------------------- ------------------------- ---------------------------
TOTAL ANNUAL VARIABLE ACCOUNT EXPENSES WITHOUT ANY
OPTIONAL RIDER FEES 1.00% 1.25%
------------------------------------------------------------- ------------------------- ---------------------------
TOTAL ANNUAL VARIABLE ACCOUNT EXPENSE WITH THE MAXIMUM
ANNIVERSARY VALUE DEATH BENEFIT RIDER FEE 1.10% 1.35%
------------------------------------------------------------- ------------------------- ---------------------------
</TABLE>
8
<PAGE>
ANNUAL OPERATING EXPENSES OF THE FUNDS (after fee waivers and/or expense
reimbursements, if applicable, as a percentage of average daily net assets)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT 12b-1 OTHER
FEES FEES EXPENSES TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXP(SM) VARIABLE PORTFOLIO -
------------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund .51% .13 .05 .69%(1)
------------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund .61% .13 .14 .88%(2)
------------------------------------------------------------------------------------------------------------------------------------
Managed Fund .59% .13 .04 .76%(1)
------------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund(R) .61% .13 .07 .81%(1)
------------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Fund .37% .13 -- .50%(2)
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund .79% .13 .31 1.23%(2)
------------------------------------------------------------------------------------------------------------------------------------
AIM V.I.
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund .62% -- .11 .73%(3)
------------------------------------------------------------------------------------------------------------------------------------
Dent Demographic Trends Fund .85% -- .55 1.40%(4)
------------------------------------------------------------------------------------------------------------------------------------
Value Fund .61% -- .15 .76%(3)
------------------------------------------------------------------------------------------------------------------------------------
ALLIANCE VP
------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Portfolio (Class B) .63% .25 .09 .97%(5)
------------------------------------------------------------------------------------------------------------------------------------
Premier Growth Portfolio (Class B) 1.00% .25 .04 1.29%(5)
------------------------------------------------------------------------------------------------------------------------------------
Technology Portfolio (Class B) .71% .25 .24 1.20%(5)
------------------------------------------------------------------------------------------------------------------------------------
EVERGREEN VA
------------------------------------------------------------------------------------------------------------------------------------
Global Leaders Fund .68% -- .33 1.01%(6)
------------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund .80% -- .21 1.01%(6)
------------------------------------------------------------------------------------------------------------------------------------
Masters Fund .37% -- .63 1.00%(6)
------------------------------------------------------------------------------------------------------------------------------------
Omega Fund .52% -- .44 .96%(6)
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund .51% -- .50 1.01%(6)
------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund .52% -- .32 .84%(6)
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP
------------------------------------------------------------------------------------------------------------------------------------
III Mid Cap Portfolio (Service Class) .57% .10 .40 1.07%(7)
------------------------------------------------------------------------------------------------------------------------------------
Contrafund(R) Portfolio (Service Class) .58% .10 .10 .78%(8)
------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio (Service Class) .58% .10 .11 .79%(8)
------------------------------------------------------------------------------------------------------------------------------------
FTVIPT
------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 .55% .25 .27 1.07%(9,10)
------------------------------------------------------------------------------------------------------------------------------------
Mutual Shares Securities Fund - Class 2 .60% .25 .19 1.04%(9,11)
------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities Fund - Class 2 1.25% .25 .31 1.81%(9,12)
------------------------------------------------------------------------------------------------------------------------------------
Templeton International Securities Fund - Class 2 .69% .25 .19 1.13%(9,13)
------------------------------------------------------------------------------------------------------------------------------------
MFS(R) VIT
------------------------------------------------------------------------------------------------------------------------------------
Growth Series - Service Class .75% .20 .16 1.11%(14,15,16)
------------------------------------------------------------------------------------------------------------------------------------
New Discovery Series - Service Class .90% .20 .17 1.27%(14,15,16)
------------------------------------------------------------------------------------------------------------------------------------
Total Return Series - Service Class .75% .20 .15 1.10%(14,15)
------------------------------------------------------------------------------------------------------------------------------------
PUTNAM VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Growth and Income Fund - Class IB Shares .46% .15 .04 .65%(3)
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT International New Opportunities Fund - Class IB Shares 1.08% .15 .33 1.56%(3)
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Vista Fund - Class IB Shares .65% .15 .10 .90%(3)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund's expense figures are based on actual expenses for the fiscal year
ended Aug. 31, 1999 restated to include a Rule 12b-1 distribution fee of .125%
that went into effect Sept. 21, 1999.
(2) Based on estimated expenses after fee waivers and expense reimbursements.
Without fee waivers and expense reimbursements "Other Expenses" and "Total"
would be: 0.26% and 1.00% for AXP(SM) Variable Portfolio - Federal Income Fund,
and 0.43% and 1.35% for AXP(SM) Variable Portfolio - Small Cap Advantage Fund.
(3) Figures in "Management Fees," "12b-1 Fees," "Other Expenses" and "Total" are
based on actual expenses for the fiscal year ended Dec. 31, 1999.
(4) Calculated based on estimated net assets.
9
<PAGE>
(5) Figures in "Management Fees," "12b-1 Fees," "Other Expenses," and "Total"
are based on actual expenses for the fiscal period ended Dec. 31, 1999. Absent
fee waivers and expense reimbursements "Management Fees," "12b-1 Fees," "Other
Expenses" and "Total" would be, respectively, 1.00%, 0.25%, 0.27% and 1.52% for
Alliance Technology Portfolio.
(6) Annualized operating expenses for the Evergreen Funds at Dec. 31, 1999,
restated to reflect current fees. If the underlying funds had borne all expenses
that were assumed or waived by the investment advisor, the ratios for
"Management Fees," "Other Expenses," and "Total" respectively would have been as
follows: Evergreen VA Global Leaders Fund: 0.83%, 0.33%, 1.20%; Evergreen VA
Growth and Income Fund: 0.87%, 0.21%, 1.08%; Evergreen VA Masters Fund: 0.87%,
0.63%, 1.50%; Evergreen VA Omega Fund: 0.52%, 0.44%, 0.96%; Evergreen VA Small
Cap Value Fund: 0.87%, 0.50%, 1.37%; and Evergreen VA Strategic Income Fund:
0.52%, 0.32%, 0.84%.
(7) FMR agreed to reimburse a portion of Mid Cap Portfolio's expenses during the
period. Without this reimbursement, the Portfolio's management fee, distribution
& service fee (12b-1), other expenses and total expenses would have been 0.57%,
0.10%, 2.74% and 3.41% respectively.
(8) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain funds'
custodians, credits realized as a result of uninvested cash balances were used
to reduce a portion of each applicable funds' expenses. With these reductions,
the "Other Expenses," and "Total" presented in the table would have been 0.07%
and 0.75% for Contrafund(R) Portfolio.
(9) The fund's class 2 distribution plan or "Rule 12b-1 plan" is described in
the fund's prospectus.
(10) On Feb 8, 2000, a merger and reorganization was approved that combined the
assets of the fund with a similar fund of the Templeton Variable products Series
Fund, effective May 1, 2000. On Feb. 8, 2000, fund shareholders approved new
management fees, which apply to the combined fund effective May 1, 2000. The
table shows restated total expenses based on the new fees and assets of the fund
as of Dec. 31, 1999, and not the assets of the combined fund. However, if the
table reflected both the new fees and the combined assets, the fund's expenses
after May 1, 2000 would be estimated as: "Management Fees" 0.55%, "12b-1 Fees"
0.25%, "Other Expenses" 0.27%, and "Total" 1.07%.
(11) On Feb. 8, 2000 a merger and reorganization was approved that combined the
fund with a similar fund of Templeton Variable Products Series Fund, effective
May 1, 2000. The table shows total expenses based on the fund's assets as of
Dec. 31, 1999, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after May 1, 2000 would be
estimated as: "Management Fees" 0.60%, "12b-1 Fees" 0.25%, "Other Expenses"
0.19%, and "Total" 1.04%.
(12) Previously Templeton Developing Markets Fund. On Feb 8, 2000, shareholders
approved a merger and reorganization combined the fund with the Templeton
Developing Markets Equity Fund, effective May 1, 2000. The shareholders of that
fund had approved new management fees, which apply to the combined fund
effective May 1, 2000. The table shows restated total expenses based on the new
fees and assets of the fund as of Dec. 31, 1999, and not the assets of the
combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after May 1, 2000 would be estimated as:
"Management Fees" 1.25%, "12b-1 Fees" 0.25%, "Other Expenses" 0.29%, and "Total"
1.79%. The fund's class 2 distribution plan or "Rule 12b-1 plan" is described in
the fund's prospectus. While the maximum amount payable under the fund's class 2
Rule 12b-1 plan is 0.35% per year of the fund's average daily net assets, the
Board of Trustees of Franklin Templeton Variable Insurance Products Trust has
set the current rate at 0.25% per year.
(13) Previously Templeton International Fund. Feb 8, 2000, shareholders approved
a merger and reorganization combined the fund with the Templeton International
Equity Fund, effective May 1, 2000. The shareholders of that fund had approved
new management fees, which apply to the combined fund effective May 1, 2000. The
table shows restated total expenses based on the new fees and assets of the fund
as of Dec. 31, 1999, and not the assets of the combined fund. However, if the
table reflected both the new fees and the combined assets, the fund's expenses
after May 1, 2000 would be estimated as: "Management Fees" 0.65%, "12b-1 Fees"
0.25%, "Other Expenses" 0.20%, and "Total" 1.10%
(14) Each Series has adopted a distribution plan under Rule 12b-1 that permits
it to pay marketing and other fees to support the sales and distribution of
service class shares (these fees are referred to as distribution fees).
(15) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with its
custodian and dividend disbursing agent. The series may enter into other similar
arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. "Other Expenses" do not take into
account these expense reductions, and are therefore higher than the actual
expenses of the series. Had these fee reductions been taken into account, Net
Expenses would be lower, and for service class shares would be estimated to be:
1.10% for Growth Series, 1.25% for New Discovery Series and 1.09% for Total
Return Series.
(16) MFS has contractually agreed, subject to reimbursement, to bear expenses
for the series' expenses such that "Other Expenses" (after taking into account
the expense offset arrangement described above), do not exceed 0.15% annually.
Without this agreement, "Other Expenses" and "Total" would be 0.71%and 1.66% for
Growth Series and 1.59% and 2.69% for New Discovery Series. These contractual
fee arrangements will continue until at least May 1, 2001, unless changed with
the consent of the board of trustees which oversees the series.
10
<PAGE>
EXAMPLES: *
You would pay the following expenses on a $1,000 investment if you have a
qualified annuity without any optional riders and assuming a 5% annual return
and....
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
A TOTAL WITHDRAWAL AT THE NO WITHDRAWAL OR SELECTION OF AN ANNUITY
END OF EACH TIME PERIOD PAYOUT PLAN AT THE END OF EACH TIME PERIOD
------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXP(SM) VARIABLE PORTFOLIO -
------------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund $98.35 $126.80 $18.35 $56.80
------------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund 100.30 132.71 20.30 62.71
------------------------------------------------------------------------------------------------------------------------------------
Managed Fund 99.07 128.98 19.07 58.98
------------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund(R) 99.58 130.54 19.58 60.54
------------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Fund 96.40 120.87 16.40 50.87
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 103.88 143.54 23.88 73.54
------------------------------------------------------------------------------------------------------------------------------------
AIM V.I.
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 98.76 128.05 18.76 58.05
------------------------------------------------------------------------------------------------------------------------------------
Dent Demographic Trends Fund 105.63 148.76 25.63 78.76
------------------------------------------------------------------------------------------------------------------------------------
Value Fund 99.07 128.98 19.07 58.98
------------------------------------------------------------------------------------------------------------------------------------
ALLIANCE VP
------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Portfolio (Class B) 101.22 135.50 21.22 65.50
------------------------------------------------------------------------------------------------------------------------------------
Premier Growth Portfolio (Class B) 104.50 145.38 24.50 75.38
------------------------------------------------------------------------------------------------------------------------------------
Technology Portfolio (Class B) 103.58 142.61 23.58 72.61
------------------------------------------------------------------------------------------------------------------------------------
EVERGREEN VA
------------------------------------------------------------------------------------------------------------------------------------
Global Leaders Fund 101.63 136.74 21.63 66.74
------------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund 101.63 136.74 21.63 66.74
------------------------------------------------------------------------------------------------------------------------------------
Masters Fund 101.53 136.43 21.53 66.43
------------------------------------------------------------------------------------------------------------------------------------
Omega Fund 101.12 135.19 21.12 65.19
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 101.63 136.74 21.63 66.74
------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund 99.89 131.47 19.89 61.47
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP
------------------------------------------------------------------------------------------------------------------------------------
III Mid Cap Portfolio (Service Class) 102.24 138.60 22.24 68.60
------------------------------------------------------------------------------------------------------------------------------------
Contrafund(R) Portfolio (Service Class) 99.27 129.60 19.27 59.60
------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio (Service Class) 99.37 129.92 19.37 59.92
------------------------------------------------------------------------------------------------------------------------------------
FTVIPT
------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 102.24 138.60 22.24 68.60
------------------------------------------------------------------------------------------------------------------------------------
Mutual Shares Securities Fund - Class 2 101.94 137.67 21.94 67.67
------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities 109.83 161.30 29.83 91.30
Fund - Class 2
------------------------------------------------------------------------------------------------------------------------------------
Templeton International Securities Fund 102.86 140.45 22.86 70.45
- Class 2
------------------------------------------------------------------------------------------------------------------------------------
MFS(R) VIT
------------------------------------------------------------------------------------------------------------------------------------
Growth Series - Service Class 102.65 139.83 22.65 69.83
------------------------------------------------------------------------------------------------------------------------------------
New Discovery Series - Service Class 104.29 144.77 24.29 74.77
------------------------------------------------------------------------------------------------------------------------------------
Total Return Series - Service Class 102.55 139.52 22.55 69.52
------------------------------------------------------------------------------------------------------------------------------------
PUTNAM VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Growth and Income Fund - Class 97.94 125.56 17.94 55.56
IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT International New 107.27 153.67 27.27 83.67
Opportunities Fund - Class IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Vista Fund - Class IB Shares 100.50 133.33 20.50 63.33
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
You would pay the following expenses on a $1,000 investment if you have a
qualified annuity with the optional 0.10% Maximum Anniversary Value Death
Benefit Rider, 0.30% Guaranteed Minimum Income Benefit Rider and assuming a 5%
annual return and....
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
A TOTAL WITHDRAWAL AT THE NO WITHDRAWAL OR SELECTION OF AN ANNUITY
END OF EACH TIME PERIOD PAYOUT PLAN AT THE END OF EACH TIME PERIOD
------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXP(SM) VARIABLE PORTFOLIO -
------------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund $102.45 $139.21 $22.45 $69.21
------------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund 104.40 145.07 24.40 75.07
------------------------------------------------------------------------------------------------------------------------------------
Managed Fund 103.17 141.38 23.17 71.38
------------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund(R) 103.68 142.92 23.68 72.92
------------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Fund 100.50 133.33 20.50 63.33
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 107.98 155.81 27.98 85.81
------------------------------------------------------------------------------------------------------------------------------------
AIM V.I.
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 102.86 140.45 22.86 70.45
------------------------------------------------------------------------------------------------------------------------------------
Dent Demographic Trends Fund 109.73 161.00 29.73 91.00
------------------------------------------------------------------------------------------------------------------------------------
Value Fund 103.17 141.38 23.17 71.38
------------------------------------------------------------------------------------------------------------------------------------
ALLIANCE VP
------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Portfolio (Class B) 105.32 147.84 25.32 77.84
------------------------------------------------------------------------------------------------------------------------------------
Premier Growth Portfolio (Class B) 108.60 157.64 28.60 87.64
------------------------------------------------------------------------------------------------------------------------------------
Technology Portfolio (Class B) 107.68 154.89 27.68 84.89
------------------------------------------------------------------------------------------------------------------------------------
EVERGREEN VA
------------------------------------------------------------------------------------------------------------------------------------
Global Leaders Fund 105.73 149.07 25.73 79.07
------------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund 105.73 149.07 25.73 79.07
------------------------------------------------------------------------------------------------------------------------------------
Masters Fund 105.63 148.76 25.63 78.76
------------------------------------------------------------------------------------------------------------------------------------
Omega Fund 105.22 147.54 25.22 77.54
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 105.73 149.07 25.73 79.07
------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund 103.99 143.84 23.99 73.84
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP
------------------------------------------------------------------------------------------------------------------------------------
III Mid Cap Portfolio (Service Class) 106.34 150.91 26.34 80.91
------------------------------------------------------------------------------------------------------------------------------------
Contrafund(R) Portfolio (Service Class) 103.37 141.99 23.37 71.99
------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio (Service Class) 103.47 142.30 23.47 72.30
------------------------------------------------------------------------------------------------------------------------------------
FTVIPT
------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 106.34 150.91 26.34 80.91
------------------------------------------------------------------------------------------------------------------------------------
Mutual Shares Securities Fund - Class 2 106.04 149.99 26.04 79.99
------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities 113.93 173.43 33.93 103.43
Fund - Class 2
------------------------------------------------------------------------------------------------------------------------------------
Templeton International Securities Fund - 106.96 152.75 26.96 82.75
Class 2
------------------------------------------------------------------------------------------------------------------------------------
MFS(R) VIT
------------------------------------------------------------------------------------------------------------------------------------
Growth Series - Service Class 106.75 152.14 26.75 82.14
------------------------------------------------------------------------------------------------------------------------------------
New Discovery Series - Service Class 108.39 157.03 28.39 87.03
------------------------------------------------------------------------------------------------------------------------------------
Total Return Series - Service Class 106.65 151.83 26.65 81.83
------------------------------------------------------------------------------------------------------------------------------------
PUTNAM VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Growth and Income Fund - Class 102.04 137.98 22.04 67.98
IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT International New Opportunities 111.37 165.86 31.37 95.86
Fund - Class IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Vista Fund - Class IB Shares 104.60 145.69 24.60 75.69
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
You would pay the following expenses on a $1,000 investment if you have a
nonqualified annuity without any optional riders and assuming a 5% annual return
and....
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
A TOTAL WITHDRAWAL AT THE NO WITHDRAWAL OR SELECTION OF AN ANNUITY
END OF EACH TIME PERIOD PAYOUT PLAN AT THE END OF EACH TIME PERIOD
------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXP(SM) VARIABLE PORTFOLIO -
------------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund $100.91 $134.57 $20.91 $64.57
------------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund 102.86 140.45 22.86 70.45
------------------------------------------------------------------------------------------------------------------------------------
Managed Fund 101.63 136.74 21.63 66.74
------------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund(R) 102.14 138.29 22.14 68.29
------------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Fund 98.96 128.67 18.96 58.67
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 106.45 151.22 26.45 81.22
------------------------------------------------------------------------------------------------------------------------------------
AIM V.I.
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 101.32 135.81 21.32 65.81
------------------------------------------------------------------------------------------------------------------------------------
Dent Demographic Trends Fund 108.19 156.42 28.19 86.42
------------------------------------------------------------------------------------------------------------------------------------
Value Fund 101.63 136.74 21.63 66.74
------------------------------------------------------------------------------------------------------------------------------------
ALLIANCE VP
------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Portfolio (Class B) 103.78 143.23 23.78 73.23
------------------------------------------------------------------------------------------------------------------------------------
Premier Growth Portfolio (Class B) 107.06 153.06 27.06 83.06
------------------------------------------------------------------------------------------------------------------------------------
Technology Portfolio (Class B) 106.14 150.30 26.14 80.30
------------------------------------------------------------------------------------------------------------------------------------
EVERGREEN VA
------------------------------------------------------------------------------------------------------------------------------------
Global Leaders Fund 104.19 144.46 24.19 74.46
------------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund 104.19 144.46 24.19 74.46
------------------------------------------------------------------------------------------------------------------------------------
Masters Fund 104.09 144.15 24.09 74.15
------------------------------------------------------------------------------------------------------------------------------------
Omega Fund 103.68 142.92 23.68 72.92
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 104.19 144.46 24.19 74.46
------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund 102.45 139.21 22.45 69.21
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP
------------------------------------------------------------------------------------------------------------------------------------
III Mid Cap Portfolio (Service Class) 104.81 146.31 24.81 76.31
------------------------------------------------------------------------------------------------------------------------------------
Contrafund(R) Portfolio (Service Class) 101.83 137.36 21.83 67.36
------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio (Service Class) 101.94 137.67 21.94 67.67
------------------------------------------------------------------------------------------------------------------------------------
FTVIPT
------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 104.81 146.31 24.81 76.31
------------------------------------------------------------------------------------------------------------------------------------
Mutual Shares Securities Fund - Class 2 104.50 145.38 24.50 75.38
------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities 112.39 168.89 32.39 98.89
Fund - Class 2
------------------------------------------------------------------------------------------------------------------------------------
Templeton International Securities Fund - 105.42 148.15 25.42 78.15
Class 2
------------------------------------------------------------------------------------------------------------------------------------
MFS(R) VIT
------------------------------------------------------------------------------------------------------------------------------------
Growth Series - Service Class 105.22 147.54 25.22 77.54
------------------------------------------------------------------------------------------------------------------------------------
New Discovery Series - Service Class 106.86 152.44 26.86 82.44
------------------------------------------------------------------------------------------------------------------------------------
Total Return Series - Service Class 105.11 147.23 25.11 77.23
------------------------------------------------------------------------------------------------------------------------------------
PUTNAM VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Growth and Income Fund - Class 100.50 133.33 20.50 63.33
IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT International New Opportunities 109.83 161.30 29.83 91.30
Fund - Class IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Vista Fund - Class IB Shares 103.06 141.07 23.06 71.07
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
You would pay the following expenses on a $1,000 investment if you have a
nonqualified annuity with the optional 0.10% Maximum Anniversary Value Death
Benefit Rider, 0.30% Guaranteed Minimum Income Benefit Rider and assuming a 5%
annual return and....
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
A TOTAL WITHDRAWAL AT THE NO WITHDRAWAL OR SELECTION OF AN ANNUITY
END OF EACH TIME PERIOD PAYOUT PLAN AT THE END OF EACH TIME PERIOD
------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXP(SM) VARIABLE PORTFOLIO -
------------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund $105.01 $146.92 $25.01 $76.92
------------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund 106.96 152.75 26.96 82.75
------------------------------------------------------------------------------------------------------------------------------------
Managed Fund 105.73 149.07 25.73 79.07
------------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund(R) 106.24 150.61 26.24 80.61
------------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index Fund 103.06 141.07 23.06 71.07
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 110.55 163.43 30.55 93.43
------------------------------------------------------------------------------------------------------------------------------------
AIM V.I.
------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund 105.42 148.15 25.42 78.15
------------------------------------------------------------------------------------------------------------------------------------
Dent Demographic Trends Fund 112.29 168.59 32.29 98.59
------------------------------------------------------------------------------------------------------------------------------------
Value Fund 105.73 149.07 25.73 79.07
------------------------------------------------------------------------------------------------------------------------------------
ALLIANCE VP
------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Portfolio (Class B) 107.88 155.50 27.88 85.50
------------------------------------------------------------------------------------------------------------------------------------
Premier Growth Portfolio (Class B) 111.16 165.25 31.16 95.25
------------------------------------------------------------------------------------------------------------------------------------
Technology Portfolio (Class B) 110.24 162.52 30.24 92.52
------------------------------------------------------------------------------------------------------------------------------------
EVERGREEN VA
------------------------------------------------------------------------------------------------------------------------------------
Global Leaders Fund 108.29 156.73 28.29 86.73
------------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund 108.29 156.73 28.29 86.73
------------------------------------------------------------------------------------------------------------------------------------
Masters Fund 108.19 156.42 28.19 86.42
------------------------------------------------------------------------------------------------------------------------------------
Omega Fund 107.78 155.20 27.78 85.20
------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund 108.29 156.73 28.29 86.73
------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund 106.55 151.52 26.55 81.52
------------------------------------------------------------------------------------------------------------------------------------
FIDELITY VIP
------------------------------------------------------------------------------------------------------------------------------------
III Mid Cap Portfolio (Service Class) 108.91 158.56 28.91 88.56
------------------------------------------------------------------------------------------------------------------------------------
Contrafund(R) Portfolio (Service Class) 105.93 149.68 25.93 79.68
------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio (Service Class) 106.04 149.99 26.04 79.99
------------------------------------------------------------------------------------------------------------------------------------
FTVIPT
------------------------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Fund - Class 2 108.91 158.56 28.91 88.56
------------------------------------------------------------------------------------------------------------------------------------
Mutual Shares Securities Fund - Class 2 108.60 157.64 28.60 87.64
------------------------------------------------------------------------------------------------------------------------------------
Templeton Developing Markets Securities 116.49 180.96 36.49 110.96
Fund - Class 2
------------------------------------------------------------------------------------------------------------------------------------
Templeton International Securities Fund - 109.52 160.39 29.52 90.39
Class 2
------------------------------------------------------------------------------------------------------------------------------------
MFS(R) VIT
------------------------------------------------------------------------------------------------------------------------------------
Growth Series - Service Class 109.32 159.78 29.32 89.78
------------------------------------------------------------------------------------------------------------------------------------
New Discovery Series - Service Class 110.96 164.64 30.96 94.64
------------------------------------------------------------------------------------------------------------------------------------
Total Return Series - Service Class 109.21 159.47 29.21 89.47
------------------------------------------------------------------------------------------------------------------------------------
PUTNAM VARIABLE TRUST
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Growth and Income Fund - Class 104.60 145.69 24.60 75.69
IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT International New Opportunities 113.93 173.43 33.93 103.43
Fund - Class IB Shares
------------------------------------------------------------------------------------------------------------------------------------
Putnam VT Vista Fund - Class IB Shares 107.16 153.36 27.16 83.36
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*In these examples, the $40 contract administrative charge is approximated as a
0.100% charge based on our estimated average contract size. Premium taxes
imposed by some state and local governments are not reflected in these examples.
We entered into
14
<PAGE>
certain arrangements under which we are compensated by the funds' advisors
and/or distributors for the administrative services we provide to the funds.
YOU SHOULD NOT CONSIDER THESE EXAMPLES AS REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following tables give per-unit information about the financial history for
each subaccount. We have not provided this information for some of the
subaccounts because they are new and do not have any history.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
1999
<S> <C>
SUBACCOUNT PCMG1(1) (INVESTING IN SHARES OF AXP(SM) VARIABLE PORTFOLIO -- CASH
MANAGEMENT FUND)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.01
at end of period
Number of accumulation 260
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
Simple yield(3) 4.62%
Compound yield(3) 4.73%
SUBACCOUNT PMGD1(1) (INVESTING IN SHARES OF AXP(SM) VARIABLE PORTFOLIO --
MANAGED FUND)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.08
at end of period
Number of accumulation 259
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
SUBACCOUNT PNDM1(1) (INVESTING IN SHARES OF AXP(SM) VARIABLE PORTFOLIO -- NEW
DIMENSIONS FUND(R))
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.15
at end of period
Number of accumulation 257
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
SUBACCOUNT PSCA1(1) (INVESTING IN SHARES OF AXP(SM) VARIABLE PORTFOLIO -- SMALL
CAP ADVANTAGE FUND)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.11
at end of period
Number of accumulation 254
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
SUBACCOUNT PCAP1(2) (INVESTING IN SHARES OF AIM V.I. CAPITAL APPRECIATION FUND)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.26
at end of period
Number of accumulation 251
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
SUBACCOUNT PVAL1(2) (INVESTING IN SHARES OF AIM V.I. VALUE FUND)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.11
at end of period
Number of accumulation 258
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
SUBACCOUNT PMDC1(2) (INVESTING IN SHARES OF FIDELITY VIP III MID CAP PORTFOLIO -
SERVICE CLASS)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.24
at end of period
Number of accumulation 188
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
SUBACCOUNT PSMC1(2) (INVESTING IN SHARES OF FTVIPT FRANKLIN SMALL CAP FUND -
CLASS 2)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.43
at end of period
Number of accumulation 243
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
SUBACCOUNT PMSS1(2) (INVESTING IN SHARES OF FTVIPT MUTUAL SHARES SECURITIES
FUND - CLASS 2)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.03
at end of period
Number of accumulation 260
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
SUBACCOUNT PNDS1(2) (INVESTING IN SHARES OF MFS(R) VIT NEW DISCOVERY SERIES)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.43
at end of period
Number of accumulation 238
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
SUBACCOUNT PTRS1(2) (INVESTING IN SHARES OF MFS(R) VIT TOTAL RETURN SERIES)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $1.00
at end of period
Number of accumulation 259
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
SUBACCOUNT PGIN1(2) (INVESTING IN SHARES OF PUTNAM VT GROWTH AND INCOME FUND -
CLASS IB SHARES)
Accumulation unit $1.00
value at beginning
of period
Accumulation unit value $0.97
at end of period
Number of accumulation 262
units outstanding at end
of period
Ratio of operating 1.25%
expense to average
net assets
</TABLE>
(1) Operations commenced on Nov. 10, 1999.
(2) Operations commenced on Nov. 9, 1999.
FINANCIAL STATEMENTS
You can find the audited financial statements of the subaccounts with financial
history in the SAI. The SAI does not include the audited financial statements
for some of the subaccounts because they are new and do not have any assets. You
can find our audited financial statements later in this prospectus.
PERFORMANCE INFORMATION
Performance information for the subaccounts may appear from time to time in
advertisements or sales literature. This information reflects the performance of
a hypothetical investment in a particular subaccount during a specified time
period. We show actual performance from the date the subaccounts began investing
in the funds. Currently, we do not provide any performance information because
they are new and have not had any activity to date. However, we show performance
from the commencement date of the funds as if the contract existed at that time,
which it did not. Although we base performance figures on historical earnings,
past performance does not guarantee future results.
We include non-recurring charges (such as withdrawal charges) in total return
figures, but not in yield quotations. Excluding non-recurring charges in yield
calculations increases the reported value.
Total return figures do not reflect any purchase payment credits or performance
credits.
Total return figures reflect deduction of all applicable charges, including the:
- contract administrative charge,
- variable account administrative charge,
- Maximum Anniversary Value Death Benefit Rider* fee,
- Guaranteed Minimum Income Benefit Rider** fee,
- Performance Credit Rider** fee,
- mortality and expense risk fee, and
- withdrawal charge (assuming a withdrawal at the end of the illustrated
period).
* Available if both you and the annuitant are age 79 or younger. May not be
available in all states.
** You may select either the Guarantee Minimum Income Benefit Rider or the
Performance Credit Rider, but not both. Riders may not be available in all
states. The Guaranteed Minimum Income Benefit Rider is available if the
annuitant is age 75 or younger.
19
<PAGE>
We also show optional total return quotations that do not reflect deduction of
the withdrawal charge (assuming no withdrawal) and the Guaranteed Minimum Income
Benefit Rider fee. We may show total return quotations by means of schedules,
charts or graphs.
AVERAGE ANNUAL TOTAL RETURN is the average annual compounded rate of return of
the investment over a period of one, five and ten years (or up to the life of
the subaccount if it is less than ten years old).
CUMULATIVE TOTAL RETURN is the cumulative change in the value of an investment
over a specified time period. We assume that income earned by the investment is
reinvested. Cumulative total return generally will be higher than average annual
total return.
ANNUALIZED SIMPLE YIELD (FOR SUBACCOUNTS INVESTING IN MONEY MARKET FUNDS)
"annualizes" the income generated by the investment over a given seven-day
period. That is, we assume the amount of income generated by the investment
during the period will be generated each seven-day period for a year. We show
this as a percentage of the investment.
ANNUALIZED COMPOUND YIELD (FOR SUBACCOUNTS INVESTING IN MONEY MARKET FUNDS) is
calculated like simple yield except that we assume the income is reinvested when
we annualize it. Compound yield will be higher than simple yield because of the
compounding effect of the assumed reinvestment.
ANNUALIZED YIELD (FOR SUBACCOUNTS INVESTING IN INCOME FUNDS) divides the net
investment income (income less expenses) for each accumulation unit during a
given 30-day period by the value of the unit on the last day of the period. We
then convert the result to an annual percentage.
You should consider performance information in light of the investment
objectives, policies, characteristics and quality of the fund in which the
subaccount invests and the market conditions during the specified time period.
Advertised yields and total return figures include charges that reduce
advertised performance. Therefore, you should not compare subaccount performance
to that of mutual funds that sell their shares directly to the public. (See the
SAI for a further description of methods used to determine total return and
yield.)
If you would like additional information about actual performance, please
contact us at the address or telephone number on the first page of this
prospectus.
THE VARIABLE ACCOUNT AND THE FUNDS
You may allocate payments to any or all the subaccounts of the variable account
that invest in shares of the following funds:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Subaccount Investing In Investment Objectives and Policies Investment Advisor or Manager
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UCMG1 AXP(SM) Variable Objective: maximum current income consistent with IDS Life Insurance Company (IDS
UCMG2 Portfolio- Cash liquidity and conservation of capital. Invests in money Life), investment manager;
UCMG4 Management Fund market securities. American Express Financial
PCMG1 Corporation (AEFC) investment
advisor.
---------------------------------------------------------------------------------------------------------------------------------
UFIF1 AXP(SM) Variable Objective: a high level of current income and safety of IDS Life, investment manager;
UFIF2 Portfolio- Federal principal consistent with an investment in U.S. AEFC, investment advisor.
UFIF3 Income Fund government and government agency securities. Invests
UFIF4 primarily in debt obligations issued or guaranteed as
to principal and interest by the U.S. government, its
agencies or instrumentalities.
---------------------------------------------------------------------------------------------------------------------------------
UMGD1 AXP(SM) Variable Objective: maximum total investment return through a IDS Life, investment manager;
UMGD2 Portfolio- Managed Fund combination of capital growth and current income. AEFC, investment advisor.
UMGD4 Invests primarily in a combination of common and
PMGD1 preferred stocks, convertible securities, bonds and
other debt securities.
---------------------------------------------------------------------------------------------------------------------------------
UNDM1 AXP(SM) Variable Objective: long-term growth of capital. Invests IDS Life, investment manager;
UNDM2 Portfolio- New primarily in common stocks of U.S. and foreign AEFC, investment advisor.
UNDM4 Dimensions Fund(R) companies showing potential for significant growth.
PNDM1
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
USPF1 AXP(SM) Variable Objective: long-term capital appreciation. Invests IDS Life, investment manager;
USPF2 Portfolio- primarily in securities that are expected to provide AEFC investment advisor.
USPF3 S&P 500 Index Fund investment results that correspond to the performance
USPF4 of the S&P 500 Index.
---------------------------------------------------------------------------------------------------------------------------------
USCA1 AXP(SM) Variable Objective: long-term capital growth. Invests primarily IDS Life, investment manager;
USCA2 Portfolio- in equity securities of small companies that are often AEFC, investment advisor.
USCA4 Small Cap included in the S&P SmallCap 600 Index or the Russell
PSCA1 Advantage Fund 2000 Index.
---------------------------------------------------------------------------------------------------------------------------------
UCAP1 AIM V.I. Capital Objective: growth of capital. Invests primarily in A I M Advisors, Inc.
UCAP2 Appreciation Fund common stocks, with emphasis on medium- or small-sized
UCAP4 growth companies.
PCAP1
---------------------------------------------------------------------------------------------------------------------------------
UDDT1 AIM V.I. Dent Objective: long term growth of capital. Seeks to meet A I M Advisors, Inc.
UDDT2 Demographic Trends Fund its objective by investing in securities of companies
UDDT3 that are likely to benefit from changing demographic,
UDDT4 economic, and lifestyle trends.
---------------------------------------------------------------------------------------------------------------------------------
UVAL1 AIM V.I. Value Fund Objective: long-term growth of capital with income as a A I M Advisors, Inc.
UVAL2 secondary objective. Invests primarily in equity
UVAL4 securities judged to be undervalued relative to the
PVAL1 investment advisor's appraisal of the current or
projected earnings of the companies issuing the
securities, or relative to current market values of
assets owned by the companies issuing the securities,
or relative to the equity market generally.
---------------------------------------------------------------------------------------------------------------------------------
UGIP1 Alliance VP Growth & Objective: reasonable current income and reasonable Alliance Capital Management.
UGIP2 Income Portfolio appreciation. Invests primarily in dividend-paying L.P.
UGIP3 (Class B) common stocks of good quality.
UGIP4
---------------------------------------------------------------------------------------------------------------------------------
UPRG1 Alliance VP Premier Objective: long-term growth of capital by pursuing Alliance Capital Management.
UPRG2 Growth Portfolio aggresive investment policies. Invests primarily in L.P.
UPRG3 (Class B) equity securities of a limited number of large,
UPRG4 carefully selected, high-quality U.S. companies that
are judged likely to achieve superior earnings growth.
---------------------------------------------------------------------------------------------------------------------------------
UTEC1 Alliance VP Technology Objective: growth of capital. Current income is only an Alliance Capital Management.
UTEC2 Portfolio (Class B) incidental consideration. Invests primarily in L.P.
UTEC3 securities of companies expected to benefit from
UTEC4 technological advances and improvements.
---------------------------------------------------------------------------------------------------------------------------------
UEGL1 Evergreen VA Global Objective: long-term capital growth. Invests primarily Evergreen Asset Management
UEGL2 Leaders Fund in a diversified portfolio of equity securities of Corp. (EAMC)
UEGL3 companies located in the world's major industrialized
UEGL4 countries. The Fund will make investments in no less
than three countries, which may include the U.S., but
may invest more than 25% of its total assets in one
country.
---------------------------------------------------------------------------------------------------------------------------------
UEGI1 Evergreen VA Growth and Objective: capital growth and current income. Invests EAMC
UEGI2 Income Fund primarily in common stocks of mid-sized U.S. companies.
UEGI3 The Fund's stock selection is based on a diversified
UEGI4 style of equity that allows it to invest in both growth
and value equity securities and which have a catalyst
(new products, new management, changes in regulation
and/or restructuring potential) that will bring the
stock's price into line with its actual or potential
value.
---------------------------------------------------------------------------------------------------------------------------------
UEMS1 Evergreen VA Masters Objective: long-term capital appreciation. The Evergreen Investment
UEMS2 Fund portfolio's assets are invested on an approximately Management, investment advisor;
UEMS3 equal basis among the following four styles, each EAMC, MFS Institutional
UEMS4 implemented by a different sub-investment advisor: 1) Advisors Inc.,
equity securities of U.S. and foreign companies that OppenheimerFunds, Inc. and
are temporarily undervalued; 2) equity securities Putnam Investment Management,
expected to show growth above that of the overall Inc. sub-investment advisors.
economy and inflation; 3) blended growth and
value-oriented strategy focusing on foreign and
domestic large-cap equity securities; and 4) growth
oriented strategy focusing on large-cap equity
securities of U.S. and foreign issuers.
---------------------------------------------------------------------------------------------------------------------------------
UEOM1 Evergreen VA Omega Fund Objective: long-term capital growth. Invests primarily Evergreen Investment Management
UEOM2 in common stocks of U.S. companies across all market Company (EIMC)
UEOM3 capitalizations.
UEOM4
---------------------------------------------------------------------------------------------------------------------------------
UESC1 Evergreen VA Small Cap Objective: current income and capital growth. Invests EAMC
UESC2 Value Fund primarily in common stocks and convertible preferred
UESC3 stocks of small companies (less than $1.5 billion in
UESC4 market capitalization).
---------------------------------------------------------------------------------------------------------------------------------
UESI1 Evergreen VA Strategic Objective: high current income from interest on debt EIMC
UESI2 Income Fund securities with a secondary objective of potential for
UESI3 growth of capital. Invests primarily in domestic
UESI4 high-yield, high-risk bonds and debt securities of
foreign governments and corporations.
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C>
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UMDC1 Fidelity VIP III Mid Objective: long-term growth of capital. Invests FMR investment manager; FMR
UMDC2 Cap Portfolio (Service primarily in medium market capitalization common stocks. U.K. and FMR Far East,
UMDC4 Class) sub-investment advisors.
PMDC1
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UCOF1 Fidelity VIP Objective: long-term capital appreciation. Invests FMR Investment manager; FMR
UCOF2 Contrafund(R) Portfolio primarily in common stocks of foreign and domestic U.K. and FMR Far East,
UCOF3 (Service Class) companies whose value is not fully recognized by the sub-investment advisors.
UCOF4 public.
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UHIP1 Fidelity VIP High Objective: high level of current income while also FMR Investment manager; FMR
UHIP2 Income Portfolio considering growth of capital. Invests primarily in U.K. and FMR Far East,
UHIP3 (Service Class) foreign and domestic issued income-producing debt sub-investment advisors.
UHIP4 securities, preferred stocks and convertible
securities, with an emphasis on lower-quality debt
securities. Invests in companies in troubled or
uncertain financial condition.
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USMC1 FTVIPT Franklin Small Objective: long-term capital growth. Invests primarily Franklin Advisers, Inc.
USMC2 Cap Fund - Class 2 in equity securities of U.S. small capitalization
USMC4 (small cap) growth companies.
PSMC1
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UMSS1 FTVIPT Mutual Shares Objective: capital appreciation with income as a Franklin Mutual Advisers, LLC
UMSS2 Securities Fund - secondary goal. Invests primarily in equity securities
UMSS4 Class 2 of companies that the manager believes are available at
PMSS1 market prices less than their value based on certain
recognized or objective criteria (intrinsic value).
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UDMS1 FTVIPT Templeton Objective: long-term capital appreciation. Invests Templeton Asset Management Ltd.
UDMS2 Developing Markets primarily in emerging markets equity securities.
UDMS3 Securities
UDMS4 Fund - Class 2
(previously Templeton
Developing Markets Fund)
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UINT1 FTVIPT Templeton Objective: long-term capital growth. Invests primarily Templeton Investment Counsel,
UINT2 International in equity securities of non-U.S. companies, including Inc.
UINT3 Securities Fund emerging markets.
UINT4 (Class 2)
(previously Templeton
International Fund)
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UGRS1 MFS(R) VIT Growth Objective: long-term growth of capital and future MFS Investment Management(R)
UGRS2 Series - Service Class income. Invests at least 80% of its total assets in
UGRS3 common stocks and related securities of companies which
UGRS4 MFS believes offer better than average prospects for
long-term growth.
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UNDS1 MFS(R) VIT New Objective: capital appreciation. Invests primarily in MFS Investment Management(R)
UNDS2 Discovery Series - equity securities of emerging growth companies.
UNDS4 Service Class
PNDS1
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UTRS1 MFS(R) VIT New Total Objective: above-average income (compared to a MFS Investment Management(R)
UTRS2 Return Series - Service portfolio invested entirely in equity securities)
UTRS4 Class consistent with the prudent employment of capital, and
PTRS1 secondarily reasonable opportunity for growth of
capital and income. Invests primarily in a combination
of equity and fixed income securities.
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UGIN1 Putnam VT Growth and Objective: capital growth and current income. Invests Putnam Investment Management,
UGIN2 Income Fund - Class IB primarily in common stocks that offer potential of Inc.
UGIN4 Shares capital growth, current income or both.
PGIN1
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UINO1 Putnam VT International Objective: long-term capital appreciation by investing Putnam Investment Management,
UINO2 New Opportunities Fund in companies that have above-average growth prospects Inc.
UINO3 - Class IB Shares due to the fundamental growth of their market sector.
UINO4 Invests primarily in growth stocks outside the U.S.
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UVIS1 Putnam VT Vista Fund - Objective: capital appreciation. Invests primarily in a Putnam Investment Management,
UVIS2 Class IB Shares diversified portfolio of common stocks that Putnam Inc.
UVIS3 Management believes have the potential for
UVIS4 above-average capital appreciation.
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</TABLE>
The investment objectives and policies of some of the funds are similar to the
investment objectives and policies of other mutual funds that an investment
advisor or its affiliates manage. Although the objectives and policies may be
similar, each fund will have its own portfolio holdings and its own fees and
expenses. Accordingly, each fund will have its own investment results, and those
results may differ significantly from other funds with similar investment
objectives and policies.
22
<PAGE>
The investment managers and advisors cannot guarantee that the funds will meet
their investment objectives. Please read the funds' prospectuses for facts you
should know before investing. These prospectuses are also available by
contacting us at the address or telephone number on the first page of this
prospectus.
All funds are available to serve as the underlying investments for variable
annuities. Some funds also are available to serve as investment options for
variable life insurance policies and tax-deferred retirement plans. It is
possible that in the future, it may be disadvantageous for variable annuity
accounts and variable life insurance accounts and/or tax-deferred retirement
plans to invest in the available funds simultaneously.
Although the insurance company and the funds do not currently foresee any such
disadvantages, the board of directors will monitor events in order to identify
any material conflicts between annuity owners, policy owners and tax-deferred
retirement plans and to determine what action, if any, should be taken in
response to a conflict. If a board were to conclude that it should establish
separate funds for the variable annuity, variable life insurance and
tax-deferred retirement plan accounts, you would not bear any expenses
associated with establishing separate funds. Please refer to the funds'
prospectuses for risk disclosure regarding simultaneous investments by variable
annuity, variable life insurance and tax-deferred retirement plan accounts.
The Internal Revenue Service (IRS) issued final regulations relating to the
diversification requirements under Section 817(h) of the Code. Each fund intends
to comply with these requirements.
The variable account was established under Indiana law on July 15, 1987, and the
subaccounts are registered together as a single unit investment trust under the
Investment Company Act of 1940 (the 1940 Act). This registration does not
involve any supervision of our management or investment practices and policies
by the SEC. All obligations arising under the contracts are general obligations
of American Enterprise Life.
The variable account meets the definition of a separate account under federal
securities laws. We credit or charge income, capital gains and capital losses of
each subaccount only to that subaccount. State insurance law prohibits us from
charging a subaccount with liabilities of any other subaccount or of our general
business. The variable account includes other subaccounts that are available
under contracts that are not described in this prospectus.
The U.S. Treasury and the IRS indicated that they may provide additional
guidance on investment control. This concerns how many variable subaccounts an
insurance company may offer and how many exchanges among subaccounts it may
allow before the contract owner would be currently taxed on income earned within
subaccount assets. At this time, we do not know what the additional guidance
will be or when action will be taken. We reserve the right to modify the
contract, as necessary, so that the owner will not be subject to current
taxation as the owner of the subaccount assets.
We intend to comply with all federal tax laws so that the contract continues to
qualify as an annuity for federal income tax purposes. We reserve the right to
modify the contract as necessary to comply with any new tax laws.
THE FIXED ACCOUNTS
GUARANTEE PERIOD ACCOUNTS
You may allocate purchase payments to one or more of the Guarantee Period
Accounts with Guarantee Periods ranging from two to ten years. These accounts
are not available in all states and are not offered after annuity payouts begin.
Each Guarantee Period Account pays an interest rate that is declared when you
allocate money to that account. That interest rate is then fixed for the
Guarantee Period that you chose. We will periodically change the declared
interest rate for any future allocations to these accounts, but we will not
change the rate paid on money currently in a Guarantee Period Account.
23
<PAGE>
The interest rates that we will declare as guaranteed rates in the future are
determined by us at our discretion. We will determine these rates based on
various factors, including, but not limited to, the interest rate environment,
returns available on investments backing these annuities, product design,
competition and American Enterprise Life's revenues and other expenses.
You may transfer money out of the Guarantee Period Accounts within 30 days
before the end of the Guarantee Period without receiving a MVA (see "Market
Value Adjustment (MVA)" below.) At that time you may choose to start a new
Guarantee Period of the same length, transfer the money to another Guarantee
Period Account, transfer the money to any of the subaccounts, or withdraw the
money from the contract (subject to applicable withdrawal provisions). If we do
not receive any instructions at the end of your Guarantee Period, we will
automatically transfer the money into the one-year fixed account.
We hold amounts you allocate to the Guarantee Period Accounts in a "nonunitized"
separate account we have established under the Indiana Insurance Code. This
separate account provides an additional measure of assurance that we will make
full payment of amounts due under the Guarantee Period Accounts. State insurance
law prohibits us from charging this separate account with liabilities of any
other separate account or of our general business. We own the assets of this
separate account as well as any favorable investment performance of those
assets. You do not participate in the performance of the assets held in this
separate account. We guarantee all benefits relating to your value in the
Guarantee Period Accounts.
We intend to construct and manage the investment portfolio relating to the
separate account 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.
We must invest this portfolio of assets 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. Our investment
strategy will incorporate the use of a variety of debt instruments having price
durations tending to match the applicable Guarantee 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 any of three nationally
recognized rating agencies - Standard & Poor's, Moody's Investors Service
or Duff and Phelp's - or are rated in the two highest grades by the
National Association of Insurance Commissioners;
- Other debt instruments which are unrated or rated below investment grade,
limited to 10% of assets at the time of purchase; and
- Real estate mortgages, limited to 45% 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 Indiana and other state insurance laws.
MARKET VALUE ADJUSTMENT (MVA)
You may choose to transfer money out of the Guarantee Period Accounts at anytime
after 60 days of transfer or payment allocation into the Account. Any amount
transferred or withdrawn will receive a MVA
24
<PAGE>
which will increase or decrease the actual amount transferred or withdrawn. We
calculate the MVA using the formula shown below and we base it on the current
level of interest rates compared to the rate of your Guarantee Period Account.
Amount transferred x ( l + i ) n/12
--------------------
( l + j + .001 )
Where: i = rate earned in the account from which funds
are being transferred
j = current rate for a new Guarantee Period equal
to the remaining term in the current Guarantee
Period
n = number of months remaining in the current
Guarantee Period (rounded up)
We will not make MVAs for amounts withdrawn for withdrawal charges, the annual
contract administrative charge or paid out as a death claim. We also will not
make MVAs on automatic transfers from the two year Guarantee Period Account. We
determine any applicable withdrawal charges based on the market value adjusted
withdrawals. In some states the MVA is limited.
THE ONE-YEAR FIXED ACCOUNT
You may also allocate purchase payments to the one-year fixed account. We back
the principal and interest guarantees relating to the one-year fixed account.
The value of the one-year fixed account increases as we credit interest to the
account. Purchase payments and transfers to the one-year fixed account become
part of our general account. We credit interest daily and compound it annually.
We will change the interest rates from time to time at our discretion. These
rates will be based on various factors including, but not limited to, the
interest rate environment, returns earned on investments backing annuities, the
interest rates currently in effect for new and existing company annuities,
product design, competition, and the company's revenues and expenses.
Interest in the one-year fixed account is not required to be registered with the
SEC. However, the Market Value Adjustment interests under the contracts are
registered with the SEC. The SEC staff does not review the disclosures in this
prospectus on the one-year fixed account (but the SEC does review the
disclosures in this prospectus on the Market Value Adjustment interests).
Disclosures regarding the one-year fixed account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. (See
"Making the Most of Your Contract -- Transfer policies" for restrictions on
transfers involving the one-year fixed account.)
BUYING YOUR CONTRACT
You can fill out an application and send it along with your initial purchase
payment to our office. As the owner, you have all rights and may receive all
benefits under the contract. You can own a nonqualified annuity in joint tenancy
with rights of survivorship only in spousal situations. You cannot own a
qualified annuity in joint tenancy. You can buy a contract or become an
annuitant if you are 85 or younger. (The age limit may be younger for qualified
annuities in some states.)
When you apply, you may select (if available in your state):
- the optional Maximum Anniversary Value Death Benefit Rider*;
- an optional Guaranteed Minimum Income Benefit Rider**;
- the optional Performance Credit Rider**
- the one-year fixed account, Guarantee Period Accounts and/or subaccounts in
which you want to invest;
- how you want to make purchase payments; and
- a beneficiary.
* Available if both you and the annuitant are age 79 or younger. May not be
available in all states.
** You may select either the Guarantee Minimum Income Benefit Rider or the
Performance Credit Rider, but not both. Riders may not be available in all
states. The Guaranteed Minimum Income Benefit Rider is available if the
annuitant is age 75 or younger.
25
<PAGE>
The contract provides for allocation of purchase payments to the subaccounts of
the variable account and/or to the fixed accounts in even 1% increments.
If your application is complete, we will process it and apply your purchase
payment to the fixed accounts and subaccounts you selected within two business
days after we receive it at our office. If we accept your application, we will
send you a contract. If we cannot accept your application within five business
days, we will decline it and return your payment. We will credit additional
purchase payments you make to your accounts on the valuation date we receive
them. We will value the additional payments at the next accumulation unit value
calculated after we receive your payments at our office.
You may make monthly payments to your contract under a Systematic Investment
Plan (SIP). To begin the SIP, you will complete and send a form and your first
SIP payment along with your application. There is no charge for SIP. You can
stop your SIP payments at any time.
In most states, you may make additional purchase payments to nonqualified and
qualified annuities until the retirement date.
THE RETIREMENT DATE
Annuity payouts are scheduled to begin on the retirement date. When we process
your application, we will establish the retirement date to the maximum age or
date described below. You can also select a date within the maximum limits. You
can align this date 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 also can change the date, provided you send us written
instructions at least 30 days before annuity payouts begin.
FOR NONQUALIFIED ANNUITIES AND ROTH IRAS, the retirement date must be:
- no earlier than the 60th day after the contract's effective date; and
- no later than the annuitant's 85th birthday or the tenth contract
anniversary, if purchased after age 75.
FOR QUALIFIED ANNUITIES (EXCEPT ROTH IRAS), to avoid IRS penalty taxes, the
retirement date generally must be:
- on or after the date the annuitant reaches age 59 1/2; and
- for IRAs and SEPs, by April 1 of the year following the calendar year when
the annuitant reaches age 70 1/2.
If you take the minimum IRA distribution as required by the Code from another
tax-qualified investment, or in the form of partial withdrawals from this
contract, annuity payouts can start as late as the annuitant's 85th birthday or
the tenth contract anniversary, if later.
BENEFICIARY
We will pay your named beneficiary the death benefit if it becomes payable
before the retirement date (while the contract is in force and before annuity
payouts begin). If there is no named beneficiary, then you or your estate will
be the beneficiary. (See "Benefits in Case of Death" for more about
beneficiaries.)
PURCHASE PAYMENTS
MINIMUM INITIAL PURCHASE PAYMENT (NOT
INCLUDING SIPS):
$5,000 for contracts sold in Pennsylvania,
Texas, Washington and South Carolina
$2,000 for contracts sold in other states
MINIMUM ADDITIONAL PURCHASE PAYMENTS:
If paying by SIP*: If paying by any other method:
$50 $100
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<PAGE>
* Payments made using SIP must total $2,000 before you can make partial
withdrawals.
MAXIMUM TOTAL ALLOWABLE PURCHASE PAYMENTS** (WITHOUT PRIOR
APPROVAL): $1,000,000
** This limit applies in total to all American Enterprise Life annuities
you own. We reserve the right to increase the maximum limit. For qualified
annuities, the tax-deferred retirement plan's limits on annual
contributions also apply.
HOW TO MAKE PURCHASE PAYMENTS
1
BY LETTER: Send your check along with your name and contract number to:
American Enterprise Life Insurance Company
829 AXP Financial Center
Minneapolis, MN 55474
2
BY SIP: Contact your sales representative to complete the necessary
SIP paperwork.
PURCHASE PAYMENT CREDITS
You will generally receive a purchase payment credit with any payment you make
to your contract that brings your total net payment (total payments less total
withdrawals) to $100,000 or more.
We apply this 1% credit to your contract based on your current payment. If you
make any future payments which cause the contract to be eligible for the credit,
we will add credits attributable to purchase payments. We apply this credit
immediately. We allocate the credit to the fixed accounts and subaccounts in the
same proportions as your purchase payment.
We fund the credit from our general account. We do not consider credits to be
"investments" for income tax purposes. (See "Taxes.")
We will reverse credits from the contract value for any purchase payment that is
not honored (if, for example, your purchase payment check is returned for
insufficient funds).
To the extent a death benefit or withdrawal payment includes purchase payment
credits applied within twelve months preceding: (1) the date of death that
results in a lump sum death benefit under this contract; or (2) a request for
withdrawal charge waiver due to "Contingent events" (see "Charges - Contingent
events"), we will assess a charge, similar to a withdrawal charge, equal to the
amount of the purchase payment credits. The amount we pay to you under these
circumstances will always equal or exceed your withdrawal value. The amount
returned to you under the free look provision also will not include any credits
applied to your contract.
Because of higher charges, there may be circumstances where you may be worse off
for having received the credit than in other contracts. All things being equal
(such as guarantee availability or fund performance and availability), this may
occur if you hold your contract for 15 years or more. This also may occur if you
make a full withdrawal in the first seven years. You should consider these
higher charges and other relevant factors before you buy this contract or before
you exchange a contract you currently own for this contract.
This credit is made available because of lower distribution and other expenses
associated with larger sized contracts and through revenue from higher
withdrawal charges and contract administrative charges than would otherwise be
charged. In general, we do not profit from the higher charges assessed to cover
the cost of the purchase payment credit. We use all the revenue from these
higher charges to pay for the cost of the credits. However, we could profit from
the higher charges if market appreciation is higher than expected or if contract
owners hold their contracts for longer than expected.
27
<PAGE>
CHARGES
CONTRACT ADMINISTRATIVE CHARGE
We charge this fee for establishing and maintaining your records. We deduct
$40 from the contract value on your contract anniversary at the end of each
contract year. We prorate this charge among the subaccounts and the fixed
accounts in the same proportion your interest in each account bears to your
total contract value. Some states restrict the amount that can be allocated
to the fixed account.
We will waive this charge when your contract value is $50,000 or more on the
current contract anniversary.
If you take a full withdrawal from your contract, we will deduct this charge at
the time of withdrawal regardless of the contract value. We cannot increase the
annual contract administrative charge and it does not apply after annuity
payouts begin or when we pay death benefits.
VARIABLE ACCOUNT ADMINISTRATIVE CHARGE
We apply this charge daily to the subaccounts. It is reflected in the unit
values of your subaccounts and it totals 0.15% of their average daily net assets
on an annual basis. It covers certain administrative and operating expenses of
the subaccounts such as accounting, legal and data processing fees and expenses
involved in the preparation and distribution of reports and prospectuses. We
cannot increase the variable account administrative charge.
MORTALITY AND EXPENSE RISK FEE
We charge this fee daily to the subaccounts. The unit values of your subaccounts
reflect this fee. For qualified contracts, this fee totals 0.85% of their
average daily net assets on an annual basis. For non-qualified contracts, this
fee totals 1.10% of their average daily net assets on an annual basis. This fee
covers the mortality and expense risk that we assume. Approximately two-thirds
of this amount is for our assumption of mortality risk, and one-third is for our
assumption of expense risk. If you choose the optional Maximum Anniversary Value
Death Benefit Rider, we will charge an additional fee (see "Death Benefit Rider
fee" below). These fees do not apply to the fixed accounts. We cannot increase
these fees.
Mortality risk arises because of our guarantee to pay a death benefit and our
guarantee to make annuity payouts according to the terms of the contract, no
matter how long a specific annuitant lives and no matter how long our entire
group of annuitants live. If, as a group, annuitants outlive the life expectancy
we assumed in our actuarial tables, then we must take money from our general
assets to meet our obligations. If, as a group, annuitants do not live as long
as expected, we could profit from the mortality risk fee.
Expense risk arises because we cannot increase the contract administrative
charge or the variable account administrative charge and these charges may not
cover our expenses. We would have to make up any deficit from our general
assets. We could profit from the expense risk fee if future expenses are less
than expected.
The subaccounts pay us the mortality and expense risk fee they accrued as
follows:
- first, to the extent possible, the subaccounts pay this fee from any
dividends distributed from the funds in which they invest;
- then, if necessary, the funds redeem shares to cover any remaining fees
payable.
We may use any profits we realize from the subaccounts' payment to us of the
mortality and expense risk fee for any proper corporate purpose, including,
among others, payment of distribution (selling) expenses. We do not expect that
the withdrawal charge, discussed in the following paragraphs, will cover sales
and distribution expenses.
MAXIMUM ANNIVERSARY VALUE DEATH BENEFIT RIDER FEE
We charge a fee for this optional feature only if you choose this option. If
selected, we apply this fee daily to the subaccounts as part of the mortality
and expense risk fee. It is reflected in the unit values of the
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<PAGE>
subaccounts, and it totals 0.10% of their average daily net assets on an annual
basis. We cannot increase the Maximum Anniversary Value Death Benefit Rider fee.
GUARANTEED MINIMUM INCOME BENEFIT RIDER FEE
We charge a fee based on the adjusted contract value for this optional feature
only if you choose this option. If selected, we deduct the fee (currently 0.30%)
from the contract value on your contract anniversary at the end of each contract
year. We prorate this fee among the subaccounts and fixed accounts in the same
proportion your interest in each account bears to your total contract value.
We apply the fee on an adjusted contract value calculated as the contract value
plus the lesser of zero or (a) - (b), where:
(a)is the transfers from the subaccounts to the fixed accounts made in the
last six months,
(b)is the total contract value in the fixed accounts. This adjustment
allows us to base the charge largely on the subaccounts and not on the
fixed accounts.
We will deduct the fee, adjusted for the number of calendar days coverage was in
place, if the contract is terminated for any reason or when annuity payouts
begin. We cannot increase the Guaranteed Minimum Income Benefit Rider fee after
the rider effective date and it does not apply after annuity payouts begin. We
can increase the Guaranteed Minimum Income Benefit Rider fee on new contracts up
to a maximum of 0.75%.
PERFORMANCE CREDIT RIDER FEE
We charge a fee for this optional feature if you choose this option. If
selected, we deduct the fee of 0.15% of your contract value on your contract
anniversary. We prorate this fee among the subaccounts and fixed accounts in the
same proportion as your interest bears to your total contract value.
We will deduct this fee, adjusted for the number of calendar days coverage was
in place, if the contract is terminated for any reason or when annuity payouts
begin. We cannot increase the Performance Credit Rider fee.
WITHDRAWAL CHARGE
If you withdraw all or part of your contract, you may be subject to a withdrawal
charge. A withdrawal charge applies if all or part of the withdrawal amount is
from purchase payments we received within seven years before withdrawal. The
withdrawal charge percentages that apply to you are shown in your contract. In
addition, amounts withdrawn from a Guarantee Period Account prior to the end of
the applicable Guarantee Period will be subject to a MVA. (See "The Fixed
Accounts - Market Value Adjustments (MVA).")
For purposes of calculating any withdrawal charge, we treat amounts withdrawn
from your contract value in the following order:
1. First, in each contract year, we withdraw amounts totaling up to 10% of
your prior anniversary contract value. (We consider your initial purchase
payment to be the prior anniversary contract value during the first
contract year.) We do not assess a withdrawal charge on this amount.
2. Next, we withdraw contract earnings, if any, that are greater than the
annual 10% free withdrawal amount described in number one above. Contract
earnings equal contract value less purchase payments received and not
previously withdrawn. We do not assess a withdrawal charge on contract
earnings.
NOTE: We determine contract earnings by looking at the entire contract value,
not the earnings of any particular subaccount or the fixed accounts.
3. Next we withdraw purchase payments received prior to the withdrawal charge
period shown in your contract. We do not assess a withdrawal charge on
these purchase payments.
29
<PAGE>
4. Finally, if necessary, we withdraw purchase payments received that are
still within the withdrawal charge period shown in your contract. We
withdraw these payments on a first-in, first-out (FIFO) basis. We do assess
a withdrawal charge on these payments.
We determine your withdrawal charge by multiplying each of your payments
withdrawn by the applicable withdrawal charge percentage, and then adding the
total withdrawal charges.
The withdrawal charge percentage depends on the number of years since you made
the payments that are withdrawn:
<TABLE>
<CAPTION>
YEARS FROM PURCHASE PAYMENT WITHDRAWAL CHARGE
RECEIPT PERCENTAGE
<S> <C>
1 8%
2 8
3 7
4 7
5 6
6 5
7 3
Thereafter 0
</TABLE>
For a partial withdrawal that is subject to a withdrawal charge, the amount
deducted for the withdrawal charge will be a percentage of the total amount
withdrawn. We will deduct the charge from the value remaining after we pay you
the amount you requested. Example: Assume you request a withdrawal of $1,000 and
there is a 7% withdrawal charge. The withdrawal charge is $75.26 for a total
withdrawal amount of $1075.26. This charge represents 7% of the total amount
withdrawn and we deduct it from the contract value remaining after we pay you
the $1,000 you requested. If you make a full withdrawal of your contract, we
will deduct the applicable contract administrative charge.
WITHDRAWAL CHARGE UNDER ANNUITY PAYOUT PLAN E: Payouts for a specified period.
Under this payout plan, you can choose to take a withdrawal. The amount that you
can withdraw is the present value of any remaining variable payouts. With a
qualified annuity, the discount rate we use in the calculation will be 4.86% if
the assumed investment rate is 3.5% and 6.36% if the assumed investment rate is
5%. With a nonqualified annuity, the discounted rate we use in the calculation
will be 5.11% if the assumed investment rate is 3.5% and 6.61% if the assumed
investment rate is 5%. The withdrawal charge is equal to the difference in
discount values using the above discount rates and the assumed investment rate.
The withdrawal charge will not be greater than 9% of the amount available for
payouts under the plan.
WITHDRAWAL CHARGE CALCULATION EXAMPLE:
The following is an example of the calculation we would make to determine the
withdrawal charge on a contract with this history:
- The contract date is Jan. 1, 2000 with a contract year of Jan. 1 through
Dec. 31 and with an anniversary date of Jan. 1 each year; and
- We received these payments
- $10,000 Jan. 1, 2000;
- $8,000 Feb. 28, 2007; and
- $6,000 Feb. 20, 2008; and
- You withdraw the contract for its total withdrawal value of $38,101 on
Aug. 5, 2010 and did not make any other withdrawals during that contract
year; and
- The prior anniversary Jan. 1, 2009 contract value was $38,488.
30
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<TABLE>
<CAPTION>
Withdrawal Charge Explanation
<S> <C>
$ 0 $3,848.80 is 10% of the prior anniversary contract
value withdrawn without withdrawal charge; and
0 $10,252.20 is contract earnings in excess of the 10%
free withdrawal amount withdrawn without withdrawal
charge; and
0 $10,000 Jan. 1, 2000 payment was received seven or
more years before withdrawal and is withdrawn
without withdrawal charge; and
560 $8,000 Feb. 28, 2007 payment is in its fourth year
from receipt, withdrawn with a 7% withdrawal charge;
and
420 $6,000 Feb. 20, 2008 payment is in its third year
--- from receipt withdrawn with a 7% withdrawal charge.
$980
</TABLE>
WAIVER OF WITHDRAWAL CHARGES
We do not assess withdrawal charges for:
- withdrawals of any contract earnings;
- withdrawals of amounts totaling up to 10% of your prior contract
anniversary contract value to the extent it exceeds contract earnings;
- required minimum distributions from a qualified annuity (for those amounts
required to be distributed from the contract described in this prospectus);
- contracts settled using an annuity payout plan;
- withdrawals made as a result of one of the "Contingent events"* described
below to the extent permitted by state law (see your contract for
additional conditions and restrictions);
- amounts we refund to you during the free look period;* and
- death benefits.*
*However, we will reverse certain purchase payment credits up to the
maximum withdrawal charge. (See "Buying Your Contract - Purchase payment
credits.")
CONTINGENT EVENTS
- Withdrawals you make if you or the annuitant are confined to a hospital or
nursing home and have been for the prior 60 days. Your contract will
include this provision when the owner and annuitant are under age 76 on the
date we issue the contract. You must provide proof satisfactory to us of
the confinement as of the date you request the withdrawal.
- To the extent permitted by state law, withdrawals you make if you or the
annuitant are diagnosed in the second or later contract years as disabled
with a medical condition that with reasonable medical certainty will result
in death within 12 months or less from the date of the licensed physician's
statement. You must provide us with a licensed physician's statement
containing the terminal illness diagnosis and the date the terminal illness
was initially diagnosed.
POSSIBLE GROUP REDUCTIONS: In some cases we may incur lower sales and
administrative expenses due to the size of the group, the average contribution
and the use of group enrollment procedures. In such cases, we may be able to
reduce or eliminate the contract administrative and withdrawal charges. However,
we expect this to occur infrequently.
PREMIUM TAXES
Certain state and local governments impose premium taxes on us (up to 3.5%).
These taxes depend upon your state of residence or the state in which the
contract was sold. Currently, we any applicable premium
31
<PAGE>
tax when annuity payouts begin, but we reserve the right to deduct this tax at
other times such as when you make purchase payments or when you make a full
withdrawal from your contract.
VALUING YOUR INVESTMENT
We value your accounts as follows:
FIXED ACCOUNTS
We value the amounts you allocated to the fixed accounts directly in dollars.
The value of a fixed account equals:
- the sum of your purchase payments and transfer amounts allocated to the
one-year fixed account and the Guarantee Period Accounts;
- plus any purchase payment credits allocated to the fixed accounts;
- plus interest credited;
- minus the sum of amounts withdrawn after the MVA (including any applicable
withdrawal charges) and amounts transferred out;
- minus any prorated contract administrative charge;
- minus any prorated portion of the Guaranteed Minimum Income Benefit Rider
fee (if applicable); and
- minus any prorated portion of the Performance Credit Rider (if applicable).
SUBACCOUNTS
We convert amounts you allocated to the subaccounts into accumulation units.
Each time you make a purchase payment or transfer amounts into one of the
subaccounts or we apply any purchase payment credits, we credit a certain number
of accumulation units to your contract for that subaccount. Conversely, each
time you take a partial withdrawal, transfer amounts out of a subaccount, or we
assess a contract administrative charge or the Guaranteed Minimum Income Benefit
Rider fee, we subtract a certain number of accumulation units from your
contract.
The accumulation units are the true measure of investment value in each
subaccount during the accumulation period. They are related to, but not the same
as, the net asset value of the fund in which the subaccount invests. The dollar
value of each accumulation unit can rise or fall daily depending on the variable
account expenses, performance of the fund and on certain fund expenses.
Here is how we calculate accumulation unit values:
NUMBER OF UNITS: to calculate the number of accumulation units for a particular
subaccount, we divide your investment by the current accumulation unit value.
ACCUMULATION UNIT VALUE: the current accumulation unit value for each subaccount
equals the last value times the subaccount's current net investment factor.
WE DETERMINE THE NET INVESTMENT FACTOR BY:
- adding the fund's current net asset value per share, plus the per share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
- dividing that sum by the previous adjusted net asset value per share; and
- subtracting the percentage factor representing the mortality and expense
risk fee, the variable account administrative charge, any death benefit
rider fee (if selected) from the result.
Because the net asset value of the fund may fluctuate, the accumulation unit
value may increase or decrease. You bear all the investment risk in a
subaccount.
FACTORS THAT AFFECT SUBACCOUNT ACCUMULATION UNITS: accumulation units may change
in two ways - in number and in value.
32
<PAGE>
The number of accumulation units you own may fluctuate due to:
- additional purchase payments you allocate to the subaccounts;
- any purchase payment credits allocated to the subaccounts;
- transfers into or out of the subaccounts;
- partial withdrawals;
- withdrawal charges;
- prorated portions of the contract administrative charge;
- prorated portions of the Guaranteed Minimum Income Benefit Rider fee (if
selected); and/or
- prorated portion of the Performance Credit Rider fee (if selected).
Accumulation unit values will fluctuate due to:
- changes in funds' net asset value;
- dividends distributed to the subaccounts;
- capital gains or losses of funds;
- fund operating expenses; and/or
- mortality and expense risk fee, the variable account administrative charge,
the Maximum Anniversary Value Death Benefit Rider fee (if selected).
MAKING THE MOST OF YOUR CONTRACT
AUTOMATED DOLLAR-COST AVERAGING
Currently, you can use automated transfers to take advantage of dollar-cost
averaging (investing a fixed amount at regular intervals). For example, you
might transfer a set amount monthly from a relatively conservative subaccount to
a more aggressive one, or to several others, or from the one-year fixed account
or the two-year Guarantee Period Account to one or more subaccounts. The three
to ten year Guarantee Period Accounts are not available for automated transfers.
You can also obtain the benefits of dollar-cost averaging by setting up regular
automatic SIP payments. There is no charge for dollar-cost averaging.
This systematic approach can help you benefit from fluctuations in accumulation
unit values caused by fluctuations in the market values of the funds. Since you
invest the same amount each period, you automatically acquire more units when
the market value falls and fewer units when it rises. The potential effect is to
lower your average cost per unit.
<TABLE>
<CAPTION>
HOW DOLLAR-COST AVERAGING WORKS
<S> <C> <C> <C> <C>
By investing an AMOUNT ACCUMULATION UNIT NUMBER OF UNITS
equal number of MONTH INVESTED VALUE PURCHASED
dollars each month... Jan $100 $20 5.00
Feb 100 18 5.56
you automatically buy Mar 100 17 5.88
more units when the Apr 100 15 6.67
per unit market price May 100 16 6.25
is low... Jun 100 18 5.56
Jul 100 17 5.88
and fewer units when Aug 100 19 5.26
the per unit market Sept 100 21 4.76
price is high. Oct 100 20 5.00
</TABLE>
You paid an average price of only $17.91 per unit over the 10 months, while the
average market price actually was $18.10.
Dollar-cost averaging does not guarantee that any subaccount will gain in value
nor will it protect against a decline in value if market prices fall. Because
dollar-cost averaging involves continuous investing, your success will depend
upon your willingness to continue to invest regularly through periods of low
price
33
<PAGE>
levels. Dollar-cost averaging can be an effective way to help meet your
long-term goals. For specific features contact your sales representative.
ASSET REBALANCING
You can ask us in writing to automatically rebalance the subaccount portion of
your contract value either quarterly, semi-annually or annually. The period you
select will start to run on the date we record your request. On the first
valuation date of each of these periods, we automatically will rebalance your
contract value so that the value in each subaccount matches your current
subaccount percentage allocations. These percentage allocations must be in whole
numbers. Asset rebalancing does not apply to the fixed accounts. There is no
charge for asset rebalancing. The contract value must be at least $2,000.
You can change your percentage allocations or your rebalancing period at any
time by contacting us in writing. We will restart the rebalancing period you
selected as of the date we record your change. You also can ask us in writing to
stop rebalancing your contract value. You must allow 30 days for us to change
any instructions that currently are in place. For more information on asset
rebalancing, contact your sales representative.
TRANSFERRING MONEY BETWEEN ACCOUNTS
You may transfer money from any one subaccount, or the fixed accounts, to
another subaccount before annuity payouts begin. (Certain restrictions apply to
transfers involving the fixed accounts.) We will process your transfer on the
valuation date we receive your request. We will value your transfer at the next
accumulation unit value calculated after we receive your request. There is no
charge for transfers. Before making a transfer, you should consider the risks
involved in switching investments. Transfers out of the Guarantee Period
Accounts will be subject to a MVA if done more than 30 days before the end of
the Guarantee Period.
We may suspend or modify transfer privileges at any time. Excessive trading
activity can disrupt fund management strategy and increase expenses, which are
borne by all contract owners who allocated purchase payments to the fund
regardless of their transfer activity. We may apply modifications or
restrictions in any reasonable manner to prevent transfers we believe will
disadvantage other contract owners.
These modifications could include, but not be limited to:
- requiring a minimum time period between each transfer;
- not accepting transfer requests of an agent acting under power of attorney
on behalf of more than one contract owner; or
- limiting the dollar amount that a contract owner may transfer at any one
time.
For information on transfers after annuity payments begin, see "Transfer
policies" below.
TRANSFER POLICIES
- Before annuity payouts begin, you may transfer contract values between the
subaccounts, or from the subaccounts to the fixed accounts at any time.
However, if you made a transfer from the one-year fixed account to the
subaccounts, you may not make a transfer from any subaccount back to the
one-year fixed account for six months following that transfer.
- You may transfer contract values from the one-year fixed account to the
subaccounts or the Guarantee Period Accounts once a year on or within 30
days before or after the contract anniversary (except for automated
transfers, which can be set up at any time for certain transfer periods
subject to certain minimums). Transfers from the one-year fixed account are
not subject to a MVA.
- You may transfer contract values from a Guarantee Period Account anytime
after 60 days of transfer or payment allocation to the Account. Transfers
made before the end of the Guarantee Period will receive a MVA, which may
result in a gain or loss of contract value.
34
<PAGE>
- If we receive your request on or within 30 days before or after the
contract anniversary date, the transfer from the one-year fixed account to
the subaccounts or the Guarantee Period Accounts will be effective on the
valuation date we receive it.
- We will not accept requests for transfers from the one-year fixed account
at any other time.
- Once annuity payouts begin, you may not make transfers to or from the
one-year fixed account, but you may make transfers once per contract year
among the subaccounts. During the annuity payout period, we reserve the
right to limit the number of subaccounts in which you may invest.
- Once annuity payouts begin, you may not make any transfers to the Guarantee
Period Accounts.
HOW TO REQUEST A TRANSFER OR WITHDRAWAL
1 Send your name, contract number, Social Security Number
BY LETTER: or Taxpayer Identification Number and signed request
for a transfer or withdrawal to:
American Enterprise Life Insurance Company
829 AXP Financial Center
Minneapolis, MN 55474
MINIMUM AMOUNT
Transfers or
withdrawals: $500 or entire account balance
MAXIMUM AMOUNT
Transfers or
withdrawals: Contract value or entire account balance
2 Your sales representative can help you set up automated
BY AUTOMATED transfers or partial withdrawals among your subaccounts or
TRANSFERS AND fixed accounts.
AUTOMATED PARTIAL You can start or stop this service by written request or
WITHDRAWALS: other method acceptable to us.
You must allow 30 days for us to change any instructions
that are currently in place.
- Automated transfers from the one-year fixed account to
any one of the subaccounts may not exceed an amount
that, if continued, would deplete the one-year fixed
account within 12 months.
- Automated withdrawals may be restricted by applicable
law under some contracts.
- You may not make additional purchase payments if
automated partial withdrawals are in effect.
- Automated partial withdrawals may result in IRS taxes
and penalties on all or part of the amount withdrawn.
MINIMUM AMOUNT
Transfers or
withdrawals: $100 monthly
$250 quarterly, semi-annually or annually
35
<PAGE>
3 Call between 8 a.m. and 6 p.m. Central time:
BY PHONE:
1-800-333-3437
MINIMUM AMOUNT
Transfers or
withdrawals: $500 or entire account balance
MAXIMUM AMOUNT
Transfers: Contract value or entire account balance
Withdrawals: $25,000
We answer telephone requests promptly, but you may experience delays when the
call volume is unusually high. If you are unable to get through, use the mail
procedure as an alternative.
We will honor any telephone transfer or withdrawal requests that we believe are
authentic and we will use reasonable procedures to confirm that they are. This
includes asking identifying questions and tape recording calls. We will not
allow a telephone withdrawal within 30 days of a phoned-in address change. As
long as we follow the procedures, we (and our affiliates) will not be liable for
any loss resulting from fraudulent requests.
Telephone transfers and withdrawals are automatically available. You may request
that telephone transfers and withdrawals NOT be authorized from your account by
writing to us.
GUARANTEED MINIMUM INCOME BENEFIT RIDER
An optional Guaranteed Minimum Income Benefit Rider may be available in many
jurisdictions for a separate annual charge (see "Charges - Guaranteed Minimum
Income Rider fee"). You cannot select this rider if you select the Performance
Credit Rider. The rider guarantees a minimum amount of fixed annuity lifetime
income during the annuity payout period if your contract has been in force for
at least seven years, subject to the conditions described below. The rider also
provides you the option of variable annuity payouts, with a guaranteed minimum
initial payment.
In some instances, we may allow you to add this rider if it was not available
when you initially purchased your contract. In these instances, we would add
this rider at the next contract anniversary and all conditions of the rider
would use this date as the effective date.
This rider does not create contract value or guarantee the performance of any
investment option. Fixed annuity payouts under the terms of this rider will
occur at the guaranteed annuity purchase rates stated in the contract. We base
first year payments from the variable annuity payout option offered under this
rider on the same factors as the fixed annuity payout option. We base subsequent
payments on the initial payment and an assumed annual return of 5%. Because this
rider is based on guaranteed actuarial factors for the fixed option, the level
of fixed lifetime income it guarantees may be less than the level that would be
provided by applying the then current annuity factors. Likewise, for the
variable annuity payout option, we base the rider on more conservative factors
resulting in a lower initial payment and lower lifetime payments than those
provided otherwise if the same benefit base were used. However, the Guaranteed
Income Benefit Base described below establishes a floor, which when higher than
the contract value, can result in a higher annuity payout level. Thus, the rider
is a guarantee of a minimum amount of annuity income.
The Guaranteed Income Benefit Base is equal to the benefit provided by the
Maximum Anniversary Value Death Benefit Rider.
36
<PAGE>
The Guaranteed Income Benefit Base, less any applicable premium tax, is the
value that will be used to determine minimum annuity payouts if the rider is
exercised.
We reserve the right to exclude subsequent payments and purchase payment credits
paid in the last five years before exercise of the benefit, in the calculation
of the Guaranteed Income Benefit Base. We would do so only if such payments and
credits total $50,000 or more or if they are 25% or more of total payments and
credits paid into the contract.
If we exclude such payments and credits, the Guaranteed Minimum Income Benefit
Base would be calculated as the greatest of:
(a) contract value less "market value adjusted prior five years of payments and
purchase payment credits";
(b) total payments and purchase payment credits less prior five years of
payments and purchase payment credits, less adjusted partial withdrawals;
or
(c) Maximum Anniversary Value immediately preceding the date of settlement,
plus payments and credits and minus adjusted partial withdrawals since that
anniversary, less the "market value adjusted prior five years of payments
and purchase payment credits";
"Market value adjusted prior five years of payments and purchase payment
credits" are calculated as the sum of each such payment or credit, multiplied by
the ratio of the current contract value over the estimated contract value on the
anniversary prior to such payment or credit. The estimated contract value at
such anniversary is calculated by assuming that payments, credits and partial
withdrawals occurring in a contract year take place at the beginning of the year
for that anniversary and every year after that to the current contract year.
CONDITIONS ON ELECTION OF THE RIDER:
- you must elect the rider at the time you purchase your contract along
with the corresponding death benefit rider option, and
- the annuitant must be age 75 or younger on the contract date.
FUND SELECTION TO CONTINUE THE RIDER: You may allocate your purchase payments to
any of the subaccounts or the fixed accounts. However, we reserve the right to
limit the amount in the AXP(SM) Variable Portfolio - Cash Management Fund to 10%
of the total amount in the subaccounts. If we are required to activate this
restriction, and you have more than 10% of your subaccount value in this fund,
we will send you notice and ask that you reallocate your contract value so that
the limitation is satisfied within 60 days. If after 60 days the limitation is
not satisfied, the rider will be terminated.
EXERCISING THE RIDER:
- you may only exercise the rider within 30 days after any contract
anniversary following the expiration of the 7 year waiting period from
the effective date of the rider,
- the annuitant on the retirement date must be between 50 and 86 years
old, and
- you can only take an annuity payout in one of the following annuity
payout plans:
- Plan A -- Life Annuity - no refund
- Plan B -- Life Annuity with ten years certain
- Plan D -- Joint and last survivor life annuity - no refund
37
<PAGE>
TERMINATING THE RIDER:
- You may terminate the rider within 30 days after the first anniversary
of the effective date of the rider.
- You may terminate the rider any time after the end of the seven year
waiting period of the rider.
- The rider will terminate on the date you make a full withdrawal from
the contract, or annuity payouts begin, or on the date that a death
benefit is payable.
- The rider will terminate on the contract anniversary after the
annuitant's 86th birthday.
EXAMPLE:
- The contract is purchased with a payment of $100,000 on Jan. 1, 2000,
and a $1,000 purchase payment credit is added to the contract.
- There are no additional purchase payments and no partial withdrawals.
- The money is fully allocated to the subaccounts.
- The annuitant is male and age 55 on the contract date. For the joint
and last survivor option (annuity payout Plan D), the joint annuitant
is female and age 55 on the contract date.
- The Maximum Anniversary Value is $180,000 on the 10th anniversary and
$220,000 on the 15th anniversary.
- The contract is within 30 days after contract anniversary.
If the Guaranteed Minimum Income Benefit Rider is exercised, the minimum fixed
annuity monthly payout or the first year variable annuity monthly payout would
be:
<TABLE>
<CAPTION>
Fixed Annuity Payout Options
Minimum Guaranteed Annual Income
CONTRACT ANNIVERSARY AT EXERCISE MINIMUM GUARANTEED BENEFIT BASE PLAN A -- PLAN B -- PLAN D --
-------------------------------- ------------------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
10 $180,000 $ 937.80 $ 912.60 $ 747.00
15 $220,000 $1,311.20 $1,249.60 $1,014.20
</TABLE>
After the first year payments, lifetime income payments on a variable annuity
payout option will depend on the investment performance of the subaccounts you
select. The payments will be higher if investment performance is greater than a
5% annual return and lower if investment performance is less than a 5% annual
return.
PERFORMANCE CREDIT RIDER
If this rider is available in your state, you may choose to add this benefit to
your contract at issue. You cannot select this rider if you select the
Guaranteed Minimum Income Benefit Rider. This feature provides certain benefits
if your contract value has not reached or exceeded a Target Value on the rider's
tenth anniversary.
If, on the tenth rider anniversary, your contract value has not reached the
Target Value (as defined below) you can choose either of the following benefits:
(a) You may choose to accept a credit to your contract equal to 5% of your
purchase payments and purchase payment credits, less adjusted partial
withdrawals and less purchase payments and purchase payment credits made in
the prior five years. Such credit is made at the tenth rider anniversary
and allocated according to your current purchase payment allocations.
(b) you may choose to begin receiving annuity payouts (only with lifetime
income plans; you may not chose Annuity Payout Plan E) within 60 days of
the tenth rider anniversary and receive an additional 5% credit (for a
total of 10% credit) as calculated in (a).
Following your tenth rider anniversary, we will inform you if your contract
value did not meet or exceed the Target Value. We will assume that you have
elected (a) unless we receive your request to begin a lifetime annuity payout
plan within 60 days after the tenth rider anniversary.
38
<PAGE>
On the tenth rider anniversary and every ten years thereafter while you have the
contract, the ten year calculation period restarts if you elect (a). We use the
contract value (after any credits) on that anniversary as the initial purchase
payment for the calculation of the Target Value and any credit. Additional
credits may then be made at the end of each ten year period as described above.
TARGET VALUE: the Target Value at each anniversary is equal to the Target Value
at the prior anniversary plus any purchase payments, purchase payment credits,
and less adjusted partial withdrawals made during the year, accumulated at an
effective annual rate of 7.2%.
ADJUSTED PARTIAL WITHDRAWALS: we calculate the adjusted partial withdrawals for
each partial withdrawal as the product of (a) times (b) where:
(a) is the ratio of the amount of partial withdrawal (including any applicable
withdrawal charge) to the contract value on the date of (but prior to) the
partial withdrawal, and
(b) is the Target Value on the date of (but prior to) the partial withdrawal.
RESET OPTION: you can elect to lock in the growth in your contract by restarting
the ten-year period on any contract anniversary. If you elect to restart the
calculation period, the contract value on the restart date is used as the
initial purchase payment for the calculation of the target value and any credit.
The next ten year calculation period will then restart at the end of the new ten
year period from the most recent restart date. We must receive your request to
restart the calculation period within 30 days after an anniversary.
FUND SELECTION EFFECT ON TARGET VALUE: you may allocate your purchase payments
to any of the subaccounts or the fixed accounts. However, we reserve the right
to limit the aggregate amount in the fixed accounts and the AXP(SM) Variable
Portfolio - Cash Management Fund to 10% of the contract value. If we are
required to activate this restriction and you have more than 10% of your
contract value in these accounts, we will send you notice and ask you that you
reallocate your contract value so that the limitation is satisfied in 60 days.
If after 60 days, the limitation is not satisfied, we will terminate the rider.
TERMINATING THE RIDER:
- You may terminate the rider within 30 days following the first
anniversary after the effective date of the rider.
- You may terminate the rider within 30 days following the later of the
tenth anniversary of the effective date of the rider or the last rider
reset date.
- The rider will terminate on the date you make a full withdrawal from
the contract, or annuity payouts begin, or on the date that a death
benefit is payable.
EXAMPLE:
- You purchase the contract with a payment of $100,000 on January 1,
2000 and we add a $1,000 purchase payment credit to the contract
- There are no additional purchase payments and no partial withdrawals
- On January 1, 2010, the contract value is $200,000
- We determine the performance credit on January 1, 2010 as:
<TABLE>
<S><C>
10
Target Value on January 1, 2010 = 101,000 x (1.072)^ = 101,000 x 2.00423 = 202,427
</TABLE>
As the target value of $202,427 is greater than the contract value of
$200,000, we add a performance credit to the contract equal to $5,050
(or 5% of the purchase payment and purchase payment credits of
$101,000). Your total contract value on January 1, 2010 would be
$205,050.
39
<PAGE>
On February 1, 2010, the contract value is $210,000 and you choose to
begin receiving annuity payouts under a lifetime income plan. We would
use the value of $215,050 ($210,000 + another performance credit of
$5,050) to determine your monthly income.
If the contract continues and annuity payouts are not started, the
benefit restarts on January 1, 2010 with the "initial purchase
payment" equal to $205,050 and the performance credit determination
made on January 1, 2020.
WITHDRAWALS
You may withdraw all or part of your contract at any time before annuity
payouts begin by sending us a written request or calling us. We will process
your withdrawal request on the valuation date we receive it. For total
withdrawals, we will compute the value of your contract at the next
accumulation unit value calculated after we receive your request. We may ask
you to return the contract. You may have to pay charges (see "Charges -
Withdrawal charge") and IRS taxes and penalties (see "Taxes"). You cannot
make withdrawals after annuity payouts begin except under Plan E (see "The
Annuity Payout Period - Annuity payout plans").
WITHDRAWAL POLICIES
If you have a balance in more than one account and you request a partial
withdrawal, we will withdraw money from all your subaccounts and/or the fixed
accounts in the same proportion as your value in each account correlates to your
total contract value, unless you request otherwise.
RECEIVING PAYMENT
By regular or express mail:
- payable to owner;
- mailed to address of record.
NOTE: We will charge you a fee if you request express mail delivery.
Normally, we will send the payment within seven days after receiving your
request. However, we may postpone the payment if:
-- the withdrawal amount includes a purchase payment check that has not cleared;
-- the NYSE is closed, except for normal holiday and weekend closings;
-- trading on the NYSE is restricted, according to SEC rules;
-- an emergency, as defined by SEC rules, makes it impractical to sell
securities or value the net assets of the accounts; or
-- the SEC permits us to delay payment for the protection of security holders.
CHANGING OWNERSHIP
You may change ownership of your nonqualified annuity at any time by completing
a change of ownership form we approve and sending it to our office. The change
will become binding upon us when we receive and record it. We will honor any
change of ownership request that we believe is authentic and we will use
reasonable procedures to confirm authenticity. If we follow these procedures, we
will not take any responsibility for the validity of the change.
If you have a nonqualified annuity, you may incur income tax liability by
transferring, assigning or pledging any part of it. (See "Taxes.")
If you have a qualified annuity, you may not sell, assign, transfer, discount or
pledge your contract 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. However, 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.
40
<PAGE>
BENEFITS IN CASE OF DEATH
We will pay the death benefit to your beneficiary upon the earlier of your death
or the annuitant's death. We will base the benefit paid on the death benefit
coverage you selected when you purchased the contract. If a contract has more
than one person as the owner, we will pay benefits upon the first to die of any
owner or the annuitant. If you own the contract in joint tenancy with rights of
survivorship, we will pay benefits upon the first to die of either you or the
annuitant.
RETURN OF PURCHASE PAYMENT DEATH BENEFIT
We require this option if either you or the annuitant are age 80 or above.
Under this option, if you or the annuitant die before annuity payouts begin
while this contract is in force, we will pay the beneficiary the greater of the
following less any purchase payment credits added to the contract in the last 12
months:
1. the contract value; or
2. the total purchase payments paid plus purchase payments credits and less
any "adjusted partial withdrawals."
ADJUSTED PARTIAL WITHDRAWALS: We calculate an "adjusted partial withdrawal" for
each partial withdrawal as the product of (a) times (b) where:
(a) is the ratio of the amount of the partial withdrawal (including
any applicable withdrawal charge) to the contract value on the date of
(but prior to) the partial withdrawal; and
(b) is the death benefit on the date of (but prior to) the partial
withdrawal.
EXAMPLE:
- You purchase the contract with a payment of $25,000 on Jan. 1, 2000.
- On Jan. 1, 2001 you make an additional purchase payment of $5,000.
- On March 1, 2001 the contract value falls to $28,000. You take a $1,500
partial withdrawal leaving a contract value of $26,500.
- On March 1, 2002 the contract value falls to $25,000.
We calculate the death benefit on March 1, 2002 as follows:
<TABLE>
<S><C>
Total payments paid: $30,000.00
minus any "adjusted partial withdrawals"
calculated as: 1,500 X 30,000 = - 1,607.14
-------------- ----------
28,000
for a death benefit of: $28,392.86
</TABLE>
MAXIMUM ANNIVERSARY VALUE DEATH BENEFIT RIDER
If this rider is available in your state and both you and the annuitant are age
79 or younger on the contract date, you may choose to add this benefit to your
contract. This rider provides that if you or the annuitant die before annuity
payouts begin while this contract is in force, we will pay the beneficiary the
greatest of the following amounts less any purchase payment credits added in the
last 12 months:
1. the contract value; or
2. the total purchase payments paid plus purchase payment credits and less any
"adjusted partial withdrawals"; or
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<PAGE>
3. the "maximum anniversary value" immediately preceding the date of death
plus the dollar amount of any payments since that anniversary plus purchase
payment credits and minus any "adjusted partial withdrawals" since that
anniversary.
MAXIMUM ANNIVERSARY VALUE: Each contract anniversary prior to the earlier of
your or the annuitant's 81st birthday, we calculate the anniversary value which
is the greater of:
(a) the contract value on that anniversary; or
(b) total purchase payments made to the contract plus purchase payment credits
and minus any "adjusted partial withdrawals."
The "maximum anniversary value" is equal to the greatest of these anniversary
values.
After the earlier of your or the annuitant's 81st birthday, the death benefit
continues to be the death benefit value as of that date, plus any subsequent
payments and purchase payment credits and minus any "adjusted partial
withdrawals."
EXAMPLE:
- You purchase the contract with a payment of $20,000 on Jan. 1, 2000.
- On Jan. 1, 2001 (the first contract anniversary) the contract value grows
to $24,000.
- On March 1, 2001 the contract value falls to $22,000, at which point you
take a $1,500 partial withdrawal, leaving a contract value of $20,500.
We calculate the death benefit on March 1, 2001 as follows:
<TABLE>
<S><C>
The "maximum anniversary value" : $24,000.00
(the greatest of the anniversary values which
was the contract value on Jan. 1, 2001)
plus any purchase payments paid since that anniversary: +0.00
minus any "adjusted partial withdrawal" taken since that
anniversary, calculated as: 1,500 X 24,000 = - 1,636.36
---------------- ----------
22,000
for a death benefit of: $22,363.64
</TABLE>
IF YOUR SPOUSE IS SOLE BENEFICIARY and you die before the retirement 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. The Guaranteed Minimum Income Benefit Rider, if selected, is
then terminated.
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<PAGE>
PAYMENTS: Under a nonqualified annuity, 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 payouts under any annuity payout plan available under this contract if:
- the beneficiary asks us in writing within 60 days after we receive proof of
death; and
- payouts begin no later than one year after your death, or other date as
permitted by the Code; and
- the payout period does not extend beyond the beneficiary's life or life
expectancy.
When paying the beneficiary, we will process the death claim 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, from the date of
death at a rate no less than required by law. We will mail payment to the
beneficiary within seven days after our death claim requirements are fulfilled.
Other rules may apply to qualified annuities. (See "Taxes.")
THE ANNUITY PAYOUT PERIOD
As owner of the contract, you have the right to decide how and to whom annuity
payouts will be made starting at the retirement date. You may select one of the
annuity payout plans outlined below, or we may mutually agree on other payout
arrangements. We do not deduct any withdrawal charges under the payout plans
listed below.
You also decide whether we will make annuity payouts on a fixed or variable
basis, or a combination of fixed and variable. The amounts available to purchase
payouts under the plan you select is the contract value on your retirement date
(less any applicable premium tax). You may reallocate this contract value to the
one-year fixed account to provide fixed dollar payouts and/or among the
subaccounts to provide variable annuity payouts. During the annuity payout
period, we reserve the right to limit the number of subaccounts in which you may
invest. The Guarantee Period Accounts are not available during this payout
period.
Amounts of fixed and variable payouts depend on:
- the annuity payout plan you select;
- the annuitant's age and, in most cases, sex;
- the annuity table in the contract; and
- the amounts you allocated to the accounts at settlement.
In addition, for variable payouts only, amounts depend on the investment
performance of the subaccounts you select. These payouts will vary from month to
month because the performance of the funds will fluctuate. (In the case of fixed
annuities, payouts remain the same from month to month.)
For information with respect to transfers between accounts after annuity payouts
begin, see "Making the Most of Your Contract -- Transfer policies."
ANNUITY TABLE
The annuity table in your contract shows the amount of the first monthly payment
for each $1,000 of contract value according to the age and, when applicable, the
sex of the annuitant. (Where required by law, we will use a unisex table of
settlement rates.) The table assumes that the contract value is invested at the
beginning of the annuity payout period and earns a 5% rate of return, which is
reinvested and helps to support future payouts.
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<PAGE>
SUBSTITUTION OF 3.5% TABLE
If you ask us at least 30 days before the retirement date, we will substitute an
annuity table based on an assumed 3.5% investment rate for the 5% table in the
contract. The assumed investment rate affects both the amount of the first
payout and the extent to which subsequent payouts increase or decrease. Using
the 5% table results in a higher initial payment, but later payouts will
increase more slowly when annuity unit values rise and decrease more rapidly
when they decline.
ANNUITY PAYOUT PLANS
You may choose any one of these annuity payout plans by giving us written
instructions at least 30 days before contract values are used to purchase the
payout plan:
- PLAN A -- LIFE ANNUITY - NO REFUND: We make monthly payouts until the
annuitant's death. Payouts end with the last payout before the annuitant's
death. We will not make any further payouts. This means that if the
annuitant dies after we made only one monthly payout, we will not make any
more payouts.
- PLAN B -- LIFE ANNUITY WITH FIVE, TEN OR 15 YEARS CERTAIN: We make monthly
payouts for a guaranteed payout period of five, ten or 15 years that you
elect. This election will determine the length of the payout period to the
beneficiary if the annuitant should die before the elected period expires.
We calculate the guaranteed payout period from the retirement date. If the
annuitant outlives the elected guaranteed payout period, we will continue
to make payouts until the annuitant's death.
- PLAN C -- LIFE ANNUITY - INSTALLMENT REFUND: We make monthly payouts until
the annuitant's death, with our guarantee that payouts will continue for
some period of time. We will make payouts for at least the number of months
determined by dividing the amount applied under this option by the first
monthly payout, whether or not the annuitant is living.
- PLAN D -- JOINT AND LAST SURVIVOR LIFE ANNUITY - NO REFUND: We make monthly
payouts while both the annuitant and a joint annuitant are living. If
either annuitant dies, we will continue to make monthly payouts at the full
amount until the death of the surviving annuitant. Payouts end with the
death of the second annuitant.
- PLAN E -- PAYOUTS FOR A SPECIFIED PERIOD: We make monthly payouts for a
specific payout period of ten to 30 years that you elect. We will make
payouts only for the number of years specified whether the annuitant is
living or not. Depending on the selected time period, it is foreseeable
that an annuitant can outlive the payout period selected. During the payout
period, you can elect to have us determine the present value of any
remaining variable payouts and pay it to you in a lump sum. We determine
the present value of the remaining annuity payouts which are assumed to
remain level. The discount rate we use in the calculation will vary between
4.86% and 6.61% depending on the mortality and expense risk charge and the
applicable assumed investment rate. (See "Charges-Withdrawal charge under
Annuity Payout Plan E.") You can also take a portion of the discounted
value once a year. If you do so, your monthly payouts will be reduced by
the proportion of your withdrawal to the full discounted value. A 10% IRS
penalty tax could apply if you take a withdrawal. (See "Taxes.")
RESTRICTIONS FOR SOME TAX-DEFERRED RETIREMENT PLANS: If you purchased a
qualified annuity, you may be required to select a payout plan that provides for
payouts:
- over the life of the annuitant;
- over the joint lives of the annuitant and a designated beneficiary;
- for a period not exceeding the life expectancy of the annuitant; or
- for a period not exceeding the joint life expectancies of the annuitant and
a designated beneficiary.
You have the responsibility for electing a payout plan that complies with your
contract and with applicable law.
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<PAGE>
IF WE DO NOT RECEIVE INSTRUCTIONS: You must give us written instructions for the
annuity payouts at least 30 days before the annuitant's retirement date. If you
do not, we will make payouts under Plan B, with 120 monthly payouts guaranteed.
Contract values that you allocated to the one-year fixed account will provide
fixed dollar payouts and contract values that you allocated among the
subaccounts will provide variable annuity payouts.
IF MONTHLY PAYOUTS WOULD BE LESS THAN $20: We will calculate the amount of
monthly payouts at the time the contract value is used to purchase a payout
plan. If the calculations show that monthly payouts would be less than $20, we
have the right to pay the contract value to you in a lump sum or to change the
frequency of the payouts.
DEATH AFTER ANNUITY PAYOUTS BEGIN
If you or the annuitant die after annuity payouts begin, we will pay any amount
payable to the beneficiary as provided in the annuity payout plan in effect.
TAXES
Generally, under current law, your contract has a tax deferral feature. This
means any increase in the value of the fixed accounts and/or subaccounts in
which you invest is taxable to you only when you receive a payout or withdrawal
(see detailed discussion below). Any portion of the annuity payouts and any
withdrawals 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.
ANNUITY PAYOUTS UNDER NONQUALIFIED ANNUITIES: A portion of each payout will be
ordinary income and subject to tax, and a portion of each payout will be
considered a return of part of your investment and will not be taxed. All
amounts you receive after your investment in the contract is fully recovered
will be subject to tax.
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: Your contract may be used to fund a tax-deferred retirement
plan that is already tax-deferred under the Code. The contract will not provide
any necessary or additional tax deferral if it is used to fund a retirement plan
that is tax-deferred. Special rules apply to these retirement plans. Your rights
to benefits may be subject to the terms and conditions of these retirement plans
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 during your life (except for Roth IRAs) and after your
death. You should refer to your retirement plan or adoption agreement or consult
a tax advisor for more information about your distribution rules.
ANNUITY PAYOUTS UNDER QUALIFIED ANNUITIES (EXCEPT ROTH IRAS): Under a qualified
annuity, the entire payout generally is includable as ordinary income and is
subject to tax except to the extent that contributions were made with after-tax
dollars. If you or your employer invested in your contract with deductible or
pre-tax dollars as part of a tax-deferred retirement plan, such amounts are not
considered to be part of your investment in the contract and will be taxed when
paid to you.
PURCHASE PAYMENT CREDITS AND CREDITS UNDER THE PERFORMANCE CREDIT RIDER: These
are considered earnings and are taxed accordingly.
WITHDRAWALS: If you withdraw part or all of your contract before your annuity
payouts begin, your withdrawal payment will be taxed to the extent that the
value of your contract immediately before the
45
<PAGE>
withdrawal exceeds your investment. You also may have to pay a 10% IRS penalty
for withdrawals you make before reaching age 59 1/2 unless certain exceptions
apply. For qualified annuities, other penalties may apply if you withdraw your
contract before your plan specifies that you can receive payouts.
DEATH BENEFITS TO BENEFICIARIES: The death benefit under a contract (except a
Roth IRA) 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 years he or she receives the payments.
The death benefit under a Roth IRA generally is 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: If you receive amounts from your contract 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 by you or
your beneficiary:
- 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 a qualified annuity, other penalties or exceptions may apply if you make
withdrawals from your contract before your plan specifies that payouts 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 tax return.
If the payment is part of an annuity payout 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.
If the distribution is any other type of payment (such as a partial or full
withdrawal), 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.
Some states also 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. 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.
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 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.
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 withdrawal.
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<PAGE>
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.
VOTING RIGHTS
As a contract owner with investments in the subaccounts, you may vote on
important fund policies until annuity payouts begin. Once they begin, the person
receiving them has voting rights. We will vote fund shares according to the
instructions of the person with voting rights.
Before annuity payouts begin, the number of votes you have is determined by
applying your percentage interest in each subaccount to the total number of
votes allowed to the subaccount.
After annuity payouts begin, the number of votes you have is equal to:
- the reserve held in each subaccount for your contract;
- divided by the net asset value of one share of the applicable fund.
As we make annuity payouts, the reserve for the contract decreases; therefore,
the number of votes also will decrease.
We calculate votes separately for each subaccount. We will send notice of
shareholders' meetings, proxy materials and a statement of the number of votes
to which the voter is entitled. We will vote shares for which we have not
received instructions in the same proportion as the votes for which we received
instructions. We also will vote the shares for which we have voting rights in
the same proportion as the votes for which we received instructions.
SUBSTITUTION OF INVESTMENTS
We may substitute the funds in which the subaccounts invest if:
- laws or regulations change,
- existing funds become unavailable, or
- in our judgment, the funds no longer are suitable for the subaccounts.
If any of these situations occur and if we believe it is in the best interest of
persons having voting rights under the contract, we have the right to substitute
funds other than those currently listed in this prospectus for other funds.
We may also:
- add new subaccounts;
- combine any two or more subaccounts;
- add subaccounts investing in additional funds;
- transfer assets to and from the subaccounts or the variable account; and
- eliminate or close any subaccounts.
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<PAGE>
In the event of substitution or any of these changes, we may amend the contract
and take whatever action is necessary and appropriate without your consent or
approval. However, we will not make any substitution or change without the
necessary approval of the SEC and state insurance departments. We will notify
you of any substitution or change.
ABOUT THE SERVICE PROVIDERS
PRINCIPAL UNDERWRITER
American Express Financial Advisors Inc. (AEFA) serves as the principal
underwriter for the contract. Its office are located at 200 AXP Financial
Center, Minneapolis, MN 55474. AEFA is a wholly-owned subsidiary of American
Express Financial Corporation (AEFC) which is a wholly-owned subsidiary of
American Express Company.
The contracts will be distributed by broker-dealers which have entered into
distribution agreements with AEFA and American Enterprise Life.
We pay commissions for sales of the contracts of up to 7% of purchase payments
to insurance agencies or broker-dealers that are also insurance agencies.
Sometimes we pay the commissions as a combination of a certain amount of the
commission at the time of sale and a trail commission (which, when totaled,
could exceed 7% of purchase payments). In addition, we may pay certain sellers
additional compensation for selling and distribution activities under certain
circumstances. From time to time, we will pay or permit other promotional
incentives, in cash or credit or other compensation.
Other contracts issued by American Enterprise Life that are not described in
this prospectus may be available through your sales representative. The
features, investment options, sales charges and expenses of the other contracts
are different than those of this contract. Therefore, the contract values under
the other contracts may be different than your contract value under this
contract. In addition, sales commissions for the other contracts may be higher
or lower than sales commissions for this contract.
ISSUER
American Enterprise Life issues the annuities. American Enterprise Life is a
wholly-owned subsidiary of IDS Life, which is a wholly-owned subsidiary of AEFC.
AEFC is a wholly-owned subsidiary of American Express Company. American Express
Company is a financial services company principally engaged through subsidiaries
(in addition to AEFC) in travel related services, investment services and
international banking services.
American Enterprise Life is a stock life insurance company organized in 1981
under the laws of the state of Indiana. Its administrative offices are located
at 829 AXP Financial Center, Minneapolis, MN 55474. Our statutory address is 100
Capitol Center South, 201 North Illinois Street, Indianapolis, IN 46204.
American Enterprise Life conducts a conventional life insurance business.
LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which American Enterprise Life and its affiliates do business
involving insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents and other matters. IDS Life is a defendant in three
class action lawsuits of this nature. American Enterprise Life is a named
defendant in one of these suits, RICHARD W. AND ELIZABETH J. THORESEN VS.
AMERICAN EXPRESS FINANCIAL CORPORATION, AMERICAN CENTURION LIFE ASSURANCE
COMPANY, AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, AMERICAN PARTNERS LIFE
INSURANCE COMPANY, IDS LIFE INSURANCE COMPANY AND IDS LIFE INSURANCE COMPANY OF
NEW YORK , which was commenced in Minnesota State Court in October, 1998. The
action was brought by individuals who purchased an annuity in a qualified plan.
The plaintiffs allege that the sale of annuities in tax-deferred contributory
retirement investment plans (E.G., IRAs) is never appropriate. The plaintiffs
purport to represent a class consisting of all persons who made similar
purchases. The plaintiffs seek damages in an unspecified amount.
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<PAGE>
American Enterprise Life is included as a party to a preliminary settlement of
all three class action lawsuits. We believe this approach will put these cases
behind us and provide a fair outcome for our clients. Our decision to settle
does not include any admission of wrongdoing. We do not anticipate that this
proposed settlement, or any other lawsuits in which American Enterprise Life is
a defendant, will have a material adverse effect on our financial condition.
ADDITIONAL INFORMATION ABOUT AMERICAN ENTERPRISE LIFE
SELECTED FINANCIAL DATA
The following selected financial data for American Enterprise Life should be
read in conjunction with the financial statements and notes.
<TABLE>
<CAPTION>
Years ended Dec. 31, (thousands)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net investment income $ 322,746 $ 340,219 $ 332,268 $ 271,719 $ 223,706
Net gain/loss on 6,565 (4,788) (509) (5,258) (1,154)
investments
Other 8,338 7,662 6,329 5,753 4,214
----- ----- ----- ----- -----
Total revenues $ 337,649 $ 343,093 $ 338,088 $ 272,214 $ 226,766
========== ========== ========== ========== ==========
Income before income taxes $ 50,662 $ 36,421 $ 44,958 $ 35,735 $ 33,440
========== ========== ========== ========== ==========
Net income $ 33,987 $ 22,026 $ 28,313 $ 22,823 $ 21,748
========== ========== ========== ========== ==========
Total assets $4,603,343 $4,885,621 $4,973,413 $4,425,837 $3,570,960
========== ========== ========== ========== ==========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1999 COMPARED TO 1998:
Net income increased 54 percent to $34 million in 1999, compared to $22 million
in 1998. Earnings growth resulted primarily net realized gains of $6.6 million
in 1999, compared to net realized losses of $4.8 in 1998.
Income before income taxes totaled $51 million in 1999, compared with $36
million in 1998.
Total investment contract deposits received decreased to $336 million in 1999,
compared with $348 million in 1998. This decrease is primarily due to a decrease
in sales of variable annuities in 1999.
Total revenues decreased to $338 million in 1999, compared with $343 million in
1998. The decrease is primarily due to decreased net investment income which was
partially offset by an increase in realized gain on investments. Net investment
income, the largest component of revenues, decreased 5 percent from the prior
year, reflecting decreases in investments owned and investment yields.
Contractholder charges decreased 5 percent to $6.1 million in 1999, compared
with $6.4 million in 1998, reflecting a decrease in fixed annuities inforce. The
Company receives mortality and expense risk fees from the separate accounts.
Mortality and expense risk fees increased 77 percent to $2.3 million in 1999,
compared with $1.3 million in 1998, this reflects the increase in separate
account assets.
Net realized gain on investments was $6.6 million in 1999, compared to a net
realized loss on investments of $4.8 million in 1998. The net realized gains
were primarily due to the sale of available for sale fixed maturity investments
at a gain as well as a decrease in the allowance for mortgage loan losses based
on management's regular evaluation of allowance adequacy.
Total benefits and expenses decreased slightly to $287 million in 1999. The
largest component of expenses, interest credited on investment contracts,
decreased to $209 million, reflecting a decrease in fixed annuities
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<PAGE>
in force and lower interest rates. Amortization of deferred policy acquisition
costs decreased to $43 million, compared to $54 million in 1998. This decrease
was due primarily to decreased aggregate amounts in force, as well as the impact
of changing prospective assumptions in 1998 based on actual lapse experience on
certain fixed annuities.
Other operating expenses increased 46 percent to $35 million in 1999, compared
to $24 million in 1998. This increase is primarily reflects technology costs
related to growth initiatives.
1998 COMPARED TO 1997:
Net income decreased 22 percent to $22 million in 1998, compared to $28 million
in 1997. The decrease in earnings resulted primarily from increases in
amortization of deferred policy acquisition costs.
Income before income taxes totaled $36 million in 1998, compared with $45
million in 1997.
Total premiums and investment contract deposits received decreased to $348
million in 1998, compared with $802 million in 1997. This decrease is primarily
due to a decrease in sales of fixed annuities in 1998, reflecting the low
interest rate environment.
Total revenues increased to $343 million in 1998, compared with $338 million in
1997. The increase is primarily due to increases in net investment income and
contractholder charges. Net investment income, the largest component of
revenues, increased 2 percent from the prior year, reflecting increases in
investments owned and investment yields.
Contractholder charges, increased 12 percent to $6.4 million in 1998, compared
with $5.7 million in 1997. The Company receives mortality and expense risk fees
from the separate accounts.
Total benefits and expenses increased 4.6 percent to $307 million in 1998,
compared with 293 million in 1997. The largest component of expenses, interest
credited on contractholders investment contracts, decreased to $229 million,
reflecting a decrease in fixed annuities in force and lower interest rates.
Amortization of deferred policy acquisition costs increased to $54 million,
compared to $37 million in 1997. This increase was due primarily to the impact
of changing prospective assumptions based on actual lapse experience on certain
fixed annuities.
RISK MANAGEMENT
The sensitivity analysis of the test of market risk discussed below estimates
the effects of hypothetical sudden and sustained changes in the applicable
market conditions on the ensuing year's earnings based on year-end positions.
The market changes, assumed to occur as of year-end, is a 100 basis point
increase in market interest rates. Computations of the prospective effects of
hypothetical interest rate change based on numerous assumptions, including
relative levels of market interest rates as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by management if the hypothetical market
changes actually occurred over time. As a result, actual earnings effects in the
future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a competitive
rate of return on their investments while minimizing risk, and to provide a
dependable and targeted spread between the interest rate earned on investments
and the interest rate credited to contractholders' accounts. The Company does
not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
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security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1999, would be approximately $4.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met by funds provided by annuity
considerations, investment income, proceeds from sales of investments as well as
maturities and periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, and investment purchases.
The Company has an available line of credit with American Express Financial
Corporation aggregating $50 million. The line of credit is used strictly as a
short-term source of funds. No borrowings were outstanding under the agreement
at December 31, 1999. At December 31, 1999, outstanding reverse repurchase
agreements totaled $26 million.
At December 31, 1999, investments in fixed maturities comprised 81 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 32 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 1999, approximately 14 percent of the Company's investments in
fixed maturities were below investment grade bonds. These investments may be
subject to a higher degree of risk than the investment grade issues because of
the borrower's generally greater sensitivity to adverse economic conditions,
such as recession or increasing interest rates, and in certain instances, the
lack of an active secondary market. Expected returns on below investment grade
bonds reflect consideration of such factors. The Company has identified those
fixed maturities for which a decline in fair value is determined to be other
than temporary, and has written them down to fair value with a charge to
earnings.
At December 31, 1999, net unrealized appreciation on fixed maturities held to
maturity included $6.3 million of gross unrealized appreciation and $29 million
of gross unrealized depreciation. Net unrealized appreciation on fixed
maturities available for sale included $9.3 million of gross unrealized
appreciation and $117 million of gross unrealized depreciation.
At December 31, 1999, the Company had an allowance for losses for mortgage loans
totaling $6.7 million.
The economy and other factors have caused a number of insurance companies to
go under regulatory supervision. This circumstance has resulted in
assessments by state guaranty associations to cover losses to policyholders
of insolvent or rehabilitated companies. Some assessments can be partially
recovered through a reduction in future premium taxes in certain states. The
Company established an asset for guaranty association assessments paid to
those states allowing a reduction in future premium taxes over a reasonable
period of time. The asset is being amortized as premium taxes are reduced.
The Company has also estimated the
51
<PAGE>
potential effect of future assessments on the Company's financial position and
results of operations and has established a reserve for such potential
assessments. The Company has adopted Statement of Position 97-3 providing
guidance when an insurer should recognize a liability for guaranty fund
assessments. The SOP is effective for fiscal years beginning after December 15,
1998. Adoption did not have a material impact on the Company's results of
operations or financial condition.
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. The computation involves applying
factors to various statutory financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards provide for regulatory attention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. As of December 31, 1999, the Company's total adjusted capital was well
in excess of the levels requiring regulatory attention.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of American Enterprise Life
and the variable account. All of the major systems used by American Enterprise
Life and the variable account are maintained by AEFC and are utilized by
multiple subsidiaries and affiliates of AEFC. American Enterprise Life's and the
variable account's businesses are heavily dependent upon AEFC's computer systems
and have significant interaction with systems of third parties.
A comprehensive review of AEFC's computer systems and business processes,
including those specific to American Enterprise Life and the variable account,
was conducted to identify the major systems that could be affected by the Year
2000 issue. Steps were taken to resolve potential problems including
modification to existing software and the purchase of new software. As of Dec.
31, 1999, AEFC had completed its program of corrective measures on its internal
systems and applications, including Year 2000 compliance testing. As of Dec. 31,
1999, AEFC had also completed an evaluation of the Year 2000 readiness of other
third parties whose system failures could have an impact on American Enterprise
Life's and the variable account's operations.
AEFC's Year 2000 project also included establishing Year 2000 contingency plans
for all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. As of Dec. 31, 1999, these plans had been amended to include
specific Year 2000 considerations.
In assessing its Year 2000 initiatives and the results of actual production
since Jan. 1, 2000, management believes no material adverse consequences were
experienced, and there was no material effect on American Enterprise Life's and
the variable account's business, results of operations, or financial condition
as a result of the Year 2000 issue.
RESERVES
In accordance with the insurance laws and regulations under which we operate, we
are obligated to carry on our books, as liabilities, actuarially determined
reserves to meet our obligations on our outstanding annuity contracts. We base
our reserves for deferred annuity contracts on accumulation value and for fixed
annuity contracts in a benefit status on established industry mortality tables.
These reserves are computed amounts that will be sufficient to meet our policy
obligations at their maturities.
52
<PAGE>
INVESTMENTS
Our total investments of $4,107,559 at Dec. 31, 1999, 29% was invested in
mortgage-backed securities, 53% in corporate and other bonds, 19% in primary
mortgage loans on real estate and the remaining less than 1% in other
investments.
COMPETITION
We are engaged in a business that is highly competitive due to the large number
of stock and mutual life insurance companies and other entities marketing
insurance products. There are over 1,600 stock, mutual and other types of
insurers in the life insurance business. BEST'S INSURANCE REPORTS, Life-Health
edition 1998, assigned us one of its highest classifications, A+ (Superior).
EMPLOYEES
As of Dec. 31, 1999, we had no employees.
PROPERTIES
We occupy office space in Minneapolis, MN, which is rented by AEFC. We reimburse
AEFC for rent based on direct and indirect allocation methods. Facilities
occupied by us are believed to be adequate for the purposes for which they are
used and well maintained.
STATE REGULATION
American Enterprise Life is subject to the laws of the State of Indiana
governing insurance companies and to the regulations of the Indiana Department
of Insurance. An annual statement in the prescribed form is filed with the
Indiana Department of Insurance each year covering our operation for the
preceding year and its financial condition at the end of such year. Regulation
by the Indiana Department of Insurance includes periodic examination to
determine American Enterprise's contract liabilities and reserves so that the
Indiana Department of Insurance may certify that these items are correct. The
Company's books and accounts are subject to review by the Indiana Department of
Insurance at all times. Such regulation does not, however, involve any
supervision of the account's management or the company's investment practices or
policies. In addition, American Enterprise Life is subject to regulation under
the insurance laws of other jurisdictions in which it operates. A full
examination of American Enterprise Life's operations is conducted periodically
by the National Association of Insurance Commissioners.
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.
DIRECTORS AND EXECUTIVE OFFICERS*
The directors and principal executive officers of American Enterprise Life and
the principal occupation of each during the last five years is as follows:
DIRECTORS
JAMES E. CHOAT
Born in 1947
Director, president and chief executive officer since 1996; Senior vice
president - Institutional Products Group, AEFA, 1994 to 1997.
RICHARD W. KLING
Born 1940
Director and chairman of the board since March 1989.
53
<PAGE>
PAUL S. MANNWEILER**
Born in 1949
Director since 1986; Partner at Locke Reynolds Boyd & Weisell since 1980.
PAULA R. MEYER
Born in 1954
Director and executive vice president since 1998; vice president, AEFC since
1998; Piper Capital Management (PCM) President from Oct. 1997 to May 1998; PCM
Director of Marketing from June 1995 to Oct. 1997; PCM Director of Retail
Marketing from Dec. 1993 to June 1995.
WILLIAM A. STOLTZMANN
Born in 1948
Director since Sept. 1989; vice president, general counsel and secretary since
1985.
OFFICERS OTHER THAN DIRECTORS
JEFFREY S. HORTON
Born 1961
Vice president and treasurer since Dec. 1997; vice president and corporate
treasurer, AEFC, since Dec. 1997; controller, American Express Technologies -
Financial Services, AEFC, from July 1997 to Dec. 1997; controller, Risk
Management Products, AEFC, from May 1994 to July 1997; director of finance and
analysis, Corporate Treasury, AEFC, from June 1990 to May 1994.
PHILIP C. WENTZEL
Born in 1961
Vice president and controller since 1998; vice president - Finance, Risk
Management Products, AEFC since 1997; and director of financial reporting and
analysis from 1992 to 1997.
*The address for all of the directors and principal officers is: 200 AXP
Financial Center, Minneapolis, MN 55474, except for Mr. Mannweiler who is an
independent director.
**Mr. Mannweiler's address is: 201 No. Illinois Street, Indianapolis, IN 46204
EXECUTIVE COMPENSATION
Our executive officers also may serve one or more affiliated companies. The
following table reflects cash compensation paid to the five most highly
compensated executive officers as a group for services rendered in the most
recent year to us and our affiliates. The table also shows the total cash
compensation paid to all our executive officers, as a group, who were executive
officers at any time during the most recent year.
54
<PAGE>
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR
NUMBER IN GROUP POSITION HELD CASH COMPENSATION
<S> <C> <C>
Five most highly compensated $7,960,888
executive officers as a group:
Richard W. Kling Chairman of the Board
James E. Choat President and CEO
Stuart A. Sedlacek Executive Vice President
Lorraine R. Hart Vice President, Investments
Deborah L. Pederson Assistant Vice President, Investments
All executive officers as a group $11,535,043
(11)
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
Our directors and officers do not beneficially own any outstanding shares of
stock of the company. All of our outstanding shares of stock are beneficially
owned by IDS Life. The percentage of shares of IDS Life owned by any director,
and by all our directors and officers as a group, does not exceed 1% of the
class outstanding.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the financial statements
of American Enterprise Life Insurance Company at Dec. 31, 1999 and 1998, and for
each of the three years in the period ended Dec. 31, 1999, and the individual
and combined financial statements of American Enterprise variable Annuity
Account (comprised of subaccounts PCMG1, PMGD1, PNDM1, PSCA1, PCAP1, PVAL1,
PMDC1, PSMC1, PMSS1, PNDS1, PTRS1 and PGIN1) as of Dec. 31, 1999, and the
periods indicated therein as set forth in their reports. We've included our
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.
55
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY FINANCIAL INFORMATION
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying balance sheets of American Enterprise Life
Insurance Company (a wholly owned subsidiary of IDS Life Insurance Company) as
of December 31, 1999 and 1998, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Enterprise Life
Insurance Company at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
February 3, 2000
Minneapolis, Minnesota
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31,
($ thousands, except share amounts)
<TABLE>
<S> <C> <C>
ASSETS 1999 1998
------ ----------- -----------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1999, $984,103; 1998, $1,126,732) $1,006,349 $1,081,193
Available for sale, at fair value (amortized cost:
1999, $2,411,799; 1998, $2,526,712) 2,304,487 2,594,858
----------- -----------
3,310,836 3,676,051
Mortgage loans on real estate 785,253 815,806
Other investments 11,470 12,103
----------- -----------
Total investments 4,107,559 4,503,960
Accounts receivable 316 214
Accrued investment income 56,676 61,740
Deferred policy acquisition costs 180,288 196,479
Deferred income taxes 37,501 --
Other assets 9 43
Separate account assets 220,994 123,185
----------- -----------
Total assets $4,603,343 $4,885,621
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $3,921,513 $4,166,852
Policy claims and other policyholders' funds 12,097 7,389
Deferred income taxes -- 23,199
Amounts due to brokers 25,215 54,347
Other liabilities 17,436 24,500
Separate account liabilities 220,994 123,185
----------- -----------
Total liabilities 4,197,255 4,399,472
Stockholder's equity:
Capital stock, $100 par value per share;
100,000 shares authorized,
20,000 shares issued and outstanding 2,000 2,000
Additional paid-in capital 282,872 282,872
Accumulated other comprehensive (loss) income:
Net unrealized securities (losses) gains (69,753) 44,295
Retained earnings 190,969 156,982
----------- -----------
Total stockholder's equity 406,088 486,149
----------- -----------
Total liabilities and stockholder's equity $4,603,343 $4,885,621
========== ==========
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
--------- --------- ---------
Revenues:
Net investment income $322,746 $340,219 $332,268
Contractholder charges 6,069 6,387 5,688
Mortality and expense risk fees 2,269 1,275 641
Net realized gain (loss) on investments 6,565 (4,788) (509)
--------- --------- ---------
Total revenues 337,649 343,093 338,088
--------- --------- ---------
Benefits and expenses:
Interest credited on investment contracts 208,583 228,533 231,437
Amortization of deferred policy acquisition costs 43,257 53,663 36,803
Other operating expenses 35,147 24,476 24,890
--------- --------- ---------
Total benefits and expenses 286,987 306,672 293,130
--------- --------- ---------
Income before income taxes 50,662 36,421 44,958
Income taxes 16,675 14,395 16,645
--------- --------- ---------
Net income $ 33,987 $ 22,026 $ 28,313
========= ========= =========
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1999
($ thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
------------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $363,858 $2,000 $242,872 $ 12,343 $106,643
Comprehensive income:
Net income 28,313 -- -- -- 28,313
Unrealized holding gains arising
during the year, net of taxes of
($19,891) 36,940 -- -- 36,940 --
Reclassification adjustment for losses
included in net income, net of tax
of ($126) 233 -- -- 233 --
------------- ------------
Other comprehensive income 37,173 -- -- 37,173 --
-------------
Comprehensive income 65,486
Capital contribution from IDS Life 40,000 -- 40,000 -- --
------------- -------- ------------ ------------ -------------
Balance, December 31, 1997 469,344 2,000 282,872 49,516 134,956
Comprehensive income:
Net income 22,026 -- -- -- 22,026
Unrealized holding losses arising
during the year, net of taxes of $3,400 (6,314) -- -- (6,314) --
Reclassification adjustment for losses
included in net income, net of tax
of ($588) 1,093 -- -- 1,093 --
------------- ------------
Other comprehensive loss (5,221) -- -- (5,221) --
-------------
Comprehensive income 16,805
------------- -------- ------------ ------------ -------------
Balance, December 31, 1998 486,149 2,000 282,872 44,295 156,982
Comprehensive loss:
Net income 33,987 -- -- -- 33,987
Unrealized holding losses arising
during the year, net of taxes of $(59,231) (110,001) -- -- (110,001) --
Reclassification adjustment for gains
included in net income, net of tax (4,047) (4,047) --
of $(2,179) ------------- ------------
Other comprehensive loss (114,048) -- -- (114,048) --
-------------
Comprehensive loss (80,061)
------------- -------- ------------ ------------ -------------
Balance, December 31, 1999 $406,088 $2,000 $282,872 $(69,753) $190,969
============= ======== ============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
See accompanying notes.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 33,987 $ 22,026 $ 28,313
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income 5,064 (2,152) (8,017)
Change in accounts receivable (102) 349 9,304
Change in deferred policy acquisition costs, net 16,191 28,022 (21,276)
Change in other assets 34 74 4,840
Change in policy claims and other policyholders' funds 4,708 (3,939) (16,099)
Deferred income tax (benefit) provision 711 (9,591) (2,485)
Change in other liabilities (7,064) 7,595 1,255
Amortization of premium (accretion of discount), net 2,315 122 (2,316)
Net realized (gain) loss on investments (6,565) 4,788 509
Other, net (1,562) 2,544 959
----------- ----------- -----------
Net cash provided by (used in) operating activities 47,717 49,838 (5,013)
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases -- -- (1,996)
Maturities 65,705 73,601 41,221
Sales 8,466 31,117 30,601
Fixed maturities available for sale:
Purchases (593,888) (298,885) (688,050)
Maturities 248,317 335,357 231,419
Sales 469,126 48,492 73,366
Other investments:
Purchases (28,520) (161,252) (199,593)
Sales 57,548 78,681 29,139
Change in amounts due to brokers (29,132) 19,412 (53,796)
----------- ----------- ------------
Net cash provided by (used in) investing activities 197,622 126,523 (537,689)
Cash flows from financing activities:
Activity related to investment contracts:
Considerations received 299,899 302,158 783,339
Surrenders and other benefits (753,821) (707,052) (552,903)
Interest credited to account balances 208,583 228,533 231,437
Capital contribution from parent -- -- 40,000
----------- ----------- -----------
Net cash (used in) provided by financing activities (245,339) (176,361) 501,873
----------- ----------- -----------
Net decrease in cash and cash equivalents -- -- (40,829)
Cash and cash equivalents at beginning of year -- -- 40,829
----------- ----------- -----------
Cash and cash equivalents at end of year $ -- $ -- $ --
=========== =========== ==========
See accompanying notes.
</TABLE>
<PAGE>
1. Summary of significant accounting policies
Nature of business
American Enterprise Life Insurance Company (the Company) is a stock life
insurance company that is domiciled in Indiana and is licensed to transact
insurance business in 48 states. The Company's principal product is
deferred annuities, which are issued primarily to individuals. It offers
single premium and annual premium deferred annuities on both a fixed and
variable dollar basis.
Immediate annuities are offered as well.
Basis of presentation
The Company is a wholly-owned subsidiary of IDS Life Insurance Company (IDS
Life), which is a wholly owned subsidiary of American Express Financial
Corporation (AEFC). AEFC is a wholly owned subsidiary of American Express
Company. The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States which vary in certain respects from reporting practices prescribed
or permitted by the Indiana Department of Insurance (see Note 4).
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Investments
Fixed maturities that the Company has both the positive intent and the
ability to hold to maturity are classified as held to maturity and carried
at amortized cost. All other fixed maturities are classified as available
for sale and carried at fair value. Unrealized gains and losses on
securities classified as available for sale are reported as a separate
component of accumulated other comprehensive (loss) income, net of deferred
income taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
Mortgage loans on real estate are carried at amortized cost less an
allowance for mortgage loan losses. The estimated fair value of the
mortgage loans is determined by a discounted cash flow analysis using
mortgage interest rates currently offered for mortgages of similar
maturities.
<PAGE>
1. Summary of significant accounting policies (continued)
Impairment of mortgage loans is measured as the excess of the loan's
recorded investment over its present value of expected principal and
interest payments discounted at the loan's effective interest rate, or the
fair value of collateral. The amount of the impairment is recorded in an
allowance for mortgage loan losses. The allowance for mortgage loan losses
is maintained at a level that management believes is adequate to absorb
estimated losses in the portfolio. The level of the allowance account is
determined based on several factors, including historical experience,
expected future principal and interest payments, estimated collateral
values, and current and anticipated economic and political conditions.
Management regularly evaluates the adequacy of the allowance for mortgage
loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment income
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized
cost of interest rate caps and floors is included in other investments.
When evidence indicates a decline, which is other than temporary, in the
underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost which approximates
fair value.
Supplementary information to the statements of cash flows for the years
ended December 31, is summarized as follows:
1999 1998 1997
---- ----- ----
Cash paid during the year for:
Income taxes $22,007 $19,035 $19,456
Interest on borrowings 2,187 5,437 1,832
Contractholder charges
Contractholder charges include surrender charges and fees collected
regarding the issue and administration of annuity contracts.
<PAGE>
1. Summary of significant accounting policies (continued)
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, and certain sales expenses, have been deferred on annuity
contracts. These costs are amortized using primarily the interest method.
Amortization of deferred policy acquisition costs requires the use of
assumptions including interest margins, mortality margins, persistency
rates, maintenance expense levels and, for variable products, separate
account performance. For universal life-type insurance and deferred
annuities, actual experience is reflected in the Company's amortization
models monthly. As actual experience differs from the current assumptions,
management considers the need to change key assumptions underlying the
amortization models prospectively. The impact of changing prospective
assumptions is reflected in the period that such changes are made and is
generally referred to as an unlocking adjustment. During 1998, unlocking
adjustments resulted in a net increase in amortization of $11 million. Net
unlocking adjustments in 1999 and 1997 were not significant.
Liabilities for future policy benefits
Liabilities for universal-life type insurance and fixed and variable
deferred annuities are accumulation values.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company provides for income
taxes on a separate return basis, except that, under an agreement between
AEFC and American Express Company, tax benefit is recognized for losses to
the extent they can be used on the consolidated tax return. It is the
policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries
for all tax benefits.
Included in other liabilities at December 31, 1999 and 1998 are $2,147 and
$3,504, respectively, payable to IDS Life for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity contract owners. The Company
receives mortality and expense risk fees from the variable annuity separate
accounts.
<PAGE>
1. Summary of significant accounting policies (continued)
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of
the annuitants and beneficiaries from the mortality assumptions implicit in
the annuity contracts. The Company makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are in the benefit payment period.
The Company also guarantees that the rates at which administrative fees are
deducted from contract funds will not exceed contractual maximums.
Accounting changes
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" became effective January 1, 1999. The SOP
requires the capitalization of certain costs incurred after the date of
adoption to develop or obtain software for internal use. Software utilized
by the Company is owned by AEFC and capitalized by AEFC. As a result, the
new rule did not have a material impact on the Company's results of
operations or financial condition.
Effective January 1, 1999, the Company adopted AICPA SOP 97-3, "Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments,"
providing guidance for the timing of recognition of liabilities related to
guaranty fund assessments. The Company had historically carried balance in
other liabilities on the balance sheet for potential guaranty fund
assessment exposure. Adoption of the SOP did not have a material impact on
the Company's results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2001.
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. The ultimate financial effect
of the new rule will be measured based on the derivatives in place at
adoption and cannot be estimated at this time.
<PAGE>
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers
and financial files.
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1999 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---------- -------- -------- ----------
U.S. Government agency obligations $ 7,514 $ 23 $ 431 $ 7,106
State and municipal obligations 3,002 44 -- 3,046
Corporate bonds and obligations 816,826 5,966 23,311 799,482
Mortgage-backed securities 179,007 296 4,834 174,469
---------- -------- -------- ----------
$1,006,349 $ 6,329 $ 28,576 $ 984,103
========== ======== ======== ==========
Available for sale
U.S. Government agency obligations $ 2,047 $ -- $ 47 $ 1,999
State and municipal obligations 2,250 -- 190 2,060
Corporate bonds and obligations 1,419,150 7,445 90,703 1,335,892
Mortgage-backed securities 988,352 1,929 25,746 964,536
------------ -------- -------- ----------
$2,411,799 $ 9,374 $116,686 $2,304,487
========== ======== ======== ==========
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---------- -------- -------- ----------
U.S. Government agency obligations $ 8,652 $ 423 $ -- $ 9,075
State and municipal obligations 3,003 149 -- 3,152
Corporate bonds and obligations 877,140 48,822 6,670 919,292
Mortgage-backed securities 192,398 2,844 29 195,213
---------- -------- -------- ----------
$1,081,193 $ 52,238 $ 6,699 $1,126,732
========== ======== ======== ==========
Available for sale
U.S. Government agency obligations $ 2,062 $ 116 $ -- $ 2,178
Corporate bonds and obligations 1,472,814 69,990 34,103 1,508,701
Mortgage-backed securities 1,051,836 32,232 89 1,083,979
---------- -------- -------- ----------
$2,526,712 $102,338 $34,192 $2,594,858
========== ======== ======= ==========
</TABLE>
<PAGE>
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1999 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Held to maturity Cost Value
Due in one year or less $ 26,214 $ 26,334
Due from one to five years 412,533 408,638
Due from five to ten years 331,187 320,146
Due in more than ten years 57,408 54,516
Mortgage-backed securities 179,007 174,469
------------- -------------
$ 1,006,349 $ 984,103
=========== ============
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 46,937 $ 47,236
Due from one to five years 75,233 73,525
Due from five to ten years 1,037,001 980,633
Due in more than ten years 264,276 238,557
Mortgage-backed securities 988,352 964,536
------------ ------------
$2,411,799 $2,304,487
During the years ended December 31, 1999, 1998 and 1997, fixed maturities
classified as held to maturity were sold with amortized cost of $8,466,
$31,117 and $29,561, respectively. Net gains and losses on these sales were
not significant. The sales of these fixed maturities were due to
significant deterioration in the issuers' creditworthiness.
In addition, fixed maturities available for sale were sold during 1999 with
proceeds of $469,126 and gross realized gains and losses of $10,374 and
$4,147 respectively. Fixed maturities available for sale were sold during
1998 with proceeds of $48,492 and gross realized gains and losses of $2,835
and $4,516, respectively. Fixed maturities available for sale were sold
during 1997 with proceeds of $73,366 and gross realized gains and losses of
$1,081 and $1,440, respectively.
At December 31, 1999, bonds carried at $3,277 were on deposit with various
states as required by law.
<PAGE>
2. Investments (continued)
At December 31, 1999, investments in fixed maturities comprised 81 percent
of the Company's total invested assets. These securities are rated by
Moody's and Standard & Poor's (S&P), except for securities carried at
approximately $486 million which are rated by AEFC internal analysts using
criteria similar to Moody's and S&P. A summary of investments in fixed
maturities, at amortized cost, by rating on December 31 is as follows:
Rating 1999 1998
---------------------- ----------- -----------
Aaa/AAA $1,168,144 $1,242,301
Aa/AA 42,859 45,526
Aa/A 52,416 60,019
A/A 422,668 422,725
A/BBB 189,072 228,656
Baa/BBB 995,152 1,030,874
Baa/BB 64,137 79,687
Below investment grade 483,700 498,117
------------ ------------
$3,418,148 $3,607,905
At December 31, 1999, approximately 94 percent of the securities rated
Aaa/AAA were GNMA, FNMA and FHLMC mortgage-backed securities. No holdings
of any other issuer were greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1999, approximately 19 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
---------------------------------- ----------- ----------- ---------- -----------
South Atlantic $194,325 $ -- $198,552 $ 651
Middle Atlantic 118,699 -- 129,284 520
East North Central 126,243 -- 134,165 2,211
Mountain 103,751 -- 113,581 --
West North Central 125,891 513 119,380 9,626
New England 43,345 802 46,103 --
Pacific 41,396 -- 43,706 --
West South Central 31,153 -- 32,086 --
East South Central 7,100 -- 7,449 --
----------- ------------ ----------- ------------
791,903 1,315 824,306 13,008
Less allowance for losses 6,650 -- 8,500 --
----------- ------------ ----------- ------------
$785,253 $ 1,315 $815,806 $13,008
======== ======== ======== =======
<PAGE>
2. Investments (continued)
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
---------- -------------- ---------- ------------
Department/retail stores $232,449 $ 1,315 $253,380 $ 781
Apartments 181,346 -- 186,030 2,211
Office buildings 202,132 -- 206,285 9,496
Industrial buildings 83,186 -- 82,857 520
Hotels/Motels 43,839 -- 45,552 --
Medical buildings 32,284 -- 33,103 --
Nursing/retirement homes 6,608 -- 6,731 --
Mixed Use 10,059 -- 10,368 --
---------- -------------- ---------- ------------
791,903 1,315 824,306 13,008
Less allowance for losses 6,650 -- 8,500 --
----------- -------------- ----------- ------------
$785,253 $ 1,315 $815,806 $13,008
======== ========== ======== =======
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. The Company holds the mortgage
document, which gives it the right to take possession of the property if
the borrower fails to perform according to the terms of the agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1999, the Company's recorded investment in impaired loans
was $5,200 with an allowance of $1,250. At December 31, 1998, the Company's
recorded investment in impaired loans was $1,932 with an allowance of $500.
During 1999 and 1998, the average recorded investment in impaired loans was
$5,399 and $2,736, respectively.
The Company recognized $136, $251 and $nil of interest income related to
impaired loans for the years ended December 31, 1999, 1998 and 1997,
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Balance, January 1 $8,500 $3,718 $2,370
Provision (reduction) for investment losses (1,850) 4,782 1,805
Loan payoffs -- -- (457)
------ --------- -------
Balance, December 31 $6,650 $8,500 $3,718
====== ====== ======
Net investment income for the years ended December 31 is summarized as
follows:
1999 1998 1997
----- ----- ----
Interest on fixed maturities $265,199 $285,260 $278,736
Interest on mortgage loans 63,721 65,351 55,085
Interest on cash equivalents 534 137 704
Other (1,755) (2,493) 1,544
---------- ---------- ----------
327,699 348,255 336,069
Less investment expenses 4,953 8,036 3,801
--------- ---------- ----------
$322,746 $340,219 $332,268
======== ======== ========
</TABLE>
<PAGE>
2. Investments (continued)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Fixed maturities $ 6,534 $ 863 $ 1,638
Mortgage loans (1,650) (4,816) (1,348)
Other investments (1,819) (835) (799)
--------- -------- -------
$ 3,065 $(4,788) $ (509)
========= ======= =======
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
1999 1998 1997
----- ----- ----
Fixed maturities available for sale $(175,458) $(8,032) $57,188
3. Income taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31, consists
of the following:
1999 1998 1997
---- ---- ----
Federal income taxes:
Current $ 15,531 $ 23,227 $17,668
Deferred 711 (9,591) (2,485)
-------- -------- -------
16,242 13,636 15,183
State income taxes-current 433 759 1,462
-------- -------- -------
Income tax expense $ 16,675 $ 14,395 $16,645
======== ======== =======
</TABLE>
Increases (decreases) to the federal income tax provision applicable to
pretax income based on the statutory rate, for the years ended December 31,
are attributable to:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ---------------------
Provision Rate Provision Rate Provision Rate
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes based
on the statutory rate $17,731 35.0% $13,972 35.0% $15,735 35.0%
Increases (decreases) are
attributable to:
Tax-excluded interest (14) -- (35) (0.1) (41) (0.1)
State tax, net of federal benefit 281 0.5 493 1.2 956 2.1
Reduction of mortgage loss
reserve (1,225) (2.4) -- -- -- --
Other, net (98) (0.2) (35) -- (5) --
------ ----- -------- ------ ---- ------
Total income taxes $16,675 32.9 % $14,395 36.1% $16,645 37.0%
======= ===== ======= ==== ======= ====
</TABLE>
<PAGE>
3. Income taxes (continued)
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
Deferred income tax assets: 1999 1998
------- -------
Policy reserves $46,243 $51,298
Unrealized losses on investments 39,678 --
Other 1,070 2,214
-------- --------
Total deferred income tax assets 86,991 53,512
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs 49,490 52,908
Unrealized gains on investments -- 23,803
-------- --------
Total deferred income tax liabilities 49,490 76,711
-------- --------
Net deferred income tax assets (liabilities) $37,501 ($23,199)
======= ========
The Company is required to establish a valuation allowance for any portion
of the deferred income tax assets that management believes will not be
realized. In the opinion of management, it is more likely than not that the
Company will realize the benefit of the deferred income tax assets and,
therefore, no such valuation allowance has been established.
4. Stockholder's equity
Retained earnings available for distribution as dividends to IDS Life are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $58,223 and $45,716 as of December
31, 1999 and 1998, respectively. In addition, dividends in excess of
$15,241 would require approval by the Insurance Department of the state of
Indiana.
Statutory net income and stockholder's equity as of December 31, are
summarized as follows:
1999 1998 1997
--------- --------- -------
Statutory net income $ 15,241 $ 37,902 $ 23,589
Statutory stockholder's equity 343,094 330,588 302,264
5. Related party transactions
The Company has purchased interest rate floors from IDS Life and entered
into an interest rate swap with IDS Life to manage its exposure to interest
rate risk. The interest rate floors had a carrying amount of $8,258 and
$6,651 at December 31, 1999 and 1998, respectively. The interest rate swap
is an off balance sheet transaction.
The Company has no employees. Charges by IDS Life for services and use of
other joint facilities aggregated $38,931, $28,482 and $24,535 for the
years ended December 31, 1999, 1998 and 1997, respectively. Certain of
these costs are included in deferred policy acquisition costs.
<PAGE>
6. Lines of credit
The Company has an available line of credit with AEFC aggregating $50,000.
The rate for the line of credit is established by reference to various
indices plus 20 to 45 basis points, depending on the term. There were no
borrowings outstanding under this agreement at December 31, 1999 or 1998.
7. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk, including hedging
specific transactions. The Company does not hold derivative instruments for
trading purposes. The Company manages risks associated with these
instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate. The Company is
not impacted by market risk related to derivatives held for non-trading
purposes beyond that inherent in cash market transactions. Derivatives are
largely used to manage risk and, therefore, the cash flow and income
effects of the derivatives are inverse to the effects of the underlying
transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit risk related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty, and requiring
collateral, where appropriate. A vast majority of the Company's
counterparties are rated A or better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors is measured by
replacement cost of the contracts. The replacement cost represents the fair
value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over
the life of the agreement. Notional amounts are not recorded on the balance
sheet. Notional amounts far exceed the related credit exposure.
The Company's holdings of derivative financial instruments are as follows:
<TABLE>
<CAPTION>
Notional Carrying Fair Total Credit
December 31, 1999 Amount Amount Value Exposure
----------------- -------- -------- ------ ------------
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 900,000 $ 3,212 $ 4,437 $ 4,437
Interest rate floors 2,000,000 8,258 2,251 2,251
Off balance sheet assets:
Interest rate swaps 2,000,000 -- 18,274 18,274
--------- -------- --------
$11,470 $24,962 $24,962
======= ======= =======
<PAGE>
7. Derivative financial instruments (continued)
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
----------------- -------- -------- ------ ------------
Assets:
Interest rate caps $ 900,000 $ 5,452 $ 1,518 $ 1,518
Interest rate floors 1,000,000 6,651 17,798 17,798
Off balance sheet liabilities:
Interest rate swaps 1,000,000 -- (33,500) --
--------- ---------- --------
$12,103 ($ 14,184) $19,316
======= =========== =======
</TABLE>
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. All interest rate caps, floors and
swaps will expire on various dates from 2000 to 2006.
Interest rate caps, floors and swaps are used to manage the Company's
exposure to interest rate risk. These instruments are used primarily to
protect the margin between interest rates earned on investments and the
interest rates credited to related annuity contract holders.
8. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair value of life insurance obligations, receivables and all
non-financial instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets are also excluded. Management believes
the value of excluded assets and liabilities is significant. The fair value
of the Company, therefore, cannot be estimated by aggregating the amounts
presented.
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
---------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $1,006,349 $984,103 $1,081,193 $1,126,732
Available for sale 2,304,487 2,304,487 2,594,858 2,594,858
Mortgage loans on real estate (Note 2) 785,253 770,095 815,806 874,064
Derivative financial instruments (Note 7) 11,470 24,962 12,103 19,316
Separate account assets (Note 1) 220,994 220,994 123,185 123,185
Financial Liabilities
Future policy benefits for fixed annuities $3,905,849 $3,778,945 $4,152,059 $4,000,789
Separate account liabilities 220,994 209,942 123,185 115,879
Derivative financial instruments (Note 7) -- -- -- 33,500
</TABLE>
At December 31, 1999 and 1998, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $15,633 and $14,793, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 1999
and 1998.
<PAGE>
8. Fair values of financial instruments (continued)
The fair values of deferred annuities and separate account liabilities are
estimated as the carrying amount less applicable surrender charges. The
fair value for annuities in non-life contingent payout status is estimated
as the present value of projected benefit payments at rates appropriate for
contracts issued in 1999 and 1998.
9. Commitments and contingencies
In January 2000, AEFC reached an agreement in principle to settle three
class-action lawsuits. The Company had been named as a co-defendant in one
of these lawsuits. It is expected the settlement will provide $215 million
of benefits to more than 2 million participants. The agreement in principle
to settle also provides for release by class members of all insurance and
annuity market conduct claims dating back to 1985 and is subject to a
number of contingencies including a definitive agreement and court
approval. The portion of the settlement allocated to the Company did not
have a material impact on the Company's financial position or results from
operations.
10. YEAR 2000 ISSUE (unaudited)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than 2000. This could result in the failure of major systems or
miscalculations, which could have a material impact on the operations of
the Company. All of the major systems used by the Company are maintained by
AEFC and are utilized by multiple subsidiaries and affiliates of AEFC. The
Company's businesses are heavily dependent upon AEFC's computer systems and
have significant interaction with systems of third parties.
A comprehensive review of AEFC's computer systems and business processes,
including those specific to the Company, was conducted to identify the
major systems that could be affected by the Year 2000 issue. Steps were
taken to resolve potential problems including modification to existing
software and the purchase of new software. As of December 31, 1999, AEFC
had completed its program of corrective measures on its internal systems
and applications, including Year 2000 compliance testing. As of December
31, 1999, AEFC had also completed an evaluation of the Year 2000 readiness
of other third parties whose system failures could have an impact on the
Company's operations.
AEFC's Year 2000 project also included establishing Year 2000 contingency
plans for all key business units. Business continuation plans, which
address business continuation in the event of a system disruption, are in
place for all key business units. At December 31, 1999, these plans had
been amended to include specific Year 2000 considerations.
In assessing its Year 2000 initiatives and the results of actual production
since January 1, 2000, management believes no material adverse consequences
were experienced, and there was no material effect on the Company's
business, results of operations, or financial condition as a result of the
Year 2000 issue.
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Performance Information............................p. 3
Calculating Annuity Payouts........................p.13
Rating Agencies....................................p.15
Principal Underwriter..............................p.15
Independent Auditors...............................p.15
Financial Statements
<PAGE>
Please check the appropriate box to receive a copy of the Statement of
Additional Information for:
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[ ] American Express(R) Variable Portfolio Funds
[ ] AIM Variable Insurance Funds
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[ ] Fidelity Variable Insurance Products Funds - Service Class
[ ] Franklin Templeton Variable Insurance Products Trust
[ ] MFS(R) Variable Insurance Trust(SM)
[ ] Putnam Variable Trust - Class IB shares
MAIL YOUR REQUEST TO:
American Enterprise Life Insurance Company
829 AXP Financial Center
Minneapolis, MN 55474
We will mail your request to:
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Address _____________________________________________________________________
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