Prospectus
Feb. 14, 1999
American Express Variable Annuity
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)
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Telephone: 800-333-3437
This prospectus contains information that you should know before investing. You
also will receive the prospectuses for:
o American Express(R) Variable Portfolio Funds
Please read the prospectuses carefully and keep them for future reference. This
contract is available for qualified and nonqualified plans.
The contract provides for a credit of 1% on net current purchase payments that
bring total payments less withdrawals to $100,000 or higher. 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 adequacy or accuracy 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.
<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 Financial Information
Table of Contents of the Statement of Additional Information
<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 - An individual annuity contract or a certificate showing your interest
under a group annuity contract.
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 -- Mutual funds and/or portfolios that are investment options under your
contract, each with a different investment objective. 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 based on
your net current payment.
Qualified annuity -- A contract that you purchase for one of the following
retirement plans that is subject to applicable federal law and any rules of the
plan itself:
o Individual Retirement Annuities (IRAs), including Roth IRAs
o Simplified Employee Pension (SEP) plans
<PAGE>
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.
<PAGE>
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
investments (purchase payments) that may earn returns that
increase the value of the contract. The contract provides
lifetime or other forms of payouts beginning at a specified
date (the retirement date).
Free look period: You may return your contract to our office within 10 days
after it is delivered to you 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:
o 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. __)
o the fixed accounts, which earn interest at rates that we
adjust periodically. (p. __)
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.
o Minimum initial purchase payment -- $2,000
($5,000 in PA, SC, TX, WA). The $2,000 minimum does
not apply if you enroll in the Systematic Investment
Program (SIP).
o Minimum additional purchase payment -- $100 ($50 with
SIP payments).
o Maximum total purchase payments (without prior
approval) -- $1,000,000. (p.__ )
Transfers: Subject to certain restrictions you currently may
redistribute your money among the subaccounts and the fixed
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 fixed accounts and subaccounts. Fixed account
transfers are subject to special restrictions. (p. __)
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. __)
<PAGE>
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. --)
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. --)
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. __)
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. Roth IRAs, however, may grow
and be distributed tax free if you meet certain distribution
requirements. (p. __)
Charges:
o $40 annual contract administrative charge;
o a 0.15% variable account administrative charge;
o with qualified contracts, a 0.85% mortality and expense
risk fee applies;
o with non-qualified contracts, a 1.10% mortality and
expense risk fee applies;
o if the Maximum Anniversary Value Death Benefit Rider is
selected, an additional 0.10% mortality and expense
risk fee;
o if the Guaranteed Minimum Income Benefit Rider is
selected, an annual fee based on the adjusted contract
value (currently at 0.30%);
o if the Performance Credit Rider is selected, an annual
fee of 0.15% of the contract value. (the Performance
Credit Rider cannot be selected with the Guaranteed
Minimum Income Benefit Rider);
o withdrawal charge;
o 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); and
o the operating expenses of the funds.
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
you bear directly or indirectly for 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.
<PAGE>
Contract owner expenses:
Withdrawal charge: contingent deferred sales charge as a percentage of
purchase payment withdrawn.
Seven-year schedule
Years from purchase Withdrawal charge
payment receipt percentage
1 8%
2 8
3 7
4 7
5 6
6 5
7 3
Thereafter 0
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
contract and 1.61% under a non-qualified contract. This withdrawal
charge cannot be greater than 9% of the amount available for payouts
under the Plan.
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%
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>
<S> <C> <C>
- --------------------------------------------------------------- ------------------------- ---------------------------
Qualified Contracts Non-Qualified Contracts
- --------------------------------------------------------------- ------------------------- ---------------------------
- --------------------------------------------------------------- ------------------------- ---------------------------
Variable account administrative charge 0.15% 0.15%
- --------------------------------------------------------------- ------------------------- ---------------------------
- --------------------------------------------------------------- ------------------------- ---------------------------
Mortality and expense risk fee 0.85% 1.10%
- --------------------------------------------------------------- ------------------------- ---------------------------
- --------------------------------------------------------------- ------------------------- ---------------------------
Maximum Anniversary Value Rider 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 1.10% 1.35%
- --------------------------------------------------------------- ------------------------- ---------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Annual operating expenses of the funds after fee waivers and/or expense
reimbursements, if applicable, as a percentage of average daily net assets
- ------------------------------------------------------------------------- ----------------- ------- -------------- -----------
Management 12b-1 Other
Fees Fees Expenses Total
- ------------------------------------------------------------------------- ----------------- ------- -------------- -----------
- ------------------------------------------------------------------------- ----------------- ------- -------------- -----------
AXPSM 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 .61% .13 .07 .81%1
- ------------------------------------------------------------------------- ----------------- ------- -------------- -----------
- ------------------------------------------------------------------------- ----------------- ------- -------------- -----------
Small Cap Advantage Fund .79% .13 .31 1.23%2
- ------------------------------------------------------------------------- ----------------- ------- -------------- -----------
1 Based on annual expenses as of August 31, 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 Variable Portfolio - Federal Income Fund and
0.43% and 1.35% for AXP Variable Portfolio - Small Cap Advantage Fund.
</TABLE>
<PAGE>
Examples: *
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment if you have a
qualified contract without any optional riders and assuming a 5% annual return
and.
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXPSM Variable Portfolio - 1 year 3 years 1 year 3 years
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
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 99.58 130.54 19.58 60.54
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 103.88 143.54 23.88 73.54
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment if you have a
qualified contract 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....
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXPSM Variable Portfolio - 1 year 3 years 1 year 3 years
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund $102.52 $139.85 $22.52 $69.85
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund 104.47 145.74 24.47 75.74
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Managed Fund 103.24 142.02 23.24 72.02
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund 103.75 143.57 23.75 73.57
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 108.06 156.54 28.06 86.54
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment if you have a
non-qualified contract without any optional riders and assuming a 5% annual
return and....
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXPSM Variable Portfolio - 1 year 3 years 1 year 3 years
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
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 102.14 138.29 21.14 68.29
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 106.45 151.22 26.45 81.22
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment if you have a
non-qualified contract 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....
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AXPSM Variable Portfolio - 1 year 3 years 1 year 3 years
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Cash Management Fund $105.09 $147.60 $25.09 $77.60
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Federal Income Fund 107.03 153.47 27.03 83.47
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Managed Fund 105.80 149.76 25.80 79.76
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
New Dimensions Fund 106.32 151.31 26.32 81.31
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Small Cap Advantage Fund 110.62 164.21 30.62 94.21
- -------------------------------------------------------------------------------------------------------------------------------
*In these examples, the $40 contract administrative charge is approximated as a
.10% 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 certain arrangements under which we are compensated by the funds'
advisors and/or distributors for the administrative services we provide to the
funds.
</TABLE>
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)
We have not provided any condensed financial information for the subaccounts
because they are new and do not have any history.
Financial Statements
You can find our audited financial statements later in this prospectus. The SAI
does not include the audited financial statements of the subaccounts because
they are new and do not have any assets.
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:
o the contract administrative charge,
o the variable account administrative charge,
o any Death Benefit Rider fee,
o any Guaranteed Minimum Income Benefit Rider fee,
o the Performance Credit Rider fee,
o mortality and expense risk fee, and
o withdrawal charge (assuming a withdrawal at the end of the illustrated
period).
<PAGE>
We also may make optional total return quotations that do not reflect deduction
of the withdrawal charge (assuming no withdrawal) and the Guaranteed Minimum
Income Benefit Rider fee. Total return quotations may be shown 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
<TABLE>
<CAPTION>
You may allocate payments to any or all the subaccounts of the variable account
that invest in shares of the following funds:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Subaccount Investing In Investment Objectives and Policies Investment Advisor or Manager
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Objective: maximum current income consistent with IDS Life Insurance Company (IDS
Portfolio- Cash liquidity and conservation of capital. Invests in money Life), investment manager;
Management Fund market securities. American Express Financial
Corporation (AEFC) investment
advisor.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Objective: a high level of current income and safety of IDS Life, investment manager;
Portfolio- Federal principal consistent with an investment in U.S. AEFC, investment advisor.
Income Fund government and government agency securities. Invests
primarily in debt obligations issued or guaranteed as
to principal and interest by the U.S. government, its
agencies or instrumentalities.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Objective: maximum total investment return through a IDS Life, investment manager;
Portfolio- Managed Fund combination of capital growth and current income. AEFC, investment advisor.
Invests primarily in stocks, convertible
securities, bonds and money market
instruments.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Objective: long-term growth of capital. Invests IDS Life, investment manager;
Portfolio- New primarily in common stocks of U.S. and foreign AEFC, investment advisor.
Dimensions Fund companies showing potential for significant growth.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Objective: long-term capital growth. Invests primarily IDS Life, investment manager;
Portfolio- Small Cap in equity securities of small companies that are often AEFC, investment advisor.
Advantage Fund included in the S&P SmallCap 600 Index or the Russell
2000 Index.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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.
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 qualified plans. It is possible that in the
future, it may be disadvantageous for variable annuity accounts and variable
life insurance accounts and/or qualified 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 qualified 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 qualified plan accounts, you would
not bear any expenses associated with establishing separate funds. Please refer
to the fund prospectuses for risk disclosure regarding simultaneous investments
by variable annuity, variable life insurance and qualified plan accounts.
The IRS issued final regulations relating to the diversification requirements
under Section 817(h) of the Internal Revenue Code of 1986, as amended (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 Internal Revenue Service (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 also allocate purchase payments to one or more of the Guarantee Period
Accounts with Guarantee Periods ranging from two to ten years. The minimum
required investment in each Guarantee Period Account is $1,000. 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.
<PAGE>
We have no specific formula for determining the rate of interest that we declare
as future interest rates on the Guarantee Period Accounts. We will declare the
interest rates from time to time based on our analysis of current market
conditions. In addition, we also may consider various other factors in
determining the interest rates for a given Guarantee Period including regulatory
and tax requirements; sales commissions and administrative expenses we bear;
general economic trends; and competitive factors.
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:
o 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;
o 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;
o Other debt instruments which are unrated or rated below investment grade,
limited to 10% of assets at the time of purchase; and
o 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.
<PAGE>
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 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 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.
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 or your sales representative will send an application 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):
o the optional Maximum Anniversary Value Death Benefit Rider;
o an optional Guaranteed Minimum Income Benefit Rider;
o the optional Performance Credit Rider (cannot be selected with the
Guaranteed Minimum Income Benefit rider);
o the one-year fixed account, Guarantee Period Accounts and/or subaccounts in
which you want to invest;
o how you want to make purchase payments; and
o a beneficiary.
<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 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:
o no earlier than the 60th day after the contract's effective date; and
o 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:
o on or after the date the annuitant reaches age 59 1/2; and
o for IRAs and SEPs, by April 1 of the year following the calendar year when
the annuitant reaches age 701/2.
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: $2,000 ($5,000 in PA, WA, SC, TX)
---------------------------------
Minimum additional purchase payments:
If paying by SIP*: If paying by any other method:
$50 $100
*Payments made using SIP must total $2,000 before you can make partial
withdrawals.
<PAGE>
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 qualified 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:
Regular mail:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Enterprise Life Insurance Company
Attention: Unit 829
733 Marquette Avenue
Minneapolis, MN 55402
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
withdrawals) to $100,000 or more.
This credit is 1% of the net current payment (current payment less the amount of
partial withdrawals that exceed all premium purchase payments). If you make
subsequent payments which cause the contract to be eligible for the credit, we
will add credits attributable to premium payments. We apply this credit
immediately. We allocate the credit to the fixed accounts and subaccounts in the
same proportions as your purchase payment on the date we add credits to your
contract.
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.
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 after seven years.
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.
<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 the charge at
the time of withdrawal regardless of the contract value or purchase payments
made. 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 the 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.
The subaccounts pay us the mortality and expense risk fee they accrued as
follows:
o first, to the extent possible, the subaccounts pay this fee from any
dividends distributed from the funds in which they invest;
o 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.
<PAGE>
Death Benefit Rider fee
We charge a 0.10% 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 subaccounts. We
cannot increase the Death Benefit Rider fees.
Guaranteed Minimum Income Benefit Rider fee
We charge a fee 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. (Your initial purchase payment is
considered 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.
<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:
Years from purchase payment Withdrawal charge
receipt percentage
1 8%
2 8
3 7
4 7
5 6
6 5
7 3
Thereafter 0
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:
o 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
o We received these payments
- $10,000 Jan. 1, 2000;
- $8,000 Feb. 28, 2007; and
- $6,000 Feb. 20, 2008; and
o The owner withdraws the contract for its total withdrawal value of $38,101
on Aug. 5, 2010 and had not made any other withdrawals during that contract
year; and
o The prior anniversary Jan. 1, 2009 contract value was $38,488.
<TABLE>
<CAPTION>
<S> <C> <C>
Withdrawal Charge Explanation
$ 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>
<PAGE>
For a partial withdrawal that is subject to a withdrawal charge, the amount we
actually withdraw from your contract will be the amount you request plus any
applicable withdrawal charge. We apply the withdrawal charge to this total
amount. We pay you the amount you requested. If you make a full withdrawal of
your contract, we also will deduct the $40 contract administrative charge.
Waiver of withdrawal charges We do not assess withdrawal charges for:
o withdrawals of any contract earnings;
o amounts totaling up to 10% of your prior contract anniversary contract
value to the extent it exceeds contract earnings;
o required minimum distributions from a qualified annuity (for those amounts
required to be distributed from the contract described in this prospectus);
o contracts settled using an annuity payout plan;
o 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);
o amounts we refund to you during the free look period; and
o 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
o 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.
o 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.
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 contract, 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 non-qualified contract, 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 this Plan.
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 (up to
3.5%). These taxes depend upon your state of residence or the state in which the
contract was sold. Currently, we deduct any applicable premium 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.
<PAGE>
Valuing Your Investment
We value your fixed accounts and subaccounts as follows:
Fixed accounts: We value the amounts you allocated to the fixed accounts
directly in dollars. The value of a fixed account equals:
o the sum of your purchase payments and transfer amounts allocated to the
one-year fixed account and the Guarantee Period Accounts;
o plus any purchase payment credits allocated to the fixed accounts;
o plus interest credited;
o minus the sum of amounts withdrawn after the MVA (including any applicable
withdrawal charges) and amounts transferred out;
o minus any prorated contract administrative charge;
o minus any prorated portion of the Guaranteed Minimum Income Benefit Rider
fee (if applicable); and
o 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.
Net investment factor
We determine the net investment factor by:
o 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
o dividing that sum by the previous adjusted net asset value per share; and
o 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.
<PAGE>
Factors that affect subaccount accumulation units
Accumulation units may change in two ways: in number and in value. Here are the
factors that influence those changes:
The number of accumulation units you own may fluctuate due to:
o additional purchase payments you allocate to the subaccounts;
o any purchase payment credits allocated to the subaccounts;
o transfers into or out of the subaccounts;
o partial withdrawals;
o withdrawal charges;
o prorated portions of the contract administrative charge;
o prorated portions of the Guaranteed Minimum Income Benefit Rider fee (if
selected); and/or
o prorated portion of the Performance Credit Rider fee (if selected).
Accumulation unit values will fluctuate due to:
o changes in funds' net asset value;
o dividends distributed to the subaccounts;
o capital gains or losses of funds;
o fund operating expenses; and/or
o 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 Guarantee Period Accounts (two year only) 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>
<PAGE>
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 with this
strategy will depend upon your willingness to continue to invest regularly
through periods of low price levels. Dollar-cost averaging can be an effective
way to help meet your long-term goals. For specific features contact us.
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. (For information on transfers after annuity
payouts begin, see "Transfer policies" below.)
Transfer policies
o 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.
o 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.
o 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.
o 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.
<PAGE>
o We will not accept requests for transfers from the one-year fixed account
at any other time.
o 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, your choices of
subaccounts may be limited.
o 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:
Regular mail:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Enterprise Life Insurance Company
Attention: Unit 829
733 Marquette Avenue
Minneapolis, MN 55402
Minimum amount
Transfers or
withdrawals: $500 or entire account balance
Maximum amount
Transfers or
withdrawals: Contract value
2 Your sales representative can help you set up automated
By automated transfers or partial withdrawals among your subaccounts
transfers and
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.
o 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.
o Automated withdrawals may be restricted by
applicable law under some contracts.
o You may not make additional purchase payments
if automated partial withdrawals are in effect.
o 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
<PAGE>
3 Call between 7 a.m. and 6 p.m. Central time:
By phone:
800-333-3437 or
(612) 671-7700 (Minneapolis/St. Paul area)
Minimum amount
Transfers or
withdrawals: $500 or entire account balance
Maximum amount
Transfers: Contract value
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.
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") 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:
o payable to owner;
o mailed to address of record.
NOTE: We will charge you a fee if you request express mail delivery.
<PAGE>
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.
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. The benefit paid will be based on the death benefit
coverage you select 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 Premium Death Benefit
This option is required 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."
<PAGE>
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:
o The contract is purchased with a payment of $25,000 on Jan. 1, 2000.
o On Jan. 1, 2001 an additional premium payment of $5,000 is made.
o On March 1, 2001 the contract value has fallen to $28,000. The owner takes
a $1,500 partial withdrawal leaving a contract value of $26,500.
o On March 1, 2002 the contract value has fallen to $25,000.
The death benefit on March 1, 2002 is calculated as follows:
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
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
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."
<PAGE>
Example:
o The contract is purchased with a payment of $20,000 on Jan. 1, 2000.
o On Jan. 1, 2001 (the first contract anniversary) the contract value has
grown to $24,000.
o On March 1, 2001 the contract value has fallen to $22,000, at which point
the owner takes a $1,500 partial withdrawal, leaving a contract value of
$20,500.
The death benefit on March 1, 2001 is calculated as follows:
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
If your spouse is sole beneficiary under a nonqualified annuity 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.
Under a qualified annuity, if the annuitant dies before the Code requires
distributions to begin, and the spouse is the only beneficiary, the spouse may
keep the contract as owner until the date on which the annuitant would have
reached age 70 1/2 or any other date permitted by the Code. To do this, the
spouse must give us written instructions within 60 days after we receive proof
of death. The Guaranteed Minimum Income Benefit Rider, if selected, is then
terminated.
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:
o the beneficiary asks us in writing within 60 days after we receive proof of
death; and
o payouts begin no later than one year after your death, or other date as
permitted by the Code; and
o 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").
Guaranteed Minimum Income Benefit Rider
A 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.
<PAGE>
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 of Maximum Anniversary Value is equal to the
benefit provided by the death benefit rider.
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 5 years of payments and
purchase payment credits";
(b) total payments and purchase payment credits less prior 5 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 5 years of payments and
purchase payment credits";
"Market value adjusted prior 5 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: The following conditions apply to the
election of the rider:
o you must elect the rider at the time you purchase your contract along with
the corresponding death benefit rider option, and
o the annuitant must be age 75 or younger on the contract date.
<PAGE>
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 Money Market 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: The following conditions apply to the exercise of the
rider:
o 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,
o the annuitant on the retirement date must be between 50 and 86 years
old, and
o 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
Terminating the rider: The following conditions apply to the termination of any
of the three riders:
o you may terminate the rider within 30 days after the first anniversary
of the effective date of the rider.
o you may terminate the rider any time after the end of the 7 year
waiting period of the rider.
o 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.
o the rider will terminate on the contract
anniversary after the annuitant's 86th birthday.
Example:
o 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.
o There are no additional purchase payments and no partial withdrawals.
o The money is fully allocated to the subaccounts.
o 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.
o The Maximum Anniversary Value is $180,000 on the 10th anniversary and
$220,000 on the 15th anniversary.
o The contract is within 30 days after contract anniversary.
<TABLE>
<CAPTION>
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:
Fixed Annuity Payout Options
Minimum Guaranteed Annual Income
<S> <C> <C> <C> <C>
Contract Anniversary At Exercise Minimum Guaranteed Benefit Base Plan A -- Plan B -- Plan D --
- ------------------------ ------------------------------- --------- --------- ---------
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.
<PAGE>
Performance Credit Rider
If this rider is available in your state, you may choose to add this benefit to
your contract at issue. This rider cannot be elected at the same time that a
Guaranteed Minimum Base Benefit rider is chosen. 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 10th 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 credit, less adjusted partial
withdrawals and less purchase payments and credits made in the prior five
years. Such credit is made at the 10th 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; Plan E cannot be chosen) within 60 days of the 10th rider
anniversary and receive an additional 5% credit (for a total of 10% credit)
as calculated in (a).
Following your 10th 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 10th rider anniversary.
On the 10th rider anniversary and every 10 years thereafter while you have the
contract, the 10 year calculation period restarts if (a) is elected. The
contract value (after any credits made) on that anniversary is used 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 10 year period as
described above.
Target Value
The Target Value at each anniversary is equal to the Target Value at the prior
anniversary, any purchase payments, purchase payment credits, and adjusted
partial withdrawals made during the year, accumulated at an effective annual
rate of 7.2%.
Adjusted partial withdrawals
We calculated 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 10-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 10 year
calculation period will then restart at the end of the new 10 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 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.
<PAGE>
Terminating the rider: The following conditions apply to the termination of the
rider
o you may terminate the rider within 30 days following the first anniversary
after the effective date of the rider;
o you may terminate the rider within 30 days following the tenth anniversary
of the effective date of the rider;
o 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:
o The contract is purchased with a payment of $100,000 on January 1, 2000 and
a $1,000 purchase payment credit is added to the contract
o There are no additional purchase payments and no partial withdrawals
o On January 1, 2010, the contract value is $200,000
o The credit on January 1, 2010 is determined as:
Target Value on January 1, 2010 = 101,000 x (1.072)^10 =
101,000 x 2.00423 = 202,427
As the target value of $202,427 is greater than the contract value
of $200,000, a credit is made to the contract equal to $5,050 (or
5% of the purchase payment and credits of $101,000). Your total
contract value on January 1, 2010 would be $205,050.
o 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 credit of
$5,050) to determine your monthly income.
o 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 credit determination made on
January 1, 2020.
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.
The amount available for payouts under the plan you select is the contract value
on your retirement date (less any applicable premium tax). 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:
o the annuity payout plan you select;
o the annuitant's age and, in most cases, sex;
o the annuity table in the contract; and
o the amounts you allocated to the accounts at the settlement.
<PAGE>
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.
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:
o 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 have made only one monthly payout, we will not make
any more payouts.
o 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.
o 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.
o 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.
o 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 or if the period you chose
is less than your life expectancy as specified by tax law.
<PAGE>
Restrictions for some qualified plans: If you purchased a qualified annuity, you
may be required to select a payout plan that provides for payouts:
o over the life of the annuitant;
o over the joint lives of the annuitant and a designated beneficiary;
o for a period not exceeding the life expectancy of the annuitant; or
o 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.
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, any increase in your contract value 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 are normally 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.
Qualified annuities: We designed this contract for use with qualified retirement
plans. 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 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 annuities 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.
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 qualified retirement plan, such amounts are not
considered to be part of your investment in the contract and will be taxed when
paid to you.
<PAGE>
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 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:
o because of your death;
o because you become disabled (as defined in the Code);
o 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
o 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.
<PAGE>
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.
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:
o the reserve held in each subaccount for your contract;
o 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:
o laws or regulations change,
o existing funds become unavailable, or
o 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:
o add new subaccounts;
o combine any two or more subaccounts;
o add subaccounts investing in additional funds;
o transfer assets to and from the subaccounts or the variable account; and
o eliminate or close any subaccounts.
<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 IDS Tower 10,
Minneapolis, MN 55440. 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 will 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.
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 80 South Eighth Street, Minneapolis, MN 55402. Its 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 alleged that the sale of annuities in tax-deferred contributory
retirement investment plans (e.g., IRAs) is never appropriate. The plaintiffs
purported to represent a class consisting of all persons who made similar
purchases. The plaintiffs sought damages in an unspecified amount.
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.
<PAGE>
Additional Information About American Enterprise Life
<TABLE>
<CAPTION>
Selected financial data
The following selected financial data for American Enterprise Life should be
read in conjunction with the financial statements and notes.
Years ended Dec. 31, (thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1999* 1998** 1998 1997 1996 1995 1994
Net investment income $ 243,525 $ 258,163 $ 340,219 $ 332,268 $ 271,719 $ 223,706 $ 162,201
Net loss on investments 4,897 (1,526) (4,788) (509) (5,258) (1,154) (1,190)
Other 5,898 5,890 7,662 6,329 5,753 4,214 2,753
Total revenues $ 254,320 $ 262,527 $ 343,093 $ 338,088 $ 272,214 $ 226,766 $ 163,764
Income before income taxes $ 43,229 $ 28,865 $ 36,421 $ 44,958 $ 35,735 $ 33,440 $ 30,212
Net income $ 29,178 $ 18,475 $ 22,026 $ 28,313 $ 22,823 $ 21,748 $ 19,638
Total assets $4,757,513 $5,033,598 $4,885,621 $4,973,413 $4,425,837 $3,570,960 $2,712,286
* Nine months ended Sept. 30, 1999.
** Nine months ended Sept. 30, 1999.
</TABLE>
Management's discussion and analysis of financial condition and results of
operations
Nine months ended September 30, 1999 Compared to the nine months ended September
30 1998:
Net income increased 58 percent to $29 million for the nine months ended
September 30, 1999. A decrease in benefits and expenses, driven primarily by a
decrease in interest credited on investment contracts and a decrease in
amortization of deferred policy acquisition costs more than offset a decrease in
revenues, driven primarily by a decrease in net investment income.
Total revenues decreased to $254 million for the nine months ended September 30,
1999, compared to $263 million for the same period in 1998. The decrease is
primarily due to a decrease in net investment income resulting from a decrease
in average invested assets.
Net realized gains (losses) on investments were $4.9 million for the nine months
ended September 1999, compared to $(1.5) million for the same period in 1998.
The Company incurs realized losses when investments are sold at a loss and when
a decline in fair value of a fixed maturity investment is determined to be other
than temporary and it is written down to fair value.
Total benefits and expenses decreased 9.7 percent to $211 million for the nine
months ended September 30, 1999 compared to $234 million for the same period in
1998. The largest component of expenses, interest credited on investment
contracts, decreased to $157 million for the period, reflecting a decrease in
annuities in force. Amortization of deferred policy acquisition costs decreased
to $31 million for the nine months ended September 30, 1999 compared to $43
million for the same period in 1998. This decrease was primarily due to
accelerating amortization in 1998 to reflect actual lapse experience on certain
fixed annuities as well as lower deferred policy acquisition cost balances.
1998 Compared to 1997:
Net income decreased 22 percent to $22 million in 1998, compared to $28 million
in 1997. An increase in revenues, resulting primarily from an increase in net
investment income was more than offset by an increase in benefits and expenses,
resulting primarily from an increase in amortization of deferred policy
acquisition costs.
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, partially offset by an increase in net realized loss on
investments. Net investment income, the largest component of revenues, increased
primarily as a result of an increase in investment yields.
Contractholder charges, which consist primarily of charges on annuity contracts,
increased 12 percent to $6.4 million in 1998, compared with $5.7 million in
1997. This increase is primarily the result of an increase in surrender charges.
Net realized loss on investments increased to $4.8 million in 1998, compared to
$0.5 million in 1997. The Company incurs realized losses when investments are
sold at a loss and when a decline in the fair value of a fixed maturity
investment is determined to be other than temporary and it is written down to
fair value.
Total benefits and expenses increased 4.6 percent to $307 million in 1998. The
largest component of expenses, interest credited on investment contracts,
decreased to $229 million, reflecting a decrease in 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
accelerating amortization to reflect actual lapse experience on certain fixed
annuities.
1997 Compared to 1996:
Net income increased 24 percent to $28 million in 1997, compared to $23 million
in 1996. This growth resulted primarily from an increase in net investment
income, partially offset by an increase in interest credited on investment
contracts.
<PAGE>
Total revenues increased to $338 million in 1997, compared with $272 million in
1996. The increase is primarily due to an increase in net investment and a
decrease in net realized loss on investments. Net investment income, the largest
component of revenues, increased primarily as a result of an increase in
investments owned and a slight increase investment yields.
Contractholder charges, which consist primarily of charges on annuity contracts,
increased 3.6 percent to $5.7 million in 1997, compared with $5.5 million in
1996. This increase is primarily the result of an increase in surrender charges.
Net realized loss on investments decreased to $0.5 million in 1997, compared to
$5.3 million in 1996. The Company incurs realized losses when investments are
sold at a loss and when a decline in the fair value of a fixed maturity
investment is determined to be other than temporary and it is written down to
fair value.
Total benefits and expenses increased to $293 million in 1997. The largest
component of expenses, interest credited on investment contracts, increased 21
percent to 231 million compared to $192 million in 1996. Amortization of
deferred policy acquisition costs increased to $37 million compared to $31
million in 1996. These increases were due primarily to increased aggregate
amounts in force.
Risk Management
The sensitivity analysis discussed below estimates the effects of hypothetical
sudden and sustained change in the applicable market conditions on the ensuing
year's earnings based on year-end positions. The market change, assumed to occur
as of year-end, is a 100 basis point increase in market interest rates.
Computations of the prospective effect of the hypothetical interest rate change
is based on numerous assumptions, including relative levels of market interest
rates, as well as the levels of assets and liabilities. The hypothetical change
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 change actually occurred over time. As a
result, actual earnings effects in the future will differ from those quantified
below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a competitive
rate of return on their investments while minimizing risk, and to provide a
dependable and targeted spread between the interest rate earned on investments
and the interest rate credited to contractholders' accounts. The Company does
not invest in securities
to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1998, would be appoximately $3 million.
<PAGE>
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by premiums,
investment income, proceeds from sales of investments as well as maturities and
periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses 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
short-term sources of funds. No borrowings were outstanding under the agreement
at December 31, 1998. At December 31, 1998, outstanding reverse repurchase
agreements totaled $51 million.
At December 31, 1998, investments in fixed maturities comprised 82 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, 1998, 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, 1998, net unrealized appreciation on fixed maturities held to
maturity included $52 million of gross unrealized appreciation and $7 million of
gross unrealized depreciation. Net unrealized appreciation on fixed maturities
available for sale included $102 million of gross unrealized appreciation and
$34 million of gross unrealized depreciation.
At December 31, 1998, the Company had an allowance for losses on mortgage loans
totaling $8.5 million.
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. The computation involves applying
factors to various statutory financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards provide for regulatory attention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. As of December 31, 1998, the Company's total adjusted capital was well
in excess of the levels requiring regulatory attention.
<PAGE>
Year 2000
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 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. At 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.
Investments
Of our total investments of $4,503,960,000 at Dec. 31, 1998, 28% was invested in
mortgage-backed securities, 53% in corporate and other bonds, 18% in primary
mortgage loans on real estate and the remaining 1% in other investments.
<PAGE>
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, 1998, 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.
<PAGE>
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.
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: IDS Tower 10,
Minneapolis, MN 55440-0010 except for Mr. Mannweiler who is an independent
director.
**Mr. Mannweiler's address is: 201 No. Illinois Street, Indianapolis, IN 46204
<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Name of individual or
number in group Position held Cash compensation
Five most highly compensated $4,476,367
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 $7,925,328
(12)
</TABLE>
Security ownership of management
Our directors and officers do not beneficially own any outstanding shares of
stock of the company. All of our outstanding shares of stock are beneficially
owned by IDS Life. The percentage of shares of IDS Life owned by any director,
and by all our directors and officers as a group, does not exceed 1% of the
class outstanding.
Experts
Ernst & Young LLP, independent auditors, have audited the financial statements
of American Enterprise Life Insurance Company at Dec. 31, 1998 and 1997, and for
each of the three years in the period ended Dec. 31, 1998, as set forth in their
report. We've included our financial statements in the prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's report, given
on their authority as experts in accounting and auditing.
<PAGE>
American Enterprise Life Financial Information
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEET
September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
($ thousands, except share amounts)
<S> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1999, $1,023,281) $1,027,976
Available for sale, at fair value (amortized cost:
1999, $2,549,548) 2,480,649
-----------
3,508,625
Mortgage loans on real estate 794,117
Other investments 9,148
Total investments 4,311,890
Accounts receivable 914
Accrued investment income 57,967
Deferred policy acquisition costs 186,723
Deferred income taxes 25,420
Other assets 32
Separate account assets 174,567
------------
Total assets $4,757,513
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $4,049,397
Policy claims and other policyholders' funds 8,304
Amounts due to brokers 76,928
Other liabilities 22,069
Separate account liabilities 174,567
-----------
Total liabilities 4,331,265
Stockholder's equity:
Capital stock, $100 par value per share;
100,000 shares authorized,
20,000 shares issued and outstanding 2,000
Additional paid-in capital 282,872
Accumulated other comprehensive income:
Net unrealized securities (losses) gains (44,784)
Retained earnings 186,160
Total stockholder's equity 426,248
Total liabilities and stockholder's equity $4,757,513
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Nine months ended September 30,
(unaudited)
($ thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
--- ------ --- ----
Revenues:
Net investment income $243,525 $258,163
Contractholder charges 4,317 5,018
Mortality and expense risk fees 1,581 872
Net realized gain (loss) on investments 4,897 (1,526)
---------- ----------
Total revenues 254,320 262,527
--------- --------
Benefits and expenses:
Interest credited on investment contracts 157,155 173,709
Amortization of deferred policy acquisition costs 30,637 43,051
Other operating expenses 23,299 16,902
---------- -----------
Total benefits and expenses 211,091 233,662
--------- --------
Income before income taxes 43,229 28,865
Income taxes 14,051 10,390
---------- ------------
Net income $ 29,178 $ 18,475
========= =========
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Nine months ended September 30,
(unaudited)
($ thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
- -------- - ------
Cash flows from operating activities:
Net income $ 29,178 $18,475
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income 3,773 (1,802)
Change in accounts receivable (82) 44
Change in deferred policy acquisition costs, net 9,756 23,054
Change in other assets 10 84
Change in policy claims and other policyholders' funds 915 (3,220)
Deferred income tax benefit (448) (10,539)
Change in other liabilities (2,430) 8,960
Amortization of premium 1,394 158
Net realized gain on investments (4,897) 1,526
Other, net (1,772) (302)
--------------- ----------
Net cash provided by operating activities 35,397 36,438
Cash flows from investing activities: Fixed maturities held to maturity:
Maturities 47,277 61,786
Sales 5,681 30,468
Fixed maturities available for sale:
Purchases (589,946) (298,885)
Maturities 216,467 239,612
Sales 359,677 43,579
Other investments:
Purchases (20,766) (145,374)
Sales 41,705 53,043
Change in amounts due from brokers (619) --
Change in amounts due to brokers 22,581 94,129
---------- --------
Net cash provided by investing activities 82,057 78,358
Cash flows from financing activities: Activity related to investment contracts:
Considerations received 244,670 237,037
Surrenders and other benefits (519,255) (525,542)
Interest credited to account balances 157,131 173,709
---------- ----------
Net cash used in financing activities (117,454) (114,796)
------------ ------------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
-------------- --------------
Cash and cash equivalents at end of year $ -- $ --
============== ==============
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. General
In the opinion of the management of American Enterprise Life Insurance Company
(the Company), the accompanying unaudited financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly its balance sheet as of September 30, 1999 and the related statements of
income and cash flows for the nine month periods ended September 30, 1999 and
1998.
2. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative
Instruments and Hedging Activities. In July 1999, The FASB issued FAS 137, which
defers the effective date for implementation of FAS 133 by one year, making FAS
133 effective no later than January 1, 2001 for the Company's financial
statements. FAS 133 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 of 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. Earlier application of all of the provisions of FAS 133
is encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of FAS 133. This Statement cannot be applied
retroactively. The Company has not yet determined when it will implement FAS
133. The ultimate financial impact of the new rule will be measured based on the
derivatives in place at adoption and cannot be estimated at this time.
<PAGE>
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, 1998 and 1997, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
February 4, 1999
Minneapolis, Minnesota
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31,
($ thousands, except share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1998 1997
- ------ - ----------- - -------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1998, $1,126,732 ; 1997, $1,223,108) $1,081,193 $1,186,682
Available for sale, at fair value (amortized cost:
1998, $2,526,712; 1997, $2,609,621) 2,594,858 2,685,799
----------- -----------
3,676,051 3,872,481
Mortgage loans on real estate 815,806 738,052
Other investments 12,103 16,024
------------- -------------
Total investments 4,503,960 4,626,557
Accounts receivable 214 563
Accrued investment income 61,740 59,588
Deferred policy acquisition costs 196,479 224,501
Other assets 43 117
Separate account assets 123,185 62,087
------------ -------------
Total assets $4,885,621 $4,973,413
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $4,166,852 $4,343,213
Policy claims and other policyholders' funds 7,389 11,328
Deferred income taxes 23,199 35,601
Amounts due to brokers 54,347 34,935
Other liabilities 24,500 16,905
Separate account liabilities 123,185 62,087
----------- ------------
Total liabilities 4,399,472 4,504,069
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 income:
Net unrealized securities gains 44,295 49,516
Retained earnings 156,982 134,956
------------ ------------
Total stockholder's equity 486,149 469,344
------------ ------------
Total liabilities and stockholder's equity $4,885,621 $4,973,413
========== ==========
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
--- ------ --- ------ --- ----
Revenues:
Net investment income $340,219 $332,268 $271,719
Contractholder charges 6,387 5,688 5,450
Mortality and expense risk fees 1,275 641 303
Net realized loss on investments (4,788) (509) (5,258)
---------- ---------- -----------
Total revenues 343,093 338,088 272,214
--------- --------- ----------
Benefits and expenses:
Interest credited on investment contracts 228,533 231,437 191,672
Amortization of deferred policy acquisition costs 53,663 36,803 30,674
Other operating expenses 24,476 24,890 14,133
---------- ---------- --------
Total benefits and expenses 306,672 293,130 236,479
--------- --------- -------
Income before income taxes 36,421 44,958 35,735
Income taxes 14,395 16,645 12,912
---------- ---------- ---------
Net income $ 22,026 $ 28,313 $ 22,823
========= ========= ========
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1998
($ thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $296,816 $2,000 $177,872 $ 33,124 $83,820
Comprehensive income:
Net income 22,823 -- -- -- 22,823
Unrealized holding losses arising
during the year, net of taxes of
$12,282 (22,810) -- -- (22,810) --
Reclassification adjustment for losses
included in net income, net of tax
of $(1,093) 2,029 -- -- 2,029 --
-------------------
-----------------
Other comprehensive loss (20,781) -- -- (20,781) --
-----------------
Comprehensive income 2,042
Capital contribution from parent 65,000 -- 65,000 -- --
---------------------------------------------------------------------------
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 parent 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 1,093
of $(588) -- -- 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 $156,982
===========================================================================
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996__
- -------- - -------- --------
Cash flows from operating activities:
Net income $ 22,026 $ 28,313 $ 22,823
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income (2,152) (8,017) (9,692)
Change in accounts receivable 349 9,304 --
Change in deferred policy acquisition costs, net 28,022 (21,276) (32,651)
Change in other assets 74 4,840 (10,007)
Change in policy claims and other policyholders' funds (3,939) (16,099) 15,786
Deferred income tax (benefit) provision (9,591) (2,485) 5,084
Change in other liabilities 7,595 1,255 8,621
Amortization of premium (accretion of discount), net 122 (2,316) (2,091)
Net realized loss on investments 4,788 509 5,258
Other, net 2,544 959 (129)
------------- --------- ----------
Net cash provided by (used in) operating activities 49,838 (5,013) 3,002
Cash flows from investing activities: Fixed maturities held to maturity:
Purchases -- (1,996) (16,967)
Maturities 73,601 41,221 26,190
Sales 31,117 30,601 27,944
Fixed maturities available for sale:
Purchases (298,885) (688,050) (921,914)
Maturities 335,357 231,419 212,212
Sales 48,492 73,366 47,542
Other investments:
Purchases (161,252) (199,593) (212,182)
Sales 78,681 29,139 19,850
Change in amounts due to brokers 19,412 (53,796) 88,568
---------- ----------- ----------
Net cash provided by (used in) investing activities 126,523 (537,689) (728,757)
Cash flows from financing activities: Activity related to investment contracts:
Considerations received 302,158 783,339 846,378
Surrenders and other benefits (707,052) (552,903) (312,362)
Interest credited to account balances 228,533 231,437 191,672
Change in securities sold under repurchase agreements -- -- (67,000)
Capital contribution from parent -- 40,000 65,000
--------------- ---------- ---------
Net cash (used in) provided by financing activities (176,361) 501,873 723,688
----------- --------- --------
Net decrease in cash and cash equivalents -- (40,829) (2,067)
Cash and cash equivalents at beginning of year -- 40,829 42,896
--------------- ---------- ---------
Cash and cash equivalents at end of year $ -- $ -- $ 40,829
============== ============== ==========
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 generally accepted accounting principles 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 generally
accepted accounting principles 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 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:
1998 1997 1996
---- ----- ----
Cash paid during the year for:
Income taxes $19,035 $19,456 $10,317
Interest on borrowings 5,437 1,832 998
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.
Liabilities for future policy benefits
Liabilities for deferred annuities are accumulation values. Liabilities for
fixed annuities in a benefit status are based on the established industry
mortality tables with various interest rates ranging from 5.5 percent to
8.75 percent, depending on year of issue.
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, 1998 and 1997 are $3,504
payable to and $1,289, receivable from, respectively, 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.
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
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires the reporting and display of comprehensive income and its components.
Comprehensive income is defined as the aggregate change in stockholder's equity
excluding changes in ownership interests. For the Company, it is net income and
the unrealized gains or losses on available-for-sale securities net of taxes and
reclassification adjustment.
<PAGE>
1. Summary of significant accounting policies (continued)
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or obtained for Internal Use." The SOP, which
is effective January 1, 1999, 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 will be
capitalized on AEFC's financial statements. As a result, the new rule will
not have a material impact on the Company's results of operations or
financial condition.
In December 1997, the AICPA issued 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 will adopt the SOP on January 1, 1999. The Company has historically
carried a balance in other liabilities on the balance sheet for potential
guaranty fund assessment exposure. Adoption of the SOP will not have a material
impact on the Company's results of operations or financial condition
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective January 1, 2000. 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. Earlier application of all of the provisions of this
Statement is encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after issuance of the Statement. This Statement
cannot be applied retroactively. The ultimate financial impact of the new rule
will be measured based on the derivatives in place at adoption and cannot be
estimated at this time.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
<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, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- -------------- ---- ------- ------ ---- -----
<S> <C> <C> <C> <C>
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
========== ======== ======= ==========
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- -------------- ---- ------- -- ------ ---- -----
U.S. Government agency obligations $ 11,120 $ 710 $ -- $ 11,830
State and municipal obligations 3,003 173 -- 3,176
Corporate bonds and obligations 970,498 38,176 2,763 1005,911
Mortgage-backed securities 202,061 1,497 1,367 202,191
-------------- ---------- -------- ------------
$1,186,682 $ 40,556 $ 4,130 $1,223,108
========== ======== ======= ==========
Available for sale
U.S. Government agency obligations $ 2,077 $ 13 $ -- $ 2,090
Corporate bonds and obligations 1,273,217 52,207 8,020 1,317,404
Mortgage-backed securities 1,334,327 33,017 1,039 1,366,305
----------- -------- ------- ---------
$2,609,621 $85,237 $9,059 $2,685,799
========== ======= ====== ==========
</TABLE>
<PAGE>
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 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 $ 33,208 $ 33,499
Due from one to five years 215,010 227,139
Due from five to ten years 539,917 562,708
Due in more than ten years 100,660 108,173
Mortgage-backed securities 192,398 195,213
------------ ------------
$1,081,193 $1,126,732
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 350 $ 358
Due from one to five years 96,412 101,441
Due from five to ten years 981,556 1,021,961
Due in more than ten years 396,558 387,119
Mortgage-backed securities 1,051,836 1,083,979
--------- ---------
$2,526,712 $2,594,858
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $31,117,
$29,561 and $27,969, 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 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.Fixed maturities available for sale were sold
during 1996 with proceeds of $47,542 and gross realized gains and losses of
$17 and $3,139, respectively.
At December 31, 1998, bonds carried at $3,292 were on deposit with various
states as required by law.
<PAGE>
2. Investments (continued)
At December 31, 1998, investments in fixed maturities comprised 82 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 $480 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 1998 1997
---------------------- -- -------- -- ------
Aaa/AAA $1,242,301 $1,531,588
Aa/AA 45,526 34,167
Aa/A 60,019 69,775
A/A 422,725 421,733
A/BBB 228,656 222,022
Baa/BBB 1,030,874 954,962
Baa/BB 79,687 84,053
Below investment grade 498,117 478,003
------------ ------------
$3,607,905 $3,796,303
At December 31, 1998, approximately 94 percent of the securities rated
Aaa/AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of
any other issuer are greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1998, approximately 18 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, 1998 December 31, 1997
----------------------- ---------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
----------------------------------
----------------------------------
<S> <C> <C> <C> <C>
South Atlantic $198,552 $ 651 $186,714 $ 9,199
Middle Atlantic 129,284 520 128,239 10,167
East North Central 134,165 2,211 125,018 6,294
Mountain 113,581 -- 94,061 11,620
West North Central 119,380 9,626 96,701 11,135
New England 46,103 -- 50,932 --
Pacific 43,706 -- 33,052 --
West South Central 32,086 -- 19,573 --
East South Central 7,449 -- 7,480 --
--------- ------------ --------- ------------
824,306 13,008 741,770 48,415
Less allowance for losses 8,500 -- 3,718 --
---------- ------------ ---------- ------------
$815,806 $13,008 $738,052 $48,415
======== ======= ======== =======
</TABLE>
<PAGE>
2. Investments (continued)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
----------------------------------
----------------------------------
<S> <C> <C> <C> <C>
Department/retail stores $253,380 $ 781 $242,307 $ 9,683
Apartments 186,030 2,211 189,752 10,167
Office buildings 206,285 9,496 169,177 7,262
Industrial buildings 82,857 520 60,195 17,430
Hotels/Motels 45,552 -- 33,508 --
Medical buildings 33,103 -- 30,103 3,873
Nursing/retirement homes 6,731 -- 9,552 --
Mixed Use 10,368 -- 7,176 --
---------- ------------ --------- ------------
824,306 13,008 741,770 48,415
Less allowance for losses 8,500 -- 3,718 --
----------- ----------- ---------- -----------
$815,806 $13,008 $738,052 $48,415
======== ======= ======== =======
</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, 1998, the Company's recorded investment in impaired loans
was $1,932 with an allowance of $500. At December 31, 1997, the Company's
recorded investment in impaired loans was $4,443 with an allowance of $718.
During 1998 and 1997, the average recorded investment in impaired loans was
$2,736 and $6,473, respectively.
The Company recognized $251, $nil and $nil of interest income related to
impaired loans for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
1998 1997 1996
---- ---- ----
Balance, January 1 $3,718 $2,370 $ --
Provision for investment losses 4,782 1,805 2,370
Loan payoffs -- (457) --
---------- ------- --------
Balance, December 31 $8,500 $3,718 $2,370
====== ====== ======
Net investment income for the years ended December 31 is summarized as
follows:
1998 1997 1996
----- -- ----- ----
Interest on fixed maturities $285,260 $278,736 $230,559
Interest on mortgage loans 65,351 55,085 41,010
Interest on cash equivalents 137 704 1,402
Other (2,493) 1,544 1,194
----------- ------------- ----------
348,255 336,069 274,165
Less investment expenses 8,036 3,801 2,446
----------- ----------- ----------
$340,219 $332,268 $271,719
======== ======== ========
<PAGE>
2. Investments (continued)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
1998 1997 1996
---- ---- ----
Fixed maturities $ 863 $ 1,638 $(2,888)
Mortgage loans (4,816) (1,348) (2,370)
Other investments (835) (799) --
-------- ------ ----------
$(4,788) $ (509) $(5,258)
======= ======= =======
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
1998 1997 1996
---- ---- ----
Fixed maturities available for sale $(8,032) $57,188 $(31,970)
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:
1998 1997 1996
---- ---- ----
Federal income taxes:
Current $ 23,227 $17,668 $7,124
Deferred (9,591) (2,485) 5,084
--------- -------- -------
13,636 15,183 12,208
State income taxes-current 759 1,462 704
---------- --------- --------
Income tax expense $ 14,395 $16,645 $12,912
======== ======= =======
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>
1998 1997 1996
----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision Rate Provision Rate Provision Rate
Federal income taxes based
on the statutory rate $13,972 35.0% $15,735 35.0% $12,507 35.0%
Increases (decreases) are attributable to :
Tax-excluded interest (35) (0.1) (41) (0.1) (53) (0.1)
State tax, net of federal benefit 493 1.2 956 2.1 459 1.3
Other, net (35) -- (5) -- (1) --
------ ------ ------- ------ ------ ------
Federal income taxes $14,395 36.1% $16,645 37.0% $12,912 36.2%
======= ==== ======= ==== ======= ====
</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: 1998 1997
--------- -------
Policy reserves $51,298 $54,468
Other 2,214 1,736
--------- -------
Total deferred income tax assets 53,512 56,204
-------- ------
Deferred income tax liabilities:
Deferred policy acquisition costs 52,908 63,630
Investments 23,803 28,175
-------- ------
Total deferred income tax liabilities _76,711 91,805
------- --------
Net deferred income tax liabilities $23,199 $35,601
======= =======
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 $45,716 and $17,392 as of December
31, 1998 and 1997, respectively. In addition, dividends in excess of
$37,902 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:
1998 1997 1996
--------- --------- -------
Statutory net income $ 37,902 $ 23,589 $ 9,138
Statutory stockholder's equity 330,588 302,264 250,975
5. Related party transactions
On December 31, 1998, the Company 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 $6,651 and $8,400 at December 31, 1998 and 1997, 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 $28,482, $24,535 and $17,936 for the
years ended December 31, 1998, 1997 and 1996, 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 the parent's cost of funds, 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, 1998 or 1997.
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, 1998 Amount Amount Value Exposure
----------------- - ------ - ------ -- ----- --------
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 900,000 $ 5,452 $ 1,518 $ 1,518
Interest rate floors 1,000,000 6,651 17,798 17,798
Interest rate swaps 1,000,000 -- -- --
------------- ------------ -------------
$12,103 $19,316 $19,316
= ======= ======= =======
</TABLE>
<PAGE>
7. Derivative financial instruments (continued)
<TABLE>
<CAPTION>
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
----------------- - ------ -- ------ -- ----- -- --------
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 900,000 $ 7,624 $ 5,340 $ 5,340
Interest rate floors 1,000,000 8,400 8,400 8,400
Interest rate swaps 1,000,000 -- -- --
------------- ------------ ------------
$16,024 $13,740 $13,740
======= ======= =======
</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 2003.
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,
1998 1997
-------- --------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
Investments:
Fixed maturities (Note 2):
Held to maturity $1,081,193 $1,126,732 $1,186,682 $1,223,108
Available for sale 2,594,858 2,594,858 2,685,799 2,685,799
Mortgage loans on real estate (Note 2) 815,806 874,064 738,052 775,869
Derivative financial instruments (Note 7) 12,103 19,316 16,024 13,740
Separate account assets (Note 1) 123,185 123,185 62,087 62,087
Financial Liabilities
Future policy benefits for fixed annuities $4,152,059 $4,000,789 $4,330,173 $4,152,471
Separate account liabilities 123,185 115,879 62,087 58,116
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $14,793 and $13,040, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 1998
and 1997.
8.
<PAGE>
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 1998 and 1997.
9. Commitments and contingencies
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company conducts business involving insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. The Company, along with AEFC and its insurance
subsidiaries, has been named as a defendant in one of these types of
actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from IDS Life and its subsidiaries. The
complaint puts at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged
violations of consumer fraud statutes. IDS Life and its subsidiaries
believe they have meritorious defenses to the claims raised in this
lawsuit.
The outcome of any litigation cannot be predicted with certainty. In the
opinion of management, however, the ultimate resolution of this lawsuit
should not have a material adverse effect on the Company's financial
position.
<PAGE>
Table of Contents of the Statement of Additional Information
Performance Information p.
Calculating Annuity Payouts p.
Rating Agencies p.
Principal Underwriter p.
Independent Auditors p.
Financial Statements
<PAGE>
Please check the box to receive a copy of the Statement of Additional
Information for:
- -- American Express(R) Variable Portfolio Funds
Mail your request to:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-534
We will mail your request to:
Your name _____________________________________________
Address _______________________________________________
City _____________________ State _________ Zip ________
<PAGE>
Prospectus
Feb. 14, 2000
American Express Signature One Variable AnnuitySM
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)
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Telephone: 800-333-3437
This prospectus contains information that you should know before investing. You
also will receive the prospectuses for:
<TABLE>
<CAPTION>
<S> <C>
o American Express(R)Variable Portfolio Funds o J. P. Morgan Series Trust II
o AIM Variable Insurance Funds, Inc. o Lazard Retirement Series, Inc.
o Alliance Variable Products Series Fund o MFS(R)Variable Insurance TrustSM
o Baron Capital Funds o Royce Capital Fund
o Fidelity Variable Insurance Products - Service Class o Third Avenue Variable Series Trust
o Franklin Templeton Variable Insurance Products Trust o Wanger Advisors Trust
o Goldman Sachs Variable Insurance Trust (VIT) o Warburg Pincus Trust
o Janus Aspen Series: Service Shares o Wells Fargo Variable Trust Funds
</TABLE>
Please read the prospectuses carefully and keep them for future reference. This
contract is available for qualified and nonqualified plans.
The contract provides for purchase payment credits. Expense charges from
contracts with purchase payment credits may be higher than charges for contracts
without such credits. The amount of the credit may be more than offset by
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 adequacy or accuracy 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.
<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 Financial Information
Table of Contents of the Statement of Additional Information
<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 - An individual annuity contract or a certificate showing your interest
under a group annuity contract.
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 -- Mutual funds and/or portfolios that are investment options under your
contract, each with a different investment objective. 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 based on
your net current payment.
Qualified annuity -- A contract that you purchase for one of the following
retirement plans that is subject to applicable federal law and any rules of the
plan itself:
o Individual Retirement Annuities (IRAs), including Roth IRAs
o Simplified Employee Pension (SEP) plans
All other contracts are considered nonqualified annuities.
<PAGE>
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.
<PAGE>
The Contract in Brief
<TABLE>
<CAPTION>
<S> <C>
Purpose: The purpose of the contract is to allow you to accumulate money for
retirement. You do this by making one or more investments (purchase payments)
that may earn returns that increase the value of the contract. The contract
provides lifetime or other forms of payouts beginning at a specified date (the
retirement date). As in the case of other annuities, it may not be
advantageous for you to purchase this contract as a replacement for, in
addition to an existing contract.
Free look period: You may return your contract to our office within 10 days after it is
delivered to you 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:
o 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. __)
o the fixed accounts, which earn interest at rates that we adjust
periodically. (p. __)
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.
o Minimum initial purchase payment -- $25,000.
o Minimum additional purchase payment -- $100 ($50 with SIP payments).
o Maximum total purchase payments (without prior approval) -- $1,000,000 for issue ages up to 85 and
$100,000 for issue ages 86 to 90. (p. ___)
Transfers: Subject to certain restrictions you currently may redistribute your money
among the subaccounts and the fixed 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 fixed accounts and subaccounts. Fixed account
transfers are subject to special restrictions.
(p. __)
<PAGE>
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. __)
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. __)
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. __)
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. __)
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. Roth IRAs, however, may grow and be
distributed tax free if you meet certain distribution requirements. (p. __)
Charges:
o $40 annual contract administrative charge;
o a 0.15% variable account administrative charge;
o a 1.45% mortality and expense risk fee;
o if the Guaranteed Minimum Income Benefit
Rider (6% Accumulation Benefit Base) is
selected, an annual fee based on an
adjusted contract value (currently at
0.35%);
o if the 8% Performance Credit Rider is selected, an annual fee of 0.25%
of the contract anniversary contract value;
o withdrawal charge;
o 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); and
o the operating expenses of the funds.
</TABLE>
<PAGE>
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
you bear directly or indirectly for 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.
Years from purchase Withdrawal charge
payment receipt percentage
1 8%
2 8
3 8
4 8
5 7
6 6
7 6
8 4
9 2
Thereafter 0
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 asumed investment rate plus 1.86%. In no event would
your withdrawal charge exceed 9% of the amount available for payouts
under the plan.
Annual contract administrative charge $40*
* We will waive this charge when your contract value is $100,000 or more
on the current contract anniversary.
Guaranteed Minimum Income Benefit Rider
(6% Accumulation Benefit Base) fee:**
as a percentage of an adjusted contract value charged annually.
This is an optional expense. 0.35%
8% Performance Credit Rider fee:**
as a percentage of the contract value at contract
anniversary charged annually. This is an optional expense. 0.25%
**You may select either the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) or the 8% Performance Credit Rider, but not
both.
<PAGE>
Annual variable account expenses: as a percentage of average subaccount value.
You can choose the death benefit guarantee provided.
Variable account administrative charge 0.15%
Mortality and expense risk fee*** 1.45%
Total annual variable account expenses 1.60%
***Includes a death benefit choice of either the Maximum Anniversary Value Death
Benefit or the 5% Accumulation Death Benefit. The 5% Accumulation Death Benefit
is only available if you also select either the Guaranteed Minimum Income
Benefit Rider (6% Accumulation Benefit Base) or the 8% Performance Credit Rider.
<PAGE>
<TABLE>
<CAPTION>
Annual operating expenses of the funds after fee waivers and/or expense
reimbursements, if applicable, as a percentage of average daily net assets
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Management 12b-1 Other
Fees Fees Expenses Total
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Blue Chip Advantage Fund .56% .13 .26 .95%1
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Bond Fund .60% .13 .07 .80%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Capital Resource Fund .59% .13 .07 .79%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Cash Management Fund .50% .13 .06 .69%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Diversified Equity Income Fund .56% .13 .26 .95%1
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Extra Income Fund .62% .13 .09 .84%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Federal Income Fund .61% .13 .14 .88%1
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Growth Fund .63% .13 .19 .95%1
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Managed Fund .59% .13 .04 .76%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - New Dimensions Fund .61% .13 .06 .80%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AXPSM Variable Portfolio - Small Cap Advantage Fund .79% .13 .31 1.23%1
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AIM V.I. Capital Appreciation Fund .62% -- .05 .67%3
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AIM V.I. Capital Development Fund --% -- 1.21 1.21%4
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
AIM V.I. Value Fund .61% -- .05 .66%3
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Alliance VP Premier Growth Portfolio (Class B) 1.00% .25 .09 1.34%5
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Alliance VP Technology Portfolio (Class B) .81% .25 .14 1.20%5
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Alliance VP U.S. Government/High Grade Securities .60% .25 .18 1.03%5
Portfolio (Class B)
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Baron Capital Asset Fund 1.00% .25 .20 1.45%6
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Fidelity VIP III Growth & Income Portfolio (Service Class) .49% .10 .11 .70%7
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Fidelity VIP III Mid Cap Portfolio (Service Class) .56% .10 .44 1.10%2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Fidelity VIP Overseas Portfolio (Service Class) .74% .10 .13 .97%7
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
FT VIP Mutual Shares Securities Fund - Class 2 .74% .25 .03 1.02%8
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
FT VIP Franklin Real Estate Fund - Class 2 .52% .25 .02 .79%8
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
FT VIP Templeton International Smaller Companies Fund - 1.00% .25 .10 1.35%8
Class 2
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Goldman Sachs VIT Capital Growth Fund .75% -- .15 .90%9
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Goldman Sachs VIT CORESM U.S. Equity Fund .70% -- .10 .80%9
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Goldman Sachs VIT Global Income Fund .90% -- .15 1.05%9
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Goldman Sachs VIT International Equity Fund 1.00% -- .25 1.25%9
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Janus Aspen Aggressive Growth Portfolio: Service Shares .67% .25 .01 .93%
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Janus Aspen Growth Portfolio: Service Shares .66% .25 .01 .92%10
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Janus Aspen International Growth Portfolio: Service Shares .66% .25 .09 1.00%10
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
J.P. Morgan U.S. Disciplined Equity Portfolio .35% -- .52 .87%11
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Lazard Retirement Equity Portfolio .75% .25 .25 1.25%12
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Lazard Retirement International Equity Portfolio .75% .25 .25 1.25%12
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
MFS(R)New Discovery Series .90% -- .27 1.17%13
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
MFS(R)Research Series .75% -- .11 .86%3
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
MFS(R)Utilities Series .75% -- .26 1.01%3
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Royce Micro-Cap Portfolio 1.25% -- .10 1.35%14
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Royce Premier Portfolio 1.00% -- .35 1.35%14
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Third Avenue Value Portfolio .90% -- .40 1.30%15
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Wanger International Small Cap 1.27% -- .28 1.55%3
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Wanger U.S. Small Cap .96% -- .06 1.02%3
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Warburg Pincus Trust - Emerging Growth Portfolio .84% -- .41 1.25%16
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
Wells Fargo VT Equity Income Fund .38% .25 .37 1.00%17
- ----------------------------------------------------------- --------------- ----------- ------------ -------------
</TABLE>
<PAGE>
1Based on estimated expenses after fee waivers and expense reimbursements.
Without fee waivers and expense reimbursements "Other Expenses" and "Total"
would be: 0.39% and 1.08% for AXPSM Variable Portfolio - Blue Chip Advantage and
AXPSM Variable Portfolio - Diversified Equity Income Funds, 0.26% and 1.00% for
AXPSM Variable Portfolio - Federal Income Fund, 0.32% and 1.08% for AXPSM
Variable Portfolio - Growth Fund, and 0.43% and 1.35% for AXPSM Variable
Portfolio - Small Cap Advantage Fund.
2Annualized operating expenses of funds at Dec. 31, 1998.
3Figures in "Management Fees," "Other Expenses" and "Total" are based on actual
expenses for the fiscal year ended Dec. 31, 1998.
4Had there been no fee waivers or expense reimbursements, expenses would have
been: 0.75%, 0.00%, 5.05% and 5.80%, respectively.
5The fund's expense figures are based on estimated expenses (net of fee waivers
and/or expense reimbursements) for the fiscal period ended Dec. 31, 1998. Absent
fee waivers and/or expense reimbursements, the Management Fee, 12b-1 Fee, Other
Expenses and Total for the following portfolios would have been: Technology
Portfolio (1.00%, 0.25%, 0.20% and 1.45%) and U.S. Government High Grade
Securities Portfolio (0.60%, 0.25%, 0.31% and 1.16%).
6Fees are stated net of waivers and/or reimbursements. Absent fee waivers and/or
reimbursements, the Management Fee, 12b-1 Fee, Other Expenses and Total as a
percentage of average net assets for Baron Capital Asset Fund would be (1.00%,
0.25%, 6.37% and 7.62%).
7Fidelity Management & Research Company agreed to reimburse a portion of the
class' expenses during the period. Without this reimbursement, the Management
Fee, 12b-1 Fee, Other Expenses and Total as a percentage of average net assets
for the following funds would have been, Fidelity VIP Growth and Income
Portfolio (0.49%, 0.10%, 0.12% and 0.71%) and Fidelity VIP Overseas Portfolio
(Service Class) (0.74%, 0.10%, 0.17% and 1.01%).
8Because no Class 2 shares were issued as of Dec. 31, 1998, figures (other than
Rule 12b-1 fees) are based on the Portfolio's Class 1 actual expenses for the
fiscal year ended Dec. 31, 1998 plus Class 2's annual Rule 12b-1 fee of 0.25%
(While the maximum amount payable under each Portfolio's Class 2 Rule 12b-1 plan
is 0.35% per year of the Portfolio'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). The figure shown under Management fees,
combines both the Management and Portfolio Administration Fees. The Portfolio
Administration Fee is a direct expense for the Mutual Share Securities Fund and
the Templeton International Smaller Companies Fund; Franklin Real Estate Fund
pays for similar services indirectly through the Management Fee.
9The Goldman Sachs VIT Capital Growth Fund's expenses are estimated due to the
Fund being in existence for less than 10 months as of December 31, 1998. The
Goldman Sachs VIT CORESM U.S. Equity, Goldman Sachs VIT Global Income and
Goldman Sachs VIT International Equity Funds' expenses are based on actual
expenses for fiscal year ended December 31, 1998. The Investment Advisors to the
Goldman Sachs VIT Capital Growth, Goldman Sachs VIT CORE SM U.S. Equity, Goldman
Sachs VIT Global Income and Goldman Sachs VIT International Equity Funds have
voluntarily agreed to reduce or limit certain "Other Expenses" of such Funds
(excluding management fees, taxes, interest, brokerage fees, litigation,
indemnification and other extraordinary expenses) to the extent such expenses
exceed 0.15%, 0.10%, 0.15% and 0.25% per annum of such Funds' average daily net
assets, respectively. The expenses shown include this reimbursement. If not
included, the "Other Expenses" and "Total Expenses" for the Goldman Sachs VIT
Capital Growth, Goldman Sachs VIT CORE SM U.S. Equity, Goldman Sachs VIT Global
Income and Goldman Sachs VIT International Equity Funds would be 1.03% and
1.78%, 2.13% and 2.83%, 2.40% and 3.30% and 1.97% and 2.97% respectively. The
reductions or limits may be disconnected or modified by the investment advisors
in their discretion at any time.
10All expenses are based on the estimated gross expenses the Shares expect to
incur in their initial fiscal year (estimated as of 12-31-99) and are stated
with contractual waivers and fee reductions by Janus Capital. Fee reductions for
Growth and International Growth Portfolios reduce the Management Fee to the
level of the corresponding Janus retail fund. Other waivers, if applicable, are
first applied against the Management Fee and then against Other Expenses. Janus
Capital has agreed to continue the waivers and fee reductions until at least the
next annual renewal of the advisory agreements. Without waivers and fee
reductions, Management Fees and Total expenses would have been 0.67% and 0.93%
for Growth Portfolio and 0.72% and 1.06% for International Growth Portfolio.
11Fees are stated net of waivers and/or reimbursements. Absent fee waivers
and/or reimbursements, the Management Fee, Other Expenses and Total as a
percentage of average net assets for J.P. Morgan U.S. Disciplined Equity
Portfolio would be (0.35%, 0.0%, 1.08% and 1.43%). Effective July 1, 1999
current expenses were lowered to 0.85%.
12The portfolio's Investment Manager agrees to waive its fees and/or reimburse
the portfolios through Dec. 31, 1999 to the extent total portfolio annual
expenses exceed 1.25% of the portfolio's average daily net assets. Absent fee
waivers and/or reimbursements, the Management Fee, 12b-1 Fee, Other Expenses and
Total as a percentage of average net assets for fiscal year end Dec. 31, 1998
for the following portfolios would have been: Lazard Retirement Equity Portfolio
(0.75%, 0.25%, 20.32% and 21.32%) and Lazard Retirement International Equity
Portfolio (0.75%, 0.25%, 47.67% and 48.67%). Expenses are annualized for the
Lazard Retirement Equity Portfolio for the period March 1-Dec. 31, 1998
(commencement of operations through fiscal year end). Expenses are annualized
for the Lazard Retirement International Equity Portfolio for the period Sep. 1 -
Dec. 31, 1998 (commencement of operations through fiscal year end).
13Fees are stated net of waivers and/or reimbursements. Absent fee waivers
and/or reimbursements, the Management Fee, Other Expenses and Total as a
percentage of average net assets for MFS(R) New Discovery Series would have been
(0.90%, 0.0%, 4.32% and 5.22%).
<PAGE>
14Expense ratios are shown after fee waivers and expense reimbursements by the
investment advisor. The expense ratios before the waivers and reimbursements
would have been: Royce Micro-Cap Portfolio (1.25%, 0.0%, 1.34% and 2.59%) and
Royce Premier Portfolio (1.00%, 0.0%, 6.05% and 7.05%).
15The Fund's expenses are estimated because the fund had not commenced
operations as of Sept. 1, 1999.
16Fees are estimated net of waivers and/or reimbursements for the fiscal year
ended Dec. 31, 1999. Fee waivers and/or reimbursements may be discontinued at
any time. Absent waivers and/or reimbursements, the Management Fee, 12b-1 Fee,
Other Expenses and Total Expenses would be 0.90%, 0.0%, 0.51% and 1.41%
17The funds' annualized expenses are estimated for the period Sept. 20, 1999
(inception of the Wells Fargo Variable Trust) - Dec. 31, 1999.
<PAGE>
Examples: *
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment without any optional
riders and assuming a 5% annual return and....
- ---------------------------------------------------------------------------------------------------------------------------
no withdrawal or
a total withdrawal at selection of an annuity
the end of each time payout plan at the end
period of each time period
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 1 year 3 years
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Blue Chip Advantage Fund $106.63 $161.77 $26.63 $81.77
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Bond Fund 105.09 157.17 25.09 77.17
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Capital Resource Fund 104.99 156.86 24.99 76.86
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Cash Management Fund 103.96 153.78 23.96 73.78
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Diversified Equity Income Fund 106.63 161.77 26.63 81.77
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Extra Income Fund 105.50 158.40 25.50 78.40
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Federal Income Fund 105.91 159.62 25.91 79.62
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Growth Fund 106.63 161.77 26.63 81.77
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Managed Fund 104.68 155.94 24.68 75.94
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - New Dimensions Fund 105.09 157.17 25.09 77.17
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Small Cap Advantage Fund 109.50 170.33 29.50 90.33
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Appreciation Fund 103.81 153.32 23.81 73.32
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Development Fund 109.35 169.87 29.35 89.87
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Value Fund 103.71 153.01 23.71 73.01
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Alliance VP Premier Growth Portfolio (Class B) 110.68 173.82 30.68 93.82
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Alliance VP Technology Portfolio (Class B) 109.24 169.56 29.24 89.56
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Alliance VP U.S. Government/High Grade Securities Portfolio (Class B) 107.50 164.37 27.50 84.37
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Baron Capital Asset Fund 111.81 177.16 31.81 97.16
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth & Income Portfolio (Service Class) 104.12 154.24 24.12 74.24
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Mid Cap Portfolio (Service Class) 108.22 166.51 28.22 86.51
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio (Service Class) 106.89 162.54 26.89 82.54
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
FT VIP Mutual Shares Securities Fund - Class 2 107.40 164.07 27.40 84.07
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
FT VIP Franklin Real Estate Fund - Class 2 105.04 157.01 25.04 77.01
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
FT VIP Templeton International Smaller Companies Fund - Class 2 110.78 174.13 30.78 94.13
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Capital Growth Fund 106.17 160.39 26.17 80.39
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT CORESM U.S. Equity Fund 105.14 157.32 25.14 77.32
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Global Income Fund 107.71 164.98 27.71 84.98
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT International Equity Fund 109.76 171.09 29.76 91.09
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio: Service Shares 106.48 161.31 26.48 81.31
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio: Service Shares 106.37 161.00 26.37 81.00
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen International Growth Portfolio: Service Shares 107.19 163.45 27.19 83.45
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
J.P. Morgan U.S. Disciplined Equity Portfolio 105.86 159.47 25.86 79.47
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Lazard Retirement Equity Portfolio 109.76 171.09 29.76 91.09
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Lazard Retirement International Equity Portfolio 109.76 171.09 29.76 91.09
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MFS(R)New Discovery Series 108.94 168.65 28.94 88.65
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MFS(R)Research Series 105.76 159.16 25.76 79.16
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MFS(R)Utilities Series 107.30 163.76 27.30 83.76
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Royce Micro-Cap Portfolio 110.78 174.13 30.78 94.13
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Royce Premier Portfolio 110.78 174.13 30.78 94.13
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Third Avenue Value Portfolio 110.27 172.61 30.27 92.61
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Wanger International Small Cap 112.83 180.19 32.83 100.19
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Wanger U.S. Small Cap 107.40 164.07 27.40 84.07
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Emerging Growth Portfolio 109.76 171.09 29.76 91.09
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Wells Fargo VT Equity Income Fund 107.19 163.45 27.19 83.45
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment if you selected the
0.35% Guaranteed Minimum Income Benefit Rider (6% Accumulation Benefit Base) and
assuming a 5% annual return and....
- ---------------------------------------------------------------------------------------------------------------------------
no withdrawal or
a total withdrawal at selection of an annuity
the end of each time payout plan at the end
period of each time period
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 3 years 1 year 3 years
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Blue Chip Advantage Fund $110.34 $173.58 $30.34 $93.58
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Bond Fund 108.80 168.98 28.80 88.98
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Capital Resource Fund 108.70 168.67 28.70 88.67
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Cash Management Fund 107.67 165.59 27.67 85.59
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Diversified Equity Income Fund 110.34 173.58 30.34 93.58
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Extra Income Fund 109.21 170.21 29.21 90.21
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Federal Income Fund 109.62 171.43 29.62 91.43
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Growth Fund 110.34 173.58 30.34 93.58
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Managed Fund 108.39 167.75 28.39 87.75
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - New Dimensions Fund 108.80 168.98 28.80 88.98
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AXPSM Variable Portfolio - Small Cap Advantage Fund 113.21 182.14 33.21 102.14
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Appreciation Fund 107.52 165.13 27.52 85.13
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Development Fund 113.06 181.68 33.06 101.68
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
AIM V.I. Value Fund 107.42 164.82 27.42 84.82
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Alliance VP Premier Growth Portfolio (Class B) 114.39 185.64 34.39 105.64
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Alliance VP Technology Portfolio (Class B) 112.95 181.37 32.95 101.37
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Alliance VP U.S. Government/High Grade Securities Portfolio (Class B) 111.21 176.18 31.21 96.18
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Baron Capital Asset Fund 115.52 188.97 35.52 108.97
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Growth & Income Portfolio (Service Class) 107.83 166.05 27.83 86.05
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP III Mid Cap Portfolio (Service Class) 111.93 178.32 31.93 98.32
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio (Service Class) 110.60 174.35 30.60 94.35
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
FT VIP Mutual Shares Securities Fund - Class 2 111.11 175.88 31.11 95.88
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
FT VIP Franklin Real Estate Fund - Class 2 108.75 168.82 28.75 88.82
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
FT VIP Templeton International Smaller Companies Fund - Class 2 114.49 185.94 34.49 105.94
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Capital Growth Fund 109.88 172.20 29.88 92.20
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT CORESM U.S. Equity Fund 108.85 169.13 28.85 89.13
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT Global Income Fund 111.42 176.80 31.42 96.80
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT International Equity Fund 113.47 182.90 33.47 102.90
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio: Service Shares 110.19 173.12 30.19 93.12
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio: Service Shares 110.08 172.81 30.08 92.81
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen International Growth Portfolio: Service Shares 110.90 175.27 30.90 95.27
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
J.P. Morgan U.S. Disciplined Equity Portfolio 109.57 171.28 29.57 91.28
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Lazard Retirement Equity Portfolio 113.47 182.90 33.47 102.90
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Lazard Retirement International Equity Portfolio 113.47 182.90 33.47 102.90
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MFS(R)New Discovery Series 112.65 180.46 32.65 100.46
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MFS(R)Research Series 109.47 170.97 29.47 90.97
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
MFS(R)Utilities Series 111.01 175.57 31.01 95.57
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Royce Micro-Cap Portfolio 114.49 185.94 34.49 105.94
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Royce Premier Portfolio 114.49 185.94 34.49 105.94
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Third Avenue Value Portfolio 113.98 184.42 33.98 104.42
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Wanger International Small Cap 116.54 192.00 36.54 112.00
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Wanger U.S. Small Cap 111.11 175.88 31.11 95.88
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Warburg Pincus Trust - Emerging Growth Portfolio 113.47 182.90 33.47 102.90
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Wells Fargo VT Equity Income Fund 110.90 175.27 30.90 95.27
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
*In these examples, the $40 contract administrative charge is approximated as a
0.053% charge based on our estimated average contract size. Premium taxes
imposed by some state and local governments are reflected in these examples. We
entered into 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.
<PAGE>
Condensed Financial Information (Unaudited)
We have not provided any condensed financial information for the subaccounts
because they are new and do not have any history.
Financial Statements
You can find our audited financial statements later in this prospectus. The SAI
does not include the audited financial statements of the subaccounts because
they are new and do not have any assets.
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 reflect deduction of all applicable charges, including:
o the contract administrative charge,
o the variable account administrative charge,
o the Guaranteed Minimum Income Benefit Rider(6% Accumulation Benefit Base) fee,
o the 8% Performance Credit Rider fee,
o mortality and expense risk fee and
o withdrawal charge(assuming a withdrawal at the end of the illustrated period).
We also may make optional total return quotations that do not reflect deduction
of the withdrawal charge (assuming no withdrawal), the Guaranteed Minimum Income
Benefit Rider (6% Accumulation Benefit Base) fee and the 8% Performance Credit
Rider fee. Total return quotations may be shown 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.
<PAGE>
Seven-day simple yield (for subaccounts investing in money market funds) is the
income generated by the investment over a given seven-day period. We show this
as a percentage of the investment.
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.
<PAGE>
The Variable Account and the Funds
You may allocate payments to any or all of the subaccounts of the variable
account that invest in shares of the following funds:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Advisor or Manager
Subaccount Investing In Investment Objectives and Policies
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SBCA1 AXPSM Variable Portfolio - Objective: long-term total return exceeding that IDS Life, investment
Blue Chip Advantage Fund of the U.S. stock market. Invests primarily in manager; American Express
common stocks of companies included in the Financial Corporation (AEFC)
unmanaged S&P 500 Index. investment advisor.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SBND 1 AXPSM Variable Portfolio - Objective: high level of current income while IDS Life, investment
Bond Fund conserving the value of the investment for the manager; AEFC, investment
longest time period. Invests primarily in advisor.
investment-grade bonds.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SCAR 1 AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
Capital Resource Fund in U.S. common stocks. manager; AEFC, investment
advisor.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SCMG 1 AXPSM Variable Portfolio - Objective: maximum current income consistent with IDS Life, investment
Cash Management Fund liquidity and conservation of capital. Invests in manager; AEFC, investment
money market securities. advisor.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SDE11 AXPSM Variable Portfolio - Objective: a high level of current income and, as IDS Life, investment
Diversified Equity Income a secondary goal, steady growth of capital. manager; AEFC investment
Fund Invests primarily in dividend-paying common and advisor.
preferred stocks.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SEXI 1 AXPSM Variable Portfolio - Objective: high current income, with capital IDS Life, investment
Extra Income Fund growth as a secondary objective. Invests primarily manager; AEFC, investment
in long-term, high-yielding, high-risk debt advisor.
securities below investment grade issued by U.S.
and foreign corporations.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SFDI 1 AXPSM Variable Portfolio - Objective: a high level of current income and IDS Life, investment
Federal Income Fund safety of principal consistent with an investment manager; AEFC investment
in U.S. government and government agency advisor.
securities. Invests primarily in debt obligations
issued or guaranteed as to principal and interest
by the U.S. government, its agencies or
instrumentalities.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SGRO 1 AXPSM Variable Portfolio - Objective: long-term capital growth. Invests IDS Life, investment
Growth Fund primarily in common stocks and securities manager; AEFC investment
convertible into common stocks that appear to advisor.
offer growth opportunities.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SMGD 1 AXPSM Variable Portfolio - Objective: maximum total investment return through IDS Life, investment
Managed Fund a combination of capital growth and current manager; AEFC, investment
income. Invests primarily in stocks, convertible advisor.
securities, bonds and money market instruments.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SNDM 1 AXPSM Variable Portfolio - Objective: long-term growth of capital. Invests IDS Life, investment
New Dimensions Fund primarily in common stocks of U.S. and foreign manager; AEFC, investment
companies showing potential for significant growth. advisor.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SSCA 1 AXPSM Variable Portfolio - Objective: long-term capital growth. Invests IDS Life, investment
Small Cap Advantage Fund primarily in equity stocks of small companies that manager; AEFC investment
are often included in the S&P SmallCap 600 Index advisor.
or the Russell 2000 Index.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SCAP 1 AIM V.I. Capital Objective: growth of capital. Invests primarily in A I M Advisors, Inc.
Appreciation Fund common stocks, with emphasis on medium- and
small-sized growth companies.
- -------------------------------------------------------------------------------------------------------------------------------
SCDV 1 AIM V.I. Capital Objective: long term growth of capital. Invests A I M Advisors, Inc.
Development Fund primarily in securities (including common stocks,
convertible securities and bonds) of small- and
medium-sized companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SVAL 1 AIM V.I. Value Fund Objective: long-term growth of capital with income A I M Advisors, Inc.
as a secondary objective. Invests primarily in
equity securities judged to be undervalued
relative to the 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.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SPGR 1 Alliance VP Premier Growth Objective: growth of capital by pursuing Alliance Capital Management,
Portfolio (Class B) aggressive investment policies. Invests primarily L.P.
in equity securities of a limited number of large,
carefully selected, high-quality U.S. companies
that are judged likely to achieve superior
earnings growth. As a matter of fundamental
policy, the Portfolio normally invests at least
85% of its total assets in the equity securities
of U.S. companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
STEC 1 Alliance VP Technology Objective: growth of capital. Current income is Alliance Capital Management,
Portfolio (Class B) incidental to the Portfolio's objective. Invests L.P.
primarily in securities of
companies expected to benefit from
technological advances and
improvements. The Portfolio's
policy is to invest in any company
and industry and in any type of
security with potential for capital
appreciation. It invests in
well-known and established
companies and new and unseasoned
companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUGH 1 Alliance VP U.S. Objective: high level of current income consistent Alliance Capital Management,
Government/High Grade with preservation of capital. Invest primarily in L.P.
Securities Portfolio (1) U.S. Government securities and (2) other
(Class B) high-grade debt securities rated AAA, AA or A by
Standard & Poor's, Duff and Phelps
or Fitch, or rated Aaa, Aa or A by
Moody's Investors Service or, if
unrated, of equivalent quality. As
a matter of fundamental policy, the
Portfolio invests at least 65% of
its total assets in investment
grade corporate debt securities and
CMOs.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SCAS 1 Baron Capital Asset Fund Objective: capital appreciation. Invests primarily BAMCO, Inc. which is a
in securities of small and medium sized companies wholly owned subsidiary of
with undervalued assets or favorable growth Baron Capital Group Inc.
prospects.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SGRI 1 Fidelity VIP III Growth & Objective: high total return through a combination Fidelity Management &
Income Portfolio (Service of current income and capital appreciation. Research Company (FMR),
Class) Invests primarily in common stocks with a focus on investment manager; FMR U.K.
those that pay current dividends and show and FMR Far East,
potential for capital appreciation. sub-investment advisors.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SMDC 1 Fidelity VIP III Mid Cap Objective: long-term growth of capital. Invests FMR, investment manager; FMR
Portfolio (Service Class) primarily in medium market capitalization common U.K. and FMR Far East,
stocks. sub-investment advisors.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SOVS 1 Fidelity VIP Overseas Objective: long-term growth of capital. Invests FMR, investment manager; FMR
Portfolio (Service Class) primarily in common stocks of foreign securities. U.K., FMR Far East, Fidelity
International
Investment
Advisors
(FIIA)
and
FIIA
U.K.,
sub-investment
advisors.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SMSS 1 Franklin Templeton VIP Objective: capital appreciation with income as a Franklin Mutual Advisers, LLC
Mutual Shares Securities secondary goal. Invests primarily in equity
Fund securities of companies that the manager believes
are available at market prices less
than their actual value based on
certain recognized or objective
criteria (intrinsic value).
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SRES 1 Franklin Templeton VIP Objective: capital appreciation with a secondary Franklin Advisers, Inc.
Franklin Real Estate Fund goal to earn current income. Invests primarily in
securities of companies operating
in the real estate industry,
primarily equity real estate
investment trusts (REITS).
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SISC 1 Franklin Templeton VIP Objective: long-term capital appreciation. Invests Templeton Investment
Templeton International primarily in equity securities of smaller Counsel, Inc.
Smaller Companies Fund companies located outside the U.S., including in
emerging markets.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SCGR 1 Goldman Sachs VIT Capital Objective: long-term growth of capital. Invest Goldman Sachs Asset
Growth Fund primarily in equity securities considered by the Management
Investment Advisor to have
long-term capital appreciation
potential.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUSE 1 Goldman Sachs VIT CORESM Objective: long-term growth of capital and Goldman Sachs Asset
U.S. Equity Fund dividend income. Invests primarily in a broadly Management
diversified portfolio of large-cap and blue chip
equity securities representing all major sectors
of the U.S. economy.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SGLI 1 Goldman Sachs VIT Global Objective: high total return, emphasizing current Goldman Sachs Asset
Income Fund income, and, to a lesser extent, providing Management International
opportunities for capital appreciation. Invests
primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign
issuers and enters into transactions in foreign
currencies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SIEQ 1 Goldman Sachs VIT Objective: long-term capital appreciation. Invests Goldman Sachs Asset
International Equity Fund primarily in equity securities of companies that Management International
are organized outside the U.S., or whose
securities are principally traded outside the U.S.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SAGP 1 Janus Aspen Aggressive Objective: long-term growth of capital. Invests Janus Capital
Growth Portfolio: Service primarily in common stocks selected for their
Shares growth potential and normally invests at least 50%
of its equity assets in medium-sized companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SGIP 1 Janus Aspen Growth Objective: long-term growth of capital in a manner Janus Capital
Portfolio: Service Shares consistent with the preservation of capital.
Invests primarily in common stocks
selected for their growth
potential.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SINT 1 Janus Aspen International Objective: long-term growth of capital. Invests at Janus Capital
Growth Portfolio: Service least 65% of its total assets in securities of
Shares issuers from at least five different countries,
excluding the U.S. It may at times invest all of
its assets in fewer than five countries or even a
single country.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUDE 1 J.P. Morgan U.S. Objective: provide high total return from a J.P. Morgan
Disciplined Equity Portfolio portfolio of selected equity securities through a
disciplined management approach. Invests primarily
in large- and medium-capitalization U.S. companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SREQ 1 Lazard Retirement Equity Objective: long-term capital appreciation. Invests Lazard Asset Management
Portfolio primarily in equity securities, principally common
stocks of relatively large U.S.
companies (those whose total market
value is more than $1 billion) that
the Investment Manager believes are
undervalued based on their
earnings, cash flow or
asset values.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SRIE 1 Lazard Retirement Objective: long-term capital appreciation. Invests Lazard Asset Management
International Equity primarily in equity securities, principally common
Portfolio stocks of relatively large non-U.S. companies
(those whose total market value is more than $1
billion) that the Investment Manager believes are
undervalued based on their earnings, cash flow or
asset values.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SNDS 1 MFS(R)New Discovery Series Objective: capital appreciation. Invests primarily MFS Investment
in equity securities of emerging growth companies. Management(R)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SRSS 1 MFS(R)Research Series Objective: long-term growth of capital and future MFS Investment
income. Invests primarily in common stocks and Management(R)
related securities that have favorable prospects
for long-term growth, attractive valuations based
on current and expected earnings or cash flow,
dominant or growing market share, and superior
management.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUTS 1 MFS(R)Utilities Series Objective: capital growth and current income. MFS Investment
Invests primarily in equity and debt securities of Management(R)
domestic and foreign companies in the utilities
industry.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SMCC 1 Royce Micro-Cap Portfolio Objective: long-term growth of capital. Invests Royce & Associates, Inc.
primarily in a broadly diversified portfolio of
equity securities issued by micro-cap companies
(companies with stock market capitalizations below
$300 million).
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SPRM 1 Royce Premier Portfolio Objective: long-term growth of capital with Royce & Associates, Inc.
current income as a secondary objective. Invests
primarily in a limited number of equity securities
issued by small companies with stock market
capitalization between $300 million and $1.5
billion.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SVLU 1 Third Avenue Value Portfolio Objective: long-term capital appreciation. Invests The Investment Adviser EQSF
primarily in common stocks of well-financed Advisers, Inc.
companies at a substantial discount to what the
Advisor believes is their true value.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SISM 1 Wanger International Small Objective: long-term growth of capital. Invests Wanger Asset Management, L.P.
Cap primarily in stocks of small- and medium-size
non-U.S. companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SUSC 1 Wanger U.S. Small Cap Objective: long-term growth of capital. Invests Wanger Asset Management, L.P.
primarily in stocks of small- and medium-size U.S.
companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SEGR 1 Warburg Pincus Trust Objective: maximum capital appreciation. Invests Credit Suisse Asset
Emerging Growth Portfolio primarily in equity securities of small - or Management, LLC.
medium sized U.S. emerging-growth companies.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SEQI 1 Wells Fargo VT Equity Objective: long-term capital appreciation and Wells Fargo Bank, N.A.,
Income Fund above-average dividend income. Invests primarily advisor; Wells Capital
in common stocks of large,
high-quality domestic Management
Incorporated, companies with
above-average return potential and
sub-advisor.
above-average dividend income.
- -------------------------------------------------------------------------------------------------------------------------------
</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.
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 qualified plans. It is possible that in the
future, it may be disadvantageous for variable annuity accounts and variable
life insurance accounts and/or qualified plans to invest in the available funds
simultaneously.
Although the insurance company and the funds do not currently foresee any such
disadvantages, the boards of directors or trustees of the appropriate funds will
monitor events in order to identify any material conflicts between annuity
owners, policy owners and qualified 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 qualified plan accounts, you would not bear any expenses
associated with establishing separate funds. Please refer to the fund
prospectuses for risk disclosure regarding simultaneous investments by variable
annuity, variable life insurance and qualified plan accounts.
The IRS issued final regulations relating to the diversification requirements
under Section 817(h) of the Internal Revenue Code of 1986, as amended (the
Code). Each fund intends to comply with these requirements.
<PAGE>
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 Internal Revenue Service (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 also 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.
We have no specific formula for determining the rate of interest that we declare
as future interest rates on the Guarantee Period Accounts. We will declare the
interest rates from time to time based on our analysis of current market
conditions. In addition, we also may consider various other factors in
determining the interest rates for a given Guarantee Period including regulatory
and tax requirements; sales commissions and administrative expenses we bear;
general economic trends; and competitive factors.
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.
<PAGE>
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:
o 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;
o 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;
o Other debt instruments which are unrated or rated below investment grade,
limited to 10% of assets at
the time of purchase; and
o 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 a Guarantee Period Account at any time
after 60 days of transfer or payment allocation into the account. The amount
transferred or withdrawn will receive a MVA 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 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.
<PAGE>
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 or your sales representative will send an application 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 90 or younger. (The age limit may be younger for
qualified annuities in some states.)
When you apply, you may select:
o the optional 5% Accumulation Death Benefit*;
o the optional Guaranteed Minimum Income Benefit Rider (6% Accumulation Benefit
Base)**;
o the optional 8% Performance Credit Rider**;
o the one-year fixed account, Guarantee Period Accounts and/or subaccounts
in which you want to invest;
o how you want to make purchase payments; and o a beneficiary.
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.
*This option is only available if you also select either the Guaranteed Minimum
Income Benefit Rider (6% Accumulation Benefit Base) or the 8% Performance Credit
Rider.
**You may select either the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) or the 8% Performance Credit Rider, but not both.
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). You must make an initial purchase payment of $25,000. Then, 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.
<PAGE>
For nonqualified annuities and Roth IRAs, the retirement date must be:
o no earlier than the 60th day after the contract's effective date; and
o 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:
o on or after the date the annuitant reaches age 59 1/2; and
o 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 (includes SIPs): $25,000
-------------------------------------------------
Minimum additional purchase payments:
If paying by SIP: If paying by any other method:
$50 $100
Maximum total allowable purchase payments* (without prior approval):
$1,000,000 for issue ages up to 85
$ 100,000 for issue ages 86 to 90
*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 qualified 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:
Regular mail:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Enterprise Life Insurance Company
Attention: Unit 829
733 Marquette Avenue
Minneapolis, MN 55402
<PAGE>
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 every payment you make
to your contract. We apply this credit immediately. We allocate the credit to
the fixed accounts and subaccounts in the same proportions as your purchase
payment. We calculate the credit as a percentage of the net current payment
(current payment less the amount of partial withdrawals that exceed all prior
purchase payments) according to the following schedule:
If total net payments* made during then the purchase payment
the life of the contract equals....... credit percentage equals..
---------------------------------- -------------------------
$25,000 to less than $100,000 3%
$100,000 to less than $1 million 4
$1 million and over 5
*Net payments equal total payments less total withdrawals.
If you make subsequent payments which cause the contract to become eligible for
a higher percentage credit, we will add credits to increase the credit
percentage on prior payments (less withdrawals). We allocate credits according
to the purchase payment allocation on the date we add the credits to the
contract.
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.
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 these 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.
For contract less than $100,000, this may occur if you make a full withdrawal
after five years.
This credit is available because of lower costs associated with larger sized
contracts and through revenue from a higher and longer withdrawal charge
schedule, a higher contract administrative charge and a higher mortality and
expense risk fee. 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.
We reserve the right to increase the amount of the credit for certain groups of
contract owners. The increase will not be greater than 8% of total net payments.
Increases in credit amounts are funded by reduced expenses expected from such
groups.
<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 you can allocate to the fixed accounts.
We will waive this charge when your contract value is $100,000 or more on the
current contract anniversary.
If you take a full withdrawal from your contract, we will deduct the charge at
the time of withdrawal regardless of the contract value or purchase payments
made. 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 the 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 and it totals 1.45% of their average daily net assets on an
annual basis. This fee includes coverage in the contract under either the
Maximum Anniversary Value Death Benefit or the 5% Accumulation Death Benefit. We
cannot increase this fee. These fees cover 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. These fees
do not apply to the fixed accounts.
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.
The subaccounts pay us the mortality and expense risk fee they accrued as
follows:
o first, to the extent possible, the subaccounts pay this fee from any
dividends distributed from the funds in which they invest;
o 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.
Guaranteed Minimum Income Benefit Rider (6% Accumulation Benefit Base) fee
We charge a fee based on the Guaranteed Income Benefit Base for this optional
feature only if you choose this option.* If selected, we deduct the fee
(currently 0.35%) 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.
<PAGE>
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 in the last six
months, and
(b) is the total contract value in the fixed accounts.
This adjustment to the contract value 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 this
fee after the rider effective date and it does not apply after annuity payouts
begin. We can increase this fee on new contracts up to a maximum of 0.75%.
8% Performance Credit Rider fee
We charge a fee for this optional feature only if you choose this option.* If
selected, we deduct the fee of 0.25% of your 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 as your interest in each
account 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 8% Performance Credit Rider fee.
*You may select either the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) or the 8% Performance Credit Rider, but not both.
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 nine 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. (Your initial purchase payment is
considered 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.
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.
<PAGE>
The withdrawal charge percentage depends on the number of years since you made
the payments that are withdrawn:
Years from purchase payment Withdrawal charge
receipt percentage
1 8%
2 8
3 8
4 8
5 7
6 6
7 6
8 4
9 2
Thereafter 0
For a partial withdrawal that is subject to a withdrawal charge, the amount we
actually withdraw from your contract will be the amount you request plus any
applicable withdrawal charge. We apply the withdrawal charge to this total
amount. We pay you the amount you requested. If you make a full withdrawal of
your contract, we also will deduct the $40 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. The
discount rate we use in the calculation will be 5.36% if the assumed investment
rate is 3.5% and 6.86% 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. In no event would your withdrawal charge
exceed 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:
o The contract date is Nov. 1, 2000 with a contract year of Nov. 1 through
Oct. 30 and with an anniversary date of Nov. 1 each year; and
o We received these payments
- $10,000 Nov. 1, 2000;
- $8,000 Dec. 31, 2006; and
- $6,000 Feb. 20, 2008; and
o The owner withdraws the contract for its total withdrawal value of $38,101
on Aug. 5, 2010 and had not made any other withdrawals during that contract
year; and
o The prior anniversary Nov. 1, 2009 contract value was $38,488.
Withdrawal Charge Explanation
$ 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 Nov. 1, 2000 payment was received more than nine years before
withdrawal and is withdrawn without withdrawal charge; and
$640 $8,000 Dec. 31, 2006 payment is in its fourth year from receipt,
withdrawn with an 8% withdrawal charge; and
$6,000 Feb. 20, 2008 payment is in its third year from receipt
$480 withdrawn with an 8% withdrawal charge.
----
$1,120
Waiver of withdrawal charges We do not assess withdrawal charges for:
o withdrawals of any contract earnings;
o withdrawals of amounts totaling up to 10% of your prior contract
anniversary contract value to the extent that it exceeds contract earnings;
o required minimum distributions from a qualified annuity (for those amounts
required to be distributed from the contract described in this prospectus);
o contracts settled using an annuity payout plan;
o 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);
o amounts we refund to you during the free look period; and
o 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
o 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 withdrawal.
o 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 (up to 3.5%). These
taxes depend upon your state of residence or the state in which the contract was
sold. Currently, we deduct any applicable premium 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.
<PAGE>
Valuing Your Investment
We value your fixed accounts and subaccounts as follows:
Fixed accounts: We value the amounts you allocated to the fixed accounts
directly in dollars. The value of a fixed account equals:
o the sum of your purchase payments and transfer amounts allocated to the
one-year fixed account and the Guarantee Period Accounts;
o plus any purchase payment credits allocated to the fixed accounts;
o plus interest credited;
o minus the sum of amounts withdrawn after any applicable MVA (including any
applicable withdrawal charges) and amounts transferred out;
o minus any prorated contract administrative charge;
o minus any prorated portion of the Guaranteed Minimum Income Benefit Rider
(6% Accumulation Benefit Base) fee (if applicable); and
o minus any prorated portion of the 8% Performance Credit Rider fee (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 8% Performance
Credit Rider fee, or the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) 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.
Net investment factor
We determine the net investment factor by:
o 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
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee and the variable account administrative charge 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.
<PAGE>
Factors that affect subaccount accumulation units
Accumulation units may change in two ways: in number and in value. Here are the
factors that influence those changes:
The number of accumulation units you own may fluctuate due to:
o additional purchase payments you allocate to the subaccounts;
o any purchase payment credits allocated to the subaccounts;
o transfers into or out of the subaccounts;
o partial withdrawals;
o withdrawal charges;
o prorated portions of the contract administrative charge;
o prorated portions of the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) fee (if selected); and/or
o prorated portions of the 8% Performance Credit Rider fee (if selected).
Accumulation unit values will fluctuate due to:
o changes in funds' net asset value;
o dividends distributed to the subaccounts;
o capital gains or losses of funds;
o fund operating expenses; and/or
o mortality and expense risk fee and the variable account administrative
charge.
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>
<PAGE>
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 with this
strategy will depend upon your willingness to continue to invest regularly
through periods of low price levels. Dollar-cost averaging can be an effective
way to help meet your long-term goals. For specific features contact us.
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.
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. (For information on transfers after annuity
payouts begin, see "Transfer policies" below.)
Transfer policies
o 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.
o 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.
o You may transfer contract values from a Guarantee Period Account any time
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.
o 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.
<PAGE>
o We will not accept requests for transfers from the one-year fixed account
at any other time.
o 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, your choices of
subaccounts may be limited.
o 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:
Regular mail:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Enterprise Life Insurance Company
Attention: Unit 829
733 Marquette Avenue
Minneapolis, MN 55402
Minimum amount
Transfers or
withdrawals: $500 or entire account balance
Maximum amount
Transfers or
withdrawals: Contract value
2 Your sales representative can help you set up automated By automated transfers
or partial withdrawals among your subaccounts or fixed accounts. transfers and
automated partial You can start or stop this service by written request or other
method acceptable to us. withdrawals: You must allow 30 days for us to change
any instructions that are currently in place.
o 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.
o Automated withdrawals may be restricted by applicable law under some
contracts.
o You may not make additional purchase payments if automated partial
withdrawals are in effect.
o Automated partial withdrawals may result in IRS taxes and penalties on all or
part of the amount withdrawn.
<PAGE>
Minimum amount
Transfers or
withdrawals: $100 monthly
$250 quarterly, semi-annually or annually
3 Call between 7 a.m. and 6 p.m. Central time:
By phone:
800-333-3437 or
(612) 671-7700 (Minneapolis/St. Paul area)
Minimum amount
Transfers or
withdrawals: $500 or entire account balance
Maximum amount
Transfers: Contract value
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 (6% Accumulation Benefit Base)
This optional Guaranteed Minimum Income Benefit Rider may be available in many
jurisdictions for a separate annual charge, (see "Charges - Guaranteed Minimum
Income Rider (6% Accumulation Benefit Base) fee"). You cannot select this rider
if you select the 8% 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. This rider is only available
at the time you purchase your contract.
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 with the contract value at that
anniversary reflected as the premium. 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 based on the guaranteed annuitant
mortality table in your contract and a 2.5% interest rate. 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
<PAGE>
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 uses the same calculation as the Variable
Account 5% Floor but uses a 6% accumulation rate.
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 paid
into the contract.
If we exclude such payments and credits, the Guaranteed Income Benefit Base
would be calculated as the greatest of:
(a) contract value less "market value adjusted prior 5 years of payments and
purchase payment credits"
(b) total payments and purchase payment credits less prior 5 years of
payments and purchase payment credits, less adjusted partial
withdrawals
(c) the Variable Account 6% Floor, less the "6% adjusted prior 5 years of
payments and purchase payment credits"
"Market value adjusted prior 5 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. We calculate the estimated contract
value at such anniversary 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.
"6% Adjusted prior 5 years of payments and purchase payment credits" are
calculated as the sum of each payment or payment credit accumulated at 6% for
the number of full contract years they have been in the contract.
Conditions on election of the rider: The following conditions apply to the
election of the rider:
o you must elect the rider at the time you purchase your contract,
o you must elect either the Maximum Anniversary Value Death Benefit or
the 5% Accumulation Death Benefit and
o 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 AXPSM 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.
<PAGE>
Exercising the rider: The following conditions apply to the exercise of the
rider:
o you may only exercise the rider within 30 days after any contract
anniversary following the expiration of a seven-year waiting
period from the effective date of the rider, and
o the annuitant on the retirement date must be between 50 and 86 years
old, and
o 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
Terminating the rider: The following conditions apply to the termination of the
rider:
o you may terminate the rider within 30 days after the first anniversary of
the latest of the effective
date of the rider.
o you may terminate the rider any time after the seventh anniversary
of the effective date of the rider.
o 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.
o the rider will terminate on the contract anniversary after the
annuitant's 86th birthday.
Example:
o The contract is purchased with a payment of $100,000 on Jan. 1, 2000, and a
$4,000 purchase payment credit is added to the contract.
o There are no additional purchase payments and no partial withdrawals.
o The money is fully allocated to the subaccounts.
o 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.
o The contract is within 30 days after contract anniversary.
If the Guaranteed Minimum Income Benefit Rider (6% Accumulation Benefit Base) 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
<S> <C> <C> <C> <C>
Contract Anniversary At Guaranteed Income Benefit Base Plan A -- Plan B -- Plan D --
Exercise Life Annuity Life Annuity Joint and last
- no refund with survivor life
ten years certain annuity - no refund
10 $186,248 $970.35 $944.28 $772.93
15 $249,242 $1,485.48 $1,415.69 $1,149.00
</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.
8% 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 (6% Accumulation Benefit Base). This
feature provides certain benefits if your contract value has not reached or
exceeded a Target Value (as defined below) on the seventh and tenth rider
anniversaries.
<PAGE>
Your benefits under this rider are as follows:
(a) if on the seventh rider anniversary, your contract value has not met or
exceeded the Target Value, we will make a credit to your contract equal to
3% of your purchase payments and purchase payment credits less adjusted
partial withdrawals, purchase payments and purchase payment credits made in
the prior five years; and
(b) if on the tenth rider anniversary, your contract value has not met or
exceeded the Target Value, we will make an additional credit to your
contract equal to 5% of your purchase payments and purchase payment credits
less adjusted partial withdrawals, purchase payments and purchase payment
credits made in the prior five years.
On the tenth rider anniversary and every ten years thereafter while you have the
contract, the ten year calculation period restarts. We use the contract value
(after any credits) on that contract 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.
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 with the contract value at that
anniversary reflected as the initial purchase payment for the calculation of the
Target Value and any credit.
Target Value: The Target Value accumulates purchase payments and purchase
payment credits at an annual interest rate of 8% until the tenth rider
anniversary less adjusted partial withdrawals also accumulated at 8% until the
tenth rider anniversary.
Adjusted partial withdrawals: We calculate the adjusted partial withdrawals for
the 8% Performance Credit Rider 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 a contract anniversary.
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 fixed accounts and the AXPSM 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: The following conditions apply to the termination of the
rider:
o you may terminate the rider within 30 days following the first
anniversary after the effective date of the rider.
o you may terminate the rider within 30 days following the tenth
anniversary of the latest of the effective date of the rider or
the last reset date.
o 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.
<PAGE>
Example:
o The contract is purchased with a payment of $100,000 on January 1, 2000 and
a $4,000 purchase payment
credit is added to the contract.
o There are no additional purchase payments and no partial withdrawals.
o On January 1, 2007, the contract value is $150,000.
o The credit on January 1, 2007 is determined as:
Target Value on January 1, 2007 =
104,000 x (1.08)^7 = 104,000 x 1.71382 = $178,237.72
As the target value of $178,237.72 is greater than the contract value of
$150,000, a credit is made to the contract equal to $3,120 (or 3% of the
purchase payment and credits of $104,000). Your total contract value on
that date is $153,120.
o On January 1, 2010, the contract value is $220,000.
o The credit on January 1, 2010 is determined as:
Target Value on January 1, 2010 =
$104,000 x (1.08)^10 = $104,000 x 2.158924 = $224,528.20
As the target value of $224,528.20 is greater than the contract value of
$220,000, a credit is made to the contract equal to $5,200 (or 5% of the
purchase payment and credits of $104,000). Your total contract value on
that date is $225,200.
o The benefit automatically restarts on January 1, 2010 with the "initial
payment" equal to $225,200 and the credit determination made on January 1,
2017 and 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") 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:
o payable to owner;
o 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:
<PAGE>
- -- 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.
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. The benefit paid will be based on the death benefit
coverage you select 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.
Maximum Anniversary Value Death Benefit Rider
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
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.
<PAGE>
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.
After 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:
o The contract is purchased with a payment of $25,000 on Jan. 1, 2000. A
purchase payment credit of $750 is added to the contract.
o On Jan. 1, 2001 (the first contract anniversary) the contract value has
grown to $29,000.
o On March 1, 2001 the contract value has fallen to $27,000, at which point
the owner takes a $1,500 partial withdrawal, leaving a contract value of
$25,500.
The death benefit on March 1, 2001 is calculated as follows:
The "maximum anniversary value": $29,000.00
(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 29,000 = -1,611.11
---------------- ---------
27,000
for a death benefit of: $27,388.89
5% Accumulation 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 and you select either the Guaranteed Minimum
Income Benefit Rider (6% Accumulation Benefit Base) or the 8% Performance Credit
Rider, you may choose to add this benefit to you 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
3. the Variable Account 5% Floor
We calculate the "adjusted partial withdrawals" as described above except that
only the benefit in number two is taken into account.
<PAGE>
The Variable Account 5% Floor
The Variable Account 5% Floor is the sum of the value in the fixed accounts plus
the variable account floor. On each contract anniversary prior to the earlier of
your or the annuitant's 81st birthday, we increase the variable account floor by
accumulating the prior anniversary's floor at 5%. On the first contract
anniversary, the floor is increased by 5% of the accumulated initial purchase
payments plus purchase payment credits allocated to the subaccounts. On any day
that you allocate additional amounts to, or withdraw or transfer from the
subaccounts, we adjust the floor by adding the additional amounts and
subtracting the "adjusted partial withdrawals" or "adjusted transfers."
After the contract anniversary immediately following either your or the
annuitant's 81st birthday, the Variable Account 5% Floor is the floor on that
anniversary increased by additional amounts allocated to the subaccounts since
that anniversary plus purchase payment credits and reduced by any "adjusted
partial withdrawals" since that anniversary.
For the Variable Account 5% Floor, we calculate the "adjusted partial
withdrawals" or "adjusted transfers" as the result of (a) times (b) where: (a)
is the ratio of the amount of withdrawal (including any withdrawal charges) or
transfer from the subaccounts to the total value in the subaccounts on the date
of (but prior to) the withdrawal or transfer. (b) is the variable account floor
on the date of (but prior to) the withdrawal or transfer.
Example:
o The contract is purchased with a payment of $25,000 on Jan. 1, 2000 and a
$750 purchase payment credit is added to the contract with $5,100 allocated
to the one-year fixed account and $20,650 allocated to the subaccounts.
o On Jan. 1, 2001 (the first contract anniversary), the one-year fixed
account value is $5,200 and the subaccount value is $17,000. Total contract
value is $23, 200.
o On March 1, 2001, the one-year fixed account value is $5,300 and the
subaccount value is $19,000. Total contract value is $24,300. The owner
takes a $1,500 partial withdrawal all from the subaccounts, leaving the
contract value at $22,800.
The death benefit on March 1, 2001 is calculated as follows:
The variable account floor on Jan. 1, 2001,
calculated as: 1.05 x 20,650 = $ 21,682.50
plus any purchase payments paid since that anniversary: + 0.00
minus any "adjusted partial withdrawals" from the subaccounts,
calculated as: 1,500 x 21,682.50 =
19,000 -$ 1,711.78
-----------
Variable Account Floor Benefit $ 19,970.72
plus the one-year fixed account value + 5,300.00
----------
for a death benefit of:
$ 25,270.72
<PAGE>
If your spouse is sole beneficiary under a nonqualified annuity and you die
before the retirement date, your spouse may keep the contract as owner with the
contract value equal to the death benefit that would have otherwise been paid.
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. There will be no
withdrawal charges on the contract from that point forward unless additional
purchase payments are made. The Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base), if selected, is then terminated.
Under a qualified annuity, if the annuitant dies before the Code requires
distributions to begin, and the spouse is the only beneficiary, the spouse may
keep the contract as owner until the date on which the annuitant would have
reached age 70 1/2 or any other date permitted by the Code. To do this, the
spouse must give us written instructions within 60 days after we receive proof
of death. The contract value is equal to the death benefit that would otherwise
have been paid. There will be no withdrawal charges on the contract from that
point forward unless additional purchase payments are made. The Guaranteed
Minimum Income Benefit Rider (6% Accumulation Benefit Base), if selected, is
then terminated.
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:
o the beneficiary asks us in writing within 60 days after we receive proof of
death; and
o payouts begin no later than one year after your death, or other date as
permitted by the Code; and
o 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:
o the annuity payout plan you select;
o the annuitant's age and, in most cases, sex;
o the annuity table in the contract; and
o the amounts you allocated to the accounts at the 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.)
<PAGE>
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.
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:
o 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 have made only one monthly payout, we will not make
any more payouts.
o 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.
o 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.
o 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.
o 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 at the initial payment. The discount rate we use in the
calculation will vary between 5.36% and 6.86% depending on 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 qualified plans: If you purchased a qualified
annuity, you may be required to select a payout plan that provides for
payouts:
<PAGE>
o over the life of the annuitant;
o over the joint lives of the annuitant and a designated beneficiary;
o for a period not exceeding the life expectancy of the annuitant; or
o 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.
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, any increase in your contract value 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 are normally 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.
Qualified annuities: We designed this contract for use with qualified retirement
plans. 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 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 annuities 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.
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 qualified 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 8% Performance Credit Rider credits: These are
considered earnings and are taxed accordingly.
<PAGE>
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 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:
o because of your death;
o because you become disabled (as defined in the Code);
o 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
o 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.
<PAGE>
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.
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:
o the reserve held in each subaccount for your contract;
o 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:
o laws or regulations change,
o existing funds become unavailable, or
o in our judgment, the funds no longer are suitable for the subaccounts.
<PAGE>
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:
o add new subaccounts;
o combine any two or more subaccounts;
o add subaccounts investing in additional funds;
o transfer assets to and from the subaccounts or the variable account;and
o eliminate or close any subaccounts.
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.
<PAGE>
About the Service Providers
Principal Underwriter
American Express Financial Advisors Inc. (AEFA) serves as the principal
underwriter for the contract. Its offices are located at IDS Tower 10,
Minneapolis, MN 55440. 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 will 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.
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 80 South Eighth Street, Minneapolis, MN 55402. Its 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 alleged that the sale of annuities in tax-deferred contributory
retirement investment plans (e.g., IRAs) is never appropriate. The plaintiffs
purported to represent a class consisting of all persons who made similar
purchases. The plaintiffs sought damages in an unspecified amount.
American Enterprise Life is included as a party to 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.
<PAGE>
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** 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income $ 243,525 $ 258,163 $ 340,219 $ 332,268 $ 271,719 $ 223,706 $ 162,201
Net gain (loss) on
investments 4,897 (1,526) (4,788) (509) (5,258) (1,154) (1,190)
Other 5,898 5,890 7,662 6,329 5,753 4,214 2,753
Total revenues $ 254,320 $ 262,527 $ 343,093 $ 338,088 $ 272,214 $ 226,766 $ 163,764
=========== =========== =========== =========== =========== =========== ===========
Income before income
taxes $ 43,229 $ 28,865 $ 36,421 $ 44,958 $ 35,735 $ 33,440 $ 30,212
============ ============ ============ ============ ============ ============ ===========
Net income $ 29,178 $ 18,475 $ 22,026 $ 28,313 $ 22,823 $ 21,748 $ 19,638
============ ============ ============ ============ ============ ============ ===========
Total assets $4,757,513 $5,033,598 $4,885,621 $4,973,413 $4,425,837 $3,570,960 $2,712,286
========== =========== ========== ========== ========== ========== ==========
</TABLE>
*Nine months ended Sept. 30, 1999
**Nine months ended Sept, 30, 1998
Management's discussion and analysis of financial condition and results of
operations
Nine months ended September 30, 1999 Compared to the nine months ended
September 30, 1998:
Net income increased 58 percent to $29 million for the nine months ended
September 30, 1999. A decrease in benefits and expenses, driven primarily by a
decrease in interest credited on investment contracts and a decrease in
amortization of deferred policy acquisition costs more than offset a decrease in
revenues, driven primarily by a decrease in net investment income.
Total revenues decreased to $254 million for the nine months ended September 30,
1999, compared to $263 million for the same period in 1998. The decrease is
primarily due to a decrease in net investment income resulting from a decrease
in average invested assets.
Net realized gains (losses) on investments were $4.9 million for the nine months
ended September 1999, compared to $(1.5) million for the same period in 1998.
The Company incurs realized losses when investments are sold at a loss and when
a decline in fair value of a fixed maturity investment is determined to be other
than temporary and it is written down to fair value.
Total benefits and expenses decreased 9.7 percent to $211 million for the nine
months ended September 30, 1999 compared to $234 million for the same period in
1998. The largest component of expenses, interest credited on investment
contracts, decreased to $157 million for the period, reflecting a decrease in
annuities in force. Amortization of deferred policy acquisition costs decreased
to $31 million for the nine months ended September 30, 1999 compared to $43
million for the same period in 1998. This decrease was primarily due to
accelerating amortization in 1998 to reflect actual lapse experience on certain
fixed annuities as well as lower deferred policy acquisition cost balances.
1998 Compared to 1997:
Net income decreased 22 percent to $22 million in 1998, compared to $28 million
in 1997. An increase in revenues, resulting primarily from an increase in net
investment income was more than offset by an increase in benefits and expenses,
resulting primarily from an increase in amortization of deferred policy
acquisition costs.
<PAGE>
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, partially offset by an increase in net realized loss on
investments. Net investment income, the largest component of revenues, increased
primarily as a result of an increase in investment yields.
Contractholder charges, which consist primarily of charges on annuity contracts,
increased 12 percent to $6.4 million in 1998, compared with $5.7 million in
1997. This increase is primarily the result of an increase in surrender charges.
Net realized loss on investments increased to $4.8 million in 1998, compared to
$0.5 million in 1997. The Company incurs realized losses when investments are
sold at a loss and when a decline in the fair value of a fixed maturity
investment is determined to be other than temporary and it is written down to
fair value.
Total benefits and expenses increased 4.6 percent to $307 million in 1998. The
largest component of expenses, interest credited on investment contracts,
decreased to $229 million, reflecting a decrease in 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
accelerating amortization to reflect actual lapse experience on certain fixed
annuities.
1997 Compared to 1996:
Net income increased 24 percent to $28 million in 1997, compared to $23 million
in 1996. This growth resulted primarily from an increase in net investment
income, partially offset by an increase in interest credited on investment
contracts.
Total revenues increased to $338 million in 1997, compared with $272 million in
1996. The increase is primarily due to an increase in net investment and a
decrease in net realized loss on investments. Net investment income, the largest
component of revenues, increased primarily as a result of an increase in
investments owned and a slight increase investment yields.
Contractholder charges, which consist primarily of charges on annuity contracts,
increased 3.6 percent to $5.7 million in 1997, compared with $5.5 million in
1996. This increase is primarily the result of an increase in surrender charges.
Net realized loss on investments decreased to $0.5 million in 1997, compared to
$5.3 million in 1996. The Company incurs realized losses when investments are
sold at a loss and when a decline in the fair value of a fixed maturity
investment is determined to be other than temporary and it is written down to
fair value.
Total benefits and expenses increased to $293 million in 1997. The largest
component of expenses, interest credited on investment contracts, increased 21
percent to 231 million compared to $192 million in 1996. Amortization of
deferred policy acquisition costs increased to $37 million compared to $31
million in 1996. These increases were due primarily to increased aggregate
amounts in force.
Risk Management
The sensitivity analysis discussed below estimates the effects of hypothetical
sudden and sustained change in the applicable market conditions on the ensuing
year's earnings based on year-end positions. The market change, assumed to occur
as of year-end, is a 100 basis point increase in market interest rates.
Computations of the prospective effect of the hypothetical interest rate change
is based on numerous assumptions, including relative levels of market interest
rates, as well as the levels of assets and liabilities. The hypothetical change
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 change actually occurred over time. As a
result, actual earnings effects in the future will differ from those quantified
below.
<PAGE>
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of providing fixed annuity clients with a competitive
rate of return on their investments while minimizing risk, and to provide a
dependable and targeted spread between the interest rate earned on investments
and the interest rate credited to contractholders' accounts. The Company does
not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1998, would be appoximately $3 million.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided by premiums,
investment income, proceeds from sales of investments as well as maturities and
periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses 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
short-term sources of funds. No borrowings were outstanding under the agreement
at December 31, 1998. At December 31, 1998, outstanding reverse repurchase
agreements totaled $51 million.
At December 31, 1998, investments in fixed maturities comprised 82 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, 1998, 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, 1998, net unrealized appreciation on fixed maturities held to
maturity included $52 million of gross unrealized appreciation and $7 million of
gross unrealized depreciation. Net unrealized appreciation on fixed maturities
available for sale included $102 million of gross unrealized appreciation and
$34 million of gross unrealized depreciation.
At December 31, 1998, the Company had an allowance for losses on mortgage loans
totaling $8.5 million.
<PAGE>
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, 1998, 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 by 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 interactions 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.
Investments
Of our total investments of $4,503,960,000 at Dec. 31, 1998, 28% was invested in
mortgage-backed securities, 53% in corporate and other bonds, 18% in primary
mortgage loans on real estate and the remaining 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).
<PAGE>
Employees
As of Dec. 31, 1998, 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.
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.
<PAGE>
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: IDS Tower 10,
Minneapolis, MN 55440-0010 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.
Name of individual or
number in group Position held Cash compensation
Five most highly compensated $4,476,367 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 $7,925,328
(12)
Security ownership of management
Our directors and officers do not beneficially own any outstanding shares of
stock of the company. All of our outstanding shares of stock are beneficially
owned by IDS Life. The percentage of shares of IDS Life owned by any director,
and by all our directors and officers as a group, does not exceed 1% of the
class outstanding.
<PAGE>
Experts
Ernst & Young LLP, independent auditors, have audited the consolidated financial
statements of American Enterprise Life Insurance Company at Dec. 31, 1998 and
1997, and for each of the three years in the period ended Dec. 31, 1998, as set
forth in their report. We've included our financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
American Enterprise Life Financial Information
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEET
September 30, 1999
(unaudited)
($ thousands, except share amounts)
<S> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1999, $1,023,281) $1,027,976
Available for sale, at fair value (amortized cost:
1999, $2,549,548) 2,480,649
-----------
3,508,625
Mortgage loans on real estate 794,117
Other investments 9,148
Total investments 4,311,890
Accounts receivable 914
Accrued investment income 57,967
Deferred policy acquisition costs 186,723
Deferred income taxes 25,420
Other assets 32
Separate account assets 174,567
------------
Total assets $4,757,513
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $4,049,397
Policy claims and other policyholders' funds 8,304
Amounts due to brokers 76,928
Other liabilities 22,069
Separate account liabilities 174,567
-----------
Total liabilities 4,331,265
Stockholder's equity:
Capital stock, $100 par value per share;
100,000 shares authorized,
20,000 shares issued and outstanding 2,000
Additional paid-in capital 282,872
Accumulated other comprehensive income:
Net unrealized securities (losses) gains (44,784)
Retained earnings 186,160
Total stockholder's equity 426,248
Total liabilities and stockholder's equity $4,757,513
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Nine months ended September 30,
(unaudited)
($ thousands)
<TABLE>
<CAPTION>
1999 1998
--- ------ --- ----
<S> <C> <C>
Revenues:
Net investment income $243,525 $258,163
Contractholder charges 4,317 5,018
Mortality and expense risk fees 1,581 872
Net realized gain (loss) on investments 4,897 (1,526)
---------- ----------
Total revenues 254,320 262,527
--------- --------
Benefits and expenses:
Interest credited on investment contracts 157,155 173,709
Amortization of deferred policy acquisition costs 30,637 43,051
Other operating expenses 23,299 16,902
---------- -----------
Total benefits and expenses 211,091 233,662
--------- --------
Income before income taxes 43,229 28,865
Income taxes 14,051 10,390
---------- ------------
Net income $ 29,178 $ 18,475
========= =========
See accompanying notes.
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Nine months ended September 30,
(unaudited)
($ thousands)
1999 1998
- -------- - ------
Cash flows from operating activities:
Net income $ 29,178 $18,475
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income 3,773 (1,802)
Change in accounts receivable (82) 44
Change in deferred policy acquisition costs, net 9,756 23,054
Change in other assets 10 84
Change in policy claims and other policyholders' funds 915 (3,220)
Deferred income tax benefit (448) (10,539)
Change in other liabilities (2,430) 8,960
Amortization of premium 1,394 158
Net realized gain on investments (4,897) 1,526
Other, net (1,772) (302)
--------------- ----------
Net cash provided by operating activities 35,397 36,438
Cash flows from investing activities: Fixed maturities held to maturity:
Maturities 47,277 61,786
Sales 5,681 30,468
Fixed maturities available for sale:
Purchases (589,946) (298,885)
Maturities 216,467 239,612
Sales 359,677 43,579
Other investments:
Purchases (20,766) (145,374)
Sales 41,705 53,043
Change in amounts due from brokers (619) --
Change in amounts due to brokers 22,581 94,129
---------- --------
Net cash provided by investing activities 82,057 78,358
Cash flows from financing activities: Activity related to investment contracts:
Considerations received 244,670 237,037
Surrenders and other benefits (519,255) (525,542)
Interest credited to account balances 157,131 173,709
---------- ----------
Net cash used in financing activities (117,454) (114,796)
------------ ------------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
-------------- --------------
Cash and cash equivalents at end of year $ -- $ --
============== ==============
See accompanying notes.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. General
In the opinion of the management of American Enterprise Life Insurance
Company (the Company), the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly its balance sheet as of September 30, 1999 and
the related statements of income and cash flows for the nine month periods
ended September 30, 1999 and 1998.
2. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting
for Derivative Instruments and Hedging Activities. In July 1999, The FASB
issued FAS 137, which defers the effective date for implementation of FAS
133 by one year, making FAS 133 effective no later than January 1, 2001 for
the Company's financial statements. FAS 133 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 of 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. Earlier application of all of the provisions of FAS 133 is
encouraged, but is permitted only as of the beginning of any fiscal quarter
that begins after issuance of FAS 133. This Statement cannot be applied
retroactively. The Company has not yet determined when it will implement
FAS 133. The ultimate financial impact of the new rule will be measured
based on the derivatives in place at adoption and cannot be estimated at
this time.
3. Comprehensive Loss
For nine months ending September 30, 1999 comprehensive loss is as follows:
Net income $29,178
Net unrealized loss on investments (89,079)
--------
Comprehensive loss $(59,901)
=========
<PAGE>
Report of Independent Auditors
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying balance sheets of American Enterprise Life
Insurance Company (a wholly owned subsidiary of IDS Life Insurance Company) as
of December 31, 1998 and 1997, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Enterprise Life
Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
February 4, 1999
Minneapolis, Minnesota
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31,
($ thousands, except share amounts)
ASSETS 1998 1997
- ------ - ----------- - -------
<S> <C> <C>
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1998, $1,126,732 ; 1997, $1,223,108) $1,081,193 $1,186,682
Available for sale, at fair value (amortized cost:
1998, $2,526,712; 1997, $2,609,621) 2,594,858 2,685,799
----------- -----------
3,676,051 3,872,481
Mortgage loans on real estate 815,806 738,052
Other investments 12,103 16,024
------------- -------------
Total investments 4,503,960 4,626,557
Accounts receivable 214 563
Accrued investment income 61,740 59,588
Deferred policy acquisition costs 196,479 224,501
Other assets 43 117
Separate account assets 123,185 62,087
------------ -------------
Total assets $4,885,621 $4,973,413
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $4,166,852 $4,343,213
Policy claims and other policyholders' funds 7,389 11,328
Deferred income taxes 23,199 35,601
Amounts due to brokers 54,347 34,935
Other liabilities 24,500 16,905
Separate account liabilities 123,185 62,087
----------- ------------
Total liabilities 4,399,472 4,504,069
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 income:
Net unrealized securities gains 44,295 49,516
Retained earnings 156,982 134,956
------------ ------------
Total stockholder's equity 486,149 469,344
------------ ------------
Total liabilities and stockholder's equity $4,885,621 $4,973,413
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
1998 1997 1996
--- ------ --- ------ --- ----
<S> <C> <C> <C>
Revenues:
Net investment income $340,219 $332,268 $271,719
Contractholder charges 6,387 5,688 5,450
Mortality and expense risk fees 1,275 641 303
Net realized loss on investments (4,788) (509) (5,258)
---------- ---------- -----------
Total revenues 343,093 338,088 272,214
--------- --------- ----------
Benefits and expenses:
Interest credited on investment contracts 228,533 231,437 191,672
Amortization of deferred policy acquisition costs 53,663 36,803 30,674
Other operating expenses 24,476 24,890 14,133
---------- ---------- --------
Total benefits and expenses 306,672 293,130 236,479
--------- --------- -------
Income before income taxes 36,421 44,958 35,735
Income taxes 14,395 16,645 12,912
---------- ---------- ---------
Net income $ 22,026 $ 28,313 $ 22,823
========= ========= ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1998
($ thousands)
Accumulated Other
Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $296,816 $2,000 $177,872 $ 33,124 $83,820
Comprehensive income:
Net income 22,823 -- -- -- 22,823
Unrealized holding losses arising
during the year, net of taxes of
$12,282 (22,810) -- -- (22,810) --
Reclassification adjustment for losses
included in net income, net of tax
of $(1,093) 2,029 -- -- 2,029 --
-------------------
-----------------
Other comprehensive loss (20,781) -- -- (20,781) --
-----------------
Comprehensive income 2,042
Capital contribution from parent 65,000 -- 65,000 -- --
---------------------------------------------------------------------------
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 parent 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 1,093
of $(588) -- -- 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 $156,982
===========================================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
1998 1997 1996__
- -------- - -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,026 $ 28,313 $ 22,823
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income (2,152) (8,017) (9,692)
Change in accounts receivable 349 9,304 --
Change in deferred policy acquisition costs, net 28,022 (21,276) (32,651)
Change in other assets 74 4,840 (10,007)
Change in policy claims and other policyholders' funds (3,939) (16,099) 15,786
Deferred income tax (benefit) provision (9,591) (2,485) 5,084
Change in other liabilities 7,595 1,255 8,621
Amortization of premium (accretion of discount), net 122 (2,316) (2,091)
Net realized loss on investments 4,788 509 5,258
Other, net 2,544 959 (129)
------------- --------- ----------
Net cash provided by (used in) operating activities 49,838 (5,013) 3,002
Cash flows from investing activities: Fixed maturities held to maturity:
Purchases -- (1,996) (16,967)
Maturities 73,601 41,221 26,190
Sales 31,117 30,601 27,944
Fixed maturities available for sale:
Purchases (298,885) (688,050) (921,914)
Maturities 335,357 231,419 212,212
Sales 48,492 73,366 47,542
Other investments:
Purchases (161,252) (199,593) (212,182)
Sales 78,681 29,139 19,850
Change in amounts due to brokers 19,412 (53,796) 88,568
---------- ----------- ----------
Net cash provided by (used in) investing activities 126,523 (537,689) (728,757)
Cash flows from financing activities: Activity related to investment contracts:
Considerations received 302,158 783,339 846,378
Surrenders and other benefits (707,052) (552,903) (312,362)
Interest credited to account balances 228,533 231,437 191,672
Change in securities sold under repurchase agreements -- -- (67,000)
Capital contribution from parent -- 40,000 65,000
--------------- ---------- ---------
Net cash (used in) provided by financing activities (176,361) 501,873 723,688
----------- --------- --------
Net decrease in cash and cash equivalents -- (40,829) (2,067)
Cash and cash equivalents at beginning of year -- 40,829 42,896
--------------- ---------- ---------
Cash and cash equivalents at end of year $ -- $ -- $ 40,829
============== ============== ==========
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 generally accepted accounting principles 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 generally
accepted accounting principles 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 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:
1998 1997 1996
---- ----- ----
Cash paid during the year for:
Income taxes $19,035 $19,456 $10,317
Interest on borrowings 5,437 1,832 998
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.
Liabilities for future policy benefits
Liabilities for deferred annuities are accumulation values. Liabilities for
fixed annuities in a benefit status are based on the established industry
mortality tables with various interest rates ranging from 5.5 percent to
8.75 percent, depending on year of issue.
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, 1998 and 1997 are $3,504
payable to and $1,289, receivable from, respectively, 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.
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
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires the reporting and display of comprehensive income and its
components. Comprehensive income is defined as the aggregate change in
stockholder's equity excluding changes in ownership interests. For the
Company, it is net income and the unrealized gains or losses on
available-for-sale securities net of taxes and reclassification adjustment.
<PAGE>
1. Summary of significant accounting policies (continued)
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or obtained for Internal Use." The SOP, which
is effective January 1, 1999, 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 will be
capitalized on AEFC's financial statements. As a result, the new rule will
not have a material impact on the Company's results of operations or
financial condition.
In December 1997, the AICPA issued 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 will adopt the SOP on January 1, 1999. The Company
has historically carried a balance in other liabilities on the balance
sheet for potential guaranty fund assessment exposure. Adoption of the SOP
will not have a material impact on the Company's results of operations or
financial condition
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective January 1, 2000. 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. Earlier application of all of the provisions of this Statement
is encouraged, but it is permitted only as of the beginning of any fiscal
quarter that begins after issuance of the Statement. This Statement cannot
be applied retroactively. The ultimate financial impact of the new rule
will be measured based on the derivatives in place at adoption and cannot
be estimated at this time.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
<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, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
========== ======== ======= ==========
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- -------------- ---- ------- -- ------ ---- -----
U.S. Government agency obligations $ 11,120 $ 710 $ -- $ 11,830
State and municipal obligations 3,003 173 -- 3,176
Corporate bonds and obligations 970,498 38,176 2,763 1005,911
Mortgage-backed securities 202,061 1,497 1,367 202,191
-------------- ---------- -------- ------------
$1,186,682 $ 40,556 $ 4,130 $1,223,108
========== ======== ======= ==========
Available for sale
U.S. Government agency obligations $ 2,077 $ 13 $ -- $ 2,090
Corporate bonds and obligations 1,273,217 52,207 8,020 1,317,404
Mortgage-backed securities 1,334,327 33,017 1,039 1,366,305
----------- -------- ------- ---------
$2,609,621 $85,237 $9,059 $2,685,799
========== ======= ====== ==========
</TABLE>
<PAGE>
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 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 $ 33,208 $ 33,499
Due from one to five years 215,010 227,139
Due from five to ten years 539,917 562,708
Due in more than ten years 100,660 108,173
Mortgage-backed securities 192,398 195,213
------------ ------------
$1,081,193 $1,126,732
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 350 $ 358
Due from one to five years 96,412 101,441
Due from five to ten years 981,556 1,021,961
Due in more than ten years 396,558 387,119
Mortgage-backed securities 1,051,836 1,083,979
--------- ---------
$2,526,712 $2,594,858
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $31,117,
$29,561 and $27,969, 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 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.Fixed maturities available for sale were sold
during 1996 with proceeds of $47,542 and gross realized gains and losses of
$17 and $3,139, respectively.
At December 31, 1998, bonds carried at $3,292 were on deposit with various
states as required by law.
<PAGE>
2. Investments (continued)
At December 31, 1998, investments in fixed maturities comprised 82 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 $480 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 1998 1997
---------------------- -- -------- -- ------
Aaa/AAA $1,242,301 $1,531,588
Aa/AA 45,526 34,167
Aa/A 60,019 69,775
A/A 422,725 421,733
A/BBB 228,656 222,022
Baa/BBB 1,030,874 954,962
Baa/BB 79,687 84,053
Below investment grade 498,117 478,003
------------ ------------
$3,607,905 $3,796,303
At December 31, 1998, approximately 94 percent of the securities rated
Aaa/AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of
any other issuer are greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1998, approximately 18 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, 1998 December 31, 1997
----------------------- ---------------------
On Balance Commitments On Balance Commitments
Region Sheet To Purchase Sheet to Purchase
----------------------------------
----------------------------------
<S> <C> <C> <C> <C>
South Atlantic $198,552 $ 651 $186,714 $ 9,199
Middle Atlantic 129,284 520 128,239 10,167
East North Central 134,165 2,211 125,018 6,294
Mountain 113,581 -- 94,061 11,620
West North Central 119,380 9,626 96,701 11,135
New England 46,103 -- 50,932 --
Pacific 43,706 -- 33,052 --
West South Central 32,086 -- 19,573 --
East South Central 7,449 -- 7,480 --
--------- ------------ --------- ------------
824,306 13,008 741,770 48,415
Less allowance for losses 8,500 -- 3,718 --
---------- ------------ ---------- ------------
$815,806 $13,008 $738,052 $48,415
======== ======= ======== =======
</TABLE>
<PAGE>
2. Investments (continued)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------- -------------------
<S> <C> <C> <C> <C>
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
----------------------------------
----------------------------------
Department/retail stores $253,380 $ 781 $242,307 $ 9,683
Apartments 186,030 2,211 189,752 10,167
Office buildings 206,285 9,496 169,177 7,262
Industrial buildings 82,857 520 60,195 17,430
Hotels/Motels 45,552 -- 33,508 --
Medical buildings 33,103 -- 30,103 3,873
Nursing/retirement homes 6,731 -- 9,552 --
Mixed Use 10,368 -- 7,176 --
---------- ------------ --------- ------------
824,306 13,008 741,770 48,415
Less allowance for losses 8,500 -- 3,718 --
----------- ----------- ---------- -----------
$815,806 $13,008 $738,052 $48,415
======== ======= ======== =======
</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, 1998, the Company's recorded investment in impaired loans
was $1,932 with an allowance of $500. At December 31, 1997, the Company's
recorded investment in impaired loans was $4,443 with an allowance of $718.
During 1998 and 1997, the average recorded investment in impaired loans was
$2,736 and $6,473, respectively.
The Company recognized $251, $nil and $nil of interest income related to
impaired loans for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
1998 1997 1996
- ---- - ---- - ----
Balance, January 1 $3,718 $2,370 $ --
Provision for investment losses 4,782 1,805 2,370
Loan payoffs -- (457) --
---------- ------- ---------
Balance, December 31 $8,500 $3,718 $2,370
====== ====== ======
Net investment income for the years ended December 31 is summarized as
follows:
1998 1997 1996
----- -- ----- - ----
Interest on fixed maturities $285,260 $278,736 $230,559
Interest on mortgage loans 65,351 55,085 41,010
Interest on cash equivalents 137 704 1,402
Other (2,493) 1,544 1,194
---------- ------------- -----------
348,255 336,069 274,165
Less investment expenses 8,036 3,801 2,446
--------- ----------- -----------
$340,219 $332,268 $271,719
======== ======== ========
<PAGE>
2. Investments (continued)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
1998 1997 1996
-- ---- -- ---- -- ----
Fixed maturities $ 863 $ 1,638 $(2,888)
Mortgage loans (4,816) (1,348) (2,370)
Other investments (835) (799) --
-------- ------ ----------
$(4,788) $ (509) $(5,258)
======= ======= =======
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
1998 1997 1996
---- ---- ----
Fixed maturities available for sale $(8,032) $57,18 8 $(31,970)
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:
1998 1997 1996
-- ---- -- ---- -- ----
Federal income taxes:
Current $ 23,227 $17,668 $7,124
Deferred (9,591) (2,485) 5,084
--------- -------- -------
13,636 15,183 12,208
State income taxes-current 759 1,462 704
----------- --------- --------
Income tax expense $ 14,395 $16,645 $12,912
======== ======= =======
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>
1998 1997 1996
----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Provision Rate Provision Rate Provision Rate
Federal income taxes based
on the statutory rate $13,972 35.0% $15,735 35.0% $12,507 35.0%
Increases (decreases) are attributable to :
Tax-excluded interest (35) (0.1) (41) (0.1) (53) (0.1)
State tax, net of federal benefit 493 1.2 956 2.1 459 1.3
Other, net (35) -- (5) -- (1) --
------ ------ ------- ------ ------ ------
Federal income taxes $14,395 36.1% $16,645 37.0% $12,912 36.2%
======= ==== ======= ==== ======= ====
</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: 1998 1997
--------- -------
Policy reserves $51,298 $54,468
Other 2,214 1,736
--------- -------
Total deferred income tax assets 53,512 56,204
-------- ------
Deferred income tax liabilities:
Deferred policy acquisition costs 52,908 63,630
Investments 23,803 28,175
-------- ------
Total deferred income tax liabilities _76,711 91,805
------- --------
Net deferred income tax liabilities $23,199 $35,601
======= =======
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 $45,716 and $17,392 as of December
31, 1998 and 1997, respectively. In addition, dividends in excess of
$37,902 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:
1998 1997 1996
--------- --------- -------
Statutory net income $ 37,902 $ 23,589 $ 9,138
Statutory stockholder's equity 330,588 302,264 250,975
5. Related party transactions
On December 31, 1998, the Company 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 $6,651 and $8,400 at December 31, 1998 and 1997, 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 $28,482, $24,535 and $17,936 for the
years ended December 31, 1998, 1997 and 1996, 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 the parent's cost of funds, 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, 1998 or 1997.
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, 1998 Amount Amount Value Exposure
----------------- - ------ - ------ -- ----- --------
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 900,000 $ 5,452 $ 1,518 $ 1,518
Interest rate floors 1,000,000 6,651 17,798 17,798
Interest rate swaps 1,000,000 -- -- --
------------- ------------ -------------
$12,103 $19,316 $19,316
= ======= ======= =======
<PAGE>
7. Derivative financial instruments (continued)
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
----------------- - ------ -- ------ -- ----- -- --------
Assets:
Interest rate caps $ 900,000 $ 7,624 $ 5,340 $ 5,340
Interest rate floors 1,000,000 8,400 8,400 8,400
Interest rate swaps 1,000,000 -- -- --
------------- ------------ ------------
$16,024 $13,740 $13,740
======= ======= =======
</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 2003.
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,
1998 1997
-------- --------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
Investments:
Fixed maturities (Note 2):
Held to maturity $1,081,193 $1,126,732 $1,186,682 $1,223,108
Available for sale 2,594,858 2,594,858 2,685,799 2,685,799
Mortgage loans on real estate (Note 2) 815,806 874,064 738,052 775,869
Derivative financial instruments (Note 7) 12,103 19,316 16,024 13,740
Separate account assets (Note 1) 123,185 123,185 62,087 62,087
Financial Liabilities
Future policy benefits for fixed annuities $4,152,059 $4,000,789 $4,330,173 $4,152,471
Separate account liabilities 123,185 115,879 62,087 58,116
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $14,793 and $13,040, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 1998
and 1997.
</TABLE>
<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 1998 and 1997.
9. Commitments and contingencies
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company conducts business involving insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. The Company, along with AEFC and its insurance
subsidiaries, has been named as a defendant in one of these types of
actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from IDS Life and its subsidiaries. The
complaint puts at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged
violations of consumer fraud statutes. IDS Life and its subsidiaries
believe they have meritorious defenses to the claims raised in this
lawsuit.
The outcome of any litigation cannot be predicted with certainty. In the opinion
of management, however, the ultimate resolution of this lawsuit should not have
a material adverse effect on the Company's financial position.
<PAGE>
Table of Contents of the Statement of Additional Information
Performance Information p.
Calculating Annuity Payouts p.
Rating Agencies p.
Principal Underwriter p.
<PAGE>
Please check the box to receive a copy of the Statement of Additional
Information for:
- -- American Express Signature One Variable AnnuitySM
- -- American Express(R)Variable Portfolio Funds
- -- AIM Variable Insurance Funds, Inc.
- -- Alliance Variable Products Series Fund
- -- Baron Capital Funds
- -- Fidelity Variable Insurance Products - Service Class
- -- Franklin Templeton Variable Insurance Products Trust
- -- Goldman Sachs Variable Insurance Trust (VIT)
- -- Janus Aspen Series: Service Shares
- -- J. P. Morgan Series Trust II
- -- Lazard Retirement Series, Inc.
- -- MFS(R) Variable Insurance TrustSM
- -- Royce Capital Fund
- -- Third Avenue Variable Series Trust
- -- Wanger Advisors Trust
- -- Warburg Pincus Trust
- -- Wells Fargo Variable Trust Funds
Mail your request to:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-534
We will mail your request to:
Your name _____________________________________________
Address _______________________________________________
City _____________________ State _________ Zip ________
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
American Enterprise Variable Annuity Account
Feb. 14, 1999
American Enterprise Variable Annuity Account is a separate account established
and maintained by American Enterprise Life Insurance Company (American
Enterprise Life).
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus dated the same date as this SAI, which may be
obtained by writing or calling us at the address and telephone number below. The
prospectus is incorporated in this SAI by reference.
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
800-333-3437
<PAGE>
TABLE OF CONTENTS
Performance Information...........................................p.
Calculating Annuity Payouts.......................................p.
Rating Agencies...................................................p.
Principal Underwriter.............................................p.
Independent Auditors..............................................p.
Financial Statements
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The subaccounts may quote various performance figures to illustrate past
performance. We base total return and current yield quotations (if applicable)
on standardized methods of computing performance as required by the Securities
and Exchange Commission (SEC). An explanation of the methods used to compute
performance follows below.
Average Annual Total Return
We will express quotations of average annual total return for the subaccounts in
terms of the average annual compounded rate of return of a hypothetical
investment in the contract over a period of one, five and ten years (or, if
less, up to the life of the subaccounts), calculated according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
We calculated the following performance figures on the basis of historical
performance of each fund. 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 exhisted at that time, which it did not.
<PAGE>
Average Annual Total Return (without purchase payment credits) For Qualified
Annuities Without Withdrawal For Periods Ending Dec. 31, 1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* 3.59% 3.97% 3.76% 5.43%
Federal Income Fund (9/99) -- -- -- 0.24
Managed Fund (4/86) 13.60 16.94 12.31 11.66
New Dimensions Fund (5/96) 30.59 -- -- 24.99
Small Cap Advantage Fund (9/99) -- -- -- 12.29
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 0.85% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Qualified
Annuities With Withdrawal For Periods Ending Dec. 31, 1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* -3.50% 2.92% 3.76% 5.43%
Federal Income Fund (9/99) -- -- -- -6.58
Managed Fund (4/86) 5.71 16.29 12.31 11.66
New Dimensions Fund (5/96) 22.59 -- -- 23.93
Small Cap Advantage Fund (9/99) -- -- -- 4.51
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 0.85% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Qualified
Annuities Without Withdrawal and Selection of the Maximum Anniversary Value
Death Benefit and Guaranteed Minimum Income Benefit Rider For Periods Ending
Dec. 31, 1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* 3.48% 3.87% 3.66% 5.32%
Federal Income Fund (9/99) -- -- -- 0.21
Managed Fund (4/86) 13.49 16.83 12.20 11.55
New Dimensions Fund (5/96) 30.46 -- -- 24.87
Small Cap Advantage Fund (9/99) -- -- -- 12.26
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 0.85% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Qualified
Annuities With Withdrawal and Selection of the Maximum Anniversary Value Death
Benefit and Guaranteed Minimum Income Benefit Rider For Periods Ending Dec. 31,
1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* -4.31% 2.75% 3.66% 5.31%
Federal Income Fund (9/99) -- -- -- -7.31
Managed Fund (4/86) 5.49 16.10 12.20 11.53
New Dimensions Fund (5/96) 22.46 -- -- 23.70
Small Cap Advantage Fund (9/99) -- -- -- 3.92
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 0.85% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Non-Qualified
Annuities Without Withdrawal For Periods Ending Dec. 31, 1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* 3.33% 3.71% 3.50% 5.17%
Federal Income Fund (9/99) -- -- -- 0.16
Managed Fund (4/86) 13.32 16.65 12.03 11.38
New Dimensions Fund (5/96) 30.26 -- -- 24.68
Small Cap Advantage Fund (9/99) -- -- -- 12.20
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.10% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Non-Qualified
Annuities With Withdrawal For Periods Ending Dec. 31, 1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* -4.14% 2.65% 3.50% 5.17%
Federal Income Fund (9/99) -- -- -- -7.05
Managed Fund (4/86) 5.32 16.00 12.03 11.38
New Dimensions Fund (5/96) 22.26 -- -- 23.61
Small Cap Advantage Fund (9/99) -- -- -- 4.20
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.10% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Non-Qualified
Annuities Without Withdrawal and Selection of the Maximum Anniversary Value
Death Benefit and Guaranteed Minimum Income Benefit Riders For Periods Ending
Dec. 31, 1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* 3.22% 3.61% 3.40% 5.06%
Federal Income Fund (9/99) -- -- -- 0.13
Managed Fund (4/86) 13.20 16.53 11.92 11.27
New Dimensions Fund (5/96) 30.13 -- -- 24.56
Small Cap Advantage Fund (9/99) -- -- -- 12.17
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.10% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Average Annual Total Return (without purchase payment credits) For Non-Qualified
Annuities With Withdrawal and Selection of the Maximum Anniversary Value Death
Benefit and Guaranteed Minimum Income Benefit Riders For Periods Ending Dec. 31,
1999
<TABLE>
<CAPTION>
Performance Since Commencement of the Fund**
<S> <C> <C> <C> <C> <C>
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
AXPSM Variable Portfolio -
Cash Management Fund (10/81)* -4.23% 2.47% 3.40% 5.04%
Federal Income Fund (9/99) -- -- -- -7.39
Managed Fund (4/86) 5.20 15.80 11.92 11.25
New Dimensions Fund (5/96) 22.13 -- -- 23.38
Small Cap Advantage Fund (9/99) -- -- -- 3.83
* (Commencement date of the funds)
** Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.10% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected.
</TABLE>
<PAGE>
Cumulative Total Return
Cumulative total return represents the cumulative change in the value of an
investment for a given period (reflecting change in a subaccount's accumulation
unit value). We compute cumulative total return by using the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period, at the
end of the period (or fractional portion thereof)
Total return figures reflect the deduction of the withdrawal charge which
assumes you withdraw the entire contract value at the end of the one, five and
ten year periods (or, if less, up to the life of the subaccount). We also may
show performance figures without the deduction of a withdrawal charge. In
addition, total return figures reflect the deduction of all other applicable
charges including the contract administrative charge, the variable account
administrative charge, the Guaranteed Minimum Income Benefit Rider fee and the
mortality and expense risk fee.
Calculation of Yield for Subaccounts Investing in Money Market Funds
Annualized Simple Yield
For subaccounts investing in money market funds, we base quotations of simple
yield on:
(a) the change in the value of a hypothetical subaccount
(exclusive of capital changes and income other than investment
income) at the beginning of a particular seven-day period:
(b) less, a pro rata share of the subaccount expenses accrued over
the period;
(c) dividing the difference by the value of the subaccount at the
beginning of the period to obtain the base period return; and
(d) multiplying the base period return by 365/7.
The subaccount's value includes:
o any declared dividends;
o the value of any shares purchased with dividends paid during the period; and
o any dividends declared for such shares.
It does not include:
o the effect of any applicable withdrawal charge; or
o any realized or unrealized gains or losses.
Annualized Compound Yield
We calculate compound yield using the base period return described above, which
we then compound according to the following formula:
Compound Yield = [(Base Period Return + 1)365/7] - 1
You must consider (when comparing an investment in subaccounts investing in
money market funds with fixed annuities) that fixed annuities often provide an
agreed-to or guaranteed yield for a stated period of time, whereas the
subaccount's yield fluctuates. In comparing the yield of the subaccount to a
money market fund, you should consider the different services that the contract
provides.
<PAGE>
Annualized Yield for Subaccounts Investing in Income Funds
For the subaccounts investing in income funds, we base quotations of yield on
all investment income earned during a particular 30-day period, less expenses
accrued during the period (net investment income) and compute it by dividing net
investment income per accumulation unit by the value of an accumulation unit on
the last day of the period, according to the following formula:
YIELD = 2[( a-b + 1)6 - 1]
cd
where: a = dividends and investment income earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of accumulation units
outstanding during the period that were entitled to
receive dividends
d = the maximum offering price per accumulation unit on
the last day of the period
The subaccount earns yield from the increase in the net asset value of shares of
the fund in which it invests and from dividends declared and paid by the fund,
which are automatically invested in shares of the fund.
The yield on the subaccount's accumulation unit may fluctuate daily and does not
provide a basis for determining future yields.
Independent rating or statistical services or publishers or publications such as
those listed below may quote subaccount performance, compare it to rankings,
yields or returns, or use it in variable annuity accumulation or settlement
illustrations they publish or prepare.
The Bank Rate Monitor National Index, Barron's, Business Week, CDA
Technologies, Donoghue's Money Market Fund Report, Financial Services
Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal
Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today,
U.S. News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
CALCULATING ANNUITY PAYOUTS
The Variable Account
We do the following calculations separately for each of the subaccounts of the
variable account. The separate monthly payouts, added together, make up your
total variable annuity payout.
Initial Payout: To compute your first monthly payment, we:
o determine the dollar value of your contract as of the valuation date that
falls on (or closest to the valuation date that falls before) the seventh
calendar day before the retirement date and then deduct any applicable
premium tax; then
o apply the result to the annuity table contained in the contract or another
table at least as favorable.
The annuity table shows the amount of the first monthly payment for each $1,000
of value which depends on factors built into the table, as described below.
<PAGE>
Annuity Units: We then convert the value of your subaccount to annuity units. To
compute the number of units credited to you, we divide the first monthly payment
by the annuity unit value (see below) on the valuation date that falls on (or
closest to the valuation date that falls before) the seventh calendar day before
the retirement date. The number of units in your subaccount is fixed. The value
of the units fluctuates with the performance of the underlying fund.
Subsequent Payouts: To compute later payouts, we multiply:
o the annuity unit value on the valuation date that falls on (or closest to
the valuation date that falls before) the seventh calendar day before the
payout is due; by
o the fixed number of annuity units credited to you.
Annuity Unit Values: We originally set this value at $1 for each subaccount. To
calculate later values we multiply the last annuity value by the product of:
o the net investment factor; and
o the neutralizing factor.
The purpose of the neutralizing factor is to offset the effect of the assumed
rate built into the annuity table. With an assumed investment rate of 5%, the
neutralizing factor is 0.999866 for a one day valuation period.
Net Investment Factor:
We determine the net investment factor by:
o 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
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee, the variable account administrative charge and the Death Benefit
Rider fee (if selected) from the result.
Because the net asset value of the fund may fluctuate, the net investment factor
may be greater or less than one, and the annuity unit value may increase or
decrease. You bear this investment risk in a variable subaccount.
The One-Year Fixed Account
We guarantee your fixed annuity payout amounts. Once calculated, your payout
will remain the same and never change. To calculate your annuity payouts we:
o take the value of your one-year fixed account at the retirement date or the
date you selected to begin receiving your annuity payouts; then
o using an annuity table, we apply the value according to the annuity payout
plan you select.
The annuity payout table we use will be the one in effect at the time you choose
to begin your annuity payouts. The values in the table will be equal to or
greater than the table in your contract.
<PAGE>
RATING AGENCIES
The following chart reflects the ratings given to us by independent rating
agencies. These agencies evaluate the financial soundness and claims-paying
ability of insurance companies based on a number of different factors. This
information does not relate to the management or performance of the subaccounts
of the contract. This information relates only to our general account and
reflects our ability to make annuity payouts and to pay death benefits and other
distributions from the contract.
Rating Agency Rating
A.M. Best A+
(Superior)
- -----------------------
Duff & Phelps AAA
- -----------------------
Moody's Aa2
PRINCIPAL UNDERWRITER
The principal underwriter for the contract is American Express Financial
Advisors Inc. (AEFA) which offers the contract on a continuous basis.
The contract is new and, therefore, we have not received any withdrawal charges
or paid any commissions.
INDEPENDENT AUDITORS
The financial statements appearing in this SAI have been audited by Ernst &
Young LLP (1400 Pillsbury Center, 200 South Sixth Street, Minneapolis, MN 55402)
independent auditors, as stated in their report appearing herein.
FINANCIAL STATEMENTS
[To be filed by amendment]
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
AMERICAN EXPRESS SIGNATURE ONE VARIABLE ANNUITYSM
American Enterprise Variable Annuity Account
Feb. 14, 2000
American Enterprise Variable Annuity Account is a separate account established
and maintained by American Enterprise Life Insurance Company (American
Enterprise Life).
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus dated the same date as this SAI, which may be
obtained by writing or calling us at the address and telephone number below. The
prospectus is incorporated in this SAI by reference.
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
800-333-3437
<PAGE>
TABLE OF CONTENTS
Performance Information........................................p.
Calculating Annuity Payouts....................................p.
Rating Agencies................................................p.
Principal Underwriter..........................................p.
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The subaccounts may quote various performance figures to illustrate past
performance. We base total return and current yield quotations (if applicable)
on standardized methods of computing performance as required by the Securities
and Exchange Commission (SEC). An explanation of the methods used to compute
performance follows below.
Average Annual Total Return
We will express quotations of average annual total return for the subaccounts in
terms of the average annual compounded rate of return of a hypothetical
investment in the contract over a period of one, five and ten years (or, if
less, up to the life of the subaccounts), calculated according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period, at the end of the
period (or fractional portion thereof)
We calculated the following performance figures on the basis of historical
performance of each fund. Currently, we do not show any performance information
for the subaccounts 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. Past performance does not
guarantee future results.
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
Without Withdrawal For Periods Ending Dec. 31, 1998
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
AXPSM VARIABLE PORTFOLIO
SBCA1 Blue Chip Advantage Fund+ --% --% --% --%
SBND1 Bond Fund (10/81)** -0.16% 5.04% 7.15% 9.45%
SCAR1 Capital Resource Fund (10/81) 22.09 14.66 13.93 13.66
SCMG1 Cash Management Fund (10/81) 3.42 3.22 3.61 4.95
SDEI1 Diversified Equity Income Fund+ -- -- -- --
SEXI1 Extra Income Fund (5/96) -5.98 -- -- 3.52
SFDI1 Federal Income Fund+ -- -- -- --
SGRO1 Growth Fund+ -- -- -- --
SMGD1 Managed Fund (4/86) 13.90 12.07 12.69 10.89
SNDM1 New Dimensions Fund ( 5/96) 26.55 -- -- 22.27
SSCA1 Small Cap Advantage Fund+ -- -- -- --
AIM V.I.
SCAP1 Capital Appreciation Fund (5/93) 17.37 15.32 -- 16.82
SCDV1 Capital Development Fund (5/98) -- -- -- -8.59
SVAL1 Value Fund (5/93) 30.22 19.72 -- 19.90
ALLIANCE VP
SPGR1 Premier Growth Portfolio (Class B) (7/99)+ -- -- -- --
STEC1 Technology Portfolio (Class B) (9/99)+ -- -- -- --
SUGH1 U.S. Government/High Grade Securities -- -- -- --
Portfolio (Class B) (6/99)+
BARON
SCAS1 Capital Asset Fund (10/98) -- -- -- 33.18
FIDELITY VIP
SGRI1 III Growth & Income Portfolio (Service 27.17 -- -- 26.93
Class) (12/96)
SMDC1 III Mid Cap Portfolio -- -- -- 3.03
(Service Class) (12/98)
SOVS1 Overseas Portfolio (Service Class) (12/87) 4.74 4.81 6.67 6.77
FRANKLIN TEMPLETON VIP TRUST -- -- -- --
SMSS1 Mutual Shares Securities Fund - -1.58 -- -- 7.81
Class 2 (11/96)***
SRES1 Franklin Real Estate Securities Fund - -18.21 8.22 -- 8.50
Class 2 (1/89)***
SISC1 Templeton International Smaller Companies -13.66 -- -- -2.30
Fund - Class 2 (11/95)***
*Current applicable charges deducted from fund performance include a $40 contract administrative charge,
a 1.45% mortality and expense risk fee and a 0.15% variable account administrative charge. Premium taxes
are not reflected in these total returns.
+Had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Fund.)
***Because no Class 2 shares were issued as of Dec. 31, 1998, Class 2 performance represents the
historical performance results of Class 1 shares. Performance of Class 2 shares for periods after its
Jan. 6, 1999 inception will reflect Class 2's additional 12b-1 fee expense, which also affects all future
performance.
</TABLE>
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
Without Withdrawal For Periods Ending Dec. 31, 1998 (continued)
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
GOLDMAN SACHS VARIABLE INSURANCE TRUST (VIT)
SCGR1 Capital Growth Fund (4/98)** --% --% --% 12.14%
SUSE1 CORESM U.S. Equity Fund (2/98) -- -- -- 12.96
SGLI1 Global Income Fund (1/98) -- -- -- 6.61
SIEQ1 International Equity Fund (1/98) -- -- -- 18.17
JANUS ASPEN SERIES
SGIP1 Growth Portfolio: Service Shares+ -- -- -- --
SAGP1 aggressive Growth Portfolio: Service Shares+ -- -- -- --
SINT1 International Growth Portfolio: Service Shares+ -- -- -- --
J.P. MORGAN
SUDE1 U.S. Disciplined Equity Portfolio (12/94) 20.80 -- -- 23.98
LAZARD RETIREMENT
SREQ1 Equity Portfolio (3/98) -- -- -- 9.45
SRIE1 International Equity Portfolio (9/98) -- -- -- 11.67
MFS INVESTMENT MANAGEMENT(R)
SNDS1 New Discovery Series (4/98) -- -- -- 1.05
SRSS1 Research Series (7/95) 21.40 -- -- 20.63
SUTS1 Utilities Series (1/95) 16.15 -- -- 23.37
ROYCE
SMCC1 Micro-Cap Portfolio (12/96) 2.27 -- -- 10.44
SPRM1 Premier Portfolio (12/96) 7.04 -- -- 11.05
THIRD AVENUE VARIABLE SERIES TRUST
SVLU1 Value Portfolio+ -- -- -- --
WANGER
SISM1 International Small Cap (5/95) 14.44 -- -- 19.44
SUSC2 U.S. Small Cap (5/95) 6.91 -- -- 24.82
WARBURG PINCUS TRUST
SEGR1 Emerging Growth Portfolio (9/99)+ -- -- -- --
WELLS FARGO
SEQI1 Equity Income Fund (5/96) 16.51 -- -- 18.88
*Current applicable charges deducted from fund performance include a $40 contract administrative charge,
a 1.45% mortality and expense risk fee and a 0.15% variable account administrative charge. Premium taxes
are not reflected in these total returns.
**(Commencement date of the Fund.)
+Had not commenced operations as of Dec. 31, 1998.
</TABLE>
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
With Withdrawal For Periods Ending Dec. 31, 1998
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
AXPSM VARIABLE PORTFOLIO
SBCA1 Blue Chip Advantage Fund+ --% --% --% --%
SBND1 Bond Fund (10/81)** -7.35 3.86 7.15 9.45
SCAR1 Capital Resource Fund (10/81) 14.09 13.84 13.93 13.66
SCMG1 Cash Management Fund (10/81) -4.06 1.95 3.61 4.95
SDEI1 Diversified Equity Income Fund+ -- -- -- --
SEXI1 Extra Income Fund (5/96) -12.70 -- -- 0.70
SFDI1 Federal Income Fund+ -- -- -- --
SGRO1 Growth Fund+ -- -- -- --
SMGD1 Managed Fund (4/86) 5.90 11.17 12.69 10.89
SNDM1 New Dimensions Fund ( 5/96) 18.55 -- -- 20.09
SSCA1 Small Cap Advantage Fund+ -- -- -- --
AIM V.I.
SCAP1 Capital Appreciation Fund (5/93) 9.37 14.51 -- 16.30
SCDV1 Capital Development Fund (5/98) -- -- -- -15.10
SVAL1 Value Fund (5/93) 22.22 19.03 -- 19.44
ALLIANCE VP
SPGR1 Premier Growth Portfolio (Class B) (7/99)+ -- -- -- --
STEC1 Technology Portfolio (Class B) (9/99)+ -- -- -- --
SUGH1 U.S. Government/High Grade Securities -- -- -- --
Portfolio (Class B) (6/99)+
BARON
SCAS1 Capital Asset Fund (10/98) -- -- -- 25.18
FIDELITY VIP
SGRI1 III Growth & Income Portfolio (Service 19.17 -- -- 23.74
Class) (12/96)
SMDC1 III Mid Cap Portfolio -- -- -- -4.41
(Service Class) (12/98)
SOVS1 Overseas Portfolio (Service Class) (12/87) -2.84 3.63 6.67 6.77
FRANKLIN TEMPLETON VIP TRUST -- -- -- --
SMSS1 Mutual Shares Securities Fund - -8.66 -- -- 4.36
Class 2 (11/96)***
SRES1 Franklin Real Estate Securities Fund - -23.95 7.18 -- 8.50
Class 2 (1/89)***
SISC1 Templeton International Smaller Companies -19.77 -- -- -4.64
Fund - Class 2 (11/95)***
*Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.45% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected in these total returns.
+Had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Fund.)
***Because no Class 2 shares were issued as of Dec. 31, 1998, Class 2
performance represents the historical performance results of Class 1 shares.
Performance of Class 2 shares for periods after its Jan. 6, 1999 inception will
reflect Class 2's additional 12b-1 fee expense, which also affects all future
performance.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
With Withdrawal For Periods Ending Dec. 31, 1998 (continued)
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
GOLDMAN SACHS VARIABLE INSURANCE TRUST (VIT)
SCGR1 Capital Growth Fund (4/98)** --% --% --% 4.14%
SUSE1 CORESM U.S. Equity Fund (2/98) -- -- -- 4.96
SGLI1 Global Income Fund (1/98) -- -- -- -1.12
SIEQ1 International Equity Fund (1/98) -- -- -- 10.17
JANUS ASPEN SERIES
SGIP1 Growth Portfolio: Service Shares+ -- -- -- --
SAGP1 aggressive Growth Portfolio: Service Shares+ -- -- -- --
SINT1 International Growth Portfolio: Service Shares+ -- -- -- --
J.P. MORGAN
SUDE1 U.S. Disciplined Equity Portfolio (12/94) 12.80 -- -- 23.06
LAZARD RETIREMENT
SREQ1 Equity Portfolio (3/98) -- -- -- 1.49
SRIE1 International Equity Portfolio (9/98) -- -- -- 3.67
MFS INVESTMENT MANAGEMENT(R)
SNDS1 New Discovery Series (4/98) -- -- -- -6.24
SRSS1 Research Series (7/95) 13.40 -- -- 19.12
SUTS1 Utilities Series (1/95) 8.15 -- -- 22.29
ROYCE
SMCC1 Micro-Cap Portfolio (12/96) -5.11 -- -- 6.76
SPRM1 Premier Portfolio (12/96) -0.72 -- -- 7.39
THIRD AVENUE VARIABLE SERIES TRUST
SVLU1 Value Portfolio+ -- -- -- --
WANGER
SISM1 International Small Cap (5/95) 6.44 -- -- 18.06
SUSC1 U.S. Small Cap (5/95) -0.84 -- -- 23.60
WARBURG PINCUS TRUST
SEGR1 Emerging Growth Portfolio (9/99)+ -- -- -- --
WELLS FARGO
SEQI1 Equity Income Fund (5/96) 8.51 -- -- 16.58
*Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.45% mortality and expense risk fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
Premium taxes are not reflected in these total returns.
**(Commencement date of the Fund.)
+Had not commenced operations as of Dec. 31, 1998.
</TABLE>
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
Without Withdrawal and Selection of the Guaranteed Minimum Income Benefit Rider
(6% Accumulation Benefit Base) For Periods Ending Dec. 31, 1998
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
AXPSM VARIABLE PORTFOLIO
SBCA1 Blue Chip Advantage Fund+ --% --% --% --%
SBND1 Bond Fund (10/81)** -0.53 4.71 6.83 9.12
SCAR1 Capital Resource Fund (10/81) 21.67 14.32 13.59 13.32
SCMG1 Cash Management Fund (10/81) 3.04 2.90 3.30 4.63
SDEI1 Diversified Equity Income Fund+ -- -- -- --
SEXI1 Extra Income Fund (5/96) -6.35 -- -- 3.18
SFDI1 Federal Income Fund+ -- -- -- --
SGRO1 Growth Fund+ -- -- -- --
SMGD1 Managed Fund (4/86) 13.50 11.74 12.35 10.55
SNDM1 New Dimensions Fund ( 5/96) 26.11 -- -- 21.88
SSCA1 Small Cap Advantage Fund+ -- -- -- --
AIM V.I.
SCAP1 Capital Appreciation Fund (5/93) 16.96 14.97 -- 16.46
SCDV1 Capital Development Fund (5/98) -- -- -- -8.95
SVAL1 Value Fund (5/93) 29.76 19.36 -- 19.53
ALLIANCE VP
SPGR1 Premier Growth Portfolio (Class B) (7/99)+ -- -- -- --
STEC1 Technology Portfolio (Class B) (9/99)+ -- -- -- --
SUGH1 U.S. Government/High Grade Securities -- -- -- --
Portfolio (Class B) (6/99)+
BARON
SCAS1 Capital Asset Fund (10/98) -- -- -- 32.71
FIDELITY VIP
SGRI1 III Growth & Income Portfolio (Service 26.72 -- -- 26.52
Class) (12/96)
SMDC1 III Mid Cap Portfolio -- -- -- 2.67
(Service Class) (12/98)
SOVS1 Overseas Portfolio (Service Class) (12/87) 4.37 4.49 6.35 6.44
FRANKLIN TEMPLETON VIP TRUST -- -- -- --
SMSS1 Mutual Shares Securities Fund - -1.95 -- -- 7.46
Class 2 (11/96)***
SRES1 Franklin Real Estate Securities Fund - -18.58 7.87 -- 8.16
Class 2 (1/89)***
SISC1 Templeton International Smaller Companies -14.03 -- -- -2.64
Fund - Class 2 (11/95)***
*Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.45% mortality and expense risk fee, a 0.15%
variable account administrative charge and a 0.35% Guaranteed Minimum Income
Benefit Rider (6% Accumulation Benefit Base) fee. Premium taxes are not
reflected in these total returns.
+Had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Fund.)
***Because no Class 2 shares were issued as of Dec. 31, 1998, Class 2
performance represents the historical performance results of Class 1 shares.
Performance of Class 2 shares for periods after its Jan. 6, 1999 inception will
reflect Class 2's additional 12b-1 fee expense, which also affects all future
performance.
</TABLE>
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
Without Withdrawal and Selection of the Guaranteed Minimum Income Benefit Rider
(6% Accumulation Benefit Base) For Periods Ending Dec. 31, 1998 (continued)
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
GOLDMAN SACHS VARIABLE INSURANCE TRUST (VIT)
SCGR1 Capital Growth Fund (4/98)** --% --% --% 11.75%
SUSE1 CORESM U.S. Equity Fund (2/98) -- -- -- 12.57
SGLI1 Global Income Fund (1/98) -- -- -- 6.24
SIEQ1 International Equity Fund (1/98) -- -- -- 17.76
JANUS ASPEN SERIES
SGIP1 Growth Portfolio: Service Shares+ -- -- -- --
SAGP1 aggressive Growth Portfolio: Service Shares+ -- -- -- --
SINT1 International Growth Portfolio: Service Shares+ -- -- -- --
J.P. MORGAN
SUDE1 U.S. Disciplined Equity Portfolio (12/94) 20.38 -- -- 23.60
LAZARD RETIREMENT
SREQ1 Equity Portfolio (3/98) -- -- -- 9.06
SRIE1 International Equity Portfolio (9/98) -- -- -- 11.28
MFS INVESTMENT MANAGEMENT(R)
SNDS1 New Discovery Series (4/98) -- -- -- 0.68
SRSS1 Research Series (7/95) 20.97 -- -- 20.25
SUTS1 Utilities Series (1/95) 15.75 -- -- 22.98
ROYCE
SMCC1 Micro-Cap Portfolio (12/96) 1.90 -- -- 10.09
SPRM1 Premier Portfolio (12/96) 6.67 -- -- 10.69
THIRD AVENUE VARIABLE SERIES TRUST
SVLU1 Value Portfolio+ -- -- -- --
WANGER
SISM1 International Small Cap (5/95) 14.04 -- -- 19.05
SUSC1 U.S. Small Cap (5/95) 6.53 -- -- 24.42
WARBURG PINCUS TRUST
SEGR1 Emerging Growth Portfolio (9/99)+ -- -- -- --
WELLS FARGO
SEQI1 Equity Income Fund (5/96) 16.10 -- -- 18.50
*Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.45% mortality and expense risk fee, a 0.15%
variable account administrative charge and a 0.35% Guaranteed Minimum Income
Benefit Rider (6% Accumulation Benefit Base) fee. Premium taxes are not
reflected in these total returns.
**(Commencement date of the Fund.)
+Had not commenced operations as of Dec. 31, 1998.
</TABLE>
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
With Withdrawal and Selection of the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) For Periods Ending Dec. 31, 1998
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
AXPSM VARIABLE PORTFOLIO
SBCA1 Blue Chip Advantage Fund+ --% --% --% --%
SBND1 Bond Fund (10/81)** -7.72 3.52 6.83 9.12
SCAR1 Capital Resource Fund (10/81) 13.67 13.49 13.59 13.32
SCMG1 Cash Management Fund (10/81) -4.43 1.62 3.30 4.63
SDEI1 Diversified Equity Income Fund+ -- -- -- --
SEXI1 Extra Income Fund (5/96) -13.07 -- -- 0.35
SFDI1 Federal Income Fund+ -- -- -- --
SGRO1 Growth Fund+ -- -- -- --
SMGD1 Managed Fund (4/86) 5.50 10.82 12.35 10.55
SNDM1 New Dimensions Fund ( 5/96) 18.11 -- -- 19.69
SSCA1 Small Cap Advantage Fund+ -- -- -- --
AIM V.I.
SCAP1 Capital Appreciation Fund (5/93) 8.96 14.16 -- 15.93
SCDV1 Capital Development Fund (5/98) -- -- -- -15.47
SVAL1 Value Fund (5/93) 21.76 18.67 -- 19.06
ALLIANCE VP
SPGR1 Premier Growth Portfolio (Class B) (7/99)+ -- -- -- --
STEC1 Technology Portfolio (Class B) (9/99)+ -- -- -- --
SUGH1 U.S. Government/High Grade Securities -- -- -- --
Portfolio (Class B) (6/99)+
BARON
SCAS1 Capital Asset Fund (10/98) -- -- -- 24.71
FIDELITY VIP
SGRI1 III Growth & Income Portfolio (Service 18.72 -- -- 23.32
Class) (12/96)
SMDC1 III Mid Cap Portfolio -- -- -- -4.77
(Service Class) (12/98)
SOVS1 Overseas Portfolio (Service Class) (12/87) -3.21 3.29 6.35 6.44
FRANKLIN TEMPLETON VIP TRUST
SMSS1 Mutual Shares Securities Fund - -9.03 -- -- 4.00
Class 2 (11/96)***
SRES1 Franklin Real Estate Securities Fund - -24.32 6.82 -- 8.16
Class 2 (1/89)***
SISC1 Templeton International Smaller Companies -20.14 -- -- -4.98
Fund - Class 2 (11/95)***
*Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.45% mortality and expense risk fee, a 0.15%
variable account administrative charge, a 0.35% Guaranteed Minimum Income
Benefit Rider (6% Accumulation Benefit Base) fee and applicable withdrawal
charges. Premium taxes are not reflected in these total returns.
+Had not commenced operations as of Dec. 31, 1998.
**(Commencement date of the Fund.)
***Because no Class 2 shares were issued as of Dec. 31, 1998, Class 2
performance represents the historical performance results of Class 1 shares.
Performance of Class 2 shares for periods after its Jan. 6, 1999 inception will
reflect Class 2's additional 12b-1 fee expense, which also affects all future
performance.
</TABLE>
<PAGE>
Average Annual Total Return (Without Purchase Payment Credits) For Annuities
With Withdrawal and Selection of the Guaranteed Minimum Income Benefit Rider (6%
Accumulation Benefit Base) For Periods Ending Dec. 31, 1998 (continued)
<TABLE>
<CAPTION>
Performance Since
Commencement of the Fund*
Since
Subaccount Investing In: 1 Year 5 Years 10 Years Commencement
- ---------- ------------- ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
GOLDMAN SACHS VARIABLE INSURANCE TRUST (VIT)
SCGR1 Capital Growth Fund (4/98)** --% --% --% 3.75%
SUSE1 CORESM U.S. Equity Fund (2/98) -- -- -- 4.57
SGLI1 Global Income Fund (1/98) -- -- -- -1.49
SIEQ1 International Equity Fund (1/98) -- -- -- 9.76
JANUS ASPEN SERIES
SGIP1 Growth Portfolio: Service Shares+ -- -- -- --
SAGP1 aggressive Growth Portfolio: Service Shares+ -- -- -- --
SINT1 International Growth Portfolio: Service Shares+ -- -- -- --
J.P. MORGAN
SUDE1 U.S. Disciplined Equity Portfolio (12/94) 12.38 -- -- 22.66
LAZARD RETIREMENT
SREQ1 Equity Portfolio (3/98) -- -- -- 1.11
SRIE1 International Equity Portfolio (9/98) -- -- -- 3.28
MFS INVESTMENT MANAGEMENT(R)
SNDS1 New Discovery Series (4/98) -- -- -- -6.60
SRSS1 Research Series (7/95) 12.97 -- -- 18.73
SUTS1 Utilities Series (1/95) 7.75 -- -- 21.89
ROYCE
SMCC1 Micro-Cap Portfolio (12/96) -5.48 -- -- 6.39
SPRM1 Premier Portfolio (12/96) -1.09 -- -- 7.01
THIRD AVENUE VARIABLE SERIES TRUST
SVLU1 Value Portfolio+ -- -- -- --
WANGER
SISM1 International Small Cap (5/95) 6.04 -- -- 17.66
SUSC1 U.S. Small Cap (5/95) -1.22 -- -- 23.18
WARBURG PINCUS TRUST
SEGR1 Emerging Growth Portfolio (9/99)+ -- -- -- --
WELLS FARGO
SEQI1 Equity Income Fund (5/96) 8.10 -- -- 16.19
*Current applicable charges deducted from fund performance include a $40
contract administrative charge, a 1.45% mortality and expense risk fee, a 0.15%
variable account administrative charge, a 0.35% Guaranteed Minimum Income
Benefit Rider (6% Accumulation Benefit Base) fee and applicable withdrawal
charges. Premium taxes are not reflected in these total returns.
**(Commencement date of the Fund.)
+Had not commenced operations as of Dec. 31, 1998.
</TABLE>
<PAGE>
Cumulative Total Return
Cumulative total return represents the cumulative change in the value of an
investment for a given period (reflecting change in a subaccount's accumulation
unit value). We compute cumulative total return by using the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period, at the
end of the period (or fractional portion thereof)
Total return figures reflect the deduction of the withdrawal charge which
assumes you withdraw the entire contract value at the end of the one, five and
ten year periods (or, if less, up to the life of the subaccount). We also may
show performance figures without the deduction of a withdrawal charge. In
addition, total return figures reflect the deduction of all other applicable
charges including the contract administrative charge, the variable account
administrative charge, the Maximum Anniversary Value Death Benefit Rider fee,
the Enhanced Death Benefit Rider fee, the Guaranteed Minimum Income Benefit
Rider fee and the mortality and expense risk fee.
Calculation of Yield for Subaccounts Investing in Money Market Funds
Seven-Day Simple Yield
For the subaccounts investing in money market funds, we base quotations of
simple yield on:
(a) the change in the value of a hypothetical subaccount (exclusive of
capital changes and income other than investment income) at the
beginning of a particular seven-day period;
(b) less a pro rata share of the subaccount expenses accrued over the
period; and
(c) dividing this difference by the value of the subaccount at the
beginning of the period to obtain the base period return.
The subaccount's value includes:
o any declared dividends,
o the value of any shares purchased with dividends paid during the period, and
o any dividends declared for such shares.
It does not include:
o the effect of any applicable withdrawal charge, or
o any realized or unrealized gains or losses.
You must consider (when comparing an investment in subaccounts investing in
money market funds with fixed annuities) that fixed annuities often provide an
agreed-to or guaranteed yield for a stated period of time, whereas the
subaccount's yield fluctuates. In comparing the yield of the subaccount to a
money market fund, you should consider the different services that the contract
provides.
<PAGE>
Annualized Yield for Subaccounts Investing in Income Funds
For the subaccounts investing in income funds, we base quotations of yield on
all investment income earned during a particular 30-day period, less expenses
accrued during the period (net investment income) and compute it by dividing net
investment income per accumulation unit by the value of an accumulation unit on
the last day of the period, according to the following formula:
YIELD = 2[( a-b + 1)6 - 1]
cd
where: a = dividends and investment income earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of accumulation units
outstanding during the period that were entitled to
receive dividends
d = the maximum offering price per accumulation unit on the
last day of the period
The subaccount earns yield from the increase in the net asset value of shares of
the fund in which it invests and from dividends declared and paid by the fund,
which are automatically invested in shares of the fund.
The yield on the subaccount's accumulation unit may fluctuate daily and does not
provide a basis for determining future yields.
Independent rating or statistical services or publishers or publications such as
those listed below may quote subaccount performance, compare it to rankings,
yields or returns, or use it in variable annuity accumulation or settlement
illustrations they publish or prepare.
The Bank Rate Monitor National Index, Barron's, Business Week, CDA
Technologies, Donoghue's Money Market Fund Report, Financial Services
Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal
Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today,
U.S. News and World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
CALCULATING ANNUITY PAYOUTS
The Variable Account
We do the following calculations separately for each of the subaccounts of the
variable account. The separate monthly payouts, added together, make up your
total variable annuity payout.
Initial Payout: To compute your first monthly payment, we:
o determine the dollar value of your contract as of the valuation date that
falls on (or closest to the valuation date that falls before) the seventh
calendar day before the retirement date and then deduct any applicable premium
tax; then
o apply the result to the annuity table contained in the contract or another
table at least as favorable.
The annuity table shows the amount of the first monthly payment for each $1,000
of value which depends on factors built into the table, as described below.
Annuity Units: We then convert the value of your subaccount to annuity units. To
compute the number of units credited to you, we divide the first monthly payment
by the annuity unit value (see below) on the valuation date that falls on (or
closest to the valuation date that falls before) the seventh calendar day before
the retirement date. The number of units in your subaccount is fixed. The value
of the units fluctuates with the performance of the underlying fund.
<PAGE>
Subsequent Payouts: To compute later payouts, we multiply:
o the annuity unit value on the valuation date that falls on (or closest to
the valuation date that falls before) the seventh calendar day before the
payout is due; by
o the fixed number of annuity units credited to you.
Annuity Unit Values: We originally set this value at $1 for each subaccount. To
calculate later values we multiply the last annuity value by the product of:
o the net investment factor; and
o the neutralizing factor.
The purpose of the neutralizing factor is to offset the effect of the assumed
rate built into the annuity table. With an assumed investment rate of 5%, the
neutralizing factor is 0.999866 for a one day valuation period.
Net Investment Factor:
We determine the net investment factor by:
o 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
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee and the variable account administrative charge from the result.
Because the net asset value of the fund may fluctuate, the net investment factor
may be greater or less than one, and the annuity unit value may increase or
decrease. You bear this investment risk in a variable subaccount.
The One-Year Fixed Account
We guarantee your fixed annuity payout amounts. Once calculated, your payout
will remain the same and never change. To calculate your annuity payouts we:
o take the value of your one-year fixed account at the retirement date or the
date you selected to begin receiving your annuity payouts; then
o using an annuity table, we apply the value according to the annuity payout
plan you select.
The annuity payout table we use will be the one in effect at the time you choose
to begin your annuity payouts. The values in the table will be equal to or
greater than the table in your contract.
<PAGE>
RATING AGENCIES
The following chart reflects the ratings given to us by independent rating
agencies. These agencies evaluate the financial soundness and claims-paying
ability of insurance companies based on a number of different factors. This
information does not relate to the management or performance of the subaccounts
of the contract. This information relates only to our general account and
reflects our ability to make annuity payouts and to pay death benefits and other
distributions from the contract.
Rating Agency Rating
A.M. Best A+
(Superior)
- -----------------------
Duff & Phelps AAA
- -----------------------
Moody's Aa2
PRINCIPAL UNDERWRITER
The principal underwriter for the contract is American Express Financial
Advisors Inc. (AEFA) which offers the contract on a continuous basis.
The contract is new and, therefore, we have not received any withdrawal charges
or paid any commissions.
