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IDS Life Flexible Payment Market Value Annuity
Prospectus, April 30, 1997
This prospectus describes interests in a flexible premium group market value
annuity contract and individual market value annuity contracts offered by IDS
Life Insurance Company (IDS Life) to the general public for non-tax qualified
purchases. With respect to the group contract, eligible individuals include
members of the general public.
Participation in a group contract will be accounted for separately by the
issuance of a certificate showing the owner's interest under the group contract.
Participation in an individual contract is shown by the issuance of an
individual annuity contract. The certificate and the individual contract are
both referred to as the "contract."
In addition, IDS Life may offer these contracts to fund retirement programs that
qualify under the following sections of the Internal Revenue Code of 1986, as
amended (the Code): (1) plans qualified under Section 401 (including 401(k));
(2) Tax-Sheltered Annuity (TSA) plans adopted by public school systems and
certain tax-exempt organizations pursuant to Section 403(b); (3) individual
retirement annuities (IRAs) and simplified employee pensions (SEP/IRAs)
qualified under Section 408; and (4) deferred compensation plans eligible under
Section 457.
A minimum purchase payment of at least $5,000 must accompany the application for
a contract. Additional purchase payments of at least $2,000 are permitted under
a contract. The contract accumulation value will be guaranteed by the general
assets of IDS Life. IDS Life generally intends to invest funds received in
relation to contracts in a variety of debt instruments having price durations
which tend to match the applicable guarantee periods under the contract.
IDS Life Account MGA
Group and Individual Flexible Premium
Market Value Annuity Contracts
Sold by:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
Telephone: 800-437-0602
These securities may be subject to a substantial surrender charge and/or market
value adjustment if not held to the end of a guarantee period which could result
in receipt of less than the original purchase payment.
Guaranteed interest rates that apply to future guarantee periods will be
declared by IDS Life based on various factors. These interest rates may be
higher or lower than the rates previously guaranteed.
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The minimum guaranteed rate is 3%.
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the accuracy or adequacy
of this prospectus. Any representation to the contrary is a criminal offense.
IDS Life is not a bank or financial institution, and the securities it offers
are not deposits or obligations of, backed or guaranteed or endorsed by any bank
or financial institution nor are they insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency. Investments in this
annuity involve investment risk including the possible loss of principal.
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Table of contents Page
The Flexible Payment Market Value Annuity in brief........
Key terms.................................................
Description of contracts..................................
General...................................................
Application and purchase payment..........................
Right to cancel...........................................
Guarantee periods.........................................
Surrenders, free withdrawals and systematic withdrawals...
Surrender charge..........................................
Transfers.................................................
Market value adjustment...................................
Premium taxes.............................................
Death benefit prior to settlement.........................
Death benefit after settlement............................
Statement.................................................
Electing the settlement date and annuity payment plan.....
Amendment, distribution and assignment of contracts.......
Amendment of contracts....................................
Distribution of contracts.................................
Assignment of contracts...................................
Federal tax considerations................................
The Company...............................................
Business..................................................
Investments by IDS Life...................................
Selected financial data...................................
Management's discussion and analysis of consolidated
financial condition and results of operations.............
Directors and executive officers..........................
Executive compensation....................................
Security ownership of management..........................
Legal proceedings and opinion.............................
Experts...................................................
Appendix A - Total surrender illustration.................
Appendix B - Market value adjustment illustration.........
IDS Life financial information............................
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The Flexible Payment Market Value Annuity in brief
Contracts: IDS Life is offering group and individual flexible premium market
value annuity contracts to the general public for non-tax qualified and tax
qualified purchases. IDS Life is a wholly owned subsidiary of American Express
Financial Corporation, which itself is a wholly owned subsidiary of American
Express Company. As described in this prospectus, each subaccount of the
contracts has a guaranteed rate of interest that is credited to the purchase
payment when it is held to the end of the subaccount guarantee period.
Surrenders or transfers before the end of a subaccount guarantee period are
subject to a market value adjustment and a surrender charge (if applicable).
Surrenders or transfers are available without market value adjustment on the
last day of each subaccount guarantee period and during the first ten days of
each new subaccount guarantee period. A free withdrawal amount is available
under each subaccount.
Guarantee periods: When an initial purchase payment is made under an
application, or when additional purchase payments or transfers are made, the
owner allocates the payment or transfer to one or more subaccounts then offered
by IDS Life. A subaccount is established for each combination of guarantee
period and guarantee rate to which the owner allocates a purchase payment or
transfer. The purchase payment or transfer allocated to each subaccount earns
interest at the applicable rate for that subaccount guarantee period as
established by IDS Life. Since interest is credited on a daily basis, the
interest credited also earns interest at the applicable rate established for the
guarantee period. The guarantee rate established by IDS Life will always be at
least 3%. (p.)
When a subaccount guarantee period ends, a new guarantee period will begin. IDS
Life will transfer the subaccount accumulation value without market value
adjustment to a new subaccount. The new subaccount guarantee period will be for
one year unless the owner elects a different period from those IDS Life then
offers. The new guarantee period may never extend beyond the settlement date.
(p.)
Surrenders, free withdrawals and systematic withdrawals: Each contract year, the
owner may surrender or transfer free withdrawal amounts. These free withdrawal
amounts are not subject to either a surrender charge or a market value
adjustment. However, they are subject to federal income tax and may be subject
to a federal penalty tax and, under certain tax qualified contracts, to 20%
income tax withholding. Free withdrawal amounts are calculated separately for
each subaccount. From the time a subaccount is established by payment or
transfer up to the next contract anniversary, the free withdrawal amount is 10%
of the subaccount payment or transfer. During each contract year thereafter, the
free withdrawal amount is 10% of the prior contract anniversary subaccount
accumulation value. The owner also may establish systematic withdrawals of
amounts up to the free withdrawal amount. (p.)
Subject to certain restrictions, partial or total surrenders are permitted. IDS
Life may defer payment of any surrender for a
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period up to six months from the date it receives notice of surrender, or for
the period permitted by state law, if less. IDS Life will not defer a payment
for a period greater than seven days except under extraordinary circumstances.
IDS Life will pay annual interest of at least 3% of any amounts deferred for
more than thirty days during such period if it chooses to exercise this deferral
right. (p.)
Surrender charge: Surrenders may be subject to a surrender charge. Surrender
charges are calculated separately for each subaccount. The surrender charge
depends on the number of contract years a purchase payment to a subaccount has
been in the contract. For purchase payments that have been in the contract for
less than eight contract years, a surrender charge, beginning at a maximum of
7%, will be assessed on a surrender. There are no surrender charges for payments
that have been in the contract for eight or more contract years or if the
surrender occurs on the last day of a subaccount guarantee period or during the
first ten days of the new subaccount guarantee period. In addition, IDS Life
will waive the surrender charge in certain instances. (p.)
Transfers: The owner may transfer the accumulation value from an existing
subaccount to a new subaccount at any time before the settlement date as long as
a subaccount is established for at least one calendar year prior to the
transfer. The minimum accumulation value the owner may transfer is $2,000 or the
entire subaccount accumulation value, if less. For transfers before the end of a
subaccount guarantee period, there will be a market value adjustment to the
accumulation value in excess of the free withdrawal amount. (p.)
Market value adjustment: A market value adjustment will be applied to a
surrender or transfer that occurs before the end of a subaccount guarantee
period. A market value adjustment is a positive or negative adjustment of the
subaccount accumulation value. Therefore, the amount distributed from a
subaccount on surrender or transfer may be more or less than the total purchase
payments or transfers made to that subaccount (plus accrued interest). The
market value adjustment reflects the relationship, at the time of surrender or
transfer, between the subaccount guarantee rate and the interest rate IDS Life
then is crediting on purchase payments or transfers made to new subaccounts with
guarantee periods of the same duration as the time remaining in the subaccount
guarantee period. (p.)
Premium taxes: IDS Life reserves the right to deduct applicable premium taxes
from the accumulation value of the contract. State premium taxes range from 0 to
3.5% of the gross purchase payments. (p.)
Death benefit prior to settlement: The contract provides for a guaranteed death
benefit. In the event of the death of the annuitant or owner prior to the
settlement date, IDS Life will pay to the owner or beneficiary the death benefit
in lieu of any other payment under the contract. The amount of the death benefit
will equal the accumulation value. (p.)
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Electing the settlement date and annuity payment plan: On the settlement date
specified by the owner, IDS Life will pay the owner a lump sum payment or start
to pay a series of payments. A series of payments may be elected under certain
annuity payment plans. (p.)
Key terms
These terms can help you understand details about your annuity:
Accumulation value - The value of the net purchase and transfer payments plus
interest credited, adjusted for any surrenders. The contract accumulation value
is the sum of all subaccount accumulation values.
Annuitant - The person on whose life monthly annuity payments depend.
Annuity - A contract purchased from an insurance company that offers
tax-deferred growth of the purchase payment until earnings are withdrawn.
Contract anniversary - The same day and month as the contract date each year
that the contract remains in force.
Contract date - The date from which contract anniversaries, contract years and
contract months are determined.
Free withdrawal amount - The amount of surrenders and transfers that may be made
each contract year without market value adjustment or surrender charge. Free
withdrawal amounts are calculated separately for each subaccount. From the time
a subaccount is established by payment or transfer to the next contract
anniversary, the free withdrawal amount is 10% of the subaccount payment or
transfer. During each contract year thereafter, the free withdrawal amount is
10% of the prior contract anniversary subaccount accumulation value.
Guarantee period - The period for which IDS Life guarantees a particular
declared effective annual interest rate.
Guarantee rate - The particular declared effective annual interest rate IDS Life
guarantees for a guarantee period.
Market adjusted value - The accumulation value in excess of the free withdrawal
amount, adjusted by the market value adjustment formula, plus the free
withdrawal amount. The adjustment is for interest rate changes since a
subaccount begins. The adjustment is calculated separately for each subaccount.
The contract market adjusted value is the sum of all subaccount market adjusted
values.
Market value adjustment - The difference between the market adjusted value and
the accumulation value. It is positive if the market adjusted value is greater
than the accumulation value. It is negative if the accumulation value is greater
than the market adjusted value.
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Owner - The person or entity to whom the contract is issued. The owner may be
someone other than the annuitant.
Purchase payment - Payment made to IDS Life for an annuity.
Settlement - The application of the accumulation value of the contract to
provide annuity payments.
Settlement date - The date on which annuity payments are to begin.
Subaccount - An account IDS Life establishes for each combination of guarantee
period and guarantee rate to which the owner allocates a purchase or transfer
payment. Each subaccount is distinguished by the guarantee period and the date
the guarantee period begins.
Surrender value - The accumulation value plus any applicable market value
adjustment, less any applicable surrender charge.
Written request - A request in writing signed by the owner and delivered to IDS
Life at its home office.
Description of contracts
General
This prospectus describes interests in a flexible premium group market value
annuity and individual market value annuity contracts offered by IDS Life to the
general public for non-tax qualified purchases. In addition, IDS Life may offer
the contracts in the following tax qualified programs: (1) Section 401(a)
(including 401(k)) plans; (2) TSA plans; (3) IRAs and IRA/SEPs; and (4) deferred
compensation plans eligible under Section 457.
As described in this prospectus, each subaccount of the contracts has a
guaranteed interest rate that is credited to a purchase payment when it is held
to the end of the subaccount guarantee period. Surrenders or transfers before
the end of a subaccount guarantee period are subject to a market value
adjustment and a surrender charge (if applicable).
Subject to insurance department approval of the contract, IDS Life will be
offering this contract in the District of Columbia and all states except New
York.
Application and purchase payment
To apply for a contract, the owner must complete an application and make a
minimum purchase payment of $5,000. Additional purchase payments of at least
$2,000 are permitted under a contract. These additional purchase payments may be
made until the date the contract terminates or the date on which annuity
payments begin, whichever is earlier. The maximum total purchase payments in the
first and later contract years is $500,000. IDS Life reserves the right to
change this maximum. If the owner purchases the contract to fund a tax qualified
plan, that plan's limit on contributions also will apply.
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IDS Life will return an improperly completed application, along with the
corresponding purchase payment, five business days after its receipt if the
application has not, by that time, been properly completed.
A payment is credited to a contract on the date IDS Life receives a properly
completed application at our Minneapolis office along with the purchase payment.
Interest is earned the next day. IDS Life then issues a contract and confirms
the purchase payment in writing.
When an initial purchase payment is made under an application, or when
additional purchase payments or transfers are made, the owner allocates the
payment to one or more subaccounts then offered by IDS Life. The minimum amount
the owner may allocate to a subaccount is $2,000 or, in the case of a transfer,
the entire subaccount accumulation value if less than $2,000. The owner has a
subaccount for each guarantee period to which an initial purchase payment is
allocated. The owner also has a subaccount for each guarantee period to which an
additional purchase payment is allocated or to which a transfer of all or a
portion of an existing subaccount is made. Each subaccount is distinguished by
the guarantee period and the date the guarantee period begins.
Right to cancel
The owner has the right to cancel the contract within 10 days after receipt of
the contract and receive a refund of the entire purchase payment. For
cancellation to be effective, mailing or delivery of notice of cancellation must
be made in writing to IDS Life's home office at the following address: IDS Life
Insurance Company, Attn: Transactions, P.O. Box 534, Minneapolis, Minnesota
55440-0534.
Guarantee periods
The owner selects guarantee periods from among those offered by IDS Life. As of
the date of this prospectus, IDS Life is offering guarantee periods with annual
durations from one to 10 years; however, the guarantee periods IDS Life offers
in the future could be different. The guarantee period selected will determine
the guarantee rate. The purchase payment (less surrenders made and less
applicable premium taxes, if any) or any transfer will earn interest at this
guarantee rate during the entire guarantee period. All interest earned will be
credited daily; this compounding effect is reflected in the guarantee rate.
Below is an illustration of how IDS Life will credit interest during the
guarantee period. For the purpose of this example, IDS Life has made the
assumptions as indicated.
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Example of guarantee rate:
Beginning subaccount accumulation value: $50,000
Guaranteed period: 10 years
Guarantee rate: 6% annual effective rate
Interest credited Cumulative interest
Year during year credited to the account
1 $3,000.00 $ 3,000.00
2 3,180.00 6,180.00
3 3,370.80 9,550.80
4 3,573.05 13,123.85
5 3,787.43 16,911.28
6 4,014.68 20,925.96
7 4,255.56 25,181.51
8 4,510.89 29,692.40
9 4,781.54 34,473.95
10 5,068.44 39,542.38
Guaranteed accumulation value at the end of 10 years is:
$50,000 + $39,542.38 = $89,542.38
Note: This example assumes no surrenders of any amount during the entire
ten-year period. A market value adjustment applies and a surrender charge may
apply to any interim surrender in excess of the free withdrawal amount (See
Surrenders, free withdrawals and systematic withdrawals). The hypothetical
interest rates are illustrative only and are not intended to predict future
interest rates to be declared by IDS Life. Actual interest rates declared for
any given time may be more or less than those shown.
End of a subaccount guarantee period: When a subaccount guarantee period ends, a
new guarantee period will begin. IDS Life will transfer the owner's subaccount
accumulation value to a new subaccount without applying a market value
adjustment. At the end of a guarantee period, or during the first ten days of
the new subaccount guarantee period, the owner also will be able to totally or
partially surrender the subaccount accumulation value without market value
adjustment or surrender charge. However, such a surrender will be subject to
federal income tax and may be subject to a federal penalty tax. Surrenders from
certain tax qualified contracts also may be subject to 20% income tax
withholding. If the owner surrenders less than the entire subaccount
accumulation value, at least $1,000 must remain in the subaccount.
IDS Life will mail the owner a notice twenty-one calendar days before the
guarantee period ends to remind the owner to select a new guarantee period. If
IDS Life does not receive the written selection request within ten calendar days
after the guarantee period ends, the new guarantee period will be one year. The
new guarantee period will never extend beyond the settlement date. For example,
if the annuitant is age 62 at the end of a guarantee period and the settlement
date is the annuitant's age 65, a three-year guarantee period is the maximum
guarantee period that may be selected under the contract.
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The accumulation value transferred to the new subaccount is guaranteed by IDS
Life's general assets and will earn interest at a guarantee rate that IDS Life
has declared for the guarantee period. This guarantee rate may be higher or
lower than previous guarantee rates. IDS Life may declare new schedules of
guaranteed interest rates as frequently as daily.
At the owner's written request, IDS Life will provide notice of the guarantee
rate that applies to a specific guarantee period. The owner also may call IDS
Life to inquire about guarantee rates.
Establishment of guarantee rates: The guaranteed rate of interest for a chosen
guarantee period will be known at the time a purchase payment is received or a
transfer is made. IDS Life will send the owner a confirmation that will show the
amount paid or transferred and the applicable guarantee rate. When one
subaccount guarantee period ends and another begins, IDS Life will establish a
guarantee rate for the new period that is equal to or greater than the rate
credited on new comparable purchase payments at the time. The minimum guarantee
rate established by IDS Life will always be at least 3% per year.
IDS Life has no specific formula for determining the rates of interest that it
will declare as guarantee rates in the future. IDS Life will declare the
guarantee rates from time to time based on its analysis of current market
conditions. (See Investments by IDS Life). In addition, IDS Life also may
consider various other factors in determining guarantee rates for a given
period, including regulatory and tax requirements; sales commission and
administrative expenses; general economic trends; and competitive factors. IDS
Life management will make the final determination as to the guarantee rates to
be declared. IDS Life cannot predict or guarantee future guarantee rates above
the 3% rate.
Surrenders, free withdrawals and systematic withdrawals
General: Subject to certain tax law and retirement plan restrictions noted
below, total and partial surrenders may be made under a contract at any time.
In the case of all surrenders, the accumulation value will be reduced by the
amount surrendered on the surrender date and that amount will be payable to the
owner. The accumulation value also will be reduced by any applicable surrender
charge and either reduced or increased by any market value adjustment applicable
to the surrender. IDS Life will, on request, inform the owner of the amount
payable in a total or partial surrender. Any total or partial surrender may be
subject to tax and tax penalties and surrenders from certain tax qualified
contracts may be subject to 20% income tax withholding. (See Federal tax
considerations.)
Tax-sheltered annuities: The Code imposes certain restrictions on an owner's
right to receive early distributions attributable to salary reduction
contributions from a contract purchased for a retirement plan qualified under
Section 403(b) of the Code as a TSA.
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Distributions attributable to salary reduction contributions made after Dec. 31,
1988, plus the earnings on them, or to transfers or rollovers of such amounts
from other contracts may be made from the TSA contract only if the owner has
attained age 59-1/2, has become disabled as defined in the Code, has separated
from the service of the employer that purchased the contract or has died.
Additionally, if the owner should encounter a financial hardship (within the
meaning of the Code), he or she may receive a distribution of all contract
values attributable to salary reduction contributions made after Dec. 31, 1988,
but not of the earnings on them.
Even though a distribution may be permitted under these rules (e.g., for
hardship or after separation from service), it may nonetheless be subject to a
10% IRS penalty tax (in addition to income tax) as a premature distribution and
to 20% income tax withholding. (See Federal tax considerations.)
These restrictions do not apply to transfers of contract values to another TSA
investment vehicle available through the employer.
Free withdrawal amounts: Each contract year, the owner may surrender or transfer
free withdrawal amounts. These free withdrawal amounts are not subject to either
a surrender charge or a market value adjustment. However, they are subject to
federal income tax and may be subject to a federal penalty tax and, if made from
certain tax qualified contracts, to 20% income tax withholding. Free withdrawal
amounts are calculated separately for each subaccount. From the time a
subaccount is established by payment or transfer up to the next contract
anniversary, the free withdrawal amount is 10% of the subaccount payment or
transfer. During each contract year thereafter, the free withdrawal amount is
10% of the prior contract anniversary subaccount accumulation value.
Systematic withdrawals: The owner may establish systematic withdrawals of
amounts up to the free withdrawal amount by written request or other method
acceptable to IDS Life. The minimum systematic withdrawal amount from the
contract is $100, and these withdrawals can be made on a monthly, quarterly,
semi-annual or annual basis. The owner may designate the systematic withdrawal
to be made from the contract in one of the following ways:
o withdrawing interest earnings up to the free withdrawal amount from each
subaccount over the systematic withdrawal period;
o withdrawing the entire free withdrawal amount over the systematic
withdrawal period; or
o withdrawing a specific dollar amount less than the free withdrawal amount.
Under this option, the specific dollar amount will be withdrawn on a pro-rata
basis from all the subaccounts in which the owner has a balance, unless the
owner instructs otherwise.
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The minimum contract accumulation value required to begin systematic withdrawals
is $5,000. The owner may start or stop this service at any time, but must give
IDS Life 30 days' notice to change any systematic withdrawal instructions that
are currently in place.
Systematic withdrawals may result in taxes, tax penalties and 20% income tax
withholding being applied to all or a portion of the amount withdrawn. The owner
should consult a tax advisor regarding the tax consequences of systematic
withdrawals.
Partial surrenders: Unless we agree otherwise, the minimum contract accumulation
value the owner may surrender is $1,000 (except for free withdrawal amounts and
systematic withdrawals as explained above). The minimum balance in a subaccount
after surrender is $1,000.
The owner may make a surrender by written request. This request must specify the
subaccount(s) from which the surrender is to be made and the surrender amount. A
partial surrender request not exceeding $50,000 also may be made by telephone.
IDS Life has the authority to honor any telephone partial surrender request
believed to be authentic and will use reasonable procedures to confirm that they
are. This includes asking identifying questions and tape recording calls. As
long as reasonable procedures are followed, neither IDS Life nor its affiliates
will be liable for any loss resulting from fraudulent requests. At times when
the volume of telephone requests is unusually high, IDS Life will take special
measures to ensure that calls are answered as promptly as possible. A telephone
surrender request will not be allowed within 30 days of a phoned-in address
change.
The owner may request the net check amount that he or she wishes to receive. IDS
Life will determine how much accumulation value needs to be surrendered to yield
the net check amount after any applicable market value adjustments and surrender
charge deductions.
Total surrenders: IDS Life will compute the value of the contract at the close
of business after receipt of the owner's request for a complete surrender. A
contract terminates upon total surrender. IDS Life may request return of the
contract prior to a total surrender.
Payment on surrender: IDS Life may defer payment of any partial or total
surrender for a period not exceeding 6 months from the date it receives the
owner's notice of surrender or the period permitted by state insurance law, if
less. Only under extraordinary circumstances will IDS Life defer a surrender
payment more than 7 days. If payment is deferred for more than 30 days, IDS Life
will pay annual interest of at least 3% on the amount deferred. While all
circumstances under which IDS Life could defer payment upon surrender may not be
foreseeable at this time, such circumstances could include, for example, IDS
Life's inability to liquidate assets due to a general financial crisis. IDS Life
will notify the owner in writing if it intends to withhold payment more than 30
days.
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Surrender at the end of a guarantee period: A subaccount surrender at the end of
the guarantee period or during the first ten days of the new guarantee period
will not incur a surrender charge or market value adjustment, nor will it
reflect any interest earned during this ten day period.
NOTE: The owner will be charged a fee if he or she requests express mail
delivery.
Surrender charge
A surrender charge may be assessed on any total or partial surrender of purchase
payments that have been in the contract for less than eight contract years
unless the surrender occurs on the last day of a subaccount guarantee period or
during the first ten days of the new subaccount guarantee period. Surrender
charges are calculated separately for each subaccount. The surrender charge
depends on the number of contract years a purchase payment to a subaccount has
been in the contract. The surrender charge decreases each year on the contract
anniversary date. There are no surrender charges for payments that have been in
the contract for eight or more contract years.
The surrender charge is determined by multiplying the applicable surrender
charge percentage by the subaccount market adjusted value in excess of the free
withdrawal amount. The surrender charge percentages are as follows:
Contract years since Surrender charge
payment received percentage
-------------------- ----------
1 7%
2 6
3 5
4 4
5 3
6 2
7 1
8 or more 0
For an example of how the surrender charge is calculated for the total surrender
of a subaccount, please see Appendix A.
No surrender charge: There will be no surrender charge for:
o exercise of the cancellation right;
o free withdrawal amounts;
o payments that have been in the contract for eight or more
contract years;
o transfers between subaccounts;
o surrenders from a subaccount at the end of its guarantee period
and during the first ten days of the new subaccount guarantee
period;
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o application of the accumulation value to provide annuity
payments using an annuity payment plan; or
o death benefits.
In some cases, such as when an employer makes this annuity available to
employees, IDS Life may expect to incur lower sales and administrative expenses
or perform fewer services due to the size of the group, the average contribution
and the use of group enrollment procedures. Then IDS Life may be able to reduce
or eliminate surrender charges. However, IDS Life expects this to occur
infrequently.
Transfers
The owner may transfer the accumulation value from an existing subaccount to a
new subaccount at any time before the settlement date. A subaccount must have
been established for at least one calendar year before the owner can make a
transfer from it. IDS Life will not charge a fee for these transfers. However,
the transfers are subject to a market value adjustment.
For transfers before the end of a guarantee period, there will be a market value
adjustment to the accumulation value in excess of the free withdrawal amount.
There will not be a market value adjustment for transfers at the end of a
guarantee period.
The minimum accumulation value the owner may transfer is $2,000 or the entire
subaccount accumulation value, if less. The owner may transfer less than the
entire subaccount accumulation value only if a minimum accumulation value of
$1,000 remains in the subaccount after the transfer.
The owner may make a transfer by written request. This request must specify the
subaccount from which the transfer is to be made and the amount of the transfer
if it is less than the entire subaccount accumulation value. The request must
also specify the length of the new guarantee period.
Market value adjustment
The subaccount accumulation value, including the interest credited, is
guaranteed if the value is held in the subaccount until the end of the guarantee
period. However, IDS Life will apply a market value adjustment if a surrender or
transfer occurs prior to the end of the guarantee period.
A market value adjustment is a positive or negative adjustment of the subaccount
accumulation value. The market value adjustment reflects the relationship, at
the time of surrender or transfer, between the subaccount guarantee rate and the
interest rate IDS Life then is crediting on purchase payments or transfers made
to new subaccounts with guarantee periods of the same duration as the time
remaining in the subaccount guarantee period.
The market adjusted value is the subaccount accumulation value (in excess of the
free withdrawal amount) adjusted by the market value adjustment, plus the free
withdrawal amount. Upon surrender a
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subaccount's market adjusted value may be greater than the annuity's
accumulation value, equal to it or less than it depending on how the guaranteed
interest rate on the annuity compares to the interest rate of a new annuity for
the same number of years as the guarantee period remaining on the annuity.
- -------------------------------------------------------------------
Relationship between the annuity's
guaranteed rate and new annuity for
the same number of years as the
guaranteed period remaining on the
annuity: The market adjusted
value will be:
- -------------------------------------------------------------------
If the annuity rate > new annuity rate + .25% greater than the
accumulation value
If the annuity rate = new annuity rate + .25% equal to the
accumulation value
If the annuity rate < new annuity rate + .25% less than the
accumulation value
- -------------------------------------------------------------------
For example, assume the owner made a purchase payment to a subaccount with a
guarantee period of 10 years and a guarantee rate of 4.5% annually. Assume that
after 3 years the owner decides to surrender the value of that subaccount (with
7 years left in the subaccount guarantee period). If, at the time of surrender,
the guarantee rate IDS Life is crediting on subaccounts with 7-year guarantee
periods is 5%, the market adjusted value will be lower than the accumulation
value. On the other hand, if the current guarantee rates on subaccounts with
7-year guarantee periods is 4%, the market adjusted value will be higher than
the accumulation value. A 5% surrender charge would then be deducted from the
market adjusted value.
Determining the market value adjustment: The market value adjustment is
determined by:
o Calculating the subaccount accumulation value to be adjusted.
This is the amount to be surrendered or transferred from the
subaccount;
o Calculating the market adjusted value of that accumulation value
using the market adjusted value formula below; and
o Subtracting the accumulation value from the market adjusted
value.
Market adjusted value formula:
Market adjusted value = [(AVc - FWA) X F] + FWA where:
<PAGE>
PAGE 16
AVc = the subaccount accumulation value to be surrendered
or transferred
FWA = free withdrawal amount
F = (1 + ig)(N + t)
---------------------
(1 + ic + .0025)(N + t)
where:
ig = the subaccount guarantee rate
N = the number of complete years to the end of the
guarantee period for the subaccount
t = the fraction of a year remaining to the end of the
guarantee period (for example, if 180 days remain in
a 365 day year, t would be .493 for the subaccount)
ic = the subaccount guarantee rate IDS Life then is crediting on
purchase payments or transfers made to new subaccounts with
guarantee periods of the same duration as the time remaining in
the subaccount guarantee period (straight line interpolation
between whole year rates. If N is zero, ic is the rate for a one
year guarantee period)
For an illustration showing an upward and downward market value adjustment,
please see Appendix B.
No market value adjustment: There will be no market value adjustment for:
o exercise of the cancellation right;
o free withdrawal amounts;
o surrenders or transfers from a subaccount at the end of its
guarantee period and during the first ten days of the new
subaccount guarantee period;
o application of the accumulation value to provide annuity
payments using an annuity payment plan; or
o death benefits.
Premium taxes
IDS Life reserves the right to deduct an amount from the accumulation value of
the contract at the time that any applicable premium taxes not previously
deducted are payable. If a tax is payable at the time of the purchase payment
and IDS Life chooses not to deduct it at that time, it further reserves the
right to deduct it at a later date. Current premium taxes range in an amount up
to 3.5% depending on jurisdiction.
<PAGE>
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Death benefit prior to settlement
If the annuitant or owner dies before the settlement date while the contract is
in force, the death benefit payable to the beneficiary will equal the
accumulation value as determined at the next close of business after IDS Life's
death claim requirements are fulfilled.
If the spouse is sole beneficiary or co-owner: If the owner or co-owner dies
before the settlement date and the spouse is the only beneficiary or co-owner,
the spouse may keep the contract as owner. To do this, the spouse must, within
60 days after IDS Life receives proof of death, give IDS Life written
instructions to keep the contract in force.
Tax qualified plans: If the contract is purchased under a plan qualified under
Code Section 401 (including 401(k)), a TSA plan, a plan eligible under Code
Section 457, a custodial or trusteed plan, or as an IRA or a SEP/IRA and IDS
Life receives proof of the annuitant's death before the settlement date, IDS
Life will pay the beneficiary the death benefit described above. If the
annuitant dies before reaching the settlement date and the spouse is the only
beneficiary, the spouse may keep the contract in force until the date on which
the annuitant would have reached 70-1/2 or any other date permitted by the Code.
To do this, the spouse must, within 60 days after IDS Life receives proof of
death, give IDS Life written instructions to keep the contract in force.
Paying the beneficiary: Unless the owner has given other written instructions,
IDS Life will pay the beneficiary in a single payment. Payment from a tax
qualified contract (except an IRA or SEP/IRA) made to a surviving spouse instead
of being directly rolled over to an IRA may be subject to 20% income tax
withholding. The beneficiary may elect to receive this payment at any time
within 5 years after the date of death. Instead of a single payment, IDS Life
may make payments under any annuity payment plan available under this contract
if:
o the beneficiary elects the plan in writing within 60 days after
IDS Life receives proof of death;
o payments begin no later than one year after death or any other
date permitted by the Code; and
o the plan provides payments over a period that does not extend beyond the
beneficiary's life or life expectancy.
Death benefit after settlement
If the annuitant dies after settlement, the amount payable, if any, will be as
provided in the annuity payment plan then in effect.
Statement
Prior to the settlement date, at least annually, IDS Life will send a statement
showing a summary of the contract.
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Electing the settlement date and annuity payment plan
Upon processing the owner's application IDS Life will establish the settlement
date to the maximum age or date as specified below. The owner can also select a
date within the maximum limits. This date can be aligned with the owner's actual
retirement from a job, or it can be a different future date, depending on the
owner's needs and goals and on certain restrictions. The owner can also change
the date, provided IDS Life receives written instructions at least 30 days
before annuity payouts begin.
For non-tax qualified contracts, the settlement date cannot be later than the
latest of:
o the contract anniversary nearest the annuitant's 85th birthday;
or
o the 10th contract anniversary.
For tax qualified contracts, to avoid IRS penalty taxes, the retirement date
generally must be:
o on or after the date the annuitant reaches 59-1/2; and
o for IRAs, by April 1 of the year following the calendar year
when the annuitant reaches age 70-1/2; or
o for all other tax qualified contracts, by April 1 of the year following the
calendar year when the annuitant reaches age 70- 1/2 or, if later, retires;
except that 5% business owners may not select a settlement date that is later
than April 1 of the year following the calendar year when they reach age
70-1/2.
Annuity payments: The first payment will be made as of the settlement date. Once
annuity payments have started for an annuitant, no surrender of the annuity
benefit can be made for the purpose of receiving a lump sum in lieu of payments.
Annuity payment plans: On the settlement date, the owner may receive a lump sum
payment of the surrender value (see Surrenders, free withdrawals and systematic
withdrawals) or begin receiving annuity payments. If a lump sum payment is made
from a tax qualified contract (except an IRA or SEP/IRA), 20% income tax
withholding may apply. There are different ways to receive annuity payments
called payment plans. The owner may elect one of these payment plans, or another
payment arrangement to which IDS Life agrees, by giving IDS Life written notice
at least 30 days before the settlement date. In the absence of an election, IDS
Life will make annuity payments according to Plan B with payments guaranteed for
ten years.
If the amount to be applied to a payment plan is not at least $2,000 or if
payments are to be made to other than a natural person, IDS Life has the right
to make a lump sum payment of the surrender value.
<PAGE>
PAGE 19
o Plan A - This provides monthly annuity payments for the lifetime of the
annuitant. No payments will be made after the annuitant dies.
o Plan B - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by IDS Life that payments will be made for a
period of at least 5, 10 or 15 years. The owner must select the guaranteed
period.
o Plan C - This provides monthly annuity payments for the lifetime of the
annuitant with a guarantee by IDS Life that payments will be made for a
certain number of months. IDS Life determines the number of months by
dividing the accumulation value applied under this plan by the amount of the
monthly annuity payment.
o Plan D - This is a joint and survivor life annuity. Monthly payments will be
paid for the lifetime of the annuitant and a joint annuitant. When either the
annuitant or joint annuitant dies, IDS Life will continue to make monthly
payments for the lifetime of the survivor. No payments will be made after the
death of both the annuitant and joint annuitant.
o Plan E - This provides monthly fixed dollar annuity payments for a period of
years. The period of years may be no less than 10 or more than 30.
The contract provides for annuity payments on a fixed basis only. The amount of
each annuity payment will not change during the annuity payment period. The
amount of the annuity payment will depend on:
o the annuity table IDS Life then is using for annuity settlements (never less
than the table guaranteed in the contract);
o the annuitant's age; and
o the annuity payment plan selected.
The tables for Plans A, B, C and D are based on the "1983 Individual Annuitant
Mortality Table A" and an assumed rate of 4% per year. The table for Plan E is
based on an interest rate of 4%. IDS Life may, at its discretion, if mortality
appears more favorable and interest rates justify, apply other tables that will
result in higher monthly payments.
Restrictions for some tax qualified plans: If the contract was purchased under a
plan qualified under Code Section 401( including 401(k)), a TSA plan, a plan
eligible under Code Section 457, a custodial or trusteed plan, or as an IRA or a
SEP/IRA, the owner must elect a payment plan that provides for payments:
o during the life of the annuitant;
o during the joint lives of the annuitant and beneficiary;
o for a period not exceeding the life expectancy of the annuitant;
or
<PAGE>
PAGE 20
o for a period not exceeding the joint life expectancies of the
annuitant and beneficiary.
Reference also must be made to the terms of the tax qualified plan and
applicable law for any limitations or restrictions on the settlement date or
annuity payment plan that may be selected.
Amendment, distribution and assignment of contracts
Amendment of contracts
IDS Life reserves the right to amend the contracts to meet the requirements of
applicable federal or state laws or regulations. IDS Life will notify the owner
of the contract in writing of any such amendments.
Distribution of contracts
IDS Life is the principal underwriter for the contracts. IDS Life is registered
with the Securities and Exchange Commission under the Securities Exchange Act of
1934 (1934 Act) as a broker-dealer and is a member of the National Association
of Securities Dealers, Inc. IDS Life may enter into distribution agreements with
certain broker-dealers registered under the 1934 Act. IDS Life will pay a
maximum commission of 5% for the sale of a contract. In the future, IDS Life may
pay a commission on an election of a subsequent guarantee period by an owner or
when an owner maintains a contract in force.
Assignment of contracts
The owner may change ownership of the contract at any time by filing a change of
ownership with IDS Life at its home office. No change of ownership will be
binding upon IDS Life until it receives and records the change. IDS Life takes
no responsibility for the validity of the change. If the contract is purchased
under a tax qualified plan, the contract may not be sold, assigned, transferred,
discounted or pledged as collateral for a loan or as security for the
performance of an obligation or for any other purpose to any person other than
IDS Life; provided, however, that if the owner is a trustee or custodian, or an
employer acting in a similar capacity, ownership of a contract may be
transferred to the annuitant.
The value of any part of a non-tax qualified contract assigned or pledged is
taxed like a surrender to the extent allocable to investment in annuity
contracts after Aug. 13, 1982.
Transfer of a non-tax qualified contract to another person without adequate
consideration is considered a gift and the transfer will be considered a
surrender of the contract for federal income tax purposes. The income in the
contract will be taxed to the transferor who may be subject to the 10% IRS
penalty tax for early withdrawal. The transferee's investment in the contract
will be the value of the contract at the time of the transfer. The owner should
consult with a tax advisor before taking any action.
<PAGE>
PAGE 21
Federal tax considerations
Under current law, there is no liability for federal income tax on any increase
in the contract's value until payments are made (except for change of ownership
discussed above in "Assignment of contracts"). However, since federal tax
consequences cannot always be anticipated, the owner should consult a tax
advisor regarding any questions about the taxation of the contract.
The owner is not taxed on the purchase payment. The purchase payment generally
includes purchase payments made with after-tax dollars. If the purchase payment
was made by or on behalf of the owner with pre-tax dollars as part of a tax
qualified retirement plan, such amounts are not considered to be part of the
investment in the contract and will be taxed when payment is made.
If the owner surrenders part or all of the contract or takes a free withdrawal
amount, the owner will be taxed on the payments received, to the extent that the
value of the contract exceeds the investment in the contract, and the owner may
have to pay an IRS penalty tax for early withdrawal.
A portion of each annuity payment under a non-tax qualified contract will be
subject to tax and a portion of each payment will be considered to be part of
the investment in the contract and will not be taxed. All amounts received after
the investment in the contract is recovered will be subject to tax. All annuity
payments from a tax qualified contract, for example an IRA, TSA or a plan
eligible under Code Section 457, generally will be subject to taxation except to
the extent that the contributions were made with after-tax dollars.
Unlike life insurance proceeds, the death benefit under a contract is not tax
exempt. The gain, if any, is taxable as ordinary income to the beneficiary in
the year(s) he or she receives the payments.
Tax law requires that all non-tax qualified deferred annuity contracts issued by
the same company to the same contract owner during a calendar year are to be
treated as a single, unified contract. The amount of income included and taxed
in a distribution (or a transaction deemed a distribution under tax law) taken
from any one of such contracts is determined by summing all such contracts.
The income earned on a non-tax qualified contract held by such entities as
corporations, partnerships or trusts generally will be treated as ordinary
income received during that year. However, if the trust was set up for the
benefit of a natural person only, the income will continue to be tax-deferred.
A 10% IRS penalty tax may apply on any amount includible in ordinary income.
This penalty will not apply to any amount received:
o after the owner reaches age 59-1/2;
o after the owner dies;
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PAGE 22
o after the owner becomes disabled (as defined in the Code);
o as a distribution that is part of a series of substantially equal periodic
payments over the life or life expectancy of the owner (or joint lives or
life expectancies of the owner and beneficiary); or
o if it is allocable to a purchase payment before Aug. 14, 1982 (except for
contracts in tax qualified plans).
These are the major exceptions to the 10% IRS penalty tax. Additional exceptions
may apply depending upon whether or not the contract is tax qualified. For tax
qualified contracts, other penalties apply if a contract bought under a plan is
surrendered before the plan specifies that payments can be made under the plan.
In general, if the owner receives all or part of the contract value from an
annuity, withholding may be imposed against the taxable income portion of the
payment. Any withholding that is done represents a prepayment of the tax due for
the year. The owner takes credit for such amounts on the annual tax return that
is filed.
If the payment is part of an annuity payment plan, the amount of withholding
generally is computed using payroll tables. The owner can provide us with a
statement of how many exemptions to use in calculating the withholding. As long
as the owner has provided us with a valid Social Security Number or Taxpayer
Identification Number, the owner can elect not to have any withholding occur.
If the distribution is any other type of payment (such as a partial or full
surrender), withholding is computed using 10% of the taxable portion. Similar to
above, as long as the owner has provided us with a valid Social Security Number
or Taxpayer Identification Number, the owner can elect not to have this
withholding occur.
If a distribution is taken from a contract offered under a Section 457 Plan
(deferred compensation plan of state and local governments and tax-exempt
organizations), withholding is computed using payroll methods depending upon the
type of payment.
Some states also impose withholding requirements similar to the federal
withholding described above. If this should be the case, any payment from which
federal withholding is deducted may also have state withholding deducted.
The withholding requirements may differ if payment is being made to a non-U.S.
citizen or if the payment is being delivered outside the United States.
If the owner receives all or part of the contract value from a tax qualified
annuity (except an IRA, SEP/IRA or Section 457 plan), mandatory 20% income tax
withholding generally will be imposed at the time the payment is made. In
addition, federal income tax and
<PAGE>
PAGE 23
the 10% IRS penalty tax for early withdrawals may apply to amounts properly
includible in income. This mandatory 20% income tax withholding will not be
imposed if:
o instead of receiving the payment, the owner elects to have the payment rolled
over directly to an IRA or another eligible plan;
o the payment is one of a series of substantially equal periodic payments, made
at least annually, over the life or life expectancy of the owner (or joint
lives or life expectancies of the owner and beneficiary) or made over a
period of 10 years or more; or
o the payment is a minimum distribution required under the Code.
These are the major exceptions to the mandatory 20% income tax withholding.
Payments made to a surviving spouse instead of being directly rolled over to an
IRA may be subject to 20% income tax withholding. For taxable distributions that
are not subject to the mandatory 20% withholding, federal income tax will be
withheld from the taxable part of the owner's distribution unless he or she
elects otherwise. State withholding also may be imposed on taxable
distributions.
IDS Life will send the owner and/or annuitant, as appropriate, a tax statement
for any year that a taxable distribution from the contract is received according
to our records.
The contract is intended to 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, notwithstanding 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 such amendments.
This discussion of federal tax laws is based upon IDS Life's understanding of
these laws as they are currently interpreted. Either federal tax laws or current
interpretations of them may change. Please consult a tax advisor concerning
specific circumstances.
The Company
Business
IDS Life is a stock life insurance company organized in 1957 under the laws of
the State of Minnesota. IDS Life is a wholly owned subsidiary of American
Express Financial Corporation, which is a wholly owned subsidiary of American
Express Company. IDS Life acts as a direct writer of insurance policies and
annuities and as the investment manager of various investment companies. IDS
Life is licensed to write life insurance and annuity contracts in 49 states and
the District of Columbia. The headquarters of IDS Life is IDS Tower 10,
Minneapolis, MN 55440-0010.
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Investments by IDS Life
Assets of IDS Life must be invested in accordance with requirements established
by applicable state laws regarding the nature and quality of investments that
may be made by life insurance companies and the percentage of their assets that
may be committed to any particular type of investment. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state, and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. All claims by purchasers of the contracts, and other general
account products, will be funded by the general account.
IDS Life intends to construct and manage the investment portfolio 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. Immunization is achieved 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 flexibility and efficiency to IDS
Life in creating and managing the asset portfolio, while still assuring safety
and soundness for funding liability obligations.
IDS Life's investment strategy will incorporate the use of a variety of debt
instruments having price durations tending to match the applicable guaranteed
interest periods. These instruments include, but are not necessarily limited to,
the following:
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 the nationally recognized rating
agencies;
o Debt instruments that are unrated, but which are deemed by IDS Life to have
an investment quality within the four highest grades;
o Other debt instruments, which are rated below investment
grade, limited to 15% of assets at the time of purchase; and
o Real estate mortgages, limited to 30% of portfolio assets at
the time of acquisition.
In addition, options and futures contracts on fixed income securities will be
used from time to time to achieve and maintain appropriate investment and
liquidity characteristics on the overall asset portfolio.
While this information generally describes our investment strategy, we are not
obligated to follow any particular strategy except as
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PAGE 25
may be required by federal law and Minnesota and other state
insurance laws.
Selected financial data
The following selected financial data for IDS Life and its subsidiaries should
be read in conjunction with the consolidated financial statements and notes
included in the prospectus beginning on page __.
<TABLE>
<CAPTION>
Years ended Dec. 31, (thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Premiums $ 182,921 $ 161,530 $ 144,640 $ 127,245 $ 114,379
Net investment income 1,965,362 1,907,309 1,781,873 1,783,219 1,616,821
Net realized loss on investments (159) (4,898) (4,282) (6,737) (3,710)
Other 574,341 472,035 384,105 304,344 240,959
---------- ---------- ---------- ---------- ----------
Total revenues $ 2,722,465 $ 2,535,976 $ 2,306,336 $ 2,208,071 $ 1,968,449
---------- ---------- ---------- ---------- ----------
Income before income taxes $ 621,714 $ 560,782 $ 512,512 $ 412,726 $ 315,821
---------- ---------- ---------- ---------- ----------
Net income $ 414,576 $ 364,940 $ 336,169 $ 270,079 $ 211,170
---------- ---------- ---------- ---------- ----------
Total assets $47,305,981 $42,900,078 $35,747,543 $33,057,753 $27,295,773
</TABLE>
Management's discussion and analysis of consolidated financial condition and
results of operations
Results of operations
1996 compared to 1995:
Consolidated net income increased 14% to $415 million in 1996, compared to $365
million in 1995. Earnings growth resulted primarily from increases in management
fees and policyholder and contractholder charges partially offset by a slight
decrease in investment margins. These increases reflect higher average insurance
and annuities in force during 1996. Investment margins were below prior year
levels primarily due to increasing interest credited rates throughout 1996.
Consolidated income before income taxes totaled $622 million in 1996, compared
with $561 million in 1995. In 1996, $161 million was from the life, disability
income and long-term care insurance segment, compared with $125 million in 1995.
In 1996, $461 million was from the annuity segment, compared with $440 million
in 1995.
Total premiums received increased to $6.1 billion in 1996, compared with $5.0
billion in 1995. This increase is primarily due to an increase in sales of
variable annuities in 1996.
Total revenues increased to $2.7 billion in 1996, compared with $2.5 billion in
1995. The increase is primarily due to increases in net investment income,
policyholder and contractholder charges, and management fees. Net investment
income, the largest component of revenues, increased from the prior year,
reflecting a slight increase in investments owned.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 18% to $303 million
in 1996, compared with $256 million in 1995. This increase reflects higher total
life insurance in force which grew 13% to $67 billion at December 31, 1996.
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Management and other fees increased 26% to $271 million in 1996, compared with
$216 million in 1995. This is primarily due to an increase in separate account
assets, which grew 24% to $19 billion at December 31, 1996, due to market
appreciation and sales. The Company provides investment management services for
the mutual funds used as investment options for variable annuities and variable
life insurance. The Company also receives a mortality and expense risk fee from
the separate accounts.
Total benefits and expenses increased slightly to $2.1 billion in 1996. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, increased to $1.4
billion. This was due to higher aggregate amounts in force and an increase in
average interest credited rates.
1995 compared to 1994:
Consolidated net income increased 8.6% to $365 million in 1995, compared to $336
million in 1994. Earnings growth resulted primarily from increases in management
fees and policyholder and contractholder charges partially offset by a slight
decrease in investment margins. These increases reflect higher average insurance
and annuities in force during 1995. Investment margins were below prior year
levels primarily due to higher interest credited rates during the first two
quarters of 1995.
Consolidated income before income taxes totaled $561 million in 1995, compared
with $513 million in 1994. In 1995, $125 million was from the life, disability
income, health and long-term care insurance segment, compared with $123 million
in 1994. In 1995, $440 million was from the annuity segment, compared with $394
million in 1994. There was a $4.9 million net realized loss on investments in
1995, compared with a net realized loss on investments of $4.3 million in 1994.
Total premiums received decreased to $5.0 billion in 1995, compared with $5.7
billion in 1994. This decrease is primarily due to a decrease in sales of
variable annuities, reflecting very strong sales of variable products during
1994.
Total revenues increased to $2.5 billion in 1995, compared with $2.3 billion in
1994. The increase is primarily due to increases in net investment income,
policyholder and contractholder charges, and management fees. Net investment
income, the largest component of revenues, increased from the prior year,
reflecting an increase in investments owned.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 16% to $256 million
in 1995, compared with $220 million in 1994. This increase reflects higher total
life insurance in force which grew 13% to $59.4 billion at December 31, 1995.
Management and other fees increased 32% to $216 million in 1995, compared with
$164 million in 1994. This is primarily due to an increase in separate account
assets, which grew 38% to $15
<PAGE>
PAGE 27
billion at December 31, 1995, due to market appreciation and sales. The Company
provides investment management services for the mutual funds used as investment
options for variable annuities and variable life insurance. The Company also
receives a mortality and expense risk fee from the separate accounts.
Total benefits and expenses increased to $2.0 billion in 1995. The largest
component of expenses, interest credited to policyholder accounts for universal
life-type insurance and investment contracts, increased to $1.3 billion. This
was due to higher aggregate amounts in force and an increase in average interest
credited rates.
Risk management
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 clients' 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 clients' 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 and swaps, 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 clients' accounts.
Liquidity and capital resources
The liquidity requirements of the Company are met by funds provided from
operations and investment activity. The primary components of the funds provided
are premiums, investment income, proceeds from sales of investments as well as
maturities and periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has available lines of credit with two banks and its parent
aggregating $175 million, of which $100 million is with its parent. The $25,000
line of credit with one bank expired on Dec. 31, 1996 and the Company did not
seek renewal. The $50,000 line of
<PAGE>
PAGE 28
credit with the other bank expires June 30, 1997 and the Company expects
to seek renewal. The lines of credit are used strictly as short-term sources of
funds. Borrowings outstanding under the agreements were $nil at Dec. 31, 1996.
At Dec. 31, 1996, outstanding reverse repurchase agreements totaled $17 million.
At Dec. 31, 1996, investments in fixed maturities comprised 86% of the Company's
total invested assets. Of the fixed maturity portfolio, approximately 42% is
invested in GNMA, FNMA and FHLMC mortgage-backed securities which are considered
AAA/Aaa quality.
At Dec. 31, 1996, approximately 9.6% 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 high-rated 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 Dec. 31, 1996, net unrealized appreciation on fixed maturities held to
maturity included $380 million of gross unrealized appreciation and $94 million
of gross unrealized depreciation. Net unrealized appreciation on fixed
maturities available for sale included $231 million of gross unrealized
appreciation and $93 million of gross unrealized depreciation.
At Dec. 31, 1996, the Company had an allowance for losses for mortgage loans
totaling $37 million and for real estate investments totaling $4 million.
The economy and other factors have caused an increase in the number of insurance
companies that are under regulatory supervision. This circumstance has resulted
in an increase in assessments by state guaranty associations to cover losses to
policyholders of insolvent or rehabilitated companies. Some assessments can be
partially recovered through a reduction in future premium taxes in certain
states. The Company established an asset for guaranty association assessments
paid to those states allowing a reduction in future premium taxes over a
reasonable period of time. The asset is being amortized as premium taxes are
reduced. The Company has also estimated the potential effect of future
assessments on the Company's financial position and results of operations and
has established a reserve for such potential assessments.
In the first quarter of 1997, the Company paid a $45 million dividend to its
parent. In 1996, dividends paid to its parent were $165 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
<PAGE>
PAGE 29
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 Dec. 31, 1996, the Company's total adjusted capital was well in
excess of the levels requiring regulatory attention.
Segment information
The Company's operations consist of two business segments: Individual and group
life, disability income and long-term care insurance; and fixed and variable
annuity products designed for individuals, pension plans, small businesses and
employer-sponsored groups. The Company is not dependent upon any single customer
and no single customer accounted for more than 10% of revenue in 1996, 1995 or
1994. Additionally, no single distributor accounted for more than 10% of
premiums received in 1996, 1995, or 1994. (See Note 10, Segment information, in
the "Notes to Consolidated Financial Statements".)
Reinsurance
Reinsurance arrangements are used to reduce exposure to large losses. The
maximum amount of risk retained by the Company on any one life is $750,000 of
life and waiver of premium benefits plus $50,000 of accidental death benefits.
The excesses are reinsured with other life insurance companies. At December 31,
1996, traditional life and universal life-type insurance in force aggregated
$67.2 billion, of which $3.9 billion was reinsured.
Reserves
In accordance with the insurance laws and regulations under which IDS Life
operates, it is obligated to carry on its books, as liabilities, actuarially
determined reserves to meet its obligations on its outstanding life and health
insurance policies and annuity contracts. Reserves for policies and contracts
are based on mortality and morbidity tables in general use in the United States.
These reserves are computed amounts that, with additions from premiums to be
received, and with interest on such reserves compounded annually at assumed
rates, will be sufficient to meet IDS Life's policy obligations at their
maturities or in the event of an insured's death. In the accompanying financial
statements these reserves are determined in accordance with generally accepted
accounting principles. (See Note 1, Liabilities for future policy benefits, in
the "Notes to Consolidated Financial Statements.")
Investments
Of IDS Life's consolidated total investments of $25.6 billion at Dec. 31, 1996,
36% was invested in mortgage-backed securities, 47% in corporate and other
bonds, 14% in primary mortgage loans on real estate, 2% in policy loans and the
remaining 1% in other investments.
<PAGE>
PAGE 30
Competition
IDS Life is 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 2,600 stock, mutual and other types of
insurers in the life insurance business. Best's Insurance Reports, Life-Health
edition, 1996, assigned IDS Life one of its highest classifications, A+
(Superior).
Employees
As of Dec. 31, 1996, IDS Life and its subsidiaries had 266 employees; including
209 employed at the corporate office in Minneapolis, MN, 8 employed at American
Centurion Life Assurance Company located in Albany, NY and 49 employed at IDS
Life Insurance Company of New York located in Albany, NY.
Properties
IDS Life occupies office space in Minneapolis, MN, which is rented by its
parent, American Express Financial Corporation. IDS Life reimburses American
Express Financial Corporation for rent based on direct and indirect allocation
methods. Facilities occupied by IDS Life and its subsidiaries are believed to be
adequate for the purposes for which they are used and are well maintained.
State regulation
IDS Life is subject to the laws of the State of Minnesota governing insurance
companies and to the regulations of the Minnesota Department of Commerce. An
annual statement in the prescribed form is filed with the Minnesota Department
of Commerce each year covering IDS Life's operation for the preceding year and
its financial condition at the end of such year. Regulation by the Minnesota
Department of Commerce includes periodic examination to determine IDS Life's
contract liabilities and reserves so that the Minnesota Department of Commerce
may certify that these items are correct. IDS Life's books and accounts are
subject to review by the Minnesota Department of Commerce at all times. Such
regulation does not, however, involve any supervision of the account's
management or IDS Life's investment practices or policies. In addition, IDS Life
is subject to regulation under the insurance laws of other jurisdictions in
which it operates. A full examination of IDS 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>
PAGE 31
Directors and executive officers
The members of the Board of Directors and the principal executive officers of
IDS Life, together with the principal occupation of each during the last five
years, are as follows:
Directors*
David R. Hubers
Born in 1943
Director since September 1989; president and chief executive officer, AEFC,
since August 1993, and director since January 1984.Senior vice president,
Finance and chief financial officer, AEFC, from January 1984 to August 1993.
Richard W. Kling
Born in 1940
Director since February 1984; president since March 1994. Executive vice
president, Marketing and Products from January 1988 to March 1994. Senior vice
president, AEFC, since May 1994. Director of IDS Life Series Fund, Inc. and
member of the board of managers and president of IDS Life Variable Annuity Funds
A and B.
Paul F. Kolkman
Born in 1946
Director since May 1984; executive vice president since March 1994; vice
president, Finance from May 1984 to March 1994; vice president, AEFC, since
January 1987. Vice president and chief actuary of IDS Life Series Fund, Inc.
James A. Mitchell
Born in 1941
Chairman of the board since March 1994; director since July 1984; chief
executive officer since November 1986; president from July 1984 to March 1994;
executive vice president, AEFC, since March 1994; director, AEFC, since July
1984; senior vice president, AEFC, from July 1984 to March 1994.
Barry J. Murphy
Born in 1951
Director and executive vice president, Client Service, since March 1994; senior
vice president, AEFC, since May 1994; senior vice president, Travel Related
Services (TRS), a subsidiary of American Express Company, from July 1992 to
April 1994; vice president, TRS, from November 1989 to July 1992.
Stuart A. Sedlacek
Born in 1957
Director and executive vice president, Assured Assets since March 1994; vice
president, AEFC, since September 1988.
<PAGE>
PAGE 32
Melinda S. Urion
Born in 1953
Director and controller since September 1991; executive vice president since
March 1994; vice president and treasurer from September 1991 to March 1994;
senior vice president, chief financial officer and director, AEFC, since
November 1995; corporate controller, AEFC, from April 1994 to November 1995;
vice president, AEFC, from September 1991 to November 1995; chief accounting
officer, AEFC, from July 1988 to September 1991.
Officers other than directors*
Morris Goodwin Jr.
Born in 1951
Vice president and treasurer since March 1994; vice president and corporate
treasurer, AEFC, since July 1989. Vice president and treasurer of IDS Life
Series Fund, Inc. and IDS Life Variable Annuity Funds A and B.
William A. Stoltzmann
Born in 1948
Vice president, general counsel and secretary since 1989; vice president and
assistant general counsel, AEFC, since November 1985.
*The address for all of the directors and principal officers is:
IDS Tower 10, Minneapolis, MN 55440-0010.
Executive compensation
Executive officers of IDS Life 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 1996 to IDS
Life and its affiliates. The table also shows the total cash compensation paid
to all executive officers of IDS Life, as a group, who were executive officers
at any time during 1996.
Name of individual Cash
or number in group Position held compensation
__________________________________________________________________
Five most highly compensated
executive officers as a group: $3,448,681
James A. Mitchell Chairman of the Board
and Chief Executive
Officer
Richard W. Kling President
Barry J. Murphy Exec. Vice President,
Client Service
Stuart A. Sedlacek Exec. Vice President,
Assured Assets
<PAGE>
PAGE 33
Lorraine R. Hart Vice President,
Investments
All executive officers
as a group (10) $4,923,385
Security ownership of management
IDS Life's directors and officers do not beneficially own any outstanding shares
of stock of IDS Life. All of the outstanding shares of stock of IDS Life are
beneficially owned by its parent, American Express Financial Corporation. The
percentage of shares of American Express Financial Corporation owned by any
director, and by all directors and officers of IDS Life as a group, does not
exceed 1% of the class outstanding.
Legal proceedings and opinion
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life does business involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents, and
other matters. IDS Life, like other life and health insurers, from time to time
is involved in such litigation. On December 13, 1996, an action of this nature
was commenced in Minnesota state court. The plaintiffs purport to represent a
class consisting of all persons who replaced existing IDS Life policies with new
IDS Life policies from and after January 1, 1985. Plaintiffs seek damages in an
unspecified amount and also seek to establish a claims resolution facility for
the determination of individual issues. IDS Life filed an answer to the
Complaint on February 18, 1997. A similar action involving the replacement of
existing IDS Life insurance policies and annuity contracts was filed in the same
court on March 21, 1997.
IDS Life believes it has meritorious defenses to these and other actions arising
in connection with the conduct of its business activities and intends to defend
them vigorously. IDS Life believes that it is not a party to, nor are any of its
properties the subject of, any pending legal proceedings which would have a
material adverse effect on its consolidated financial condition.
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the contracts described in this prospectus and the
organization of IDS Life, its authority to issue contracts under Minnesota law
and the validity of the forms of the contracts under Minnesota law have been
passed on by the general counsel of IDS Life.
Experts
The consolidated financial statements of IDS Life Insurance Company at December
31, 1996 and 1995, and for each of the three years in the period ended December
31, 1996, appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the registration statement, and is
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
<PAGE>
PAGE 34
Appendix A
Total surrender of a subaccount
This example shows how surrender charges are calculated for the total surrender
of one subaccount.
Assumptions:
The contract is dated January 15, 1996. The contract year is January 15 to
January 14 and the anniversary date is January 15th each year.
Subaccount P is established with a $5,000 payment on July 1, 1997. The surrender
charge percentages for Subaccount P will be:
Surrender date Surrender charge percentage
- -----------------------------------------------------
7-1-97 to 1-14-98 7%
1-15-98 to 1-14-99 6
1-15-99 to 1-14-00 5
1-15-00 to 1-14-01 4
1-15-01 to 1-14-02 3
1-15-02 to 1-14-03 2
1-15-03 to 1-14-04 1
January 15, 2004+ 0
The Subaccount P market adjusted value is transferred to Subaccount Q on
September 1, 1998. The above surrender charge percentage date limits do not
change even though Subaccount P transferred to Subaccount Q.
Subaccount Q is entirely surrendered November 4, 2001, when the Subaccount Q
accumulation value is $8,300. Interest rates have increased since Subaccount Q
started. The January 15, 2001 (prior contract anniversary) Subaccount Q
accumulation value was $8,000.
Assume that the November 4, 2001 market adjusted value is $8,000. This includes
the $800 free withdrawal amount (10% of the January 15, 2001 Subaccount Q
accumulation value) and an assumed ($300) negative market value adjustment due
to interest rate increases.
What is the surrender charge amount?
The $8,000 market adjusted value less the $800 free withdrawal amount is subject
to a 3% surrender charge. The surrender charge is 3% of $7,200 which is $216.
<PAGE>
PAGE 35
What net amount does the owner receive?
The owner receives a net surrender check of $7,784 which is:
Subaccount Q market adjusted value $8,000
(Which includes the $800 free withdrawal amount
and the ($300) market value adjustment)
Less Subaccount Q surrender charge - 216
------
Net Subaccount Q surrender check $7,784
<PAGE>
PAGE 36
Appendix B
Market value adjustment illustration
Assumptions:
Contract date: January 1, 1996
Subaccount established: July 1, 1996
Purchase payment: $50,000
Subaccount guarantee period: 10 years
Subaccount guarantee rate: 4.5% effective annual yield
Market value adjustment assumptions: These examples show how the market value
adjustment may affect your contract subaccount values. The surrenders in these
examples occur on July 1, 1997, one year after the subaccount is established.
There are no previous surrenders.
The subaccount accumulation value at the end of one year is $52,250. If there
are no surrenders, the subaccount accumulation value at the end of the 10-year
guarantee period will be $77,648.47.
The subaccount accumulation value on January 1, 1997, the contract anniversary,
is: $50,000 x (1 + .045)(184/365) = $51,121.87. The free withdrawal amount for
the next year is $5,112.19. This free withdrawal amount (10% of the contract
anniversary subaccount accumulation value) is free of both market value
adjustment and surrender charge.
The market value adjustment reflects the relationship (at the time of surrender)
between the subaccount guarantee rate and the interest rate IDS Life then is
crediting on purchase payments or transfers made to new subaccounts with
guarantee periods of the same duration as the time remaining in the subaccount
guarantee period. After one year, there are 9 years left of the 10-year
subaccount guarantee period.
Example I shows a downward market value adjustment. Example II shows an upward
market value adjustment. These examples do not show the surrender charge (if
any) which would be calculated separately after the market value adjustment.
Surrender charge calculations are shown in Appendix A.
Market adjusted value formula:
Market adjusted value = [(AVc - FWA) x F] + FWA
where:
AVc = the subaccount accumulation value to be surrendered or
transferred
FWA = free withdrawal amount
F = (1 + ig)(N + t)
(1 + ic + .0025)(N + t)
<PAGE>
PAGE 37
where:
ig = the subaccount guarantee rate
N = the number of complete years to the end of the guarantee
period for the subaccount
t = the fraction of a year remaining to the end of the
guarantee period (for example, if 180 days remain in a
365 day year, t would be .493 for the subaccount)
ic = the subaccount guarantee rate IDS Life then is crediting on purchase
payments or transfers made to new subaccounts with guarantee periods
of the same duration as the time remaining in the subaccount guarantee
period (straight line interpolation between whole year rates. If N is
zero, ic is the rate for a one year guarantee period)
Example I - Downward market value adjustment
A surrender results in a downward market value adjustment when interest rates
have increased. Assume after one year, IDS Life is crediting 5% for a new
subaccount with a 9-year guarantee period. If the owner totally surrenders the
subaccount, the market adjusted value is:
[(AVc - FWA) x F] + FWA
[($52,250.00 - $5,112.19) x (1 + .045)9]+ 5,112.19 = $49,311.66
(1 + .05 + .0025)9]
The market value adjustment is a $2,938.34 reduction of the accumulation value:
($2,938.34) = $49,311.66 - $52,250.00
Example II - Upward market value adjustment
A surrender results in an upward market value adjustment when interest rates
have decreased. Assume after one year, IDS Life is crediting 4% for a new
subaccount with a 9-year guarantee period. If the owner totally surrenders the
subaccount, the market adjusted value is:
[(AVc - FWA) x F] + FWA
[$52,250.00 - $5,112.19) x (1 + .045)9] + $5,112.19 = $53,277.18
(1 + .04 + .0025)9]
The market value adjustment is a $1,027.18 increase of the accumulation value:
$1,027.18 = $53,277.18 - $52,250.00
<PAGE>
IDS Life Financial Information
The financial statements shown below are those of the insurance company and not
those of any other entity. They are included in the prospectus for the purpose
of informing the investor as to the financial condition of the insurance company
and its ability to carry out its obligations under its variable contracts.
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
Dec. 31, Dec. 31,
ASSETS 1996 1995
- ------ ---- ---------
(thousands)
Investments:
Fixed maturities:
Held to maturity, at amortized cost (Fair value:
1996, $10,521,650; 1995, $11,878,377) .............. $10,236,379 $11,257,591
Available for sale, at fair value (Amortized cost:
1996, $11,008,622; 1995, $10,146,136) .............. 11,146,845 10,516,212
Mortgage loans on real estate ...................... 3,493,364 2,945,495
Policy loans ....................................... 459,902 424,019
Other investments .................................. 251,465 146,894
Total investments .................................. 25,587,955 25,290,211
Cash and cash equivalents .......................... 224,603 72,147
Amounts recoverable from reinsurers ................ 157,722 114,387
Amounts due from brokers ........................... 11,047 --
Other accounts receivable .......................... 44,089 39,108
Accrued investment income .......................... 343,313 348,008
Deferred policy acquisition costs .................. 2,330,805 2,025,725
Deferred income taxes .............................. 33,923 --
Other assets ....................................... 37,364 36,410
Separate account assets ............................ 18,535,160 14,974,082
Total assets ....................................... $47,305,981 $42,900,078
=========== ===========
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
Dec. 31, Dec. 31
LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995
- ------------------------------------ ---- ----
(thousands)
Liabilities:
Future policy benefits:
Fixed annuities .................................... $21,838,008 $21,404,836
Universal life-type insurance ...................... 3,177,149 3,076,847
Traditional life insurance ......................... 209,685 209,249
Disability income and long-term care insurance ..... 424,200 327,157
Policy claims and other
policyholders' funds ............................... 83,634 56,323
Deferred income taxes .............................. -- 112,904
Amounts due to brokers ............................. 261,987 121,618
Other liabilities .................................. 332,078 285,354
Separate account liabilities ....................... 18,535,160 14,974,082
Total liabilities .................................. 44,861,901 40,568,370
Stockholder's equity:
Capital stock, $30 par value per share;
100,000 shares authorized, issued and outstanding .. 3,000 3,000
Additional paid-in capital ......................... 283,615 278,814
Net unrealized gain on investments ................. 86,102 230,129
Retained earnings .................................. 2,071,363 1,819,765
Total stockholder's equity ......................... 2,444,080 2,331,708
Total liabilities and stockholder's equity ......... $47,305,981 $42,900,078
=========== ===========
Commitments and contingencies (Note 6)
See accompanying notes to consolidated financial statements.
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended Dec. 31,
1996 1995 1994
---- ---- ----
(thousands)
<S> <C> <C> <C>
Revenues:
Premiums:
Traditional life insurance $ 51,403 $ 50,193 $ 48,184
Disability income and long-term care insurance 131,518 111,337 96,456
Total premiums 182,921 161,530 144,640
Policyholder and contractholder charges 302,999 256,454 219,936
Management and other fees 271,342 215,581 164,169
Net investment income 1,965,362 1,907,309 1,781,873
Net realized loss on investments (159) (4,898) (4,282)
Total revenues 2,722,465 2,535,976 2,306,336
Benefits and expenses:
Death and other benefits:
Traditional life insurance 26,919 29,528 28,263
Universal life-type insurance
and investment contracts 85,017 71,691 52,027
Disability income and
long-term care insurance 19,185 16,259 13,393
Increase (decrease) in liabilities for future policy benefits:
Traditional life insurance 1,859 (1,315) (3,229)
Disability income and
long-term care insurance 57,230 51,279 37,912
Interest credited on universal life-type
insurance and investment contracts 1,370,468 1,315,989 1,174,985
Amortization of deferred policy acquisition costs 278,605 280,121 280,372
Other insurance and operating expenses 261,468 211,642 210,101
Total benefits and expenses 2,100,751 1,975,194 1,793,824
Income before income taxes 621,714 560,782 512,512
Income taxes 207,138 195,842 176,343
Net income $ 414,576 $ 364,940 $ 336,169
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended Dec. 31, 1996
(thousands)
Additional Net Unrealized
Capital Paid-In Gain (Loss) on Retained
Stock Capital Investments Earnings Total
----- ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1993 $3,000 $ 222,000 $ 114 $1,468,230 $1,693,344
Initial adoption of SFAS No. 115 -- -- 181,269 -- 181,269
Net income -- -- -- 336,169 336,169
Change in net unrealized
gain (loss) on investments -- -- (457,091) -- (457,091)
Cash dividends -- -- -- (165,000) (165,000)
Balance, Dec. 31, 1994 3,000 222,000 (275,708) 1,639,399 1,588,691
Net income -- -- -- 364,940 364,940
Change in net unrealized
gain (loss) on investments -- -- 505,837 -- 505,837
Capital contribution from parent -- 56,814 -- -- 56,814
Loss on reinsurance transaction
with affiliate -- -- -- (4,574) (4,574)
Cash dividends -- -- -- (180,000) (180,000)
Balance, Dec. 31, 1995 3,000 278,814 230,129 1,819,765 2,331,708
Net income -- -- -- 414,576 414,576
Change in net unrealized
gain (loss) on investments -- -- (144,027) -- (144,027)
Capital contribution from parent -- 4,801 -- -- 4,801
Other changes -- -- -- 2,022 2,022
Cash dividends -- -- -- (165,000) (165,000)
Balance, Dec. 31, 1996 $3,000 $283,615 $ 86,102 $2,071,363 $2,444,080
===== ======= ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended Dec. 31,
1996 1995 1994
---- ---- ----
(thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 414,576 $ 364,940 $ 336,169
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Policy loan issuance, excluding universal
life-type insurance (49,314) (46,011) (37,110)
Policy loan repayment, excluding universal
life-type insurance 41,179 36,416 33,384
Change in amounts recoverable from reinsurers (43,335) (34,083) (25,006)
Change in other accounts receivable (4,981) 12,231 (28,551)
Change in accrued investment income 4,695 (30,498) (10,333)
Change in deferred policy acquisition
costs, net (294,755) (196,963) (192,768)
Change in liabilities for future policy
benefits for traditional life,
disability income and
long-term care insurance 97,479 85,575 55,354
Change in policy claims and other
policyholders' funds 27,311 6,255 5,552
Change in deferred income taxes (65,609) (33,810) (19,176)
Change in other liabilities 46,724 (6,548) (122)
(Accretion of discount)
amortization of premium, net (23,032) (22,528) 30,921
Net realized loss on investments 159 4,898 4,282
Policyholder and contractholder
charges, non-cash (154,286) (140,506) (126,918)
Other, net (10,816) 3,849 (8,709)
Net cash (used in) provided by operating
activities $ (14,005) $ 3,217 $ 16,969
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years ended Dec. 31,
1996 1995 1994
(thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases $ (43,751) $ (1,007,208) $ (879,740)
Maturities, sinking fund payments and calls 759,248 538,219 1,651,762
Sales 279,506 332,154 58,001
Fixed maturities available for sale:
Purchases (2,299,198) (2,452,181) (2,763,278)
Maturities, sinking fund payments and calls 1,270,240 861,545 1,234,401
Sales 238,905 136,825 374,564
Other investments, excluding policy loans:
Purchases (904,536) (823,131) (634,807)
Sales 236,912 160,521 243,862
Change in amounts due from brokers (11,047) 7,933 (2,214)
Change in amounts due to brokers 140,369 (105,119) (124,749)
Net cash used in investing activities (333,352) (2,350,442) (842,198)
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 3,567,586 4,189,525 3,566,814
Surrenders and death benefits (4,250,294) (3,141,404) (3,602,392)
Interest credited to account balances 1,370,468 1,315,989 1,174,985
Universal life-type insurance policy loans:
Issuance (86,501) (84,700) (78,239)
Repayment 58,753 52,188 50,554
Capital contribution from parent 4,801 -- --
Cash dividends to parent (165,000) (180,000) (165,000)
Net cash provided by financing activities 499,813 2,151,598 946,722
Net increase (decrease) in cash and
cash equivalents 152,456 (195,627) 121,493
Cash and cash equivalents at
beginning of year 72,147 267,774 146,281
Cash and cash equivalents at
end of year $ 224,603 $ 72,147 $ 267,774
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation, which is a wholly
owned subsidiary of American Express Company. The Company serves residents of
all states except New York. IDS Life Insurance Company of New York is a
wholly owned subsidiary of the Company and serves New York State residents.
The Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company (ACLAC) and American Partners Life
Insurance Company.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single
premium and flexible premium deferred annuities on both a fixed and variable
dollar basis. Immediate annuities are offered as well. The Company's
insurance products include universal life (fixed and variable), whole life,
single premium life and term products (including waiver of premium and
accidental death benefits). The Company also markets disability income and
long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which vary in
certain respects from reporting practices prescribed or permitted by state
insurance regulatory authorities.
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 and all marketable equity
securities are classified as available for sale and carried at fair value.
Unrealized gains and losses on securities classified as available for sale
are carried as a separate component of stockholder's equity, net of deferred
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 reserves for
mortgage loan losses. The estimated fair value of the mortgage loans is
determined by a discounted cash flow analysis using mortgage interest rates
currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of 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 a reserve for
mortgage loan losses. The reserve for mortgage loans losses is maintained at
a level that management believes is adequate to absorb estimated losses in
the portfolio. The level of the reserve account is determined based on
several factors, including historical experience, expected future principal
and interest payments, estimated collateral values, and current and
anticipated economic and political conditions. Management regularly evaluates
the adequacy of the reserve for mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgement as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to the
recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment income
over the life of the contracts and payments received as a result of these
agreements are recorded as investment income when realized. The amortized
cost of interest rate caps and floors is included in other investments.
Amounts paid or received under interest rate swap agreements are recognized
as an adjustment to investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which
do not exceed the cash surrender values of the related policies.
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 consolidated statements of cash flows
for the years ended Dec. 31 is summarized as follows:
1996 1995 1994
--------- -------- -----
Cash paid during the year for:
Income taxes $317,283 $191,011 $226,365
Interest on borrowings 4,119 5,524 1,553
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over the
lives of the contracts, using primarily the interest method. Profits
represent the excess of investment income earned from investment of contract
considerations over interest credited to contract owners and other expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. This method recognizes profits over the lives of the
policies in proportion to the estimated gross profits expected to be
realized.
Premiums on traditional life, disability income and long-term care insurance
policies are recognized as revenue when due, and related benefits and
expenses are associated with premium revenue in a manner that results in
recognition of profits over the lives of the insurance policies. This
association is accomplished by means of the provision for future policy
benefits and the deferral and subsequent amortization of policy acquisition
costs.
Policyholder and contractholder charges include the monthly cost of insurance
charges and issue and administrative fees. These charges also include the
minimum death benefit guarantee fees received from the variable life
insurance separate accounts. Management and other fees include investment
management fees and mortality and expense risk fees from the variable annuity
and variable life insurance separate accounts and underlying funds.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most
single premium deferred annuities and installment annuities are amortized in
relation to surrender charge revenue and a portion of the excess of
investment income earned from investment of the contract considerations over
the interest credited to contract owners. The costs for universal life-type
insurance and certain installment annuities are amortized as a percentage of
the estimated gross profits expected to be realized on the policies. For
traditional life, disability income and long-term care insurance policies,
the costs are amortized over an appropriate period in proportion to premium
revenue.
Liabilities for future policy benefits
Liabilities for universal life-type insurance, single premium deferred
annuities and installment annuities are accumulation values.
Liabilities for fixed annuities in a benefit status are based on the
Progressive Annuity Table with interest at 5 percent, the 1971 Individual
Annuity Table with interest at 7 percent or 8.25 percent, or the 1983a Table
with various interest rates ranging from 5.5 percent to 9.5 percent,
depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on
the net level premium method and anticipated rates of mortality, policy
persistency and interest earnings. Anticipated mortality rates generally
approximate the 1955-1960 Select and Ultimate Basic Table for policies issued
prior to 1980, the 1965-1970 Select and Ultimate Basic Table for policies
issued from 1981-1984 and the 1975-1980 Select and Ultimate Basic Table for
policies issued after 1984. Anticipated policy persistency rates vary by
policy form, issue age and policy duration with persistency on cash value
plans generally anticipated to be better than persistency on term insurance
plans. Anticipated interest rates are 4% for policies issued before 1974,
5.25% for policies issued from 1974-1980, and range from 10% to 6% depending
on policy form, issue year and policy duration for policies issued after
1980.
Liabilities for future disability income policy benefits include both policy
reserves and claim reserves. Policy reserves are based on the net level
premium method and anticipated rates of morbidity, mortality, policy
persistency and interest earnings. Anticipated morbidity rates are based on
the 1964 Commissioners Disability Table for policies issued before 1996 and
the 1985 CIDA table for policies issued in 1996. Anticipated mortality rates
are based on the 1958 Commissioners Standard Ordinary Table for policies
issued before 1996 and the 1975-1980 Basic Table for policies issued in 1996.
Anticipated policy persistency rates vary by policy form, occupation class,
issue age and policy duration. Anticipated interest rates are 3% for policies
issued before 1996 and grade from 7.5% to 5% over five years for policies
issued in 1996. Claim reserves are calculated on the basis of anticipated
rates of claim continuance and interest earnings. Anticipated claim
continuance rates are based on the 1964 Commissioners Disability Table for
claims incurred before 1993 and the 1985 CIDA Table for claims incurred after
1992. Anticipated interest rates are 8% for claims incurred prior to 1992, 7%
for claims incurred in 1992 and 6% for claims incurred after 1992.
Liabilities for future long-term care policy benefits include both policy
reserves and claim reserves. Policy reserves are based on the net level
premium method and anticipated rates of morbidity, mortality, policy
persistency and interest earnings. Anticipated morbidity rates are based on
the 1985 National Nursing Home Survey. Anticipated mortality rates are based
on the 1983a Table. Anticipated policy persistency rates vary by policy form,
issue age and policy duration. Anticipated interest rates are 9.5% grading to
7% over 10 years for policies issued from 1989-1992 and 7.75% grading to 7%
over 4 years for policies issued after 1992. Claim reserves are calculated on
the basis of anticipated rates of claim continuance and interest earnings.
Anticipated claim continuance rates are based on the 1985 National Nursing
Home Survey. Anticipated interest rates are 8% for claims incurred prior to
1992, 7% claims incurred in 1992 and 6% for claims incurred after 1992.
Reinsurance
The maximum amount of life insurance risk retained by the Company on any one
life is $750 of life and waiver of premium benefits plus $50 of accidental
death benefits. The maximum amount of disability income risk retained by the
Company on any one life is $6 of monthly benefit for benefit periods longer
than three years. The excesses are reinsured with other life insurance
companies on a yearly renewable term basis. Graded premium whole life and
long-term care policies are primarily reinsured on a coinsurance basis.
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 American
Express Financial Corporation 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 American Express Financial Corporation to
reimburse subsidiaries for all tax benefits.
Included in other liabilities at Dec. 31, 1996 and 1995 are $33,358 and
($13,415), respectively, receivable from/(payable to) American Express
Financial Corporation for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance
contract owners.
The Company 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 the beneficiaries from the mortality assumptions implicit in
the annuity contracts. The Company makes periodic fund transfers to, or
withdrawals from, the separate accounts for such actuarial adjustments for
variable annuities that are in the benefit payment period. For variable life
insurance, the Company guarantees that the rates at which insurance charges
and administrative fees are deducted from contract funds will not exceed
contractual maximums. The Company also guarantees that the death benefit will
continue payable at the initial level regardless of investment performance so
long as minimum premium payments are made.
Accounting changes
The Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was effective
Jan. 1, 1996. The new rule did not have a material impact on the Company's
results of operations or financial condition. The Company adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
effect of adopting the new rule was to increase stockholder's equity by
$181,269, net of tax, as of Jan. 1, 1994, but the adoption had no impact on
the Company's net income.
Reclassification
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
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.
Net realized gain (loss) on investments for the years ended Dec. 31 is
summarized as follows:
1996 1995 1994
-------- -------- --------
Fixed maturities ............ $ 8,736 $ 9,973 $ (1,575)
Mortgage loans .............. (8,745) (13,259) (3,013)
Other investments ........... (150) (1,612) 306
-------- -------- --------
$ (159) $ (4,898) $ (4,282)
======== ======== ========
<PAGE>
Changes in net unrealized appreciation (depreciation) of investments for the
years ended Dec. 31 are summarized as follows:
1996 1995 1994
---------- ------------ -----------
Fixed maturities:
Held to maturity ....... $ (335,515) $ 1,195,847 $(1,329,740)
Available for sale ..... (231,853) 811,649 (720,449)
Equity securities ......... (52) 3,118 (2,917)
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at Dec. 31, 1996 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 $ 44,002 $ 933 $ 1,276 $ 43,659
State and municipal obligations 9,685 412 -- 10,097
Corporate bonds and obligations 8,057,997 356,687 47,639 8,367,045
Mortgage-backed securities 2,124,695 21,577 45,423 2,100,849
------------ --------- ------- ------------
$10,236,379 $379,609 $94,338 $10,521,650
=========== ======== ======= ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
------------------ ---- ----- ------ -----
U.S. Government agency obligations $ 77,944 $ 2,607 $ 96 $ 80,455
State and municipal obligations 11,032 1,336 -- 12,368
Corporate bonds and obligations 3,701,604 122,559 24,788 3,799,375
Mortgage-backed securities 7,218,042 104,808 68,203 7,254,647
---------- -------- ------ -----------
Total fixed maturities 11,008,622 231,310 93,087 11,146,845
Equity securities 3,000 308 -- 3,308
----------- -------- ------- -----------
$11,011,622 $231,618 $93,087 $11,150,153
=========== ======== ======= ===========
</TABLE>
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at Dec. 31, 1995 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 $ 64,523 $ 3,919 $ -- $ 68,442
State and municipal obligations 11,936 362 32 12,266
Corporate bonds and obligations 8,921,431 620,327 36,786 9,504,972
Mortgage-backed securities 2,259,701 42,684 9,688 2,292,697
----------- --------- ------- -----------
$11,257,591 $667,292 $46,506 $11,878,377
=========== ======== ======= ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
U.S. Government agency obligations $ 84,082 $ 3,248 $ 50 $ 87,280
State and municipal obligations 11,020 1,476 -- 12,496
Corporate bonds and obligations 2,514,308 186,596 3,451 2,697,453
Mortgage-backed securities 7,536,726 206,288 24,031 7,718,983
---------- -------- ------- ----------
Total fixed maturities 10,146,136 397,608 27,532 10,516,212
Equity securities 3,156 361 -- 3,517
---------- -------- ------- ----------
$10,149,292 $397,969 $27,532 $10,519,729
=========== ======== ======= ===========
</TABLE>
<PAGE>
The amortized cost and fair value of investments in fixed maturities at Dec.
31, 1996 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 $ 197,711 $ 200,134
Due from one to five years 2,183,374 2,294,335
Due from five to ten years 4,606,775 4,779,690
Due in more than ten years 1,123,824 1,146,642
Mortgage-backed securities 2,124,695 2,100,849
------------ ------------
$10,236,379 $10,521,650
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 227,051 $ 229,650
Due from one to five years 851,428 899,098
Due from five to ten years 2,140,579 2,182,079
Due in more than ten years 571,522 581,371
Mortgage-backed securities 7,218,042 7,254,647
------------ ------------
$11,008,622 $11,146,845
During the years ended Dec. 31, 1996, 1995 and 1994, fixed maturities
classified as held to maturity were sold with amortized cost of $277,527,
$333,508 and $61,290, respectively. Net gains and losses on these sales were
not significant. The sale of these fixed maturities was due to significant
deterioration in the issuers' creditworthiness.
As a result of adopting the FASB Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company reclassified securities with a book value of $91,760
and net unrealized gains of $881 from held to maturity to available for sale
in December 1995.
In addition, fixed maturities available for sale were sold during 1996 with
proceeds of $238,905 and gross realized gains and losses of $571 and $16,084,
respectively. Fixed maturities available for sale were sold during 1995 with
proceeds of $136,825 and gross realized gains and losses of $nil and $5,781,
respectively. Fixed maturities available for sale were sold during 1994 with
proceeds of $374,564 and gross realized gains and losses of $1,861 and
$7,602, respectively.
At Dec. 31, 1996, bonds carried at $13,571 were on deposit with various
states as required by law.
<PAGE>
Net investment income for the years ended Dec. 31 is summarized as follows:
1996 1995 1994
--------- ------- -----
Interest on fixed maturities $1,666,929 $1,656,136 $1,556,756
Interest on mortgage loans 283,830 232,827 196,521
Other investment income 43,283 35,936 38,366
Interest on cash equivalents 5,754 5,363 6,872
------------- ------- -----------
1,999,796 1,930,262 1,798,515
Less investment expenses 34,434 22,953 16,642
------------ --------- ----------
$1,965,362 $1,907,309 $1,781,873
========== ========== ==========
At Dec. 31, 1996, investments in fixed maturities comprised 84 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 $1.9
billion which are rated by American Express Financial Corporation internal
analysts using criteria similar to Moody's and S&P. A summary of investments
in fixed maturities, at amortized cost, by rating on Dec. 31 is as follows:
Rating 1996 1995
------ ----------- -----------
Aaa/AAA ....................... $ 9,460,134 $ 9,907,664
Aaa/AA ........................ 2,870 3,112
Aa/AA ......................... 241,914 279,403
Aa/A .......................... 192,631 154,846
A/A ........................... 2,949,895 3,104,122
A/BBB ......................... 1,034,661 871,782
Baa/BBB ....................... 4,531,515 4,417,654
Baa/BB ........................ 768,285 657,633
Below investment grade ........ 2,063,096 2,007,511
----------- -----------
$21,245,001 $21,403,727
At Dec. 31, 1996, 95 percent of the securities rated Aaa/AAA are GNMA, FNMA
and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than 1 percent of the Company's total investments in fixed
maturities.
<PAGE>
At Dec. 31, 1996, approximately 13.7 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:
Dec. 31, 1996 Dec. 31, 1995
------------------------- ------------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
------------------ ----------- ----------- ----------- ----------
East North Central $ 777,960 $ 19,358 $ 720,185 $ 67,206
West North Central 389,285 29,620 303,113 34,411
South Atlantic 891,852 35,007 732,529 111,967
Middle Atlantic 553,869 17,959 508,634 37,079
New England 310,177 14,042 244,816 40,452
Pacific 190,770 4,997 168,272 23,161
West South Central 105,173 11,246 61,860 27,978
East South Central 75,176 -- 58,462 10,122
Mountain 236,597 11,401 184,964 16,774
---------- -------- -------- ------
3,530,859 143,630 2,982,835 369,150
Less allowance for losses 37,495 -- 37,340 --
---------- -------- ------- ---
$3,493,364 $143,630 $2,945,495 $369,150
========== ======== ========== ========
Dec. 31, 1996 Dec. 31, 1995
------------------------- ------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
- ----------------------- --------- --------- ----------- -----------
Department/retail stores $1,154,179 $ 68,032 $ 985,660 $ 134,538
Apartments 1,119,352 23,246 1,038,446 84,978
Office buildings 611,395 27,653 464,381 62,664
Industrial buildings 296,944 6,716 255,469 22,721
Hotels/motels 97,870 6,257 31,335 48,816
Nursing/retirement homes 88,226 1,877 80,864 4,378
Mixed Use 73,120 -- 53,169 --
Medical buildings 67,178 8,289 57,772 2,495
Other 22,595 1,560 15,739 8,560
------------ ---------- --------- --------
3,530,859 143,630 2,982,835 369,150
Less allowance for losses 37,495 -- 37,340 --
------------ ------ --------- ------
$3,493,364 $143,630 $2,945,495 $369,150
========== ======== ========== ========
<PAGE>
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
the right to take possession of the property if the borrower fails to perform
according to the terms of the agreement. The 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. Commitments to purchase
mortgages are made in the ordinary course of business. The fair value of the
mortgage commitments is $nil.
At Dec. 31, 1996 and 1995, the Company's recorded investment in impaired loans
was $79,441 and $83,874 with a reserve of $16,162 and $19,307, respectively.
During 1996 and 1995, the average recorded investment in impaired loans was
$74,338 and $74,567, respectively.
The Company recognized $4,889 and $5,014 of interest income related to impaired
loans for the year ended Dec. 31, 1996 and 1995, respectively.
The following table presents changes in the reserve for investment losses
related to all loans:
1996 1995
--------- --------
Balance, Jan. 1 .................... $ 37,340 $ 35,252
Provision for investment losses .... 10,005 15,900
Loan payoffs ....................... (4,700) (11,900)
Foreclosures ....................... (5,150) (1,350)
Other .............................. -- (562)
-------- --------
Balance, Dec. 31 ................... $ 37,495 $ 37,340
======== ========
At Dec. 31, 1996, the Company had commitments to purchase affordable housing
limited partnership investments of $28,476, which is recorded as a liability in
the accompanying balance sheets. The total amounts committed in 1997 and 1998
are $25,234 and $3,242, respectively. The Company also had commitments to
purchase real estate investments for $35,425. Commitments to purchase real
estate investments are made in the ordinary course of business. The fair value
of these commitments is $nil.
<PAGE>
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.
Income tax expense consists of the following:
1996 1995 1994
------ -------- -------
Federal income taxes:
Current $260,357 $218,040 $186,508
Deferred (65,609) (33,810) (19,175)
-------- -------- --------
194,748 184,230 167,333
State income taxes-current 12,390 11,612 9,010
--------- ------- ------
Income tax expense $207,138 $195,842 $176,343
======== ======== ========
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
Provision Rate Provision Rate Provision Rate
<S> <C> <C> <C> <C> <C> <C>
Federal income
taxes based on
the statutory rate $217,600 35.0% $196,274 35.0% $179,379 35.0%
Increases (decreases)
are attributable to:
Tax-excluded interest
and dividend income (9,636) (1.6) (8,524) (1.5) (9,939) (2.0)
Other, net (13,216) (2.1) (3,520) (0.6) (2,107) (0.4)
--------- ----- -------- ---- -------- ----
Federal income taxes $194,748 31.3% $184,230 32.9% $167,333 32.6%
======== ===== ======== ==== ======== ====
</TABLE>
A portion of life insurance company income earned prior to 1984 was not
subject to current taxation but was accumulated, for tax purposes, in a
policyholders' surplus account. At Dec. 31, 1996, the Company had a
policyholders' surplus account balance of $20,114. The policyholders' surplus
account is only taxable if dividends to the stockholder exceed the
stockholder's surplus account or if the Company is liquidated. Deferred
income taxes of $7,040 have not been established because no distributions of
such amounts are contemplated.
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
as of Dec. 31 are as follows:
1996 1995
------- -----
Deferred tax assets:
Policy reserves $724,412 $600,176
Life insurance guarantee
fund assessment reserve 29,854 26,785
Other 2,763 --
--------- -------
Total deferred tax assets 757,029 626,961
--------- -------
Deferred tax liabilities:
Deferred policy acquisition costs 665,685 590,762
Unrealized gain on investments 48,486 129,653
Investments, other 8,935 17,152
Other -- 2,298
-------- -------
Total deferred tax liabilities 723,106 739,865
-------- -------
Net deferred tax assets (liabilities)$ 33,923 $(112,904)
========= =========
The Company is required to establish a "valuation allowance" for any portion
of the deferred tax assets that management believes will not be realized. In
the opinion of management, it is more likely than not that the Company will
realize the benefit of the deferred tax assets and, therefore, no such
valuation allowance has been established.
4. Stockholder's equity
During 1996, the Company received a $4,801 capital contribution from its
parent, American Express Financial Corporation. During 1995, the Company
received a $39,700 capital contribution from its parent in the form of
investments in fixed maturities and mortgage loans. In addition, effective
Jan. 1, 1995, the Company began consolidating the financial results of ACLAC.
This change reflected the transfer of ownership of ACLAC from Amex Life
Assurance Company (Amex Life), a former affiliate, to the Company prior to
the sale of Amex Life to an unaffiliated third party on Oct. 2, 1995. This
transfer of ownership to the Company has been reflected as a capital
contribution of $17,114 in the accompanying financial statements. The effect
of this change in reporting entity was not significant and prior periods have
not been restated.
As discussed in Note 5, the Company entered into a reinsurance agreement with
Amex Life during 1995. As a result of this transaction, a loss of $4,574 was
realized and reported as a direct charge to retained earnings.
Other changes in the statements of stockholder's equity are primarily related
to reinsurance transactions with affiliates.
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory authorities. Statutory
unassigned surplus aggregated $1,261,592 as of Dec. 31, 1996 and $1,103,993
as of Dec. 31, 1995 (see Note 3 with respect to the income tax effect of
certain distributions). In addition, any dividend distributions in 1997 in
excess of approximately $351,306 would require approval of the Department of
Commerce of the State of Minnesota.
Statutory net income for the years ended Dec. 31 and capital and surplus as
of Dec. 31 are summarized as follows:
1996 1995 1994
------ ------ ------
Statutory net income $ 365,585 $ 326,799 $ 294,699
Statutory capital and surplus 1,565,082 1,398,649 1,261,958
Dividends paid to American Express Financial Corporation were $165,000 in
1996, $180,000 in 1995, and $165,000 in 1994.
5. Related party transactions
The Company has loaned funds to American Express Financial Corporation under
a collateral loan agreement. The balance of the loan was $11,800 and $25,800
at Dec. 31, 1996 and 1995, respectively. This loan can be increased to a
maximum of $75,000 and pays interest at a rate equal to the preceding month's
effective new money rate for the Company's permanent investments. It is
collateralized by equity securities valued at $116,543 at Dec. 31, 1996.
Interest income on related party loans totaled $780, $1,371 and $2,894 in
1996, 1995 and 1994, respectively.
The Company purchased a five year secured note from an affiliated company
which had an outstanding balance of $nil and $19,444 at Dec. 31, 1996 and
1995, respectively. The note bears a fixed rate of 8.42 percent. Interest
income on the above note totaled $1,637, $1,937 and $2,278 in 1996, 1995 and
1994, respectively.
The Company has a reinsurance agreement whereby it assumed 100 percent of a
block of single premium life insurance business from Amex Life Assurance
Company (Amex Life), a former affiliate. The accompanying consolidated
balance sheets at Dec. 31, 1996 and 1995 include $758,812 and $764,663,
respectively, of future policy benefits related to this agreement.
The Company has a reinsurance agreement to cede 50 percent of its long-term
care insurance business to Amex Life. The accompanying consolidated balance
sheets at Dec. 31, 1996 and 1995 include $134,121 and $95,484, respectively,
of reinsurance receivables related to this agreement. Premiums ceded amounted
to $32,917, $25,553 and $20,360 and reinsurance recovered from reinsurers
amounted to $5,135, $4,998 and $3,022 for the years ended Dec. 31, 1996, 1995
and 1994, respectively.
The Company has a reinsurance agreement to assume deferred annuity contracts
from Amex Life. At Oct. 1, 1995, a $803,618 block of deferred annuities and
$28,327 of deferred policy acquisition costs were transferred to the Company.
The accompanying consolidated balance sheet at Dec. 31, 1996 includes
$828,298 of future policy benefits related to this agreement. Contracts with
future policy benefits totaling $50,400 were still reinsured with the former
affiliate at Dec. 31, 1996. The remaining contracts had been novated to
Company contracts.
Until July 1, 1995, the Company participated in the IDS Retirement Plan of
American Express Financial Corporation which covered all permanent employees
age 21 and over who had met certain employment requirements. Effective July
1, 1995, the IDS Retirement Plan was merged with American Express Company's
American Express Retirement Plan, which simultaneously was amended to include
a cash balance formula and a lump sum distribution option. Employer
contributions to the plan are based on participants' age, years of service
and total compensation for the year. Funding of retirement costs for this
plan complies with the applicable minimum funding requirements specified by
ERISA. The Company's share of the total net periodic pension cost was $174,
$155 and $156 in 1996, 1995 and 1994, respectively.
The Company also participates in defined contribution pension plans of
American Express Company which cover all employees who have met certain
employment requirements. Company contributions to the plans are a percent of
either each employee's eligible compensation or basic contributions. Costs of
these plans charged to operations in 1996, 1995 and 1994 were $990, $815 and
$957, respectively.
The Company participates in defined benefit health care plans of American
Express Financial Corporation that provide health care and life insurance
benefits to retired employees and retired financial advisors. The plans
include participant contributions and service related eligibility
requirements. Upon retirement, such employees are considered to have been
employees of American Express Financial Corporation. American Express
Financial Corporation expenses these benefits and allocates the expenses to
its subsidiaries. Accordingly, costs of such benefits to the Company are
included in employee compensation and benefits and cannot be identified on a
separate company basis.
Charges by American Express Financial Corporation for use of joint
facilities, marketing services and other services aggregated $397,362,
$377,139, and $335,183 for 1996, 1995 and 1994, respectively. Certain of
these costs are included in deferred policy acquisition costs. In addition,
the Company rents its home office space from American Express Financial
Corporation on an annual renewable basis.
6. Commitments and contingencies
At Dec. 31, 1996 and 1995, traditional life insurance and universal life-type
insurance in force aggregated $67,274,354 and $59,683,532, respectively, of
which $3,875,921 and $3,771,204 were reinsured at the respective year ends.
The Company also reinsures a portion of the risks assumed under disability
income and long-term care policies. Under all reinsurance agreements,
premiums ceded to reinsurers amounted to $48,250, $39,399 and $31,016 and
reinsurance recovered from reinsurers amounted to $15,612, $14,088, and
$10,778 for the years ended Dec. 31, 1996, 1995 and 1994. Reinsurance
contracts do not relieve the Company from its primary obligation to
policyholders.
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company and its subsidiaries do business involving
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. In December 1996, an action of this type
was brought against the Company and its parent, American Express Financial
Corporation. The plaintiffs purport to represent a class consisting of all
persons who replaced existing Company policies with new Company policies from
and after Jan. 1, 1985. The complaint puts at issue various alleged sales
practices and misrepresentations, alleged breaches of fiduciary duties and
alleged violations of consumer fraud statutes. Plaintiffs seek damages in an
unspecified amount and seek to establish a claims resolution facility for the
determination of individual issues. The Company and its parent believe they
have meritorious defenses to the claims raised in the lawsuit. The outcome of
any litigation cannot be predicted with certainty, particularly in the early
stages of an action. In the opinion of management, however, the ultimate
resolution of the above lawsuit and others filed against the Company should
not have a material adverse effect on the Company's consolidated financial
position.
During 1996, the Company settled the federal tax audit for 1987 through 1989
tax years. There was no material impact as a result of that audit. Also, the
IRS is currently auditing the Company's 1990 through 1992 tax years.
Management does not believe there will be a material impact as a result of
this audit.
7. Lines of credit
The Company has available lines of credit with two banks and its parent
aggregating $175,000, of which $100,000 is with its parent. The lines of
credit are at 40 to 80 basis points over the lenders' cost of funds or equal
to the prime rate, depending on which line of credit agreement is used. The
$25,000 line of credit with one bank expired on Dec. 31, 1996 and the Company
did not seek renewal. The $50,000 line of credit with the other bank expires
on June 30, 1997 and the Company expects to seek renewal. Borrowings
outstanding under these agreements were $nil at Dec. 31, 1996 and 1995.
8. 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 held for
purposes other than trading are largely used to manage risk and, therefore,
the cash flow and income effects of the derivatives are inverse to the
effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the
terms of the contract. The Company monitors credit exposure related to
derivative financial instruments through established approval procedures,
including setting concentration limits by counterparty and industry, 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 exposure related to interest rate caps and floors is measured by the
replacement cost of the contracts. The replacement cost represents the fair
value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over the
life of the agreement. Notional amounts are not recorded on the balance
sheet. Notional amounts far exceed the related credit exposure.
<PAGE>
The Company's holdings of derivative financial instruments are as follows:
Notional Carrying Fair Total Credit
Dec. 31, 1996 Amount Value Value Exposure
------------- --------- ------- -------- ------------
Assets:
Interest rate caps $ 4,000,000 $16,227 $ 7,439 $ 7,439
Interest rate floors 1,000,000 2,041 4,341 4,341
Interest rate swaps 1,000,000 -- (24,715) --
---------- ------- -------- -------
$6,000,000 $18,268 $(12,935) $11,780
========== ======= ======== =======
Dec. 31, 1995
Assets:
Interest rate caps $5,100,000 $26,680 $ 8,366 $ 8,366
========== ======= ======== =======
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps and floors
expire on various dates from 1996 to 2001. The interest rate swaps are in
effect through 2001.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the
margin between interest rates earned on investments and the interest rates
credited to related annuity contract holders.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance
sheet financial instruments for which it is practicable to estimate that
value. Fair values of life insurance obligations and all non-financial
instruments, such as deferred acquisition costs are excluded. Off-balance
sheet intangible assets, such as the value of the field force, are also
excluded. Management believes the value of excluded assets is significant.
The fair value of the Company, therefore, cannot be estimated by aggregating
the amounts presented.
1996 1995
------ -----
<TABLE>
<CAPTION>
Carrying Fair Carrying Fair
Financial Assets Value Value Value Value
---------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $10,236,379 $10,521,650 $11,257,591 $11,878,377
Available for sale 11,146,845 11,146,845 10,516,212 10,516,212
Mortgage loans on
real estate (Note 2) 3,493,364 3,606,077 2,945,495 3,184,666
Other:
Equity securities (Note 2) 3,308 3,308 3,517 3,517
Derivative financial
instruments (Note 8) 18,268 (12,935) 26,680 8,366
Other 63,993 66,242 52,182 52,182
Cash and
cash equivalents (Note 1) 224,603 224,603 72,147 72,147
Separate account assets
(Note 1) 18,535,160 18,535,160 14,974,082 14,974,082
Financial Liabilities
Future policy benefits
for fixed annuities 20,641,986 19,721,968 20,259,265 19,603,114
Separate account
liabilities 17,358,087 16,688,519 14,208,619 13,665,636
</TABLE>
<PAGE>
At Dec. 31, 1996 and 1995, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related contracts
carried at $1,112,155 and $1,070,598, respectively, and policy loans of
$83,867 and $74,973, respectively. The fair value of these benefits is based
on the status of the annuities at Dec. 31, 1996 and 1995. The fair value of
deferred annuities is estimated as the carrying amount less any applicable
surrender charges and related loans. The fair value for annuities in non-life
contingent payout status is estimated as the present value of projected
benefit payments at rates appropriate for contracts issued in 1996 and 1995.
At Dec. 31, 1996 and 1995, the fair value of liabilities related to separate
accounts is estimated as the carrying amount less any applicable surrender
charges and less variable insurance contracts carried at $1,177,073 and
$765,463, respectively.
10.Segment information
The Company's operations consist of two business segments; first, individual
and group life insurance, disability income and long-term care insurance, and
second, annuity products designed for individuals, pension plans, small
businesses and employer-sponsored groups. The consolidated condensed
statements of income for the years ended Dec. 31, 1996, 1995 and 1994 and
total assets at Dec. 31, 1996, 1995 and 1994 by segment are summarized as
follows:
1996 1995 1994
------ ------ -----
Net investment income:
Life, disability income
and long-term care insurance $ 262,998 $ 256,242 $ 247,047
Annuities 1,702,364 1,651,067 1,534,826
----------- ----------- ------------
$ 1,965,362 $ 1,907,309 $ 1,781,873
=========== =========== ============
Premiums, charges and fees:
Life, disability income
and long-term care insurance $ 448,389 $ 384,008 $ 335,375
Annuities 308,873 249,557 193,370
------------ ------------ -------------
$ 757,262 $ 633,565 $ 528,745
============ ============ =============
Income before income taxes:
Life, disability income
and long-term care insurance $ 161,115 $ 125,402 $ 122,677
Annuities 460,758 440,278 394,117
Net loss on investments (159) (4,898) (4,282)
------------- ------------- --------------
$ 621,714 $ 560,782 $ 512,512
============ ============ =============
Total assets:
Life, disability income
and long-term care insurance $ 7,028,906 $ 6,195,870 $ 5,269,188
Annuities 40,277,075 36,704,208 30,478,355
----------- ----------- -----------
$47,305,981 $42,900,078 $35,747,543
=========== =========== ===========
Allocations of net investment income and certain general expenses are based
on various assumptions and estimates.
Assets are not individually identifiable by segment and have been allocated
principally based on the amount of future policy benefits by segment.
Capital expenditures and depreciation expense are not material, and
consequently, are not reported.
<PAGE>
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1996. 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 consolidated financial position of IDS Life Insurance
Company at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1994.
Ernst & Young LLP
February 7, 1997
Minneapolis, Minnesota
<PAGE>
PAGE 38
STATEMENT OF DIFFERENCES
Difference Description
1) Prospectus language. 1) On page 2 of the
electronic filing in the
second paragraph, the
following words were added:
"bank or" before financial
institution, and "backed"
before or guaranteed....
2) Asterisks. 2) On page 31 of the
electronic filing, an
asterisk was deleted at the
end of the "Directors and
executive officers" line,
and added at "Directors".
On page 32 of the
electronic filing, an
asterisk was added at the
end of the "Officers other
than directors" line.