SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
POST EFFECTIVE AMENDMENT NO. 8
TO REGISTRATION STATEMENT NO. 33-48701
Under
The Securities Act of 1933
IDS Life Insurance Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Minnesota
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
63
- --------------------------------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
41-0823832
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(I.R.S. Employer Identification No.)
IDS Tower 10, Minneapolis, MN 55440-0010
(612) 671-3131
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Mary Ellyn Minenko, Counsel
IDS Life Insurance Company
IDS Tower 10, Minneapolis, Minnesota 55440-0010
(612) 671-3678
- --------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
It is proposed that this filing become effective on April 30, 1999.
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
<PAGE>
<TABLE>
<CAPTION>
Calculation of Registration Fee
<S> <C> <C> <C> <C>
- ------------------------------------- ----------------- ------------------------ ----------------------- -------------------
Proposed maximum
Title of each class of securities Amount to be Proposed maximum aggregate offering Amount of
to be registered registered offering price per unit price registration fee
- ------------------------------------- ----------------- ------------------------ ----------------------- -------------------
Interests in the Fixed Account of N/A
the Group, Unallocated
Fixed/Variable Annuity Contracts
for Qualified Retirement Plans
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
Registration Statement on Form S-1
Cross-Reference Sheet
Pursuant to Regulation S-K, Item 501(b)
<TABLE>
<CAPTION>
<S> <C>
Form S-1 Item Number and Caption Located in Prospectus
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus........................................Outside Front Cover
2. Inside Front and Outside Back
Cover Pages of Prospectus.......................................Table of Contents
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges.........................................................Summary or, as to ratio of
earnings to fixed charges, Not
Applicable
4. Use of Proceeds.................................................The variable accounts; The fixed account
5. Determination of Offering Price.................................Not Applicable
6. Dilution........................................................Not Applicable
7. Selling Security Holders........................................Not Applicable
8. Plan of Distribution............................................Distribution of Contracts
9. Description of Securities to Be Registered......................The variable accounts; The fixed account
10. Interests of Named Experts and Counsel..........................Not Applicable
11. Information with Respect to the Registrant......................About IDS Life; Additional
Information about IDS Life
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................................................See Item 14 in Part II
</TABLE>
<PAGE>
PART I.
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated April 30, 1999.
<PAGE>
<PAGE>
IDS LIFE GROUP
VARIABLE ANNUITY
CONTRACT
PROSPECTUS
APRIL 30, 1999
Group, unallocated deferred combination fixed/variable annuity.
NEW GROUP VARIABLE ANNUITY CONTRACTS ARE NOT CURRENTLY BEING OFFERED.
IDS LIFE ACCOUNTS F, IZ, JZ, G, H, N, KZ, LZ AND MZ
Issued by:
IDS Life Insurance Company (IDS Life)
IDS Tower 10
Minneapolis, MN 55440-0010
Telephone: 800-437-0602
This prospectus contains information that you should know before investing. You
also will receive the IDS Life Retirement Annuity Mutual Funds prospectus.
Please read the prospectuses carefully and keep them for future reference. This
contract is designed to fund employer group retirement plans that qualify as
retirement programs under Sections 401 (including 401(k)) and 457 of the
Internal Revenue Code of 1986, as amended (the Code).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THIS CONTRACT IS NOT A DEPOSIT OF A BANK OR FINANCIAL
INSTITUTION AND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN THIS CONTRACT
INVOLVES INVESTMENT RISK INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information (SAI), dated the same date as this
prospectus, is incorporated by reference into this prospectus. It is filed with
the Securities and Exchange Commission (SEC), and is available without charge by
contacting IDS Life at the telephone number above or by completing and sending
the order form on page 63 of this prospectus. The table of contents of the SAI
is on page 61 of this prospectus.
<PAGE>
TABLE OF CONTENTS
KEY TERMS 3
THE CONTRACT IN BRIEF 5
EXPENSE SUMMARY 7
CONDENSED FINANCIAL INFORMATION (UNAUDITED) 9
FINANCIAL STATEMENTS 12
PERFORMANCE INFORMATION 12
THE VARIABLE ACCOUNTS 14
THE FUNDS 16
THE FIXED ACCOUNT 18
BUYING THE CONTRACT 19
CHARGES 20
VALUING THE INVESTMENT 23
WITHDRAWALS, LOANS AND CONVERSIONS 25
CONTRACT TRANSFER, MARKET VALUE ADJUSTMENT
AND CONTRACT TERMINATION 28
CHANGING OWNERSHIP 34
THE ANNUITY PAYOUT PERIOD 35
TAXES 37
VOTING RIGHTS 40
OTHER CONTRACTUAL PROVISIONS 41
RECORDKEEPING SERVICES 42
ABOUT THE SERVICE PROVIDERS 43
ADDITIONAL INFORMATION ABOUT IDS LIFE 45
DIRECTORS AND EXECUTIVE OFFICERS 57
EXPERTS 60
IDS LIFE FINANCIAL INFORMATION F-1
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION 61
2
<PAGE>
- ----------------------------------------------
KEY TERMS
THESE TERMS CAN HELP YOU UNDERSTAND DETAILS
ABOUT YOUR CONTRACT.
ACCUMULATION UNIT -- A measure of the value of each variable account before
annuity payouts begin.
ANNUITY PAYOUTS -- A fixed amount paid at regular intervals.
CLOSE OF BUSINESS -- When the New York Stock Exchange (NYSE) closes, normally
4:00 p.m. Eastern time.
CONTRACT ANNIVERSARY -- An anniversary of the effective date of this contract.
CONTRACT VALUE -- The total value of your contract before we deduct any
applicable charges.
CONTRACT YEAR -- A period of 12 months, starting on the effective date of your
contract and on each anniversary of the effective date.
FIXED ACCOUNT -- An account to which you may allocate purchase payments. Amounts
you allocate to this account earn interest at rates that we declare
periodically.
FUNDS -- Mutual funds and/or portfolios, that are investment options under your
contract, each with a different investment objective. You may allocate your
purchase payments into variable accounts investing in shares of any or all of
these funds.
OWNER (YOU, YOUR) -- The plan sponsor or trustee of the Plan.
3
<PAGE>
KEY TERMS
PARTICIPANT -- An eligible employee or other person who is entitled to benefits
under the Plan.
PLAN -- The retirement Plan under which the contract is issued and which meets
the requirements of Code Sections 401 (including 401(k)) or 457.
RETIREMENT DATE -- The date when annuity payouts are scheduled to begin.
VALUATION DATE -- Any normal business day, Monday through Friday, that the NYSE
is open. Each valuation date ends at the close of business. We calculate the
value of each variable account at the close of business on each valuation date.
VARIABLE ACCOUNTS -- Separate accounts to which you may allocate purchase
payments; each invests in shares of one fund. The value of your investment in
each variable account changes with the performance of the particular fund.
WITHDRAWAL CHARGE -- A deferred sales charge that we may apply if the you take a
total or partial withdrawal or you transfer or terminate the contract.
4
<PAGE>
- ----------------------------------------------
THE CONTRACT IN BRIEF
PURPOSE: The contract is designed to fund employer group
retirement plans that meet the requirements of Code
sections 401 (including 401(k)) and 457. The contract
provides for the accumulation of values on a fixed
and/or variable basis. The contract also provides
lifetime or other forms of payout on a fixed basis
beginning at a specified date (the retirement date).
ACCOUNTS: Currently, you can elect to accumulate contract
values in any or all of:
- the variable accounts, each of which invests in a fund
with a particular investment objective. The value of
each variable account varies with the performance of
the particular fund in which it invests. We cannot
guarantee that the value at the retirement date will
equal or exceed the total of purchase payments
allocated to the variable accounts. (p. 14)
- the fixed account, which earns interest at a rate that
we adjust periodically. (p. 18)
BUYING THE CONTRACT: A financial advisor will help you complete and submit
an application. Applications are subject to acceptance
at our office. Generally, purchase payments may be made
annually, semiannually, quarterly or monthly or any
other frequency we accept. (p. 19)
WITHDRAWALS,
LOANS AND
CONVERSIONS: You may withdraw all or part of the contract's value
at any time. Withdrawals may be subject to charges and
IRS penalty taxes and may have tax consequences. Total
withdrawals may be subject to a market value adjustment.
(p. 25)
You also may request a withdrawal for the purpose of
funding loans for participants. A withdrawal for a loan
is not subject to withdrawal charges. However, we
reserve the right to deduct withdrawal charges from the
remaining contract value if there are any unpaid loans
at the time of a total withdrawal, contract transfer or
termination. (p. 26)
If a participant terminates employment, you may direct
us to withdraw a part of the contract value so that the
participant can purchase an individual deferred annuity
from us. Withdrawal charges will not apply at the time
of withdrawal for this conversion. (p. 27)
5
<PAGE>
THE CONTRACT IN BRIEF
CONTRACT TRANSFER,
MARKET VALUE ADJUSTMENT
AND CONTRACT TERMINATION:
Subject to certain restrictions, you currently may
redistribute money among accounts without charge at any
time while the contract is in force. (p. 28)
You may direct us to withdraw the total contract value
and transfer that value to another funding agent. (p.
28)
If the value of the fixed account is canceled due to
total withdrawal, contract transfer or contract
termination, we may impose a market value adjustment in
addition to applicable contract charges. The amount of
the market value adjustment approximates the gain or
loss resulting from our sale of assets we purchased with
the purchase payments. (p. 30)
Under certain circumstances, we may terminate the
contract. (p. 32)
Prohibited investments: You will not offer under the
plan any of the following funding vehicles to which
future contributions may be made:
- guaranteed investment contracts;
- bank investment contracts;
- annuity contracts with fixed and/or variable accounts;
or
- funding vehicles providing a guarantee of principal.
(p. 32)
ANNUITY PAYOUTS: You can direct us to begin retirement payouts to a
payee under an annuity payout plan that begins on the
participant's retirement date. You may choose from a
variety of plans, or we may agree to other payout
arrangements. The annuity payout plan you select must
meet the requirements of the plan. Payouts will be made
on a fixed basis. (p. 35)
TAXES: Generally there is no federal income tax to
participants on contributions made to the contract or on
increases in the contract's value until distributions
are made (under certain circumstances, IRS penalty taxes
and other tax consequences may apply). (p. 37)
CHARGES:
- $125 quarterly ($500 annual) contract administrative
charge;
- 1.00% mortality and expense risk fee;
- withdrawal charge; and
- the operating expenses of the funds.
CHANGING OWNERSHIP: In general, ownership of the contract may not be
transferred. (p. 34)
RECORDKEEPER: We must approve any person or entity authorized by
you to administer recordkeeping services for the plan
and participants. (p. 42)
6
<PAGE>
- ------------------------------------------------
EXPENSE SUMMARY
The purpose of this table is to help you
understand the various costs and expenses
associated with your contract.
You pay no sales charge when you purchase your
contract. We show all costs that you bear
directly or indirectly for the variable accounts
and funds below. Some expenses may vary as we
explain under "Charges."
ANNUAL CONTRACT OWNER EXPENSES:
<TABLE>
<CAPTION>
WITHDRAWAL CHARGE (contingent deferred sales charge)
<S> <C> <C> <C>
Withdrawal charge as a
Contract year percentage of amount withdrawn
------------- ----------------------------------
1 6%
2 6
3 5
4 4
5 3
6 2
7 1
8 and later 0
CONTRACT ADMINISTRATIVE CHARGE $500 ($125 per quarter)
</TABLE>
ANNUAL VARIABLE ACCOUNT EXPENSES (as a percentage of average daily
net assets of the variable accounts):
MORTALITY AND EXPENSE RISK FEE 1%
ANNUAL OPERATING EXPENSES OF THE FUNDS (as a percentage of average
daily net assets):
<TABLE>
<CAPTION>
IDS LIFE IDS LIFE IDS LIFE IDS LIFE IDS LIFE IDS LIFE IDS
AGGRESSIVE CAPITAL GLOBAL GROWTH INCOME INTERNATIONAL LIFE IDS LIFE
GROWTH RESOURCE YIELD DIMENSIONS ADVANTAGE EQUITY MANAGED MONEYSHARE
FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management fees .59% .59% .83% .61% .62% .83% .59% .50%
Other expenses .09 .07 .13 .06 .09 .15 .04 .06
Total(1) .68% .66% .96% .67% .71% .98% .63% .56%
<CAPTION>
IDS LIFE
SPECIAL
INCOME
FUND
<S> <C>
Management fees .60%
Other expenses .07
Total(1) .67%
</TABLE>
(1) Annualized operating expenses of funds at Dec. 31, 1998.
7
<PAGE>
EXPENSE SUMMARY
EXAMPLE:*
<TABLE>
<CAPTION>
IDS LIFE IDS LIFE IDS LIFE IDS LIFE IDS LIFE IDS LIFE IDS LIFE
AGGRESSIVE CAPITAL GLOBAL GROWTH INCOME INTERNATIONAL IDS LIFE IDS LIFE SPECIAL
GROWTH RESOURCE YIELD DIMENSIONS ADVANTAGE EQUITY MANAGED MONEYSHARE INCOME
FUND FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return and full withdrawal at the end
of each time period:
1 Year $ 80.29 $ 80.09 $ 82.98 $ 80.19 $ 80.57 $ 83.18 $ 79.80 $ 79.13 $ 80.19
3 Years 111.82 111.23 120.06 111.53 112.71 120.65 110.34 108.27 111.53
5 Years 132.99 131.98 147.15 132.48 134.52 148.15 130.45 126.88 132.48
10 Years 212.37 210.21 242.30 211.29 215.62 244.40 206.94 199.30 211.29
</TABLE>
You would pay the following expenses on the same investment assuming no
withdrawal or selection of an annuity payout plan at the end of each time
period:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year $ 18.39 $ 18.18 $ 21.26 $ 18.29 $ 18.70 $21.46 $ 17.88 $17.16 $ 18.29
3 Years 56.93 56.30 65.63 56.62 57.86 66.25 55.37 53.18 56.62
5 Years 97.94 96.89 112.58 97.42 99.52 113.62 95.31 91.62 97.42
10 Years 212.37 210.21 242.30 211.29 215.62 244.40 206.94 199.30 211.29
</TABLE>
* In this example, the $500 contract administrative charge is approximated as a
0.114% charge based on the average contract size.
YOU SHOULD NOT CONSIDER THIS EXAMPLE AS A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
8
<PAGE>
- ----------------------------------------------
CONDENSED FINANCIAL INFORMATION (UNAUDITED)
The following tables give per-unit information about the financial history of
each account.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCOUNT JZ(1) (INVESTING IN SHARES OF IDS LIFE AGGRESSIVE GROWTH FUND)
Accumulation unit $1.88 $1.68 $1.46 $1.12 $1.21 $1.08 $1.00 -- -- --
value at beginning
of period
Accumulation unit value $1.91 $1.88 $1.68 $1.46 $1.12 $1.21 $1.08 -- -- --
at end of period
Number of accumulation 1,087,314 1,168,829 1,172,793 1,007,976 780,423 347,336 115,574 -- -- --
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% -- -- --
expense to average
net assets
ACCOUNT F (INVESTING IN SHARES OF IDS LIFE CAPITAL RESOURCE FUND)
Accumulation unit $8.21 $6.67 $6.25 $4.94 $4.93 $4.82 $4.67 $3.22 $3.23 $2.57
value at beginning
of period
Accumulation unit value $10.09 $8.21 $6.67 $6.25 $4.94 $4.93 $4.82 $4.67 $3.22 $3.23
at end of period
Number of accumulation 507,310 556,866 628,555 641,903 576,724 488,632 402,977 309,984 242,767 204,645
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
expense to average
net assets
ACCOUNT KZ(2) (INVESTING IN SHARES OF IDS LIFE GLOBAL YIELD FUND)
Accumulation unit $1.10 $1.07 $1.00 -- -- -- -- -- -- --
value at beginning
of period
Accumulation unit value $1.18 $1.10 $1.07 -- -- -- -- -- -- --
at end of period
Number of accumulation 78,150 65,609 24,878 -- -- -- -- -- -- --
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% -- -- -- -- -- -- --
expense to average
net assets
</TABLE>
9
<PAGE>
CONDENSED FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCOUNT MZ(2) (INVESTING IN SHARES OF IDS LIFE GROWTH DIMENSIONS FUND)
Accumulation unit $1.37 $1.11 $1.00 -- -- -- -- -- -- --
value at beginning
of period
Accumulation unit value $1.74 $1.37 $1.11 -- -- -- -- -- -- --
at end of period
Number of accumulation 1,001,826 831,259 350,598 -- -- -- -- -- -- --
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% -- -- -- -- -- -- --
expense to average
net assets
ACCOUNT LZ(2) (INVESTING IN SHARES OF IDS LIFE INCOME ADVANTAGE FUND)
Accumulation unit $1.18 $1.05 $1.00 -- -- -- -- -- -- --
value at beginning
of period
Accumulation unit value $1.12 $1.18 $1.05 -- -- -- -- -- -- --
at end of period
Number of accumulation 228,165 175,024 59,939 -- -- -- -- -- -- --
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% -- -- -- -- -- -- --
expense to average
net assets
ACCOUNT IZ(1) (INVESTING IN SHARES OF IDS LIFE INTERNATIONAL EQUITY FUND)
Accumulation unit $1.52 $1.49 $1.38 $1.25 $1.29 $0.98 $1.00 -- -- --
value at beginning
of period
Accumulation unit value $1.74 $1.52 $1.49 $1.38 $1.25 $1.29 $0.98 -- -- --
at end of period
Number of accumulation 1,042,405 1,168,353 1,220,486 1,088,874 913,364 405,536 69,874 -- -- --
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% -- -- --
expense to average
net assets
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACCOUNT N (INVESTING IN SHARES OF IDS LIFE MANAGED FUND)
Accumulation unit $3.51 $2.97 $2.56 $2.09 $2.21 $1.98 $1.86 $1.45 $1.42 $1.14
value at beginning
of period
Accumulation unit value $4.03 $3.51 $2.97 $2.56 $2.09 $2.21 $1.98 $1.86 $1.45 $1.42
at end of period
Number of accumulation 1,100,357 1,178,735 1,197,162 1,212,021 1,127,834 910,254 650,797 496,554 400,961 331,315
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
expense to average
net assets
ACCOUNT H (INVESTING IN SHARES OF IDS LIFE MONEYSHARE FUND)
Accumulation unit $2.46 $2.36 $2.27 $2.18 $2.12 $2.09 $2.04 $1.95 $1.82 $1.69
value at beginning
of period
Accumulation unit value $2.56 $2.46 $2.36 $2.27 $2.18 $2.12 $2.09 $2.04 $1.95 $1.82
at end of period
Number of accumulation 98,897 87,255 89,644 102,568 84,475 74,935 102,277 126,489 139,005 108,690
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
expense to average
net assets
Simple yield(3) 3.71% 4.10% 3.77% 3.97% 4.16% 1.89% 1.76% 3.26% 6.25% 6.81%
Compound yield(3) 3.78% 4.18% 3.84% 4.05% 4.24% 1.90% 1.77% 3.31% 6.44% 7.04%
ACCOUNT G (INVESTING IN SHARES OF IDS LIFE SPECIAL INCOME FUND)
Accumulation unit $5.25 $4.86 $4.59 $3.80 $3.99 $3.48 $3.21 $2.76 $2.67 $2.48
value at beginning
of period
Accumulation unit value $5.27 $5.25 $4.86 $4.59 $3.80 $3.99 $3.48 $3.21 $2.76 $2.67
at end of period
Number of accumulation 287,881 316,789 362,167 393,697 361,640 405,429 330,000 270,858 236,926 222,248
units outstanding at end
of period (000 omitted)
Ratio of operating 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
expense to average
net assets
</TABLE>
(1) Accounts IZ and JZ commenced operations on Jan. 13, 1992.
(2) Accounts KZ, LZ and MZ commenced operations on April 30, 1996.
(3) Net of annual contract administrative charge and mortality and expense risk
fee.
11
<PAGE>
- ----------------------------------------------
FINANCIAL STATEMENTS
You can find the audited financial statements of the variable accounts in the
SAI. You can find our audited financial statements later in this prospectus.
PERFORMANCE INFORMATION
- -----------------------------------------------------------------------------
Performance information for the variable accounts may appear from time to time
in advertisements or sales literature. This information reflects the performance
of a hypothetical investment in a particular variable account during a specified
time period. Although we base performance figures on historical earnings, past
performance does not guarantee future results.
We include non-recurring charges (such as withdrawal charges) in total return
figures, but not in yield quotations. Excluding non-recurring charges in yield
calculations increases the reported value.
Total return figures reflect deduction of all applicable charges, including:
- -the contract administrative charge,
- -mortality and expense risk fee, and
- -withdrawal charge (assuming a full withdrawal at the end of the illustrated
period).
We also may make optional total return quotations that do not reflect a
withdrawal charge deduction (assuming no withdrawal). Total return quotations
may be shown by means of schedules, charts or graphs.
AVERAGE ANNUAL TOTAL RETURN is the average annual compounded rate of return of
the investment over a period of one, five and 10 years (or up to the life of the
variable account if it is less than ten years old).
CUMULATIVE TOTAL RETURN is the cumulative change in the value of an investment
over a specified time period. We assume that income earned by the investment is
reinvested. Cumulative total return will be higher than average annual total
return because it is not averaged.
ANNUALIZED SIMPLE YIELD (FOR VARIABLE ACCOUNTS INVESTING IN MONEY MARKET FUNDS)
"annualizes" the income generated by the investment over a given seven-day
period. That is, we assume the amount of income generated by the investment
during the period will be generated each seven-day period for a year. We show
this as a percentage of the investment.
ANNUALIZED COMPOUND YIELD (FOR VARIABLE ACCOUNTS INVESTING IN MONEY MARKET
FUNDS) is calculated like simple yield except that we assume the income is
reinvested when we annualize it. Compound yield will be higher than the simple
yield because of the compounding effect of the assumed reinvestment.
12
<PAGE>
ANNUALIZED YIELD (FOR VARIABLE ACCOUNTS INVESTING IN INCOME FUNDS) divides the
net investment income (income less expenses) for each accumulation unit during a
given 30-day period by the value of the unit on the last day of the period. We
then convert the result to an annual percentage.
You should consider performance information in light of the investment
objectives, policies, characteristics and quality of the fund in which the
variable account invests and the market conditions during the specified time
period. Advertised yields and total return figures include charges that reduce
advertised performance. Therefore, you should not compare variable account
performance to that of mutual funds that sell their shares directly to the
public. (See the SAI for a further description of methods used to determine
total return and yield.)
If you would like additional information about actual performance, please
contact your financial advisor.
13
<PAGE>
- ----------------------------------------------
THE VARIABLE ACCOUNTS
You may allocate payments to any or all the variable accounts that invest in
shares of the following funds:
<TABLE>
<CAPTION>
FUNDS OFFERED THROUGH VARIABLE
ACCOUNTS IDS LIFE ACCOUNT ESTABLISHED
<S> <C> <C>
IDS Life Aggressive Growth Fund JZ Sept. 20, 1991
IDS Life Capital Resource Fund F May 13, 1981
IDS Life Global Yield Fund KZ April 2, 1996
IDS Life Growth Dimensions Fund MZ April 2, 1996
IDS Life Income Advantage Fund LZ April 2, 1996
IDS Life International Equity Fund IZ Sept. 20, 1991
IDS Life Managed Fund N April 17, 1985
IDS Life Moneyshare Fund H May 13, 1981
IDS Life Special Income Fund G May 13, 1981
</TABLE>
Each variable account meets the definition of a separate account under federal
securities laws. We credit or charge income, capital gains and capital losses of
each variable account only to that variable account. State insurance law
prohibits us from charging a variable account with liabilities of any other
variable account or of our general business. Each variable account's net assets
are held in relation to the contracts described in this prospectus as well as
other contracts that we issue that are not described in this prospectus.
The U.S. Treasury and the Internal Revenue Service (IRS) indicated that they may
provide additional guidance on investment control. This concerns how many
variable accounts an insurance company may offer and how many exchanges among
variable accounts it may allow before the contract owner would be currently
taxed on income earned within variable account assets. At this time, we do not
know what the additional guidance will be or when action will be taken. We
reserve the right to modify the contract, as necessary, to ensure that the owner
will not be subject to current taxation as the owner of the variable account
assets.
We intend to comply with all federal tax laws to ensure that the contract
continues to qualify as an annuity for federal income tax purposes. We reserve
the right to modify the contract as necessary to comply with any new tax laws.
All variable accounts were established under Minnesota law and are registered
together as a
14
<PAGE>
single unit investment trust under the Investment Company Act of 1940 (the 1940
Act). This registration does not involve any supervision of our management or
investment practices and policies by the SEC. All obligations arising under the
contracts are general obligations of IDS Life.
15
<PAGE>
- ----------------------------------------------
THE FUNDS
IDS LIFE AGGRESSIVE GROWTH FUND
Objective: capital appreciation. Invests primarily in common stocks of
small- and medium-size companies.
IDS LIFE CAPITAL RESOURCE FUND
Objective: capital appreciation. Invests primarily in U.S. common stocks.
IDS LIFE GLOBAL YIELD FUND
Objective: high total return through income and growth of capital. Invests
primarily in debt securities of U.S. and foreign issuers.
IDS LIFE GROWTH DIMENSIONS FUND
Objective: long-term growth of capital. Invests primarily in common stocks of
U.S. and foreign companies showing potential for significant growth.
IDS LIFE INCOME ADVANTAGE FUND
Objective: high current income, with capital growth as a secondary objective.
Invests primarily in long-term, high-yielding, high-risk debt securities below
investment grade issued by U.S. and foreign corporations.
IDS LIFE INTERNATIONAL EQUITY FUND
Objective: capital appreciation. Invests primarily in common stock of foreign
issuers.
IDS LIFE MANAGED FUND
Objective: maximum total investment return through a combination of capital
growth and current income. Invests primarily in stocks, convertible securities,
bonds and money market instruments.
16
<PAGE>
IDS LIFE MONEYSHARE FUND
Objective: maximum current income consistent with liquidity and conservation of
capital. Invests in money market securities.
IDS LIFE SPECIAL INCOME FUND
Objective: to provide a high level of current income while conserving the value
of the investment for the longest time period. Invests primarily in investment-
grade bonds.
The investment objectives and policies of some of the funds are similar to the
investment objectives and policies of other mutual funds that the investment
advisor or its affiliates manage. Although the objectives and policies may be
similar, each fund will have its own portfolio holdings and its own fees and
expenses. Accordingly, each fund will have its own investment results.
The IRS issued final regulations relating to the diversification requirements
under Section 817(h) of the Code. Each fund intends to comply with these
requirements.
IDS Life is the investment manager and AEFC is the investment advisor for each
of the funds. American Express Asset Management International Inc., a wholly
owned subsidiary of AEFC, is the sub-investment advisor for IDS Life
International Equity Fund. The investment manager and advisor cannot guarantee
that the funds will meet their investment objectives. Please read the funds'
prospectus for facts you should know before investing. This prospectus is
available by contacting us at the address or telephone number on the front of
this prospectus, or from your financial advisor.
17
<PAGE>
- ----------------------------------------------
THE FIXED ACCOUNT
You also may allocate purchase payments to the fixed account. We back the
principal and interest guarantees relating to the fixed account. The value of
the fixed account increases as we credit interest to the account. Purchase
payments and transfers to the fixed account become part of our general account.
We credit interest daily and compound it annually. We will change the interest
rates from time to time at our discretion.
In addition, a market value adjustment is imposed on the fixed account if you
cancel the value of the fixed account due to total withdrawal, contract transfer
or contract termination. The amount of the market value adjustment approximates
the gain or loss resulting from our sale of assets purchased with purchase
payments. (See "Contract Transfer, Market Value Adjustment and Contract
Termination -- Market value adjustment.")
18
<PAGE>
- ----------------------------------------------
BUYING THE CONTRACT
Your financial advisor will help you prepare and submit an application and send
it along with the initial purchase payment to our office.
When applying, you may select:
- -the accounts in which to invest, and
- -how to make purchase payments
If your application is complete, we will process it and apply the purchase
payment to the accounts you selected within two business days after we receive
it at our office. If we accept your application, we will send you a contract. If
we cannot accept your application within five business days, we will decline it
and return payment. We will credit additional purchase payments to the accounts
on the valuation date we receive them. We will value the additional payments at
the next accumulation unit value calculated after we receive the payments at our
office.
HOW TO MAKE PURCHASE PAYMENTS
<TABLE>
<S> <C>
- -------------------------------------------------------------------
Send your check along with your name and
1 contract number to:
BY LETTER
REGULAR MAIL:
IDS Life Insurance Company
P.O. Box 74
Minneapolis, MN 55440-0074
EXPRESS MAIL:
IDS Life Insurance Company
733 Marquette Avenue
Minneapolis, MN 55402
- -------------------------------------------------------------------
A financial advisor can help set up:
2 - participant salary reduction
BY SCHEDULED
PAYMENT PLAN
</TABLE>
19
<PAGE>
- ----------------------------------------------
CHARGES
CONTRACT ADMINISTRATIVE CHARGE
We charge this fee for establishing and maintaining your records. We deduct $125
from the contract value at the end of each contract quarter (each three-month
period measured from the effective date of your contract). This equates to an
annual charge of $500. We prorate this charge among the variable accounts and
the fixed account in the same proportion your interest in each account bears to
your total contract value. We reserve the right to increase the contract
administrative charge in the future, but we guarantee that it will never exceed
$250 per quarter ($1,000 per year).
MORTALITY AND EXPENSE RISK FEE
This fee is to cover the mortality risk and expense risk. We charge this fee
daily to your variable accounts. The unit values of your variable accounts
reflect this fee and it totals 1% of the variable accounts' average daily net
assets on an annual basis. Approximately two-thirds of this amount is for our
assumption of mortality risk, and one-third is for our assumption of expense
risk. This fee does not apply to the fixed account.
Mortality risk arises because of our guarantee to make annuity payouts according
to the terms of the contract, no matter how long a specific participant lives
and no matter how long our entire group of annuitants live. If, as a group,
annuitants outlive the life expectancy we assumed in our actuarial tables, then
we must take money from our general assets to meet our obligations. If, as a
group, annuitants do not live as long as expected, we could profit from the
mortality risk fee.
Expense risk arises because we cannot increase the contract administrative
charge above $1,000 per year and this charge may not cover our expenses. We
would have to make up any deficit from our general assets.
The variable accounts pay us the mortality and expense risk fee they accrued as
follows:
- -first, to the extent possible, the variable accounts pay this fee from any
dividends distributed from the funds in which they invest;
- -then, if necessary, the funds redeem shares to cover any remaining fees
payable.
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<PAGE>
We may use any profits we realize from the variable accounts' payment to us of
the mortality and expense risk fee for any proper corporate purpose, including,
among others, payment of distribution (selling) expenses. We do not expect that
the withdrawal charge, discussed in the following paragraphs, will cover sales
and distribution expenses.
WITHDRAWAL CHARGE
If you withdraw part or all of the contract, a withdrawal charge may apply. This
withdrawal charge represents a percentage of the amount withdrawn as follows:
<TABLE>
<CAPTION>
Withdrawal charge as a
Contract percentage of
year amount withdrawn
- ------------ --------------------------
<S> <C>
1 6%
2 6
3 5
4 4
5 3
6 2
7 1
8 and later 0
</TABLE>
For a partial withdrawal that is subject to a withdrawal charge, the amount we
actually withdraw from the contract will be the amount the owner requests plus
any applicable withdrawal charge. We apply the withdrawal charge to this total
amount. We pay the owner the amount requested.
Example of withdrawal charge:
You request a $1,000 partial withdrawal, and the withdrawal charge is 5%:
<TABLE>
<S> <C>
1,000 partial withdrawal = $1,052.63
- ---------------------------
.95
Total amount withdrawn.................. $1,052.63
X 0.05
---------
Total withdrawal charge................. $ 52.63
---------
---------
</TABLE>
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<PAGE>
CHARGES
There are no withdrawal charges for withdrawals on behalf of a participant if
the participant:
- -attains age 59 1/2;
- -purchases an immediate annuity under the annuity payout plans of this contract
after separation from service;
- -retires under the plan after age 55;
- -becomes disabled (as defined by the Code);
- -dies;
- -encounters financial hardship as permitted under the plan and the Code;
- -receives a loan as requested by you; or
- -converts contract value to an individual retirement annuity or other qualified
annuity offered by us as requested by you.
Under no circumstance will withdrawal charges exceed 8.5% of aggregate purchase
payments made.
POSSIBLE GROUP REDUCTIONS: In some cases we may incur lower sales and
administrative expenses or we may perform fewer services. In such cases, we may
be able to reduce or eliminate certain contract charges. However, we expect this
to occur infrequently.
PREMIUM TAXES: Currently, there are no premium taxes under this contract.
However, a charge will be made by us against the contract value for any state
and local premium taxes to the extent the taxes are payable in connection with
the purchase of a contract under the annuity payout plans.
22
<PAGE>
- ----------------------------------------------
VALUING THE INVESTMENT
We value your accounts as follows:
FIXED ACCOUNT: We value the amounts allocated to the fixed account directly in
dollars. The fixed account value equals:
- -the sum of your purchase payments and transfer amounts allocated to the fixed
account;
- -plus interest credited;
- -minus the sum of amounts withdrawn (including any applicable withdrawal
charges) and amounts transferred out; and
- -minus any prorated contract administrative charge.
VARIABLE ACCOUNTS: We convert amounts allocated to the variable accounts into
accumulation units. Each time you make a purchase payment or transfer amounts
into one of the variable accounts, we credit a certain number of accumulation
units to the contract for that account. Conversely, each time you take a partial
withdrawal, transfer amounts out of a variable account or we assess a contract
administrative charge, we subtract a certain number of accumulation units from
the contract.
The accumulation units are the true measure of investment value in each account
during the accumulation period. They are related to, but not the same as, the
net asset value of the fund in which the account invests.
The dollar value of each accumulation unit can rise or fall daily depending on
the variable account expenses, performance of the fund and on certain fund
expenses. Here is how we calculate accumulation unit values:
NUMBER OF UNITS
To calculate the number of accumulation units for a particular account, we
divide the investment by the current accumulation unit value.
ACCUMULATION UNIT VALUE
The current accumulation unit value for each variable account equals the last
value times the account's current net investment factor.
23
<PAGE>
VALUING THE INVESTMENT
NET INVESTMENT FACTOR
We determine the net investment factor by:
- -adding the fund's current net asset value per share, plus the per share amount
of any accrued income or capital gain dividends to obtain a current adjusted
net asset value per share; then
- -dividing that sum by the previous adjusted net asset value per share; and
- -subtracting the percentage factor representing the mortality and expense risk
fee from the result.
Because the net asset value of the fund may fluctuate, the accumulation unit
value may increase or decrease. You bear all the investment risk in a variable
account.
FACTORS THAT AFFECT VARIABLE ACCOUNT ACCUMULATION UNITS
Accumulation units may change in two ways: in number and in value. Here are the
factors that influence those changes:
The number of accumulation units owned may fluctuate due to:
- -additional purchase payments allocated to the variable accounts;
- -transfers into or out of the variable accounts;
- -partial withdrawals;
- -withdrawal charges; and/or
- -prorated portions of the contract administrative charge.
Accumulation unit values may fluctuate due to:
- -changes in funds' net asset value;
- -dividends distributed to the variable accounts;
- -capital gains or losses of funds;
- -fund operating expenses; and/or
- -mortality and expense risk fees.
24
<PAGE>
- ----------------------------------------------
WITHDRAWALS, LOANS AND CONVERSIONS
WITHDRAWAL POLICIES
- -If you request a total withdrawal, payment will equal the total contract value
less the contract administrative charge, any applicable premium tax and
withdrawal charge.
- -You or the recordkeeper must state the reason for a partial withdrawal.
- -If the contract has a balance in more than one account and you request a
partial withdrawal, we will withdraw money from all your accounts in the same
proportion as your value in each account correlates to your total contract
value, unless requested otherwise.
- -A market value adjustment may apply to total withdrawals from the fixed
account. (See "Contract Transfer, Market Value Adjustment and Contract
Termination").
SPECIAL WITHDRAWAL PROVISIONS
- -The rights of any person to benefits under the plans in which these contracts
are issued will be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the contract.
- -We reserve the right to defer withdrawal payments from the fixed account for a
period not to exceed six months from the date we receive the withdrawal
request.
- -Since contracts offered will be issued in connection with retirement plans you
should refer to the terms of the particular plan for any further limitations or
restrictions on withdrawals.
- -You may pay withdrawal charges (see "Charges") and IRS taxes and penalties (see
"Taxes").
25
<PAGE>
WITHDRAWALS, LOANS AND CONVERSIONS
RECEIVING WITHDRAWAL PAYMENTS
By regular or express mail:
- -payable to you.
- -mailed to address of record within seven days after receiving your request.
However, we may postpone the payment if:
- -- the withdrawal amount includes a purchase payment check that has not cleared;
- -- the NYSE is closed, except for normal holiday and weekend closings;
- -- trading on the NYSE is restricted, according to SEC rules;
- -- an emergency, as defined by SEC rules, makes it impractical to sell
securities or value the net assets of the accounts; or
- -- the SEC permits us to delay payment for the protection of security holders.
NOTE: We will charge you a fee if you request express mail delivery.
LOANS
You may request withdrawals to fund loans for participants. You must specify
from which accounts to make withdrawals at the time of the loan request. Loan
amounts and terms must comply with the applicable requirements of the plan and
Code. We assume no responsibility for the validity or compliance of the loan.
Withdrawals to fund loans under the plan will not be subject to withdrawal
charges when the loan is made. However, we reserve the right to deduct
withdrawal charges from the remaining contract value if there is an unpaid loan
balance at the time of a total withdrawal, contract transfer or termination (see
"Charges").
26
<PAGE>
CONVERSION
You may transfer on the participant's behalf part of the contract value to an
individual deferred annuity contract offered by us in the event of:
- -the termination of participant's employment, or
- -other reasons which are acceptable to us and meet the requirements of the plan
and the Code.
This individual contract will qualify as an individual retirement annuity under
Section 408 or another applicable section of the Code. Withdrawal charges will
not apply at the time of conversion.
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<PAGE>
- ----------------------------------------------
CONTRACT TRANSFER, MARKET VALUE ADJUSTMENT AND CONTRACT
TERMINATION
TRANSFERRING MONEY BETWEEN ACCOUNTS
You may transfer money from any one variable account, or the fixed account, to
another variable account before annuity payouts begin. We will process your
transfer request on the valuation date we receive your request. We will value
your transfer at the next accumulation unit value calculated after we receive
your request. There is no charge for transfers. Before making a transfer, you
should consider the risks involved in switching investments.
We may suspend or modify transfer privileges
at any time. Any restrictions imposed by the plan will apply.
HOW TO REQUEST A TRANSFER OR WITHDRAWAL
You can request a transfer or withdrawal by letter or any other method we agree
to. Send the plan name, contract number, Social Security Number or Taxpayer
Identification Number and signed request for a transfer or withdrawal to:
REGULAR MAIL:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
EXPRESS MAIL:
IDS Life Insurance Company
733 Marquette Avenue
Minneapolis, MN 55402
You may withdraw all or part of the contract value at any time. We will process
your withdrawal request on the valuation date we receive it. For total
withdrawal, we will compute the value of the contract at the next accumulation
unit value calculated after we receive the request. We may ask you to return the
contract. You may have to pay withdrawal charges (see "Charges") and IRS taxes
and penalties (see "Taxes").
WITHDRAWALS BY OWNER FOR TRANSFER OF FUNDS
You may direct us to withdraw the total contract value and transfer that value
to another funding agent. You will pay all applicable contract charges including
withdrawal charges, and we will deduct them from the first payout unless you
transfer the total contract value to a plan offered by us or our affiliates.
(See "Charges.")
28
<PAGE>
You must provide us with a written request to make such a withdrawal. This
written request must be sent to our office and must specify the initial
withdrawal date and payee to whom the payouts are to be made.
At your option, we will pay the contract value, less any applicable charges, in
annual installments or in a lump sum as follows:
1. We may pay the contract value in five annual installments beginning on the
initial withdrawal date and then on each of the next four anniversaries of such
date as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF THEN REMAINING
INSTALLMENT PAYMENT CONTRACT VALUE BALANCE
<S> <C>
1 20%
2 25
3 33
4 50
5 100
</TABLE>
We will not allow additional withdrawals for benefits or other transfers of
contract values and we will not accept additional purchase payments after we
make the first withdrawal payment. We will continue to credit interest to any
contract value balance remaining after an installment payment at the interest
rate then in effect for the fixed account.
29
<PAGE>
CONTRACT TRANSFER, MARKET VALUE ADJUSTMENT AND CONTRACT
TERMINATION
2. We may pay the contract value in a lump sum. We will base any contract value
attributable to the fixed account on market value. We will determine the market
value by applying the formula described below under "Market value adjustment."
We will make lump sum payments according to the withdrawal provisions (see
"Withdrawals, Loans and Conversions--Receiving withdrawal payments").
MARKET VALUE ADJUSTMENT -- A market value adjustment (MVA) applies only when we
pay out the fixed account value in a lump sum when:
- -you withdraw the total contract value to transfer that value to another funding
vehicle;
- -you make a total withdrawal of the fixed account contract value; or
- -we terminate the contract as described below. (See "Contract termination.")
We will apply the MVA to the contract value withdrawn from the fixed account
after deducting any applicable contract administrative charge and withdrawal
charge. (See "Charges.")
The MVA will reflect the relationship between the current interest rate credited
to new purchase payments allocated to the fixed account and the rate credited to
all prior purchase payments. We calculate the MVA as follows:
MVA = fixed account value X (A - B) X C
Where:
A = the weighted average interest rate (in decimal form) credited to all fixed
account purchase payments made by you at the time of termination, rounded to
4 decimal places;
B = the interest rate (in decimal form) credited to new purchase payments to the
contract at the time of termination or total withdrawal, rounded to 4
decimal places; and
30
<PAGE>
C = the annuity factor, which represents the relationship between the contract
year and the average duration of underlying investments from the following
table:
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUITY FACTOR
<S> <C>
1-3 6.0
4-6 5.0
7+ 4.0
</TABLE>
The following example shows a downward and upward MVA.
1. Assume: contract effective date of October 1, 1993
contract termination date of July 1, 1998
contract year at termination is 5
<TABLE>
<CAPTION>
PURCHASE INITIAL CURRENT ACCUMULATION
YEAR PAYMENTS RATE RATE ACCOUNT VALUE
<S> <C> <C> <C> <C>
1 $10,000 6.50% 6.25% $12,560
2 8,000 6.00 6.25 9,870
3 12,000 6.25 6.25 13,960
4 15,000 7.50 6.75 16,660
5 20,000 6.50 6.50 20,640
</TABLE>
<TABLE>
<S> <C>
Total accumulation account value = $ 73,690
Withdrawal charge = .03 X 73,690 = 2,211
Fixed account value = 73,690 - 2,211 = 71,479
Weighted average interest rate = 6.433%
Interest rate on new purchase payments = 6.750
MVA = $71,479 X (.06433 - .06750) X 5.0 = $(1,132.94)
Market value = 71,479 - 1,132.94 = 70,346.06
</TABLE>
2. Assume: contract effective date of January 15, 1994
contract termination date of September 20, 1996
contract year at termination is 3
<TABLE>
<CAPTION>
PURCHASE INITIAL CURRENT ACCUMULATION
YEAR PAYMENTS RATE RATE ACCOUNT VALUE
<S> <C> <C> <C> <C>
1 $15,000 7.00% 6.25% $17,710
2 20,000 6.50 6.00 22,140
3 25,000 5.50 5.50 25,910
</TABLE>
<TABLE>
<S> <C>
Total accumulation account value = $ 65,760
Withdrawal charge = .05 X 65,760 = 3,288
Fixed account value = 65,760 - 3,288 = 62,472
Weighted average interest rate = 5.870%
Interest rate on new purchase payments = 5.250
MVA = $62,472 X (.05870 - .05250) X 6 = $ 2,323.96
Market value = 62,472 + 2,323.96 = 64,795.96
</TABLE>
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<PAGE>
CONTRACT TRANSFER, MARKET VALUE ADJUSTMENT AND CONTRACT
TERMINATION
No MVA applies if:
- -you make a partial withdrawal of the fixed account contract value;
- -we pay you installment payments when you withdraw the total contract value and
transfer that value to another funding vehicle or we terminate the contract; or
- -you transfer contract values from the fixed account to the variable accounts
"Transferring money between accounts."
CONTRACT TERMINATION
We reserve the right, upon at least 30 days' written notice, to declare a
contract termination date.
We may declare a contract termination date if:
- -you adopt an amendment to the plan that causes the plan to be materially
different from the original plan. (to be "materially different," the amendment
must cause a substantial change in the level of the dollar amounts of purchase
payments or contract benefits paid by us);
- -the plan fails to qualify or becomes disqualified under the appropriate
sections of the Code;
- -while the contract is in force, and prior to any withdrawal or contract
termination, you offer under the plan a prohibited investment as a funding
vehicle to which future contributions may be made (prohibited investments
include: guaranteed investment contracts, bank investment contracts, annuity
contracts with fixed and/or variable accounts, and funding vehicles providing a
guarantee of principal); or
- -you change to a recordkeeper not approved by us.
If we waive our rights to terminate the contract under any provision of this
section at any time, such waiver will not be considered a precedent and will not
prohibit us from exercising the right to terminate this contract, for the
reasons noted above, at any future time.
PROCEDURES AT CONTRACT TERMINATION
On the contract termination date, we will withdraw any outstanding charges,
including any contract administrative charges, from the contract value. A
withdrawal charge may apply on account of any termination under this provision.
We will deduct it from the first termination payment. (See "Charges.")
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<PAGE>
At your option, we will pay the contract value in a lump sum or in annual
installment payouts according to the table under "Withdrawals by owner for
transfer of funds" above. A lump sum payout will be subject to an applicable MVA
to the fixed account value. If you do not select an option, we will pay the
contract value to you under the installment option.
33
<PAGE>
- ----------------------------------------------
CHANGING OWNERSHIP
You may not transfer ownership of the contract except to:
- -a trustee or successor trustee of a pension or profit sharing trust qualified
under the Code; or
- -as otherwise permitted by laws and regulations governing the plans under which
the contract is issued.
Subject to the provisions above, you may not sell, assign, transfer, discount or
pledge your contract as collateral for a loan, or as security for the
performance of an obligation or for any other purpose except as required or
permitted by the Code.
34
<PAGE>
- ----------------------------------------------
THE ANNUITY PAYOUT PERIOD
When a plan participant reaches his or her retirement date, you may select one
of the annuity payout plans outlined below or we may mutually agree on other
payout arrangements. We do not deduct any withdrawal charges under the payout
plans listed below.
We will make retirement payouts on a fixed basis under a supplemental fixed
immediate annuity in the form customarily offered by us at the time of purchase.
ANNUITY PAYOUT PLANS
You may choose any one of these annuity payout plans by giving us written
instructions at least 30 days before contract values are used to purchase the
payout plan:
- -PLAN A -- LIFE ANNUITY - NO REFUND: We make monthly payouts until the
annuitant's death. Payouts end with the last payout before the annuitant's
death. We will not make any further payouts. This means that if the annuitant
dies after we have made only one monthly payout, we will not make any more
payouts.
- -PLAN B -- LIFE ANNUITY WITH FIVE, 10 OR 15 YEARS CERTAIN: We make monthly
payouts for a guaranteed payout period of five, 10 or 15 years that you elect.
This election will determine the length of the payout period to the beneficiary
if the annuitant should die before the elected period expires. We calculate the
guaranteed payout period from the retirement date. If the annuitant outlives
the elected guaranteed payout period, we will continue to make payouts until
the annuitant's death.
- -PLAN C -- LIFE ANNUITY - INSTALLMENT REFUND: We make monthly payouts until the
annuitant's death, with our guarantee that payouts will continue for some
period of time. We will make payouts for at least the number of months
determined by dividing the amount applied under this option by the first
monthly payout, whether or not the annuitant is living.
35
<PAGE>
THE ANNUITY PAYOUT PERIOD
- -PLAN D -- JOINT AND LAST SURVIVOR LIFE ANNUITY - NO REFUND: We make monthly
payouts while both the annuitant and a joint annuitant are living. If either
annuitant dies, we will continue to make monthly payouts at the full amount
until the death of the surviving annuitant. Payouts end with the death of the
second annuitant.
- -PLAN E -- PAYOUTS FOR A SPECIFIED PERIOD: We make monthly payouts for a
specific payout period of 10 to 30 years that you elect. We will make payouts
only for the number of years specified whether the annuitant is living or not.
Depending on the selected time period, it is foreseeable that an annuitant can
outlive the payout period selected. In addition, a 10% IRS penalty tax could
apply under this payout plan. (See "Taxes.")
RESTRICTIONS ON PAYOUT OPTIONS: Since the contract is issued in connection with
plans that meet the requirements of code section 401 (including 401(k)) and 457,
the payout schedule must meet the applicable requirements of the particular plan
and of the Code, including the distribution and incidental death benefit
requirements. In general, the plan must provide for retirement payouts:
- -over the life of the participant;
- -over the joint lives of the participant and a designated beneficiary;
- -for a period not exceeding the life expectancy of the participant; or
- -for a period not exceeding the joint life expectancies of the participant and a
designated beneficiary.
IF MONTHLY PAYOUTS WOULD BE LESS THAN $20:
We will calculate the amount of monthly payouts at the time the immediate
annuity is purchased to provide retirement payouts. If the calculations show
that monthly payouts would be less than $20, we have the right to pay the
contract value to you in a lump sum.
36
<PAGE>
- ----------------------------------------------
TAXES
TAX TREATMENT OF IDS LIFE AND THE VARIABLE ACCOUNTS: We are taxed as a life
insurance company under the Code. Although the operations of the variable
accounts are accounted for separately from our other operations for purposes of
federal income taxation, the variable accounts are not taxable as entities
separate from us. Under existing federal income tax laws, the income and capital
gains of the variable accounts, to the extent applied to increase reserves under
the contracts, are not taxable to us.
TAXATION OF ANNUITIES IN GENERAL: Generally, there is no tax to a participant on
contributions made to the contract or on any increases in the value of the
contract. However, when distribution to a participant occurs, the distribution
will be subject to taxation (except contributions that were made with after-tax
dollars).
PENALTIES: If participants receive amounts from the contract before reaching age
59 1/2, they may have to pay a 10% IRS penalty on the amount includable in their
ordinary income. However, this penalty will not apply to any amount received by
the participant or designated beneficiary:
- -because of the participant's death;
- -because the participant becomes disabled (as defined in the Code);
- -if the distribution is part of a series of substantially equal periodic
payments, made at least annually, over the participant's life or life
expectancy (or joint lives or life expectancies of the participant and
designated beneficiary);
- -if the participant retires under the plan during or after the year he or she
attains age 55; or
- -if the payout is a 457 plan distribution.
Other penalties or exceptions may apply if you withdraw from the contract before
your plan specifies that payouts can be made.
MANDATORY WITHHOLDING: If the participant receives a distribution, mandatory 20%
federal income tax withholding (and possibly state income tax withholding)
generally will be imposed at the time we make the payout. Any withholding that
is done represents a prepayment of the participant's tax due
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TAXES
for the year and the participant will take credit for such amounts when filing
an annual tax return. This mandatory withholding will not be imposed if:
- -instead of receiving the distribution check, the participant elects to roll the
distribution over directly to an IRA or another eligible plan;
- -the payout is one in a series of substantially equal periodic payouts, made at
least annually, over the participant's life or life expectancy (or the joint
lives or life expectancies of the participant and designated beneficiary) or
over a specified period of 10 years or more;
- -the payout is a minimum distribution required under the Code; or
- -the payout is a 457 plan distribution.
Payouts made to a surviving spouse instead of being directly rolled over to an
IRA may also be subject to 20% income tax withholding.
If a distribution is made to the participant 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.
ELECTIVE WITHHOLDING: If the distribution is not subject to mandatory
withholding as described above, the participant can elect not to have any
withholding occur. To do this the participant must provide us with a valid
Social Security Number or Taxpayer Identification Number.
If the participant does not make this election and if the payout is part of an
annuity payout plan, the amount of withholding generally is computed using
payroll tables. Please provide us with a statement of how many exemptions to use
in calculating the withholding. If the distribution is any other type of payment
(such as a partial or full withdrawal), withholding is computed using 10% of the
taxable portion.
Some states also impose withholding requirements similar to the federal
withholding described above. If this should be the case, we may deduct state
withholding from any payment from which we deduct federal withholding. The
withholding requirements may differ if we are making payment to a non-U.S.
citizen or if we deliver the payment outside the United States.
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IMPORTANT: Our discussion of federal tax laws is based upon our understanding of
these laws as they are currently interpreted. Federal tax laws or current
interpretations of them may change. For this reason and because tax consequences
are complex and highly individual and cannot always be anticipated, you should
consult a tax advisor if you have any questions about taxation of the contract.
TAX QUALIFICATION: We intend that the contract qualify as an annuity for Federal
income tax purposes. To that end, the provisions of the contract are to be
interpreted to ensure or maintain such tax qualification, in spite of any other
provisions to the contrary. 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 amendment.
39
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- ----------------------------------------------
VOTING RIGHTS
You or another authorized party with investments in the variable accounts may
vote on important fund policies. We will vote fund shares according to the
instructions we receive.
The number of votes is determined by applying the percentage interest in each
variable account to the total number of votes allowed to the account.
We calculate votes separately for each account. We will send notice of these
meetings, proxy materials and a statement of the number of votes to which the
voter is entitled.
We will vote shares for which we have not received instructions in the same
proportion as the votes for which we have received instructions. We also will
vote the shares for which we have voting rights in the same proportion as the
votes for which we have received instructions.
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- ----------------------------------------------
OTHER CONTRACTUAL PROVISIONS
MODIFICATION
We may modify the contract upon notice to you, if such modification:
- -is necessary to make the contract or the variable accounts comply with any law
or regulation issued by a governmental agency to which we or the variable
accounts are subject;
- -is necessary to assure continued qualification of the contract under the Code
or other federal or state laws relating to retirement annuities or annuity
contracts;
- -is necessary to reflect a change in the variable accounts; or
- -provides additional accumulation options for the variable accounts.
In the event of any such modification, we may make appropriate endorsement to
the contract to reflect such modification.
PROOF OF CONDITION OR EVENT
Where any payments under the contract depend on the recipient being alive and/or
being a certain age on a given date, or depend on the occurrence of a specific
event, we may require proof satisfactory to it that such a condition has been
met prior to making the payment.
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- ----------------------------------------------
RECORDKEEPING SERVICES
We provide a contract to fund plans that meet the requirements of Code Sections
401 (including 401(k)) and 457. We do not provide any administrative or
recordkeeping services in connection with the Plan. We will rely on information
and/or instructions provided by the Plan administrator and/or recordkeeper in
order to properly administer the contract. For this reason, any person or entity
authorized by you to administer recordkeeping services for the Plan and we must
approve participants.
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- ----------------------------------------------
ABOUT THE SERVICE PROVIDERS
ISSUER AND PRINCIPAL UNDERWRITER
IDS Life issues and is the principal underwriter for the contracts. IDS Life is
a stock life insurance company organized in 1957 under the laws of the State of
Minnesota and is located at IDS Tower 10, Minneapolis, MN 55440-0010. IDS Life
conducts a conventional life insurance business.
IDS Life is a wholly-owned subsidiary of AEFC, which itself is a wholly-owned
subsidiary of American Express Company, a financial services company
headquartered in New York City. The AEFC family of companies offers not only
insurance and annuities, but also mutual funds, investment certificates and a
broad range of financial management services. American Express Financial
Advisors Inc. (AEFA) serves individuals and businesses through its nationwide
network of more than 180 offices and 9200 advisors.
IDS Life pays total commissions of up to 7% of the total purchase payments it
receives on the contracts. We pay a portion of this total commission to district
managers and field vice presidents of the selling representatives.
LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which IDS Life and AEFC do business involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. IDS Life and AEFC, like other life and health insurers, from time
to time are involved in such litigation. On December 13, 1996, an action
entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life Insurance Company
and American Express Financial Corporation was commenced in Minnesota state
court. The action was brought by individuals who replaced an existing IDS Life
insurance policy with a new IDS Life policy. The plaintiffs purport to represent
a class consisting of all persons who replaced existing IDS Life policies with
new policies from and after January 1, 1985. The complaint puts at issue various
alleged sales practices and misrepresentations, alleged breaches of fiduciary
duties and alleged violations of consumer fraud statutes. IDS Life and AEFC
filed an answer to the complaint on February 18, 1997, denying the allegations.
A second action, entitled Arnold Mork, Isabella Mork, Ronald Melchart and Susan
Melchart vs. IDS Life Insurance Company and
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ABOUT THE SERVICE PROVIDERS
American Express Financial Corporation was commenced in the same court on March
21, 1997. In addition to claims that are included in the Benacquisto lawsuit,
the second action includes an allegation of improper replacement of an existing
IDS Life annuity contract. A subsequent class action, Richard Thoresen and
Elizabeth Thoresen vs. AEFC, American Partners Life Insurance Company, American
Enterprise Life Insurance Company, American Centurion Life Assurance Company,
IDS Life Insurance Company and IDS Life Insurance Company of New York, was filed
in the same court on October 13, 1998 alleging that the sale of annuities in
tax-deferred contributory retirement investment plans (e.g. IRAs) was done
through deceptive marketing practices, which IDS Life denies. Plaintiffs in each
of the above actions seeks damages in an unspecified amount and also seek to
establish a claims resolution facility for the determination of individual
issues.
IDS Life and AEFC believe they have meritorious defenses to the claims raised in
the lawsuits. The outcome of any litigation cannot be predicted with certainty.
In the opinion of management, however, the ultimate resolution of the above
lawsuits and others filed against IDS Life should not have a material adverse
effect on IDS Life's consolidated financial position.
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ADDITIONAL INFORMATION ABOUT IDS LIFE
SELECTED FINANCIAL DATA
The following selected financial data for IDS Life and its subsidiaries should
be read in conjunction with the consolidated financial statements and notes.
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31, (THOUSANDS)
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Premiums $ 229,430 $ 206,494 $ 182,921 $ 161,530 $ 144,640
Net investment income 1,986,485 1,988,389 1,965,362 1,907,309 1,781,873
Net gain (loss) on
investments 6,902 860 (159) (4,898) (4,282)
Other 785,022 682,618 574,341 472,035 384,105
----------- ----------- ----------- ----------- -----------
Total revenues $ 3,007,839 $ 2,878,361 $ 2,722,465 $ 2,535,976 $ 2,306,336
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income before income
taxes $ 775,792 $ 680,911 $ 621,714 $ 560,782 $ 512,512
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income $ 540,111 $ 474,247 $ 414,576 $ 364,940 $ 336,169
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total assets $56,550,563 $52,974,124 $47,305,981 $42,900,078 $35,747,543
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1998 COMPARED TO 1997:
Consolidated net income increased 14 percent to $540 million in 1998, compared
to $474 million in 1997. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1998.
Consolidated income before income taxes totaled $776 million in 1998, compared
with $681 million in 1997.
Total premiums and investment contract deposits received decreased to $4.4
billion in 1998, compared with $5.2 billion in 1997. This decrease is primarily
due to a decrease in sales of fixed annuities in 1998, reflecting the low
interest rate environment.
Total revenues increased to $3.0 billion in 1998, compared with $2.9 billion in
1997. The increase is primarily due to increased policyholder and contractholder
charges and management fees. Net investment income, the largest component of
revenues, decreased slightly from the prior year, reflecting slight decreases in
investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 12 percent to $384
million in
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<PAGE>
ADDITIONAL INFORMATION ABOUT IDS LIFE
1998, compared with $342 million in 1997. This increase reflects increased total
life insurance in force, which grew 8 percent to $81 billion at December 31,
1998.
Management and other fees increased 18 percent to $401 million in 1998, compared
with $341 million in 1997. This is primarily due to an increase in separate
account assets, which grew 18 percent to $27.3 billion at December 31, 1998, 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 $2.2 billion in 1998. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, decreased to $1.3
billion, reflecting a decrease in fixed annuities in force and lower interest
rates. Amortization of deferred policy acquisition costs increased to $383
million, compared to $323 million in 1997. This increase was due primarily to
increased aggregate amounts in force, as well as accelerating amortization to
reflect actual lapse experience on certain fixed annuities.
1997 COMPARED TO 1996:
Consolidated net income increased 14 percent to $474 million in 1997, compared
to $415 million in 1996. Earnings growth resulted primarily from increases in
management fees and policyholder and contractholder charges. These increases
reflect higher average insurance and annuities in force during 1997.
Consolidated income before income taxes totaled $681 million in 1997, compared
with $622 million in 1996. In 1997, $179 million was from the life, disability
income and long-term care insurance segment, compared with $161 million in 1996
and $502 million was from the annuity segment, compared with $461 million in
1996.
Total premiums received decreased to $5.2 billion in 1997, compared with $6.1
billion in 1996. This decrease is primarily due to a decrease in sales of fixed
annuities in 1997.
Total revenues increased to $2.9 billion in 1997, compared with $2.7 billion in
1996. The increase is primarily due to increases in net investment income,
policyholder and contractholder charges, and management fees. Net investment
income, the largest
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<PAGE>
component of revenues, increased slightly from the prior year, reflecting slight
increases in investments owned and investment yields.
Policyholder and contractholder charges, which consist primarily of cost of
insurance charges on universal life-type policies, increased 13 percent to $342
million in 1997, compared with $303 million in 1996. This increase reflects
increased total life insurance in force which grew 12 percent to $75 billion at
December 31, 1997.
Management and other fees increased 26 percent to $341 million in 1997, compared
with $271 million in 1996. This is primarily due to an increase in separate
account assets, which grew 25 percent to $23 billion at December 31, 1997, 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 $2.2 billion in 1997. The
largest component of expenses, interest credited to policyholder accounts for
universal life-type insurance and investment contracts, remained steady at $1.4
billion. Amortization of deferred policy acquisition costs increased to $323
million compared to $279 million in 1996. These increases were due primarily to
increased aggregate amounts in force.
RISK MANAGEMENT
The sensitivity analysis of two different tests of market risk discussed below
estimates the effects of hypothetical sudden and sustained changes in the
applicable market conditions on the ensuing year's earnings based on year-end
positions. The market changes, assumed to occur as of year-end, are a 100 basis
point increase in market interest rates and a 10% decline in equity prices.
Computations of the prospective effects of hypothetical interest rate and equity
price changes are based on numerous assumptions, including relative levels of
market interest rates and equity prices, as well as the levels of assets and
liabilities. The hypothetical changes and assumptions will be different from
what actually occurs in the future. Furthermore, the computations do not
anticipate actions that may be taken by management if the hypothetical market
changes actually occurred over time. As a result, actual earnings effects in the
future will differ from those quantified below.
The Company primarily invests in fixed income securities over a broad range of
maturities for the purpose of
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<PAGE>
ADDITIONAL INFORMATION ABOUT IDS LIFE
providing fixed annuity clients with a competitive rate of return on their
investments while minimizing risk, and to provide a dependable and targeted
spread between the interest rate earned on investments and the interest rate
credited to contractholders' accounts. The Company does not invest in securities
to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings
and, when necessary, special meetings. At these meetings, the committee reviews
models projecting different interest rate scenarios and their impact on
profitability. The objective of the committee is to structure the investment
security portfolio based upon the type and behavior of products in the liability
portfolio so as to achieve targeted levels of profitability.
Rates credited to contractholders' accounts are generally reset at shorter
intervals than the maturity of underlying investments. Therefore, margins may be
negatively impacted by increases in the general level of interest rates. Part of
the committee's strategy includes the purchase of some types of derivatives,
such as interest rate caps, swaps and floors, for hedging purposes. These
derivatives protect margins by increasing investment returns if there is a
sudden and severe rise in interest rates, thereby mitigating the impact of an
increase in rates credited to contractholders' accounts.
The fees earned by the Company for managing fixed income securities in mutual
funds are generally based on the value of the portfolios. To manage the level of
1999 fee income, the committee's strategy is to enter into a series of swaps
designed to mitigate the negative effect on fees that would result from an
increase in interest rates.
The negative effect on the Company's pretax earnings of a 100 basis point
increase in interest rates, which assumes repricings and customer behavior based
on the application of proprietary models to the book of business at December 31,
1998, would be approximately $34 million.
On a certain annuity product, the interest is credited to contractholders'
accounts based upon the relative change in a major stock market index between
the beginning and end of the product's term. As a means of hedging the Company's
obligation under the provisions of this product, the committee's strategy is to
purchase and write options on the major stock market index.
The amount of the fee income the Company receives is based upon the daily market
value of the separate
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<PAGE>
account assets. As a result, the Company's fee income would be negatively
impacted by a decline in the equity markets. Another part of the committee's
strategy is to enter into index option collars (combination of puts and calls)
for hedging purposes. These derivatives protect fee income by providing option
income when there is a significant decline in the equity markets. The Company
finances the cost of this protection through selling a portion of the upside
potential from an increasing market through written options.
The negative effect on the Company's pretax earnings of the 10% decline in
equity prices would be approximately $32 million based on assets under
management and the index options as of December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met by funds provided by premiums,
investment income, proceeds from sales of investments as well as maturities and
periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating
expenses, policy loans, dividends and investment purchases.
The Company has an available line of credit with its parent aggregating $100
million. The line of credit is used strictly as short-term sources of funds. No
borrowings were outstanding under the agreement at December 31, 1998. At
December 31, 1998, outstanding reverse repurchase agreements totaled $187
million.
At December 31, 1998, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. Of the fixed maturity portfolio,
approximately 33 percent is invested in GNMA, FNMA and FHLMC mortgage-backed
securities which are considered AAA/Aaa quality.
At December 31, 1998, approximately 13 percent of the Company's investments in
fixed maturities were below investment grade bonds. These investments may be
subject to a higher degree of risk than the investment grade issues because of
the borrower's generally greater sensitivity to adverse economic conditions,
such as recession or increasing interest rates, and in certain instances, the
lack of an active secondary market. Expected returns on below investment grade
bonds reflect consideration of such factors. The Company has identified those
fixed maturities for which a decline in
49
<PAGE>
ADDITIONAL INFORMATION ABOUT IDS LIFE
fair value is determined to be other than temporary, and has written them down
to fair value with a charge to earnings.
At December 31, 1998, net unrealized appreciation on fixed maturities held to
maturity included $483 million of gross unrealized appreciation and $27 million
of gross unrealized depreciation. Net unrealized appreciation on fixed
maturities available for sale included $427 million of gross unrealized
appreciation and $159 million of gross unrealized depreciation.
At December 31, 1998, the Company had an allowance for losses for mortgage loans
totaling $40 million and for real estate investments totaling $6 million.
The economy and other factors have caused a number of insurance companies to go
under regulatory supervision. This circumstance has resulted in assessments by
state guaranty associations to cover losses to policyholders of insolvent or
rehabilitated companies. Some assessments can be partially recovered through a
reduction in future premium taxes in certain states. The Company established an
asset for guaranty association assessments paid to those states allowing a
reduction in future premium taxes over a reasonable period of time. The asset is
being amortized as premium taxes are reduced. The Company has also estimated the
potential effect of future assessments on the Company's financial position and
results of operations and has established a reserve for such potential
assessments. The Company has not adopted Statement of Position 97-3 providing
guidance when an insurer should recognize a liability for guaranty fund
assessments. The SOP is effective for fiscal years beginning after December 15,
1998. Adoption will not have a material impact on the Company's results of
operations or financial condition.
In the first quarter of 1999, the Company paid a $70 million dividend to its
parent. In 1998, dividends paid to its parent were $240 million.
The National Association of Insurance Commissioners has established risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company's actual total adjusted capital. The computation involves applying
factors to various statutory financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards provide for regulatory attention when the
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<PAGE>
percentage of total adjusted capital to authorized control level risk-based
capital is below certain levels. As of December 31, 1998, the Company's total
adjusted capital was well in excess of the levels requiring regulatory
attention.
YEAR 2000 ISSUE
The Company is a wholly owned subsidiary of American Express Financial
Corporation (AEFC), which is a wholly owned subsidiary of American Express
Company (American Express). All of the major systems used by the Company are
maintained by AEFC and are utilized by multiple subsidiaries and affiliates of
AEFC. American Express is coordinating Year 2000 (Y2K) efforts on behalf of all
of its businesses and subsidiaries. Representatives of AEFC are participating in
these efforts. The Y2K issue is the result of computer programs having been
written using two digits rather than four to define a year. Some programs may
recognize a date using "00" as the year 1900 rather than 2000. This
misinterpretation could result in the failure of major systems or
miscalculations, which could have a material impact on American Express and its
businesses or subsidiaries through business interruption or shutdown, financial
loss, reputation damage and legal liability to third parties. American Express
and AEFC began addressing the Y2K issue in 1995 and have established a plan for
resolution, which involves the remediation, decommissioning and replacement of
relevant systems, including mainframe, mid-range and desktop computers,
application software, operating systems, systems software, date back-up archival
and retrieval services, telephone and other communications systems, and hardware
peripherals and facilities dependent on embedded technology. As a part of their
plan, American Express has generally followed and utilized the specific policies
and guidelines established by the Federal Financial Institutions Examination
Council, as well as other U.S. and international regulatory agencies.
Additionally, American Express continues to participate in Y2K related industry
consortia sponsored by various partners and suppliers. Progress is reviewed
regularly with the Company's senior management and American Express's senior
management and Board of Directors.
American Express' and AEFC's Y2K compliance effort related to information
technology (IT) systems is divided into two initiatives. The first, which is the
much larger initiative, is known internally as "Millenniax," and relates to
mainframe and other technological systems maintained by the American Express
Technologies organization. The second, known as "Business T," relates
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<PAGE>
ADDITIONAL INFORMATION ABOUT IDS LIFE
to the technological assets that are owned, managed or maintained by American
Express' individual business units, including AEFC. Business T also encompasses
the remediation of non-IT systems. These initiatives involve a substantial
number of employees and external consultants. This multiple sourcing approach is
intended to mitigate the risk of becoming dependent on any one vendor or
resource. While the vast majority of American Express' and AEFC's systems that
require modification are being remediated, in some cases they have chosen to
migrate to new applications that are already Y2K compliant.
American Express' and AEFC's plans for remediation with respect to Millenniax
and Business T include the following program phases: (i) employee awareness and
mobilization, (ii) inventory collection and assessment, (iii) impact analysis,
(iv) remediation/decommission, (v) testing and (vi) implementation. As part of
the first three phases, American Express and AEFC have identified their
mission-critical systems for purposes of prioritization. American Express and
AEFC targeted substantial testing of critical systems for completion early in
1999 and have a goal to continue compliance efforts, including but not limited
to the testing of systems on an integrated basis and independent validation of
such testing, through 1999.** American Express and AEFC currently are on track
with this schedule. With respect to systems maintained by American Express and
AEFC, the first three phases referred to above have been substantially completed
for both Millenniax and Business T. In addition, remediation of critical systems
is substantially complete. As of December 31, 1998, for Millenniax for American
Express, the remediation/decommission, testing and implementation phases for
critical and non-critical systems in total are 82%, 75% and 60% complete,
respectively. For Millenniax for AEFC, such phases are 99%, 97% and 97%
complete, respectively. For Business T for American Express, such phases are
85%, 70% and 69% complete, respectively. For Business T for AEFC, such phases
are 74%, 62% and 62% complete, respectively.
American Express' most commonly used methodology for remediation is the sliding
window. Once an application/system has been remediated, American Express applies
specific types of tests, such as stress, regression, unit, future date and
baseline to ensure that the remediation process has achieved Y2K compliance
while maintaining the fundamental data processing integrity of the
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particular system. To assist with remediation and testing, American Express is
using various standardized tools obtained from a variety of vendors.
American Express' cumulative costs since inception of the Y2K initiatives were
$383 million through December 31, 1998 and are estimated to be in the range of
$135-$160 million for the remainder through 2000.** AEFC's cumulative costs
since inception of the Y2K initiative were $56 million through December 31, 1998
and are estimated to be in the range of $13-$19 million for the remainder
through 2000.** These include both remediation costs and costs related to
replacements that were or will be required as a result of Y2K. These costs,
which are expensed as incurred, relate to both Millenniax and Business T, and
have not had, nor are they expected to have, a material adverse impact on
American Express', AEFC's, or the Company's results of operations or financial
condition.** Costs related to Milleniax, which represent most of the total Y2K
costs of American Express, are managed by and included in the American Express
corporate level financial results; costs related to Business T are included in
American Express' individual business segment's financial results, including
AEFC's. American Express and AEFC have not deferred other critical technology
projects or investment spending as a result of Y2K. However, because American
Express and AEFC must continually prioritize the allocation of finite financial
and human resources, certain non-critical spending initiatives have been
deferred.
American Express' and AEFC's major businesses are heavily dependent upon
internal computer systems, and all have significant interaction with systems of
third parties, both domestically and internationally. American Express and AEFC
are working with key external parties, including merchants, clients,
counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory
agencies to mitigate the potential risks to American Express and AEFC of Y2K.
The failure of external parties to resolve their own Y2K issues in a timely
manner could result in a material financial risk to American Express or AEFC. As
part of their overall compliance program, American Express and AEFC are actively
communicating with third parties through face-to-face meetings and
correspondence, on an ongoing basis, to ascertain their state of readiness.
Although numerous third parties have indicated to American Express and AEFC in
writing that they are addressing their Y2K issues on a timely basis, the
readiness of third parties overall varies across the spectrum. Because American
Express' and AEFC's Y2K compliance is dependent on key third parties being
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ADDITIONAL INFORMATION ABOUT IDS LIFE
compliant on a timely basis, there can be no assurances that American Express'
and AEFC's efforts alone will resolve all Y2K issues.
At this point, American Express and AEFC are in the process of performing an
assessment of reasonably likely Y2K systems failures and related consequences.
American Express is also preparing specific Y2K contingency plans for all key
American Express business units, including AEFC, to mitigate the potential
impact of such failures. This effort is a full-scale initiative that includes
both internal and external experts under the guidance of an American
Express-wide steering committee. The contingency plans, which will be based in
part on an assessment of the magnitude and probability of potential risks, will
primarily focus on proactive steps to prevent Y2K failures from occurring, or if
they should occur, to detect them quickly, minimize their impact and expedite
their repair. The Y2K contingency plans will supplement disaster recovery and
business continuity plans already in place, and are expected to include measures
such as selecting alternative suppliers and channels of distribution, and
developing American Express' and AEFC's own technology infrastructure in lieu of
those provided by third parties. The contingency plans are being amended to
include specific Year 2000 considerations, and will continue to be refined
throughout 1999 as additional information related to American Express' and
AEFC's potential Year 2000 exposure is gathered.**
** Statements in this Y2K discussion marked with two asterisks are
forward-looking statements which are subject to risks and uncertainties.
Important factors that could cause results to differ materially from these
forward-looking statements include, among other things, the ability of
American Express or AEFC to successfully identify systems containing
two-digit codes, the nature and amount of programming required to fix the
affected systems, the costs of labor and consultants related to such efforts,
the continued availability of such resources, and the ability of third
parties that interface with American Express or AEFC to successfully address
their Y2K issues.
REINSURANCE
Reinsurance arrangements are used to reduce exposure to large losses. The
maximum amount of risk retained by IDS Life 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 Dec. 31, 1998,
traditional life and universal life-type insurance in force aggregated $80.8
billion, of which $4.7 billion was reinsured.
RESERVES
In accordance with the insurance laws and regulations under which IDS Life
operates, it is obligated to carry
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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 $26 billion at Dec. 31, 1998,
30% was invested in mortgage-backed securities, 53% in corporate and other
bonds, 13% in primary mortgage loans on real estate, 2% in policy loans and the
remaining 2% in other investments.
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 1,600 stock, mutual and other types of
insurers in the life insurance business. BEST'S INSURANCE REPORTS, Life-Health
edition, 1998, assigned IDS Life one of its highest classifications, A+
(Superior).
EMPLOYEES
As of Dec. 31, 1998, IDS Life and its subsidiaries had 282 employees; including
227 employed at the corporate office in Minneapolis, MN, 8 employed at the
American Centurion Life Assurance Company, located in Albany, NY and 47 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, AEFC. IDS Life reimburses AEFC for rent based on direct and indirect
allocation methods. Facilities occupied by IDS Life and our 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
55
<PAGE>
ADDITIONAL INFORMATION ABOUT IDS LIFE
the Minnesota Department of Commerce. An annual statement in the prescribed form
is filed with the Minnesota Department of Commerce each year covering our
operation for the preceding year and its financial condition at the end of such
year. Regulation by the Minnesota Department of Commerce includes periodic
examination to determine IDS Life's contract liabilities and reserves so that
the Minnesota Department of Commerce may certify that these items are correct.
The Company'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 the company'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.
56
<PAGE>
- ----------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS*
The directors and principal executive officers of IDS Life and the principal
occupation of each during the last five years is 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.
PAULA R. MEYER
Born in 1954
Director and executive vice president since 1998; vice president, AEFC since
1998; Piper Capital Management (PCM) President from October 1997 to May 1998;
PCM Director of Marketing from June 1995 to October 1997; PCM Director of Retail
Marketing from December 1993 to June 1995.
JAMES A. MITCHELL
Born in 1941
Chairman of the board since March 1994; director since July 1984; chief
executive officer from November 1986 to March 1999; 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.
57
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS*
STUART A. SEDLACEK
Born in 1957
Director since 1994, executive vice president since 1998; executive vice
president, Assured Assets from March 1994 to 1998; senior vice president and
chief financial officer, AEFC, since 1998; vice president, AEFC, from September
1988 to 1998.
OFFICERS OTHER THAN DIRECTORS
TIMOTHY V. BECHTOLD
Born in 1953
Executive vice president, Risk Management Products since 1995; vice president,
Risk Management, AEFC since 1995; and vice president, Insurance Product
Development from 1989 to 1995.
MARK W. CARTER
Born in 1954
Executive vice president, Marketing since 1997; senior vice president and chief
marketing officer, AEFC since 1997; vice president of TVSM Inc. from 1996 to
1997; and regional vice president and general manager of ADVO Inc. from 1991 to
1996.
LORRAINE R. HART
Born in 1951
Vice president, Investments since 1992; vice president, Insurance Investments,
AEFC since 1998; and vice president, Investments, IDS Certificate Company since
1994.
JEFFREY S. HORTON
Born in 1961
Vice president and treasurer since December 1997; vice president and corporate
treasurer, AEFC, since December 1997; controller, American Express Technologies
- -- Financial Services, AEFC, from July 1997 to December 1997; controller, Risk
Management Products, AEFC, from May 1994 to July 1997; director of finance and
analysis, Corporate Treasury, AEFC, from June 1990 to May 1994.
PAMELA J. MORET
Born in 1956
Executive vice president, Variable Assets since 1997; vice president, Variable
Assets, AEFC since 1997; vice president, Retail Service Group of AEFC from 1996
to 1997; and vice president, Communications, AEFC from 1993 to 1996.
WILLIAM A. STOLTZMANN
Born in 1948
Vice president, general counsel and secretary since 1989; vice president and
assistant general counsel, AEFC, since November 1985.
PHILIP C. WENTZEL
Born in 1961
Vice president and controller since 1998; vice president -- Finance, Risk
Management Products, AEFC since 1997; and director of financial reporting and
analysis from 1992 to 1997.
* The address for all of the directors and principal officers is: IDS Tower 10,
Minneapolis, MN 55440-0010.
58
<PAGE>
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 the most
recent year 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 the most recent year.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CASH
OR NUMBER IN GROUP POSITION HELD COMPENSATION
<S> <C> <C>
Five most highly compensated executive
officers as a group: $6,640,964
James A. Mitchell Chairman of the Board
and Chief Exec. Officer
Stuart A. Sedlacek Exec. Vice President
Pamela J. Moret Exec. Vice President,
Variable Assets
Barry J. Murphy Exec. Vice President,
Client Service
Lorraine R. Hart Vice president,
Investments
All executive officers as a group (10) $9,938,094
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
IDS Life's directors and officers do not beneficially own any outstanding shares
of stock of the company. All of the outstanding shares of stock of IDS Life are
beneficially owned by its parent, AEFC. The percentage of shares of AEFC owned
by any director, and by all directors and officers of IDS Life as a group, does
not exceed 1% of the class outstanding.
59
<PAGE>
- ----------------------------------------------
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated financial
statements of IDS Life Insurance Company at Dec. 31, 1998 and 1997, and for each
of the three years in the period ended Dec. 31, 1998, as set forth in their
report. We've included our consolidated financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
60
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
IDS LIFE FINANCIAL INFORMATION
- -----------------------------------------------------------------
The financial statements shown below are those of the insurance company and not
those of any other entity. They are included for the purpose of informing the
investor as to the financial condition of the insurance company and its ability
to carry out its obligations under its variable contracts.
IDS LIFE INSURANCE COMPANY
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS DEC. 31, 1998 DEC. 31, 1997
ASSETS ($ thousands, except share amounts)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value: 1998,
$8,420,035; 1997, $9,743,410).................................... $ 7,964,114 $ 9,315,450
Available for sale, at fair value (amortized cost: 1998,
$13,344,949; 1997, $12,515,030).................................. 13,613,139 12,876,694
Mortgage loans on real estate.................................... 3,505,458 3,618,647
Policy loans..................................................... 525,431 498,874
Other investments................................................ 366,604 318,591
- -------------------------------------------------------------------------------------------------
Total investments................................................ 25,974,746 26,628,256
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents........................................ 22,453 19,686
Amounts recoverable from reinsurers.............................. 262,260 205,716
Amounts due from brokers......................................... 327 8,400
Other accounts receivable........................................ 47,963 37,895
Accrued investment income........................................ 366,574 357,390
Deferred policy acquisition costs................................ 2,496,352 2,479,577
Other assets..................................................... 30,487 22,700
Separate account assets.......................................... 27,349,401 23,214,504
- -------------------------------------------------------------------------------------------------
Total assets..................................................... $ 56,550,563 $ 52,974,124
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities.................................................. $ 21,172,303 $ 22,009,747
Universal life-type insurance.................................... 3,343,671 3,280,489
Traditional life insurance....................................... 225,306 213,676
Disability income and long-term care insurance................... 660,320 533,124
Policy claims and other policyholders' funds..................... 70,309 68,345
Deferred income taxes, net....................................... 16,930 61,582
Amounts due to brokers........................................... 195,406 381,458
Other liabilities................................................ 410,285 345,383
Separate account liabilities..................................... 27,349,401 23,214,504
- -------------------------------------------------------------------------------------------------
Total liabilities................................................ 53,443,931 50,108,308
- -------------------------------------------------------------------------------------------------
Stockholder's equity:
Capital stock, $30 par value per share; 100,000 shares
authorized, issued and outstanding............................... 3,000 3,000
Additional paid-in capital....................................... 288,327 290,847
Accumulated other comprehensive income, net of tax:
Net unrealized securities gains.................................. 169,584 226,359
Retained earnings................................................ 2,645,721 2,345,610
- -------------------------------------------------------------------------------------------------
Total stockholder's equity....................................... 3,106,632 2,865,816
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity....................... $ 56,550,563 $ 52,974,124
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-1
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31,
1998 1997 1996
CONSOLIDATED STATEMENTS OF INCOME ($ thousands)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Revenues:
Premiums:
Traditional life insurance....................................... $ 53,132 $ 52,473 $ 51,403
Disability income and long-term care insurance................... 176,298 154,021 131,518
- ------------------------------------------------------------------------------------------------------------
Total premiums................................................... 229,430 206,494 182,921
- ------------------------------------------------------------------------------------------------------------
Policyholder and contractholder charges.......................... 383,965 341,726 302,999
Management and other fees........................................ 401,057 340,892 271,342
Net investment income............................................ 1,986,485 1,988,389 1,965,362
Net realized gain (loss) on investments.......................... 6,902 860 (159)
- ------------------------------------------------------------------------------------------------------------
Total revenues................................................... 3,007,839 2,878,361 2,722,465
- ------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Death and other benefits:
Traditional life insurance....................................... 29,835 28,951 26,919
Universal life-type insurance and investment contracts........... 108,349 92,814 85,017
Disability income and long-term care insurance................... 27,414 22,333 19,185
Increase in liabilities for future policy benefits:
Traditional life insurance....................................... 6,052 3,946 1,859
Disability income and long-term care insurance................... 73,305 63,631 57,230
Interest credited on universal life-type insurance and investment
contracts........................................................ 1,317,124 1,386,448 1,370,468
Amortization of deferred policy acquisition costs................ 382,642 322,731 278,605
Other insurance and operating expenses........................... 287,326 276,596 261,468
- ------------------------------------------------------------------------------------------------------------
Total benefits and expenses...................................... 2,232,047 2,197,450 2,100,751
- ------------------------------------------------------------------------------------------------------------
Income before income taxes....................................... 775,792 680,911 621,714
Income taxes..................................................... 235,681 206,664 207,138
- ------------------------------------------------------------------------------------------------------------
Net income....................................................... $ 540,111 $ 474,247 $ 414,576
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY OTHER
TOTAL ADDITIONAL COMPREHENSIVE
STOCKHOLDER'S CAPITAL PAID-IN INCOME, RETAINED
THREE YEARS ENDED DEC. 31, 1998 ($ thousands) EQUITY STOCK CAPITAL NET OF TAX EARNINGS
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995................................ $2,331,708 $3,000 $278,814 $ 230,129 $1,819,765
Comprehensive income:
Net income................................................ 414,576 -- -- -- 414,576
Unrealized holding losses arising during the year, net of
deferred policy acquisition costs of $10,325 and taxes of
$82,982................................................... (154,111) -- -- (154,111) --
Reclassification adjustment for losses included in net
income, net of tax of $(5,429)............................ 10,084 -- -- 10,084 --
----------- ----------
Other comprehensive loss.................................. (144,027) -- -- (144,027) --
-----------
Comprehensive income...................................... 270,549 -- -- -- --
Capital contribution from parent.......................... 4,801 -- 4,801 -- --
Other changes............................................. 2,022 -- -- -- 2,022
Cash dividends to parent.................................. (165,000) -- -- -- (165,000)
---------------------------------------------------------------
Balance, December 31, 1996................................ 2,444,080 3,000 283,615 86,102 2,071,363
Comprehensive income:
Net income................................................ 474,247 -- -- -- 474,247
Unrealized holding gains arising during the year, net of
effect on deferred policy acquisition costs of $(7,714)
and taxes of $(75,215).................................... 139,686 -- -- 139,686 --
Reclassification adjustment for losses included in net
income, net of tax of $(308).............................. 571 -- -- 571 --
----------- ----------
Other comprehensive income................................ 140,257 -- -- 140,257 --
-----------
Comprehensive income...................................... 614,504 -- -- -- --
Capital contribution from parent.......................... 7,232 -- 7,232 -- --
Cash dividends to parent.................................. (200,000) -- -- -- (200,000)
---------------------------------------------------------------
Balance, December 31, 1997................................ 2,865,816 3,000 290,847 226,359 2,345,610
Comprehensive income:
Net income................................................ 540,111 -- -- -- 540,111
Unrealized holding losses arising during the year, net of
effect on deferred policy acquisition costs of $6,333 and
taxes of $32,826.......................................... (60,964) -- -- (60,964) --
Reclassification adjustment for losses included in net
income, net of tax of $(2,254)............................ 4,189 -- -- 4,189 --
----------- ----------
Other comprehensive loss.................................. (56,775) -- -- (56,775) --
-----------
Comprehensive income...................................... 483,336 -- -- -- --
Other changes............................................. (2,520) -- (2,520) -- --
Cash dividends to parent.................................. (240,000) -- -- -- (240,000)
---------------------------------------------------------------
Balance, December 31, 1998................................ $3,106,632 $3,000 $288,327 $ 169,584 $2,645,721
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DEC. 31,
1998 1997 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 540,111 $ 474,247 $ 414,576
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Policy loan issuance, excluding universal life-type insurance.... (53,883) (54,665) (49,314)
Policy loan repayment, excluding universal life-type insurance... 57,902 46,015 41,179
Change in amounts recoverable from reinsurers.................... (56,544) (47,994) (43,335)
Change in other accounts receivable.............................. (10,068) 6,194 (4,981)
Change in accrued investment income.............................. (9,184) (14,077) 4,695
Change in deferred policy acquisition costs, net................. (10,443) (156,486) (294,755)
Change in liabilities for future policy benefits for traditional
life, disability income and long-term care insurance............. 138,826 112,915 97,479
Change in policy claims and other policyholders' funds........... 1,964 (15,289) 27,311
Change in deferred income tax provision (benefit)................ (19,122) 19,982 (65,609)
Change in other liabilities...................................... 64,902 13,305 46,724
Amortization of premium (accretion of discount), net............. 9,170 (5,649) (23,032)
Net realized (gain) loss on investments.......................... (6,902) (860) 159
Policyholder and contractholder charges, non-cash................ (172,396) (160,885) (154,286)
Other, net....................................................... 10,786 7,161 (10,816)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities.............. $ 485,119 $ 223,914 $ (14,005)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities held to maturity:
Purchases........................................................ $ (1,020) $ (1,996) $ (43,751)
Maturities, sinking fund payments and calls...................... 1,162,731 686,503 759,248
Sales............................................................ 236,963 236,761 279,506
Fixed maturities available for sale:
Purchases........................................................ (4,100,238) (3,160,133) (2,299,198)
Maturities, sinking fund payments and calls...................... 2,967,311 1,206,213 1,270,240
Sales............................................................ 278,955 457,585 238,905
Other investments, excluding policy loans:
Purchases........................................................ (555,647) (524,521) (904,536)
Sales............................................................ 579,038 335,765 236,912
Change in amounts due from brokers............................... 8,073 2,647 (11,047)
Change in amounts due to brokers................................. (186,052) 119,471 140,369
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities.............. 390,114 (641,705) (333,352)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Activity related to universal life-type insurance and
investment contracts:
Considerations received.......................................... 1,873,624 2,785,758 3,567,586
Surrenders and death benefits.................................... (3,792,612) (3,736,242) (4,250,294)
Interest credited to account balances............................ 1,317,124 1,386,448 1,370,468
Universal life-type insurance policy loans:
Issuance......................................................... (97,602) (84,835) (86,501)
Repayment........................................................ 67,000 54,513 58,753
Capital transaction with parent.................................. -- 7,232 4,801
Dividends paid................................................... (240,000) (200,000) (165,000)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities........................ (872,466) 212,874 499,813
- ------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents............. 2,767 (204,917) 152,456
Cash and cash equivalents at beginning of year................... 19,686 224,603 72,147
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year......................... $ 22,453 $ 19,686 $ 224,603
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS)
- -----------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
IDS Life Insurance Company (the Company) is a stock life insurance company
organized under the laws of the State of Minnesota. The Company is a wholly
owned subsidiary of American Express Financial Corporation (AEFC), which is a
wholly owned subsidiary of American Express Company. The Company serves
residents of all states except New York. IDS Life Insurance Company of New York
is a wholly owned subsidiary of the Company and serves New York State residents.
The Company also wholly owns American Enterprise Life Insurance Company,
American Centurion Life Assurance Company, American Partners Life Insurance
Company and American Express Corporation.
The Company's principal products are deferred annuities and universal life
insurance, which are issued primarily to individuals. It offers single premium
and flexible premium deferred annuities on both a fixed and variable dollar
basis. Immediate annuities are offered as well. The Company's insurance products
include universal life (fixed and variable), whole life, single premium life and
term products (including waiver of premium and accidental death benefits). The
Company also markets disability income and long-term care insurance.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All 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 (see Note 4).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENTS
Fixed maturities that the Company has both the positive intent and the ability
to hold to maturity are classified as held to maturity and carried at amortized
cost. All other fixed maturities and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized gains and
losses on securities classified as available for sale are reported as a separate
component of other comprehensive income, net of deferred policy acquisition
costs and 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 a loan's recorded
investment over its present value of expected principal and interest payments
discounted at the loan's effective interest rate, or the fair value of
collateral. The amount of the impairment is recorded in a reserve for mortgage
loan losses. The reserve for mortgage loan losses is maintained at a level that
management believes is adequate to absorb estimated losses in the portfolio. The
level of the reserve account is determined based on several factors, including
historical
F-5
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
judgment as to the ultimate collectibility of principal, interest payments
received are either recognized as income or applied to the recorded investment
in the loan.
The cost of interest rate caps and floors is amortized to investment income over
the life of the contracts and payments received as a result of these agreements
are recorded as investment income when realized. The amortized cost of interest
rate caps and floors is included in other investments. Amounts paid or received
under interest rate swap agreements are recognized as an adjustment to
investment income.
The Company purchases and writes index options to hedge the fee income earned on
the management of equity securities in separate accounts and the underlying
mutual funds. These index options are carried at market value and are included
in other investments or other liabilities, as appropriate. Gains or losses on
index options that qualify as hedges are deferred and recognized in management
and other fees in the same period as the hedged fee income. Gains or losses on
index options that do not qualify as hedges are marked to market through the
income statement.
The Company also uses index options to manage the risks related to a certain
annuity product that pays interest based upon the relative change in a major
stock market index between the beginning and end of the product's term.
Purchased options used in conjunction with this product are reported in other
investments and written options are included in other liabilities. The
amortization of the cost of purchased options, the proceeds of written options
and the changes in intrinsic value of the contracts are included in net
investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which do
not exceed the cash surrender values of the related policies.
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 December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Income taxes....................... $215,003 $174,472 $317,283
Interest on borrowings............. 14,529 8,213 4,119
- -----------------------------------------------------------------
</TABLE>
RECOGNITION OF PROFITS ON ANNUITY CONTRACTS AND INSURANCE POLICIES
Profits on fixed deferred annuities are recognized by the Company over the lives
of the contracts, using primarily the interest method. Profits represent the
excess of investment income earned from investment of contract considerations
over interest credited to contract owners and other expenses.
F-6
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The retrospective deposit method is used in accounting for universal life-type
insurance. Under this method, profits are recognized over the lives of the
policies in proportion to the estimated gross profits expected to be realized.
Premiums on traditional life, disability income and long-term care insurance
policies are recognized as revenue when due, and related benefits and expenses
are associated with premium revenue in a manner that results in recognition of
profits over the lives of the insurance policies. This association is
accomplished by means of the provision for future policy benefits and the
deferral and subsequent amortization of policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of insurance
charges, issue and administrative fees and surrender charges. These charges also
include the minimum death benefit guarantee fees received from the variable life
insurance separate accounts. Management and other fees include investment
management fees from underlying proprietary mutual funds and mortality and
expense risk fees received from the variable annuity and variable life insurance
separate accounts.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally sales compensation, policy
issue costs, underwriting and certain sales expenses, have been deferred on
insurance and annuity contracts. The deferred acquisition costs for most single
premium deferred annuities and installment annuities are amortized using
primarily the interest method. The costs for universal life-type insurance and
certain installment annuities are amortized as a percentage of the estimated
gross profits expected to be realized on the policies. For traditional life,
disability income and long-term care insurance policies, the costs are amortized
over an appropriate period in proportion to premium revenue.
LIABILITIES FOR FUTURE POLICY BENEFITS
Liabilities for universal life-type insurance and deferred annuities are
accumulation values.
Liabilities for fixed annuities in a benefit status are based on established
industry mortality tables and interest rates ranging from 5% to 9.5%, depending
on year of issue.
Liabilities for future benefits on traditional life insurance are based on the
net level premium method, using anticipated mortality, policy persistency and
interest earning rates. Anticipated mortality rates are based on established
industry mortality tables. Anticipated policy persistency rates vary by policy
form, issue age and policy duration with persistency on cash value plans
generally anticipated to be better than persistency on term insurance plans.
Anticipated interest rates range from 4% to 10%, depending on policy form, issue
year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are based on
the net level premium method, using anticipated morbidity, mortality, policy
persistency and interest earning rates. Anticipated morbidity and mortality
rates are based on established industry morbidity and mortality tables.
Anticipated policy persistency rates vary by policy form, issue age, policy
duration and, for disability income policies, occupation class. Anticipated
interest rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10
years.
Claim reserves are calculated based on claim continuance tables and anticipated
interest earnings. Anticipated claim continuance rates are based on established
industry tables. Anticipated interest rates for claim reserves for both
disability income and long-term care range from 6% to 8%.
REINSURANCE
The maximum amount of life insurance risk retained by the Company on any one
life is $750 of life benefit plus $50 of accidental death benefits. The maximum
amount of life insurance risk retained on any joint-life
F-7
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
combination is $1,500. The excesses are reinsured with other life insurance
companies, primarily on a yearly renewable term basis. Long-term care policies
are primarily reinsured on a coinsurance basis. Beginning in 1998, the Company
retains all disability income and waiver of premium risk.
FEDERAL INCOME TAXES
The Company's taxable income is included in the consolidated federal income tax
return of American Express Company. The Company provides for income taxes on a
separate return basis, except that, under an agreement between AEFC and American
Express Company, tax benefit is recognized for losses to the extent they can be
used on the consolidated tax return. It is the policy of AEFC and its
subsidiaries that AEFC will reimburse subsidiaries for all tax benefits.
Included in other liabilities at December 31, 1998 and 1997 are $26,291 payable
to and $12,061, receivable from, respectively, AEFC for federal income taxes.
SEPARATE ACCOUNT BUSINESS
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners. The Company receives investment management fees from the proprietary
mutual funds used as investment options for variable annuities and variable life
insurance. The Company receives mortality and expense risk fees from the
separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
aggregate change in stockholder's equity excluding changes in ownership
interests. For the Company, it is net income and the unrealized gains or losses
on available-for-sale securities, net of the effect on deferred policy
acquisition costs, taxes and reclassification adjustment.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." The SOP, which is effective
January 1, 1999, requires the capitalization of certain costs incurred after the
date of adoption to develop or obtain software for internal use. Software
utilized by the Company is owned by AEFC and will be capitalized by AEFC. As a
result, the new rule will not have a material impact on the Company's results of
operations or financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments," providing guidance for the
timing of recognition of liabilities related to guaranty fund assessments. The
Company will adopt the SOP on January 1, 1999. The Company has historically
carried a balance
F-8
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in other liabilities on the balance sheet for potential guaranty fund assessment
exposure. Adoption of the SOP will not have a material impact on the Company's
results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective January 1, 2000. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting designation.
Earlier application of all of the provisions of this Statement is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that begins
after issuance of the Statement. This Statement cannot be applied retroactively.
The ultimate financial impact of the new rule will be measured based on the
derivatives in place at adoption and cannot be estimated at this time.
RECLASSIFICATION
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
- --------------------------------------------------------------------------------
2. INVESTMENTS
Fair values of investments in fixed maturities represent quoted market prices
and estimated values when quoted prices are not available. Estimated values are
determined by established procedures involving, among other things, review of
market indices, price levels of current offerings of comparable issues, price
estimates and market data from independent brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair values of
investments in fixed maturities and equity securities at December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 39,888 $ 4,460 $ -- $ 44,348
State and municipal obligations.............. 9,683 491 -- 10,173
Corporate bonds and obligations.............. 6,305,476 447,752 27,087 6,726,141
Mortgage-backed securities................... 1,609,067 30,458 152 1,639,373
- ----------------------------------------------------------------------------------------------------
$7,964,114 $483,161 $ 27,239 $ 8,420,035
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 52,043 $ 3,324 $ -- $ 55,367
State and municipal obligations.............. 11,060 1,231 -- 12,291
Corporate bonds and obligations.............. 7,332,344 271,174 155,181 7,448,337
Mortgage-backed securities................... 5,949,502 151,511 3,869 6,097,144
- ----------------------------------------------------------------------------------------------------
Total fixed maturities....................... 13,344,949 427,240 159,050 13,613,139
Equity securities............................ 3,000 158 -- 3,158
- ----------------------------------------------------------------------------------------------------
$13,347,949 $427,398 $159,050 $ 13,616,297
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-9
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
The amortized cost, gross unrealized gains and losses and fair values of
investmentsin fixed maturities and equity securities at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
HELD TO MATURITY COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 41,932 $ 2,949 $ -- $ 44,881
State and municipal obligations.............. 9,684 568 -- 10,252
Corporate bonds and obligations.............. 7,280,646 415,700 9,322 7,687,024
Mortgage-backed securities................... 1,983,188 25,976 7,911 2,001,253
- -----------------------------------------------------------------------------------------------------
$9,315,450 $445,193 $17,233 $ 9,743,410
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
U.S. Government agency obligations........... $ 65,291 $ 4,154 $ -- $ 69,445
State and municipal obligations.............. 11,045 1,348 -- 12,393
Corporate bonds and obligations.............. 5,308,129 232,761 30,198 5,510,692
Mortgage-backed securities................... 7,130,565 160,478 6,879 7,284,164
- -----------------------------------------------------------------------------------------------------
Total fixed maturities....................... 12,515,030 398,741 37,077 12,876,694
Equity securities............................ 3,000 361 -- 3,361
- -----------------------------------------------------------------------------------------------------
$12,518,030 $399,102 $37,077 $ 12,880,055
- -----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of investments in fixed maturities at December
31, 1998 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
HELD TO MATURITY COST VALUE
<S> <C> <C>
- ------------------------------------------------------------------
Due in one year or less................. $ 354,296 $ 359,020
Due from one to five years.............. 2,111,369 2,249,847
Due from five to ten years.............. 3,012,227 3,189,789
Due in more than ten years.............. 877,155 982,006
Mortgage-backed securities.............. 1,609,067 1,639,373
- ------------------------------------------------------------------
$7,964,114 $ 8,420,035
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR
AVAILABLE FOR SALE COST VALUE
<S> <C> <C>
- ------------------------------------------------------------------
Due in one year or less................. $ 102,463 $ 104,475
Due from one to five years.............. 682,336 725,859
Due from five to ten years.............. 3,904,326 4,044,378
Due in more than ten years.............. 2,718,659 2,654,382
Mortgage-backed securities.............. 5,937,165 6,084,045
- ------------------------------------------------------------------
$13,344,949 $13,613,139
- ------------------------------------------------------------------
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $230,036,
$229,848 and $277,527, respectively. Net gains and losses on these sales were
not significant. The sale of these fixed maturities was due to significant
deterioration in the issuers' credit worthiness.
Fixed maturities available for sale were sold during 1998 with proceeds of
$278,955 and gross realized gains and losses of $15,658 and $22,102,
respectively. Fixed maturities
F-10
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
available for sale were sold during 1997 with proceeds of $457,585 and gross
realized gains and losses of $6,639 and $7,518, respectively. 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.
At December 31, 1998, bonds carried at $14,302 were on deposit with various
states as required by law.
At December 31, 1998, investments in fixed maturities comprised 83 percent of
the Company's total invested assets. These securities are rated by Moody's and
Standard & Poor's (S&P), except for securities carried at approximately $3.6
billion which are rated by AEFC's internal analysts using criteria similar to
Moody's and S&P. A summary of investments in fixed maturities, at amortized
cost, by rating on December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1998 1997
<S> <C> <C>
- ------------------------------------------------------------------
Aaa/AAA................................. $ 7,629,628 $ 9,195,619
Aaa/AA.................................. 2,277 --
Aa/AA................................... 308,053 232,451
Aa/A.................................... 301,325 246,792
A/A..................................... 2,525,283 2,787,936
A/BBB................................... 1,148,736 1,200,345
Baa/BBB................................. 6,237,014 5,226,616
Baa/BB.................................. 492,696 475,084
Below investment grade.................. 2,664,051 2,465,637
- ------------------------------------------------------------------
$21,309,063 $21,830,480
- ------------------------------------------------------------------
</TABLE>
At December 31, 1998, 93 percent of the securities rated Aaa/AAA are GNMA, FNMA
and FHLMC mortgage-backed securities. No holdings of any other issuer are
greater than one percent of the Company's total investments in fixed maturities.
At December 31, 1998, approximately 13 percent of the Company's invested assets
were mortgage loans on real estate. Summaries of mortgage loans by region of the
United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------
ON BALANCE COMMITMENTS ON BALANCE COMMITMENTS
REGION SHEET TO PURCHASE SHEET TO PURCHASE
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
East North Central............ $ 750,705 $ 16,393 $ 748,372 $ 32,462
West North Central............ 491,006 81,648 456,934 14,340
South Atlantic................ 839,233 21,020 922,172 14,619
Middle Atlantic............... 476,448 6,169 545,601 15,507
New England................... 263,761 2,824 316,250 2,136
Pacific....................... 195,851 16,946 184,917 3,204
West South Central............ 136,841 1,412 125,227 --
East South Central............ 46,029 -- 60,274 --
Mountain...................... 345,379 8,473 297,545 28,717
- --------------------------------------------------------------------------------------
3,545,253 154,885 3,657,292 110,985
Less allowance for losses..... 39,795 -- 38,645 --
- --------------------------------------------------------------------------------------
$3,505,458 $154,885 $3,618,647 $110,985
- --------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------
ON BALANCE COMMITMENTS ON BALANCE COMMITMENTS
PROPERTY TYPE SHEET TO PURCHASE SHEET TO PURCHASE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Department/retail stores...... $ 1,139,349 $ 59,305 $ 1,189,203 $ 27,314
Apartments.................... 960,808 9,272 1,089,127 16,576
Office buildings.............. 783,576 50,450 716,729 34,546
Industrial buildings.......... 298,549 13,263 295,889 21,200
Hotels/motels................. 109,185 14,122 101,052 --
Medical buildings............. 124,369 -- 99,979 9,748
Nursing/retirement homes...... 46,696 -- 72,359 --
Mixed Use..................... 65,151 -- 71,007 --
Other......................... 17,570 8,473 21,947 1,601
- -----------------------------------------------------------------------------------------
3,545,253 154,885 3,657,292 110,985
Less allowance for losses..... 39,795 -- 38,645 --
- -----------------------------------------------------------------------------------------
$ 3,505,458 $ 154,885 $ 3,618,647 $ 110,985
- -----------------------------------------------------------------------------------------
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory authorities
to 80 percent or less of the market value of the real estate at the time of
origination of the loan. The Company holds the mortgage document, which gives it
the right to take possession of the property if the borrower fails to perform
according to the terms of the agreement. Commitments to purchase mortgages are
made in the ordinary course of business. The fair value of the mortgage
commitments is $nil.
At December 31, 1998 and 1997, the Company's recorded investment in impaired
loans was $24,941 and $45,714, respectively, with allowances of $6,662 and
$9,812, respectively. During 1998 and 1997, the average recorded investment in
impaired loans was $37,873 and $61,870, respectively.
The Company recognized $1,809, $2,981and $4,889 of interest income related to
impaired loans for the years ended December 31, 1998, 1997 and 1996
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------
Balance, January 1................. $38,645 $37,495 $37,340
Provision for investment losses.... 7,582 8,801 10,005
Loan payoffs....................... (800) (3,851) (4,700)
Foreclosures and writeoffs......... (5,632) (3,800) (5,150)
- --------------------------------------------------------------
Balance, December 31............... $39,795 $38,645 $37,495
- --------------------------------------------------------------
</TABLE>
At December 31, 1998, the Company had commitments to purchase investments other
than mortgage loans for $223,011. Commitments to purchase investments are
made in the ordinary course of business. The fair value of these commitments is
$nil.
Net investment income for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Interest on fixed maturities....... $1,676,984 $1,692,481 $1,666,929
Interest on mortgage loans......... 301,253 305,742 283,830
Other investment income............ 43,518 25,089 43,283
Interest on cash equivalents....... 5,486 5,914 5,754
- -----------------------------------------------------------------------
2,027,241 2,029,226 1,999,796
Less investment expenses........... 40,756 40,837 34,434
- -----------------------------------------------------------------------
$1,986,485 $1,988,389 $1,965,362
- -----------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
2. INVESTMENTS (CONTINUED)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------
Fixed maturities................... $12,084 $16,115 $ 8,736
Mortgage loans..................... (5,933) (6,424) (8,745)
Other investments.................. 751 (8,831) (150)
- --------------------------------------------------------------
$ 6,902 $ 860 $ (159)
- --------------------------------------------------------------
</TABLE>
Changes in net unrealized appreciation (depreciation) of investments for the
years ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------
Fixed maturities available for sale..... $(93,474) $ 223,441 $(231,853)
Equity securities....................... (203) 53 (52)
- ------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
3. INCOME TAXES
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the
Internal Revenue Code provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31 consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------
Federal income taxes:
Current............................ $244,946 $176,879 $260,357
Deferred........................... (16,602) 19,982 (65,609)
- -----------------------------------------------------------------
228,344 196,861 194,748
State income taxes-current......... 7,337 9,803 12,390
- -----------------------------------------------------------------
Income tax expense................. $235,681 $206,664 $207,138
- -----------------------------------------------------------------
</TABLE>
Increases (decreases) to the federal tax provision applicable to pretax income
based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
PROVISION RATE PROVISION RATE PROVISION RATE
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes based
on the statutory rate....................................... $271,527 35.0% $238,319 35.0% $217,600 35.0%
(Decreases) increases are attributable to:
Tax-excluded interest and dividend income................... (12,289) (1.6) (10,294) (1.5) (9,636) (1.5)
State taxes, net of federal benefit......................... 4,769 .6 6,372 .9 8,053 1.3
Affordable housing credits.................................. (19,688) (2.5) (20,705) (3.0) (5,090) (.8)
Other, net.................................................. (8,638) (1.1) (7,028) (1.0) (3,789) (.7)
- --------------------------------------------------------------------------------------------------------------------------
Federal income taxes........................................ $235,681 30.4% $206,664 30.4% $207,138 33.3%
- --------------------------------------------------------------------------------------------------------------------------
</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 December 31, 1998, the Company had a policyholders' surplus
account balance of $20,114. The policyholders' surplus account is only
F-13
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- --------------------------------------------------------------------------------
3. INCOME TAXES (CONTINUED)
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.
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------
Deferred tax assets:
Policy reserves........................................ $756,769 $748,204
Life insurance guaranty fund assessment reserve........ 15,289 20,101
Other.................................................. 4,253 9,589
- ---------------------------------------------------------------------------
Total deferred tax assets.............................. 776,311 777,894
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs...................... 698,471 700,032
Unrealized gain on investments......................... 91,315 121,885
Investments, other..................................... 3,455 17,559
- ---------------------------------------------------------------------------
Total deferred tax liabilities......................... 793,241 839,476
- ---------------------------------------------------------------------------
Net deferred tax liabilities........................... $ 16,930 $ 61,582
- ---------------------------------------------------------------------------
</TABLE>
The Company is required to establish a valuation allowance for any portion of
the deferred tax assets that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets and, therefore, no such valuation
allowance has been established.
- --------------------------------------------------------------------------------
4. STOCKHOLDER'S EQUITY
Retained earnings available for distribution as dividends to the parent are
limited to the Company's surplus as determined in accordance with accounting
practices prescribed by state insurance regulatory authorities. Statutory
unassigned surplus aggregated $1,598,203 as of December 31, 1998 and $1,468,677
as of December 31, 1997 (see Note 3 with respect to the income tax effect of
certain distributions). In addition, any dividend distributions in 1999 in
excess of approximately $353,933 would require approval of the Department of
Commerce of the State of Minnesota.
Statutory net income for the years ended December 31 and capital and surplus as
of December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Statutory net income............... $ 429,903 $ 379,615 $ 365,585
Statutory capital and surplus...... 1,883,405 1,765,290 1,565,082
- -----------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS
The Company loans funds to AEFC under a collateral loan agreement. The balance
of the loan was $nil at December 31, 1998 and 1997. This loan can be increased
to a maximum of $75,000 and pays interest at a rate equal to the preceding
month's effective new money rate for the Company's permanent investments.
Interest income on related party loans totaled $nil, $103 and $780 in 1998, 1997
and 1996, respectively.
The Company participates in the American Express Company Retirement Plan which
covers all permanent employees age 21 and over who have met certain employment
requirements. Employer contributions to the plan are based on participants' age,
years of service and total compensation for the year. Funding of retirement
costs for this plan complies with the applicable minimum funding requirements
specified by ERISA. The Company's share of the total net periodic pension cost
was $211, $201 and $174 in 1998, 1997 and 1996, 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 1998, 1997 and 1996 were $1,503, $1,245 and $990,
respectively.
The Company participates in defined benefit health care plans of AEFC that
provide health care and life insurance benefits to retired employees and retired
financial advisors. The plans include participant contributions and service
related eligibility requirements. Upon retirement, such employees are considered
to have been employees of AEFC. AEFC expenses these benefits and allocates the
expenses to its subsidiaries. The Company's share of postretirement benefits in
1998, 1997 and 1996 was $1,352, $1,330 and $1,449, respectively.
Charges by AEFC for use of joint facilities, technology support, marketing
services and other services aggregated $411,337, $414,155 and $397,362 for 1998,
1997 and 1996, respectively. Certain of these costs are included in deferred
policy acquisition costs.
- --------------------------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, 1997 and 1996, traditional life insurance and universal
life-type insurance in force aggregated $81,074,928, $74,730,720 and
$67,274,354, respectively, of which $4,912,313, $4,351,904 and $3,875,921 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 $66,378,
$60,495 and $48,250 and reinsurance recovered from reinsurers amounted to
$20,982, $19,042, and $15,612 for the years ended December 31, 1998, 1997 and
1996, respectively. Reinsurance contracts do not relieve the Company from its
primary obligation to policyholders.
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company, its parent and its subsidiaries conduct
business involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents, and other matters. The Company has been named as a
defendant in three of these types of actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from the Company and its subsidiaries. The
complaints put at issue various alleged sales practices and misrepresentations,
alleged breaches of fiduciary duties and alleged violations of consumer fraud
statutes. The Company and its subsidiaries believe they have meritorious
defenses to the claims raised in these lawsuits.
The outcome of any litigation cannot be predicted with certainty. In the opinion
of
F-15
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
management, however, the ultimate resolution of these lawsuits, taken in the
aggregate, should not have a material adverse effect on the Company's
consolidated financial position.
The IRS routinely examines the Company's federal income tax returns, and is
currently auditing the Company's returns for the 1990 through 1992 tax years.
Management does not believe there will be a material adverse effect on the
Company's consolidated financial position as a result of this audit.
- --------------------------------------------------------------------------------
7. LINES OF CREDIT
The Company has available lines of credit with its parent aggregating $100,000.
The interest rate for any borrowings is established by reference to various
indices plus 20 to 45 basis points, depending on the term. Borrowings
outstanding under this agreement were $nil at December 31, 1998 and 1997.
- --------------------------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into transactions involving derivative financial instruments
to manage its exposure to interest rate risk and equity market risk, including
hedging specific transactions. The Company does not hold derivative instruments
for trading purposes. The Company manages risks associated with these
instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate or equity market index.
The Company is not impacted by market risk related to derivatives held for
non-trading purposes beyond that inherent in cash market transactions.
Derivatives held for purposes other than trading are largely used to manage risk
and, therefore, the cash flow and income effects of the derivatives are inverse
to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the terms
of the contract. The Company monitors credit risk related to derivative
financial instruments through established approval procedures, including setting
concentration limits by counterparty, and requiring collateral, where
appropriate. A vast majority of the Company's counterparties are rated A or
better by Moody's and Standard & Poor's.
Credit risk related to interest rate caps and floors and index options is
measured by the replacement cost of the contracts. The replacement cost
represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid over the
life of the agreement. Notional amounts are not recorded on the balance sheet.
Notional amounts far exceed the related credit risk.
F-16
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company's holdings of derivative financial instruments are as follows:
<TABLE>
<CAPTION>
TOTAL
DECEMBER 31, 1998 NOTIONAL CARRYING FAIR CREDIT
ASSETS: AMOUNT AMOUNT VALUE EXPOSURE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Assets:
Interest rate caps............ $ 3,400,000 $ 15,985 $ 4,256 $ 4,256
Interest rate floors.......... 1,000,000 1,082 13,971 13,971
Options purchased............. 110,912 24,094 29,453 29,453
Liabilities:
Options purchased/written..... 265,454 (10,526) (11,062) --
Off balance sheet:
Interest rate swaps........... 1,667,000 -- (73,477) --
- -------------------------------------------------------------------------------
$ 30,635 $ (36,859) $47,680
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 NOTIONAL CARRYING FAIR TOTAL CREDIT
ASSETS: AMOUNT AMOUNT VALUE EXPOSURE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------
Assets:
Interest rate caps............ $4,600,000 $24,963 $ 15,665 $15,665
Interest rate floors.......... 1,000,000 1,561 4,551 4,551
Options purchased/written..... 279,737 9,808 10,449 10,449
Liabilities:
Options written............... 7,373 (89) 114 --
Off balance sheet:
Interest rate swaps........... 1,267,000 -- (45,799) --
- ---------------------------------------------------------------------------------
$36,243 $ (15,020) $30,655
- ---------------------------------------------------------------------------------
</TABLE>
The fair values of derivative financial instruments are based on market values,
dealer quotes or pricing models. The interest rate caps, floors and swaps expire
on various dates from 1999 to 2003. The put and call options expire on various
dates from 1999 to 2005.
Interest rate caps, swaps and floors are used principally to manage the
Company's interest rate risk. These instruments are used to protect the margin
between interest rates earned on investments and the interest rates credited to
related annuity contract holders.
The Company is also using interest rate swaps to manage interest rate risk
related to the level of fee income earned on the management of fixed income
securities in separate accounts and the underlying mutual funds. The amount of
fee income received is based upon the daily market value of the separate account
and mutual fund assets. As a result, changing interest rate conditions could
impact the Company's fee income significantly. The Company entered into interest
rate swaps to hedge anticipated fee income for 1999 related to separate accounts
and mutual funds which invest in fixed income securities. Interest will be
accrued and reported in accrued investment income and other liabilities, as
appropriate, and management and other fees.
The Company offers a certain annuity product that pays interest based upon the
relative change in a major stock market index between the beginning and end of
the product's term. As a means of hedging its obligation under the provisions of
this product, the Company purchases and writes options on the major stock market
index.
Index options are used to manage the equity market risk related to the fee
income that the Company receives from its separate accounts and the underlying
mutual funds. The amount of the fee income received is based upon the daily
market value of the separate account and mutual fund assets. As a result, the
Company's fee income could be impacted significantly by changing economic
conditions in the equity market. The Company entered into index option
F-17
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ THOUSANDS) (CONTINUED)
- -----------------------------------------------------------------
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
collars (combination of puts and calls) to hedge anticipated fee income for 1998
and 1999 related to separate accounts and mutual funds which invest in equity
securities. Testing has demonstrated the impact of these instruments on the
income statement closely correlates with the amount of fee income the Company
realizes. In the event that testing demonstrates that this correlation no longer
exists, or in the event the Company disposes of the index options collars, the
instruments will be marked-to-market through the income statement. At December
31, 1998 deferred losses on purchased put and written call index options were
$2,933 and $7,435, respectively. At December 31, 1997 deferred losses on
purchased put index options were $2,428 and deferred gains on written call index
options were $5,275.
- --------------------------------------------------------------------------------
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company discloses fair value information for most on- and off-balance sheet
financial instruments for which it is practicable to estimate that value. Fair
values of life insurance obligations and all non-financial instruments, such as
deferred acquisition costs are excluded.
Off-balance sheet intangible assets, such as the value of the field force, are
also excluded. Management believes the value of excluded assets and liabilities
is significant. The fair value of the Company, therefore, cannot be estimated by
aggregating the amounts presented.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------
FINANCIAL ASSETS
Investments:
Fixed maturities (Note 2):
Held to maturity.............. $ 7,964,114 $ 8,420,035 $ 9,315,450 $ 9,743,410
Available for sale............ 13,613,139 13,613,139 12,876,694 12,876,694
Mortgage loans on real estate
(Note 2)...................... 3,505,458 3,745,617 3,618,647 3,808,570
Other:
Equity securities (Note 2).... 3,158 3,158 3,361 3,361
Derivative financial
instruments (Note 8).......... 41,161 47,680 36,332 30,665
Other......................... 28,872 28,872 82,347 85,383
Cash and cash equivalents
(Note 1)...................... 22,453 22,453 19,686 19,686
Separate account assets
(Note 1)...................... 27,349,401 27,349,401 23,214,504 23,214,504
FINANCIAL LIABILITIES
Future policy benefits for
fixed annuities............... $19,855,203 $19,144,838 $20,731,052 $19,882,302
Derivative financial
instruments (Note 8).......... 10,526 84,539 89 45,685
Separate account
liabilities................... 25,005,732 24,179,115 21,488,282 20,707,620
- ----------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related contracts
carried at $1,226,985 and $1,185,155, respectively, and policy loans of $90,115
and $93,540, respectively. The fair value of these benefits is based on the
status of the annuities at December 31, 1998 and 1997. 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 1998 and 1997.
At December 31, 1998 and 1997, the fair value of liabilities related to separate
accounts is estimated as the carrying amount less any applicable surrender
charges and less variable insurance contracts carried at $2,343,669 and
$1,726,222, respectively.
F-18
<PAGE>
IDS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AMERICAN EXPRESS FINANCIAL CORPORATION)
- -----------------------------------------------------------------
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, 1998 and 1997, 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, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IDS Life Insurance
Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 4, 1999
F-19
<PAGE>
- ----------------------------------------------
TABLE OF CONTENTS OF THE STATEMENT OF
ADDITIONAL INFORMATION
Performance Information...................... p. 3
Calculating Annuity Payouts.................. p. 6
Rating Agencies.............................. p. 6
Principal Underwriter........................ p. 6
Independent Auditors......................... p. 6
Financial Statements
61
<PAGE>
Please check the box to receive a copy of the Statement
of Additional Information for:
/ / IDS Life Group Variable Annuity Contract
/ / IDS Life Retirement Annuity Mutual Funds
MAIL YOUR REQUEST TO:
IDS Life Insurance Company
IDS Tower 10
Minneapolis, MN 55440-0010
WE WILL MAIL YOUR REQUEST TO:
Your name
________________________________________________________________________________
Address
________________________________________________________________________________
City State Zip
________________________________________________________________________________
63
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses of the issuance and distribution of the interests in the
Fixed Account of the Contract to be registered, other than commissions on sales
of the Contracts, are to be borne by the registrant.
Item 14. Indemnification of Directors and Officers
Section 300.083 of Minnesota Law provides in part that a corporation
organized under such law shall have power to indemnify anyone made, or
threatened to be made, a party to a threatened, pending or completed proceeding,
whether civil or criminal, administrative or investigative, because he is or was
a director or officer of the corporation, or served as a director or officer of
another corporation at the request of the corporation. Indemnification in such a
proceeding may extend to judgments, penalties, fines and amounts paid in, as
well as to reasonable expenses, including attorneys' fees and disbursements. In
a civil proceeding, there can be no indemnification under the statute, unless it
appears that the person seeking indemnification has acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation and its shareholders and unless such person has received no
improper personal benefit; in a criminal proceeding, the person seeking
indemnification must also have no reasonable cause to believe his conduct was
unlawful.
Article IX of the By-laws of the IDS Life Insurance Company requires
the IDS Life Insurance Company to indemnify directors and officers to the extent
indemnification is permitted as stated by the preceding paragraph, and contains
substantially the same language as the above-mentioned Section 300.083.
Article IX, paragraph (2), of the By-laws of the IDS Life Insurance
Company provides as follows:
"Section 2. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party, by reason of the fact that he is or
was a director, officer, employee or agent of this Corporation, or is or was
serving at the direction of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to any threatened, pending or completed action, suit or proceeding,
wherever brought, to the fullest extent permitted by the laws of the State of
Minnesota, as now existing or hereafter amended, provided that this Article
shall not indemnify or protect any such director, officer, employee or agent
against any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of his duties or by reason of his reckless
disregard of his obligations and duties."
The parent company of IDS Life Insurance Company maintains an insurance
policy which affords liability coverage to directors and officers of the IDS
Life Insurance Company while acting in that capacity. IDS Life Insurance Company
pays its proportionate share of the premiums for the policy.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 15. Recent Sales of Unregistered Securities
.........None
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company
dated July 23, 1957, filed electronically as Exhibit 3.1 to
Post-Effective Amendment No. 2 to Registration Statement No. 33-48701
is incorporated herein by reference.
3.2 Copy of By-laws of IDS Life Insurance Company, filed electronically as
Exhibit 3.2 to Post-Effective Amendment No. 2 to Registration
Statement No. 33-48701 is incorporated herein by reference.
4.1 Form of Group Deferred Variable Annuity Contract, Form 34660, filed
electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to
Registration Statement No. 33-48701 is incorporated herein by
reference.
5. Opinion of Counsel dated Sept. 14, 1992 regarding legality of
Contracts, filed electronically as Exhibit 5 to Post-Effective
Amendment No. 2 to Registration Statement No. 33-48701 is incorporated
herein by reference.
22. List of Subsidiaries, filed electronically as Exhibit 22 to
Post-Effective Amendment No. 5 to Registration Statement No. 33-48701
is incorporated herein by reference.
23. Consent of Independent Auditors, filed electronically herewith.
24. Power of Attorney dated August 19, 1997, filed electronically as
Exhibit 24 to Post-Effective Amendment No. 7 to Registration Statement
No. 33-48701 is incorporated herein by reference.
24.1 Power of Attorney dated April 9, 1998, filed electronically as Exhibit
24.1 to Post-Effective Amendment No. 7 to Registration Statement No.
33-48701 is incorporated herein by reference.
(b) Not Applicable.
Item 17. Undertakings
Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, IDS Life Insurance
Company has duly caused this Registration Statement to be signed on behalf of
the Registrant by the undersigned, thereunto duly authorized in this City of
Minneapolis, and State of Minnesota on the 28th day of April, 1999.
IDS Life Insurance Company
(Registrant)
By IDS Life Insurance Company
By /s/ Richard W. Kling*
Richard W. Kling
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on the 28th day of April, 1999
Signature Title
/s/ James A. Mitchell* Director, Chairman of the
James A. Mitchell Board and Chief Executive Officer
/s/ Richard W. Kling* Director and President
Richard W. Kling
/s/ Jeffrey S. Horton** Vice President, Treasurer and Assistant Secretary
Jeffrey S. Horton
/s/ David R. Hubers* Director
David R. Hubers
/s/ Paul F. Kolkman* Director and Executive Vice President
Paul F. Kolkman
/s/ Barry J. Murphy* Director and Executive Vice
Barry J. Murphy President, Client Service
/s/ Stuart A. Sedlacek* Director and Executive Vice President
Stuart A. Sedlacek
/s/ Philip C. Wentzel** Vice President and Controller
Philip C. Wentzel
*Signed pursuant to Power of Attorney dated August 19, 1997, filed
electronically as Exhibit 24 to Post-Effective Amendment No. 7 to Registration
Statement No. 33-48701 is incorporated herein by reference.
**Signed pursuant to Power of Attorney dated April 9, 1998, filed electronically
as Exhibit 24.1 to Post-Effective Amendment No. 7 to Registration Statement No.
33-48701 is incorporated herein by reference.
/s/ Mary Ellyn Minenko
- -----------------------------
Mary Ellyn Minenko
EXHIBIT INDEX
Exhibit 23: Consent of Independent Auditors
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 4, 1999 on the consolidated financial
statements of IDS Life Insurance Company in Post-Effective Amendment No. 8 to
the Registration Statement (Form S-1, No. 33-48701) for the registration of the
Group Variable Annuity Contracts to be offered by IDS Life Insurance Company.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 27, 1999
