<PAGE>
IDS Life
Single Premium
Variable Life
Insurance Policy
Annual Report for:
- - Single Premium Variable Life Insurance
Policy issued by IDS Life Insurance
Company
Prospectus for:
- - Smith Barney Inc. Stripped ("Zero Coupon")
U.S. Treasury Securities Fund, Series A
[LOGO]
Offers an
opportunity for
growth with
life insurance
protection
Issued by IDS Life Insurance Company
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
MESSAGE FROM THE PRESIDENT
- -----------------------------------------------------------------
[PHOTO]
Lessening one's tax burden is always important, especially if you're among the
highest income earners. But no matter what bracket you're in, you can help meet
both your life insurance and investment needs on a tax-favored basis with just
one product -- Single Premium Variable Life.
Taxes may change, but one thing hasn't changed at all. That's the need for
insurance protection and sound investment choices. At IDS Life Insurance Company
(IDS Life), we've been providing that for nearly four decades. American Express
Financial Advisors has been helping people reach their financial goals for more
than 100 years, and the strength and stability of IDS Life has been enhanced by
being part of the American Express Financial Corporation family of companies.
Diversification and balance continue to be critical elements in a financial
strategy. IDS Life's Single Premium Variable Life Insurance Policy provides
those elements by combining a variety of investment options with life insurance
protection.
You can allocate your policy value among five of the investment portfolios of
IDS Life Series Fund, or you may choose to invest in units of the Zero Coupon
U.S. Treasury Securities Trust. Investing in any of these options allows you to
accumulate money on a tax-deferred basis while also meeting your protection
objectives.
IDS Life is among the largest life insurance companies in the country and
provides a wide range of insurance and annuity products that help meet the needs
of a changing society. We do not view our products as separate investments but
as integral parts of the total financial planning service offered by your
financial advisor. All of us have the same goal -- to turn your financial
objectives into reality through a prudent, sound investment program.
Sincerely,
/s/ Richard W. Kling
Richard W. Kling
President
IDS Life Insurance Company
2
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
ANNUAL FINANCIAL INFORMATION
- -----------------------------------------------------------------
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying individual and combined statements of net
assets of the segregated asset subaccounts of IDS Life Variable Life Separate
Account -- Single Premium Variable Life Subaccounts (comprised of subaccounts P,
Q, R, S, T and 2004) as of December 31, 1998, and the related statements of
operations and changes in net assets for each of the three years in the period
then ended. These financial statements are the responsibility of the management
of IDS Life Insurance Company. 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. Our procedures included
confirmation of securities owned at December 31, 1998 with the affiliated mutual
fund manager and the unit investment trust sponsor. 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 individual and combined financial position of the
segregated asset subaccounts of IDS Life Variable Life Separate Account --
Single Premium Variable Life Subaccounts at December 31, 1998 and the individual
and combined results of their operations and the changes in their net assets for
the periods described above, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Minneapolis, Minnesota
March 12, 1999
3
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF NET ASSETS DEC. 31, 1998
SEGREGATED ASSET SUBACCOUNTS COMBINED
------------------------------------------------------------------------ VARIABLE
ASSETS P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Investments in shares of mutual fund
portfolios and units of the trust:
at cost.................................... $ 7,144,352 $3,314,194 $1,467,057 $20,764,765 $2,323,899 $ 636,241 $35,650,508
-------------------------------------------------------------------------------------
at market value............................ $10,285,497 $3,410,591 $1,467,034 $28,880,625 $2,476,491 $1,563,457 $48,083,695
Dividends receivable......................... -- 19,034 5,887 -- 10,582 -- 35,503
Receivable from mutual fund portfolios and
the trust for share redemptions.............. 27,121 156 64 32,328 44 12 59,725
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets................................. 10,312,618 3,429,781 1,472,985 28,912,953 2,487,117 1,563,469 48,178,923
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Payable to IDS Life for:
Mortality and expense risk fee............... 4,413 1,450 628 12,460 1,052 676 20,679
Minimum death benefit guarantee risk
charge....................................... 1,324 435 189 3,738 315 203 6,204
Contract terminations........................ 21,384 156 64 16,130 44 12 37,790
Transaction charge........................... -- -- -- -- -- 338 338
Payable to mutual fund portfolios and the
trust for investments purchased.............. -- 17,149 5,070 -- 61 -- 22,280
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities............................ 27,121 19,190 5,951 32,328 1,472 1,229 87,291
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Variable Life
contracts in accumulation period............. $10,285,497 $3,410,591 $1,467,034 $28,880,625 $2,485,645 $1,562,240 $48,091,632
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNITS OUTSTANDING............... 1,793,506 1,393,133 808,770 5,648,944 1,065,127 505,671
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER ACCUMULATION UNIT........ $ 5.73 $ 2.45 $ 1.81 $ 5.11 $ 2.33 $ 3.09
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- --------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS YEAR ENDED DEC. 31, 1998
SEGREGATED ASSET SUBACCOUNTS COMBINED
--------------------------------------------------------------- VARIABLE
INVESTMENT INCOME P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Dividend income from mutual fund portfolios
and in the trust............................ $ 1,581,306 $261,481 $ 80,350 $2,488,706 $149,470 $ -- $4,561,313
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fee.............. 49,124 17,744 8,135 141,519 12,084 4,332 232,938
Minimum death benefit guarantee risk
charge...................................... 14,737 5,323 2,440 42,456 3,625 1,372 69,953
Transaction charge.......................... -- -- -- -- -- 3,788 3,788
- --------------------------------------------------------------------------------------------------------------------------
Total expenses.............................. 63,861 23,067 10,575 183,975 15,709 9,492 306,679
- --------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net............. 1,517,445 238,414 69,775 2,304,731 133,761 (9,492) 4,254,634
- --------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- NET
- --------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on sales of investments
in mutual fund portfolios and in the trust:
Proceeds from sales......................... 916,312 553,538 942,680 2,288,452 198,947 74,670 4,974,599
Cost of investments sold.................... 571,791 528,892 942,701 1,713,396 187,596 31,847 3,976,223
- --------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments..... 344,521 24,646 (21) 575,056 11,351 42,823 998,376
Net change in unrealized appreciation or
depreciation of investments................. (1,042,794) (93,807) 16 691,542 33,795 127,755 (283,493)
- --------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments.............. (698,273) (69,161) (5) 1,266,598 45,146 170,578 714,883
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations................... $ 819,172 $169,253 $ 69,770 $3,571,329 $178,907 $161,086 $4,969,517
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial
statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS YEAR ENDED DEC. 31, 1997
SEGREGATED ASSET SUBACCOUNTS COMBINED
-------------------------------------------------------------- VARIABLE
INVESTMENT INCOME P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Dividend income from mutual fund portfolios
and in the trust............................. $ 343,995 $261,147 $102,366 $2,543,542 $162,479 $ -- $3,413,529
- -------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fee............... 46,670 18,388 10,328 133,297 12,192 10,542 231,417
Minimum death benefit guarantee risk
charge....................................... 14,001 5,517 3,099 39,989 3,658 3,088 69,352
Transaction charge........................... -- -- -- -- -- 3,579 3,579
- -------------------------------------------------------------------------------------------------------------------------
Total expenses............................... 60,671 23,905 13,427 173,286 15,850 17,209 304,348
- -------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net.............. 283,324 237,242 88,939 2,370,256 146,629 (17,209) 3,109,181
- -------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- NET
- -------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on sales of investments
in mutual fund portfolios and in the trust:
Proceeds from sales.......................... 910,595 783,751 805,066 2,116,485 458,355 211,798 5,286,050
Cost of investments sold..................... 580,005 744,814 805,089 1,543,981 443,302 101,778 4,218,969
- -------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments...... 330,590 38,937 (23) 572,504 15,053 110,020 1,067,081
Net change in unrealized appreciation or
depreciation of investments.................. 1,101,264 (17,969) 20 1,180,213 19,281 40,514 2,323,323
- -------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments............... 1,431,854 20,968 (3) 1,752,717 34,334 150,534 3,390,404
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations.................... $1,715,178 $258,210 $ 88,936 $4,122,973 $180,963 $133,325 $6,499,585
- -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial
statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS YEAR ENDED DEC. 31, 1996
SEGREGATED ASSET SUBACCOUNTS COMBINED
---------------------------------------------------------------- VARIABLE
INVESTMENT INCOME P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Dividend income from mutual fund portfolios
and in the trust............................ $1,302,115 $274,564 $ 99,278 $1,818,663 $178,514 $ -- $3,673,134
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk fee.............. 41,475 20,641 10,368 123,717 13,341 7,968 217,510
Minimum death benefit guarantee risk
charge...................................... 12,449 6,194 3,112 37,133 4,004 2,391 65,283
Transaction charge.......................... -- -- -- -- -- 3,984 3,984
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses.............................. 53,924 26,835 13,480 160,850 17,345 14,343 286,777
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net............. 1,248,191 247,729 85,798 1,657,813 161,169 (14,343) 3,386,357
- ---------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS -- NET
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on sales of
investments in mutual fund portfolios and in
the trust:
Proceeds from sales......................... 1,029,303 632,209 1,098,262 3,438,322 324,814 271,600 6,794,510
Cost of investments sold.................... 608,085 605,074 1,098,299 2,639,668 311,240 140,918 5,403,284
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments..... 421,218 27,135 (37) 798,654 13,574 130,682 1,391,226
Net change in unrealized appreciation or
depreciation of investments................. (256,986) (167,669) 24 692,490 (158,222) (156,453) (46,816)
- ---------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments.............. 164,232 (140,534) (13) 1,491,144 (144,648) (25,771) 1,344,410
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations................... $1,412,423 $107,195 $ 85,785 $3,148,957 $ 16,521 $(40,114) $4,730,767
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial
statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS YEAR ENDED DEC. 31, 1998
SEGREGATED ASSET SUBACCOUNTS COMBINED
------------------------------------------------------------------------- VARIABLE
OPERATIONS P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net............ $ 1,517,445 $ 238,414 $ 69,775 $ 2,304,731 $ 133,761 $ (9,492) $ 4,254,634
Net realized gain (loss) on investments.... 344,521 24,646 (21) 575,056 11,351 42,823 998,376
Net change in unrealized appreciation or
depreciation of investments................ (1,042,794) (93,807) 16 691,542 33,795 127,755 (283,493)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations.................. 819,172 169,253 69,770 3,571,329 178,907 161,086 4,969,517
- -----------------------------------------------------------------------------------------------------------------------------------
CONTRACT TRANSACTIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net transfers*............................. 204,760 (75,831) (232,325) (16,488) 94,550 10,818 (14,516)
Transfers for policy loans................. (175,686) 14,631 10,607 (261,010) (18,997) 6,733 (423,722)
Policy charges............................. (174,382) (94,276) (44,790) (517,821) (57,290) (30,900) (919,459)
Contract terminations:
Surrender benefits......................... (306,093) (118,675) (44,930) (455,723) (21,777) (164) (947,362)
Death benefits............................. (149,897) (154,453) (117,934) (744,585) (80,996) (17,390) (1,265,255)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from contract
transactions............................... (601,298) (428,604) (429,372) (1,995,627) (84,510) (30,903) (3,570,314)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year............ 10,067,623 3,669,942 1,826,636 27,304,923 2,391,248 1,432,057 46,692,429
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year.................. $10,285,497 $3,410,591 $ 1,467,034 $28,880,625 $2,485,645 $1,562,240 $48,091,632
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT ACTIVITY
- -----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at beginning of year..... 1,902,396 1,565,410 1,051,218 6,070,531 1,104,618 516,431
Net transfers*............................. 36,930 (25,232) (131,751) (4,678) 40,629 3,582
Transfers for policy loans................. (32,796) 5,999 5,767 (57,546) (8,516) 2,159
Policy charges............................. (32,792) (39,286) (25,238) (109,742) (25,587) (10,472)
Contract terminations:
Surrender benefits......................... (53,774) (49,492) (24,972) (96,459) (9,706) (57)
Death benefits............................. (26,458) (64,266) (66,254) (153,162) (36,311) (5,972)
- -----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year........... 1,793,506 1,393,133 808,770 5,648,944 1,065,127 505,671
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes transfer activity from (to) other subaccounts and transfers from (to) IDS Life's fixed account.
See accompanying notes to financial
statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS YEAR ENDED DEC. 31, 1997
SEGREGATED ASSET SUBACCOUNTS COMBINED
------------------------------------------------------------------------ VARIABLE
OPERATIONS P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net............ $ 283,324 $ 237,242 $ 88,939 $ 2,370,256 $ 146,629 $ (17,209) $ 3,109,181
Net realized gain (loss) on investments.... 330,590 38,937 (23) 572,504 15,053 110,020 1,067,081
Net change in unrealized appreciation or
depreciation of investments................ 1,101,264 (17,969) 20 1,180,213 19,281 40,514 2,323,323
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations.................. 1,715,178 258,210 88,936 4,122,973 180,963 133,325 6,499,585
- ----------------------------------------------------------------------------------------------------------------------------------
CONTRACT TRANSACTIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Net transfers*............................. 318,374 (327,174) 399,796 (130,268) (152,023) (116,174) (7,469)
Transfers for policy loans................. (184,275) (30,586) (19,079) (302,455) (18,873) (4,568) (559,836)
Policy charges............................. (161,793) (94,537) (50,050) (472,276) (56,360) (30,502) (865,518)
Contract terminations:
Surrender benefits......................... (238,095) (156,242) (485,317) (435,414) (76,325) (34,738) (1,426,131)
Death benefits............................. (41,714) (59,968) -- (347,973) (69,127) (57) (518,839)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from contract
transactions............................... (307,503) (668,507) (154,650) (1,688,386) (372,708) (186,039) (3,377,793)
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year............ 8,659,948 4,080,239 1,892,350 24,870,336 2,582,993 1,484,771 43,570,637
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year.................. $10,067,623 $3,669,942 $1,826,636 $27,304,923 $2,391,248 $1,432,057 $46,692,429
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT ACTIVITY
- ----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at beginning of year..... 1,965,179 1,875,734 1,137,105 6,472,563 1,290,739 589,227
Net transfers*............................. 72,137 (157,837) 241,569 (29,588) (76,901) (46,017)
Transfers for policy loans................. (36,505) (13,544) (11,114) (71,678) (9,011) (1,652)
Policy charges............................. (34,105) (42,007) (29,445) (112,375) (27,442) (11,759)
Contract terminations:
Surrender benefits......................... (54,621) (71,009) (286,897) (105,019) (38,302) (13,347)
Death benefits............................. (9,689) (25,927) -- (83,372) (34,465) (21)
- ----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year........... 1,902,396 1,565,410 1,051,218 6,070,531 1,104,618 516,431
- ----------------------------------------------------------------------------------------------------------------------------------
*Includes transfer activity from (to) other subaccounts and transfers from (to) IDS Life's fixed account.
See accompanying notes to financial
statements.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT -- SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS YEAR ENDED DEC. 31, 1996
SEGREGATED ASSET SUBACCOUNTS COMBINED
----------------------------------------------------------------------- VARIABLE
OPERATIONS P Q R S T 2004 ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Investment income (loss) -- net.............. $1,248,191 $ 247,729 $ 85,798 $ 1,657,813 $ 161,169 $ (14,343) $ 3,386,357
Net realized gain (loss) on investments...... 421,218 27,135 (37) 798,654 13,574 130,682 1,391,226
Net change in unrealized appreciation or
depreciation of investments.................. (256,986) (167,669) 24 692,490 (158,222) (156,453) (46,816)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations.................... 1,412,423 107,195 85,785 3,148,957 16,521 (40,114) 4,730,767
- -----------------------------------------------------------------------------------------------------------------------------------
CONTRACT TRANSACTIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net transfers*............................... 566,270 55,477 (130,763) (445,985) (48,328) 1,622 (1,707)
Transfers for policy loans................... (172,770) (88,520) (65,299) (220,076) (25,011) (26,115) (597,791)
Policy charges............................... (144,815) (95,469) (49,366) (426,537) (57,839) (31,725) (805,751)
Contract terminations:
Surrender benefits........................... (480,855) (207,625) (240,286) (1,035,403) (45,636) (148,400) (2,158,205)
Death benefits............................... (97,964) (36,579) (368,159) (687,979) (85,162) (50,454) (1,326,297)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from contract
transactions................................. (330,134) (372,716) (853,873) (2,815,980) (261,976) (255,072) (4,889,751)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year.............. 7,577,659 4,345,760 2,660,438 24,537,359 2,828,448 1,779,957 43,729,621
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of year.................... $8,659,948 $4,080,239 $1,892,350 $24,870,336 $2,582,993 $1,484,771 $43,570,637
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATION UNIT ACTIVITY
- -----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at beginning of year....... 2,052,489 2,054,522 1,666,697 7,266,276 1,425,106 696,387
Net transfers*............................... 137,391 26,004 (82,210) (125,102) (24,424) 656
Transfers for policy loans................... (41,998) (42,365) (40,723) (63,350) (12,862) (10,949)
Policy charges............................... (35,560) (45,597) (30,287) (119,543) (29,683) (12,981)
Contract terminations:
Surrender benefits........................... (123,358) (99,305) (148,981) (292,418) (23,536) (63,592)
Death benefits............................... (23,785) (17,525) (227,391) (193,300) (43,862) (20,294)
- -----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year............. 1,965,179 1,875,734 1,137,105 6,472,563 1,290,739 589,227
- -----------------------------------------------------------------------------------------------------------------------------------
*Includes transfer activity from (to) other subaccounts and transfers from (to) IDS Life's fixed account.
See accompanying notes to financial
statements.
</TABLE>
10
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------
1. ORGANIZATION
IDS Life Variable Life Separate Account (the Variable Account) was established
under Minnesota law on Oct. 16, 1985 as a segregated asset account of IDS Life
Insurance Company (IDS Life). The Variable Account is registered as a single
unit investment trust under the Investment Company Act of 1940, as amended (the
1940 Act). Operations of the Variable Account commenced on Jan. 20, 1986.
The Variable Account is comprised of various subaccounts. Each subaccount
invests exclusively in shares of one of the following portfolios (the Funds) of
IDS Life Series Fund, Inc. (IDS Life Series Fund) or in the Trust. IDS Life
Series Fund is registered under the 1940 Act as a diversified, open-end
management investment company. The Trust is registered under the 1940 Act as a
unit investment trust. The Funds have the following investment managers and the
Trust has the following sponsor.
<TABLE>
<CAPTION>
SUBACCOUNT INVESTS EXCLUSIVELY IN SHARES OF INVESTMENT MANAGER/SPONSOR
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
P IDS Life Series Fund Equity Portfolio........ IDS Life Insurance Company(1)
Q IDS Life Series Fund Income Portfolio........ IDS Life Insurance Company(1)
IDS Life Series Fund Money Market
R Portfolio.................................... IDS Life Insurance Company(1)
S IDS Life Series Fund Managed Portfolio....... IDS Life Insurance Company(1)
IDS Life Series Fund Government Securities
T Portfolio.................................... IDS Life Insurance Company(1)
2004 2004 Trust................................... Smith Barney Inc.
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) American Express Financial Corporation (AEFC) is the investment advisor.
The assets of each subaccount of the Variable Account are not chargeable with
liabilities arising out of the business conducted by any other segregated asset
account or by IDS Life.
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS IN THE FUNDS
Investments in shares of the Funds are stated at market value which is the net
asset value per share as determined by the respective Funds. Investment
transactions are accounted for on the date the shares are purchased and sold.
The cost of investments sold and redeemed is determined on the average cost
method. Dividend distributions received from the Funds are reinvested in
additional shares of the Funds and are recorded as income by the subaccounts on
the ex-dividend date.
Unrealized appreciation or depreciation of investments in the accompanying
financial statements represents the subaccounts' share of the Funds'
undistributed net investment income, undistributed realized gain or loss and the
unrealized appreciation or depreciation on their investment securities.
INVESTMENTS IN THE TRUST
Investments in units of the Trust are stated at market value which is the net
asset value per unit as determined by the Trust. Investment transactions are
accounted for on the date the units are purchased and sold. The cost of
investments sold and redeemed is determined on the average cost method.
Unrealized appreciation or depreciation of investments in the accompanying
financial statements represents the subaccount's share of the Trust's
undistributed net investment income, undistributed realized gain or loss and the
unrealized appreciation or depreciation on their investment securities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
11
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
FEDERAL INCOME TAXES
IDS Life is taxed as a life insurance company. The Variable Account is treated
as part of IDS Life for federal income tax purposes. Under existing federal
income tax law, no income taxes are payable with respect to any investment
income of the Variable Account.
- --------------------------------------------------------------------------------
3. MORTALITY CHARGE
IDS Life deducts a mortality charge from the policy value each month. Prior to
the maturity date of the policy, the death benefit will always be higher than
the policy value. This deduction will enable IDS Life to pay this additional
amount. The charge is determined on the monthly date by multiplying the net
amount at risk IDS Life is assuming, as of that day, by the cost of insurance
rate. The mortality charge is taken from the subaccounts as specified in the
application for the policy, or as subsequently changed.
- --------------------------------------------------------------------------------
4. MORTALITY AND EXPENSE RISK CHARGE
IDS Life makes contractual assurances to the Variable Account that possible
future adverse changes in administrative expenses and mortality experience of
the policy owners and beneficiaries will not affect the Variable Account. The
mortality and expense risk fee paid to IDS Life is computed daily and is equal,
on an annual basis, to 0.5% of the daily net asset value of the Variable
Account.
- --------------------------------------------------------------------------------
5. MINIMUM DEATH BENEFIT GUARANTEE RISK CHARGE
IDS Life deducts a minimum death benefit guarantee risk charge equal, on an
annual basis, to 0.15% of the daily net asset value of the Variable Account.
This deduction is made to compensate IDS Life for the risk it assumes by
providing a guaranteed minimum death benefit. The deduction is made from the
Variable Account and computed on a daily basis. This charge is guaranteed for
the life of the contract and may not be increased.
- --------------------------------------------------------------------------------
6. ISSUE AND ADMINISTRATIVE EXPENSE CHARGE
The policy provides for a one-time $150 issue and administrative expense charge
which was deducted directly from the premium paid by the owner. This charge is
to reimburse IDS Life for expenses incurred in processing the premium payment
and establishing and maintaining the records relating to the owner and
participation in the subaccounts for the duration of the policy.
12
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. PREMIUM TAX CHARGE
The policy provides that a charge of 2.5% of the single premium will be deducted
from the single premium to cover the premium taxes assessed by the various
states. Premium taxes vary from state to state. This charge is the average rate
which IDS Life expects to pay on premiums from all states.
- --------------------------------------------------------------------------------
8. TRANSACTION CHARGE
IDS Life makes a daily charge against the assets of the subaccount investing in
the Trust. This charge is intended to reimburse IDS Life for the transaction
charge paid directly by IDS Life to Smith Barney Inc. on the sale of the Trust
units to the Variable Account. IDS Life pays these amounts from its general
account assets. The amount of the asset charge is equivalent to an effective
annual rate of 0.25% of the account value invested in the Trust. This amount may
be increased in the future but in no event will it exceed an effective annual
rate of 0.5% of the Variable Account value. The charge will be cost-based
(taking into account a loss of interest) with no anticipated element of profit
for IDS Life.
- --------------------------------------------------------------------------------
9. SURRENDER CHARGE
IDS Life will use a surrender charge to help it recover certain selling
expenses. The surrender charge will be deducted during the first eight policy
years. IDS Life will never deduct more than 9% of the single premium as a
surrender charge. Charges by IDS Life for surrenders are not identified on an
individual segregated asset account basis. Charges for all segregated asset
accounts amounted to $17,936,810 in 1998, $14,502,145 in 1997 and $11,956,753 in
1996. Such charges are not treated as a separate expense of the subaccounts or
Variable Account. They are ultimately deducted from contract surrender benefits
paid by IDS Life.
- --------------------------------------------------------------------------------
10. INVESTMENT IN SHARES/UNITS
The subaccounts' investment in shares of the Funds and units of the Trust as of
Dec. 31, 1998 were as follows:
<TABLE>
<CAPTION>
SUBACCOUNT INVESTMENT SHARES/UNITS NAV
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
P IDS Life Series Fund Equity Portfolio........ $ 373,491 $ 27.54
Q IDS Life Series Fund Income Portfolio........ 340,095 10.03
IDS Life Series Fund Money Market
R Portfolio.................................... 1,467,173 1.00
S IDS Life Series Fund Managed Portfolio....... 1,512,126 19.10
IDS Life Series Fund Government Securities
T Portfolio.................................... 238,722 10.37
2004 2004 Trust................................... 2,053,508 0.76
- ----------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
11. INVESTMENT TRANSACTIONS
The subaccounts' purchases of Fund shares or Trust units, including reinvestment
of dividend distributions, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31,
----------------------------------
SUBACCOUNT INVESTMENT 1998 1997 1996
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
P IDS Life Series Fund Equity Portfolio........ $1,821,507 $ 887,907 $1,948,845
Q IDS Life Series Fund Income Portfolio........ 350,347 365,487 507,222
IDS Life Series Fund Money Market
R Portfolio.................................... 583,082 739,355 330,187
S IDS Life Series Fund Managed Portfolio....... 2,567,821 2,801,013 2,281,172
IDS Life Series Fund Government Securities
T Portfolio.................................... 244,585 235,276 215,464
2004 2004 Trust................................... 32,833 10,039 2,082
- ---------------------------------------------------------------------------------------------
Combined Variable Account $5,600,175 $5,039,077 $5,284,972
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
12. YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of IDS Life and the
Variable Account. IDS Life and the Variable Account have no computer systems of
their own but are dependent upon the systems of AEFC and certain other third
parties.
A comprehensive review of AEFC's computer systems and business processes has
been conducted to identify the major systems that could be affected by the Year
2000 issue. Steps are being taken to resolve any potential problems including
modification to existing software and the purchase of new software. These
measures are scheduled to be completed and tested on a timely basis. AEFC's
target date for substantially completing corrective measures on business
critical systems was Dec. 31, 1998. Substantial testing of these systems was
targeted for completion early in 1999. AEFC is currently on track with this
schedule and is also on track to finish the work on non-critical systems by June
30, 1999. The Year 2000 readiness of other third parties whose system failures
could have an impact on IDS Life's and the Variable Account's operations
continues to be evaluated. The potential materiality of any such impact is not
known at this time.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans for
all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. These plans are being amended to include specific Year 2000
considerations and will continue to be refined throughout 1999 as additional
information related to potential Year 2000 exposure is gathered.
14
<PAGE>
IDS LIFE VARIABLE LIFE SEPARATE ACCOUNT --
SINGLE PREMIUM VARIABLE LIFE SUBACCOUNTS
CONDENSED FINANCIAL INFORMATION (UNAUDITED)
- -----------------------------------------------------------------
The following table gives per-unit information about the financial history of
each subaccount.
<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>
- ----------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT P (INVESTING IN SHARES OF IDS LIFE SERIES FUND EQUITY PORTFOLIO)
Accumulation unit value at beginning of period............ $5.29 $4.41 $3.69 $2.69 $2.63 $2.34 $2.23 $1.35 $ 1.43 $ 1.17
Accumulation unit value at end of period.................. $5.73 $5.29 $4.41 $3.69 $2.69 $2.63 $2.34 $2.23 $ 1.35 $ 1.43
Number of accumulation units outstanding at end of period
(000 omitted)............................................. 1,794 1,902 1,965 2,052 2,239 2,374 2,493 2,575 2,893 3,286
- ----------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT Q (INVESTING IN SHARES OF IDS LIFE SERIES FUND INCOME PORTFOLIO)
Accumulation unit value at beginning of period............ $2.34 $2.18 $2.12 $1.76 $1.85 $1.62 $1.49 $1.30 $ 1.23 $ 1.11
Accumulation unit value at end of period.................. $2.45 $2.34 $2.18 $2.12 $1.76 $1.85 $1.62 $1.49 $ 1.30 $ 1.23
Number of accumulation units outstanding at end of period
(000 omitted)............................................. 1,393 1,565 1,876 2,055 2,028 2,178 2,378 2,647 3,289 3,778
- ----------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT R (INVESTING IN SHARES OF IDS LIFE SERIES FUND MONEY MARKET PORTFOLIO)
Accumulation unit value at beginning of period............ $1.74 $1.66 $1.60 $1.53 $1.48 $1.45 $1.41 $1.35 $ 1.26 $ 1.16
Accumulation unit value at end of period.................. $1.81 $1.74 $1.66 $1.60 $1.53 $1.48 $1.45 $1.41 $ 1.35 $ 1.26
Number of accumulation units outstanding at end of period
(000 omitted)............................................. 809 1,051 1,137 1,667 1,470 1,505 2,046 2,751 3,172 3,146
- ----------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT S (INVESTING IN SHARES OF IDS LIFE SERIES FUND MANAGED PORTFOLIO)
Accumulation unit value at beginning of period............ $4.50 $3.84 $3.38 $2.85 $2.85 $2.40 $2.19 $1.67 $ 1.56 $ 1.20
Accumulation unit value at end of period.................. $5.11 $4.50 $3.84 $3.38 $2.85 $2.85 $2.40 $2.19 $ 1.67 $ 1.56
Number of accumulation units outstanding at end of period
(000 omitted)............................................. 5,649 6,071 6,473 7,266 8,103 8,703 9,123 9,735 10,289 11,099
- ----------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT T (INVESTING IN SHARES OF IDS LIFE SERIES FUND GOVERNMENT SECURITIES PORTFOLIO)
Accumulation unit value at beginning of period............ $2.16 $2.00 $1.98 $1.69 $1.79 $1.61 $1.52 $1.31 $ 1.24 $ 1.09
Accumulation unit value at end of period.................. $2.33 $2.16 $2.00 $1.98 $1.69 $1.79 $1.61 $1.52 $ 1.31 $ 1.24
Number of accumulation units outstanding at end of period
(000 omitted)............................................. 1,065 1,105 1,290 1,425 1,479 1,603 1,671 1,826 1,937 2,168
- ----------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 2004 (INVESTING IN SHARES OF 2004 TRUST)
Accumulation unit value at beginning of period............ $2.77 $2.52 $2.56 $1.97 $2.19 $1.82 $1.68 $1.40 $ 1.36 $ 1.11
Accumulation unit value at end of period.................. $3.09 $2.77 $2.52 $2.56 $1.97 $2.19 $1.82 $1.68 $ 1.40 $ 1.36
Number of accumulation units outstanding at end of period
(000 omitted)............................................. 506 516 589 696 673 732 792 800 731 930
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<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>
[LOGO] BULK RATE
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IDS LIFE INSURANCE COMPANY PAID
IDS Tower 10 PERMIT NO. 85
Minneapolis, MN 55440-0010 SPENCER, IA
S-6190 N (4/99)
