<PAGE>
-------------------------------------------------------------------------------
Smith Barney LifeVestSM
Annual Report for:
o Single Premium Variable Life Insurance
Policy issued by IDS Life Insurance
Company
Prospectus for:
o Smith Barney Stripped "Zero Coupon"
U.S. Treasury Securities Fund, Series A
<PAGE>
IDS Life Variable Account for Smith Barney
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 Account for
Smith Barney for Single Premium Variable Life Insurance (comprised of
subaccounts SAP, SMM, SHI, STR, SGO and SO4) as of December 31, 1997, and the
related statements of operations and changes in net assets for each of the three
years in the period then ended, except for the S95 subaccount which is for the
period January 1, 1995 to November 15, 1995 (date of maturity of the securities
in the Trust). 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, 1997 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 Account for Smith Barney for
Single Premium Variable Life Insurance at December 31, 1997 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 13, 1998
<PAGE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Net Assets Dec. 31, 1997
Segregated Asset Subaccount Combined
- ---------------------------------------------------------------------------------------------------------------- Variable
Assets SAP SMM SHI STR SGO S04 Account
===========================================================================================================================
Investments in shares of mutual fund
portfolios and units of the trust, at
market value: IDS Life Series Fund
Equity Portfolio - 489,803 shares at net
asset value of
<S> <C> <C> <C> <C> <C> <C> <C>
$29.98 per share (cost $8,501,234) $14,686,345 $ - $ - $ - $ - $ - $14,686,345
IDS Life Series Fund Money Market Portfolio -
894,006 shares at net asset
value of $1.00 per share (cost $893,923) - 893,923 - - - - 893,923
IDS Life Series Fund Income Portfolio -
143,225 shares at net asset value
of $10.23 per share (cost $1,543,151) - - 1,465,130 - - - 1,465,130
IDS Life Series Fund Managed Portfolio -
355,975 shares at net asset value
of $18.26 per share (cost $5,085,578) - - - 6,497,659 - - 6,497,659
IDS Life Series Fund Government Securities
Portfolio - 136,122 shares at
net asset value of $10.18 per share
(cost $1,330,779) - - - - 1,386,024 - 1,386,024
Smith Barney Inc. Stripped ("Zero Coupon")
U. S. Treasury Securities Fund,
Series A 2004 273,346 units at
net asset value of $0.68 per share
(cost $143,120) - - - - - 185,595 185,595
- ---------------------------------------------------------------------------------------------------------------------------
14,686,345 893,923 1,465,130 6,497,659 1,386,024 185,595 25,114,676
- ---------------------------------------------------------------------------------------------------------------------------
Dividends receivable - 3,850 8,897 - 7,073 - 19,820
Accounts receivable from IDS Life
for contract purchase payments - 79,801 - - - - 79,801
Receivable from mutual fund portfolios
and the trust for share redemptions 80,801 - - - - - 80,801
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 14,767,146 977,574 1,474,027 6,497,659 1,393,097 185,595 25,295,098
===========================================================================================================================
Liabilities
===========================================================================================================================
Payable to IDS Life for:
Mortality and expense risk fee 45,388 1,318 2,405 19,964 2,284 100 71,459
Minimum death benefit
guarantee risk charge - - - - - 66 66
Issue and administrative
expense charge - - - - - 50 50
Distribution expense charge - - - - - 83 83
Transaction charge - - - - - 42 42
Contract terminations 79,801 - - - - 1,200 81,001
Payable to mutual fund portfolios
and the trust for investments purchased - 82,333 6,492 - 4,429 - 93,254
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 125,189 83,651 8,897 19,964 6,713 1,541 245,955
- ---------------------------------------------------------------------------------------------------------------------------
Net assets applicable to
Variable Life contracts $14,641,957 $893,923 $1,465,130 $6,477,695 $1,386,384 $184,054 $25,049,143
===========================================================================================================================
Accumulation units outstanding 3,193,430 652,554 94,631 2,180,377 806,092 87,862
===========================================================================================================================
Net asset value per
accumulation unit $ 4.59 $ 1.37 $ 1.47 $ 2.97 $ 1.72 $ 2.09
===========================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Operations Year ended Dec. 31, 1997
Segregated Asset Subaccount Combined
- -------------------------------------------------------------------------------------------------------------- Variable
Investment income SAP SMM SHI STR SGO S04 Account
===========================================================================================================================
Dividend income from mutual fund
<S> <C> <C> <C> <C> <C> <C> <C>
portfolios and in the trust $ 520,767 $ 42,790 $103,257 $ 603,574 $ 97,044 $ - $ 1,367,432
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense
risk charge 65,051 6,481 7,356 31,853 9,465 864 121,070
Minimum death benefit
guarantee risk charge 55,691 3,408 5,791 25,333 5,320 762 96,305
Issue and administrative
expense charge 38,165 2,504 4,087 17,813 3,721 546 66,836
Mortality charge 69,461 4,250 7,224 31,596 6,637 953 120,121
Transaction charge - - - - - 477 477
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 228,368 16,643 24,458 106,595 25,143 3,602 404,809
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss) - net 292,399 26,147 78,799 496,979 71,901 (3,602) 962,623
===========================================================================================================================
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 2,638,482 1,506,359 113,702 765,985 485,010 27,302 5,536,840
Cost of investments sold 1,602,604 1,506,371 120,084 592,834 473,135 21,867 4,316,895
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss)
on investments 1,035,878 (12) (6,382) 173,151 11,875 5,435 1,219,945
Net change in unrealized
appreciation or depreciation
of investments 1,041,788 9 15,156 235,338 8,076 14,869 1,315,236
- ---------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 2,077,666 (3) 8,774 408,489 19,951 20,304 2,535,181
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $2,370,065 $26,144 $87,573 $905,468 $91,852 $16,702 $3,497,804
===========================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Operations Year ended Dec. 31, 1996
Segregated Asset Subaccount Combined
- ------------------------------------------------------------------------------------------------------------ Variable
Investment income SAP SMM SHI STR SGO S04 Account
===========================================================================================================================
Dividend income from mutual fund
<S> <C> <C> <C> <C> <C> <C> <C>
portfolios and in the trust $2,074,894 $ 55,631 $ 96,268 $ 452,040 $108,372 $ - $2,787,205
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charge 113,889 6,956 8,643 35,953 9,722 2,901 178,064
Minimum death benefit
guarantee risk charge 44,086 4,646 5,774 24,017 6,494 1,836 86,853
Issue and administrative
expense charge 44,086 4,646 5,774 24,017 6,494 1,836 86,853
Distribution charge 32,999 3,478 4,322 17,977 4,861 1,377 65,014
Mortality charge 54,910 5,787 7,191 29,913 8,088 2,295 108,184
Premium tax charge 21,911 2,309 2,870 11,936 3,228 917 43,171
Transaction charge - - - - - 1,147 1,147
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 311,881 27,822 34,574 143,813 38,887 12,309 569,286
- ---------------------------------------------------------------------------------------------------------------------------
Investment income (loss) - net 1,763,013 27,809 61,694 308,227 69,485 (12,309) 2,217,919
===========================================================================================================================
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 2,463,451 1,103,070 384,711 1,031,121 124,181 557,795 5,664,329
Cost of investments sold 1,395,185 1,103,081 418,426 845,728 119,993 486,356 4,368,769
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss)
on investments 1,068,266 (11) (33,715) 185,393 4,188 71,439 1,295,560
Net change in unrealized appreciation
or depreciation of investments (823,689) 3 (15,687) 157,510 (92,975) (53,998) (828,836)
- ---------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 244,577 (8) (49,402) 342,903 (88,787) 17,441 466,724
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $2,007,590 $ 27,801 $ 12,292 $ 651,130 $(19,302)$ 5,132 $2,684,643
===========================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- ---------------------------------------------------------------------------------------------------------------------------------
Statements of Operations Year ended Dec. 31, 1995
Segregated Asset Subaccount Combined
- ------------------------------------------------------------------------------------------------------------------ Variable
Investment income SAP SMM SHI STR SGO S95* S04 Account
=================================================================================================================================
Dividend income from mutual fund
<S> <C> <C> <C> <C> <C> <C> <C> <C>
portfolios and in the trusts $ 268,604 $ 63,687 $ 88,953 $ 300,012 $ 97,485 $ - $ - $ 818,741
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charge 69,242 7,380 7,802 44,426 12,045 4,122 1,646 146,663
Minimum death benefit
guarantee risk charge 46,254 4,930 5,212 22,999 5,788 2,748 1,097 89,028
Issue and administrative
expense charge 46,254 4,930 5,212 22,999 5,788 2,748 1,097 89,028
Distribution expense charge 34,621 3,691 3,901 16,869 4,333 2,061 823 66,299
Mortality charge 57,610 6,140 6,492 28,646 7,209 3,435 1,371 110,903
Premium tax charge 22,988 2,450 2,590 11,776 2,877 1,374 548 44,603
Transaction charge - - - - - 1,717 686 2,403
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 276,969 29,521 31,209 147,715 38,040 18,205 7,268 548,927
Investment income (loss) - net (8,365) 34,166 57,744 152,297 59,445 (18,205) (7,268) 269,814
=================================================================================================================================
Realized and unrealized gain (loss) on investments - net
=================================================================================================================================
Net realized gain (loss) on sales of investments in mutual fund portfolios and
in the trusts:
Proceeds from sales 1,847,284 860,714 159,993 1,331,998 146,245 824,274 133,665 5,304,173
Cost of investments sold 1,081,307 860,734 184,473 1,182,522 141,246 683,352 87,161 4,220,795
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 765,977 (20) (24,480) 149,476 4,999 140,922 46,504 1,083,378
Net change in unrealized appreciation
or depreciation of investments 2,603,618 15 183,529 623,831 158,503 (98,959) 25,013 3,495,550
- ---------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 3,369,595 (5) 159,049 773,307 163,502 41,963 71,517 4,578,928
Net increase (decrease) in net assets
resulting from operations $ 3,361,230 $ 34,161 $ 216,793 $ 925,604 $222,947 $ 23,758 $ 64,249 $4,848,742
=================================================================================================================================
*For the period Jan. 1, 1995 to Nov. 15, 1995, date of maturity of securities in the 1995 Trust.
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets Year ended Dec. 31, 1997
Segregated Asset Subaccount Combined
- ----------------------------------------------------------------------------------------------------------- Variable
Operations SAP SMM SHI STR SGO S04 Account
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss) - net $ 292,399 $ 26,147 $ 78,799 $ 496,979 $ 71,901 $ (3,602) $ 962,623
Net realized gain (loss)
on investments 1,035,878 (12) (6,382) 173,151 11,875 5,435 1,219,945
Net change in unrealized
appreciation or
depreciation of investments 1,041,788 9 15,156 235,338 8,076 14,869 1,315,236
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 2,370,065 26,144 87,573 905,468 91,852 16,702 3,497,804
===========================================================================================================================
Contract Transactions
===========================================================================================================================
Net transfers* (58,787) 128,879 4,685 (38,507) (124,034) - (87,764)
Transfers for policy loans (191,279) (50,065) 2,941 6,665 (3,767) (438) (235,943)
Contract terminations:
Surrender benefits (304,825) (606,569) (52,383) (272,825) (137,608) (17,281) (1,391,491)
Death benefits (216,595) - - - (38,017) - (254,612)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from
contract transactions (771,486) (527,755) (44,757) (304,667) (303,426) (17,719) (1,969,810)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year 13,043,378 1,395,534 1,422,314 5,876,894 1,597,958 185,071 23,521,149
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $14,641,957 $ 893,923 $1,465,130 $6,477,695 $1,386,384 $184,054 $25,049,143
===========================================================================================================================
Accumulation Unit Activity
===========================================================================================================================
Units outstanding
at beginning of year 3,372,075 1,055,223 1,021,781 2,287,669 991,272 96,078
Net transfers* 3,119 91,014 7,401 (7,805) (75,872)
Transfers for policy loans (44,966) (37,530) 2,229 1,236 (2,300) (229)
Contract terminations:
Surrender benefits (82,464) (456,153) (36,780) (100,723) (83,757) (7,987)
Death benefits (54,334) - - - (23,251) -
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year 3,193,430 652,554 994,631 2,180,377 806,092 87,862
===========================================================================================================================
*Includes transfer activity from (to) other subaccounts and transfers from (to)
IDS Life's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets Year ended Dec. 31, 1996
Segregated Asset Subaccount Combined
- ----------------------------------------------------------------------------------------------------------- Variable
Operations SAP SMM SHI STR SGO S04 Account
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss) - net $ 1,763,013 $ 27,809 $ 61,694 $ 308,227 $ 69,485 $ (12,309) $ 2,217,919
Net realized gain (loss)
on investments 1,068,266 (11) (33,715) 185,393 4,188 71,439 1,295,560
Net change in unrealized
appreciation or
depreciation of investments (823,689) 3 (15,687) 157,510 (92,975) (53,998) (828,836)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 2,007,590 27,801 12,292 651,130 (19,302) 5,132 2,684,643
===========================================================================================================================
Contract Transactions
===========================================================================================================================
Net transfers* (60,419) 47,499 117,069 (26,624) (35,049) (42,280) 196
Transfers for policy loans (108,461) (18,730) 60,629 (119,615) (9,028) (364) (195,569)
Contract terminations:
Surrender benefits (1,141,243) (274,026) (186,939) (696,013) (76,608) (40) (2,374,869)
Death benefits - - - (25,291) - - (25,291)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from
contract transactions (1,310,123) (245,257) (9,241) (867,543) (120,685) (42,684) (2,595,533)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year 12,345,911 1,612,990 1,419,263 6,093,307 1,737,945 222,623 23,432,039
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $13,043,378 $1,395,534 $1,422,314 $5,876,894 $1,597,958 $185,071 $23,521,149
===========================================================================================================================
Accumulation Unit Activity
===========================================================================================================================
Units outstanding at
beginning of year 3,739,368 1,249,006 1,030,438 2,652,684 1,068,232 112,267
Net transfers* (20,628) 31,341 86,005 (11,417) (22,468) (15,967)
Transfers for policy loans (31,349) (14,304) 45,513 (50,916) (5,690) (201)
Contract terminations:
Surrender benefits (315,316) (210,820) (140,175) (292,276) (48,802) (21)
Death benefits - - - (10,406) - -
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year 3,372,075 1,055,223 1,021,781 2,287,669 991,272 96,078
===========================================================================================================================
*Includes transfer activity from (to) other subaccounts and transfers from (to)
IDS Life's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS Life Variable Account for Smith Barney
- -----------------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets Year ended Dec. 31, 1995
Segregated Asset Subaccount Combined
- ------------------------------------------------------------------------------------------------------------------- Variable
Operations SAP SMM SHI STR SGO S95** S04 Account
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss) - net $ (8,365) $ 34,166 $ 57,744 $ 152,297 $ 59,445 $(18,205) $ (7,268) $ 269,814
Net realized gain (loss)
on investments 765,977 (20) (24,480) 149,476 4,999 140,922 46,504 1,083,378
Net change in unrealized appreciation
or depreciation of investments 2,603,618 15 183,529 623,831 158,503 (98,959) 25,013 3,495,550
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 3,361,230 34,161 216,793 925,604 222,947 23,758 64,249 4,848,742
===================================================================================================================================
Contract Transactions
- -----------------------------------------------------------------------------------------------------------------------------------
Net transfers* (296,536) 715,785 37,201 41,957 230,395 (795,854) 67,927 875
Transfers for policy loans (300,101) (17,359) (51,160) (230,174) (9,698) (502) (446) (609,440)
Policy charges (12) - (8) - - - - (20)
Contract terminations:
Surrender benefits (524,947) (92,138) (20,709) (854,418) (91,812) (8,017) (126,106) (1,718,147)
Death benefits (9,260) (13,995) (1,749) (3,892) (18,396) - - (47,292)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from
contract transactions (1,130,856) 592,293 (36,425) (1,046,527) 110,489 (804,373) (58,625) (2,374,024)
Net assets at beginning of year 10,115,537 986,536 1,238,895 6,214,230 1,404,509 780,615 216,999 20,957,321
Net assets at end of year $12,345,911 $ 1,612,990 $1,419,263 $6,093,307 $ 1,737,945 $ - $ 222,623 $ 23,432,039
===================================================================================================================================
Accumulation Unit Activity
===================================================================================================================================
Units outstanding at
beginning of year 4,142,587 786,564 1,064,043 3,145,108 994,719 544,506 139,733
Net transfers* (115,120) 558,464 29,935 13,084 151,909 (538,654) 39,068
Transfers for policy loans (106,416) (13,520) (45,198) (107,778) (6,626) (347) (253)
Policy charges (5) - (7) - - - -
Contract terminations:
Surrender benefits (178,399) (71,634) (16,837) (395,731) (59,983) (5,505) (66,281)
Death benefits (3,279) (10,868) (1,498) (1,999) (11,787) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year 3,739,368 1,249,006 1,030,438 2,652,684 1,068,232 - 112,267
===================================================================================================================================
* Includes transfer activity from (to) other subaccounts and transfers from (to) IDS Life's fixed account.
**For the period Jan. 1, 1995 to Nov. 15, 1995, date of maturity of securities in the 1995 Trust.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
IDS Life Variable Account for Smith Barney
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization
IDS Life Variable Account for Smith Barney (the Variable Account) was
established on April 23, 1986 as a segregated asset account of IDS Life
Insurance Company (IDS Life) under Minnesota law and is registered as a single
unit investment trust under the Investment Company Act of 1940. Operations of
the Variable Account commenced on Oct. 3, 1986.
The Variable Account is comprised of various subaccounts. Prior to Nov. 15,
1995, the date of maturity of securities in the 1995 Trust, the Variable Account
was comprised of seven subaccounts. 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. Policy owners
allocate their premium payment to one or more of the six subaccounts. Such funds
are then invested in shares of five portfolios of IDS Life Series Fund, Inc.
(the Mutual Fund) or in units of one Trust of Smith Barney Inc. Stripped ("Zero
Coupon") U.S. Treasury Securities Fund, Series A (the Trust).
The Mutual Fund, which commenced operations Jan. 20, 1986, is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. Funds allocated to Subaccount SAP are invested in the shares
of the Equity Portfolio; Subaccount SMM invests in the shares of the Money
Market Portfolio; Subaccount SHI invests in the shares of the Income Portfolio;
Subaccount STR invests in the shares of the Managed Portfolio; and Subaccount
SGO invests in the shares of the Government Securities Portfolio. The Trust,
which commenced operations Aug. 4, 1986, is registered under the Investment
Company Act of 1940 as a unit investment trust. Funds allocated to the 2004
subaccount (S04) invest in units of the 2004 Trust, and the 1995 subaccount
(S95) were invested in units of the 1995 Trust. The 1995 Trust matured on Nov.
15, 1995 and is no longer available for investment.
IDS Life acts as the investment manager and American Express Financial
Corporation acts as the investment advisor of the IDS Life Series Fund, Inc. IDS
Life serves as the issuer of the contract investing in the Variable Account.
Smith Barney Inc. serves as sponsor for the Trust.
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies
Investments in Mutual Funds
Investments in shares of the mutual fund portfolios are stated at market value
which is the net asset value per share as determined by the respective
portfolios. 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 portfolios are
reinvested in additional shares of the portfolios and 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 portfolios'
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.
<PAGE>
IDS Life Variable Account for Smith Barney
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
Unrealized appreciation or depreciation of investments in the accompanying
financial statements represents the subaccounts' 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
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 equal (except as explained below), on an
annual basis, to 0.5 percent of the daily net asset value of the Variable
Account. 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. Although IDS Life does not expect to charge more than the
rate mentioned above, its charge for providing life insurance protection could
be greater. If, at any time, IDS Life assesses a charge higher than 0.5 percent
for a policy, it will waive any surrender charges which may exist on that
policy. IDS Life guarantees that its charge will never be greater than an amount
based upon the 1958 Commissioners' Standard Ordinary Mortality Table.
- --------------------------------------------------------------------------------
4. Mortality and Expense Risk Charge
IDS Life makes contractual assurances to the Variable Account that possible
future adverse changes in administrative expense 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 0.6 percent 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 0.4 percent 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 will be 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.
<PAGE>
IDS Life Variable Account for Smith Barney
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Issue and Administrative Expense Charge
IDS Life deducts a charge to compensate it for expenses it incurs in
administering the policy, such as the costs of underwriting the policy,
conducting any medical examinations, establishing and maintaining records, and
providing reports to policy owners. This charge is deducted daily and is
equivalent, on an annual basis, to 0.4 percent of the daily net asset value of
the Variable Account during the first 10 years of the policy, and to 0.3 percent
thereafter. This charge was reduced to 0.3 percent for all policy owners in
1997. There is not necessarily a relationship between the amount of the charge
imposed on a particular policy and the amount of administrative expenses that
may be attributable to that policy.
- --------------------------------------------------------------------------------
7. Premium Tax Charge
To cover the premium taxes assessed by the various states and to compensate IDS
Life for the average premium tax expense it incurs when issuing the policy, IDS
Life deducts a charge equivalent, on an annual basis, to 0.2 percent of the
daily net asset value of the Variable Account during the first 10 policy years,
and 0 percent thereafter. This charge was reduced to 0 percent for all policy
owners in 1997.
- --------------------------------------------------------------------------------
8. Distribution Expense Charge
IDS Life incurs certain sales and other distribution expenses at the time the
policies are issued. This charge is equal, on an annual basis, to 0.3 percent of
the daily average net asset value of the Variable Account for the first 10
policy years and 0 percent thereafter. This charge was reduced to 0 percent for
all policy owners in 1997. IDS Life anticipates that this charge, together with
any applicable surrender charge, will cover the expected costs of distributing
the policies. In no event will the sum of the surrender charge deducted on
surrender and cumulative distribution expense charges previously deducted exceed
9 percent of the single premium paid.
- --------------------------------------------------------------------------------
9. Transaction Charge
IDS Life makes a daily charge against the assets of each 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 percent 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 percent 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. This charge also varies directly with the size
of the account value.
<PAGE>
IDS Life Variable Account for Smith Barney
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
10. 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. Further, IDS Life guarantees that the total cumulative distribution
expense charges and the surrender charge will never exceed 9 percent of the
single premium. Charges by IDS Life for surrenders are not identified on an
individual segregated asset account basis. Charges for all segregated asset
accounts amounted to $14,502,145 in 1997, $11,956,753 in 1996 and $10,125,762 in
1995. 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.
- --------------------------------------------------------------------------------
11. Investment Transaction
The subaccounts' purchases of portfolio shares or trust units, including
reinvestment of dividend distributions, were as follows:
Year Ended Dec. 31,
- --------------------------------------------------------------------------------
Subaccount Investment 1997 1996 1995
================================================================================
SAP Equity Portfolio $2,150,762 $2,920,271 $ 717,367
SMM Money Market Portfolio 1,004,752 885,621 1,487,172
SHI Income Portfolio 147,744 437,164 181,311
STR Managed Portfolio 954,707 470,506 438,831
SGO Government Securities Portfolio 253,124 72,982 316,179
S04 2004 Trust 7,115 502,585 67,928
- --------------------------------------------------------------------------------
Combined Variable Account $4,518,204 $5,289,129 $3,208,788
================================================================================
- --------------------------------------------------------------------------------
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 the Variable Account.
The Variable Account has no computer systems of its own but is dependent upon
the systems maintained by 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 goal
is to complete internal remediation and testing of each system by the end of
1998 and to continue compliance efforts through 1999.
The Year 2000 readiness of unaffiliated investment managers and other third
parties whose system failures could have an impact on the Variable Account's
operations is currently being evaluated. The potential materiality of any such
impact is not known at this time.
<PAGE>
IDS Life Variable Account for Smith Barney
<TABLE>
<CAPTION>
Condensed Financial Information (Unaudited)
The following table gives per-unit information about the financial history of
each variable subaccount.
Year Ended Dec. 31,
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
===============================================================================================================================
Subaccount SAP (Investing in shares of Equity Portfolio)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value at beginning of period $3.87 $3.30 $2.44 $2.43 $2.20 $2.14 $1.32 $1.35 $1.05 $0.97
Accumulation unit value at end of period $4.59 $3.87 $3.30 $2.44 $2.43 $2.20 $2.14 $1.32 $1.35 $1.05
Number of accumulation units outstanding
at end of period (000 omitted) 3,193 3,372 3,739 4,143 4,254 4,592 4,902 5,464 5,590 6,111
===============================================================================================================================
Subaccount SMM (Investing in shares of
Money Market Portfolio)
Accumulation unit value at beginning of period $1.32 $1.29 $1.25 $1.24 $1.24 $1.23 $1.18 $1.13 $1.08 $1.04
Accumulation unit value at end of period $1.37 $1.32 $1.29 $1.25 $1.24 $1.24 $1.23 $1.18 $1.13 $1.08
Number of accumulation units outstanding
at end of period (000 omitted) 653 1,055 1,249 787 982 1,452 1,822 2,038 2,005 1,603
===============================================================================================================================
Subaccount SHI (Investing in shares of Income Portfolio)
Accumulation unit value at beginning of period $1.39 $1.38 $1.16 $1.24 $1.11 $1.04 $0.92 $1.13 $1.18 $1.06
Accumulation unit value at end of period $1.47 $1.39 $1.38 $1.16 $1.24 $1.11 $1.04 $0.92 $1.13 $1.18
Number of accumulation units outstanding
at end of period (000 omitted) 995 1,021 1,030 1,064 1,144 901 947 1,310 2,331 3,401
===============================================================================================================================
Subaccount STR (Investing in shares of Managed Portfolio)
Accumulation unit value at beginning of period $2.57 $2.30 $1.98 $2.01 $1.72 $1.59 $1.23 $1.25 $1.09 $0.95
Accumulation unit value at end of period $2.97 $2.57 $2.30 $1.98 $2.01 $1.72 $1.59 $1.23 $1.25 $1.09
Number of accumulation units outstanding
at end of period (000 omitted) 2,180 2,287 2,653 3,145 3,397 3,515 3,784 4,173 4,388 4,789
===============================================================================================================================
Subaccount SGO (Investing in shares of Government Securities Portfolio)
Accumulation unit value at beginning of period $1.61 $1.63 $1.41 $1.52 $1.39 $1.33 $1.17 $1.12 $1.04 $1.00
Accumulation unit value at end of period $1.72 $1.61 $1.63 $1.41 $1.52 $1.39 $1.33 $1.17 $1.12 $1.04
Number of accumulation units outstanding
at end of period (000 omitted) 806 991 1,068 995 1,264 1,486 1,724 1,548 1,598 1,672
===============================================================================================================================
Subaccount S951 (Investing in shares of 1995 Trust)
Accumulation unit value at beginning of period -- -- $1.43 $1.44 $1.39 $1.32 $1.17 $1.09 $0.97 $0.92
Accumulation unit value at end of period -- -- -- $1.43 $1.44 $1.39 $1.32 $1.17 $1.09 $0.97
Number of accumulation units outstanding
at end of period (000 omitted) -- -- -- 545 660 313 585 811 499 467
===============================================================================================================================
Subaccount S04 (Investing in shares of 2004 Trust)
Accumulation unit value at beginning of period $1.90 $1.98 $1.55 $1.74 $1.47 $1.38 $1.17 $1.16 $0.96 $0.86
Accumulation unit value at end of period $2.09 $1.90 $1.98 $1.55 $1.74 $1.47 $1.38 $1.17 $1.16 $0.96
Number of accumulation units outstanding
at end of period (000 omitted) 88 96 112 140 139 280 261 605 636 464
===============================================================================================================================
1 The 1995 Trust matured on Nov. 15, 1995.
</TABLE>
<PAGE>
<PAGE>
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life
Insurance Company (a wholly owned subsidiary of American Express Financial
Corporation) as of December 31, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
February 5, 1998
<PAGE>
IDS Life Financial Information
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
Dec. 31, Dec. 31,
ASSETS 1997 1996
(thousands)
Investments:
Fixed maturities:
Held to maturity, at amortized cost (Fair value:
1997, $9,743,410; 1996, $10,521,650) $9,315,450 $10,236,379
Available for sale, at fair value (Amortized cost:
1997, $12,515,030; 199, $11,008,622) 12,876,694 11,146,845
Mortgage loans on real estate 3,618,647 3,493,364
Policy loans 498,874 459,902
Other investments 318,591 251,465
Total investments 26,628,256 25,587,955
Cash and cash equivalents 19,686 224,603
Amounts recoverable from reinsurers 205,716 157,722
Amounts due from brokers 8,400 11,047
Other accounts receivable 37,895 44,089
Accrued investment income 357,390 343,313
Deferred policy acquisition costs 2,479,577 2,330,805
Deferred income taxes, net -- 33,923
Other assets 22,700 37,364
Separate account assets 23,214,504 18,535,160
Total assets $52,974,124 $47,305,981
========= =========
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
Dec. 31, Dec. 31
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
(thousands)
Liabilities:
Future policy benefits:
Fixed annuities $22,009,747 $21,838,008
Universal life-type insurance 3,280,489 3,177,149
Traditional life insurance 213,676 209,685
Disability income and long-term care insurance 533,124 424,200
Policy claims and other policyholders' funds 68,345 83,634
Deferred income taxes, net 61,582 --
Amounts due to brokers 381,458 261,987
Other liabilities 345,383 332,078
Separate account liabilities 23,214,504 18,535,160
Total liabilities 50,108,308 44,861,901
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 290,847 283,615
Net unrealized gain on investments 226,359 86,102
Retained earnings 2,345,610 2,071,363
Total stockholder's equity 2,865,816 2,444,080
Total liabilities and stockholder's equity $52,974,124 $47,305,981
========= =========
See accompanying notes.
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended Dec. 31,
1997 1996 1995
(thousands)
<S> <C> <C> <C>
Revenues:
Premiums:
Traditional life insurance $ 52,473 $ 51,403 $ 50,193
Disability income and long-term care insurance 154,021 131,518 111,337
Total premiums 206,494 182,921 161,530
Policyholder and contractholder charges 341,726 302,999 256,454
Management and other fees 340,892 271,342 215,581
Net investment income 1,988,389 1,965,362 1,907,309
Net realized gain (loss) on investments 860 (159) (4,898)
Total revenues 2,878,361 2,722,465 2,535,976
Benefits and expenses:
Death and other benefits:
Traditional life insurance 28,951 26,919 29,528
Universal life-type insurance
and investment contracts 92,814 85,017 71,691
Disability income and
long-term care insurance 22,333 19,185 16,259
Increase (decrease) in liabilities for
future policy benefits:
Traditional life insurance 3,946 1,859 (1,315)
Disability income and
long-term care insurance 63,631 57,230 51,279
Interest credited on universal life-type
insurance and investment contracts 1,386,448 1,370,468 1,315,989
Amortization of deferred policy acquisition costs 322,731 278,605 280,121
Other insurance and operating expenses 276,596 261,468 211,642
Total benefits and expenses 2,197,450 2,100,751 1,975,194
Income before income taxes 680,911 621,714 560,782
Income taxes 206,664 207,138 195,842
Net income $ 474,247 $ 414,576 $ 364,940
======== ======== =======
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended Dec. 31, 1997
(thousands)
<TABLE>
<CAPTION>
Additional Net Unrealized
Capital Paid-In Gain (Loss) on Retained
Stock Capital on Investments Earnings Total
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1994 3,000 222,000 (275,708) 1,639,399 1,588,691
Net income -- -- -- 364,940 364,940
Change in net unrealized
gain (loss) on investments -- -- 505,837 -- 505,837
Capital contribution from parent -- 56,814 -- -- 56,814
Loss on reinsurance transaction
with affiliate -- -- -- (4,574) (4,574)
Cash dividends -- -- -- (180,000) (180,000)
Balance, Dec. 31, 1995 3,000 278,814 230,129 1,819,765 2,331,708
Net income -- -- -- 414,576 414,576
Change in net unrealized
gain (loss) on investments -- -- (144,027) -- (144,027)
Capital contribution from parent -- 4,801 -- -- 4,801
Other changes -- -- -- 2,022 2,022
Cash dividends -- -- -- (165,000) (165,000)
Balance, Dec. 31, 1996 $3,000 $283,615 $ 86,102 $2,071,363 $2,444,080
Net income -- -- -- 474,247 474,247
Change in net unrealized
gain (loss) on investments -- -- 140,257 -- 140,257
Capital contribution from parent -- 7,232 -- -- 7,232
Cash dividends -- -- -- (200,000) (200,000)
Balance, Dec. 31, 1997 $3,000 $290,847 $226,359 $2,345,610 $2,865,816
===== ======= ======= ========= ========
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended Dec. 31,
1997 1996 1995
(thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 474,247 $ 414,576 $ 364,940
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Policy loan issuance, excluding universal
life-type insurance (54,665) (49,314) (46,011)
Policy loan repayment, excluding universal
life-type insurance 46,015 41,179 36,416
Change in amounts recoverable from reinsurers (47,994) (43,335) (34,083)
Change in other accounts receivable 6,194 (4,981) 12,231
Change in accrued investment income (14,077) 4,695 (30,498)
Change in deferred policy acquisition
costs, net (156,486) (294,755) (196,963)
Change in liabilities for future policy
benefits for traditional life,
disability income and
long-term care insurance 112,915 97,479 85,575
Change in policy claims and other
policyholders' funds (15,289) 27,311 6,255
Change in deferred income tax provision (benefit) 19,982 (65,609) (33,810)
Change in other liabilities 13,305 46,724 (6,548)
(Accretion of discount)
amortization of premium, net (5,649) (23,032) (22,528)
Net realized (gain) loss on investments (860) 159 4,898
Policyholder and contractholder
charges, non-cash (160,885) (154,286) (140,506)
Other, net 7,161 (10,816) 3,849
Net cash provided by (used in) operating
activities $ 223,914 $ (14,005) $ 3,217
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Years ended Dec. 31,
1997 1996 1995
(thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases $ (1,996) $ (43,751) $ (1,007,208)
Maturities, sinking fund payments and calls 686,503 759,248 538,219
Sales 236,761 279,506 332,154
Fixed maturities available for sale:
Purchases (3,160,133) (2,299,198) (2,452,181)
Maturities, sinking fund payments and calls 1,206,213 1,270,240 861,545
Sales 457,585 238,905 136,825
Other investments, excluding policy loans:
Purchases (524,521) (904,536) (823,131)
Sales 335,765 236,912 160,521
Change in amounts due from brokers 2,647 (11,047) 7,933
Change in amounts due to brokers 119,471 140,369 (105,119)
Net cash used in investing activities (641,705) (333,352) (2,350,442)
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 2,785,758 3,567,586 4,189,525
Surrenders and death benefits (3,736,242) (4,250,294) (3,141,404)
Interest credited to account balances 1,386,448 1,370,468 1,315,989
Universal life-type insurance policy loans:
Issuance (84,835) (86,501) (84,700)
Repayment 54,513 58,753 52,188
Capital contribution from parent 7,232 4,801 --
Dividends paid (200,000) (165,000) (180,000)
Net cash provided by financing activities 212,874 499,813 2,151,598
Net (decrease) increase in cash and
cash equivalents (204,917) 152,456 (195,627)
Cash and cash equivalents at
beginning of year 224,603 72,147 267,774
Cash and cash equivalents at
end of year $ 19,686 $ 224,603 $ 72,147
======= ======== ========
See accompanying notes.
</TABLE>
<PAGE>
IDS LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
($ 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 (ACLAC), 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 stockholder's equity, net of deferred taxes.
<PAGE>
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.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
Impairment of mortgage loans is measured as the excess of the loan's
recorded investment over its present value of expected principal and
interest payments discounted at the loan's effective interest rate, or
the fair value of collateral. The amount of the impairment is recorded
in a reserve for mortgage loan losses. The reserve for mortgage loans
losses is maintained at a level that management believes is adequate to
absorb estimated losses in the portfolio. The level of the reserve
account is determined based on several factors, including historical
experience, expected future principal and interest payments, estimated
collateral values, and current and anticipated economic and political
conditions. Management regularly evaluates the adequacy of the reserve
for mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for
which interest payments are delinquent more than three months. Based
on management's 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.
During 1997, 1996 and 1995, the Company purchased and wrote index
options to protect against significant declines in fee income as a
result of a decrease in the market value of its managed assets. These
options were marked-to-market through the income statement.
During 1997, the Company purchased and wrote index options to hedge
1998 management fee and other income from separate accounts and the
underlying mutual funds. These index options are carried at market
value and are included in other investments. Gains or losses on these
instruments are deferred and recognized in management and other fees in
the same period as the hedged fee 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.
<PAGE>
Supplementary information to the consolidated statements of cash flows
for the years ended December 31 is summarized as
follows:
1997 1996 1995
---- ---- ----
Cash paid during the year for:
Income taxes $174,472 $317,283 $191,011
Interest on borrowings 8,213 4,119 5,524
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over
the lives of the contracts, using primarily the interest method.
Profits represent the excess of investment income earned from
investment of contract considerations over interest credited to
contract owners and other expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. 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 and issue and administrative fees. These charges
also include the minimum death benefit guarantee fees received from the
variable life insurance separate accounts. Management and other fees
include investment management fees and mortality and expense risk fees
received from the variable annuity and variable life insurance separate
accounts and underlying mutual funds.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation,
policy issue costs, underwriting and certain sales expenses, have been
deferred on insurance and annuity contracts.The deferred acquisition costs
for most single premium deferred annuities and installment annuities are
amortized in relation to accumulation values and surrender charge revenue.
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.
<PAGE>
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.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
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 10% 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 a national survey. 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 and waiver of premium benefits plus $50 of
accidental death benefits. The maximum amount of disability income
risk retained by the Company on any one life is $6 of monthly benefit
for benefit periods longer than three years. The excesses are
reinsured with other life insurance companies on a yearly renewable
term basis. Graded premium whole life and long-term care policies are
primarily reinsured on a coinsurance basis.
Federal income taxes
The Company's taxable income is included in the consolidated federal
income tax return of American Express Company. The Company provides
for income taxes on a separate return basis, except that, under an
agreement between 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, 1997 and 1996 are $12,061
and $33,358, respectively, receivable from American Express Financial
Corporation for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for
the exclusive benefit of the variable annuity and variable life
insurance contract owners. The Company 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.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------
The Company makes contractual mortality assurances to the variable
annuity contract owners that the net assets of the separate accounts
will not be affected by future variations in the actual life expectancy
experience of the annuitants and the beneficiaries from the mortality
assumptions implicit in the annuity contracts. The Company makes
periodic fund transfers to, or withdrawals from, the separate accounts
for such actuarial adjustments for variable annuities that are in the
benefit payment period. For variable life insurance, the Company
guarantees that the rates at which insurance charges and administrative
fees are deducted from contract funds will not exceed contractual
maximums. The Company also guarantees that the death benefit will
continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
Reclassification
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 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, 1997 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 $41,932 $ 2,950 $ -- $ 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 $445,194 $17,233 $9,743,410
========= ======= ====== =========
</TABLE>
<PAGE>
<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>
<PAGE>
2. Investments (continued)
-----------
The amortized cost, gross unrealized gains and losses and fair values
of investments in fixed maturities and equity securities at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government agency obligations $ 44,002 $ 933 $ 1,276 $ 43,659
State and municipal obligations 9,685 412 -- 10,097
Corporate bonds and obligations 8,057,997 356,687 47,639 8,367,045
Mortgage-backed securities 2,124,695 21,577 45,423 2,100,849
---------- ------- ------ ----------
$10,236,379 $379,609 $94,338 $10,521,650
========== ======= ====== ==========
</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 $ 77,944 $ 2,607 $ 96 $ 80,455
State and municipal obligations 11,032 1,336 -- 12,368
Corporate bonds and obligations 3,701,604 122,559 24,788 3,799,375
Mortgage-backed securities 7,218,042 104,808 68,203 7,254,647
--------- ------- ------ ---------
Total fixed maturities 11,008,622 231,310 93,087 11,146,845
Equity securities 3,000 308 -- 3,308
---------- ------- ------ ----------
$11,011,622 $231,618 $93,087 $11,150,153
========== ======= ====== ==========
</TABLE>
The amortized cost and fair value of investments in fixed maturities at
December 31, 1997 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.
<PAGE>
Amortized Fair
Held to maturity Cost Value
---------------- --------- --------
Due in one year or less $ 356,597 $360,956
Due from one to five years 1,536,239 1,619,875
Due from five to ten years 4,337,547 4,577,552
Due in more than ten years 1,101,879 1,183,774
Mortgage-backed securities 1,983,188 2,001,253
--------- ---------
$9,315,450 $9,743,410
========= =========
Amortized Fair
Available for sale Cost Value
--------- -----
Due in one year or less $ 162,663 $ 164,012
Due from one to five years 633,339 679,561
Due from five to ten years 2,418,162 2,517,098
Due in more than ten years 2,170,301 2,231,859
Mortgage-backed securities 7,130,565 7,284,164
---------- ----------
$12,515,030 $12,876,694
========== ==========
<PAGE>
2. Investments (continued)
-----------
During the years ended December 31, 1997, 1996 and 1995, fixed
maturities classified as held to maturity were sold with amortized cost
of $229,848, $277,527 and $333,508, 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 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. Fixed maturities available for sale
were sold during 1995 with proceeds of $136,825 and gross realized
gains and losses of $nil and $5,781, respectively.
At December 31, 1997, bonds carried at $14,351 were on deposit with
various states as required by law.
At December 31, 1997, 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 $2.7 billion which are rated by American
Express Financial Corporation internal analysts using criteria similar
to Moody's and S&P. A summary of investments in fixed maturities, at
amortized cost, by rating on December 31 is as follows:
Rating 1997 1996
--------- --------- ---------
Aaa/AAA $ 9,195,619 $ 9,460,134
Aaa/AA -- 2,870
Aa/AA 232,451 241,914
Aa/A 246,792 192,631
A/A 2,787,936 2,949,895
A/BBB 1,200,345 1,034,661
Baa/BBB 5,226,616 4,531,515
Baa/BB 475,084 768,285
Below investment grade 2,465,637 2,063,096
--------- ---------
$21,830,480 $21,245,001
========== ==========
At December 31, 1997, 95 percent of the securities rated Aaa/AAA are
GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any
other issuer are greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1997, approximately 14 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:
<PAGE>
December 31, 1997 December 31, 1996
------------------------ -----------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
------------- ---------- ------------ ---------- -----------
East North Central $ 748,372 $ 32,462 $ 777,960 $ 19,358
West North Central 456,934 14,340 389,285 29,620
South Atlantic 922,172 14,619 891,852 35,007
Middle Atlantic 545,601 15,507 553,869 17,959
New England 316,250 2,136 310,177 14,042
Pacific 184,917 3,204 190,770 4,997
West South Central 125,227 -- 105,173 11,246
East South Central 60,274 -- 75,176 --
Mountain 297,545 28,717 236,597 11,401
--------- ------- --------- -------
3,657,292 110,985 3,530,859 143,630
Less allowance for
losses 38,645 -- 37,495 --
--------- ------- --------- -------
$3,618,647 $110,985 $3,493,364 $143,630
========= ======= ========= =======
<PAGE>
2. Investments (continued)
-----------
December 31, 1997 December 31, 1996
------------------------ -------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
--------------- ---------- ----------- ---------- -----------
Department/retail
stores $1,189,203 $ 27,314 $1,154,179 $ 68,032
Apartments 1,089,127 16,576 1,119,352 23,246
Office buildings 716,729 34,546 611,395 27,653
Industrial buildings 295,889 21,200 296,944 6,716
Hotels/motels 101,052 -- 97,870 6,257
Medical buildings 99,979 9,748 67,178 8,289
Nursing/retirement
homes 72,359 -- 88,226 1,877
Mixed Use 71,007 -- 73,120 --
Other 21,947 1,601 22,595 1,560
--------- ------- --------- ------
3,657,292 110,985 3,530,859 143,630
Less allowance for
losses 38,645 -- 37,495 --
--------- ------- --------- -------
$3,618,647 $110,985 $3,493,364 $143,630
========= ======= ========= =======
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. The fair value of the mortgage loans is determined by a
discounted cash flow analysis using mortgage interest rates currently
offered for mortgages of similar maturities. Commitments to purchase
mortgages are made in the ordinary course of business. The fair value
of the mortgage commitments is $nil.
At December 31, 1997 and 1996, the Company's recorded investment in
impaired loans was $45,714 and $79,441, respectively, with allowances
of $9,812 and $16,162, respectively. During 1997 and 1996, the average
recorded investment in impaired loans was $61,870 and $74,338,
respectively.
The Company recognized $2,981, $4,889 and $5,014 of interest income
related to impaired loans for the years ended December 31, 1997, 1996
and 1995 respectively.
<PAGE>
The following table presents changes in the allowance for investment
losses related to all loans:
1997 1996 1995
------ ------ ------
Balance, January 1 $37,495 $37,340 $35,252
Provision for investment losses 8,801 10,005 15,900
Loan payoffs (3,851) (4,700) (11,900)
Foreclosures (3,800) (5,150) (1,350)
Other -- -- (562)
------ ------ -------
Balance, December 31 $38,645 $37,495 $37,340
====== ====== ======
At December 31, 1997, the Company had commitments to purchase
investments other than mortgage loans for $234,485. Commitments to
purchase investments are made in the ordinary course of business. The
fair value of these commitments is $nil.
<PAGE>
2. Investments (continued)
-----------
Net investment income for the years ended December 31 is summarized as
follows:
1997 1996 1995
--------- --------- ---------
Interest on fixed maturities $1,692,481 $1,666,929 $1,656,136
Interest on mortgage loans 305,742 283,830 232,827
Other investment income 25,089 43,283 35,936
Interest on cash equivalents 5,914 5,754 5,363
--------- --------- ---------
2,029,226 1,999,796 1,930,262
Less investment expenses 40,837 34,434 22,953
--------- --------- ---------
$1,988,389 $1,965,362 $1,907,309
========= ========= =========
Net realized gain (loss) on investments for the years ended December 31
is summarized as follows:
1997 1996 1995
------ ----- -----
Fixed maturities $ 16,115 $ 8,736 $ 9,973
Mortgage loans (6,424) (8,745) (13,259)
Other investments (8,831) (150) (1,612)
------- ----- -------
$ 860 $ (159) $ (4,898)
======= ====== ======
Changes in net unrealized appreciation (depreciation) of investments
for the years ended December 31 are summarized as follows:
1997 1996 1995
------- ------- -------
Fixed maturities available
for sale $223,441 $(231,853) $811,649
Equity securities 53 (52) 3,118
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 consists of the following:
1997 1996 1995
Federal income taxes:
Current $176,879 $260,357 $218,040
Deferred 19,982 (65,609) (33,810)
------- -------- -------
196,861 194,748 184,230
State income taxes-current 9,803 12,390 11,612
------- ------- -------
Income tax expense $206,664 $207,138 $195,842
======= ======= =======
<PAGE>
3. Income taxes (continued)
------------
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory rate are attributable to:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ---------------
Provision Rate Provision Rate Provision Rate
--------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal income
taxes based on
the statutory rate $238,319 35.0% $217,600 35.0% $196,274 35.0%
Increases (decreases)
are attributable to:
Tax-excluded interest
and dividend income (10,294) (1.5) (9,636) (1.5) (8,524) (1.5)
State Taxes, net of federal
benefit 6,372 0.9 8,053 1.3 7,548 1.3
Low income housing
credits (20,705) (3.0) (5,090) (0.8) (861) (0.2)
Other, net (7,028) (1.0) (3,789) (0.7) 1,405 0.3
------- ----- ------- ---- ------- ----
Federal income taxes $206,664 30.4% $207,138 33.3% $195,842 34.9%
======= ==== ======= ==== ======= ====
</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, 1997, the Company had
a policyholders' surplus account balance of $20,114. The
policyholders' surplus account is only taxable if dividends to the
stockholder exceed the stockholder's surplus account or if the Company
is liquidated. Deferred income taxes of $7,040 have not been
established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
1997 1996
---- ----
Deferred tax assets:
Policy reserves $748,204 $724,412
Life insurance guarantee
fund assessment reserve 20,101 29,854
Other 9,589 2,763
------- -------
Total deferred tax assets 777,894 757,029
------- -------
<PAGE>
Deferred tax
liabilities:
Deferred policy acquisition costs 700,032 665,685
Unrealized gain on investments 121,885 48,486
Investments, other 17,559 8,935
------- -------
Total deferred tax liabilities 839,476 723,106
------- -------
Net deferred tax (liabilities) assets $(61,582) $ 33,923
====== ======
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.
<PAGE>
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 $1,468,677 as of
December 31, 1997 and $1,261,592 as of December 31, 1996 (see Note 3
with respect to the income tax effect of certain distributions). In
addition, any dividend distributions in 1998 in excess of approximately
$331,480 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:
1997 1996 1995
---------- ---------- ----------
Statutory net income $ 379,615 $ 365,585 $ 326,799
Statutory capital and surplus 1,765,290 1,565,082 1,398,649
surplus
5. Related party transactions
--------------------------
The Company loans funds to American Express Financial Corporation under
a collateral loan agreement. The balance of the loan was $nil and
$11,800 at December 31, 1997 and 1996, respectively. This loan can be
increased to a maximum of $75,000 and pays interest at a rate equal to
the preceding month's effective new money rate for the Company's
permanent investments. Interest income on related party loans totaled
$103, $780 and $1,371 in 1997, 1996 and 1995, respectively.
The Company purchased a five year secured note from an affiliated
company which was redeemed in 1996. The interest rate on the note was
8.42 percent. Interest income on the above note totaled $1,637 and
$1,937 in 1996 and 1995, 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 $201, $174
and $155 in 1997, 1996 and 1995, 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 1997,
1996 and 1995 were $1,245, $990 and $815, respectively.
<PAGE>
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. Accordingly, costs of such benefits to
the Company are included in employee compensation and benefits and
cannot be identified on a separate company basis.
<PAGE>
5. Related party transactions (continued)
--------------------------
Charges by AEFC for use of joint facilities, marketing services and
other services aggregated $414,155, $397,362 and $377,139 for 1997,
1996 and 1995, respectively. Certain of these costs are included in
deferred policy acquisition costs. In addition, the Company rents its
home office space from AEFC on an annual renewable basis.
6. Commitments and contingencies
-----------------------------
At December 31, 1997 and 1996, traditional life insurance and universal
life-type insurance in force aggregated $74,730,720 and $67,274,354,
respectively, of which $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 $60,495, $48,250 and $39,399 and reinsurance recovered from
reinsurers amounted to $19,042, $15,612, and $14,088 for the years
ended December 31, 1997, 1996 and 1995, 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 and its subsidiaries do business
involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents, and other matters. In December 1996, an
action of this type was brought against the Company and its parent,
AEFC. A second action was filed in March, 1997. The plaintiffs
purport to represent a class consisting of all persons who replaced
existing Company policies with new Company policies from and after
January 1, 1985. The complaint puts at issue various alleged sales
practices and misrepresentations, alleged breaches of fiduciary duties
and alleged violations of consumer fraud statutes. Plaintiffs seek
damages in an unspecified amount and seek to establish a claims
resolution facility for the determination of individual issues. The
Company and its parent believe they have meritorious defenses to the
claims raised in the lawsuit. The outcome of any litigation cannot be
predicted with certainty. In the opinion of management, however, the
ultimate resolution of the above lawsuit and others filed against the
Company should not have a material adverse effect on the Company's
consolidated financial position.
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 an available line of credit with its parent aggregating
$100,000. The rate for the line of credit is the parent's cost of
funds, ranging from 20 to 45 basis points over the established index.
Borrowings outstanding under this agreement were $nil at
December 31, 1997 and 1996.
<PAGE>
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.
<PAGE>
8. Derivative financial instruments (continued)
--------------------------------
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.
The Company's holdings of derivative financial instruments are as
follows:
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
----------------- -------- -------- ----- ------------
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
Put index options 221,984 11,120 11,120 11,120
Liabilities:
Call index options 221,984 (8,273) (8,273) --
Off balance sheet:
Interest rate swaps 1,267,000 -- (45,799) --
--------- ------ ------ ------
$29,371 $(22,736) $31,336
====== ====== ======
Notional Carrying Fair Total Credit
December 31, 1996 Amount Amount Value Exposure
Assets:
Interest rate caps $4,000,000 $ 16,227 $ 7,439 $ 7,439
Interest rate floors 1,000,000 2,041 4,341 4,341
Off balance sheet:
Interest rate swaps 1,000,000 -- (24,715) --
--------- ------ -------- ------
$18,268 $(12,935) $11,780
====== ====== ======
<PAGE>
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps and
floors expire on various dates from 1998 to 2003. The interest rate
swaps expire on various dates from 2000 to 2003. All put and call
options expire in 1998.
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.
<PAGE>
8. Derivative financial instruments (continued)
--------------------------------
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 collars (combination of puts and
calls) to hedge anticipated fee income for 1998 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, 1997, deferred gains on purchased
put index options were $11,120 and deferred losses on written call
index options were $8,273.
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>
1997 1996
------------------ ---------------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
---------------- -------- ------ ------- -----
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $9,315,450 $9,743,410 $10,236,379 $10,521,650
Available for sale 12,876,694 12,876,694 11,146,845 11,146,845
Mortgage loans on
real estate (Note 2) 3,618,647 3,808,570 3,493,364 3,606,077
Other:
Equity securities (Note 2) 3,361 3,361 3,308 3,308
Derivative financial
instruments (Note 8) 37,644 31,336 18,268 11,780
Other 82,347 85,383 63,993 66,242
Cash and
cash equivalents (Note 1) 19,686 19,686 224,603 224,603
Separate account assets
(Note 1) 23,214,504 23,214,504 18,535,160 18,535,160
<PAGE>
Financial Liabilities
Future policy benefits
for fixed annuities 20,731,052 19,882,302 20,641,986 19,721,968
Derivative financial
instruments (Note 8) (8,273) (54,072) -- (24,715)
Separate account liabilities 21,488,282 20,707,620 17,358,087 16,688,519
</TABLE>
<PAGE>
9. Fair values of financial instruments (continued)
------------------------------------
At December 31, 1997 and 1996, the carrying amount and fair value of
future policy benefits for fixed annuities exclude life
insurance-related contracts carried at $1,185,155 and $1,112,155,
respectively, and policy loans of $93,540 and $83,867, respectively.
The fair value of these benefits is based on the status of the
annuities at December 31, 1997 and 1996. 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
1997 and 1996.
At December 31, 1997 and 1996, the fair value of liabilities related to
separate accounts is estimated as the carrying amount less any
applicable surrender charges and less variable insurance contracts
carried at $1,726,222 and $1,177,073, respectively.
10. Segment information
-------------------
The Company's operations consist of two business segments; first,
individual and group life insurance, disability income and long-term
care insurance, and second, annuity products designed for individuals,
pension plans, small businesses and employer-sponsored groups. The
consolidated condensed statements of income for the years ended
December 31, 1997, 1996 and 1995 and total assets at December 31, 1997,
1996 and 1995 by segment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net investment income:
Life, disability income
and long-term care insurance $ 269,874 $ 262,998 $ 256,242
Annuities 1,718,515 1,702,364 1,651,067
--------- --------- ---------
$ 1,988,389 $ 1,965,362 $ 1,907,309
========= ========= =========
Premiums, charges and fees:
Life, disability income
and long-term care insurance $ 514,838 $ 448,389 $ 384,008
Annuities 374,274 308,873 249,557
------- ------- -------
$ 889,112 $ 757,262 $ 633,565
======= ======= =======
Income before income taxes:
Life, disability income
and long-term care insurance $ 178,717 $ 161,115 $ 125,402
Annuities 501,334 460,758 440,278
Net gain (loss) on investments 860 (159) (4,898)
------- ------- -------
$ 680,911 $ 621,714 $ 560,782
======= ======= =======
<PAGE>
Total assets:
Life, disability income
and long-term care insurance $ 8,193,796 $ 7,028,906 $ 6,195,870
Annuities 44,780,328 40,277,075 36,704,208
---------- ---------- ----------
$52,974,124 $47,305,981 $42,900,078
========== ========== ==========
</TABLE>
<PAGE>
Allocations of net investment income and certain general expenses are
based on various assumptions and estimates.
Assets are not individually identifiable by segment and have been
allocated principally based on the amount of future policy benefits by
segment.
Capital expenditures and depreciation expense are not material, and
consequently, are not reported.
11. Year 2000 Issue (unaudited)
---------------
The Year 2000 issue is the result of computer programs having been
written using two digits rather than four to define a year. Any
programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than 2000. This could result in the failure of
major systems or miscalculations, which could have a material impact on
the operations of the Company. All of the systems used by the Company are
maintained by AEFC and are utilized by multiple subsidiaries and
affiliates of AEFC. The Company's business is heavily dependent
upon AEFC's computer systems and has significant interactions with
systems of third parties.
A comprehensive review of AEFC's computer systems and business
processes, including those specific to the Company, 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 goal is to complete internal remediation and testing of each
system by the end of 1998 and to continue compliance efforts through
1999.
AEFC is evaluating the Year 2000 readiness of advisors and other third
parties whose system failures could have an impact on the Company's
operations. The potential materiality of any such impact is not known at
this time.
<PAGE>
(Back cover)
Smith Barney LifeVestSM
certain investments are spnsored by:
Smith Barney and subsidiaries
Smith Barney LifeVestSM
is underwritten, issued, managed and serviced by:
IDS Life Insurance Company
_______________________________________________________________________________
