<PAGE>
For Use In New York Only
- --------------------------------------------------------------------------------
Smith Barney LifeVestSM
Annual Report for:
o Single Premium Variable Life Insurance
Policy issued by IDS Life Insurance
Company of New York
Prospectus for:
o Smith Barney Inc. Stripped ("Zero Coupon")
U.S. Treasury Securities Fund, Series A
<PAGE>
IDS Life of New York Account 7
Annual Financial Information
- --------------------------------------------------------------------------------
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company of New York
We have audited the accompanying individual and combined statements of net
assets of the segregated asset subaccounts of IDS Life of New York Account 7 for
Single Premium Variable Life Insurance (comprised of subaccounts NAP, NMM, NHI,
NTR, NGO and N04) 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 N95 subaccount which is for the period January 1,
1995 to November 15, 1995 (date of maturity of securities in the Trust). These
financial statements are the responsibility of the management of IDS Life
Insurance Company of New York. 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 of New York Account 7 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 of New York Account 7
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Net Assets Dec. 31, 1997
Segregated Asset Subaccount Combined
- ------------------------------------------------------------------------------------------------------------- Variable
Assets NAP NMM NHI NTR NGO N04 Account
===========================================================================================================================
Investments in shares of mutual fund
portfolios and units of the trust, at
market value: IDS Life Series Fund
Equity Portfolio
33,513 shares at net asset
value of
$29.98 per share
<S> <C> <C> <C> <C> <C> <C> <C>
(cost $507,309) $1,004,848 $ - $ - $ - $ - $ - $1,004,848
IDS Life Series Fund
Money Market Portfolio
95,695 shares at net asset value
of $1.00 per share
(cost $95,690) - 95,686 - - - - 95,686
IDS Life Series Fund
Income Portfolio
14,861 shares at net asset
value of $10.23 per share
(cost $148,231) - - 152,025 - - - 152,025
IDS Life Series Fund
Managed Portfolio
8,328 shares at net asset value
of $18.26 per share
(cost $117,586) - - - 152,052 - - 152,052
IDS Life Series Fund Government
Securities Portfolio
1,151 shares at
net asset value of
$10.18 per share
(cost $11,627) - - - - 11,715 - 11,715
Smith Barney Inc. Stripped
("Zero Coupon")
U. S. Treasury Securities Fund,
Series A 2004 45,028 units
at net asset value of
$0.68 per unit
(cost $13,622) - - - - - 30,573 30,573
- ---------------------------------------------------------------------------------------------------------------------------
1,004,848 95,686 152,025 152,052 11,715 30,573 1,446,899
- ---------------------------------------------------------------------------------------------------------------------------
Dividends receivable - 455 916 - 59 - 1,430
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 1,004,848 96,141 152,941 152,052 11,774 30,573 1,448,329
===========================================================================================================================
Liabilities
===========================================================================================================================
Payable to IDS Life of New York for:
Mortality and expense risk fee 3,095 156 249 420 19 17 3,956
Minimum death benefit
guarantee risk charge - - - - - 11 11
Issue and administrative
expense charge - - - - - 8 8
Mortality charge - - - - - 14 14
Transaction charge - - - - - 7 7
Payable to mutual fund portfolios and
the trust for investments purchased - 299 467 - 40 - 806
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,095 455 716 420 59 57 4,802
Net assets applicable to
Variable Life contracts $1,001,753 $95,686 $152,225 $151,632 $11,715 $30,516 $1,443,527
===========================================================================================================================
Accumulation units outstanding 223,878 70,527 104,605 52,556 6,700 12,449
===========================================================================================================================
Net asset value per
accumulation unit $ 4.48 $ 1.36 $ 1.46 $ 2.89 $ 1.75 $ 2.45
===========================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS Life of New York Account 7
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Operations Year ended Dec. 31, 1997
Segregated Asset Subaccount Combined
- -------------------------------------------------------------------------------------------------------------- Variable
Investment income NAP NMM NHI NTR NGO N04 Account
===========================================================================================================================
Dividend income from mutual
<S> <C> <C> <C> <C> <C> <C> <C>
fund portfolios and in the trust $ 38,768 $4,683 $11,034 $15,582 $1,367 $ - $ 71,434
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense
risk charge 7,486 696 950 1,177 149 237 10,695
Minimum death benefit
guarantee risk charge 3,758 346 632 586 72 158 5,552
Issue and administrative
expense charge 3,085 285 533 481 60 136 4,580
Distribution charge 784 75 175 121 17 53 1,225
Mortality charge 4,691 432 789 732 90 197 6,931
Premium tax charge 272 26 60 42 6 18 424
Transaction charge - - - - - 99 99
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 20,076 1,860 3,139 3,139 394 898 29,506
Investment income (loss) - net 18,692 2,823 7,895 12,443 973 (898) 41,928
===========================================================================================================================
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 196,635 - 41,833 19,018 11,291 13,954 282,731
Cost of investments sold 101,199 - 41,601 14,864 11,373 6,504 175,541
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 95,436 - 232 4,154 (82) 7,450 107,190
Net change in unrealized appreciation
or depreciation of investments 67,292 - 274 6,230 265 (4,302) 69,759
- ---------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 162,728 - 506 10,384 183 3,148 176,949
Net increase (decrease) in net assets
resulting from operations $181,420 $2,823 $ 8,401 $22,827 $1,156 $2,250 $218,877
===========================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS Life of New York Account 7
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Operations Year ended Dec. 31, 1996
Segregated Asset Subaccount Combined
- -------------------------------------------------------------------------------------------------------------- Variable
Investment income NAP NMM NHI NTR NGO N04 Account
===========================================================================================================================
Dividend income from mutual fund
<S> <C> <C> <C> <C> <C> <C> <C>
portfolios and in the trust $149,047 $ 7,233 $12,955 $10,422 $ 2,286 $ - $181,943
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and
expense risk fee 7,238 1,184 1,461 1,042 246 236 11,407
Minimum death benefit
guarantee risk charge 3,473 546 720 514 137 157 5,547
Issue and administrative
expense charge 3,473 546 720 514 137 157 5,547
Distribution expense charge 2,595 408 538 384 102 118 4,145
Mortality charge 4,332 681 898 641 171 197 6,920
State premium tax charge 878 138 182 130 35 39 1,402
Transaction charge - - - - - 98 98
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 21,989 3,503 4,519 3,225 828 1,002 35,066
Investment income (loss) - net 127,058 3,730 8,436 7,197 1,458 (1,002) 146,877
===========================================================================================================================
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 73,792 88,028 44,981 - 64,950 1,007 272,758
Cost of investments sold 38,652 88,031 43,851 - 65,167 296 235,997
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss)
on investments 35,140 (3) 1,130 - (217) 711 36,761
Net change in unrealized appreciation
or depreciation of investments (16,941) 2 (7,659) 8,548 (4,056) (292) (20,398)
- ---------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 18,199 (1) (6,529) 8,548 (4,273) 419 16,363
Net increase (decrease) in net assets
resulting from operations $145,257 $ 3,729 $ 1,907 $15,745 $(2,815) $ (583) $163,240
===========================================================================================================================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS Life of New York Account 7
- ----------------------------------------------------------------------------------------------------------------------------------
Statements of Operations Year ended Dec. 31, 1995
Segregated Asset Subaccount Combined
- --------------------------------------------------------------------------------------------------------------------- Variable
Investment income NAP NMM NHI NTR NGO N95* N04 Account
==================================================================================================================================
Dividend income from mutual
<S> <C> <C> <C> <C> <C> <C> <C> <C>
fund portfolios and in the trusts $ 18,104 $ 9,023 $ 18,799 $ 6,655 $ 2,513 $ - $ - $ 55,094
- ----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Mortality and expense risk charge 4,680 1,030 1,661 841 249 166 224 8,851
Minimum death benefit guarantee risk charge 3,120 687 1,107 561 166 110 150 5,901
Issue and administrative expense charge 3,120 687 1,107 561 166 110 150 5,901
Distribution expense charge 2,331 513 827 419 124 83 113 4,410
Mortality charge 3,891 856 1,381 699 207 138 188 7,360
State premium tax charge 789 174 280 142 42 28 38 1,493
Transaction charge - - - - - 69 94 163
- ----------------------------------------------------------------------------------------------------------------------------------
Total expenses 17,931 3,947 6,363 3,223 954 704 957 34,079
Investment income (loss) - net 173 5,076 12,436 3,432 1,559 (704) (957) 21,015
==================================================================================================================================
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 55,575 172,639 274,510 58,977 12,751 40,339 944 615,735
Cost of investments sold 29,800 172,648 276,207 53,762 12,482 22,694 527 568,120
- ----------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 25,775 (9) (1,697) 5,215 269 17,645 417 47,615
Net change in unrealized appreciation
or depreciation of investments 202,797 9 35,402 11,563 4,007 (15,804) 9,664 247,638
- ----------------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on investments 228,572 - 33,705 16,778 4,276 1,841 10,081 295,253
Net increase (decrease)
in net assets resulting from operations $228,745 $ 5,076 $ 46,141 $20,210 $ 5,835 $ 1,137 $ 9,124 $316,268
==================================================================================================================================
*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>
<TABLE>
<CAPTION>
IDS Life of New York Account 7
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets Year ended Dec. 31, 1997
Segregated Asset Subaccount Combined
- ------------------------------------------------------------------------------------------------------------ Variable
Operations NAP NMM NHI NTR NGO N04 Account
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss) - net $ 18,692 $ 2,823 $ 7,895 $ 12,443 $ 973 $ (898) $ 41,928
Net realized gain (loss)
on investments 95,436 - 232 4,154 (82) 7,450 107,190
Net change in unrealized appreciation
or depreciation of investments 67,292 - 274 6,230 265 (4,302) 69,759
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 181,420 2,823 8,401 22,827 1,156 2,250 218,877
===========================================================================================================================
Contract Transactions
===========================================================================================================================
Net transfers* 11,561 - (10,324) - - - 1,237
Transfers for policy loans (52,748) - 7,464 (607) - - (45,891)
Contract terminations:
Surrender benefits (61,355) - (8,339) (18,371) (11,291) (12,971) (112,327)
Death benefits (59,912) - (15,207) - - - (75,119)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from
contract transactions (162,454) 0 (26,406) (18,978) (11,291) (12,971) (232,100)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year 982,787 92,863 170,230 147,783 21,850 41,237 1,456,750
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $1,001,753 $95,686 $152,225 $151,632 $11,715 $30,516 $1,443,527
===========================================================================================================================
Accumulation Unit Activity
===========================================================================================================================
Units outstanding at
beginning of year 260,415 70,527 123,932 59,059 13,304 17,938
Net transfers* 3,094 - (7,568) - - -
Transfers for policy loans (12,562) - 5,533 (220) - -
Contract termination:
Surrender benefits (14,071) - (5,997) (6,283) (6,604) (5,489)
Death benefits (12,998) - (11,295) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year 223,878 70,527 104,605 52,556 6,700 12,449
===========================================================================================================================
*Includes transfer activity from (to) other subaccounts and transfers from (to)
IDS Life of New York's fixed account.
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
IDS Life of New York Account 7
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets Year ended Dec. 31, 1996
Segregated Asset Subaccount Combined
- ------------------------------------------------------------------------------------------------------------ Variable
Operations NAP NMM NHI NTR NGO N04 Account
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss) - net $127,058 $ 3,730 $ 8,436 $ 7,197 $ 1,458 $(1,002) $ 146,877
Net realized gain (loss)
on investments 35,140 (3) 1,130 - (217) 711 36,761
Net change in unrealized appreciation
or depreciation of investments (16,941) 2 (7,659) 8,548 (4,056) (292) (20,398)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 145,257 3,729 1,907 15,745 (2,815) (583) 163,240
===========================================================================================================================
Contract Transactions
===========================================================================================================================
Net transfers* - 64,949 (4,516) 2,267 (62,691) - 9
Transfers for policy loans (45,449) - (2,055) - - - (47,504)
Contract terminations:
Surrender benefits - (88,028) (38,409) - - - (126,437)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from
contract transactions (45,449) (23,079) (44,980) 2,267 (62,691) - (173,932)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year 882,979 112,213 213,303 129,771 87,356 41,820 1,467,442
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at end of year $982,787 $ 92,863 $170,230 $147,783 $21,850 $41,237 $1,456,750
===========================================================================================================================
Accumulation Unit Activity
===========================================================================================================================
Units outstanding
at beginning of year 274,198 87,438 157,173 58,036 52,748 17,938
Net transfers* - 50,324 (3,572) 1,023 (39,444) -
Transfers for policy loans (13,783) - (1,508) - - -
Contract termination:
Surrender benefits - (67,235) (28,161) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year 260,415 70,527 123,932 59,059 13,304 17,938
===========================================================================================================================
*Includes transfer activity from (to) other subaccounts and transfers from (to)
IDS Life of New York's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IDS Life of New York Account 7
- ---------------------------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets Year ended Dec. 31, 1995
Segregated Asset Subaccount Combined
- --------------------------------------------------------------------------------------------------------------- Variable
Operations NAP NMM NHI NTR NGO N95** N04 Account
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss) - net $ 173 $ 5,076 $ 12,436 $ 3,432 $ 1,559 $ (704) $ (957) $ 21,015
Net realized gain (loss)
on investments 25,775 (9) (1,697) 5,215 269 17,645 417 47,615
Net change in unrealized appreciation
or depreciation of investments 202,797 9 35,402 11,563 4,007 (15,804) 9,664 247,638
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 228,745 5,076 46,141 20,210 5,835 1,137 9,124 316,268
===========================================================================================================================
Contract Transactions
===========================================================================================================================
Net transfers* 54,733 (70,719) 4,086 (17,680) 65,719 (36,134) - 5
Transfers for policy loans (23,671) 9,728 21,632 (346) (192) (3,417) - 3,734
Contract terminations:
Surrender benefits (13,600) (101,920) (195,631) (22,494) (12,559) - - (346,204)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) from
contract transactions 17,462 (162,911) (169,913) (40,520) 52,968 (39,551) - (342,465)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets at beginning of year 636,772 270,048 337,075 150,081 28,553 38,414 32,696 1,493,639
Net assets at end of year $882,979 $112,213 $213,303 $129,771 $ 87,356 $ - $41,820 $1,467,442
===========================================================================================================================
Accumulation Unit Activity
===========================================================================================================================
Units outstanding at
beginning of year 267,688 216,641 293,305 78,087 19,887 24,516 17,938
Net transfers* 19,680 (55,401) 3,102 (9,314) 40,807 (22,392) -
Transfers for policy loans (8,213) 7,709 18,285 (162) (120) (2,124) -
Contract terminations:
Surrender benefits (4,957) (81,511) (157,519) (10,575) (7,826) - -
- ---------------------------------------------------------------------------------------------------------------------------
Units outstanding at end of year 274,198 87,438 157,173 58,036 52,748 - 17,938
===========================================================================================================================
* Includes transfer activity from (to) other subaccounts and transfers from
(to) IDS Life of New York'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 of New York Account 7
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Organization
IDS Life of New York Account 7 (the Variable Account) was established on Sept.
12, 1985 as a segregated asset account of IDS Life Insurance Company of New York
(IDS Life of New York) under New York law and is registered as a single unit
investment trust under the Investment Company Act of 1940. Operations of the
Variable Account commenced on April 15, 1987.
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 of New York.
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 NAP are invested in the shares
of the Equity Portfolio; Subaccount NMM invests in the shares of the Money
Market Portfolio; Subaccount NHI invests in the shares of the Income Portfolio;
Subaccount NTR invests in the shares of the Managed Portfolio; and Subaccount
NGO 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 (N04) invest in units of the 2004 Trust and the 1995 subaccount (N95)
funds 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 Insurance Company (IDS Life), parent company of IDS Life of New York,
acts as the investment manager and American Express Financial Corporation acts
as the investment advisor of the IDS Life Series Fund, Inc. IDS Life of New York
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.
<PAGE>
IDS Life of New York Account 7
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
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 of New York is taxed as a life insurance company. The Variable Account
is treated as part of IDS Life of New York for federal income tax purposes.
Under existing federal income tax law, IDS Life of New York is not subject to
income taxes with respect to any investment income of the Variable Account.
- --------------------------------------------------------------------------------
3. Mortality Charge
IDS Life of New York 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
of New York to pay this additional amount.
Although IDS Life of New York does not expect to charge more than the rate
mentioned above, its charge for providing life insurance protection could be
greater. IDS Life of New York 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 of New York makes contractual assurances to the Variable Account that
possible future adverse changes in administrative expenses and mortality
experience of the policy owners and beneficiaries will not affect the Variable
Account. The mortality and expense risk fee paid to IDS Life of New York 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 of New York 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 of New York 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 of New York Account 7
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Issue and Administrative Expense Charge
IDS Life of New York 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 state of New York and to compensate
IDS Life of New York for the average premium tax expense it incurs when issuing
the policy, IDS Life of New York deducts a charge equivalent, on an annual
basis, to 0.1 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 of New York 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 of New York 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 of New York makes a daily charge against the assets of each subaccount
investing in the Trust. This charge is intended to reimburse IDS Life of New
York for the transaction charge paid directly by IDS Life of New York to Smith
Barney Inc. on the sale of the Trust units to the Variable Account. IDS Life of
New York 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
account value. The charge will be cost-based (taking into account a loss of
interest) with no anticipated element of profit for IDS Life of New York. This
charge also varies directly with the size of the account value.
<PAGE>
IDS Life of New York Account 7
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Surrender Charge
IDS Life of New York 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 of New York 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 of New York for surrenders
are not identified on an individual segregated asset account basis. Charges for
all segregated asset accounts amounted to $688,445 in 1997, $551,374 in 1996 and
$464,724 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 of New York.
- --------------------------------------------------------------------------------
11. Investment Transactions
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
================================================================================
NAP Equity Portfolio $52,171 $155,918 $ 73,918
NMM Money Market Portfolio 2,824 68,679 14,805
NHI Income Portfolio 23,122 8,436 117,032
NTR Managed Portfolio 12,337 9,550 21,771
NGO Government Securities Portfolio 973 3,716 67,278
N04 2004 Trust 65 -- --
- --------------------------------------------------------------------------------
Combined Variable Account $91,492 $246,299 $294,804
================================================================================
- --------------------------------------------------------------------------------
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>
<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 NAP (Investing in shares of Equity Portfolio)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value at beginning of period $3.77 $3.22 $2.38 $2.37 $2.14 $2.08 $1.28 $1.31 $1.02 $0.94
Accumulation unit value at end of period $4.48 $3.77 $3.22 $2.38 $2.37 $2.14 $2.08 $1.28 $1.31 $1.02
Number of accumulation units outstanding at end of period
(000 omitted) 224 260 274 268 325 317 307 362 395 386
==============================================================================================================================
Subaccount NMM (Investing in shares of Money Market Portfolio)
Accumulation unit value at beginning of period $1.32 $1.28 $1.25 $1.23 $1.23 $1.21 $1.18 $1.12 $1.06 $1.02
Accumulation unit value at end of period $1.36 $1.32 $1.28 $1.25 $1.23 $1.23 $1.21 $1.18 $1.12 $1.06
Number of accumulation units outstanding at end of period
(000 omitted) 71 71 87 217 165 165 247 219 243 228
==============================================================================================================================
Subaccount NHI (Investing in shares of Income Portfolio)
Accumulation unit value at beginning of period. $1.38 $1.36 $1.15 $1.23 $1.10 $1.02 $0.90 $1.12 $1.16 $1.05
Accumulation unit value at end of period $1.46 $1.38 $1.36 $1.15 $1.23 $1.10 $1.02 $0.90 $1.12 $1.16
Number of accumulation units outstanding at end of period
(000 omitted) 105 124 157 293 326 358 358 148 610 742
==============================================================================================================================
Subaccount NTR (Investing in shares of Managed Portfolio)
Accumulation unit value at beginning of period $2.50 $2.24 $1.92 $1.95 $1.67 $1.55 $1.20 $1.21 $1.06 $0.92
Accumulation unit value at end of period $2.89 $2.50 $2.24 $1.92 $1.95 $1.67 $1.55 $1.20 $1.21 $1.06
Number of accumulation units outstanding at end of period
(000 omitted) 53 59 58 78 127 144 109 94 145 101
==============================================================================================================================
Subaccount NGO (Investing in shares of Government Securities Portfolio)
Accumulation unit value at beginning of period $1.64 $1.66 $1.44 $1.54 $1.41 $1.35 $1.19 $1.13 $1.05 $1.02
Accumulation unit value at end of period $1.75 $1.64 $1.66 $1.44 $1.54 $1.41 $1.35 $1.19 $1.13 $1.05
Number of accumulation units outstanding at end of period
(000 omitted) 7 13 53 20 20 28 65 50 10 20
==============================================================================================================================
Subaccount N951 (Investing in shares of 1995 Trust)
Accumulation unit value at beginning of period -- -- $1.57 $1.58 $1.52 $1.45 $1.28 $1.19 $1.05 $1.00
Accumulation unit value at end of period -- -- -- $1.57 $1.58 $1.52 $1.45 $1.28 $1.19 $1.05
Number of accumulation units outstanding at end of period
(000 omitted) -- -- -- 25 35 59 69 50 55 59
==============================================================================================================================
Subaccount N042 (Investing in shares of 2004 Trust)
Accumulation unit value at beginning of period $2.25 $2.33 $1.82 $2.06 $1.74 $1.63 $1.38 $1.36 $1.13 $1.00
Accumulation unit value at end of period $2.45 $2.25 $2.33 $1.82 $2.06 $1.74 $1.63 $1.38 $1.36 $1.13
Number of accumulation units outstanding at end of period
(000 omitted) 12 18 18 18 36 36 36 12 12 12
==============================================================================================================================
1 The 1995 Trust matured on Nov. 15, 1995.
2 Subaccount N04 commenced operations on July 19, 1988.
</TABLE>
<PAGE>
<PAGE>
Report of Independent Auditors
The Board of Directors
IDS Life Insurance Company of New York
We have audited the accompanying balance sheets of IDS Life
Insurance Company of New York (a wholly owned subsidiary of IDS
Life Insurance Company) as of December 31, 1997 and 1996, and the
related 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 financial position
of IDS Life Insurance Company of New York at December 31, 1997
and 1996, and the 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 INSURANCE COMPANY OF NEW YORK
- --------------------------------------------------------------------------
BALANCE SHEETS Dec. 31, 1997 Dec. 31, 1996
ASSETS (thousands)
- --------------------------------------------------------------------------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (Fair value:
1997, $562,979; 1996, $604,635) $ 535,651 $ 585,812
Available for sale, at fair value (Fair value:
1996, $582,962; 1996, $590,608) 603,576 601,623
Mortgage loans on real estate 178,826 160,017
Policy loans 23,349 20,077
Other investments 970 1,374
- --------------------------------------------------------------------------
Total investments 1,342,372 1,368,903
- --------------------------------------------------------------------------
Accrued investment income 20,205 21,068
Deferred policy acquisition costs 126,614 119,183
Other assets 4,227 3,950
Separate account assets 1,236,759 950,018
- --------------------------------------------------------------------------
Total assets $2,730,177 $2,463,122
- --------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------
Liabilities:
Future policy benefits:
Fixed annuities $964,483 $1,054,954
Universal life-type insurance 147,744 142,278
Traditional life, disability income
and long-term care insurance 50,469 45,338
Policy claims and other policyholders' funds 4,013 3,155
Deferred income taxes 11,445 9,046
Amounts due to brokers 29,054 3,007
Other liabilities 28,931 25,463
Separate account liabilities 1,236,759 950,018
- --------------------------------------------------------------------------
Total liabilities 2,472,898 2,233,259
- --------------------------------------------------------------------------
Stockholder's equity:
Capital stock, $10 par value per share;
200,000 shares authorized, issued and outstanding 2,000 2,000
Additional paid-in capital 49,000 49,000
Net unrealized gain on investments 13,175 6,937
Retained earnings 193,104 171,926
- --------------------------------------------------------------------------
Total stockholder's equity 257,279 229,863
- --------------------------------------------------------------------------
Total liabilities and stockholder's equity $2,730,177 $2,463,122
- --------------------------------------------------------------------------
See accompanying notes.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENTS OF INCOME
Years ended Dec. 31,
1997 1996 1995
(thousands)
- -------------------------------------------------------------------------------
Revenues:
Traditional life, disability income
and long-term care insurance
premiums $ 12,376 $ 10,931 $ 9,280
Policyholder and contractholder charges 18,319 15,832 13,216
Mortality and expense risk fees 11,312 8,574 6,213
Net investment income 106,274 109,468 110,924
Net realized gains (losses) on investments 547 (1,424) 1,548
- -------------------------------------------------------------------------------
Total revenues 148,828 143,381 141,181
- -------------------------------------------------------------------------------
Benefits and expenses:
Death and other benefits:
Traditional life, disability income
and long-term care insurance 3,633 4,182 3,354
Universal life-type insurance
and investment contracts 3,852 4,409 4,548
Increase in liabilities for future
policy benefits for traditional life,
disability income and
long-term care insurance 3,979 2,324 1,958
Interest credited on universal life-type
insurance and investment contracts 62,294 65,099 68,630
Amortization of deferred policy
acquisition costs 17,201 16,071 13,085
Other insurance and operating expenses 10,220 8,972 7,474
- -------------------------------------------------------------------------------
Total benefits and expenses 101,179 101,057 99,049
- -------------------------------------------------------------------------------
Income before income taxes 47,649 42,324 42,132
Income taxes 16,471 14,640 14,745
- -------------------------------------------------------------------------------
Net income $ 31,178 $ 27,684 $ 27,387
- -------------------------------------------------------------------------------
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1997
(thousands)
Additional Net Unrealized
Capital Paid-In Gains (Losses) Retained
Stock Capital on Investments Earnings Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,000 $ 49,000 $ (12,369) $133,090 $171,721
Net income -- -- -- 27,387 27,387
Change in net unrealized
gains (losses) on investments -- -- 27,710 -- 27,710
Cash dividends -- -- -- (8,000) (8,000)
Loss on investment transfer
to parent -- -- -- (235) (235)
- ----------------------------------------------------------------------------------------
Balance, December 31, 1995 2,000 49,000 15,341 152,242 218,583
Net income -- -- -- 27,684 27,684
Change in net unrealized
gains (losses) on investments -- -- (8,404) -- (8,404)
Cash dividends -- -- -- (8,000) (8,000)
- ----------------------------------------------------------------------------------------
Balance, December 31, 1996 2,000 49,000 6,937 171,926 229,863
Net income -- -- -- 31,178 31,178
Change in net unrealized
gains (losses) on investments -- -- 6,238 -- 6,238
Cash dividends -- -- -- (10,000) (10,000)
- ----------------------------------------------------------------------------------------
Balance, December 31, 1997 $2,000 $49,000 $ 13,175 $193,104 $257,279
- ----------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS Years ended Dec. 31,
1997 1996 1995
(thousands)
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $31,178 $27,684 $27,387
Adjustments to reconcile net income to net
cash provided by operating activities:
Policy loan issuance, excluding universal
life-type insurance (3,073) (2,473) (2,093)
Policy loan repayment, excluding universal
life-type insurance 1,897 1,571 881
Change in accrued investment income 863 1,504 (1,055)
Change in deferred policy acquisition
costs, net (7,431) (9,087) (11,017)
Change in liabilities for future policy
benefits for traditional life, disability income
and long-term care insurance 5,131 2,861 1,931
Change in policy claims and other
policyholders' funds 858 (489) 427
Deferred income tax benefit (960) (2,095) (1,301)
Change in other liabilities 3,468 4,434 2,429
(Accretion of discount)
amortization of premium, net (352) (652) (480)
Net realized (gain) loss on investments (547) 1,424 (1,548)
Policyholder and contractholder
charges, non-cash (8,772) (7,831) (6,962)
Other, net (557) (1,781) (508)
- --------------------------------------------------------------------------------
Net cash provided by operating activities $21,703 $15,070 $ 8,091
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases $ -- $ -- $ (37,540)
Maturities, sinking fund payments and calls 36,511 39,082 34,216
Sales 12,616 14,465 28,905
Fixed maturities available for sale:
Purchases (101,818) (97,370) (133,503)
Maturities, sinking fund payments and calls 84,229 71,939 44,234
Sales 27,055 15,669 8,839
Other investments, excluding policy loans:
Purchases (33,243) (14,802) (1,939)
Sales 14,233 12,659 5,993
Change in amounts due from broker 995 -- --
Change in amounts due to broker 26,047 (6,993) 10,000
- --------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 66,625 34,649 (40,795)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Activity related to universal life-type insurance
and investment contracts:
Considerations received 112,732 131,011 159,431
Surrenders and death benefits (251,259) (236,689) (190,695)
Interest credited to account balances 62,294 65,099 68,630
Universal life-type insurance policy loans:
Issuance (4,848) (4,490) (4,870)
Repayment 2,753 3,350 2,946
Cash dividend to parent (10,000) (8,000) (8,000)
- --------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (88,328) (49,719) 27,442
- --------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents -- -- (5,262)
Cash and cash equivalents at beginning of year -- -- 5,262
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ -- $ -- $ --
- --------------------------------------------------------------------------------
See accompanying notes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS ($ thousands)
1. Summary of significant accounting policies
------------------------------------------
Nature of business
IDS Life Insurance Company of New York (the Company) is engaged in the
insurance and annuity business in the state of New York. 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 Company is a wholly owned subsidiary of IDS Life Insurance Company
(IDS Life), which is a wholly owned subsidiary of American Express
Financial Corporation (AEFC), which is a wholly owned subsidiary of
American Express Company. The accompanying financial statements have
been prepared in conformity with generally accepted accounting
principles which vary in certain respects from reporting practices
prescribed or permitted by the New York Department of Insurance as
reconciled in Note 11.
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 income taxes.
Realized investment gains or losses are 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
allowances for mortgage loan losses. The estimated fair value of the
mortgage loans is determined by a discounted cash flow analysis using
mortgage interest rates currently offered for mortgages of similar
maturities.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------------------
Impairment of mortgage loans is measured as the excess of the loan's
recorded investment over its present value of expected principal and
interest payments discounted at the loan's effective interest rate, or
the fair value of collateral. The amount of the impairment is recorded
in an allowance for mortgage loan losses. The allowance for mortgage
loan losses is maintained at a level that management believes is
adequate to absorb estimated losses in the portfolio. The level of the
allowance account is determined based on several factors, including
historical experience, expected future principal and interest payments,
estimated collateral values, and current and anticipated economic and
political conditions. Management regularly evaluates the adequacy of
the allowance for mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for
which interest payments are delinquent more than three months. Based
on management's judgment as to the ultimate collectibility of
principal, interest payments received are either recognized as income
or applied to the recorded investment in the loan.
The cost of interest rate caps 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 is included in other investments.
Policy loans are carried at the aggregate of the unpaid loan balances
which do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in
the underlying value or earning power of individual investments, such
investments are written down to the fair value by a charge to income.
Statements of cash flows
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost which approximates
fair value.
Supplementary information to the 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 $17,811 $15,247 $15,026
Interest on borrowings 1,026 777 742
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over
the lives of the contracts, using primarily the interest method.
Profits represent the excess of investment income earned from
investment of contract considerations over interest credited to
contract owners and other expenses.
The retrospective deposit method is used in accounting for universal
life-type insurance. This method recognizes profits over the lives of
the policies in proportion to the estimated gross profits expected to
be realized.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------------------
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. Mortality and expense fees
are charged to the variable annuity and variable life insurance
separate accounts.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation,
policy issue costs, underwriting and certain sales expenses, have been
deferred on insurance and annuity contracts.
The deferred acquisition costs for most single premium deferred
annuities and installment annuities are amortized 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
mortality tables with various interest rates ranging from 5% to 9.5%,
depending on year of issue.
Liabilities for future benefits on traditional life insurance are based
on the net level premium method, using anticipated mortality, policy
persistency and interest earning rates. Anticipated mortality rates
are based on established industry mortality tables. Anticipated policy
persistency rates vary by policy form, issue age and policy duration
with persistency on cash value plans generally anticipated to be better
than persistency on term insurance plans. Anticipated interest rates
range from 4% to 10%, depending on policy form, issue year and policy
duration.
Liabilities for future disability income and long-term care policy
benefits include both policy reserves and claim reserves. Policy
reserves are based on the net level premium method, using anticipated
morbidity, mortality, policy persistency and interest earning rates.
Anticipated morbidity and mortality rates are based on established
industry morbidity and mortality tables. Anticipated policy
persistency rates vary by policy form, issue age, policy duration and,
for disability income policies, occupation class. Anticipated interest
rates for disability income and long-term care policy reserves are 3%
to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 4
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%.
<PAGE>
1. Summary of significant accounting policies (continued)
------------------------------------------------------
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. 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 $5,026
and $5,161, respectively, payable to IDS Life for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for
the exclusive benefit of the variable annuity and variable life
insurance contract owners. The Company receives mortality and expense
risk fees from the variable annuity separate accounts.
The Company makes contractual mortality assurances to the variable
annuity contract owners that the net assets of the separate accounts
will not be affected by future variations in the actual life expectancy
experience of the annuitants and 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.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
<PAGE>
2. Investments
-----------
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available.
Estimated values are determined by established procedures involving,
among other things, review of market indices, price levels of current
offerings of comparable issues, price estimates and market data from
independent brokers and financial files.
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---- ----- ------ -----
U.S. Government agency
obligations $ 3,690 $ 253 $ -- $ 3,943
Corporate bonds and
obligations 476,108 27,361 444 503,025
Mortgage-backed securities 55,853 452 294 56,011
------- ------ --- -------
$535,651 $28,066 $738 $562,979
======= ====== === =======
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
------------------ ---- ----- ------ -----
State and municipal
obligations $ 104 $ 10 $ -- $ 114
Corporate bonds and
obligations 281,555 14,272 1,635 294,192
Mortgage-backed securities 301,303 8,253 286 309,270
------- ------ ----- -------
$582,962 $22,535 $1,921 $603,576
======= ====== ===== =======
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1996 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---- ----- ------ -----
U.S. Government agency
obligations $ 4,498 $ 144 $ -- $ 4,642
Corporate bonds and
obligations 523,807 23,060 2,964 543,903
Mortgage-backed securities 57,507 409 1,826 56,090
------- ------ ----- -------
$585,812 $23,613 $4,790 $604,635
======= ====== ===== =======
Gross Gross
Amortized Unrealized Unrealized Fair
Available for sale Cost Gains Losses Value
------------------ --------- ---------- ---------- -----
State and municipal
obligations $ 105 $ 10 $ -- $ 115
Corporate bonds and
obligations 260,966 8,857 1,181 268,642
Mortgage-backed securities 329,537 5,788 2,459 332,866
------- ------ ----- -------
$590,608 $14,655 $3,640 $601,623
======= ====== ===== =======
<PAGE>
2. Investments (continued)
-----------------------
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.
Amortized Fair
Held to maturity Cost Value
---------------- --------- -----
Due in one year or less $18,376 $ 18,593
Due from one to five years 84,712 89,432
Due from five to ten years 309,104 325,967
Due in more than ten years 67,606 72,976
Mortgage-backed securities 55,853 56,011
------- -------
$535,651 $562,979
======= =======
Amortized Fair
Available for sale Cost Value
------------------ --------- -----
Due in one year or less $12,635 $ 12,747
Due from one to five years 39,808 42,497
Due from five to ten years 139,686 145,567
Due in more than ten years 89,530 93,495
Mortgage-backed securities 301,303 309,270
------- -------
$582,962 $603,576
======= =======
During the years ended December 31, 1997, 1996 and 1995, fixed
maturities classified as held to maturity were sold with amortized cost
of $12,737, $14,507 and $27,971, respectively. Net gains and losses on
these sales were not significant. The sale of these fixed maturities
was due to significant deterioration in the issuers' creditworthiness.
Fixed maturities available for sale were sold during 1997 with proceeds
of $27,055 and gross realized gains and losses of $461 and $309,
respectively. Fixed maturities available for sale were sold during
1996 with proceeds of $15,669 and gross realized gains and losses of
$28 and $1,541, respectively. Fixed maturities available for sale were
sold during 1995 with proceeds of $8,839 and gross realized gains and
losses of $nil and $74, respectively.
At December 31, 1997, bonds carried at $259 were on deposit with the
state of New York as required by law.
<PAGE>
2. Investments (continued)
-----------------------
At December 31, 1997, investments in fixed maturities comprised
85 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 $117 million which are rated by AEFC internal
analysts using criteria similar to Moody's and S&P. A summary of
investments in fixed maturities, at amortized cost, by rating on
December 31 is as follows:
Rating 1997 1996
--------- ---- ----
Aaa/AAA $ 367,242 $ 396,097
Aa/AA 9,685 13,996
Aa/A 13,646 10,197
A/A 162,275 196,542
A/BBB 81,463 62,488
Baa/BBB 343,519 336,706
Baa/BB 21,519 51,639
Below investment grade 119,264 108,755
--------- ---------
$1,118,613 $1,176,420
========= =========
At December 31, 1997, 96 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 13 percent of the Company's
investments 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:
December 31, 1997 December 31, 1996
----------------------- -----------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
------ ----- ----------- ----- -----------
West North Central $ 27,833 $ -- $ 23,191 $1,342
East North Central 33,515 -- 33,430 1,708
South Atlantic 34,182 2,750 35,501 --
Middle Atlantic 24,485 -- 22,889 --
Pacific 9,873 -- 12,986 --
Mountain 32,864 6,417 15,425 --
New England 8,624 -- 8,805 --
East South Central 8,698 -- 8,825 --
West South Central 252 -- 265 --
------- ----- ------- -----
180,326 9,167 161,317 3,050
Less allowance for
losses 1,500 -- 1,300 --
------- ----- ------- -----
$178,826 $9,167 $160,017 $3,050
======= ===== ======= =====
December 31, 1997 December 31, 1996
---------------------- ------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
-------------- ----- ----------- ----- -----------
Apartments $ 68,823 $ -- $ 70,292 $1,708
Department/retail 54,622 6,417 48,476 1,342
stores
Office buildings 25,042 1,650 18,684 --
Industrial buildings 17,975 1,100 11,956 --
Nursing/retirement 6,035 -- 6,477 --
Medical buildings 7,577 -- 5,167 --
Hotels/motels 252 -- 265 --
------- ----- ------- -----
180,326 9,167 161,317 3,050
Less allowance for
losses 1,500 -- 1,300 --
------- ----- ------- -----
$178,826 $9,167 $160,017 $3,050
======= ===== ======= =====
<PAGE>
2. Investments (continued)
-----------------------
Mortgage loan fundings are restricted by state insurance regulatory
authority 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 $1,299 and $1,327, with allowances of $300 and $300,
respectively. During 1997 and 1996, the average recorded investment in
impaired loans was $1,312 and $1,628, respectively.
The Company recognized $126 and $152 of interest income related to
impaired loans for the years ended December 31, 1997 and 1996,
respectively.
The following table presents changes in the allowance for investment
losses related to all loans:
1997 1996 1995
---- ---- ----
Balance, January 1 $1,300 $ 445 $445
Provision for investment losses 200 855 --
----- ----- ---
Balance, December 31 $1,500 $1,300 $445
===== ===== ===
Net investment income for the years ended December 31 is summarized as
follows:
1997 1996 1995
---- ---- ----
Interest on fixed maturities $ 92,007 $ 95,574 $ 97,092
Interest on mortgage loans 14,228 14,171 13,888
Other investment income 1,715 1,293 1,291
Interest on cash equivalents 91 67 186
------- ------- -------
108,041 111,105 112,457
Less investment expenses 1,767 1,637 1,533
------- ------- -------
$106,274 $109,468 $110,924
======= ======= =======
Net realized gains (losses) on investments for the years ended December
31 is summarized as follows:
1997 1996 1995
---- ---- ----
Fixed maturities $844 $ (572) $1,997
Mortgage loans (200) (855) (487)
Other investments (97) 3 38
---- ------ -----
$547 $(1,424) $1,548
=== ===== =====
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 9,599 (13,215) 43,726
<PAGE>
3. Income taxes
------------
The Company qualifies as a life insurance company for federal income
tax purposes. As such, the Company is subject to the Internal Revenue
Code provisions applicable to life insurance companies.
The income tax expense for the years ending December 31 consists of the
following:
1997 1996 1995
---- ---- ----
Federal income taxes:
Current $16,371 $15,735 $15,146
Deferred (960) (2,095) (1,301)
------ -------- --------
15,411 13,640 13,845
State income taxes-current 1,060 1,000 900
------ ------ ------
Income tax expense $16,471 $14,640 $14,745
====== ====== ======
Increases (decreases) to the federal tax provision applicable to pretax
income based on the statutory
rate are attributable to:
1997 1996 1995
-------------- -------------- -------------
Provision Rate Provision Rate Provision Rate
--------- ---- --------- ---- --------- ----
Federal income taxes based
on the statutory rate $16,677 35.0% $14,814 35.0% $14,746 35.0%
Increases (decreases)
are attributable to:
Tax-excluded interest
and dividend income (569) (1.2) (458) (1.1) (464) (1.1)
State tax, net benefit 689 1.4 650 1.5 585 1.4
Other, net (326) (0.6) (366) (0.8) (122) (0.3)
------ ---- ------ ---- ------ ----
Federal income taxes $16,471 34.6% $14,640 34.6% $14,745 35.0%
====== ==== ====== ==== ====== ====
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 $798. 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 $279 have not been established
because no distributions of such amounts are contemplated.
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
1997 1996
Deferred income tax assets:
Policy reserves $28,922 $28,809
Other 5,467 4,018
----- -----
Total deferred income tax assets 34,389 32,827
Deferred income tax liabilities:
Deferred policy acquisition costs 36,594 35,302
Investments 9,240 6,571
------ -------
Total deferred income tax
liabilities 45,834 41,873
------ ------
Net deferred income tax liabilities $11,445 $9,046
====== =====
<PAGE>
3. Income taxes (continued)
------------------------
The Company is required to establish a valuation allowance for any
portion of the deferred income tax assets that management believes will
not be realized. In the opinion of management, it is more likely than
not that the Company will realize the benefit of the deferred tax
assets and, therefore, no such valuation allowance has been established.
4. Stockholder's equity
--------------------
Retained earnings available for distribution as dividends to the parent
are limited to the Company's surplus as determined in accordance with
accounting practices prescribed by the New York Department of
Insurance. All dividend distributions must be approved by the New York
Department of Insurance. Statutory unassigned surplus aggregated
$115,828 and $94,007 as of December 31, 1997 and 1996, respectively
(see Note 3 with respect to the income tax effect of certain
distributions and Note 11 for a reconciliation of net income and
stockholder's equity per the accompanying financial statements to
statutory net income and surplus).
5. Benefit plans
-------------
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 $39, $34 and
$33 in 1997, 1996 and 1995, respectively.
The Company has a "Sales Benefit Plan" which is an unfunded,
noncontributory retirement plan for all eligible financial advisors.
Total plan costs for 1997, 1996 and 1995, which are calculated on the
basis of commission earnings of the individual financial advisors, were
$1,965, $1,474 and $1,392, respectively. Such costs are included in
deferred policy acquisition costs.
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 $312, $248 and $231, respectively.
The Company participates in defined benefit health care plans of AEFC
that provide health care and life insurance benefits to retired
employees and retired financial advisors. The plans include
participant contributions and service-related eligibility
requirements. Upon retirement, such employees are considered to have
been employees of AEFC. AEFC expenses these benefits and allocates the
expenses to its subsidiaries. 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>
6. Incentive plan and related party operating expenses
---------------------------------------------------
The Company maintains a "Persistency Payment Plan." Under the terms of
this plan, financial advisors earn additional compensation based on the
volume and persistency of insurance sales. The total costs for the
plan for 1997, 1996 and 1995 were $1,490, $1,424 and $1,720,
respectively. Such costs are included in deferred policy acquisition
costs.
Charges by IDS Life and AEFC for the use of joint facilities, marketing
services and other services aggregated $11,589, $12,389 and $12,122 for
1997, 1996 and 1995, respectively. Certain of these costs are included
in deferred policy acquisition costs.
7. Commitments and contingencies
-----------------------------
At December 31, 1997 and 1996, traditional life insurance and universal
life-type insurance in force aggregated $4,513,251 and $4,053,561,
respectively, of which $220,798 and $203,963 were reinsured at the
respective year ends.
In addition, the Company has a stop loss reinsurance agreement with IDS
Life covering ordinary life benefits. IDS Life agrees to pay all death
benefits incurred each year which exceed 125 percent of normal claims,
where normal claims are defined in the agreement as .095 percent of the
mean retained life insurance in force. Premiums ceded to IDS Life
amounted to $115, $98 and $85 for the years ended December 31, 1997,
1996 and 1995, respectively. Claim recoveries under the terms of this
reinsurance agreement were $963, $861 and $1,426 in 1997, 1996 and
1995, respectively.
Premiums ceded to reinsurers other than IDS Life amounted to $1,583,
$747 and $667 for the years ended December 31, 1997, 1996 and 1995,
respectively. Reinsurance recovered from reinsurers other than IDS
Life amounted to $1,366, $66 and $576 for the years ended
December 31, 1997, 1996 and 1995.
Reinsurance contracts do not relieve the Company from its primary
obligations to policyholders.
The Company has an agreement to assume a block of extended term life
insurance business. The amount of insurance in force related to this
agreement was $303,263 and $345,943 at December 31, 1997 and 1996,
respectively. The accompanying statement of income includes premiums of
$nil for the years ended December 31, 1997, 1996 and 1995, and decreases
in liabilities for future policy benefits of $1,889, $2,010 and $2,039
related to this agreement for the years ended December 31, 1997, 1996 and
1995, respectively.
8. Lines of credit
---------------
The Company has an available line of credit with AEFC aggregating
$25,000. The line of credit is at 45 basis points over the Federal
Funds rate. A $20,000 line of credit with another bank expired on
June 30, 1997 and the Company did not seek renewal. Outstanding
borrowings under these agreements were $nil at December 31, 1997 and
1996.
9. Derivative financial instruments
--------------------------------
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk, including
hedging specific transactions. The Company does not hold derivative
instruments for trading purposes. The Company manages risks associated
with these instruments as described below.
<PAGE>
9. 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.
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
industry, and requiring collateral, where appropriate. A vast majority
of the Company's counterparties are rated A or better by Moody's and
Standard & Poor's.
Credit risk related to interest rate caps is measured by replacement
cost of the contracts. The replacement cost represents the fair value
of the instruments.
The notional or contract amount of a derivative financial instrument is
generally used to calculate the cash flows that are received or paid
over the life of the agreement. Notional amounts are not recorded on
the balance sheet. Notional amounts far exceed the related credit
exposure.
The Company's holdings of derivative financial instruments are as
follows:
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
----------------- ------ ------ ----- --------
Assets:
Interest rate caps $200,000 $ 970 $ 62 $ 62
======= === == ==
December 31, 1996
-----------------
Assets:
Interest rate caps $250,000 $1,374 $832 $832
======= ===== === ===
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. The interest rate caps expire
on various dates through 2000.
Interest rate caps are used to manage the Company's exposure to
interest rate risk. These instruments are used primarily to protect
the margin between interest rates earned on investments and the
interest rates credited to related annuity contract holders.
10. 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,
receivables 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.
<PAGE>
10. Fair values of financial instruments (continued)
------------------------------------------------
1997 1996
------------------ -----------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
---------------- ------ ----- ------ -----
Investments:
Fixed maturities (Note 2):
Held to maturity $ 535,651 $ 562,979 $585,812 $604,635
Available for sale 603,576 603,576 601,623 601,623
Mortgage loans on real estate 178,826 187,992 160,017 164,444
(Note 2)
Other:
Derivative financial 970 62 1,374 832
instruments (Note 9)
Separate accounts assets (Note 1) 1,236,759 1,236,759 950,018 950,018
Financial Liabilities
Future policy benefits for
fixed annuities 880,809 852,391 979,030 946,359
Separate account liabilities 1,136,408 1,086,565 880,160 838,492
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 $78,853 and $72,252,
respectively, and policy loans of $4,821 and $3,672, 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 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 applicable
surrender charges and less variable insurance contracts carried at
$100,351and $69,859, respectively.
<PAGE>
11. Statutory insurance accounting practices
----------------------------------------
Reconciliations of net income for 1997, 1996 and 1995 and stockholder's
equity at December 31, 1997 and 1996, as shown in the accompanying
financial statements, to that determined using statutory accounting
practices are as follows:
1997 1996 1995
---- ---- ----
Net income, per accompanying
financial statements $31,178 $27,684 $27,387
Deferred policy acquisition costs (7,432) (9,087) (11,017)
Adjustments of future policy
benefit liabilities (4,928) (9,683) (10,655)
Deferred income tax benefit (960) (2,095) (1,301)
Provision for losses on 296 877 --
investments
IMR gain/loss transfer and (119) 1,010 (331)
amortization
Adjustment to separate account 10,267 8,863 20,769
reserves
Other, net 430 116 948
------ ------ ------
Net income, on basis of
statutory accounting practices $28,732 $17,685 $25,800
====== ====== ======
Stockholder's equity, per accompanying
financial statements $257,279 $229,863
Deferred policy acquisition costs (126,614) (119,183)
Adjustments of future policy 9,452 13,458
benefit
liabilities
Deferred income taxes 11,445 9,046
Asset valuation reserve (16,698) (19,446)
Adjustments of separate account 53,456 43,189
liabilities
Adjustments of investments to
amortized cost (20,613) (11,016)
Premiums due, deferred and advance 1,237 1,149
Deferred revenue liability 1,941 1,342
Allowance for losses 1,645 1,349
Non-admitted assets (552) (634)
Interest maintenance reserve (1,551) (1,432)
Other, net (1,463) (281)
-------- --------
Stockholder's equity, on basis of
statutory accounting practices $168,963 $147,404
======= =======
<PAGE>
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 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 sponsored by:
Smith Barney and subsidiaries
Smith Barney LifeVestSM
is underwritten, issued, managed and serviced by:
IDS Life Insurance Company of New York
