<PAGE>
Prospectus
Sept. 13, 1999
American Express Signature Variable AnnuitySM
Individual flexible premium deferred combination fixed/variable annuity
American Enterprise Variable Annuity Account
Issued by: American Enterprise Life Insurance Company (American Enterprise Life)
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Telephone: 800-333-3437
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<CAPTION>
<S> <C> <C>
This prospectus contains information that you should know before investing. You
also will receive the prospectuses for:
o American Express Variable Portfolio Funds o J. P. Morgan Series Trust II
o AIM Variable Insurance Funds, Inc. o Lazard Retirement Series, Inc.
o Alliance Variable Products Series Fund o MFS(R) Variable Insurance TrustSM
o Baron Capital Funds o Putnam Variable Trust
o Fidelity Variable Insurance Products Service Class o Royce Capital Fund
o Franklin Templeton Variable Insurance Products Trust - Class II o Wanger Advisors Trust
o Goldman Sachs Variable Insurance Trust (VIT) o Warburg Pincus Trust
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Please read the prospectuses carefully and keep them for future reference. This
contract is available for nonqualified annuities, IRAs (including Roth IRAs),
Simplified Employee Pension (SEP) plans and Tax-Sheltered Annuity (TSA)
rollovers.
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
An investment in this contract is not a deposit of a bank or financial
institution and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. An investment in this contract
involves investment risk including the possible loss of principal.
A Statement of Additional Information (SAI), dated the same date as this
prospectus, is incorporated by reference into this prospectus. It is filed with
the SEC and is available without charge by contacting American Enterprise Life
at the telephone number above or by completing and sending the order form on the
last page of this prospectus. The table of contents of the SAI is on the last
page of this prospectus.
Table of Contents
Key Terms...........................................................3
The Contract in Brief...............................................4
Expense Summary.....................................................6
Condensed Financial Information (Unaudited).........................11
Financial Statements................................................12
Performance Information.............................................13
The Variable Account and the Funds..................................14
The Fixed Account...................................................17
Buying Your Contract................................................17
Charges.............................................................19
Valuing your Investment.............................................22
Making the Most of Your Contract....................................25
Withdrawals.........................................................29
TSA - Special Withdrawal Provisions.................................29
Changing Ownership..................................................29
Benefits in Case of Death...........................................30
The Annuity Payout Period...........................................32
Taxes...............................................................34
Voting Rights.......................................................36
Substitution of Investments.........................................36
About the Service Providers.........................................37
Table of Contents of the Statement of Additional Information........39
Key terms
These terms can help you understand details about your contract.
Accumulation unit - A measure of the value of each subaccount before annuity
payouts begin.
Annuitant - The person on whose life or life expectancy the annuity payouts are
based.
Annuity payouts - An amount paid at regular intervals under one of several
plans.
Beneficiary - The person you designate to receive benefits in case of the
owner's or annuitant's death while the contract is in force and before annuity
payouts begin.
Close of business - When the New York Stock Exchange (NYSE) closes, normally 4
p.m. Eastern time.
Contract value - The total value of your contract before we deduct any
applicable charges.
Contract year - A period of 12 months, starting on the effective date of your
contract and on each anniversary of the effective date.
Fixed account - An account to which you may allocate purchase payments. Amounts
you allocate to this account earn interest at rates that we declare
periodically.
Funds - Investment options under your contract. You may allocate your purchase
payments into subaccounts investing in shares of any or all of these funds.
Owner (you, your) - The person who controls the contract (decides on investment
allocations, transfers, payout options, etc.). Usually, but not always, the
owner is also the annuitant. The owner is responsible for taxes, regardless of
whether he or she receives the contract's benefits.
Qualified annuity - A contract that you purchase for one of the following
retirement plans that is subject to applicable federal law and any rules of the
plan itself:
o Individual Retirement Annuities (IRAs), including Roth IRAs
o Simplified Employee Pension (SEP) plans
o Tax-Sheltered Annuity (TSA) rollovers
All other contracts are nonqualified annuities.
Retirement date - The date when annuity payouts are scheduled to begin.
Valuation date - Any normal business day, Monday through Friday, that the NYSE
is open. Each valuation date ends at the close of business. We calculate the
value of each subaccount at the close of business on each valuation date.
Variable account - Consists of separate subaccounts to which you may allocate
purchase payments; each subaccount invests in shares of one fund. The value of
your investment in each subaccount changes with the performance of the fund.
Withdrawal value - The amount you are entitled to receive if you make a full
withdrawal from your contract. It is the contract value minus any applicable
charges.
The Contract in Brief
Purpose: The purpose of the contract is to allow you to accumulate money for
retirement. You do this by making one or more investments (purchase payments)
that may earn returns that increase the value of the contract. The contract
provides lifetime or other forms of payouts beginning at a specified date (the
retirement date). As in the case of other annuities, it may not be advantageous
for you to purchase this contract as a replacement for, or in addition to an
existing annuity.
Free look period: You may return your contract to your sales representative or
to our office within the time stated on the first page of your contract and
receive a full refund of the contract value. We will not deduct any charges.
However, you bear the investment risk from the time of purchase until you return
the contract; the refund amount may be more or less than the payment you made.
(Exception: If the law requires, we will refund all of your purchase payments.)
Accounts: Currently, you may allocate your purchase payments among any or all
of:
o the subaccounts, each of which invests in a fund with a particular
investment objective. The value of each subaccount varies with the
performance of the particular fund in which it invests. We cannot guarantee
that the value at the retirement date will equal or exceed the total
purchase payments you allocate to the subaccounts. (p.14)
o the fixed account, which earns interest at a rate that we adjust
periodically. (p.17)
Buying your contract: Your sales representative will help you complete and
submit an application. Applications are subject to acceptance at our office. You
may buy a nonqualified annuity or a qualified annuity. After your initial
purchase payment, you have the option of making additional purchase payments in
the future. Some states have time limitations for making additional payments.
o Minimum initial purchase payment - $2,000
o Minimum additional purchase payment - $100 ($50 for Systematic Investment Plan
payments)
o Maximum total purchase payments (without prior approval) -
$1,000,000 (for issue ages up to 85)
$100,000 (for issue ages 86 to 90) (p.17)
Transfers: Subject to certain restrictions you currently may redistribute your
money among accounts without charge at any time until annuity payouts begin, and
once per contract year among the subaccounts after annuity payouts begin. You
may establish automated transfers among the fixed account and subaccounts. Fixed
account transfers are subject to special restrictions. (p.26)
Withdrawals: You may withdraw all or part of your contract value at any time
before the retirement date. You also may establish automated partial
withdrawals. Withdrawals may be subject to charges and tax penalties (including
a 10% IRS penalty if you make withdrawals prior to your reaching age 59 1/2) and
may have other tax consequences; also, certain restrictions apply. (p.28)
Changing ownership: You may change ownership of a nonqualified annuity by
written instruction, but this may have federal income tax consequences.
Restrictions apply to changing ownership of a qualified annuity. (p.29)
Benefits in case of death: If you or the annuitant die before annuity payouts
begin, we will pay the beneficiary an amount at least equal to the contract
value. (p.30)
Annuity payouts: You can apply your contract value to an annuity payout plan
that begins on the retirement date. You may choose from a variety of plans to
make sure that payouts continue as long as you like. If you purchased a
qualified annuity, the payout schedule must meet the requirements of the
qualified plan. We can make payouts on a fixed or variable basis, or both. Total
monthly payouts may include amounts from each subaccount and the fixed account.
(p.32)
Taxes: Generally, your contract grows tax-deferred until you make withdrawals
from it or begin to receive payouts. (Under certain circumstances, IRS penalty
taxes may apply.) Even if you direct payouts to someone else, you will be taxed
on the income if you are the owner. However, Roth IRAs may grow and be
distributed tax free if you meet certain distribution requirements. (p.34)
Charges:
o $30 annual contract administrative charge;
o 0.15% variable account administrative charge;
o 1.25% mortality and expense risk fee;
o withdrawal charge;
o any premium taxes that may be imposed on us by state or local governments
currently, we deduct any applicable premium tax when you make a total
withdrawal or when annuity payouts begin, but we reserve the right to
deduct this tax at other times such as when you make purchase payments, and
o the operating expenses of the funds.
Expense Summary
The purpose of the following information is to help you understand the various
costs and expenses associated with your contract.
You pay no sales charge when you purchase your contract. We show all costs that
you bear directly or indirectly for the subaccounts and funds below. Some
expenses may vary as we explain under "Charges." Please see the funds'
prospectuses for more information on the operating expenses for each fund.
Contract owner expenses:
Withdrawal charge
(contingent deferred sales charge as a percentage of purchase payment withdrawn)
Years from purchase Withdrawal charge
payment receipt percentage
1 7.5%
2 7.5
3 7
4 6
5 5
6 4
7 2
Thereafter 0
Annual contract administrative charge $30*
* We will waive this charge when your contract value is $50,000 or more on the
current contract anniversary.
Annual variable account expenses
(as a percentage of average subaccount value)
Variable account administrative charge...................0.15%
Mortality and expense risk fee...........................1.25%
Total annual variable account expenses............................1.40%
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Annual operating expenses of the funds (as a percentage of average daily net
assets)
<S> <C> <C> <C> <C>
Management 12b-1 Other
Fees Fees Expenses Total
AXPSM Variable Portfolio - Bond Fund .60% -- .07 .67%1
AXPSM Variable Portfolio - Capital Resource Fund .59% -- .07 .66%1
AXPSM Variable Portfolio - Cash Management Fund .50% -- .06 .56%1
AXPSM Variable Portfolio - Extra Income Fund .62% -- .09 .71%1
AXPSM Variable Portfolio - Managed Fund .59% -- .04 .63%1
AXPSM Variable Portfolio - New Dimensions Fund .61% -- .06 .67%1
AIM V.I. Capital Appreciation Fund .62% -- .05 .67%2
AIM V.I. Capital Development Fund (after fee --% -- 1.21 1.21%3
waivers and expense reimbursements)
AIM V.I. Value Fund (after fee waivers and expense .61% -- .05 .66%3
reimbursements)
Alliance Premier Growth Portfolio (Class B) 1.00% .25 .09 1.34%4
Alliance Technology Portfolio (Class B) .81% .25 .14 1.20%4
Alliance U.S. Government/High Grade Securities .60% .25 .18 1.03%4
Portfolio (Class B)
Baron Capital Asset Fund (after fee waivers and 1.00% .25 .20 1.45%5
expense reimbursements)
Fidelity VIP III Growth & Income Portfolio (Service .49% .10 .11 .70%6
Class)
Fidelity VIP III Mid Cap Portfolio (Service Class) .59% .10 .41 1.10%1
Fidelity VIP Overseas Portfolio (Service Class) .74% .10 .13 .97%6
(after expense reimbursements)
FT VIP Mutual Shares Securities Fund - Class 2 .74% .25 .03 1.02%7
FT VIP Real Estate Securities Fund - Class 2 .52% .25 .02 .79%7
FT VIP Templeton International Smaller Companies 1.00% .25 .10 1.35%7
Fund - Class 2
Goldman Sachs Capital Growth Fund .75% -- .15 .90%
Goldman Sachs VIT COREsm U.S. Equity Fund .70% -- .10 .80%
Goldman Sachs Global Income Fund .90% -- .15 1.05%
Goldman Sachs International Equity Fund 1.00% -- .25 1.25%
J.P. Morgan U.S. Disciplined Equity Portfolio .35% -- .52 .87%8
(after fee waivers and expense reimbursements)
Lazard Retirement Equity Portfolio (after fee .75% .25 .25 1.25%9
waivers and expense reimbursements)
Lazard Retirement International Equity Portfolio .75% .25 .25 1.25%9
(after fee waivers and expense reimbursements)
MFS(R)New Discovery Series (after fee waivers and .90% -- .27 1.17%10
expense reimbursements)
MFS(R)Research Series .75% -- .11 .86%2
MFS(R)Utilities Series .75% -- .26 1.01%2
Putnam VT Growth and Income Fund - Class IB Shares .46% .15 .04 .65%11
Putnam VT International Growth Fund - Class IB .80% .15 .27 1.22%11
Shares
Putnam VT International New Opportunities Fund - 1.18% .15 .68 2.01%11
Class IB Shares
Royce Micro-Cap Portfolio (after fee waivers and 1.25% -- .10 1.35%12
expense reimbursements)
Royce Premier Portfolio (after fee waivers and 1.00% -- .35 1.35%12
expense reimbursements)
Wanger International Small Cap 1.27% -- .28 1.55%2
Wanger U.S. Small Cap .96% -- .06 1.02%2
Warburg Pincus Trust - Emerging Growth Portfolio .84% -- .41 1.25%4
</TABLE>
1Annualized operating expenses of funds at Dec. 31, 1998.
2Figures in "Management Fees," "Other Expenses" and "Total" are based on actual
expenses for the fiscal year ended Dec. 31, 1998.
3Had there been no fee waivers or expense reimbursements, expenses would have
been: 0.75%, 0.00%, 5.05% and 5.80%, respectively.
4The fund's expense figures are based on estimated expenses (before fee waivers
and expense reimbursements) for the fiscal period ended Dec. 31, 1999.
5Fees are stated net of waivers and/or reimbursements. Absent fee waivers and/or
reimbursements, the Management Fee, Other Expenses and Total as a percentage of
average net assets for Baron Capital Asset Fund would be (1.00%, 6.62% and
7.62%).
6Fidelity Management & Research Company agreed to reimburse a portion of the
class' expenses during the period. Without this reimbursement, the Management
Fee, 12b-1 Fee, Other Expenses and Total as a percentage of average net assets
for the following funds would have been, Fidelity VIP Growth and Income
Portfolio (0.49%, 0.10%, 0.12% and 0.71%) and Fidelity VIP Overseas Portfolio
(Service Class) (0.74%, 0.10%, 0.17% and 1.01%).
7The figure shown under Management Fees, combines both the Management and
Portfolio Administration Fees. The Portfolio Administration Fee is a direct
expense for the Templeton International Smaller Companies Fund and the Mutual
Shares Securities Fund; the Real Estate Securities Fund pays for similar
services indirectly through the Management Fee. Because no Class 2 shares were
issued as of Dec. 31, 1998, figures (other than Rule 12b-1 Fees) are based on
the Portfolios' Class 1 actual expenses for the fiscal year ended Dec. 31, 1998
plus Class 2's annual Rule 12b-1 Fee of 0.25% (While the maximum amount payable
under each Portfolio's Class 2 Rule 12b-1 Plan is 0.35% per year of the
Portfolio's average daily net assets, the Board of Trustees of Franklin
Templeton Variable Insurance Products Trust has set the current rate at 0.25%
per year.)
8Fees are stated net of waivers and/or reimbursements. Absent fee waivers and/or
reimbursements, the Management Fee, Other Expenses and Total as a percentage of
average net assets for J.P. Morgan U.S. Disciplined Equity Portfolio would be
(0.35%, 1.08% and 1.43%).
Effective July 1, 1999 current expenses were lowered to 0.85%.
9The portfolio's Investment Manager agrees to waive its fees and/or reimburse
the portfolios through Dec. 31, 1999 to the extent total portfolio annual
expenses exceed 1.25% of the portfolio's average daily net assets. Absent fee
waivers and/or reimbursements, the Management Fee, 12b-1 Fee, Other Expenses and
Total as a percentage of average net assets for fiscal year end Dec. 31, 1998
for the following portfolios would have been: Equity Portfolio (0.75%, 0.25%,
20.32% and 21.32%) and International Equity Portfolio (0.75%, 0.25%, 47.67% and
48.67%). Expenses are annualized for the International Equity Portfolio for the
period Sep. 1 - Dec. 31, 1998 (commencement of operations through fiscal year
end).
10Fees are stated net of waivers and/or reimbursements. Absent fee waivers
and/or reimbursements, the Management Fee, Other Expenses and Total as a
percentage of average net assets for MFS(R) New Discovery Series would have been
(0.90%, 4.32% and 5.22%).
11Based on estimated expenses.
12Expense ratios are shown after fee waivers and expense reimbursements by the
investment advisor. The expense ratios before the waivers and reimbursements
would have been: Royce Micro-Cap Portfolio (1.25%, 1.34% and 2.59%) and Royce
Premier Portfolio (1.00%, 6.05% and 7.05%).
13The Goldman Sachs VIT CORE U.S. Equity Funds' expenses are based on actual
expenses for fiscal year ended December 31, 1998. The Investment Advisor to the
Goldman Sachs CORE U.S. Equity Fund has voluntarily agreed to reduce or limit
certain "Other Expenses" of such Funds (excluding management fees, taxes,
interest and brokerage fees, litigation, indemnififcation and other
extraordinary expenses) to the extent such expenses exceed 0.15% and 0.10% per
annum of such Funds' average daily net assets, respectively. The expenses shown
include this reimbursement. If not included, the "Other Expenses" and "Total
Annual Expenses" for the Goldman Sachs CORE U.S. Equity Funds would be 3.17% and
3.92% and 2.13% and 2.83%, respectively. The reductions or limits may be
discontinued or modified by the investment adviser in their discretion at any
time.
Example:*
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<CAPTION>
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return and full withdrawal at the end of each time period.
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
AXPSM Variable Portfolio - Bond Fund $ 96.90 $137.56 $165.83 $248.87
AXPSM Variable Portfolio - Capital Resource Fund 96.80 137.25 165.31 247.83
AXPSM Variable Portfolio - Cash Management Fund 95.77 134.16 160.11 237.29
AXPSM Variable Portfolio - Extra Income Fund 97.31 138.80 167.90 253.06
AXPSM Variable Portfolio - Managed Fund 96.49 136.33 163.75 244.68
AXPSM Variable Portfolio - New Dimensions Fund 96.90 137.56 165.83 248.87
AIM V.I. Capital Appreciation Fund 96.90 137.56 165.83 248.87
AIM V.I. Capital Development Fund 102.44 154.18 -- --
AIM V.I. Value Fund 96.80 137.25 165.31 247.83
Alliance Premier Growth Portfolio (Class B) 103.77 158.15 -- --
Alliance Technology Portfolio (Class B) 102.33 153.87 -- --
Alliance U.S. Government/High Grade Securities 100.59 148.66 -- --
Portfolio (Class B)
Baron Capital Asset Fund 104.90 161.50 -- --
Fidelity VIP III Growth & Income Portfolio
(Service Class) 97.21 138.49 -- --
Fidelity VIP III Mid Cap Portfolio (Service Class) 101.31 150.81 -- --
Fidelity VIP Overseas Portfolio (Service Class) 99.98 146.82 -- --
FT VIP Mutual Shares Securities Fund - Class 2 100.49 148.35 -- --
FT VIP Real Estate Securities Fund - Class 2 98.13 141.27 -- --
FT VIP Templeton International Smaller Companies Fund 103.87 158.45 -- --
- - - Class 2
Goldman Sachs Capital Growth Fund 99.26 144.66 177.70 272.70
Goldman Sachs VIT COREsm U.S. Equity Fund 98.23 141.58 172.55 262.41
Goldman Sachs Global Income Fund 100.80 149.27 185.37 287.94
Goldman Sachs International Equity Fund 102.85 155.40 195.53 307.92
J.P. Morgan U.S. Disciplined Equity Portfolio 98.95 143.74 -- --
Lazard Retirement Equity Portfolio 102.85 155.40 -- --
Lazard Retirement International Equity Portfolio 102.85 155.40 -- --
MFS(R)New Discovery Series 102.03 152.95 -- --
MFS(R)Research Series 98.85 143.43 -- --
MFS(R)Utilities Series 100.39 148.05 -- --
Putnam VT Growth and Income Fund - Class IB Shares 96.70 136.95 164.79 246.78
Putnam VT International Growth Fund - Class IB Shares 102.54 154.48 -- --
Putnam VT International New Opportunities Fund - Class 110.64 178.45 -- --
IB Shares
Royce Micro-Cap Portfolio 103.87 158.45 -- --
Royce Premier Portfolio 103.87 158.45 -- --
Wanger International Small Cap 105.92 164.54 -- --
Wanger U.S. Small Cap 100.49 148.35 -- --
Warburg Pincus Trust - Emerging Growth Portfolio 102.85 155.40 -- --
</TABLE>
<TABLE>
<CAPTION>
You would pay the following expenses on a $1,000 investment assuming a 5% annual
return and no withdrawal or selection of an annuity payout plan at the end of
each time period.
<S> <C> <C> <C> <C>
1 year 3 years 5 years 10 years
AXPSM Variable Portfolio - Bond Fund $21.90 $67.56 $115.83 $248.87
AXPSM Variable Portfolio - Capital Resource Fund 21.80 67.25 115.31 247.83
AXPSM Variable Portfolio - Cash Management Fund 20.77 64.16 110.11 237.29
AXPSM Variable Portfolio - Extra Income Fund 22.31 68.80 117.90 253.06
AXPSM Variable Portfolio - Managed Fund 21.49 66.33 113.75 244.68
AXPSM Variable Portfolio - New Dimensions Fund 21.90 67.56 115.83 248.87
AIM V.I. Capital Appreciation Fund 21.90 67.56 115.83 248.87
AIM V.I. Capital Development Fund 27.44 84.18 -- --
AIM V.I. Value Fund 21.80 67.25 115.31 247.83
Alliance Premier Growth Portfolio (Class B) 28.77 88.15 -- --
Alliance Technology Portfolio (Class B) 27.33 83.87 -- --
Alliance U.S. Government/High Grade Securities 25.59 78.66 -- --
Portfolio (Class B)
Baron Capital Asset Fund 29.90 91.50 -- --
Fidelity VIP III Growth & Income Portfolio
(Service Class) 22.21 68.49 -- --
Fidelity VIP III Mid Cap Portfolio (Service Class) 26.31 80.81 -- --
Fidelity VIP Overseas Portfolio (Service Class) 24.98 76.82 -- --
FT VIP Mutual Shares Securities Fund - Class 2 25.49 78.35 -- --
FT VIP Real Estate Securities Fund - Class 2 23.13 71.27 -- --
FT VIP Templeton International Smaller Companies Fund 28.87 88.45 -- --
- - - Class 2
Goldman Sachs Capital Growth Fund 24.26 74.66 127.70 272.70
Goldman Sachs VIT COREsm U.S. Equity Fund 23.23 71.58 122.55 262.41
Goldman Sachs Global Income Fund 25.80 79.27 135.37 287.94
Goldman Sachs International Equity Fund 27.85 85.40 145.53 307.92
J.P. Morgan U.S. Disciplined Equity Portfolio 23.95 73.74 -- --
Lazard Retirement Equity Portfolio 27.85 85.40 -- --
Lazard Retirement International Equity Portfolio 27.85 85.40 -- --
MFS(R)New Discovery Series 27.03 82.95 -- --
MFS(R)Research Series 23.85 73.43 -- --
MFS(R)Utilities Series 25.39 78.05 -- --
Putnam VT Growth and Income Fund - Class IB Shares 21.70 66.95 114.79 246.78
Putnam VT International Growth Fund - Class IB Shares 27.54 84.48 -- --
Putnam VT International New Opportunities Fund - Class 35.64 108.45 -- --
IB Shares
Royce Micro-Cap Portfolio 28.87 88.45 -- --
Royce Premier Portfolio 28.87 88.45 -- --
Wanger International Small Cap 30.92 94.54 -- --
Wanger U.S. Small Cap 25.49 78.35 -- --
Warburg Pincus Trust - Emerging Growth Portfolio 27.85 85.40 -- --
</TABLE>
In this example, the $30 annual contract administrative charge is approximated
as a 0.067% charge based on the estimated average contract size. Premium taxes
imposed by some state and local governments are not reflected in this example.
We entered into certain arrangements under which we are compensated by the
funds' advisors and/or distributors for the administrative services we provide
to the funds.
You should not consider this example as a representation of past or future
expenses. Actual expenses may be more or less than those shown.
Condensed Financial Information (Unaudited)
The following tables give per-unit information about the financial history of
each subaccount. We have not provided this information for some of the
subaccounts because they are new and do not have any history.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year ended Dec. 31,
1998 1997 1996 1995
Subaccount EVA2 (Investing in shares of AIM V.I. Value Fund)
Accumulation unit value at beginning of period $1.03 $1.00 -- --
Accumulation unit value at end of period $1.34 $1.03 -- --
Number of accumulation units outstanding at end of period (000 1,779 66 -- --
omitted)
Ratio of operating expense to average net assets 1.40% 1.40% -- --
Subaccount ECR1 (Investing in shares of AXPSM Variable Portfolio -
Capital Resource Fund)
Accumulation unit value at beginning of period $1.56 $1.27 $1.20 $1.00
Accumulation unit value at end of period $1.91 $1.56 $1.27 $1.20
Number of accumulation units outstanding at end of period (000 5,163 3,813 2,350 818
omitted)
Ratio of operating expense to average net assets 1.40% 1.40% 1.50% 1.50%
Subaccount EGD2 (Investing in shares of AXPSM Variable Portfolio
- - - New Dimensions Fund)
Accumulation unit value at beginning of period $1.05 $1.00 -- --
Accumulation unit value at end of period $1.32 $1.05 -- --
Number of accumulation units outstanding at end of period (000 1,108 69 -- --
omitted)
Ratio of operating expense to average net assets 1.40% 1.40% -- --
Subaccount EMG1 (Investing in shares of AXPSM Variable Portfolio -
Managed Fund)
Accumulation unit value at beginning of period $1.60 $1.36 $1.18 $1.00
Accumulation unit value at end of period $1.83 $1.60 $1.36 $1.18
Number of accumulation units outstanding at end of period (000 4,684 2,944 1,546 589
omitted)
Ratio of operating expense to average net assets 1.40% 1.40% 1.50% 1.50%
Subaccount EMS1 (Investing in shares of AXPSM Variable Portfolio -
Cash Management Fund)
Accumulation unit value at beginning of period $1.11 $1.07 $1.03 $1.00
Accumulation unit value at end of period $1.15 $1.11 $1.07 $1.03
Number of accumulation units outstanding at end of period (000 749 231 241 132
omitted)
Ratio of operating expense to average net assets 1.40% 1.40% 1.50% 1.50%
Simple yield4 3.24% 3.71% 3.26% 3.53%
Compound yield4 3.29% 3.78% 3.32% 3.59%
Subaccount ESI1 (Investing in shares of AXPSM Variable Portfolio -
Bond Fund
Accumulation unit value at beginning of period $1.33 $1.24 $1.17 $1.00
Accumulation unit value at end of period $1.33 $1.33 $1.24 $1.17
Number of accumulation units outstanding at end of period (000 5,689 2,544 1,377 414
omitted)
Ratio of operating expense to average net assets 1.40% 1.40% 1.50% 1.50%
Subaccount EPG3 (Investing in shares of Putnam VT Growth and Income Fund --
Class IB Shares)
Accumulation unit value at beginning of period $1.00 -- -- --
Accumulation unit value at end of period $1.18 -- -- --
Number of accumulation units outstanding at end of period (000 239 -- -- --
omitted)
Ratio of operating expense to average net assets 1.40% -- -- --
</TABLE>
1Operations commenced on Feb. 21, 1995.
2Operations commenced on Oct. 30, 1997.
3Operations commenced on Oct. 5, 1998.
4Net of annual contract administrative charge and mortality and expense risk
fee.
Financial Statements
You can find our audited financial statements with financial history in the SAI.
The SAI does not include audited financial statements for some of the
subaccounts because they are new and do not have any assets with financial
history in the SAI.
Performance Information
Performance information for the variable subaccounts may appear from time to
time in advertisements or sales literature. This information reflects the
performance of a hypothetical investment in a particular subaccount during a
specified time period. We show actual performance from the date the subaccounts
began investing in the funds. For some subaccounts, we do not provide any
performance information because they are new and have not had any activity to
date. We also show performance from the commencement date of the funds as if the
contract existed at that time, which it did not. Although we base performance
figures on historical earnings, past performance does not guarantee future
results.
We include non-recurring charges (such as withdrawal charges) in total return
figures, but not in yield quotations. Excluding non-recurring charges in yield
calculations increases the reported value.
Total return figures reflect the deduction of all applicable charges including:
o contract administrative charge;
o mortality and expense risk fee;
o variable account administrative charge; and
o withdrawal charge (assuming a withdrawal at the end of the illustrated
period)
We also show optional total return quotations that do not reflect a withdrawal
charge deduction (assuming no withdrawal). We may show total return quotations
by means of schedules, charts or graphs.
Average annual total return is the average annual compounded rate of return of
the investment over a period of one, five and ten years (or up to the life of
the subaccount if it is less than ten years old).
Cumulative total return is the cumulative change in the value of the investment
over a specified time period. We assume that income earned by the investment is
reinvested. Cumulative total return generally will be higher than average annual
total return.
Annualized simple yield (for subaccounts investing in money market funds)
"annualizes" the income generated by the investment over a given seven-day
period. That is, we assume the amount of income generated by the investment
during the period will be generated each seven-day period for a year. We show
this as a percentage of the investment.
Annualized compound yield (for subaccounts investing in money market funds) is
calculated like simple yield except that we assume the income is reinvested when
we annualize it. Compound yield will be higher than simple yield because of the
compounding effect of the assumed reinvestment.
Annualized yield (for subaccounts investing in income funds) divides the net
investment income (income less expenses) for each accumulation unit during a
given 30-day period by the value of the unit on the last day of the period. We
then convert the result to an annual percentage.
You should consider performance information in light of the investment
objectives and policies, characteristics and quality of the fund in which the
subaccount invests and the market conditions during the given time period.
Advertised yields and total return figures include charges that reduce the
advertised performance. Therefore, you should not compare subaccount performance
to that of mutual funds that sell their shares directly to the public. (See the
SAI for a further description of methods used to determine total return and
yield).
If you would like additional information about actual performance, contact us at
the address or telephone number on the first page of this prospectus.
The Variable Account and the Funds
<TABLE>
<CAPTION>
You may allocate purchase payments to any or all of the subaccounts of the
variable account that invest in shares of the following funds:
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Advisor or
Subaccount Investing in Investment Objectives and Policies: Manager
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ESI AXPSM Variable Portfolio - Objective: high level of current income while IDS Life Insurance Company
Bond Fund conserving the value of the investment for the (IDS Life), investment
longest time period. Invests primarily in manager; American Express
investment-grade bonds. Financial Corporation
(AEFC) investment advisor.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ECR AXPSM Variable Portfolio - Objective: capital appreciation. Invests primarily IDS Life, investment
Capital Resource Fund in U.S. common stocks. manager; AEFC investment
advisor.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EMS AXPSM Variable Portfolio - Objective: maximum current income consistent with IDS Life, investment
Cash Management Fund liquidity and conservation of capital. Invests in manager; AEFC investment
money market securities. advisor.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EIA AXPSM Variable Portfolio - Objective: high current income, with capital growth IDS Life, investment
Extra Income Fund as a secondary objective. Invests primarily in manager; AEFC investment
long-term, high-yielding, high-risk debt securities advisor.
below investment grade issued by U.S. and foreign
corporations.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EMG AXPSM Variable Portfolio - Objective: maximum total investment return through IDS Life, investment
Managed Fund a combination of capital growth and current income. manager; AEFC investment
Invests primarily in stocks, convertible advisor.
securities, bonds and money market instruments.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EGD AXPSM Variable Portfolio - Objective: long-term growth of capital. Invests IDS Life, investment
New Dimensions Fund primarily in common stocks of U.S. and foreign manager; AEFC investment
companies showing potential for significant growth. advisor.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ECA AIM V.I. Capital Objective: growth of capital. Invests primarily in A I M Advisors, Inc.
Appreciation Fund common stocks, with emphasis on medium- or
small-sized growth companies.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ECD AIM V.I. Capital Objective: long term growth of capital. Invests A I M Advisors, Inc.
Development Fund primarily in securities (including common stocks,
convertible securities bond bonds) of small- and
medium-sized companies.
- - ------------------------------------------------------------------------------------------------------------------------------
EVA AIM V.I. Value Fund Objective: long-term growth of capital with income A I M Advisors, Inc.
as a secondary objective. Invests primarily in
equity securities judged to be undervalued relative
to the investment advisor's appraisal of the current
or projected earnings of the companies issuing the
securities, or relative to current market values of
assets owned by the companies issuing the securities,
or relative to the equity market generally.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EPP Alliance Premier Growth Objective: long-term growth of capital. Invests Alliance Capital
Portfolio (Class B) primarily in equity securities of a limited number Management, L.P.
of large, carefully selected, high-quality U.S.
companies that are judged likely to achieve superior
earnings growth.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ETC Alliance Technology Objective: growth of capital. Invests primarily in Alliance Capital
Portfolio (Class B) securities of companies expected to benefit from Management, L.P.
technological advances and improvements.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EHG Alliance U.S. Objective: high level of current income consistent Alliance Capital
Government/High Grade with preservation of capital. Invest primarily in Management, L.P.
Securities Portfolio (1) U.S. Government securities and (2) other
(Class B) high-grade debt securities or, if unrated, of
equivalent quality.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EAS Baron Capital Asset Fund Objective: capital appreciation. Invests primarily BAMCO, Inc.
in securities of small and medium sized companies
with undervalued assets or favorable growth
prospects.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EFG Fidelity VIP III Growth & Objective: high total return through a combination Fidelity Management &
Income Portfolio (Service of current income and capital appreciation. Invests Research Company (FMR),
Class) primarily in common stocks with a focus on those investment manager; FMR
that pay current dividends and show potential for U.K. and FMR Far East,
capital appreciation. sub-investment advisors.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EFM Fidelity VIP III Mid Cap Objective: long-term growth of capital. Invests FMR, investment manager;
Portfolio (Service Class) primarily in medium market capitalization common FMR U.K. and FMR Far East,
stocks. sub-investment advisors.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EFO Fidelity VIP Overseas Objective: long-term growth of capital. Invests FMR, investment manager;
Portfolio (Service Class) primarily in common stocks of foreign securities. FMR U.K., FMR Far East,
Fidelity
International
Investment
Advisors
(FIIA)
and
FIIA
U.K.,
sub-investment
advisors.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EMU Franklin Templeton VIP Objective: capital appreciation with income as a Franklin Mutual Advisers,
Mutual Shares Securities secondary goal. Invests primarily in equity LLC
Fund - Class 2 securities of companies that the manager believes
are available at market prices less than their
actual value based on certain recognized or objective
criteria (intrinsic value).
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ERE Franklin Templeton VIP Trust Objective: capital appreciation with a secondary Franklin Advisers, Inc.
Real Estate Securities goal to earn current income. Invests primarily in
Fund - Class 2 securities of companies operating in the real
estate industry, primarily equity real estate
investment trusts (REITS).
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EIS Franklin Templeton VIP Trust Objective: long-term capital appreciation. Invests Templeton Investment
Templeton International primarily in equity securities of smaller Counsel Inc.
Smaller Companies Fund - companies located outside the U.S., including
Class 2 in emerging markets.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
JCG Goldman Sachs Capital Objective: long-term growth of capital. Invest Goldman Sachs Asset
Growth Fund primarily in equity securities considered by the Management
Investment Advisor to have long-term
capital appreciation potential.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
JUS Goldman Sachs VIT COREsm U.S. Objective: long-term growth of capital and dividend Goldman Sachs Asset
Equity Fund income. Invests primarily in a broadly diversified Management
portfolio of large-cap and blue chip equity
securities representing all major sectors
of the U.S. economy.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
JGL Goldman Sachs Global Objective: high total return, emphasizing current Goldman Sachs Asset
Income Fund income, and, to a lesser extent, providing Management International
opportunities for capital appreciation. Invests
primarily in a portfolio of high quality
fixed-income securities of U.S. and foreign issuers
and enters into transactions in foreign currencies.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
JIF Goldman Sachs Objective: long-term capital appreciation. Invests Goldman Sachs Asset
International Equity Fund primarily in equity securities of companies that Management International
are organized outside the U.S., or whose securities
are principally traded outside the U.S.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EDE J.P. Morgan U.S. Objective: outperform U.S. stock markets over the J.P. Morgan
Disciplined Equity long term through a disciplined management
Portfolio approach. Invests primarily in large- and
medium-capitalization U.S. companies.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ERQ Lazard Retirement Equity Objective: long-term capital appreciation. Invests Lazard Asset Management
Portfolio primarily in equity securities, principally common
stocks of relatively large U.S. companies (those
whose total market value is more than $1 billion)
that the Investment Manager believes are
undervalued based on their earnings, cash flow or
asset values.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ERI Lazard Retirement Objective: long-term capital appreciation. Invests Lazard Asset Management
International Equity primarily in equity securities, principally common
Portfolio stocks of relatively large non-U.S. companies
(those whose total market value is more than $1
billion) that the Investment Manager believes are
undervalued based on their earnings, cash flow or
asset values.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
END MFS(R) New Discovery Series Objective: capital appreciation. Invests primarily Massachusetts Financial
in equity securities of emerging growth companies. Service Company (MFS) Investment
Management (R)
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
ERS MFS(R) Research Series Objective: long-term growth of capital and future MFS Investment Management(R)
income. Invests primarily in common
stocks and related securities that
have favorable prospects for long-term
growth, attractive valuations based on
current and expected earnings or cash flow,
dominant or growing market share, and superior
management.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EUT MFS(R) Utilities Series Objective: capital growth and current income. MFS Investment
Invests primarily in equity and debt securities of Management(R)
domestic and foreign companies in the utilities
industry.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EPG Putnam VT Growth and Objective: capital growth and current income. Putnam Investment
Income Fund -- Class IB Invests primarily in common stocks that offer Management, Inc.
Shares potential for capital growth, current income or
both.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EPL Putnam VT International Objective: capital appreciation. Invests primarily Putnam Investment
Growth Fund -- Class IB in growth stocks outside the U.S. Management, Inc.
Shares
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EPN Putnam VT International Objective: long-term capital appreciation by Putnam Investment
New Opportunities Fund -- investing in companies that have above-average Management, Inc.
Class IB Shares growth prospects due to the fundamental growth of
their market sector. Invests primarily in growth
stocks outside the U.S.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EMC Royce Micro-Cap Portfolio Objective: long-term growth of capital. Invests Royce & Associates, Inc.
primarily in a broadly diversified portfolio of
equity securities issued by micro-cap companies
(companies with stock market capitalizations below
$300 million).
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EPR Royce Premier Portfolio Objective: long-term growth of capital with current Royce & Associates, Inc.
income as a secondary objective. Invests primarily
in a limited number of equity securities issued by
small companies with stock market capitalization
between $300 million and $1.5 billion.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EIC Wanger International Small Objective: long-term growth of capital. Invests Wanger Asset Management,
Cap primarily in stocks of small- and medium-size L.P.
non-U.S. companies.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EUC Wanger U.S. Small Cap Objective: long-term growth of capital. Invests Wanger Asset Management,
primarily in stocks of small- and medium-size U.S. L.P.
companies.
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
EEG Warburg Pincus Trust Objective: maximum capital appreciation. Invests Warburg Pincus Asset
Emerging Growth Portfolio primarily in equity securities of small to Management, Inc.
medium sized U.S.emerging-growth
companies.
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The investment objectives and policies of some of the funds are similar to the
investment objectives and policies of other mutual funds that the investment
advisor or its affiliates manage. Although the objectives and policies may be
similar, each fund will have its own portfolio holdings and its own fees and
expenses. Accordingly, each fund will have its own investment results.
The investment managers and advisors cannot guarantee that the funds will meet
their investment objectives. Please read the funds' prospectuses for facts you
should know before investing. These prospectuses are available by contacting us
at the address or telephone number on the first page of this prospectus.
All funds are available to serve as the underlying investments for variable
annuities. Some funds also are available to serve as investment options for
variable life insurance policies and qualified plans. It is possible that in the
future, it may be disadvantageous for variable annuity accounts and variable
life insurance accounts and/or qualified plans to invest in the available funds
simultaneously.
Although the insurance company and the funds do not currently foresee any such
disadvantages, the boards of directors or trustees of the appropriate funds will
monitor events in order to identify any material conflicts between annuity
owners, policy owners and qualified plans and to determine what action, if any,
should be taken in response to a conflict. If a board were to conclude that it
should establish separate funds for the variable annuity, variable life
insurance and qualified plan accounts, you would not bear any expenses
associated with establishing separate funds. Please refer to the fund
prospectuses for risk disclosure regarding simultaneous investments by variable
annuity, variable life insurance and qualified plan accounts.
The IRS issued final regulations relating to the diversification requirements
under Section 817(h) of the Internal Revenue Code of 1986, as amended (the
Code). Each fund intends to comply with these requirements.
The variable account was established under Indiana law on July 15, 1987, and the
subaccounts are registered together as a single unit investment trust under the
Investment Company Act of 1940 (the 1940 Act). This registration does not
involve any supervision of our management or investment practices and policies
by the SEC. All obligations arising under the contracts are general obligations
of American Enterprise Life.
The variable account meets the definition of a separate account under federal
securities laws. We credit or charge income, capital gains and capital losses of
each subaccount only to that subaccount. State insurance law prohibits us from
charging a subaccount with liabilities of any other subaccount or of our general
business. The variable account includes other subaccounts that are available
under contracts not described in this prospectus.
The U.S. Treasury and the Internal Revenue Service (IRS) said that they may
provide additional guidance on investment control. This concerns how many
subaccounts an insurance company may offer and how many exchanges among
subaccounts it may allow before the contract owner would be currently taxed on
income earned within subaccount assets. At this time, we do not know what the
additional guidance will be or when action will be taken. We reserve the right
to modify the contract, as necessary, so that the contract owner will not be
subject to current taxation as the owner of the subaccount assets.
We intend to comply with all federal tax laws so that the contract continues to
qualify as an annuity for federal income tax purposes. We reserve the right to
modify the contract as necessary to comply with any new tax laws.
The Fixed Account
You also may allocate purchase payments to the fixed account. We back the
principal and interest guarantees relating to the fixed account. The value of
the fixed account increases as we credit interest to the account. Purchase
payments and transfers to the fixed account become part of our general account.
We credit and compound interest daily. We will change the interest rates from
time to time at our discretion.
Interests in the fixed account are not required to be registered with the SEC.
The SEC staff does not review the disclosures in this prospectus on the fixed
account. Disclosures regarding the fixed account, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. (See
"Making the Most of Your Contract -- Transfer policies" for restrictions on
transfers involving the fixed account.)
Buying Your Contract
Your sales representative will help you prepare and submit your application, and
send it along with your initial purchase payment to our office. As the owner,
you have all rights and may receive all benefits under the contract. You can own
a nonqualified annuity in joint tenancy with rights of survivorship only in
spousal situations. You cannot own a qualified annuity in joint tenancy. You can
buy a contract or become an annuitant if you are 90 or younger.
When you apply, you may select:
o the fixed account and/or subaccounts in which you want to invest;
o how you want to make purchase payments;
o the date you want to start receiving annuity payouts (the retirement date);
o a death benefit option; and
o a beneficiary.
The contract provides for allocation of purchase payments to the subaccounts of
the variable account and/or to the fixed account in even 1% increments.
If your application is complete, we will process it and apply your purchase
payment to the fixed account and subaccounts you selected within two business
days after we receive it at our office. If we accept your application, we will
send you a contract. If we cannot accept your application within five business
days, we will decline it and return your payment. We will credit additional
purchase payments you make to your accounts on the valuation date we receive
them. We will value the additional payments at the next accumulation unit value
calculated after we receive your payments at our office.
You may make monthly payments to your contract under a Systematic Investment
Plan (SIP). You must make an initial purchase payment of at least $2,000. Then,
to begin the SIP, you will complete and send a form and your first SIP payment
along with your application.
There is no charge for SIP. You can stop your SIP payments at any time.
In most states, you may make additional purchase payments to nonqualified and
qualified annuities until the retirement date.
The retirement date
Annuity payouts are scheduled to begin on the retirement date. You can align
this date with your actual retirement from a job, or it can be a different
future date, depending on your needs and goals and on certain restrictions. You
also can change the date, provided you send us written instructions at least 30
days before annuity payouts begin.
For nonqualified annuities and Roth IRAs, the retirement date must be:
o no earlier than the 60th day after the contract's effective date; and o no
later than the annuitant's 85th birthday (or the 10th contract anniversary, if
later).
For qualified annuities (except Roth IRAs), to avoid IRS penalty taxes, the
retirement date generally must be:
o on or after the date the annuitant reaches age 59 1/2; and
o for IRAs and SEPs, by April 1 of the year following the calendar year when
the annuitant reaches age 70 1/2; or
o for TSAs, by April 1 of the year following the calendar year when the
annuitant reaches age 70 1/2, or, if later, retires (except that 5%
business owners may not select a retirement date that is later than April 1
of the year following the calendar year when they reach age 70 1/2).
If you are taking the minimum IRA or TSA distributions as required by the Code
from another tax-qualified investment, or in the form of partial withdrawals
from this contract, annuity payouts can start as late as the annuitant's 85th
birthday or the 10th contract anniversary, if later.
Beneficiary
If death benefits become payable before the retirement date (while the contract
is in force and before annuity payouts begin), we will pay your named
beneficiary all or part of the contract value. If there is no named beneficiary,
then you or your estate will be the beneficiary. (See "Benefits in Case of
Death" for more about beneficiaries.)
Purchase payments
Minimum initial purchase payment (includes SIPs): $2,000
Minimum additional purchase payments:
$ 50 for SIPs
$100 for regular payments
Maximum total purchase payments*:
$ 100,000 (for ages 86 to 90 without prior approval)
$1,000,000 (for ages up to 85 without prior approval)
* These limits apply in total to all American Enterprise Life annuities you
own. We reserve the right to increase maximum limits. For qualified
annuities the qualified plan's limits on annual contributions also apply.
How to make purchase payments
1 By letter
Send your check along with your name and contract number to:
Regular mail:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Enterprise Life Insurance Company
Attention: Unit 829
733 Marquette Avenue
Minneapolis, MN 55402
2 By SIP:
Contact your sales representative to complete the necessary SIP paperwork.
Charges
Contract administrative charge
We charge this fee for establishing and maintaining your records. We deduct $30
from the contract value on your contract anniversary at the end of each contract
year. We prorate this charge among the subaccounts and the fixed account in the
same proportion your interest in each account bears to your total contract
value.
We will waive this charge when the contract value is $50,000 or more on the
current contract anniversary.
If you take a full withdrawal from your contract, we will deduct the charge at
the time of withdrawal regardless of the contract value. We cannot increase the
annual contract administrative charge and it does not apply after annuity
payouts begin or when we pay death benefits.
Variable account administrative charge
We apply this charge daily to the subaccounts. It is reflected in the unit
values of the subaccounts and it totals 0.15% of their average daily net assets
on an annual basis. It covers certain administrative and operating expenses of
the subaccounts such as accounting, legal and data processing fees and expenses
involved in the preparation and distribution of reports and prospectuses. We
cannot increase the variable account administrative charge.
Mortality and expense risk fee
We charge this fee daily to the subaccounts. The unit values of your subaccounts
reflect this fee and it totals 1.25% of their average daily net assets on an
annual basis. This fee covers the mortality and expense risk that we assume.
Approximately two-thirds of this amount is for our assumption of mortality risk,
and one-third is for our assumption of expense risk. This fee does not apply to
the fixed account.
Mortality risk arises because of our guarantee to pay a death benefit and our
guarantee to make annuity payouts according to the terms of the contract, no
matter how long a specific annuitant lives and no matter how long our entire
group of annuitants live. If, as a group, annuitants outlive the life expectancy
we assumed in our actuarial tables, then we must take money from our general
assets to meet our obligations. If, as a group, annuitants do not live as long
as expected, we could profit from the mortality risk fee.
Expense risk arises because we cannot increase the contract administrative
charge and variable account administrative charge and these charges may not
cover our expenses. We would have to make up any deficit from our general
assets.
The subaccounts pay us the mortality and expense risk fee they accrued as
follows:
o first, to the extent possible, the subaccounts pay this fee from any
dividends distributed from the funds in which they invest;
o then, if necessary, the funds redeem shares to cover any remaining fees
payable.
We may use any profits we realize from the subaccounts' payment to us of the
mortality and expense risk fee for any proper corporate purpose, including,
among others, payment of distribution (selling) expenses. We do not expect that
the withdrawal charge, discussed in the following paragraphs, will cover sales
and distribution expenses.
Withdrawal charge
If you withdraw all or part of your contract, you may be subject to a withdrawal
charge. We calculate the withdrawal charge by drawing from your total contract
value in the following order:
o After the first contract year, we withdraw up to 10% of your prior
anniversary contract value that you have not yet withdrawn during that
contract year. We do not assess a withdrawal charge on this amount.
o During the first contract year, we withdraw contract earnings, if any.
After the first contract year, we withdraw those contract earnings that are
greater than any applicable 10% free withdrawal amount described above.
Contract earnings are contract value minus all purchase payments received
and not previously withdrawn. We determine contract earnings by looking at
the entire contract value, not the earnings of any particular subaccount or
the fixed account. We do not assess a withdrawal charge on this amount.
o Next, we withdraw purchase payments we received eight or more years before
the withdrawal and not previously withdrawn. We do not assess a withdrawal
charge on these purchase payments.
o Finally, if necessary, we withdraw purchase payments received in the seven
years before the withdrawal on a "first-in, first-out" (FIFO) basis. There
is a withdrawal charge on these payments. We determine your withdrawal
charge by multiplying each of these payments by the applicable withdrawal
charge percentage, and then totaling the withdrawal charges.
The withdrawal charge percentage depends on the number of years since you made
the payments that are withdrawn.
Years from purchase Withdrawal charge
payment receipt percentage
1 7.5%
2 7.5
3 7
4 6
5 5
6 4
7 2
Thereafter 0
Withdrawal charge calculation example
The following is an example of the calculation we would make to determine the
withdrawal charge on a contract with this history:
o The contract date is July 1, 1999 with a contract year of July 1 through
June 30 and with an anniversary date of July 1 each year; and
o We received these payments:
- $10,000 July 1, 1999;
- $8,000 Dec. 31, 2004;
- $6,000 Feb. 20, 2007; and
o The owner withdraws the contract for its total withdrawal value of
$38,101 on Aug. 5, 2009 and had not made any other withdrawals during
that contract year; and
o The prior anniversary July 1, 2008 contract value was $38,488.
<TABLE>
<CAPTION>
<S> <C> <C>
Withdrawal charge Explanation
$0 $3,848.80 is 10% of the prior anniversary contract value withdrawn
without withdrawal charge; and
$0 $10,252.20 is contract earnings in excess of the 10% free withdrawal
amount withdrawn without withdrawal charge; and
$0 $10,000 July 1, 1999 payment was received eight or more years before
withdrawal and is withdrawn without withdrawal charge; and
$400 $8,000 Dec. 31, 2004 payment is in its fifth year from receipt,
withdrawn with a 5% withdrawal charge; and
$420 $6,000 Feb. 20, 2007 payment is in its third year from receipt,
withdrawn with a 7% withdrawal charge.
- - -------------------------------------
$820
</TABLE>
For a partial withdrawal that is subject to a withdrawal charge, the amount we
actually withdraw from your contract value will be the amount you request plus
any applicable withdrawal charge. We apply the withdrawal charge to this total
amount. We pay you the amount you requested. If you take a full withdrawal from
your contract, we also will deduct the $30 contract administrative charge.
Waiver of withdrawal charge
We do not assess a withdrawal charge for:
o withdrawals of any contract earnings during the first contract year;
o withdrawals during each contract year after the first totaling the greater
of 10% of your prior contract anniversary
contract value or contract earnings;
o required minimum distributions from a qualified annuity (for those amounts
required to be distributed from the contract described in this prospectus);
o contracts settled using an annuity payout plan;
o death benefits;
o withdrawals you make under your contract's "Waiver of Withdrawal Charges"
provision. To the extent permitted by state law, your contract will include
this provision when the owner and annuitant are under age 76 on the date we
issue the contract. We will waive withdrawal charges that we normally
assess upon full or partial withdrawal if you provide proof satisfactory to
us that, as of the date you request the withdrawal, you or the annuitant
are confined to a hospital or nursing home and have been for the prior 60
days. (See your contract for additional conditions and restrictions on this
waiver); and
o withdrawals you make if you or the annuitant are diagnosed in the second or
later contract years as disabled with a medical condition that with
reasonable medical certainty will result in death within 12 months or less
from the date of the licensed physician's statement. You must provide us
with a licensed physician's statement containing the terminal illness
diagnosis and the date the terminal illness was initially diagnosed.
Possible group reductions: In some cases, we may incur lower sales and
administrative expenses due to the size of the group, the average contribution
and the use of group enrollment procedures. In such cases, we may be able to
reduce or eliminate the contract administrative and withdrawal charges. However,
we expect this to occur infrequently.
Premium taxes
Certain state and local governments impose premium taxes (up to 3.5%). These
taxes depend upon your state of residence or the state in which the contract was
sold. Currently, we deduct any applicable premium tax when you make a full
withdrawal from your contract or when annuity payouts begin, but we reserve the
right to deduct this tax at other times such as when you make purchase payments.
Valuing your Investment
We value your fixed account and subaccounts as follows:
Fixed account: We value the amounts you allocated to the fixed account directly
in dollars. The fixed account value equals:
o the sum of your purchase payments and transfer amounts allocated to the
fixed account;
o any contract value credits allocated to the fixed account;
o plus interest credited;
o minus the sum of amounts withdrawn (including any applicable withdrawal
charges) and amounts transferred out; and
o minus any prorated contract administrative charge.
Subaccounts: We convert amounts you allocated to the subaccounts into
accumulation units. Each time you make a purchase payment or transfer amounts
into one of the subaccounts or we apply any contract value credits to a
subaccount, we credit a certain number of accumulation units to your contract
for that subaccount. Conversely, each time you take a partial withdrawal,
transfer amounts out of a subaccount or we assess a contract administrative
charge, we subtract a certain number of accumulation units from your contract.
The accumulation units are the true measure of investment value in each
subaccount during the accumulation period. They are related to, but not the same
as, the net asset value of the fund in which the subaccount invests.
The dollar value of each accumulation unit can rise or fall daily depending on
the variable account expenses, performance of the fund and on certain fund
expenses. Here is how we calculate accumulation unit values:
Number of units
To calculate the number of accumulation units for a particular subaccount, we
divide your investment after deduction of any premium taxes, by the current
accumulation unit value.
Accumulation unit value
The current accumulation unit value for each subaccount equals the last value
times the subaccount's current net investment factor.
Net investment factor
We determine the net investment factor by:
o adding the fund's current net asset value per share, plus the per-share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee and the variable account administrative charge from the result.
Because the net asset value of the fund may fluctuate, the accumulation unit
value may increase or decrease. You bear all the investment risk in a
subaccount.
Factors that affect subaccount accumulation units
Accumulation units may change in two ways: in number and in value. Here are the
factors that influence those changes:
The number of accumulation units you own may fluctuate due to:
o additional purchase payments you allocate to the subaccounts;
o any contract value credits allocated to the subaccounts;
o transfers into or out of the subaccounts;
o partial withdrawals;
o withdrawal charges; and/or
o prorated portions of the contract administrative charge.
Accumulation unit values will fluctuate due to:
o changes in funds' net asset value;
o dividends distributed to the subaccounts;
o capital gains or losses of funds;
o fund operating expenses;
o mortality and expense risk fees; and/or
o variable account administrative charges.
Contract value credits
Before annuity payouts begin, and starting in the eighth contract year while
this contract is in force, we periodically will apply a "contract value credit"
to your contract value if:
o you chose death benefit Option A at the time of application (see "Benefits in
Case of Death"); and
o there are "eligible purchase payments" at the time we calculate the credit.
"Eligible purchase payments" means payments you made to the contract that you
have not withdrawn and that are no longer subject to a withdrawal charge.
On an annual basis, the contract value credit is 0.50% of an amount we calculate
by multiplying (a) times (b) where:
(a) is the contract value at the time we make the calculation; and
(b) is the ratio of "eligible purchase payments" to total purchase
payments.
We reserve the right to calculate and apply the contract value credit on a
quarterly or monthly basis. If we calculate the credit on a quarterly basis, the
percentage will be 0.125% instead of 0.50%. If we calculate the credit on a
monthly basis, the percentage will be 0.04167% instead of 0.50%.
We will apply the contract value credit to your contract value according to your
fixed account and subaccount allocation instructions that are in effect at the
time. We will continue to apply the contract value credit, if applicable, for
the life of your contract until full withdrawal or until annuity payouts begin.
The contract value credit will be taxable when we distribute it to you.
Making the Most of your Contract
Automated dollar-cost averaging
Currently, you can use automated transfers to take advantage of dollar-cost
averaging (investing a fixed amount at regular intervals). For example, you
might transfer a set amount monthly from a relatively conservative subaccount to
a more aggressive one, or to several others, or from the fixed account to one or
more subaccounts. You also can obtain the benefits of dollar-cost averaging by
setting up regular automatic SIP payments. There is no charge for dollar-cost
averaging.
This systematic approach can help you benefit from fluctuations in accumulation
unit values caused by fluctuations in the market values of the funds. Since you
invest the same amount each period, you automatically acquire more units when
the market value falls and fewer units when it rises. The potential effect is to
lower your average cost per unit.
<TABLE>
<CAPTION>
How dollar-cost averaging works
<S> <C> <C> <C> <C>
Month Amount Accumulation Number of units
Invested unit value purchased
By investing an Jan $100 $20 5.00
equal number of
dollars each month... Feb 100 18 5.56
Mar 100 17 5.88
you automatically Apr 100 15 6.67
buy more units
when the per unit May 100 16 6.25
market price is low...
Jun 100 18 5.56
Jul 100 17 5.88
Aug 100 19 5.26
and fewer units Sept 100 21 4.76
when the per unit
market price is high. Oct 100 20 5.00
</TABLE>
You have paid an average price of only $17.91 per unit over the 10 months, while
the average market price actually was $18.10.
Dollar-cost averaging does not guarantee that any subaccount will gain in value
nor will it protect against a decline in value if market prices fall. Because
dollar-cost averaging involves continuous investing, your success with this
strategy will depend upon your willingness to continue to invest regularly
through periods of low price levels. Dollar-cost averaging can be an effective
way to help meet your long-term goals. For specific features, contact your sales
representative.
Asset rebalancing
You can ask us in writing to automatically rebalance the subaccount portion of
your contract value either quarterly, semi-annually or annually. The period you
select will start to run on the date we record your request. On the first
valuation date of each of these periods, we automatically will rebalance your
contract value so that the value in each subaccount matches your current
subaccount percentage allocations. These percentage allocations must be in whole
numbers. Asset rebalancing does not apply to the fixed account.
There is no charge for asset rebalancing.
You can change your percentage allocations or your rebalancing period at any
time by contacting us in writing. We will restart the rebalancing period you
selected as of the date we record your change. You also can ask us in writing to
stop rebalancing your contract value. You must allow 30 days for us to change
any instructions that currently are in place. For more information on asset
rebalancing, contact your sales representative.
Transferring money between accounts
You may transfer money from any one subaccount, or the fixed account, to another
subaccount before annuity payouts begin. (Certain restrictions apply to
transfers involving the fixed account.) We will process your transfer on the
valuation date we receive your request. We will value your transfer at the next
accumulation unit value calculated after we receive your request. There is no
charge for transfers. Before making a transfer, you should consider the risks
involved in switching investments.
We may suspend or modify transfer privileges at any time. Excessive trading
activity can disrupt fund management strategy and increase expenses, which are
borne by all contract owners who allocated purchase payments to the fund
regardless of their transfer activity. We may apply modifications or
restrictions in any reasonable manner to prevent transfers we believe will
disadvantage other contract owners. These modifications could include, but not
be limited to:
o requiring a minimum time period between each transfer;
o not accepting transfer requests of an agent acting under power of attorney on
behalf of more than one contract owner; or
o limiting the dollar amount that a contract owner may transfer at any one time.
For information on transfers after annuity payouts begin, see "Transfer
policies" below.
Transfer policies
o Before annuity payouts begin, you may transfer contract values between
the subaccounts or from the subaccounts to the fixed account at any
time. However, if you made a transfer from the fixed account to the
subaccounts, you may not make a transfer from any subaccount back to
the fixed account for six months following that transfer.
o You may transfer contract values from the fixed account to the
subaccounts on or within 30 days before or after the contract
anniversary (except for automated transfers, which can be set up for
certain transfer periods subject to certain minimums). The transfer
from the fixed account to the subaccounts will be effective on the
valuation date we receive it.
o We will not accept requests for transfers from the fixed account at
any other time.
o Once annuity payouts begin, you may not make transfers to or from the
fixed account, but you may make transfers once per contract year among
the subaccounts. During the annuity payout period, we reserve the right
to limit the number of subaccounts in which you may invest.
How to request a transfer or a withdrawal
1 By letter
Send your name, contract number, Social Security Number or Taxpayer
Identification Number and signed request for a transfer or withdrawal to:
Regular mail:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
Express mail:
American Enterprise Life Insurance Company
Attention: Unit 829
733 Marquette Avenue
Minneapolis, MN 55402
Minimum amount
Transfers or withdrawals: $500 or entire account balance
Maximum amount
Transfers or withdrawals: Contract value or the entire account balance
2 By automated transfers and automated partial withdrawals
Your sales representative can help you set up automated transfers among your
subaccounts or fixed account or partial withdrawals from the accounts.
You can start or stop this service by written request or other method acceptable
to us. You must allow 30 days for us to change any instructions that are
currently in place.
o Automated transfers may not exceed an amount that, if continued, would
deplete the fixed account or subaccounts within 12 months unless we
agree otherwise.
o Automated transfers and automated partial withdrawals are subject to
all of the contract provisions and terms, including transfer of
contract values between accounts.
o Automated withdrawals may be restricted by applicable law under some
contracts.
o Automated partial withdrawals may result in IRS taxes and penalties on
all or part of the amount withdrawn.
Minimum amount
Transfers or withdrawals: $100 monthly/$250 quarterly,
semiannually or annually
Maximum amount
Transfers or withdrawals: Contract value (except for
automated transfers from the
fixed account)
3 By Phone
Call between 8 a.m. and 6 p.m. Central time:
1-800-333-3437 or
(612) 671-7700 (Minneapolis/St. Paul area)
Minimum amount
Transfers or withdrawals: $500 or entire account balance
Maximum amount
Transfers: Contract value or the entire account balance
Withdrawals: $25,000
We answer telephone requests promptly, but you may experience delays when the
call volume is unusually high. If you are unable to get through, use the mail
procedure as an alternative.
We will honor any telephone transfer or withdrawal requests that we believe are
authentic and we will use reasonable procedures to confirm that they are. This
includes asking identifying questions and tape recording calls. We will not
allow a telephone withdrawal within 30 days of a phoned-in address change. As
long as we follow the procedures, we (and our affiliates) will not be liable for
any loss resulting from fraudulent requests.
Telephone transfers and withdrawals are automatically available. You may request
that telephone transfers and withdrawals not be authorized from your account by
writing to us.
Withdrawals
You may withdraw all or part of your contract at any time before annuity payouts
begin by sending us a written request or calling us. We will process your
withdrawal request on the valuation date we receive it. For total withdrawals,
we will compute the value of your contract at the next accumulation unit value
calculated after we receive your request. We may ask you to return the contract.
You may have to pay withdrawal charges (see "Charges - Withdrawal charge") and
IRS taxes and penalties (see "Taxes"). You cannot make withdrawals after annuity
payouts begin (except under Plan E). See "The Annuity Payout Period-Annuity
Payout Plans".
Withdrawal policies
If you have a balance in more than one account and you request a partial
withdrawal, we will withdraw money from all your subaccounts and/or the fixed
account in the same proportion as your value in each account correlates to your
total contract value, unless you request otherwise.
Receiving payment when you request a withdrawal By regular or express mail:
o payable to you.
o mailed to address of record.
NOTE: We will charge you a fee if you request express mail delivery.
Normally, we will send the payment within seven days after receiving your
request. However, we may postpone the payment if:
-the withdrawal amount includes a purchase payment check that has not
cleared;
-the NYSE is closed, except for normal holiday and weekend closings;
-trading on the NYSE is restricted, according to SEC rules;
-an emergency, as defined by SEC rules, makes it impractical to sell
securities or value the net assets of the accounts; or
-the SEC permits us to delay payment for the protection of security
holders.
TSA Special Surrender Provisions
Participants in Tax-Sheltered Annuities: The Code imposes certain restrictions
on your right to receive early distributions from a TSA:
o Distributions attributable to salary reduction contributions (plus
earnings) made after Dec. 31, 1988, or to transfers or rollovers from other
contracts, may be made from the TSA only if:
- - - you are at least age 59 1/2;
- - - you are disabled as defined in the Code;
- - - you separated from the service of the employer who purchased the
contract; or
- - - the distribution is because of your death.
o If you encounter a financial hardship (as defined by the Code), you may
receive a distribution of all contract values attributable to salary
reduction contributions made after Dec. 31, 1988, but not the earnings on
them.
o Even though a distribution may be permitted under the above rules, it may
be subject to IRS taxes and penalties (see "Taxes").
o The above restrictions on distributions do not affect the availability of
the amount credited to the contract as of Dec. 31, 1988. The restrictions
also do not apply to transfers or exchanges of contract value within the
contract, or to another registered variable annuity contract or investment
vehicle available through the employer.
Changing Ownership
You may change ownership of your nonqualified annuity at any time by completing
a change of ownership form we approve and sending it to our office. The change
will become binding upon us when we receive and record it. We will honor any
change of ownership request that we believe is authentic and we will use
reasonable procedures to confirm authenticity. If we follow these procedures, we
will not take any responsibility for the validity of the change.
If you have a nonqualified annuity, you may incur income tax liability by
transferring, assigning or pledging any part of it. (See "Taxes.")
If you have a qualified annuity, you may not sell, assign, transfer, discount or
pledge your contract as collateral for a loan, or as security for the
performance of an obligation or for any other purpose except as required or
permitted by the Code. However, if the owner is a trust or custodian, or an
employer acting in a similar capacity, ownership of a contract may be
transferred to the annuitant.
Benefits in Case of Death
There are two death benefit options under this contract. If either you or the
annuitant are age 79 or older on the contract date, Option A will apply. If both
you and the annuitant are under age 79 on the contract date, you can elect
either Option A or Option B on your application. Once you elect an option, you
cannot change it. We show the option that applies in your contract.
Under either option, we will pay the death benefit to your beneficiary upon the
earlier of your death or the annuitant's death. If a contract has more than one
person as the owner, we will pay benefits upon the first to die of any owner or
the annuitant. Other rules apply to qualified annuities. (See "Taxes").
Option A
We will pay the beneficiary the greater of:
1. the contract value; or
2. the total purchase payments paid minus "adjusted partial withdrawals."
Contract value credits may apply if you choose Option A at the time of
application (see "Valuing your Investment - Contract value credits").
Option B
We will pay the beneficiary the greatest of:
1. the contract value; or
2. the total purchase payments paid minus any "adjusted partial withdrawals";
or
3. the "maximum anniversary value" immediately preceding the date of death
plus the dollar amount of any payments since that anniversary and minus any
"adjusted partial withdrawals" since that anniversary.
Maximum anniversary value: Each contract anniversary prior to the earlier of
your or the annuitant's 81st birthday, we calculate the anniversary value which
is the greater of:
(a) the contract value on that anniversary; or
(b) total payments made to the contract minus "adjusted partial withdrawals".
The "maximum anniversary value" is equal to the greatest of these anniversary
values.
After your or the annuitant's 81st birthday, the death benefit continues to be
the death benefit value as of that date, plus any subsequent payments and minus
any "adjusted partial withdrawals".
Adjusted partial withdrawals: Under either Option A or Option B, we calculate
"adjusted partial withdrawals" for each partial withdrawal as the product of (a)
times
(b) where:
(a) is the ratio of the amount of the partial withdrawal (including any
applicable withdrawal charge) to the contract value on the date of (but
prior to) the partial withdrawal; and
(b)is the death benefit on the date of (but prior to) the partial
withdrawal.
Example:
Option A
o The contract is purchased with a payment of $20,000 on Jan. 1, 1999.
o On Jan. 1, 2000 an additional premium payment of $5,000 is made.
o On March 1, 2000 the contract value has grown to $27,000 ($25,000 in
premium payments and $2,000 in earnings). The owner takes a $1,500 partial
withdrawal.
o On March 1, 2001 the contract value has fallen to $23,000.
The death benefit on March 1, 2001 is calculated as follows:
Total premiums paid: $25,000.00
minus any "adjusted partial withdrawals"
calculated as: 1,500 x 25,000 = - 1,388.89
-------------- ------------
27,000
for a death benefit of: $23,611.11
Option B
o The contract is purchased with a payment of $20,000 on Jan. 1, 1999.
o On Jan. 1, 2000 (the first contract anniversary) the contract value has
grown to $24,000.
o On March 1, 2000 the contract value has fallen to $22,000, at which
point the owner takes a $1,500 partial withdrawal, leaving a contract
value of $20,500.
<TABLE>
<CAPTION>
<S> <C>
The death benefit on March 1, 2000 is calculated as follows:
The highest contract value on any prior contract anniversary: $24,000.00
plus any purchase payments paid since that anniversary: + 0.00
minus any "adjusted partial withdrawal" taken since that anniversary,
calculated as: 1,500 x 24,000 = - 1,636.36
-------------- ----------
22,000
for a death benefit of: $22,363.64
</TABLE>
If your spouse is sole beneficiary under a nonqualified annuity and you die
before the retirement date, your spouse may keep the contract as owner. To do
this your spouse must, within 60 days after we receive proof of death, give us
written instructions to keep the contract in force.
Under a qualified annuity, if the annuitant dies before the Code requires
distributions to begin, and the spouse is the only beneficiary, the spouse may
keep the contract as owner until the date on which the annuitant would have
reached age 70 1/2 or any other date permitted by the Code. To do this, the
spouse must give us written instructions within 60 days after we receive proof
of death.
Payments: Under a nonqualified annuity we will pay the beneficiary in a single
sum unless you give us other written instructions. We must fully distribute the
death benefit within five years of your death. However, the beneficiary may
receive payouts under any annuity payout plan available under this contract if:
o the beneficiary asks us in writing within 60 days after we receive proof of
death; and
o payouts begin no later than one year after your death, or other date as
permitted by the Code; and
o the payout period does not extend beyond the beneficiary's life or life
expectancy.
When paying the beneficiary, we will process the death claim on the valuation
date our death claim requirements are fulfilled. We will determine the
contract's value at the next accumulation unit value calculated after our death
claim requirements are fulfilled. We will pay interest, if any, from the date of
death at a rate no less than required by law. We will mail payment to the
beneficiary within seven days after our death claim requirements are fulfilled.
Other rules may apply to qualified annuities. (See "Taxes.")
The Annuity Payout Period
As owner of the contract, you have the right to decide how and to whom annuity
payouts will be made starting at the retirement date. You may select one of the
annuity payout plans outlined below, or we may mutually agree on other payout
arrangements.
The amount available for payouts under the plan you select is the contract value
on your retirement date (less any applicable premium tax). We do not deduct
withdrawal charges under the payout plans listed below.
You also decide whether we will make annuity payouts on a fixed or variable
basis, or a combination of fixed and variable. The amount available to purchase
payouts under the plan you select is the contract value on your retirement date
(less any applicable premium tax). You may reallocate this contract value to the
fixed account to provide fixed dollar payouts and/or among the subaccounts to
provide variable annuity payouts. During the annuity payout period, we reserve
the right to limit the number of subaccounts in which you may invest.
Amounts of fixed and variable payouts depend on:
o the annuity payout plan you select;
o the annuitant's age and, in most cases, sex;
o the annuity table in the contract; and
o the amounts you allocated to the accounts at settlement.
In addition, for variable payouts only, amounts depend on the investment
performance of the subaccounts you select. These payouts will vary from month to
month because the performance of the funds will fluctuate. (In the case of fixed
annuities, payouts remain the same from month to month).
For information with respect to transfers between accounts after annuity payouts
begin, see "Making the Most of your Contract Transfer policies."
Annuity Table
The annuity table in your contract shows the amount of the first monthly payment
for each $1,000 of contract value according to the age and, when applicable, the
sex of the annuitant. (Where required by law, we will use a unisex table of
settlement rates). The table assumes that the contract value is invested at the
beginning of the annuity payout period and earns a 5% rate of return, which is
reinvested and helps to support future payouts.
Substitution of 3.5% Table
If you ask us at least 30 days before the retirement date, we will substitute an
annuity table based on an assumed 3.5% investment rate for the 5% table in the
contract. The assumed investment rate affects both the amount of the first
payout and the extent to which subsequent payouts increase or decrease. Using
the 5% table results in a higher initial payment, but later payouts will
increase more slowly when annuity unit values are rising and decrease more
rapidly when they decline.
Annuity payout plans
You may choose any one of these annuity payout plans by giving us written
instructions at least 30 days before contract values are to be used to purchase
the payout plan:
o Plan A - Life annuity - no refund: We make monthly payouts until the
annuitant's death. Payouts end with the last payout before the annuitant's
death. We will not make any further payouts. This means that if the annuitant
dies after we have made only one monthly payout, we will not make any more
payouts.
o Plan B - Life annuity with five, 10 or 15 years certain: We make monthly
payouts for a guaranteed payout period of five, 10 or 15 years that you elect.
This election will determine the length of the payout period to the beneficiary
if the annuitant should die before the elected period expires. We calculate the
guaranteed payout period from the retirement date. If the annuitant outlives the
elected guaranteed payout period, we will continue to make payouts until the
annuitant's death.
o Plan C - Life annuity - installment refund: We make monthly payouts until the
annuitant's death, with our guarantee that payouts will continue for some period
of time. We will make payouts for at least the number of months determined by
dividing the amount applied under this option by the first monthly payout,
whether or not the annuitant is living.
o Plan D - Joint and last survivor life annuity - no refund: We make monthly
payouts while both the annuitant and a joint annuitant are living. If either
annuitant dies, we will continue to make monthly payouts at the full amount
until the death of the surviving annuitant. Payouts end with the death of the
second annuitant.
o Plan E - Payouts for a specified period: We make monthly payouts for a
specific payout period of 10 to 30 years that you elect. We will make payouts
only for the number of years specified whether the annuitant is living or not.
Depending on the selected time period, it is foreseeable that an annuitant can
outlive the payout period selected. During the payout period, you can elect to
have us determine the present value of any remaining variable payouts and pay it
to you in a lump sum. We determine the present value separately for each
variable subaccount from which you are currently scheduled to receive payouts.
The present value for each subaccount is equal to the discounted value of the
remaining annuity payouts which are assumed to remain level. The discount rate
used in the calculation will vary between 5.05% and 7.15% depending on the
applicable assumed investment rate and the fund management fees. A 10% IRS
penalty tax could apply under this payout plan. (See "Taxes.")
Restrictions for some qualified plans: If you purchased a qualified annuity, you
may be required to select a payout plan that provides for payouts:
o over the life of the annuitant;
o over the joint lives of the annuitant and a designated beneficiary;
o for a period not exceeding the life expectancy of the annuitant; or
o for a period not exceeding the joint life expectancies of the annuitant
and a designated beneficiary.
You have the responsibility for electing a payout plan that complies with your
contract and with applicable law.
If we do not receive instructions: You must give us written instructions for the
annuity payouts at least 30 days before the annuitant's retirement date. If you
do not, we will make payouts under Plan B, with 120 monthly payouts guaranteed.
Contract values that you allocated to the fixed account will provide fixed
dollar payouts and contract values that you allocated among the subaccounts will
provide variable annuity payouts.
If monthly payouts would be less than $20: We will calculate the amount of
monthly payouts at the time the contract value is used to purchase a payout
plan. If the calculations show that monthly payouts would be less than $20, we
have the right to pay the contract value to the owner in a lump sum or to change
the frequency of the payouts.
Death after annuity payouts begin
If you or the annuitant die after annuity payouts begin, we will pay any amount
payable to the beneficiary as provided in the annuity payout plan in effect.
Taxes
Generally, under current law, any increase in your contract value is taxable to
you only when you receive a payout or withdrawal (see detailed discussion
below). Any portion of the annuity payouts and any withdrawals you request that
represent ordinary income normally are taxable. We will send you a tax
information reporting form for any year in which we made a taxable distribution
according to our records. Roth IRAs may grow and be distributed tax free if you
meet certain distribution requirements.
Qualified annuities: We designed this contract for use with qualified retirement
plans. Special rules apply to these retirement plans. Your rights to benefits
may be subject to the terms and conditions of these retirement plans regardless
of the terms of the contract.
Adverse tax consequences may result if you do not ensure that contributions,
distributions and other transactions under the contract comply with the law.
Qualified annuities have minimum distribution rules that govern the timing and
amount of distributions during your life (except for Roth IRAs) and after your
death. You should refer to your retirement plan or adoption agreement, or
consult a tax advisor for more information about these distribution rules.
Annuity payouts under nonqualified annuities: A portion of each payout will be
ordinary income and subject to tax, and a portion of each payout will be
considered a return of part of your investment and will not be taxed. All
amounts you receive after your investment in the contract is fully recovered
will be subject to tax.
Tax law requires that all nonqualified deferred annuity contracts issued by the
same company (and possibly its affiliates) to the same owner during a calendar
year be taxed as a single, unified contract when you take distributions from any
one of those contracts.
Annuity payouts under qualified annuities (except Roth IRAs): Under a qualified
annuity, the entire payout generally is includable as ordinary income and is
subject to tax except to the extent that contributions were made with after-tax
dollars. If you or your employer invested in your contract with deductible or
pre-tax dollars as part of a qualified retirement plan, such amounts are not
considered to be part of your investment in the contract and will be taxed when
paid to you.
Withdrawals: If you withdraw part or all of your contract before your annuity
payouts begin, your withdrawal payment will be taxed to the extent that the
value of your contract immediately before the withdrawal exceeds your
investment. You also may have to pay a 10% IRS penalty for withdrawals you make
before reaching age 59 1/2 unless certain exceptions apply. For qualified
annuities, other penalties may apply if you make withdrawals from your contract
before your plan specifies that you can receive payouts.
Death benefits to beneficiaries: The death benefit under a contract (except a
Roth IRA) is not tax exempt. Any amount your beneficiary receives that
represents previously deferred earnings within the contract is taxable as
ordinary income to the beneficiary in the years he or she receives the payments.
The death benefit under a Roth IRA generally is not taxable as ordinary income
to the beneficiary if certain distribution requirements are met.
Annuities owned by corporations, partnerships or trusts: For nonqualified
annuities any annual increase in the value of annuities held by such entities
generally will be treated as ordinary income received during that year. This
provision is effective for purchase payments made after Feb. 28, 1986. However,
if the trust was set up for the benefit of a natural person only, the income
will remain tax deferred.
Penalties: If you receive amounts from your contract before reaching age 59 1/2,
you may have to pay a 10% IRS penalty on the amount includable in your ordinary
income. However, this penalty will not apply to any amount received by you or
your beneficiary:
o because of your death;
o because you become disabled (as defined in the Code);
o if the distribution is part of a series of substantially equal periodic
payments, made at least annually, over your life or life expectancy (or
joint lives or life expectancies of you and your beneficiary); or
o if it is allocable to an investment before Aug. 14, 1982 (except for
qualified annuities).
For a qualified annuity, other penalties or exceptions may apply if you make
withdrawals from your contract before your plan specifies that payouts can be
made.
Withholding, generally: If you receive all or part of the contract value, we may
deduct withholding against the taxable income portion of the payment. Any
withholding represents a prepayment of your tax due for the year. You take
credit for these amounts on your annual tax return.
If the payment is part of an annuity payout plan, we generally compute the
amount of withholding using payroll tables. You may provide us with a statement
of how many exemptions to use in calculating the withholding. As long as you've
provided us with a valid Social Security Number or Taxpayer Identification
Number, you can elect not to have any withholding occur.
If the distribution is any other type of payment (such as a partial or full
withdrawal) we compute withholding using 10% of the taxable portion. Similar to
above, as long as you have provided us with a valid Social Security Number or
Taxpayer Identification Number, you can elect not to have this withholding
occur.
Some states also may impose withholding requirements similar to the federal
withholding described above. If this should be the case, we may deduct state
withholding from any payment from which we deduct federal withholding. The
withholding requirements may differ if we are making payment to a non-U.S.
citizen or if we deliver the payment outside the United States.
Withholding from TSAs: If you receive directly all or part of the contract value
from your TSA, mandatory 20% federal income tax withholding (and possibly state
income tax withholding) generally will be imposed at the time we make the
payout. This mandatory withholding is in place of the elective withholding
discussed above. This mandatory withholding will not be imposed if:
o instead of receiving the distribution check, you elect to have the
distribution rolled over directly to an IRA or another eligible plan;
o the payout is one in a series of substantially equal periodic payouts, made
at least annually, over your life or life expectancy (or the joint lives or
life expectancies of you and your designated beneficiary) or over a
specified period of 10 years or more; or
o the payout is a minimum distribution required under the Code.
Payments we make to a surviving spouse instead of being directly rolled over to
an IRA also may be subject to mandatory 20% income tax withholding.
State withholding also may be imposed on taxable distributions.
Transfer of ownership of a nonqualified annuity: If you transfer a nonqualified
annuity without receiving adequate consideration, the transfer is a gift and
also may be a withdrawal for federal income tax purposes. If the gift is a
currently taxable event for income tax purposes, the original owner will be
taxed on the amount of deferred earnings at the time of the transfer and also
may be subject to the 10% IRS penalty discussed earlier. In this case, the new
owner's investment in the contract will be the value of the contract at the time
of the transfer.
Collateral assignment of a nonqualified annuity: If you collaterally assign or
pledge your contract, earnings on purchase payments you made after Aug. 13, 1982
will be taxed to you like a withdrawal.
Important: Our discussion of federal tax laws is based upon our understanding of
current interpretations of these laws. Federal tax laws or current
interpretations of them may change. For this reason and because tax consequences
are complex and highly individual and cannot always be anticipated, you should
consult a tax advisor if you have any questions about taxation of your contract.
Tax qualification: We intend that the contract qualify as an annuity for federal
income tax purposes. To that end, the provisions of the contract are to be
interpreted to ensure or maintain such tax qualification, in spite of any other
provisions of the contract. We reserve the right to amend the contract to
reflect any clarifications that may be needed or are appropriate to maintain
such qualification or to conform the contract to any applicable changes in the
tax qualification requirements. We will send you a copy of any amendments.
Voting Rights
As a contract owner with investments in the subaccounts, you may vote on
important fund policies until annuity payouts begin. Once they begin, the person
receiving them has voting rights. We will vote fund shares according to the
instructions of the person with voting rights.
Before annuity payouts begin, the number of votes you have is determined by
applying your percentage interest in each subaccount to the total number of
votes allowed to the subaccount.
After annuity payouts begin, the number of votes you have is equal to:
o the reserve held in each subaccount for your contract; divided by
o the net asset value of one share of the applicable fund.
As we make annuity payouts, the reserve for the contract decreases; therefore,
the number of votes also will decrease.
We calculate votes separately for each subaccount. We will send notice of
shareholders' meetings, proxy materials and a statement of the number of votes
to which the voter is entitled. We will vote shares for which we have not
received instructions in the same proportion as the votes for which we received
instructions. We also will vote the shares for which we have voting rights in
the same proportion as the votes for which we received instructions.
Substitution of Investments
We may substitute the funds in which the subaccounts invest if:
o laws or regulations change;
o existing funds become unavailable; or
o in our judgment, the funds no longer are suitable for the subaccounts.
If any of these situations occur, and if we believe it is in the best interest
of persons having voting rights under the contract, we have the right to
substitute the funds currently listed in this prospectus for other funds.
We may also:
o add new subaccounts;
o combine any two or more subaccounts;
o add subaccounts investing in additional funds;
o transfer assets to and from the subaccounts or the variable account; and
o eliminate or close any subaccounts.
In the event of substitution or any of these changes, we may amend the contract
and take whatever action is necessary and appropriate without your consent or
approval. However, we will not make any substitution or change without the
necessary approval of the SEC and state insurance departments. We will notify
you of any substitution or change.
About the Service Providers
Principal Underwriter
American Express Financial Advisors Inc. (AEFA) serves as the principal
underwriter for the contract. Its office are located at IDS Tower 10,
Minneapolis, MN 55440. AEFA is a wholly-owned subsidiary of American Express
Financial Coporation (AEFC) which is a wholly-owned subsidiary of American
Express Company.
The contracts will be distributed by broker-dealers which have entered into
distribution agreements with AEFA and American Enterprise Life.
American Enterprise Life will pay commissions for sales of the contracts of up
to 7% of purchase payments to insurance agencies or broker-dealers that are also
insurance agencies. Sometimes American Enterprise Life pays the commissions as a
combination of a certain amount of the commission at the time of sale and a
trail commission (which, when totaled, could exceed 7.0% of purchase payments).
In addition, American Enterprise Life may pay certain sellers additional
compensation for selling and distribution activities under certain
circumstances. From time to time, American Enterprise Life will pay or permit
other promotional incentives, in cash or credit or other compensation.
Issuer
American Enterprise Life issues the annuities. American Enterprise Life is a
wholly-owned subsidiary of IDS Life, which is a wholly-owned subsidiary of AEFC.
AEFC is a wholly-owned subsidiary of American Express Company. American Express
Company is a financial services company principally engaged through subsidiaries
(in addition to AEFC) in travel related services, investment services and
international banking services.
American Enterprise Life is a stock life insurance company organized in 1981
under the laws of the state of Indiana. Its administrative offices are located
at 80 South Eighth Street, Minneapolis, MN 55402. Its statutory address is 100
Capitol Center South, 201 North Illinois Street, Indianapolis, IN 46204.
American Enterprise Life conducts a conventional life insurance business.
Legal Proceedings
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which American Enterprise Life and AEFC do business involving
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents and other matters. American Enterprise Life and AEFC, like
other life and health insurers, from time to time are involved in such
litigation. On October 13, 1998, an action entitled Richard W. and Elizabeth J.
Thoresen vs. American Express Financial Corporation, American Centurion Life
Assurance Company, American Enterprise Life Insurance Company, American Partners
Life Insurance Company, IDS Life Insurance Company and IDS Life Insurance
Company of New York was commenced in Minnesota State Court. The action was
brought by individuals who purchased an annuity in a qualified plan. They allege
that the sale of annuities in tax-deferred contributory retirement investment
plans (e.g., IRAs) is never appropriate. The plaintiffs purport to represent a
class consisting of all persons who made similar purchases. The plaintiffs seek
damages in an unspecified amount. American Enterprise Life also is a defendant
in various other lawsuits. In American Enterprise Life's opinion, none of these
lawsuits will have a material adverse effect on our financial condition.
Year 2000
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 American Enterprise Life
and the Variable Account. All of the major systems used by American Enterprise
Life and by Variable Account are maintained by AEFC and are utilized by multiple
subsidiaries and affiliates of AEFC. American Enterprise Life's and the Variable
Accounts businesses are heavily dependent upon AEFC's computer systems and have
significant interactions with systems of 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 have been taken to resolve potential problems including
modification to existing software and the purchase of new software. AEFC's
target date for substantially completing its program of corrective measures on
internal business critical systems was December 31, 1998. As of June 30, 1999,
AEFC completed its program of corrective measures on its internal systems and
applications, including Year 2000 compliance testing. The Year 2000 readiness of
unaffiliated investment managers and other third parties whose system failures
could have an impact on American Enterprise Life's and the Variable Account's
operations continues to be evaluated. The failure of external parties to resolve
their own Year 2000 issues in a timely manner could result in a material
financial risk to AEFC, American Enterprise Life or the Variable Account.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans for
all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. These plans are being amended to include specific Year 2000
considerations and will continue to be refined throughout 1999 as additional
information related to potential Year 2000 exposure is gathered.
Table of Contents of the Statement of Additional Information
Performance Information................................................
Calculating Annuity Payouts............................................
Rating Agencies........................................................
Principal Underwriter..................................................
Independent Auditors...................................................
Financial Statements...................................................
- - -------------------------------------------------------------------------------
Please check the appropriate box to receive a copy of the Statement of
Additional Information for:
American Express Signature Variable AnnuitySM
American Express Variable Portfolio Funds
AIM Variable Insurance Funds, Inc.
Alliance Variable Products Series Fund
Baron Capital Funds
Fidelity Variable Insurance Products Service Class
Franklin Templeton Variable Insurance Products Trust
Goldman Sachs Variable Insurance Trust
J. P. Morgan Series Trust II
Lazard Retirement Series, Inc.
MFS(R) Variable Insurance TrustSM
Putnam Variable Trust
Royce Capital Fund
Wanger Advisors Trust
Warburg Pincus Trust
Mail your request to:
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
800-333-3437
We will mail your request to:
Your name
Address
City State Zip
STATEMENT OF ADDITIONAL INFORMATION
for
AMERICAN EXPRESS SIGNATURE VARIABLE ANNUITYSM
AMERICAN ENTERPRISE VARIABLE ANNUITY ACCOUNT
Sept. 13, 1999
American Enterprise Variable Annuity Account is a separate account established
and maintained by American Enterprise Life Insurance Company (American
Enterprise Life).
This Statement of Additional Information (SAI) is not a prospectus. It should be
read together with the prospectus dated the same date as this SAI which you can
obtain from your sales representative or by writing or calling us at the address
or telephone number below. The prospectus is incorporated into this SAI by
reference.
American Enterprise Life Insurance Company
80 South Eighth Street
P.O. Box 534
Minneapolis, MN 55440-0534
800-333-3437
TABLE OF CONTENTS
Performance Information........................................3
Calculating Annuity Payouts....................................10
Rating Agencies................................................11
Principal Underwriter..........................................11
Independent Auditors...........................................11
Financial Statements
PERFORMANCE INFORMATION
The subaccounts may quote various performance figures to illustrate past
performance. We base total return and current yield quotations (if applicable)
on standardized methods of computing performance as required by the Securities
and Exchange Commission (SEC). An explanation of the methods used to compute
performance follows below.
Average Annual Total Return
We will express quotations of average annual total return for the subaccounts in
terms of the average annual compounded rate of return of a hypothetical
investment in the contract over a period of one, five and ten years (or, if
less, up to the life of the subaccounts), calculated according to the following
formula:
P(1+T)n = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
EVR = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period, at the
end of the period (or fractional portion thereof)
We calculated the following performance figures on the basis of historical
performance of each fund. We show actual performance from the date the
subaccounts began investing in the funds. For some subaccounts, we do not
provide any performance information because they are new and have not had any
activity to date. We also show performance from the commencement date of the
funds as if the contract existed at that time, which it did not. Past
performance does not guarantee future results.
<TABLE>
<CAPTION>
Average Annual Total Return With Withdrawal For Periods Ending Dec. 31. 1998
Performance Since
Commencement of the Performance Since
Subaccount** Commencement of the Fund**
<S> <C> <C> <C> <C> <C> <C> <C>
Since Since
Subaccount Investing In: 1 Year Commencement 1 Year 5 Years 10 Years Commencement
- - ---------- ------------- ------ ------------ ------ ------- -------- ------------
AXPSM VARIABLE PORTFOLIO
ESI Bond Fund (2/95;10/81)* -6.73% 6.39% -6.73% 4.35% 7.27% 9.57%
ECR Capital Resource Fund (2/95;10/81) 14.83% 17.23% 14.83% 14.23% 14.05% 13.78%
EMS Cash Management Fund (2/95;10/81) -3.41% 2.13% -3.41% 2.42% 3.70% 5.05%
EIA Extra Income Fund (7/99;5/96) N/A N/A -19.87% N/A N/A -6.99%
EMG Managed Fund (2/95;4/86) 6.62% 16.03% 6.62% 11.58% 12.81% 11.01%
EGD New Dimensions Fund (10/97;5/96) 19.29% 20.67% 19.29% N/A N/A 20.57%
AIM V.I.
ECA Capital Appreciation Fund (7/99;5/93) N/A N/A 10.09% 14.97% N/A 16.70%
ECD Capital Development Fund (8/99;5/98) N/A N/A N/A N/A N/A -14.59%
EVA Value Fund (10/97;5/93) 23.00% 22.42% 23.00% 19.40% N/A 19.76%
ALLIANCE
EPP Premier Growth Portfolio (Class B) N/A N/A N/A N/A N/A N/A
(8/99;6/99)
ETC Technology Portfolio (Class B) (8/99;6/99) N/A N/A N/A N/A N/A N/A
EHG U.S. Government/High Grade Securities N/A N/A N/A N/A N/A N/A
Portfolio (Class B) (8/99;6/99)
BARON
EAS Capital Asset Fund (8/99;10/98) N/A N/A N/A N/A N/A 25.72%
FIDELITY VIP
EFG Growth & Income Portfolio (Service Class) N/A N/A 19.91% N/A N/A 24.19%
(8/99;12/96)
EFM Mid Cap Portfolio (Service Class) N/A N/A N/A N/A N/A -3.96%
(8/99;12/98)
EFO Overseas Portfolio (Service Class) N/A N/A -2.19% 4.17% 6.87% 6.97%
(8/99;1/87)
FRANKLIN TEMPLETON VIP Trust
WMU Mutual Shares Securities Fund - Class 2 N/A N/A N/A N/A N/A N/A
(8/99;1/99)
ERE Real Estate Securities Fund - Class 2 N/A N/A N/A N/A N/A N/A
(8/99;1/99)
EIS Templeton International Smaller Companies N/A N/A N/A N/A N/A N/A
Fund - Class 2 (8/99;1/99)
GOLDMAN SACHS Variable Insurance Trust (VIT)
JCG Capital Growth Fund (5/99;4/98) N/A N/A N/A N/A N/A 4.77%
JUS COREsm U.S. Equity Fund (5/99;2/98) N/A N/A N/A N/A N/A 5.65%
JGL Global Income Fund (5/99;1/98) N/A N/A N/A N/A N/A -0.49%
JIF International Equity Fund (5/99;1/98) N/A N/A N/A N/A N/A 10.89%
J.P. MORGAN SERIES TRUST II
EDE U.S. Disciplined Equity Portfolio N/A N/A 13.53% N/A N/A 23.56%
(8/99;12/94)
LAZARD RETIREMENT SERIES INC.
ERQ Equity Portfolio (8/99;3/98) N/A N/A N/A N/A N/A 2.13%
ERI International Equity Portfolio (8/99;9/98) N/A N/A N/A N/A N/A 4.23%
MFS INVESTMENT MANAGEMENT(R)
END New Discovery Series (7/99;5/98) N/A N/A N/A N/A N/A -5.67%
ERS Research Series (7/99;7/95) N/A N/A 14.12% N/A N/A 19.72%
RUT Utilities Series (7/99;1/95) N/A N/A 8.87% N/A N/A 22.79%
PUTNAM VARIABLE TRUST
EPG Putnam VT Growth and Income Fund - Class IB*** 6.12% 10.50% 6.12% 16.61% 14.10% 14.57%
(10/98;2/88)
EPL Putnam VT International Growth Fund - Class IB***N/A N/A 9.25% N/A N/A 12.29%
(8/99;1/97)
EPN Putnam VT International New Opportunities Fund - N/A N/A -6.80% N/A N/A -7.73%
Class IB*** (8/99;1/97)
ROYCE
EMC Micro-Cap Portfolio (8/99;12/96) N/A N/A -4.48% N/A N/A 7.21%
EPR Premier Portfolio (8/99;12/96) N/A N/A -0.05% N/A N/A 7.83%
WANGER
EIC International Small Cap (8/99;5/95) N/A N/A 7.15% N/A N/A 18.63%
EUC U.S. Small Cap (8/99;5/95) N/A N/A -0.18% N/A N/A -0.30%
WARBURG PINCUS TRUST
EEG Emerging Growth Portfolio (8/99;7/99) N/A N/A N/A N/A N/A N/A
</TABLE>
*(Commencement date of the subaccount; Commencement date of the fund)
**Current applicable charges deducted from fund performance include a $30 annual
contract administrative charge, a 1.25% mortality and expense risk fee, a
0.15% variable account administrative charge and applicable withdrawal charge.
***Performance information for Class IB shares are based on Class IA shares
adjusted to reflect payments made under the Class IB distribution plan.
Average Annual Total Return Without Withdrawal For Periods Ending Dec. 31. 1998
<TABLE>
<CAPTION>
Performance Since
Commencement of the Performance Since
Subaccount** Commencement of the Fund**
<S> <C> <C> <C> <C> <C> <C> <C>
Since Since
Subaccount Investing In: 1 Year Commencement 1 Year 5 Years 10 Years Commencement
- - ---------- ------------- ------ ------ ------- -------- ------------
AXPSM VARIABLE PORTFOLIO
ESI Bond Fund (2/95;10/81)* 0.03% 7.67% 0.03% 5.18% 7.27% 9.57%
ECR Capital Resource Fund (2/95;10/81) 22.33% 18.21% 22.33% 14.81% 14.05% 13.78%
EMS Cash Management Fund (2/95;10/81) 3.61% 3.57% 3.61% 3.31% 3.70% 5.05%
EIA Extra Income Fund (7/99;5/96) N/A N/A -14.19% N/A N/A -4.72%
EMG Managed Fund (2/95;4/86) 14.12% 17.04% 14.12% 12.22% 12.81% 11.01%
EGD New Dimensions Fund (10/97;5/96) 26.79% 26.83% 26.79% N/A N/A 22.47%
AIM V.I.
ECA Capital Appreciation Fund (7/99;5/93) N/A N/A 17.59% 15.53% N/A 17.04%
ECD Capital Development Fund (8/99;5/98) N/A N/A N/A N/A N/A -8.48%
EVA Value Fund (10/97;5/93) 30.50% 28.59% 30.50% 19.89% N/A 20.06%
ALLIANCE
EPP Premier Growth Portfolio (Class B) N/A N/A N/A N/A N/A N/A
(8/99;6/99)
ETC Technology Portfolio (Class B) (8/99;6/99) N/A N/A N/A N/A N/A N/A
EHG U.S. Government/High Grade Securities N/A N/A N/A N/A N/A N/A
Portfolio (Class B) (8/99;6/99)
BARON
EAS Capital Asset Fund (8/99;10/98) N/A N/A N/A N/A N/A 33.22%
FIDELITY VIP
EFG Growth & Income Portfolio (Service Class) N/A N/A 27.41% N/A N/A 27.17%
(8/99;12/96)
EFM Mid Cap Portfolio (Service Class) N/A N/A N/A N/A N/A 3.02%
(8/99;12/98)
EFO Overseas Portfolio (Service Class) N/A N/A 4.93% 5.01% 6.87% 6.97%
(8/99;1/87)
FRANKLIN TEMPLETON VIP
WMU Mutual Shares Securities Fund - Class 2 N/A N/A N/A N/A N/A N/A
(8/99;1/99)
ERE Real Estate Securities Fund - Class 2 N/A N/A N/A N/A N/A N/A
(8/99;1/99)
EIS Templeton International Smaller Companies N/A N/A N/A N/A N/A N/A
Fund - Class 2 (8/99;1/99)
GOLDMAN SACHS Variable Insurance Trust (VIT)
JCG Capital Growth Fund (5/99;4/98) N/A N/A N/A N/A N/A 12.27%
JUS COREsm U.S. Equity Fund (5/99;2/98) N/A N/A N/A N/A N/A 13.15%
JGL Global Income Fund (5/99;1/98) N/A N/A N/A N/A N/A 6.76%
JIF International Equity Fund (5/99;1/98) N/A N/A N/A N/A N/A 18.39%
J.P. MORGAN SERIES TRUST II
EDE U.S. Disciplined Equity Portfolio N/A N/A 21.03% N/A N/A 24.22%
(8/99;12/94)
LAZARD RETIREMENT SERIES INC.
ERQ Equity Portfolio (8/99;3/98) N/A N/A N/A N/A N/A 9.61%
ERI International Equity Portfolio (8/99;9/98) N/A N/A N/A N/A N/A 11.73%
MFS INVESTMENT MANAGEMENT(R)
END New Discovery Series (7/99;5/98) N/A N/A N/A N/A N/A 1.17%
ERS Research Series (7/99;7/95) N/A N/A 21.62% N/A N/A 20.84%
RUT Utilities Series (7/99;1/95) N/A N/A 16.37% N/A N/A 23.59%
PUTNAM VARIABLE TRUST
EPG Putnam VT Growth and Income Fund - Class IB*** 13.62% 18.00% 13.62% 17.14% 14.10% 14.57%
(10/98;2/88)
EPL Putnam VT International Growth Fund - Class IB***N/A N/A 16.75% N/A N/A 15.59%
(8/99;1/97)
EPN Putnam VT International New Opportunities Fund - N/A N/A -0.05% N/A N/A -1.06%
Class IB*** (8/99;1/97)
ROYCE
EMC Micro-Cap Portfolio (8/99;12/96) N/A N/A 2.46% N/A N/A 10.65%
EPR Premier Portfolio (8/99;12/96) N/A N/A 7.24% N/A N/A 11.25%
WANGER
EIC International Small Cap (8/99;5/95) N/A N/A 14.65% N/A N/A 19.66%
EUC U.S. Small Cap (8/99;5/95) N/A N/A 7.11% N/A N/A 1.00%
WARBURG PINCUS TRUST
EEG Emerging Growth Portfolio (8/99;7/99) N/A N/A N/A N/A N/A N/A
</TABLE>
* (Commencement date of the subaccount; Commencement date of the fund)
** Current applicable charges deducted from fund performance include a $30
annual contract administrative charge, a 1.25% mortality and expense risk fee
and a 0.15% variable account administrative charge.
***Performance information for Class IB shares are based on Class IA shares
adjusted to reflect payments made under the Class IB distribution plan.
Cumulative Total Return
Cumulative total return represents the cumulative change in value of an
investment for a given period (reflecting change in a subaccount's accumulation
unit value). We compute cumulative total return using the following formula:
ERV - P
P
where: P = a hypothetical initial payment of $1,000
ERV = Ending Redeemable Value of a hypothetical $1,000 payment
made at the beginning of the period, at the end of the period
(or fractional portion thereof)
Total return figures reflect the deduction of the withdrawal charge which
assumes you withdraw the entire contract value at the end of the one-, five- and
ten- year periods (or, if less, up to the life of the subaccount). We may also
show performance figures without the deduction of a withdrawal charge. In
addition, total return figures reflect the deduction of all other applicable
charges including the annual contract administrative charge, the variable
account administrative charge and the mortality and expense risk fee.
Calculation of Yield for Subaccounts Investing in Money Market Funds
Annualized Simple Yield
For the subaccounts investing in money market funds, we base quotations of
simple yield on:
(a) the change in the value of a hypothetical subaccount
(exclusive of capital changes and income other than investment
income) at the beginning of a particular seven-day period:
(b) less, a pro rata share of the subaccount expenses accrued over
the period;
(c) dividing this difference by the value of the subaccount at the
beginning of the period to obtain the base period return; and
(d) multiplying the base period return by 365/7.
The subaccount's value includes:
o any declared dividends;
o the value of any shares purchased with dividends paid during the period; and
o any dividends declared for such shares.
It does not include:
o the effect of any applicable withdrawal charge; or
o any realized or unrealized gains or losses.
Annualized Compound Yield
We calculate compound yield using the base period return described above, which
we then compound according to the following formula:
Compound Yield = [(Base Period Return + 1)365/7] - 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Annualized Yields Based on the Seven-Day Period Ending Dec. 31, 1998
Subaccount Investing In Simple Yield Compound Yield
EMS AXPSM VP - Cash Management Fund 3.24% 3.29%
</TABLE>
You must consider (when comparing an investment in subaccounts investing in
money market funds with fixed annuities) that fixed annuities often provide an
agreed-to or guaranteed yield for a stated period of time, whereas the
subaccount's yield fluctuates. In comparing the yield of the subaccount to a
money market fund, you should consider the different services that the contract
provides.
Annualized Yield for Subaccounts Investing in Income Funds
For the subaccounts investing in income funds, we base quotations of yield on
all investment income earned during a particular 30-day period, less expenses
accrued during the period (net investment income) and compute it by dividing net
investment income per accumulation unit by the value of an accumulation unit on
the last day of the period according to the following formula:
YIELD = 2[a-b + 1)6 - 1]
cd
where: a = dividends and investment income earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of accumulation units
outstanding during the period that were entitled to
receive dividends
d = the maximum offering price per accumulation unit on the
last day of the period
The subaccount earns yield from the increase in the net asset value of shares of
the fund in which it invests and from dividends declared and paid by the fund,
which are automatically invested in shares of the fund.
Annualized Yield Based on 30-Day Period Ended Dec. 31, 1998
Subaccount Investing In Yield
ESI AXPSM Variable Portfolio - Bond Fund 7.20%
The yield on the subaccount's accumulation unit may fluctuate daily and does not
provide a basis for determining future yields.
Independent rating or statistical services or publishers or publications such as
those listed below may quote subaccount performance, compare it to rankings,
yields or returns, or use it in variable annuity accumulation or settlement
illustrations they publish or prepare:
The Bank Rate Monitor National Index, Barron's, Business Week, CDA
Technologies, Donoghue's Money Market Fund Report, Financial Services
Week, Financial Times, Financial World, Forbes, Fortune, Global
Investor, Institutional Investor, Investor's Daily, Kiplinger's
Personal Finance, Lipper Analytical Services, Money, Morningstar,
Mutual Fund Forecaster, Newsweek, The New York Times, Personal
Investor, Stanger Report, Sylvia Porter's Personal Finance, USA Today,
U.S. News & World Report, The Wall Street Journal and Wiesenberger
Investment Companies Service.
CALCULATING ANNUITY PAYOUTS
The Variable Account
We do the following calculations separately for each of the subaccounts of the
variable account. The separate monthly payouts, added together, make up your
total variable annuity payout.
Initial Payout: To compute your first monthly payment, we:
o determine the dollar value of your contract as of the valuation date that
falls on (or the closest valuation date that falls before) the seventh
calendar day before the retirement date and then deduct any applicable
premium tax; then
o apply the result to the annuity table contained in the contract or another
table at least as favorable.
The annuity table shows the amount of the first monthly payment for each $1,000
of value which depends on factors built into the table, as described below.
Annuity Units: We then convert the value of your subaccount to annuity units. To
compute the number of units credited to you, we divide the first monthly payment
by the annuity unit value (see below) on the valuation date that falls on (or
closest to the valuation date that falls before) the seventh calendar before the
retirement date. The number of units in your subaccount is fixed.
The value of the units fluctuates with the performance of the underlying fund.
Subsequent Payouts: To compute later payouts, we multiply:
o the annuity unit value on the valuation date that falls on (or closest
to the valuation date that falls before) the seventh calendar day
before the payout is due; by
o the fixed number of annuity units credited to you.
Annuity Unit Values: We originally set this value at $1 for each subaccount.
To calculate later value we multiply the last annuity value by the product of:
o the net investment factor; and
o the neutralizing factor.
The purpose of the neutralizing factor is to offset the effect of the assumed
investment rate built into the annuity table. With an assumed investment rate of
5%, the neutralizing factor is 0.999866 for a one day valuation period.
Net Investment Factor
We determine the net investment factor by:
o adding the fund's current net asset value per share plus the per-share
amount of any accrued income or capital gain dividends to obtain a current
adjusted net asset value per share; then
o dividing that sum by the previous adjusted net asset value per share; and
o subtracting the percentage factor representing the mortality and expense
risk fee and the variable account administrative charge from the result.
Because the net asset value of the fund may fluctuate, the net investment factor
may be greater or less than one, and the annuity unit value may increase or
decrease. You bear this investment risk in a variable subaccount.
The Fixed Account
We guarantee your fixed annuity payout amounts. Once calculated, your payout
will remain the same and never change. To calculate your annuity payouts we:
o take the value of your fixed account at the retirement date or the date you
have selected to begin receiving your annuity payouts; then
o using an annuity table, we apply the value according to the annuity payout
plan you select.
The annuity payout table we use will be the one in effect at the time you choose
to begin your annuity payouts. The values in the table will be equal to or
greater than the table in your contract.
RATING AGENCIES
The following chart reflects the ratings given to us by independent rating
agencies. These agencies evaluate the financial soundness and claims-paying
ability of insurance companies based on a number of different factors. This
information does not relate to the management or performance of the subaccounts
of the contract. This information relates only to the fixed account and reflects
our ability to make annuity payouts and to pay death benefits and other
distributions from the annuities.
Rating agency Rating
A.M. Best A+
(Superior)
Duff & Phelps AAA
Moody's Aa2
PRINCIPAL UNDERWRITER
The principal underwriter for the contract is American Express Financial
Advisors Inc. which offers the contract on a continuous basis.
The contract is new and, therefore, we have not received any withdrawal charges
or paid any commissions.
INDEPENDENT AUDITORS
The financial statements appearing in this SAI have been audited by Ernst &
Young LLP (1400 Pillsbury Center, 200 South Sixth Street, Minneapolis, MN 55402)
independent auditors, as stated in their report appearing herein.
FINANCIAL STATEMENTS
American Enterprise Variable Annuity Account
Annual Financial Information
Report of Independent Auditors
The Board of Directors
American Enterprise Life Insurance Company
We have audited the individual and combined statements of net assets of the
segregated asset subaccounts of American Enterprise Variable Annuity Account
(comprised of subaccounts EVA, ECR, EGD, EMG, EMS, ESI and EPG ) as of December
31, 1998, and the related statements of operations for the year then ended,
except for subaccount EPG, which is for the period October 5, 1998 (commencement
of operations) to December 31, 1998, and the statements of changes in net assets
for each of the two years in the period then ended, except for subaccounts EVA
and EGD which are for the year ended December 31, 1998 and for the period
October 30, 1997 (commencement of operations) to December 31, 1997 and
subaccount EPG, which is for the period October 5, 1998 (commencement of
operations) to December 31, 1998. These financial statements are the
responsibility of the management of American Enterprise Life Insurance Company.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1998 with the affiliated and
unaffiliated mutual fund managers. 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 American Enterprise Variable Annuity Account at
December 31, 1998, and the individual and combined results of their operations
and the changes in their net assets for the periods described above, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Minneapolis, Minnesota
March 12, 1999
American Enterprise Variable Annuity Account
Notes to Financial Statements
1. Organization
American Enterprise Variable Annuity Account (the Account) was established under
Indiana law on July 15, 1987 and the subaccounts are registered together as a
single unit investment trust of American Enterprise Life Insurance Company
(American Enterprise Life) under the Investment Company Act of 1940, as amended
(the 1940 Act). Operations of the Account commenced on Feb. 21, 1995.
The Account is comprised of various subaccounts. Each subaccount invests
exclusively in shares of the following mutual funds (collectively, the Funds),
which are registered under the 1940 Act as diversified, open-end management
investment companies and have the following investment managers.
<TABLE>
<CAPTION>
<S> <C> <C>
Subaccount Invests exclusively in shares of Investment Manager
EVA AIM V.I. Value Fund A I M Advisors, Inc.
ECR AXPSM Variable Portfolio - Capital Resource Fund IDS Life Insurance Company 1
EGD AXPSM Variable Portfolio - New Dimensions Fund IDS Life Insurance Company 1
EMG AXPSM Variable Portfolio - Managed Fund IDS Life Insurance Company 1
EMS AXPSM Variable Portfolio - Cash Management Fund IDS Life Insurance Company 1
ESI AXPSM Variable Portfolio - Bond Fund IDS Life Insurance Company 1
EPG Putnam VT Growth and Income Fund-- Class IB Shares Putnam Investment Management, Inc.
</TABLE>
1 American Express Financial Corporation (AEFC) is the investment advisor.
The assets of each subaccount of the Account are not chargeable with liabilities
arising out of the business conducted by any other segregated asset account or
by American Enterprise Life.
American Enterprise Life issues the contracts that are distributed by banks and
financial institutions either directly or through a network of third-party
marketers.
2. Summary of Significant Accounting Policies
Investments in the Funds
Investments in shares of the Funds are stated at market value which is the net
asset value per share as determined by the respective Funds. Investment
transactions are accounted for on the date the shares are purchased and sold.
The cost of investments sold and redeemed is determined on the average cost
method. Dividend distributions received from the Funds are reinvested in
additional shares of the Funds and are recorded as income by the subaccounts on
the ex-dividend date.
Unrealized appreciation or depreciation of investments in the accompanying
financial statements represents the subaccounts' share of the Funds'
undistributed net investment income, undistributed realized gain or loss and the
unrealized appreciation or depreciation on their investment securities.
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 disclosures 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
American Enterprise Life is taxed as a life insurance company. The Account is
treated as part of American Enterprise 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 Account.
3. Mortality and Expense Risk Fee
American Enterprise Life makes contractual assurances to the Account that
possible future adverse changes in administrative expenses and mortality
experience of the contract owners and annuitants will not affect the Account.
The mortality and expense risk fee paid to American Enterprise Life is computed
daily and is equal, on an annual basis, to 1.25% of the average daily net assets
of the subaccounts.
4. Administrative Charge
American Enterprise Life deducts a daily charge equal, on an annual basis, to
0.15% of the average daily net assets of each subaccount as an administrative
charge. This charge covers certain administrative and operating expenses of the
subaccounts incurred by American Enterprise Life such as accounting, legal and
data processing fees, and expenses involved in the preparation and distribution
of reports and prospectuses. This charge cannot be increased.
5. Contract Administrative Charge
American Enterprise Life deducts a contract administrative charge of $30 per
year on each contract anniversary. This charge cannot be increased and does not
apply after annuity payouts begin. American Enterprise Life does not expect to
profit from this charge. This charge reimburses American Enterprise Life for
expenses incurred in establishing and maintaining the annuity records. This
charge is waived when the contract value is $50,000 or more on the current
contract anniversary. The $30 annual charge is deducted at the time of any full
surrender.
6. Withdrawal Charge
American Enterprise Life will use a withdrawal charge to help it recover certain
expenses relating to the sale of the annuity. The withdrawal charge is deducted
for withdrawals up to the first seven payment years following a purchase
payment. Charges by American Enterprise Life for withdrawals are not identified
on an individual segregated asset account basis. Charges for all segregated
asset accounts amounted to $199,062 in 1998 and $79,195 in 1997. Such charges
are not treated as a separate expense of the subaccounts. They are ultimately
deducted from contract withdrawal benefits paid by American Enterprise Life.
This charge is waived if the withdrawal meets certain provisions as stated in
the contract.
7. Investment in Shares
<TABLE>
<CAPTION>
The subaccounts' investment in shares of the Funds as of Dec. 31, 1998 were as
follows:
<S> <C> <C> <C>
Subaccount Investment Shares NAV
EVA AIM V.I. Value Fund 91,112 $26.25
ECR AXPSM Variable Portfolio - Capital Resource Fund 301,499 32.65
EGD AXPSM Variable Portfolio - New Dimensions Fund 83,670 17.52
EMG AXPSM Variable Portfolio - Managed Fund 462,427 18.52
EMS AXPSM Variable Portfolio - Cash Management Fund 858,872 1.00
ESI AXPSM Variable Portfolio - Bond Fund 680,095 11.11
EPG Putnam VT Growth and Income Fund-- Class IB Shares 9,822 28.75
</TABLE>
8. Investment Transactions
<TABLE>
<CAPTION>
The subaccounts' purchases of Funds' shares, including reinvestment of dividend
distributions, were as follows:
<S> <C> <C> <C>
Year ended Dec. 31,
Subaccount Investment 1998 1997
EVA1 AIM V.I. Value Fund $2,077,208 $ 68,804
ECR AXPSM Variable Portfolio - Capital Resource Fund 3,205,569 2,325,297
EGD1 AXPSM Variable Portfolio - New Dimensions Fund 1,222,554 70,723
EMG AXPSM Variable Portfolio - Managed Fund 3,919,323 2,585,442
EMS AXPSM Variable Portfolio - Cash Management Fund 1,567,312 543,283
ESI AXPSM Variable Portfolio - Bond Fund 4,647,272 1,813,929
EPG2 Putnam VT Growth and Income Fund-- Class IB Shares 269,558 --
------- ------
Combined Variable Account $16,908,796 $7,407,478
</TABLE>
1 Operations commenced on Oct. 30, 1997.
2 Operations commenced on Oct. 5, 1998.
9. 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 American Enterprise Life
and the Variable Account. All of the major systems used by the American
Enterprise Life and by the Variable Account are maintained by AEFC and are
utilized by multiple subsidiaries and affiliates of AEFC. American Enterprise
Life's and the Variable Account's businesses are heavily dependent upon AEFC's
computer systems and have significant interactions with systems of 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 have been taken to resolve potential problems including
modification to existing software and the purchase of new software. AEFC's
target date for substantially completing its program of corrective measures on
internal business critical systems was Dec. 31, 1998. As of June 30, 1999, AEFC
completed its program of corrective measures on its internal systems and
applications, including Year 2000 compliance testing. The Year 2000 readiness of
unaffiliated investment managers and other third parties whose system failures
could have an impact on American Enterprise Life's and the Variable Account's
operations continues to be evaluated. The failure of external parties to resolve
their own Year 2000 issues in a timely manner could result in a material
financial risk to AEFC, American Enterprise Life or the Variable Account.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans for
all key business units. Business continuation plans, which address business
continuation in the event of a system disruption, are in place for all key
business units. These plans are being amended to include specific Year 2000
considerations and will continue to be refined throughout 1999 as additional
information related to potential Year 2000 exposure is gathered.
American Enterprise Variable Annuity Account
Statements of Net Assets Dec. 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Segregated Asset Subaccounts
Assets EVA ECR EGD EMG EMS
Investments in shares of mutual funds:
at cost $2,129,905 $8,367,712 $1,273,181 $ 8,289,853 $858,797
---------- ---------- ---------- ----------- --------
at market value $2,391,678 $9,845,123 $1,465,483 $ 8,564,185 $858,800
Dividends receivable - - - - 3,497
Accounts receivable from American Enterprise Life for
contract purchase payments 1,237 12,759 6,154 21,217 -
----- ------ ----- ------
Total assets 2,392,915 9,857,882 1,471,637 8,585,402 862,297
--------- --------- --------- --------- -------
Liabilities
Payable to American Enterprise Life for:
Mortality and expense risk fee 2,413 10,405 1,513 8,984 918
Issue and administrative fee 290 1,249 182 1,078 110
Payable to mutual funds
for investments purchased 1,237 1,105 4,459 11,155 2,469
----- ----- ----- ------ -----
Total liabilities 3,940 12,759 6,154 21,217 3,497
----- ------ ----- ------ -----
Net assets applicable to contracts in
accumulation period 2,388,975 9,839,380 1,465,483 8,559,908 858,800
Net assets applicable to contracts in
payment period - 5,743 - 4,277 -
---- ----- ---- ----- ----
Total net assets $2,388,975 $9,845,123 $1,465,483 $ 8,564,185 $858,800
========== ========== ========== =========== ========
Accumulation units outstanding 1,778,901 5,163,185 1,108,323 4,684,466 749,301
--------- --------- --------- --------- -------
Net asset value per accumulation unit $ 1.34 $ 1.91 $ 1.32 $ 1.83 $ 1.15
------ ------ ------ ------ ------
Combined
Variable
Assets ESI EPG Account
Investments in shares of mutual funds:
at cost $7,944,815 $ 269,558 $ 29,133,821
---------- --------- ------------
at market value $7,553,609 $ 282,397 $ 30,961,275
Dividends receivable 45,255 - 48,752
Accounts receivable from American Enterprise Life for
contract purchase payments 16,799 2,714 60,880
------ ----- ------
Total assets 7,615,663 285,111 31,070,907
--------- ------- ----------
Liabilities
Payable to American Enterprise Life for:
Mortality and expense risk fee 7,851 237 32,321
Issue and administrative fee 942 29 3,880
Payable to mutual funds
for investments purchased 53,261 2,714 76,400
------ ----- ------
Total liabilities 62,054 2,980 112,601
------ ----- -------
Net assets applicable to contracts in
accumulation period 7,550,694 282,131 30,945,371
Net assets applicable to contracts in
payment period 2,915 - 12,935
----- ---- ------
Total net assets $7,553,609 $ 282,131
========== =========
Accumulation units outstanding 5,688,915 238,893
--------- -------
Net asset value per accumulation unit $ 1.33 $ 1.18
------ ------
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account
Statements of Operations Year ended Dec. 31, 1998
Segregated Asset Subaccounts
<S> <C> <C> <C> <C> <C>
Investment income EVA ECR EGD EMG EMS
Dividend income from mutual funds $104,609 $704,897 $ 4,537 $ 886,695 $ 30,212
-------- -------- ------- --------- --------
Expenses:
Mortality and expense risk fee 12,205 95,285 8,135 82,016 7,605
Administrative charge 1,464 11,434 976 9,842 912
----- ------ --- ----- ---
Total expenses 13,669 106,719 9,111 91,858 8,517
------ ------- ----- ------ -----
Investment income (loss) - net 90,940 598,178 (4,574) 794,837 21,695
------ ------- ------ ------- ------
Realized and unrealized gain (loss) on investments - net
Realized gain (loss) on sales of investments in mutual funds:
Proceeds from sales 16,585 297,921 20,854 135,373 967,780
Cost of investments sold 16,107 266,065 20,096 129,027 967,779
------ ------- ------ ------- -------
Net realized gain (loss) on investments 478 31,856 758 6,346 1
Net change in unrealized appreciation or
depreciation of investments 262,764 957,259 190,924 55,365 3
------- ------- ------- ------ -
Net gain (loss) on investments 263,242 989,115 191,682 61,711 4
------- ------- ------- ------ -
Net increase (decrease) in net assets
resulting from operations $354,182 $1,587,293 $ 187,108 $ 856,548 $ 21,699
======== ========== ========= ========= ========
Combined
Variable
Investment income ESI EPG* Account
Dividend income from mutual funds $415,320 $ - $ 2,146,270
-------- -- -----------
Expenses:
Mortality and expense risk fee 68,547 367 274,160
Administrative charge 8,226 44 32,898
----- -- ------
Total expenses 76,773 411 307,058
------ --- -------
Investment income (loss) - net 338,547 (411) 1,839,212
------- ---- ---------
Realized and unrealized gain (loss) on investments - net
Realized gain (loss) on sales of investments in mutual funds:
Proceeds from sales 86,664 - 1,525,177
Cost of investments sold 89,531 - 1,488,605
------ --- ---------
Net realized gain (loss) on investments (2,867) - 36,572
Net change in unrealized appreciation or
depreciation of investments (378,318) 12,839 1,100,836
-------- ------ ---------
Net gain (loss) on investments (381,185) 12,839 1,137,408
-------- ------ ---------
Net increase (decrease) in net assets
resulting from operations $(42,638) $ 12,428 $ 2,976,620
========= ======== ===========
</TABLE>
*For the period Oct. 5, 1998 (commencement of operations) to Dec. 31, 1998.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account
Statements of Changes in Net Assets Year ended Dec. 31, 1998
<S> <C> <C> <C> <C> <C>
Segregated Asset Subaccounts
Operations EVA ECR EGD EMG EMS
Investment income (loss) - net $ 90,940 $598,178 $ (4,574) $ 794,837 $ 21,695
Net realized gain (loss) on investments 478 31,856 758 6,346 1
Net change in unrealized appreciation or
depreciation of investments 262,764 957,259 190,924 55,365 3
------- ------- ------- ------ -
Net increase (decrease) in net assets
resulting from operations 354,182 1,587,293 187,108 856,548 21,699
------- --------- ------- ------- ------
Contract transactions
Contract purchase payments 1,616,894 3,114,006 1,111,110 3,376,704 691,275
Net transfers** 381,890 (245,243) 126,930 (21,220) (85,043)
Annuity payments - (385) - (118) -
Contract terminations:
Surrender benefits and contract charges (25,796) (529,563) (25,802) (335,067) (28,396)
Death benefits (5,952) (21,950) (5,911) (25,390) -
------ ------- ------ ------- ------
Increase (decrease) from contract transactions 1,967,036 2,316,865 1,206,327 2,994,909 577,836
--------- --------- --------- --------- -------
Net assets at beginning of year 67,757 5,940,965 72,048 4,712,728 259,265
------ --------- ------ --------- -------
Net assets at end of year $2,388,975 $9,845,123 $1,465,483 $ 8,564,185 $858,800
---------- ---------- ---------- ----------- --------
Accumulation unit activity
Units outstanding at beginning of year 65,875 3,812,754 68,572 2,944,208 231,256
Contracts purchase payments 1,418,576 1,848,700 965,321 2,000,537 635,551
Net transfers** 327,920 (146,994) 108,613 (16,062) (79,775)
Contract terminations:
Surrender benefits and contract charges (28,544) (338,414) (29,255) (229,369) (37,731)
Death benefits (4,926) (12,861) (4,928) (14,848) -
------ ------- ------ -------
Units outstanding at end of year 1,778,901 5,163,185 1,108,323 4,684,466 749,301
========= ========= ========= ========= =======
Combined
Variable
Operations ESI EPG* Account
Investment income (loss) - net $338,547 $ (411) $ 1,839,212
Net realized gain (loss) on investments (2,867) - 36,572
Net change in unrealized appreciation or
depreciation of investments (378,318) 12,839 1,100,836
-------- ------ ---------
Net increase (decrease) in net assets
resulting from operations (42,638) 12,428 2,976,620
------- ------ ---------
Contract transactions
Contract purchase payments 4,304,628 217,969 14,432,586
Net transfers** 243,040 53,032 453,386
Annuity payments (74) - (577)
Contract terminations:
Surrender benefits and contract charges (297,229) (1,298) (1,243,151)
Death benefits (28,304) - (87,507)
------- ---- -------
Increase (decrease) from contract transactions 4,222,061 269,703 13,554,737
--------- ------- ----------
Net assets at beginning of year 3,374,186 - 14,426,949
--------- ----- ----------
Net assets at end of year $7,553,609 $ 282,131 $ 30,958,306
---------- --------- ------------
Accumulation unit activity
Units outstanding at beginning of year 2,543,718 -
Contracts purchase payments 3,245,320 194,565
Net transfers** 183,324 45,511
Contract terminations:
Surrender benefits and contract charges (262,248) (1,183)
Death benefits (21,199) -
------- -----
Units outstanding at end of year 5,688,915 238,893
========= =======
</TABLE>
*For the period Oct. 5, 1998 (commencement of operations) to Dec. 31, 1998.
**Includes transfer activity from (to) other subaccounts and transfers from (to)
American Enterprise Life's fixed account.
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account
Statements of Changes in Net Assets Year ended Dec. 31, 1997
<S> <C> <C> <C> <C> <C>
Segragated Asset Subaccount
Operations EVA* ECR EGD* EMG EMS
Investment income (loss) - net $ 1,408 $ 89,908 $ (27) $ 375,811 $ 10,527
Net realized gain (loss) on investments - 8,855 - 9,422 -
Net change in unrealized appreciation or
depreciation of investments (991) 780,121 1,378 110,879 (2)
---- ------- ----- ------- --
Net increase (decrease) in net assets
resulting from operations 417 878,884 1,351 496,112 10,525
--- ------- ----- ------- ------
Contract transactions
Contract purchase payments 66,156 2,409,335 70,697 2,390,284 327,812
Net transfers** 1,184 (33,041) - (72,853) (234,808)
Annuity payments - (138) - - -
Contract terminations:
Surrender benefits and contract charges - (297,350) - (192,773) (100,987)
Death benefits - (5,701) - (7,254) -
--- ------ --- ------ ---
Increase (decrease) from contract transactions 67,340 2,073,105 70,697 2,117,404 (7,983)
------ --------- ------ --------- ------
Net assets at beginning of year - 2,988,976 - 2,099,212 256,723
---- --------- ----- --------- -------
Net assets at end of year $ 67,757 $5,940,965 $ 72,048 $4,712,728 $259,265
-------- ---------- -------- ---------- --------
Accumulation unit activity
Units outstanding at beginning of year - 2,350,045 - 1,545,535 240,823
Contract purchase payments 64,716 1,696,748 68,572 1,581,579 302,938
Net transfers** 1,159 (18,567) - (49,221) (215,723)
Contract terminations:
Surrender benefits and contract charges - (211,339) - (128,743) (96,782)
Death benefits - (4,133) - (4,942) -
---- ------ ---- ------ ----
Units outstanding at end of year 65,875 3,812,754 68,572 2,944,208 231,256
====== ========= ====== ========= =======
Statements of Changes in Net Assets
Combined
Variable
Operations ESI Account
Investment income (loss) - net $ 206,530 $ 684,157
Net realized gain (loss) on investments 956 19,233
Net change in unrealized appreciation or
depreciation of investments (31,454) 859,931
------- -------
Net increase (decrease) in net assets
resulting from operations 176,032 1,563,321
------- ---------
Contract transactions
Contract purchase payments 1,670,135 6,934,419
Net transfers** (29,630) (369,148)
Annuity payments - (138)
Contract terminations:
Surrender benefits and contract charges (139,046) (730,156)
Death benefits (6,105) (19,060)
------ -------
Increase (decrease) from contract transactions 1,495,354 5,815,917
--------- ---------
Net assets at beginning of year 1,702,800 7,047,711
--------- ---------
Net assets at end of year $3,374,186 $14,426,949
---------- -----------
Accumulation unit activity
Units outstanding at beginning of year 1,377,190
Contract purchase payments 1,304,174
Net transfers** (24,030)
Contract terminations:
Surrender benefits and contract charges (108,787)
Death benefits (4,829)
------
Units outstanding at end of year 2,543,718
=========
</TABLE>
*For the period Oct. 30, 1997 (commencement of operations) to Dec. 31, 1997.
**Includes transfer activity from (to) other subaccounts and transfers from (to)
American Enterprise Life's fixed account.
See accompanying notes to financial statements.
Report of Independent Auditors
The Board of Directors
American Enterprise Life Insurance Company
We have audited the accompanying balance sheets of American Enterprise Life
Insurance Company (a wholly owned subsidiary of IDS Life Insurance Company) as
of December 31, 1998 and 1997, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Enterprise Life
Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
February 4, 1999
Minneapolis, Minnesota
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31,
($ thousands, except share amounts)
<S> <C> <C>
ASSETS 1998 1997
- - ------ - ----------- - -------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1998, $1,126,732 ; 1997, $1,223,108) $1,081,193 $1,186,682
Available for sale, at fair value (amortized cost:
1998, $2,526,712; 1997, $2,609,621) 2,594,858 2,685,799
----------- -----------
3,676,051 3,872,481
Mortgage loans on real estate 815,806 738,052
Other investments 12,103 16,024
------------- -------------
Total investments 4,503,960 4,626,557
Accounts receivable 214 563
Accrued investment income 61,740 59,588
Deferred policy acquisition costs 196,479 224,501
Other assets 43 117
Separate account assets 123,185 62,087
------------ -------------
Total assets $4,885,621 $4,973,413
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $4,166,852 $4,343,213
Policy claims and other policyholders' funds 7,389 11,328
Deferred income taxes 23,199 35,601
Amounts due to brokers 54,347 34,935
Other liabilities 24,500 16,905
Separate account liabilities 123,185 62,087
----------- ------------
Total liabilities 4,399,472 4,504,069
Stockholder's equity:
Capital stock, $100 par value per share;
100,000 shares authorized,
20,000 shares issued and outstanding 2,000 2,000
Additional paid-in capital 282,872 282,872
Accumulated other comprehensive income:
Net unrealized securities gains 44,295 49,516
Retained earnings 156,982 134,956
------------ ------------
Total stockholder's equity 486,149 469,344
------------ ------------
Total liabilities and stockholder's equity $4,885,621 $4,973,413
========== ==========
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
<S> <C> <C> <C>
1998 1997 1996
--- ------ --- ------ --- ----
Revenues:
Net investment income $340,219 $332,268 $271,719
Contractholder charges 6,387 5,688 5,450
Mortality and expense risk fees 1,275 641 303
Net realized loss on investments (4,788) (509) (5,258)
---------- ---------- -----------
Total revenues 343,093 338,088 272,214
--------- --------- ----------
Benefits and expenses:
Interest credited on investment contracts 228,533 231,437 191,672
Amortization of deferred policy acquisition costs 53,663 36,803 30,674
Other operating expenses 24,476 24,890 14,133
---------- ---------- --------
Total benefits and expenses 306,672 293,130 236,479
--------- --------- -------
Income before income taxes 36,421 44,958 35,735
Income taxes 14,395 16,645 12,912
---------- ---------- ---------
Net income $ 22,026 $ 28,313 $ 22,823
========= ========= ========
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1998
($ thousands)
<S> <C> <C> <C> <C> <C>
Accumulated Other
Comprehensive
Total Additional
Stockholder's Capital Paid-In Income, Retained
Equity Stock Capital Net of Tax Earnings
Balance, December 31, 1995 $296,816 $2,000 $177,872 $ 33,124 $83,820
Comprehensive income:
Net income 22,823 -- -- -- 22,823
Unrealized holding losses arising
during the year, net of taxes of
$12,282 (22,810) -- -- (22,810) --
Reclassification adjustment for losses
included in net income, net of tax
of $(1,093) 2,029 -- -- 2,029 --
-------------------
-----------------
Other comprehensive loss (20,781) -- -- (20,781) --
-----------------
Comprehensive income 2,042
Capital contribution from parent 65,000 -- 65,000 -- --
---------------------------------------------------------------------------
Balance, December 31, 1996 363,858 2,000 242,872 12,343 106,643
Comprehensive income:
Net income 28,313 -- -- -- 28,313
Unrealized holding gains arising
during the year, net of taxes of
$(19,891) 36,940 -- -- 36,940 --
Reclassification adjustment for losses
included in net income, net of tax
of $(126) 233 -- -- 233 --
-------------------
-----------------
Other comprehensive income 37,173 -- -- 37,173 --
-----------------
Comprehensive income 65,486
Capital contribution from parent 40,000 40,000
---------------------------------------------------------------------------
Balance, December 31, 1997 469,344 2,000 282,872 49,516 134,956
Comprehensive income:
Net income 22,026 -- -- -- 22,026
Unrealized holding losses arising
during the year, net of taxes of $3,400 (6,314) -- -- (6,314) --
Reclassification adjustment for losses
included in net income, net of tax 1,093
of $(588) -- -- 1,093 --
----------------- -------------------
-------------------
Other comprehensive loss (5,221) -- -- (5,221) --
-----------------
-----------------
Comprehensive income 16,805
---------------------------------------------------------------------------
Balance, December 31, 1998 $486,149 $2,000 $282,872 $44,295 $156,982
===========================================================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
<S> <C> <C> <C>
1998 1997 1996__
- -------- - -------- --------
Cash flows from operating activities:
Net income $ 22,026 $ 28,313 $ 22,823
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income (2,152) (8,017) (9,692)
Change in accounts receivable 349 9,304 --
Change in deferred policy acquisition costs, net 28,022 (21,276) (32,651)
Change in other assets 74 4,840 (10,007)
Change in policy claims and other policyholders' funds (3,939) (16,099) 15,786
Deferred income tax (benefit) provision (9,591) (2,485) 5,084
Change in other liabilities 7,595 1,255 8,621
Amortization of premium (accretion of discount), net 122 (2,316) (2,091)
Net realized loss on investments 4,788 509 5,258
Other, net 2,544 959 (129)
------------- --------- ----------
Net cash provided by (used in) operating activities 49,838 (5,013) 3,002
Cash flows from investing activities: Fixed maturities held to maturity:
Purchases -- (1,996) (16,967)
Maturities 73,601 41,221 26,190
Sales 31,117 30,601 27,944
Fixed maturities available for sale:
Purchases (298,885) (688,050) (921,914)
Maturities 335,357 231,419 212,212
Sales 48,492 73,366 47,542
Other investments:
Purchases (161,252) (199,593) (212,182)
Sales 78,681 29,139 19,850
Change in amounts due to brokers 19,412 (53,796) 88,568
---------- ----------- ----------
Net cash provided by (used in) investing activities 126,523 (537,689) (728,757)
Cash flows from financing activities: Activity related to investment contracts:
Considerations received 302,158 783,339 846,378
Surrenders and other benefits (707,052) (552,903) (312,362)
Interest credited to account balances 228,533 231,437 191,672
Change in securities sold under repurchase agreements -- -- (67,000)
Capital contribution from parent -- 40,000 65,000
--------------- ---------- ---------
Net cash (used in) provided by financing activities (176,361) 501,873 723,688
----------- --------- --------
Net decrease in cash and cash equivalents -- (40,829) (2,067)
Cash and cash equivalents at beginning of year -- 40,829 42,896
--------------- ---------- ---------
Cash and cash equivalents at end of year $ -- $ -- $ 40,829
============== ============== ==========
</TABLE>
See accompanying notes.
1. Summary of significant accounting policies
Nature of business
American Enterprise Life Insurance Company (the Company) is a stock life
insurance company that is domiciled in Indiana and is licensed to transact
insurance business in 48 states. The Company's principal product is
deferred annuities, which are issued primarily to individuals. It offers
single premium and annual premium deferred annuities on both a fixed and
variable dollar basis.
Immediate annuities are offered as well.
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). AEFC 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
Indiana Department of Insurance (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 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 accumulated other comprehensive income, net of deferred income
taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed
securities in determining the constant effective yield used to recognize
interest income. Prepayment estimates are based on information received
from brokers who deal in mortgage-backed securities.
Mortgage loans on real estate are carried at amortized cost less an
allowance 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.
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 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.
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:
1998 1997 1996
---- ----- ----
Cash paid during the year for:
Income taxes $19,035 $19,456 $10,317
Interest on borrowings 5,437 1,832 998
Contractholder charges
Contractholder charges include surrender charges and fees collected
regarding the issue and administration of annuity contracts.
1. Summary of significant accounting policies (continued)
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy
issue costs, and certain sales expenses, have been deferred on annuity
contracts. These costs are amortized using primarily the interest method.
Liabilities for future policy benefits
Liabilities for deferred annuities are accumulation values. Liabilities for
fixed annuities in a benefit status are based on the established industry
mortality tables with various interest rates ranging from 5.5 percent to
8.75 percent, depending on year of issue.
Federal income taxes
The Company's taxable income is included in the consolidated federal income
tax return of American Express Company. The Company provides for income
taxes on a separate return basis, except that, under an agreement between
AEFC and American Express Company, tax benefit is recognized for losses to
the extent they can be used on the consolidated tax return. It is the
policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries
for all tax benefits.
Included in other liabilities at December 31, 1998 and 1997 are $3,504
payable to and $1,289, receivable from , respectively, 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 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 beneficiaries from the mortality assumptions implicit in
the annuity contracts. The Company makes periodic fund transfers to, or
withdrawals from, the separate account assets for such actuarial
adjustments for variable annuities that are in the benefit payment period.
The Company also guarantees that the rates at which administrative fees are
deducted from contract funds will not exceed contractual maximums.
Accounting Changes
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires the reporting and display of comprehensive income and its
components. Comprehensive income is defined as the aggregate change in
stockholder's equity excluding changes in ownership interests. For the
Company, it is net income and the unrealized gains or losses on
available-for-sale securities net of taxes and reclassification adjustment.
1. Summary of significant accounting policies (continued)
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or obtained for Internal Use." The SOP, which
is effective January 1, 1999, requires the capitalization of certain costs
incurred after the date of adoption to develop or obtain software for
internal use. Software utilized by the Company is owned by AEFC and will be
capitalized on AEFC's financial statements. As a result, the new rule will
not have a material impact on the Company's results of operations or
financial condition.
In December 1997, the AICPA issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments", providing guidance
for the timing of recognition of liabilities related to guaranty fund
assessments. The Company will adopt the SOP on January 1, 1999. The Company
has historically carried a balance in other liabilities on the balance
sheet for potential guaranty fund assessment exposure. Adoption of the SOP
will not have a material impact on the Company's results of operations or
financial condition
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective January 1, 2000. This Statement establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation. Earlier application of all of the provisions of this Statement
is encouraged, but it is permitted only as of the beginning of any fiscal
quarter that begins after issuance of the Statement. This Statement cannot
be applied retroactively. The ultimate financial impact of the new rule
will be measured based on the derivatives in place at adoption and cannot
be estimated at this time.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers
and financial files.
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- -------------- ---- ------- ------ ---- -----
U.S. Government agency obligations $ 8,652 $ 423 $ -- $ 9,075
State and municipal obligations 3,003 149 -- 3,152
Corporate bonds and obligations 877,140 48,822 6,670 919,292
Mortgage-backed securities 192,398 2,844 29 195,213
------------ ---------- ---------- -----------
$1,081,193 $ 52,238 $ 6,699 $1,126,732
========== ======== ======= ==========
Available for sale
U.S. Government agency obligations $ 2,062 $ 116 $ -- $ 2,178
Corporate bonds and obligations 1,472,814 69,990 34,103 1,508,701
Mortgage-backed securities 1,051,836 32,232 89 1,083,979
----------- ---------- ----------- ---------
$2,526,712 $102,338 $34,192 $2,594,858
========== ======== ======= ==========
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 $ 11,120 $ 710 $ -- $ 11,830
State and municipal obligations 3,003 173 -- 3,176
Corporate bonds and obligations 970,498 38,176 2,763 1,005,911
Mortgage-backed securities 202,061 1,497 1,367 202,191
------------ --------- ------- -----------
$1,186,682 $40,556 $4,130 $1,223,108
========== ======= ====== ==========
Available for sale
U.S. Government agency obligations $ 2,077 $ 13 $ -- $ 2,090
Corporate bonds and obligations 1,273,217 52,207 8,020 1,317,404
Mortgage-backed securities 1,334,327 33,017 1,039 1,366,305
----------- -------- ------- ----------
$2,609,621 $85,237 $9,059 $2,685,799
========== ======= ====== ==========
</TABLE>
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1998 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Held to maturity Cost Value
Due in one year or less $ 33,208 $ 33,499
Due from one to five years 215,010 227,139
Due from five to ten years 539,917 562,708
Due in more than ten years 100,660 108,173
Mortgage-backed securities 192,398 195,213
------------ ------------
$1,081,193 $1,126,732
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 350 $ 358
Due from one to five years 96,412 101,441
Due from five to ten years 981,556 1,021,961
Due in more than ten years 396,558 387,119
Mortgage-backed securities 1,051,836 1,083,979
--------- ---------
$2,526,712 $2,594,858
During the years ended December 31, 1998, 1997 and 1996, fixed maturities
classified as held to maturity were sold with amortized cost of $31,117,
$29,561 and $27,969, respectively. Net gains and losses on these sales were
not significant. The sales of these fixed maturities were due to
significant deterioration in the issuers' creditworthiness.
In addition, fixed maturities available for sale were sold during 1998 with
proceeds of $48,492 and gross realized gains and losses of $2,835 and
$4,516, respectively. Fixed maturities available for sale were sold during
1997 with proceeds of $73,366 and gross realized gains and losses of $1,081
and $1,440, respectively. Fixed maturities available for sale were sold
during 1996 with proceeds of $47,542 and gross realized gains and losses of
$17 and $3,139, respectively.
At December 31, 1998, bonds carried at $3,292 were on deposit with various
states as required by law.
2. Investments (continued)
At December 31, 1998, investments in fixed maturities comprised 82 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 $480 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 1998 1997
---------------------- -- -------- -- ------
Aaa/AAA $1,242,301 $1,531,588
Aa/AA 45,526 34,167
Aa/A 60,019 69,775
A/A 422,725 421,733
A/BBB 228,656 222,022
Baa/BBB 1,030,874 954,962
Baa/BB 79,687 84,053
Below investment grade 498,117 478,003
------------ ------------
$3,607,905 $3,796,303
At December 31, 1998, approximately 94 percent of the securities rated
Aaa/AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of
any other issuer are greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1998, approximately 18 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
----------------------- ---------------------
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
South Atlantic $198,552 $ 651 $186,714 $ 9,199
Middle Atlantic 129,284 520 128,239 10,167
East North Central 134,165 2,211 125,018 6,294
Mountain 113,581 -- 94,061 11,620
West North Central 119,380 9,626 96,701 11,135
New England 46,103 -- 50,932 --
Pacific 43,706 -- 33,052 --
West South Central 32,086 -- 19,573 --
East South Central 7,449 -- 7,480 --
--------- ------------ --------- ------------
824,306 13,008 741,770 48,415
Less allowance for losses 8,500 -- 3,718 --
---------- ------------ ---------- ------------
$815,806 $13,008 $738,052 $48,415
======== ======= ======== =======
2. Investments (continued)
December 31, 1998 December 31, 1997
------------------- -------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
Department/retail stores $253,380 $ 781 $242,307 $ 9,683
Apartments 186,030 2,211 189,752 10,167
Office buildings 206,285 9,496 169,177 7,262
Industrial buildings 82,857 520 60,195 17,430
Hotels/Motels 45,552 -- 33,508 --
Medical buildings 33,103 -- 30,103 3,873
Nursing/retirement homes 6,731 -- 9,552 --
Mixed Use 10,368 -- 7,176 --
---------- ------------ ----------- ------------
824,306 13,008 741,770 48,415
Less allowance for losses 8,500 -- 3,718 --
----------- ----------- ----------- -----------
$815,806 $13,008 $738,052 $48,415
======== ======= ======== =======
</TABLE>
Mortgage loan fundings are restricted by state insurance regulatory
authorities to 80 percent or less of the market value of the real estate at
the time of origination of the loan. The Company holds the mortgage
document, which gives it the right to take possession of the property if
the borrower fails to perform according to the terms of the agreement.
Commitments to purchase mortgages are made in the ordinary course of
business. The fair value of the mortgage commitments is $nil.
At December 31, 1998, the Company's recorded investment in impaired loans
was $1,932 with an allowance of $500. At December 31, 1997, the Company's
recorded investment in impaired loans was $4,443 with an allowance of $718.
During 1998 and 1997, the average recorded investment in impaired loans was
$2,736 and $6,473, respectively.
The Company recognized $251, $nil and $nil of interest income related to
impaired loans for the years ended December 31, 1998, 1997 and 1996,
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- ---- - ---- - ----
Balance, January 1 $3,718 $2,370 $ --
Provision for investment losses 4,782 1,805 2,370
Loan payoffs -- (457) --
---------- ------- ---------
Balance, December 31 $8,500 $3,718 $2,370
====== ====== ======
Net investment income for the years ended December 31 is summarized as
follows:
1998 1997 1996
- ----- -- ----- - ----
Interest on fixed maturities $285,260 $278,736 $230,559
Interest on mortgage loans 65,351 55,085 41,010
Interest on cash equivalents 137 704 1,402
Other (2,493) 1,544 1,194
----------- ------------- -----------
348,255 336,069 274,165
Less investment expenses 8,036 3,801 2,446
----------- ----------- -----------
$340,219 $332,268 $271,719
======== ======== ========
</TABLE>
2. Investments (continued)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
1998 1997 1996
-- ---- -- ---- -- ----
Fixed maturities $ 863 $ 1,638 $(2,888)
Mortgage loans (4,816) (1,348) (2,370)
Other investments (835) (799) --
-------- ------ ----------
$(4,788) $ (509) $(5,258)
======= ======= =======
<TABLE>
<CAPTION>
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
<S> <C> <C> <C>
1998 1997 1996
-- ---- -- ---- -- ----
Fixed maturities available for sale $(8,032) $57,188 $(31,970)
</TABLE>
3. Income taxes
The Company qualifies as a life insurance company for federal income tax
purposes. As such, the Company is subject to the Internal Revenue Code
provisions applicable to life insurance companies.
The income tax expense (benefit) for the years ended December 31, consists
of the following:
1998 1997 1996
-- ---- -- ---- -- ----
Federal income taxes:
Current $ 23,227 $17,668 $7,124
Deferred (9,591) (2,485) 5,084
--------- -------- -------
13,636 15,183 12,208
State income taxes-current 759 1,462 704
----------- --------- --------
Income tax expense $ 14,395 $16,645 $12,912
======== ======= =======
Increases (decreases) to the federal income tax provision applicable to
pretax income based on the statutory rate, for the years ended December 31,
are attributable to:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------- -------- -------
Provision Rate Provision Rate Provision Rate
Federal income taxes based
on the statutory rate $13,972 35.0% $15,735 35.0% $12,507 35.0%
Increases (decreases) are attributable to :
Tax-excluded interest (35) (0.1) (41) (0.1) (53) (0.1)
State tax, net of federal benefit 493 1.2 956 2.1 459 1.3
Other, net (35) -- (5) -- (1) --
------ ------ ------- ------ ------ ------
Federal income taxes $14,395 36.1% $16,645 37.0% $12,912 36.2%
======= ==== ======= ==== ======= ====
</TABLE>
3. Income taxes (continued)
Significant components of the Company's deferred income tax assets and
liabilities as of December 31 are as follows:
Deferred income tax assets: 1998 1997
-------- -------
Policy reserves $51,298 $54,468
Other 2,214 1,736
--------- -------
Total deferred income tax assets 53,512 56,204
-------- ------
Deferred income tax liabilities:
Deferred policy acquisition costs 52,908 63,630
Investments 23,803 28,175
-------- ------
Total deferred income tax liabilities _76,711 91,805
------- --------
Net deferred income tax liabilities $23,199 $35,601
======= =======
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 income tax assets and,
therefore, no such valuation allowance has been established.
4. Stockholder's equity
Retained earnings available for distribution as dividends to IDS Life are
limited to the Company's surplus as determined in accordance with
accounting practices prescribed by state insurance regulatory authorities.
Statutory unassigned surplus aggregated $45,716 and $17,392 as of December
31, 1998 and 1997, respectively. In addition, dividends in excess of
$37,902 would require approval by the Insurance Department of the state of
Indiana.
Statutory net income and stockholder's equity as of December 31, are
summarized as follows:
1998 1997 1996
-------- --------- -------
Statutory net income $ 37,902 $ 23,589 $ 9,138
Statutory stockholder's equity 330,588 302,264 250,975
5. Related party transactions
On December 31, 1998, the Company purchased interest rate floors from IDS
Life and entered into an interest rate swap with IDS Life to manage its
exposure to interest rate risk. The interest rate floors had a carrying
amount of $6,651 and $8,400 at December 31, 1998 and 1997, respectively.
The interest rate swap is an off balance sheet transaction.
The Company has no employees. Charges by IDS Life for services and use of
other joint facilities aggregated $28,482, $24,535 and $17,936 for the
years ended December 31, 1998, 1997 and 1996, respectively. Certain of
these costs are included in deferred policy acquisition costs.
6. Lines of credit
The Company has an available line of credit with AEFC aggregating $50,000.
The rate for the line of credit is the parent's cost of funds, established
by reference to various indices plus 20 to 45 basis points, depending on
the term. There were no borrowings outstanding under this agreement at
December 31, 1998 or 1997.
7. Derivative financial instruments
The Company enters into transactions involving derivative financial
instruments to manage its exposure to interest rate risk, including hedging
specific transactions. The Company does not hold derivative instruments for
trading purposes. The Company manages risks associated with these
instruments as described below.
Market risk is the possibility that the value of the derivative financial
instruments will change due to fluctuations in a factor from which the
instrument derives its value, primarily an interest rate. The Company is
not impacted by market risk related to derivatives held for non-trading
purposes beyond that inherent in cash market transactions. Derivatives 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 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Notional Carrying Fair Total Credit
December 31, 1998 Amount Amount Value Exposure
----------------- ------ - ------ -- ----- --------
Assets:
Interest rate caps $ 900,000 $ 5,452 $ 1,518 $ 1,518
Interest rate floors 1,000,000 6,651 17,798 17,798
Interest rate swaps 1,000,000 -- -- --
------------- ------------ -------------
$12,103 $19,316 $19,316
= ======= ======= =======
</TABLE>
7. Derivative financial instruments (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Notional Carrying Fair Total Credit
December 31, 1997 Amount Amount Value Exposure
----------------- - ------ -- ------ -- ----- -- --------
Assets:
Interest rate caps $ 900,000 $ 7,624 $ 5,340 $ 5,340
Interest rate floors 1,000,000 8,400 8,400 8,400
Interest rate swaps 1,000,000 -- -- --
------------- ------------ ------------
$16,024 $13,740 $13,740
======= ======= =======
</TABLE>
The fair values of derivative financial instruments are based on market
values, dealer quotes or pricing models. All interest rate caps, floors and
swaps will expire on various dates from 2000 to 2003.
Interest rate caps, floors and swaps 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.
8. 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 value of life insurance obligations, receivables and all
non-financial instruments, such as deferred acquisition costs are excluded.
Off-balance sheet intangible assets 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>
<S> <C> <C> <C> <C>
December 31,
1998 1997
-------- --------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
Investments:
Fixed maturities (Note 2):
Held to maturity $1,081,193 $1,126,732 $1,186,682 $1,223,108
Available for sale 2,594,858 2,594,858 2,685,799 2,685,799
Mortgage loans on real estate (Note 2) 815,806 874,064 738,052 775,869
Derivative financial instruments (Note 7) 12,103 19,316 16,024 13,740
Separate account assets (Note 1) 123,185 123,185 62,087 62,087
Financial Liabilities
Future policy benefits for fixed annuities $4,152,059 $4,000,789 $4,330,173 $4,152,471
Separate account liabilities 123,185 115,879 62,087 58,116
</TABLE>
At December 31, 1998 and 1997, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $14,793 and $13,040, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 1998
and 1997.
8. Fair values of financial instruments (continued)
The fair values of deferred annuities and separate account liabilities are
estimated as the carrying amount less applicable surrender charges. The
fair value for annuities in non-life contingent payout status is estimated
as the present value of projected benefit payments at rates appropriate for
contracts issued in 1998 and 1997.
9. Commitments and contingencies
A number of lawsuits have been filed against life and health insurers in
jurisdictions in which the Company conducts business involving insurers'
sales practices, alleged agent misconduct, failure to properly supervise
agents, and other matters. The Company, along with AEFC and its insurance
subsidiaries, has been named as a defendant in one of these types of
actions.
The plaintiffs purport to represent a class consisting of all persons who
purchased policies or contracts from IDS Life and its subsidiaries. The
complaint puts at issue various alleged sales practices and
misrepresentations, alleged breaches of fiduciary duties and alleged
violations of consumer fraud statutes. IDS Life and its subsidiaries
believe they have meritorious defenses to the claims raised in this
lawsuit.
The outcome of any litigation cannot be predicted with certainty. In the
opinion of management, however, the ultimate resolution of this lawsuit
should not have a material adverse effect on the Company's financial
position.
10. 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 major 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,
has been conducted to identify the major systems that could be affected by
the Year 2000 issue. Steps have been taken to resolve potential problems
including modification to existing software and the purchase of new
software. AEFC's target date for substantially completing its program of
corrective measures on internal business critical systems was December 31,
1998. As of June 30, 1999, AEFC completed its program of corrective
measures on its internal systems and applications, including Year 2000
compliance testing. The Year 2000 readiness of unaffiliated investment
managers and other third parties whose system failures could have an impact
on the Company's operations continues to be evaluated. The failure of
external parties to resolve their own Year 2000 issues in a timely manner
could result in a material financial risk to AEFC or the company.
AEFC's Year 2000 project includes establishing Year 2000 contingency plans
for all key business units. Business continuation plans, which address
business continuation in the event of a system disruption, are in place for
all key business units. These plans are being amended to include specific
Year 20000 considerations and will contine to be refined throughout 1999 as
additional information related to potential Year 2000 exposure is gathered.
