The prospectus containing information for the AEL Preferred (SM) Variable
Annuity filed electronically in Registrant's Post-Effective Amendment No. 3 to
Registration Statement No. 333-20217 on Form N-4, filed on or about April 27,
2000, is incorporated by reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
AEL PREFERREDSM VARIABLE ANNUITY
AMERICAN ENTERPRISE VARIABLE ANNUITY ACCOUNT
May 1, 2000
Revised as of July 21, 2000
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 may be
obtained from your agent, or by writing or calling us at the address and
telephone number below. The prospectus is incorporated in this SAI by reference.
American Enterprise Life Insurance Company
829 AXP Financial Center
Minneapolis, MN 55474
800-333-3437
<PAGE>
TABLE OF CONTENTS
Performance Information...................................................p.3
Calculating Annuity Payouts...............................................p.8
Rating Agencies...........................................................p.9
Principal Underwriter.....................................................p.9
Independent Auditors......................................................p.9
Financial Statements
<PAGE>
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 10 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
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)
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. 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.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return With Withdrawal For Periods Ending Dec. 31, 1999
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)* -7.02% 5.40% -7.02% 5.75% 6.51% 9.00%
ECR Capital Resource Fund 13.93 18.52 13.93 19.13 13.73 14.19
(2/95;10/81)
EMS Cash Management Fund -4.28 2.73 -4.28 2.77 3.26 4.91
(2/95;10/81)
EMG Managed Fund (2/95;4/86) 5.15 15.74 5.15 15.99 11.79 11.13
EAG Strategy Aggressive Fund 60.56 22.96 60.56 22.56 -- 15.23
(2/95;1/92)
PUTNAM VARIABLE TRUST
EDI Putnam VT Diversified Income -6.97 4.28 -6.97 4.63 -- 3.50
Fund Class IA Shares
(2/95;9/93)
EGG Putnam VT Global Growth Fund 54.61 31.39 54.61 24.86 -- 15.40
Class IA Shares (6/97;5/90)
EGI Putnam VT Growth and Income -7.13 16.39 -7.13 17.17 12.23 13.41
Fund Class IA Shares
(2/95;2/88)
ENO Putnam VT New Opportunities 58.90 30.97 58.90 30.62 -- 28.23
Fund Class IA Shares
(2/95;5/94)
EVO Putnam VT Voyager Fund Class 47.93 34.64 47.93 29.39 20.43 19.65
IA Shares (6/97;2/88)
* (Commencement dates of the subaccount; Commencement dates of the Fund)
** Current applicable charges deducted from fund performance include a $30
contract administrative charge, a 1.25% mortality and expense fee, a 0.15%
variable account administrative charge and applicable withdrawal charges.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return Without Withdrawal For Periods Ending Dec. 31, 1999
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)* 0.19% 6.06% 0.19% 6.38% 6.51% 9.00%
ECR Capital Resource Fund 21.93 18.94 21.93 19.52 13.73 14.19
(2/95;10/81)
EMS Cash Management Fund 3.18 3.46 3.18 3.48 3.26 4.91
(2/95;10/81)
EMG Managed Fund (2/95;4/86) 13.15 16.20 13.15 16.43 11.79 11.13
EAG Strategy Aggressive Fund 68.56 23.33 68.56 22.92 -- 15.23
(2/95;1/92)
PUTNAM VARIABLE TRUST
EDI Putnam VT Diversified Income 0.25 4.97 0.25 5.29 -- 3.50
Fund Class IA Shares
(2/95;9/93)
EGG Putnam VT Global Growth Fund 62.61 32.91 62.61 25.19 -- 15.40
Class IA Shares (6/97;5/90)
EGI Putnam VT Growth and Income 0.08 16.85 0.08 17.59 12.23 13.41
Fund Class IA Shares
(2/95;2/88)
ENO Putnam VT New Opportunities 66.90 31.26 66.90 30.90 -- 28.34
Fund Class IA Shares
(2/95;5/94)
EVO Putnam VT Voyager Fund Class 55.93 36.11 55.93 29.68 20.43 19.65
IA Shares (6/97;2/88)
* (Commencement dates of the subaccount; Commencement dates of the Fund)
** Current applicable charges deducted from fund performance include a $30
contract administrative charge, a 1.25% mortality and expense fee and a
0.15% variable account administrative charge.
</TABLE>
<PAGE>
Cumulative Total Return
Cumulative 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 period 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 also
may show performance figures without the deduction of a withdrawal charge. In
addition, total return figures reflect the deduction of all applicable charges
including the contract administrative charge, the variable account
administrative charge and the mortality and expense risk fee.
Annualized 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
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 guarantee 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.
<PAGE>
<TABLE>
<CAPTION>
Annualized Yields Based on the Seven-Day Period Ending Dec. 31, 1999
<S> <C> <C> <C>
Subaccount Investing In: Simple Yield Compound Yield
---------- ------------- ------------ --------------
EMS AXPSM Variable Portfolio - Cash Management Fund 4.52% 4.62%
</TABLE>
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 the 30-Day Period Ended Dec. 31, 1999
Subaccount Investing In: Yield
ESI AXPSM Variable Portfolio Bond Fund 7.52%
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 Business 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.
<PAGE>
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 on the valuation 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. 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; 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 values 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
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.
<PAGE>
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 your
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 variable
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 contract.
Rating Agency Rating
A.M. Best A+
(Superior)
Duff & Phelps AAA
Moody's Aa2
PRINCIPAL UNDERWRITER
The principal underwriter for the contracts is American Express Financial
Advisors Inc. (AEFA) which offers them on a continuous basis.
Withdrawal charges received by AEFA for the last three years aggregated
$479,554, $199,062 and $79,195, respectively.
Commissions paid by AEL for the last three years aggregated total $5,924,368,
$4,415,795 and $1,798,969, respectively.
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.
<PAGE>
FINANCIAL STATEMENTS
American Enterprise Variable Annuity Account -- AEL Preferred Variable Annuity
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 --
AEL Preferred Subaccounts (comprised of subaccounts ESI, ECR, EMS, EMG, EAG,
EDI, EGG, EGI, ENO and EVO) as of December 31, 1999, and the related statements
of operations for the year then ended, and the statements of changes in net
assets for each of the two years in the period then ended. 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 auditing standards generally accepted
in the United States. 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, 1999 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 --
AEL Preferred Subaccounts (as described above) at December 31, 1999 and the
individual and combined results of their operations and the changes in their net
assets for the periods described above, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 17, 2000
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Net Assets
December 31, 1999
Segregated Asset Subaccounts
Assets ESI ECR EMS
Investments in shares of mutual funds and portfolios:
<S> <C> <C> <C>
at cost $ 11,651,363 $ 10,984,992 $ 1,110,118
------------ ------------ -----------
at market value $ 10,828,713 $ 13,632,953 $ 1,110,117
------------ ------------ -----------
Dividends receivable 66,241 -- 5,329
Accounts receivable from American Enterprise Life
for contract purchase payments -- 27,305 --
Receivable from mutual funds and portfolios for share redemptions -- -- --
------ ------ ----
Total assets 10,894,954 13,660,258 1,115,446
========== ========== =========
Liabilities
Payable to American Enterprise Life for:
Mortality and expense risk fee 11,459 14,364 1,274
Issue and administrative fee 1,375 1,724 153
Contract terminations 61,819 -- --
Payable to mutual funds and portfolios for investments purchased -- -- --
---- ------ ----
Total liabilities 74,653 16,088 1,427
------ ------ -----
Net assets applicable to contracts in accumulation period 10,817,495 13,637,782 1,114,004
Net assets applicable to contracts in payment period 2,806 6,388 15
----- ----- --
Total net assets $ 10,820,301 $ 13,644,170 $ 1,114,019
============ ============ ===========
Accumulation units outstanding 8,126,599 5,864,252 941,161
========= ========= =======
Net asset value per accumulation unit $ 1.33 $ 2.33 $ 1.18
====== ====== ======
Assets EMG EAG
Investments in shares of mutual funds and portfolios:
at cost $ 11,427,222 $ 7,436,725
------------ -----------
at market value $ 12,406,820 $ 10,999,058
Dividends receivable -- --
Accounts receivable from American Enterprise Life
for contract purchase payments -- 35,107
Receivable from mutual funds and portfolios for share redemptions -- --
------ ---------
Total assets 12,406,820 11,034,165
========== ==========
Liabilities
Payable to American Enterprise Life for:
Mortality and expense risk fee 13,107 11,597
Issue and administrative fee 1,573 1,392
Contract terminations 1,945 --
Payable to mutual funds and portfolios for investments purchased -- --
------ ----
Total liabilities 16,625 12,989
------ ------
Net assets applicable to contracts in accumulation period 12,385,565 11,014,379
Net assets applicable to contracts in payment period 4,630 6,797
===== =====
Total net assets $ 12,390,195 $ 11,021,176
============ ============
Accumulation units outstanding 5,985,403 3,961,232
========= =========
Net asset value per accumulation unit $ 2.07 $ 2.78
====== ======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Net Assets
December 31, 1999
Segregated Asset Subaccounts
Assets EDI EGG EGI
Investments in shares of mutual funds and portfolios:
<S> <C> <C> <C>
at cost $ 8,709,431 $ 1,870,228 $ 19,106,692
----------- ----------- ------------
at market value $ 8,087,474 $ 2,931,331 $ 19,934,482
Dividends receivable -- -- --
Accounts receivable from American Enterprise Life
for contract purchase payments 9,184 -- 6,271
Receivable from mutual funds and portfolios for share redemptions 9,604 6,756 23,784
----- ----- ------
Total assets 8,106,262 2,938,087 19,964,537
========= ========= ==========
Liabilities
Payable to American Enterprise Life for:
Mortality and expense risk fee 8,575 2,998 21,236
Issue and administrative fee 1,029 360 2,548
Contract terminations -- 3,398 --
Payable to mutual funds and portfolios for investments purchased 9,184 -- 6,271
----- -----
Total liabilities 18,788 6,756 30,055
------ ----- ------
Net assets applicable to contracts in accumulation period 8,087,474 2,931,052 19,932,641
Net assets applicable to contracts in payment period -- 279 1,841
--- -----
Total net assets $ 8,087,474 $ 2,931,331 $ 19,934,482
=========== =========== ============
Accumulation units outstanding 6,355,776 1,411,843 9,311,251
========= ========= =========
Net asset value per accumulation unit $ 1.27 $ 2.08 $ 2.14
====== ====== ======
Combined
Variable
Assets ENO EVO Account
Investments in shares of mutual funds and portfolios:
at cost $ 9,228,143 $ 1,096,258 $ 82,621,172
----------- ----------- ------------
at market value $ 20,602,458 $ 1,639,313 $ 102,172,719
Dividends receivable -- -- 71,570
Accounts receivable from American Enterprise Life
for contract purchase payments -- -- 77,867
Receivable from mutual funds and portfolios for share redemptions 26,598 2,613 69,355
------ ----- ------
Total assets 20,629,056 1,641,926 102,391,511
Liabilities
Payable to American Enterprise Life for:
Mortality and expense risk fee 21,949 1,688 108,247
Issue and administrative fee 2,634 202 12,990
Contract terminations 2,015 723 69,900
Payable to mutual funds and portfolios for investments purchased -- -- 15,455
------
Total liabilities 26,598 2,613 206,592
------ ----- -------
Net assets applicable to contracts in accumulation period 20,602,458 1,639,256 102,162,106
Net assets applicable to contracts in payment period -- 57 22,813
-- ------
Total net assets $ 20,602,458 $ 1,639,313 $ 102,184,919
============ =========== =============
Accumulation units outstanding 5,475,925 743,110
========= =======
Net asset value per accumulation unit $ 3.76 $ 2.21
====== ======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Operations
Year ended December 31, 1999
Segregated Asset Subaccounts
Investment income ESI ECR EMS
<S> <C> <C> <C>
Dividend income from mutual funds and portfolios $ 639,680 $ 1,220,605 $ 49,468
--------- ----------- --------
Expenses:
Mortality and expense risk fee 116,344 140,484 13,300
Administrative charge -- -- --
Mortality charge 13,961 16,858 1,596
------ ------ -----
Total expenses 130,305 157,342 14,896
------- ------- ------
Investment income (loss) - net 509,375 1,063,263 34,572
======= ========= ======
Realized and unrealized gain (loss) on investments - net
Realized gain (loss) on sales of investments in
mutual funds and portfolios:
Proceeds from sales 519,183 775,040 3,469,740
Cost of investments sold 557,599 641,397 3,469,746
------- ------- ---------
Net realized gain (loss) on investments (38,416) 133,643 (6)
Net change in unrealized appreciation or depreciation of investments (431,444) 1,170,550 (4)
-------- --------- --
Net gain (loss) on investments (469,860) 1,304,193 (10)
-------- --------- ---
Net increase (decrease) in net assets resulting from operations $ 39,515 $ 2,367,456 $ 34,562
======== =========== ========
Investment income EMG EAG
Dividend income from mutual funds and portfolios $ 773,979 $ 777,394
--------- ---------
Expenses:
Mortality and expense risk fee 128,813 90,103
Administrative charge -- --
Mortality charge 15,456 9,769
------ -----
Total expenses 144,269 99,872
------- ------
Investment income (loss) - net 629,710 677,522
======= =======
Realized and unrealized gain (loss) on investments - net
Realized gain (loss) on sales of investments in
mutual funds and portfolios:
Proceeds from sales 674,233 784,628
Cost of investments sold 642,429 715,168
------- -------
Net realized gain (loss) on investments 31,804 69,460
Net change in unrealized appreciation or depreciation of investments 705,266 3,733,600
------- ---------
Net gain (loss) on investments 737,070 3,803,060
------- ---------
Net increase (decrease) in net assets resulting from operations $ 1,366,780 $ 4,480,582
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Operations
Year ended December 31, 1999
Segregated Asset Subaccounts
Investment income EDI EGG EGI
<S> <C> <C> <C>
Dividend income from mutual funds and portfolios $ 548,649 $ 125,227 $ 1,699,426
--------- --------- -----------
Expenses:
Mortality and expense risk fee 98,749 21,743 258,279
Administrative charge 11,850 2,609 30,994
Mortality charge -- -- --
------ ------ -------
Total expenses 110,599 24,352 289,273
------- ------ -------
Investment income (loss) - net 438,050 100,875 1,410,153
======= ======= =========
Realized and unrealized gain (loss) on investments - net
Realized gain (loss) on sales of investments in
mutual funds and portfolios:
Proceeds from sales 762,680 172,730 1,787,631
Cost of investments sold 831,712 151,397 1,649,630
------- ------- ---------
Net realized gain (loss) on investments (69,032) 21,333 138,001
Net change in unrealized appreciation or depreciation of investments (338,782) 939,066 (1,526,466)
-------- ------- ----------
Net gain (loss) on investments (407,814) 960,399 (1,388,465)
-------- ------- ----------
Net increase (decrease) in net assets resulting from operations $ 30,236 $ 1,061,274 $ 21,688
======== =========== ========
Combined
Variable
Investment income ENO EVO Account
Dividend income from mutual funds and portfolios $ 185,706 $ 65,824 $ 6,085,958
--------- -------- -----------
Expenses:
Mortality and expense risk fee 184,295 11,896 1,064,006
Administrative charge 22,115 1,428 68,996
Mortality charge -- -- 57,640
------ ------ ------
Total expenses 206,410 13,324 1,190,642
------- ------ ---------
Investment income (loss) - net (20,704) 52,500 4,895,316
======= ====== =========
Realized and unrealized gain (loss) on investments - net
Realized gain (loss) on sales of investments in
mutual funds and portfolios:
Proceeds from sales 1,782,292 84,714 10,812,871
Cost of investments sold 1,157,209 72,891 9,889,178
--------- ------ ---------
Net realized gain (loss) on investments 625,083 11,823 923,693
Net change in unrealized appreciation or depreciation of investments 7,761,913 458,840 12,472,539
--------- ------- ----------
Net gain (loss) on investments 8,386,996 470,663 13,396,232
--------- ------- ----------
Net increase (decrease) in net assets resulting from operations $ 8,366,292 $ 523,163 $ 18,291,548
=========== ========= ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Changes in Net Assets
Year ended December 31, 1999
Segregated Asset Subaccounts
Operations ESI ECR EMS
<S> <C> <C> <C>
Investment income (loss) - net $ 509,375 $ 1,063,263 $ 34,572
Net realized gain (loss) on investments (38,416) 133,643 (6)
Net change in unrealized appreciation or depreciation of investments (431,444) 1,170,550 (4)
-------- --------- --
Net increase (decrease) in net assets resulting from operations 39,515 2,367,456 34,562
====== ========= ======
Contract transactions
Contract purchase payments 2,364,485 1,613,826 327,820
Net transfers* 1,661,200 889,068 920,070
Contract terminations:
Surrender benefits (643,436) (978,721) (1,027,233)
Death benefits (155,072) (92,582) --
-------- -------
Increase (decrease) from contract transactions 3,227,177 1,431,591 220,657
--------- --------- -------
Net assets at beginning of year 7,553,609 9,845,123 858,800
--------- --------- -------
Net assets at end of year $ 10,820,301 $ 13,644,170 $ 1,114,019
============ ============ ===========
Accumulation unit activity
Units outstanding at beginning of year 5,688,915 5,163,185 749,301
Contract purchase payments 1,802,413 806,674 279,813
Net transfers* 1,255,338 436,406 788,973
Contract terminations:
Surrender benefits and contract charges (503,166) (490,112) (876,926)
Death benefits (116,901) (51,901) --
-------- -------
Units outstanding at end of year 8,126,599 5,864,252 941,161
========= ========= =======
Operations EMG EAG
Investment income (loss) - net $ 629,710 $ 677,522
Net realized gain (loss) on investments 31,804 69,460
Net change in unrealized appreciation or depreciation of investments 705,266 3,733,600
------- ---------
Net increase (decrease) in net assets resulting from operations 1,366,780 4,480,582
========= =========
Contract transactions
Contract purchase payments 1,698,764 1,327,105
Net transfers* 1,651,244 196,717
Contract terminations:
Surrender benefits (777,693) (590,047)
Death benefits (113,085) (90,014)
-------- -------
Increase (decrease) from contract transactions 2,459,230 843,761
--------- -------
Net assets at beginning of year 8,564,185 5,696,833
--------- ---------
Net assets at end of year $ 12,390,195 $ 11,021,176
============ ============
Accumulation unit activity
Units outstanding at beginning of year 4,684,466 3,452,898
Contract purchase payments 906,505 765,858
Net transfers* 874,349 135,664
Contract terminations:
Surrender benefits and contract charges (420,370) (342,970)
Death benefits (59,547) (50,218)
------- -------
Units outstanding at end of year 5,985,403 3,961,232
========= =========
*Includes transfer activity from (to) other subacounts and transfers from (to)
American Enterprise Life's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Changes in Net Assets
Year ended December 31, 1999
Segregated Asset Subaccounts
Operations EDI EGG EGI
<S> <C> <C> <C>
Investment income (loss) - net $ 438,050 $ 100,875 $ 1,410,153
Net realized gain (loss) on investments (69,032) 21,333 138,001
Net change in unrealized appreciation or depreciation of investments (338,782) 939,066 (1,526,466)
-------- ------- ----------
Net increase (decrease) in net assets resulting from operations 30,236 1,061,274 21,688
====== ========= ======
Contract transactions
Contract purchase payments 429,428 438,876 993,329
Net transfers* 819,217 253,954 1,042,498
Contract terminations:
Surrender benefits (588,321) (85,561) (1,474,391)
Death benefits (163,991) (7,699) (227,092)
-------- ------ --------
Increase (decrease) from contract transactions 496,333 599,570 334,344
------- ------- -------
Net assets at beginning of year 7,560,905 1,270,487 19,578,450
--------- --------- ----------
Net assets at end of year $ 8,087,474 $ 2,931,331 $ 19,934,482
=========== =========== ============
Accumulation unit activity
Units outstanding at beginning of year 5,962,803 995,653 9,160,761
Contract purchase payments 340,298 306,162 452,859
Net transfers* 649,312 179,237 475,496
Contract terminations:
Surrender benefits and contract charges (466,981) (64,029) (677,158)
Death benefits (129,656) (5,180) (100,707)
-------- ------ --------
Units outstanding at end of year 6,355,776 1,411,843 9,311,251
========= ========= =========
Combined
Variable
Operations ENO EVO Account
Investment income (loss) - net $ (20,704) $ 52,500 $ 4,895,316
Net realized gain (loss) on investments 625,083 11,823 923,693
Net change in unrealized appreciation or depreciation of investments 7,761,913 458,840 12,472,539
--------- ------- ----------
Net increase (decrease) in net assets resulting from operations 8,366,292 523,163 18,291,548
========= ======= ==========
Contract transactions
Contract purchase payments 420,481 312,715 9,926,829
Net transfers* (190,447) 226,374 7,469,895
Contract terminations:
Surrender benefits (986,195) (41,164) (7,192,762)
Death benefits (70,593) (3,873) (924,001)
------- ------ --------
Increase (decrease) from contract transactions (826,754) 494,052 9,279,961
-------- ------- ---------
Net assets at beginning of year 13,062,920 622,098 74,613,410
---------- ------- ----------
Net assets at end of year $ 20,602,458 $ 1,639,313 $ 102,184,919
============ =========== =============
Accumulation unit activity
Units outstanding at beginning of year 5,798,150 439,985
Contract purchase payments 165,668 196,463
Net transfers* (74,469) 139,299
Contract terminations:
Surrender benefits and contract charges (385,336) (30,344)
Death benefits (28,088) (2,293)
------- ------
Units outstanding at end of year 5,475,925 743,110
========= =======
*Includes transfer activity from (to) other subacounts and transfers from (to)
American Enterprise Life's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Express Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Changes in Net Assets
Year ended December 31, 1998
Segregated Asset Subaccounts
Operations ESI ECR EMS
<S> <C> <C> <C>
Investment income (loss) - net $ 338,547 $ 598,178 $ 21,695
Net realized gain (loss) on investments (2,867) 31,856 1
Net change in unrealized appreciation or
depreciation of investments (378,318) 957,259 3
-------- ------- -
Net increase (decrease) in net assets
resulting from operations (42,638) 1,587,293 21,699
======= ========= ======
Contract transactions
Contract purchase payments 4,304,628 3,114,006 691,275
Net transfers* 243,040 (245,243) (85,043)
Annuity payments (74) (385) --
Contract terminations:
Surrender benefits and contract charges (297,229) (529,563) (28,396)
Death benefits (28,304) (21,950) --
------- -------
Increase (decrease) from contract transactions 4,222,061 2,316,865 577,836
--------- --------- -------
Net assets at beginning of year 3,374,186 5,940,965 259,265
--------- --------- -------
Net assets at end of year $ 7,553,609 $ 9,845,123 $ 858,800
=========== =========== =========
Accumulation unit activity
Units outstanding at beginning of year 2,543,718 3,812,754 231,256
Contracts purchase payments 3,245,320 1,848,700 635,551
Net transfers* 183,324 (146,994) (79,775)
Contract terminations:
Surrender benefits and contract charges (262,248) (338,414) (37,731)
Death benefits (21,199) (12,861) --
------- -------
Units outstanding at end of year 5,688,915 5,163,185 749,301
========= ========= =======
Operations EMG EAG
Investment income (loss) - net $ 794,837 $ 291,638
Net realized gain (loss) on investments 6,346 9,024
Net change in unrealized appreciation or
depreciation of investments 55,365 (224,339)
------ --------
Net increase (decrease) in net assets
resulting from operations 856,548 76,323
======= ======
Contract transactions
Contract purchase payments 3,376,704 1,944,651
Net transfers* (21,220) 11,902
Annuity payments (118) (343)
Contract terminations:
Surrender benefits and contract charges (335,067) (292,481)
Death benefits (25,390) (13,088)
------- -------
Increase (decrease) from contract transactions 2,994,909 1,650,641
--------- ---------
Net assets at beginning of year 4,712,728 3,969,869
--------- ---------
Net assets at end of year $ 8,564,185 $ 5,696,833
=========== ===========
Accumulation unit activity
Units outstanding at beginning of year 2,944,208 2,434,211
Contracts purchase payments 2,000,537 1,189,822
Net transfers* (16,062) 27,517
Contract terminations:
Surrender benefits and contract charges (229,369) (191,090)
Death benefits (14,848) (7,562)
------- ------
Units outstanding at end of year 4,684,466 3,452,898
========= =========
*Includes transfer activity from (to) other subaccounts and transfers from (to)
American Enterprise Life's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Express Variable Annuity Account - AEL Preferred Variable Annuity
Statements of Changes in Net Assets
Year ended December 31, 1998
Segregated Asset Subaccounts
Operations EDI EGG EGI
<S> <C> <C> <C>
Investment income (loss) - net $ 210,246 $ 72,979 $ 1,584,977
Net realized gain (loss) on investments (13,263) 478 51,395
Net change in unrealized appreciation or
depreciation of investments (445,119) 126,815 430,830
-------- ------- -------
Net increase (decrease) in net assets
resulting from operations (248,136) 200,272 2,067,202
======== ======= =========
Contract transactions
Contract purchase payments 3,896,228 722,793 6,003,340
Net transfers* 204,479 (31,631) 336,195
Annuity payments -- -- (443)
Contract terminations:
Surrender benefits and contract charges (372,930) (13,786) (918,096)
Death benefits (26,715) -- (23,141)
------- -------
Increase (decrease) from contract transactions 3,701,062 677,376 5,397,855
--------- ------- ---------
Net assets at beginning of year 4,107,979 392,839 12,113,393
--------- ------- ----------
Net assets at end of year $ 7,560,905 $ 1,270,487 $ 19,578,450
=========== =========== ============
Accumulation unit activity
Units outstanding at beginning of year 3,150,958 387,592 6,452,046
Contracts purchase payments 3,003,542 646,928 3,037,405
Net transfers* 154,556 (20,850) 176,523
Contract terminations:
Surrender benefits and contract charges (325,760) (18,017) (492,893)
Death benefits (20,493) -- (12,320)
------- -------
Units outstanding at end of year 5,962,803 995,653 9,160,761
========= ======= =========
Combined
Variable
Operations ENO EVO Account
Investment income (loss) - net $ (11,649) $ 10,832 $ 3,912,280
Net realized gain (loss) on investments 113,215 1,395 197,580
Net change in unrealized appreciation or
depreciation of investments 2,107,898 76,861 2,707,255
--------- ------ ---------
Net increase (decrease) in net assets
resulting from operations 2,209,464 89,088 6,817,115
========= ====== =========
Contract transactions
Contract purchase payments 3,248,421 376,788 27,678,834
Net transfers* (206,315) (10,324) 195,840
Annuity payments (27) -- (1,390)
Contract terminations:
Surrender benefits and contract charges (563,223) (4,654) (3,355,425)
Death benefits (24,012) -- (162,600)
------- --------
Increase (decrease) from contract transactions 2,454,844 361,810 24,355,259
--------- ------- ----------
Net assets at beginning of year 8,398,612 171,200 43,441,036
--------- ------- ----------
Net assets at end of year $ 13,062,920 $ 622,098 $ 74,613,410
============ ========= ============
Accumulation unit activity
Units outstanding at beginning of year 4,575,051 148,486
Contracts purchase payments 1,636,811 310,319
Net transfers* (95,440) (7,962)
Contract terminations:
Surrender benefits and contract charges (306,558) (10,858)
Death benefits (11,714) --
-------
Units outstanding at end of year 5,798,150 439,985
========= =======
*Includes transfer activity from (to) other subaccounts and transfers from (to)
American Enterprise Life's fixed account.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
American Enterprise Variable Annuity Account -- AEL Preferred Variable Annuity
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 or portfolios (collectively,
the Funds), which are registered under the 1940 Act as diversified, open-end
management investment companies and have the following investment managers.
Subaccount Invests exclusively in shares of Investment Manager
<S> <C> <C>
ESI AXP SM Variable Portfolio-- Bond Fund IDS Life Insurance Company 1
ECR AXPSM Variable Portfolio-- Capital Resource Fund IDS Life Insurance Company 1
EMS AXP SM Variable Portfolio-- Cash Management Fund IDS Life Insurance Company 1
EMG AXPSM Variable Portfolio-- Managed Fund IDS Life Insurance Company 1
EAG AXPSM Variable Portfolio-- Strategy Aggressive Fund IDS Life Insurance Company 1
EDI Putnam VT Diversified Income Fund - Class IA Shares Putnam Investment Management, Inc.
EGG Putnam VT Global Growth Fund - Class IA shares Putnam Investment Management, Inc.
EGI Putnam VT Growth and Income Fund - Class IA Shares Putnam Investment Management, Inc.
ENO Putnam VT New Opportunities Fund - Class IA Shares Putnam Investment Management, Inc.
EVO Putnam VT Voyager Fund - Class IA Shares Putnam Investment Management, Inc.
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 which 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 accounting principles
generally accepted in the United States 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. If you
make payments to your annuity under a systematic investment plan (SIP), we will
deduct the contract administrative charge on any contract anniversary when your
contract value is $2,000 or more but less than $50,000. 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 during the first six payment years following a purchase payment.
Charges by American Enterprise Life for withdrawals are not identified on an
individual segregated asset subaccount basis. Charges for all segregated asset
subaccounts amounted to $479,554 in 1999 and $199,062 in 1998. 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
The subaccounts' investment in shares of the Funds as of Dec. 31, 1999 were as
follows:
Subaccount Investment Shares NAV
<S> <C> <C> <C>
ESI AXP SM Variable Portfolio-- Bond Fund 1,026,989 $10.54
ECR AXPSM Variable Portfolio-- Capital Resource Fund 374,575 36.40
EMS AXP SM Variable Portfolio-- Cash Management Fund 1,110,224 1.00
EMG AXPSM Variable Portfolio-- Managed Fund 626,098 19.82
EAG AXPSM Variable Portfolio-- Strategy Aggressive Fund 459,906 23.92
EDI Putnam VT Diversified Income Fund - Class IA Shares 814,449 9.93
EGG Putnam VT Global Growth Fund - Class IA Shares 96,141 30.49
EGI Putnam VT Growth and Income Fund - Class IA Shares 743,824 26.80
ENO Putnam VT New Opportunities Fund - Class IA Shares 473,185 43.54
EVO Putnam VT Voyager Fund - Class IA Shares 24,744 66.25
8. INVESTMENT TRANSACTIONS
The subaccounts' purchases of Funds' shares, including reinvestment of dividend
distributions, were as follows:
Year ended Dec. 31,
Subaccount Investment 1999 1998
<S> <C> <C> <C>
ESI AXP SM Variable Portfolio-- Bond Fund $ 4,264,147 $ 4,647,272
ECR AXPSM Variable Portfolio-- Capital Resource Fund 3,258,677 3,205,569
EMS AXP SM Variable Portfolio-- Cash Management Fund 3,721,067 1,567,312
EMG AXPSM Variable Portfolio-- Managed Fund 3,779,798 3,919,323
EAG AXPSM Variable Portfolio-- Strategy Aggressive Fund 2,283,793 2,163,591
EDI Putnam VT Diversified Income Fund - Class IA Shares 1,688,106 4,166,205
EGG Putnam VT Global Growth Fund - Class IA Shares 871,694 808,467
EGI Putnam VT Growth and Income Fund - Class IA Shares 3,508,981 7,603,531
ENO Putnam VT New Opportunities Fund - Class IA Shares 919,361 3,048,046
EVO Putnam VT Voyager Fund - Class IA Shares 630,539 401,110
Combined Variable Account $24,926,163 $31,530,426
<PAGE>
9. YEAR 2000 (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 Account. All of the major systems used by the American Enterprise Life
and by the Account are maintained by AEFC and are utilized by multiple
subsidiaries and affiliates of AEFC. American Enterprise Life's and the
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,
including those specific to American Enterprise Life and the Account, was
conducted to identify the major systems that could be affected by the Year 2000
issue. Steps were taken to resolve potential problems including modification to
existing software and the purchase of new software. As of Dec. 31, 1999, AEFC
had completed its program of corrective measures on its internal systems and
applications, including Year 2000 compliance testing. As of Dec. 31, 1999, AEFC
had also completed an evaluation of the Year 2000 readiness of other third
parties whose system failures could have an impact on American Enterprise Life's
and the Account's operations.
AEFC's Year 2000 project also included 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. As of Dec. 31, 1999, these plans had been amended to include
specific Year 2000 considerations.
In assessing its Year 2000 initiatives and the results of actual production
since Jan. 1, 2000, management believes no material adverse consequences were
experienced, and there was no material effect on American Enterprise Life's and
the Account's business, results of operations, or financial condition as a
result of the Year 2000 issue.
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY FINANCIAL INFORMATION
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, 1999 and 1998, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
February 3, 2000
Minneapolis, Minnesota
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
BALANCE SHEETS
December 31,
($ thousands, except share amounts)
<TABLE>
<S> <C> <C>
ASSETS 1999 1998
------ ----------- -----------
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value:
1999, $984,103; 1998, $1,126,732) $1,006,349 $1,081,193
Available for sale, at fair value (amortized cost:
1999, $2,411,799; 1998, $2,526,712) 2,304,487 2,594,858
----------- -----------
3,310,836 3,676,051
Mortgage loans on real estate 785,253 815,806
Other investments 11,470 12,103
----------- -----------
Total investments 4,107,559 4,503,960
Accounts receivable 316 214
Accrued investment income 56,676 61,740
Deferred policy acquisition costs 180,288 196,479
Deferred income taxes 37,501 --
Other assets 9 43
Separate account assets 220,994 123,185
----------- -----------
Total assets $4,603,343 $4,885,621
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Future policy benefits for fixed annuities $3,921,513 $4,166,852
Policy claims and other policyholders' funds 12,097 7,389
Deferred income taxes -- 23,199
Amounts due to brokers 25,215 54,347
Other liabilities 17,436 24,500
Separate account liabilities 220,994 123,185
----------- -----------
Total liabilities 4,197,255 4,399,472
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 (loss) income:
Net unrealized securities (losses) gains (69,753) 44,295
Retained earnings 190,969 156,982
----------- -----------
Total stockholder's equity 406,088 486,149
----------- -----------
Total liabilities and stockholder's equity $4,603,343 $4,885,621
========== ==========
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
Years ended December 31,
($ thousands)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
--------- --------- ---------
Revenues:
Net investment income $322,746 $340,219 $332,268
Contractholder charges 6,069 6,387 5,688
Mortality and expense risk fees 2,269 1,275 641
Net realized gain (loss) on investments 6,565 (4,788) (509)
--------- --------- ---------
Total revenues 337,649 343,093 338,088
--------- --------- ---------
Benefits and expenses:
Interest credited on investment contracts 208,583 228,533 231,437
Amortization of deferred policy acquisition costs 43,257 53,663 36,803
Other operating expenses 35,147 24,476 24,890
--------- --------- ---------
Total benefits and expenses 286,987 306,672 293,130
--------- --------- ---------
Income before income taxes 50,662 36,421 44,958
Income taxes 16,675 14,395 16,645
--------- --------- ---------
Net income $ 33,987 $ 22,026 $ 28,313
========= ========= =========
</TABLE>
<PAGE>
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
Three years ended December 31, 1999
($ thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Total Additional Comprehensive
Stockholder's Capital Paid-In (Loss) Income, Retained
Equity Stock Capital Net of Tax Earnings
------------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
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 IDS Life 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
of ($588) 1,093 -- -- 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
Comprehensive loss:
Net income 33,987 -- -- -- 33,987
Unrealized holding losses arising
during the year, net of taxes of $(59,231) (110,001) -- -- (110,001) --
Reclassification adjustment for gains
included in net income, net of tax (4,047) (4,047) --
of $(2,179) ------------- ------------
Other comprehensive loss (114,048) -- -- (114,048) --
-------------
Comprehensive loss (80,061)
------------- -------- ------------ ------------ -------------
Balance, December 31, 1999 $406,088 $2,000 $282,872 $(69,753) $190,969
============= ======== ============ ============ =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
See accompanying notes.
AMERICAN ENTERPRISE LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years ended December 31,
($ thousands)
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 33,987 $ 22,026 $ 28,313
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accrued investment income 5,064 (2,152) (8,017)
Change in accounts receivable (102) 349 9,304
Change in deferred policy acquisition costs, net 16,191 28,022 (21,276)
Change in other assets 34 74 4,840
Change in policy claims and other policyholders' funds 4,708 (3,939) (16,099)
Deferred income tax (benefit) provision 711 (9,591) (2,485)
Change in other liabilities (7,064) 7,595 1,255
Amortization of premium (accretion of discount), net 2,315 122 (2,316)
Net realized (gain) loss on investments (6,565) 4,788 509
Other, net (1,562) 2,544 959
----------- ----------- -----------
Net cash provided by (used in) operating activities 47,717 49,838 (5,013)
Cash flows from investing activities:
Fixed maturities held to maturity:
Purchases -- -- (1,996)
Maturities 65,705 73,601 41,221
Sales 8,466 31,117 30,601
Fixed maturities available for sale:
Purchases (593,888) (298,885) (688,050)
Maturities 248,317 335,357 231,419
Sales 469,126 48,492 73,366
Other investments:
Purchases (28,520) (161,252) (199,593)
Sales 57,548 78,681 29,139
Change in amounts due to brokers (29,132) 19,412 (53,796)
----------- ----------- ------------
Net cash provided by (used in) investing activities 197,622 126,523 (537,689)
Cash flows from financing activities:
Activity related to investment contracts:
Considerations received 299,899 302,158 783,339
Surrenders and other benefits (753,821) (707,052) (552,903)
Interest credited to account balances 208,583 228,533 231,437
Capital contribution from parent -- -- 40,000
----------- ----------- -----------
Net cash (used in) provided by financing activities (245,339) (176,361) 501,873
----------- ----------- -----------
Net decrease in cash and cash equivalents -- -- (40,829)
Cash and cash equivalents at beginning of year -- -- 40,829
----------- ----------- -----------
Cash and cash equivalents at end of year $ -- $ -- $ --
=========== =========== ==========
See accompanying notes.
</TABLE>
<PAGE>
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 accounting principles generally accepted in the United
States 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 accounting
principles generally accepted in the United States 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 (loss) 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.
<PAGE>
1. Summary of significant accounting policies (continued)
Impairment of mortgage loans is measured as the excess of the loan's
recorded investment over its present value of expected principal and
interest payments discounted at the loan's effective interest rate, or the
fair value of collateral. The amount of the impairment is recorded in an
allowance for mortgage loan losses. The allowance for mortgage loan losses
is maintained at a level that management believes is adequate to absorb
estimated losses in the portfolio. The level of the allowance account is
determined based on several factors, including historical experience,
expected future principal and interest payments, estimated collateral
values, and current and anticipated economic and political conditions.
Management regularly evaluates the adequacy of the allowance for mortgage
loan losses.
The Company generally stops accruing interest on mortgage loans for which
interest payments are delinquent more than three months. Based on
management's judgment as to the ultimate collectibility of principal,
interest payments received are either recognized as income or applied to
the recorded investment in the loan.
The cost of interest rate caps 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:
1999 1998 1997
---- ----- ----
Cash paid during the year for:
Income taxes $22,007 $19,035 $19,456
Interest on borrowings 2,187 5,437 1,832
Contractholder charges
Contractholder charges include surrender charges and fees collected
regarding the issue and administration of annuity contracts.
<PAGE>
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.
Amortization of deferred policy acquisition costs requires the use of
assumptions including interest margins, mortality margins, persistency
rates, maintenance expense levels and, for variable products, separate
account performance. For universal life-type insurance and deferred
annuities, actual experience is reflected in the Company's amortization
models monthly. As actual experience differs from the current assumptions,
management considers the need to change key assumptions underlying the
amortization models prospectively. The impact of changing prospective
assumptions is reflected in the period that such changes are made and is
generally referred to as an unlocking adjustment. During 1998, unlocking
adjustments resulted in a net increase in amortization of $11 million. Net
unlocking adjustments in 1999 and 1997 were not significant.
Liabilities for future policy benefits
Liabilities for universal-life type insurance and fixed and variable
deferred annuities are accumulation values.
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, 1999 and 1998 are $2,147 and
$3,504, respectively, payable to IDS Life for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the
exclusive benefit of the variable annuity contract owners. The Company
receives mortality and expense risk fees from the variable annuity separate
accounts.
<PAGE>
1. Summary of significant accounting policies (continued)
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of
the annuitants and 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
American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" became effective January 1, 1999. The SOP
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 capitalized by AEFC. As a result, the
new rule did not have a material impact on the Company's results of
operations or financial condition.
Effective January 1, 1999, the Company adopted AICPA 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 had historically carried balance in
other liabilities on the balance sheet for potential guaranty fund
assessment exposure. Adoption of the SOP did not have a material impact on
the Company's results of operations or financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective January 1, 2001.
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. The ultimate financial effect
of the new rule will be measured based on the derivatives in place at
adoption and cannot be estimated at this time.
<PAGE>
2. Investments
Fair values of investments in fixed maturities represent quoted market
prices and estimated values when quoted prices are not available. Estimated
values are determined by established procedures involving, among other
things, review of market indices, price levels of current offerings of
comparable issues, price estimates and market data from independent brokers
and financial files.
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1999 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity Cost Gains Losses Value
---------------- ---------- -------- -------- ----------
U.S. Government agency obligations $ 7,514 $ 23 $ 431 $ 7,106
State and municipal obligations 3,002 44 -- 3,046
Corporate bonds and obligations 816,826 5,966 23,311 799,482
Mortgage-backed securities 179,007 296 4,834 174,469
---------- -------- -------- ----------
$1,006,349 $ 6,329 $ 28,576 $ 984,103
========== ======== ======== ==========
Available for sale
U.S. Government agency obligations $ 2,047 $ -- $ 47 $ 1,999
State and municipal obligations 2,250 -- 190 2,060
Corporate bonds and obligations 1,419,150 7,445 90,703 1,335,892
Mortgage-backed securities 988,352 1,929 25,746 964,536
------------ -------- -------- ----------
$2,411,799 $ 9,374 $116,686 $2,304,487
========== ======== ======== ==========
The amortized cost, gross unrealized gains and losses and fair value of
investments in fixed maturities at December 31, 1998 are as follows:
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
========== ======== ======= ==========
</TABLE>
<PAGE>
2. Investments (continued)
The amortized cost and fair value of investments in fixed maturities at
December 31, 1999 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 $ 26,214 $ 26,334
Due from one to five years 412,533 408,638
Due from five to ten years 331,187 320,146
Due in more than ten years 57,408 54,516
Mortgage-backed securities 179,007 174,469
------------- -------------
$ 1,006,349 $ 984,103
=========== ============
Amortized Fair
Available for sale Cost Value
Due in one year or less $ 46,937 $ 47,236
Due from one to five years 75,233 73,525
Due from five to ten years 1,037,001 980,633
Due in more than ten years 264,276 238,557
Mortgage-backed securities 988,352 964,536
------------ ------------
$2,411,799 $2,304,487
During the years ended December 31, 1999, 1998 and 1997, fixed maturities
classified as held to maturity were sold with amortized cost of $8,466,
$31,117 and $29,561, 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 1999 with
proceeds of $469,126 and gross realized gains and losses of $10,374 and
$4,147 respectively. 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.
At December 31, 1999, bonds carried at $3,277 were on deposit with various
states as required by law.
<PAGE>
2. Investments (continued)
At December 31, 1999, investments in fixed maturities comprised 81 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 $486 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 1999 1998
---------------------- ----------- -----------
Aaa/AAA $1,168,144 $1,242,301
Aa/AA 42,859 45,526
Aa/A 52,416 60,019
A/A 422,668 422,725
A/BBB 189,072 228,656
Baa/BBB 995,152 1,030,874
Baa/BB 64,137 79,687
Below investment grade 483,700 498,117
------------ ------------
$3,418,148 $3,607,905
At December 31, 1999, approximately 94 percent of the securities rated
Aaa/AAA were GNMA, FNMA and FHLMC mortgage-backed securities. No holdings
of any other issuer were greater than one percent of the Company's total
investments in fixed maturities.
At December 31, 1999, approximately 19 percent of the Company's invested
assets were mortgage loans on real estate. Summaries of mortgage loans by
region of the United States and by type of real estate are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
On Balance Commitments On Balance Commitments
Region Sheet to Purchase Sheet to Purchase
---------------------------------- ----------- ----------- ---------- -----------
South Atlantic $194,325 $ -- $198,552 $ 651
Middle Atlantic 118,699 -- 129,284 520
East North Central 126,243 -- 134,165 2,211
Mountain 103,751 -- 113,581 --
West North Central 125,891 513 119,380 9,626
New England 43,345 802 46,103 --
Pacific 41,396 -- 43,706 --
West South Central 31,153 -- 32,086 --
East South Central 7,100 -- 7,449 --
----------- ------------ ----------- ------------
791,903 1,315 824,306 13,008
Less allowance for losses 6,650 -- 8,500 --
----------- ------------ ----------- ------------
$785,253 $ 1,315 $815,806 $13,008
======== ======== ======== =======
<PAGE>
2. Investments (continued)
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
On Balance Commitments On Balance Commitments
Property type Sheet to Purchase Sheet to Purchase
---------- -------------- ---------- ------------
Department/retail stores $232,449 $ 1,315 $253,380 $ 781
Apartments 181,346 -- 186,030 2,211
Office buildings 202,132 -- 206,285 9,496
Industrial buildings 83,186 -- 82,857 520
Hotels/Motels 43,839 -- 45,552 --
Medical buildings 32,284 -- 33,103 --
Nursing/retirement homes 6,608 -- 6,731 --
Mixed Use 10,059 -- 10,368 --
---------- -------------- ---------- ------------
791,903 1,315 824,306 13,008
Less allowance for losses 6,650 -- 8,500 --
----------- -------------- ----------- ------------
$785,253 $ 1,315 $815,806 $13,008
======== ========== ======== =======
</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, 1999, the Company's recorded investment in impaired loans
was $5,200 with an allowance of $1,250. At December 31, 1998, the Company's
recorded investment in impaired loans was $1,932 with an allowance of $500.
During 1999 and 1998, the average recorded investment in impaired loans was
$5,399 and $2,736, respectively.
The Company recognized $136, $251 and $nil of interest income related to
impaired loans for the years ended December 31, 1999, 1998 and 1997,
respectively.
The following table presents changes in the allowance for investment losses
related to all loans:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Balance, January 1 $8,500 $3,718 $2,370
Provision (reduction) for investment losses (1,850) 4,782 1,805
Loan payoffs -- -- (457)
------ --------- -------
Balance, December 31 $6,650 $8,500 $3,718
====== ====== ======
Net investment income for the years ended December 31 is summarized as
follows:
1999 1998 1997
----- ----- ----
Interest on fixed maturities $265,199 $285,260 $278,736
Interest on mortgage loans 63,721 65,351 55,085
Interest on cash equivalents 534 137 704
Other (1,755) (2,493) 1,544
---------- ---------- ----------
327,699 348,255 336,069
Less investment expenses 4,953 8,036 3,801
--------- ---------- ----------
$322,746 $340,219 $332,268
======== ======== ========
</TABLE>
<PAGE>
2. Investments (continued)
Net realized gain (loss) on investments for the years ended December 31 is
summarized as follows:
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Fixed maturities $ 6,534 $ 863 $ 1,638
Mortgage loans (1,650) (4,816) (1,348)
Other investments (1,819) (835) (799)
--------- -------- -------
$ 3,065 $(4,788) $ (509)
========= ======= =======
Changes in net unrealized appreciation (depreciation) of investments for
the years ended December 31 are summarized as follows:
1999 1998 1997
----- ----- ----
Fixed maturities available for sale $(175,458) $(8,032) $57,188
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:
1999 1998 1997
---- ---- ----
Federal income taxes:
Current $ 15,531 $ 23,227 $17,668
Deferred 711 (9,591) (2,485)
-------- -------- -------
16,242 13,636 15,183
State income taxes-current 433 759 1,462
-------- -------- -------
Income tax expense $ 16,675 $ 14,395 $16,645
======== ======== =======
</TABLE>
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>
1999 1998 1997
------------------ ------------------ ---------------------
Provision Rate Provision Rate Provision Rate
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes based
on the statutory rate $17,731 35.0% $13,972 35.0% $15,735 35.0%
Increases (decreases) are
attributable to:
Tax-excluded interest (14) -- (35) (0.1) (41) (0.1)
State tax, net of federal benefit 281 0.5 493 1.2 956 2.1
Reduction of mortgage loss
reserve (1,225) (2.4) -- -- -- --
Other, net (98) (0.2) (35) -- (5) --
------ ----- -------- ------ ---- ------
Total income taxes $16,675 32.9 % $14,395 36.1% $16,645 37.0%
======= ===== ======= ==== ======= ====
</TABLE>
<PAGE>
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: 1999 1998
------- -------
Policy reserves $46,243 $51,298
Unrealized losses on investments 39,678 --
Other 1,070 2,214
-------- --------
Total deferred income tax assets 86,991 53,512
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs 49,490 52,908
Unrealized gains on investments -- 23,803
-------- --------
Total deferred income tax liabilities 49,490 76,711
-------- --------
Net deferred income tax assets (liabilities) $37,501 ($23,199)
======= ========
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 $58,223 and $45,716 as of December
31, 1999 and 1998, respectively. In addition, dividends in excess of
$15,241 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:
1999 1998 1997
--------- --------- -------
Statutory net income $ 15,241 $ 37,902 $ 23,589
Statutory stockholder's equity 343,094 330,588 302,264
5. Related party transactions
The Company has 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 $8,258 and
$6,651 at December 31, 1999 and 1998, 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 $38,931, $28,482 and $24,535 for the
years ended December 31, 1999, 1998 and 1997, respectively. Certain of
these costs are included in deferred policy acquisition costs.
<PAGE>
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 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, 1999 or 1998.
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>
Notional Carrying Fair Total Credit
December 31, 1999 Amount Amount Value Exposure
----------------- -------- -------- ------ ------------
<S> <C> <C> <C> <C>
Assets:
Interest rate caps $ 900,000 $ 3,212 $ 4,437 $ 4,437
Interest rate floors 2,000,000 8,258 2,251 2,251
Off balance sheet assets:
Interest rate swaps 2,000,000 -- 18,274 18,274
--------- -------- --------
$11,470 $24,962 $24,962
======= ======= =======
<PAGE>
7. Derivative financial instruments (continued)
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
Off balance sheet liabilities:
Interest rate swaps 1,000,000 -- (33,500) --
--------- ---------- --------
$12,103 ($ 14,184) $19,316
======= =========== =======
</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 2006.
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>
December 31,
1999 1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
---------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities (Note 2):
Held to maturity $1,006,349 $984,103 $1,081,193 $1,126,732
Available for sale 2,304,487 2,304,487 2,594,858 2,594,858
Mortgage loans on real estate (Note 2) 785,253 770,095 815,806 874,064
Derivative financial instruments (Note 7) 11,470 24,962 12,103 19,316
Separate account assets (Note 1) 220,994 220,994 123,185 123,185
Financial Liabilities
Future policy benefits for fixed annuities $3,905,849 $3,778,945 $4,152,059 $4,000,789
Separate account liabilities 220,994 209,942 123,185 115,879
Derivative financial instruments (Note 7) -- -- -- 33,500
</TABLE>
At December 31, 1999 and 1998, the carrying amount and fair value of future
policy benefits for fixed annuities exclude life insurance-related
contracts carried at $15,633 and $14,793, respectively. The fair value of
these benefits is based on the status of the annuities at December 31, 1999
and 1998.
<PAGE>
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 1999 and 1998.
9. Commitments and contingencies
In January 2000, AEFC reached an agreement in principle to settle three
class-action lawsuits. The Company had been named as a co-defendant in one
of these lawsuits. It is expected the settlement will provide $215 million
of benefits to more than 2 million participants. The agreement in principle
to settle also provides for release by class members of all insurance and
annuity market conduct claims dating back to 1985 and is subject to a
number of contingencies including a definitive agreement and court
approval. The portion of the settlement allocated to the Company did not
have a material impact on the Company's financial position or results from
operations.
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 businesses are heavily dependent upon AEFC's computer systems and
have significant interaction with systems of third parties.
A comprehensive review of AEFC's computer systems and business processes,
including those specific to the Company, was conducted to identify the
major systems that could be affected by the Year 2000 issue. Steps were
taken to resolve potential problems including modification to existing
software and the purchase of new software. As of December 31, 1999, AEFC
had completed its program of corrective measures on its internal systems
and applications, including Year 2000 compliance testing. As of December
31, 1999, AEFC had also completed an evaluation of the Year 2000 readiness
of other third parties whose system failures could have an impact on the
Company's operations.
AEFC's Year 2000 project also included 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. At December 31, 1999, these plans had
been amended to include specific Year 2000 considerations.
In assessing its Year 2000 initiatives and the results of actual production
since January 1, 2000, management believes no material adverse consequences
were experienced, and there was no material effect on the Company's
business, results of operations, or financial condition as a result of the
Year 2000 issue.
