ITEM 1. BUSINESS
IDS Life Insurance Company (the Company) is a stock life insurance company organized under the laws of the State of Minnesota. The Company is a wholly owned subsidiary of American Express Financial Corporation (AEFC), which is a wholly owned subsidiary of American Express Company. The Company serves residents of all states except New York. IDS Life Insurance Company of New York and American Centurion Life Assurance Company are wholly owned subsidiaries of the Company and serve New York State residents. The Company also wholly owns American Enterprise Life Insurance Company and American Partners Life Insurance Company.
The Company's principal products are deferred annuities and universal life insurance, which are issued primarily to individuals. It offers single premium and flexible premium deferred annuities on both a fixed and variable dollar basis. Immediate annuities are offered as well. The Company's insurance products include universal life (fixed and variable), whole life, single premium life and term products (including waiver of premium and accidental death benefits). The Company also markets disability income and long-term care insurance.
The Company's principal annuity product in terms of amount in force is the fixed deferred annuity. The annuity contract guarantees a minimum interest rate during the accumulation period (the time before annuity payments begin), although the Company normally pays a higher rate reflective of current market rates. The Company has also adopted a practice whereby the higher current rate is guaranteed for a specified period. The Company also offers a variable annuity product under the name Flexible Portfolio Annuity. This is a fixed/variable annuity offering the purchaser a choice among mutual funds with portfolios of equities, bonds, managed assets and/or short-term securities, and the Company's general account, as the underlying investment vehicles. With respect to funds applied to the variable portion of the annuity, the purchaser, rather than the Company, assumes the investment risks and receives the rewards inherent in the ownership of the underlying investment. The Flexible Portfolio Annuity provides for a surrender charge during the first eight years after a purchase payment is made. At December 31, 1996, the Company had $39.2 billion of fixed and variable annuities in force, an increase of 10 percent from the prior year end.
The Company's principal insurance product is the flexible-premium, adjustable-benefit universal life insurance policy. In this type of insurance policy, each premium payment accumulates interest in a cash value account. The policyholder has access to the cash surrender value in whole or in part after the first year. The size of the cash value of the fund can also be controlled by the policyholder by increasing or decreasing premiums, subject only to maintaining a required minimum to keep the policy in force. Monthly deductions from the cash value of the policy are made for the cost of insurance, expense charges and any policy riders. At December 31, 1996, the Company had $49.6 billion of fixed and variable universal life-type insurance in force, up 15 percent from December 31, 1995.
Assets held in segregated accounts which fund the variable annuity and variable life insurance products totaled $18.5 billion at December 31, 1996, a 24 percent increase from December 31, 1995.
IDS Life Insurance Company, American Enterprise Life Insurance Company and American Partners Life Insurance Company are subject to comprehensive regulation by the Minnesota Department of Commerce (Insurance Division), the Indiana Department of Insurance and the Arizona Department of Insurance, respectively. IDS Life Insurance Company of New York and American Centurion Life Assurance Company are both subject to comprehensive regulation by the New York Department of Insurance. The laws of the other states in which the Company does business regulate such matters as the licensing of sales personnel and, in some cases, the contents of insurance policies. The purpose of such regulation and supervision is primarily to protect the interests of policyholders. In the United States, the McCarran-Ferguson Act provides that the primary regulation of the insurance industry is left to the individual states. Typically, states regulate such matters as company licensing, agent licensing, cancellation or nonrenewal of policies, minimum health insurance policy benefits, life insurance cost disclosure, solicitation and replacement practices, unfair trade and claims practices, rates, forms, advertising, investment type and quality, minimum capital and surplus levels and changes in control. Virtually all states mandate participation in insurance guaranty associations, which assess insurance companies in order to fund claims of policyholders of insolvent insurance companies. In addition to state laws, the Company is affected by a variety of federal laws, and there is periodic federal interest in various aspects of the insurance industry including taxation, solvency and accounting procedures, as well as the treatment of persons differently because of sex, with respect to terms, conditions, rates or benefits of an insurance contract. If any of these issues were resolved unsatisfactorily, there could be an adverse effect upon the Company.
As a distributor of variable contracts, the Company is registered as a broker-dealer. As the investment manager for various investment companies, the Company is registered as an investment advisor under applicable federal laws and is a member of the National Association of Securities Dealers, Inc.
The insurance and annuity business is highly competitive and the Company's competitors consist of insurance companies and other financial institutions. Competitive factors applicable to the business of the Company include the interest rates credited to its products, the financial strength of the organization and the services provided to policyholders.
For additional information, see Note 10, Segment information, in the "Notes to Consolidated Financial Statements".
ITEM 2.
ITEM 2. PROPERTIES
The Company occupies office space in Minneapolis, Minnesota, which is leased by its parent, American Express Financial Corporation. The Company reimburses American Express Financial Corporation for rent based on direct and indirect allocation methods. IDS Life Insurance Company of New York and American Centurion Life Assurance Company rent office space in Albany, New York. Facilities occupied by the Company and its subsidiaries are believed to be adequate for the purposes for which they are used and are well maintained.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
A number of lawsuits have been filed against life and health insurers in jurisdictions in which the Company and AEFC do business involving insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. The Company and AEFC, like other life and health insurers, from time to time are involved in such litigation. On December 13, 1996, an action entitled Lesa Benacquisto and Daniel Benacquisto vs. IDS Life Insurance Company and American Express Financial Corporation was commenced in Minnesota state court. The action is brought by individuals who replaced an existing Company insurance policy with a new Company policy. The plaintiffs purport to represent a class consisting of all persons who replaced existing Company policies with new policies from and after January 1, 1985. The complaint puts at issue various alleged sales practices and misrepresentations, alleged breaches of fiduciary duties and alleged violations of consumer fraud statutes. Plaintiffs seek damages in an unspecified amount and also seek to establish a claims resolution facility for the determination of individual issues. The Company and AEFC filed an answer to the Complaint on February 18, 1997.
The Company is a defendant in various other lawsuits, none of which, in the opinion of the Company counsel, will result in a material liability.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1996 Compared to 1995:
Consolidated net income increased 14 percent to $415 million in 1996, compared to $365 million in 1995. Earnings growth resulted primarily from increases in management fees and policyholder and contractholder charges partially offset by a slight decrease in investment margins. These increases reflect higher average insurance and annuities in force during 1996. Investment margins were below prior year levels primarily due to increasing interest credited rates throughout 1996.
Consolidated income before income taxes totaled $622 million in 1996, compared with $561 million in 1995. In 1996, $161 million was from the life, disability income and long-term care insurance segment, compared with $125 million in 1995. In 1996, $461 million was from the annuity segment, compared with $440 million in 1995.
Total premiums received increased to $6.1 billion in 1996, compared with $5.0 billion in 1995. This increase is primarily due to an increase in sales of variable annuities in 1996.
Total revenues increased to $2.7 billion in 1996, compared with $2.5 billion in 1995. The increase is primarily due to increases in net investment income, policyholder and contractholder charges, and management fees. Net investment income, the largest component of revenues, increased from the prior year, reflecting a slight increase in investments owned.
Policyholder and contractholder charges, which consist primarily of cost of insurance charges on universal life-type policies, increased 18 percent to $303 million in 1996, compared with $256 million in 1995. This increase reflects higher total life insurance in force which grew 13 percent to $67 billion at December 31, 1996.
Management and other fees increased 26 percent to $271 million in 1996, compared with $216 million in 1995. This is primarily due to an increase in separate account assets, which grew 24 percent to $19 billion at December 31, 1996, due to market appreciation and sales. The Company provides investment management services for the mutual funds used as investment options for variable annuities and variable life insurance. The Company also receives a mortality and expense risk fee from the separate accounts.
Total benefits and expenses increased slightly to $2.1 billion in 1996. The largest component of expenses, interest credited to policyholder accounts for universal life-type insurance and investment contracts, increased to $1.4 billion. This was due to higher aggregate amounts in force and an increase in average interest credited rates.
1995 compared to 1994:
Consolidated net income increased 8.6% to $365 million in 1995, compared to $336 million in 1994. Earnings growth resulted primarily from increases in management fees and policyholder and contractholder charges partially offset by a slight decrease in investment margins. These increases reflect higher average insurance and annuities in force during 1995. Investment margins were below prior year levels primarily due to higher interest credited rates during the first two quarters of 1995.
Consolidated income before income taxes totaled $561 million in 1995, compared with $513 million in 1994. In 1995, $125 million was from the life, disability income, health and long-term care insurance segment, compared with $123 million in 1994. In 1995, $440 million was from the annuity segment, compared with $394 million in 1994. There was a $4.9 million net realized loss on investments in 1995, compared with a net realized loss on investments of $4.3 million in 1994.
Total premiums received decreased to $5.0 billion in 1995, compared with $5.7 billion in 1994. This decrease is primarily due to a decrease in sales of variable annuities, reflecting very strong sales of variable products during 1994.
Total revenues increased to $2.5 billion in 1995, compared with $2.3 billion in 1994. The increase is primarily due to increases in net investment income, policyholder and contractholder charges, and management fees. Net investment income, the largest component of revenues, increased from the prior year, reflecting an increase in investments owned.
Policyholder and contractholder charges, which consist primarily of cost of insurance charges on universal life-type policies, increased 16% to $256 million in 1995, compared with $220 million in 1994. This increase reflects higher total life insurance in force which grew 13% to $59.4 billion at December 31, 1995.
Management and other fees increased 32% to $216 million in 1995, compared with $164 million in 1994. This is primarily due to an increase in separate account assets, which grew 38% to $15 billion at December 31, 1995, due to market appreciation and sales. The Company provides investment management services for the mutual funds used as investment options for variable annuities and variable life insurance. The Company also receives a mortality and expense risk fee from the separate accounts.
Total benefits and expenses increased to $2.0 billion in 1995. The largest component of expenses, interest credited to policyholder accounts for universal life-type insurance and investment contracts, increased to $1.3 billion. This was due to higher aggregate amounts in force and an increase in average interest credited rates.
Risk Management
The Company primarily invests in fixed income securities over a broad range of maturities for the purpose of providing fixed annuity clients with a competitive rate of return on their investments while minimizing risk, and to provide a dependable and targeted spread between the interest rate earned on investments and the interest rate credited to clients' accounts. The Company does not invest in securities to generate trading profits.
The Company has an investment committee that holds regularly scheduled meetings and, when necessary, special meetings. At these meetings, the committee reviews models projecting different interest rate scenarios and their impact on profitability. The objective of the committee is to structure the investment security portfolio based upon the type and behavior of products in the liability portfolio so as to achieve targeted levels of profitability.
Rates credited to clients' accounts are generally reset at shorter intervals than the maturity of underlying investments. Therefore, margins may be negatively impacted by increases in the general level of interest rates. Part of the committee's strategy includes the purchase of some types of derivatives, such as interest rate caps and swaps, for hedging purposes. These derivatives protect margins by increasing investment returns if there is a sudden and severe rise in interest rates, thereby mitigating the impact of an increase in rates credited to clients' accounts.
Liquidity and Capital Resources
The liquidity requirements of the Company are met by funds provided from operations and investment activity. The primary components of the funds provided are premiums, investment income, proceeds from sales of investments as well as maturities and periodic repayments of investment principal.
The primary uses of funds are policy benefits, commissions and operating expenses, policy loans, dividends and investment purchases.
The Company has available lines of credit with two banks and its parent aggregating $175 million, of which $100 million is with its parent. The $25,000 line of credit with one bank expired on Dec. 31, 1996 and the Company did not seek renewal. The $50,000 line of credit with the other bank expires on June 30, 1997 and the Company expects to seek renewal. The lines of credit are used strictly as short-term sources of funds. Borrowings outstanding under the agreements were $nil at Dec. 31, 1996. At Dec. 31, 1996, outstanding reverse repurchase agreements totaled $17 million.
At Dec. 31, 1996, investments in fixed maturities comprised 86 percent of the Company's total invested assets. Of the fixed maturity portfolio, approximately 42 percent is invested in GNMA, FNMA and FHLMC mortgage-backed securities which are considered AAA/Aaa quality.
At Dec. 31, 1996, approximately 9.6 percent of the Company's investments in fixed maturities were below investment grade bonds. These investments may be subject to a higher degree of risk than the high-rated issues because of the borrower's generally greater sensitivity to adverse economic conditions, such as recession or increasing interest rates, and in certain instances, the lack of an active secondary market. Expected returns on below investment grade bonds reflect consideration of such factors. The Company has identified those fixed maturities for which a decline in fair value is determined to be other than temporary, and has written them down to fair value with a charge to earnings.
At Dec. 31, 1996, net unrealized appreciation on fixed maturities held to maturity included $380 million of gross unrealized appreciation and $94 million of gross unrealized depreciation. Net unrealized appreciation on fixed maturities available for sale included $231 million of gross unrealized appreciation and $93 million of gross unrealized depreciation.
At Dec. 31, 1996, the Company had an allowance for losses for mortgage loans totaling $37 million and for real estate investments totaling $4 million.
The economy and other factors have caused an increase in the number of insurance companies that are under regulatory supervision. This circumstance has resulted in an increase in assessments by state guaranty associations to cover losses to policyholders of insolvent or rehabilitated companies. Some assessments can be partially recovered through a reduction in future premium taxes in certain states. The Company established an asset for guaranty association assessments paid to those states allowing a reduction in future premium taxes over a reasonable period of time. The asset is being amortized as premium taxes are reduced. The Company has also estimated the potential effect of future assessments on the Company's financial position and results of operations and has established a reserve for such potential assessments.
In the first quarter of 1997, the Company paid a $45 million dividend to its parent. In 1996, dividends paid to its parent were $165 million.
The National Association of Insurance Commissioners has established risk-based capital standards to determine the capital requirements of a life insurance company based upon the risks inherent in its operations. These standards require the computation of a risk-based capital amount which is then compared to a company's actual total adjusted capital. The computation involves applying factors to various statutory financial data to address four primary risks: asset default, adverse insurance experience, interest rate risk and external events. These standards provide for regulatory attention when the percentage of total adjusted capital to authorized control level risk-based capital is below certain levels. As of Dec. 31, 1996, the Company's total adjusted capital was well in excess of the levels requiring regulatory attention.
Segment Information
The Company's operations consist of two business segments: Individual and group life, disability income and long-term care insurance; and fixed and variable annuity products designed for individuals, pension plans, small businesses and employer-sponsored groups. The Company is not dependent upon any single customer and no single customer accounted for more than 10 percent of revenue in 1996, 1995 or 1994. Additionally, no single distributor accounted for more than 10 percent of premiums received in 1996, 1995 or 1994.(See Note 10, Segment information, in the "Notes to Consolidated Financial Statements".)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement Schedules.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedules.
(3) Exhibits
3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company filed electronically as Exhibit 3.1 to Post Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
3.2 Copy of the Amended By-laws of IDS Life Insurance Company filed electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
3.3 Copy of Resolution of the Board of Directors of IDS Life Insurance Company, dated May 5, 1989, establishing IDS Life Account MGA filed electronically as Exhibit 3.3 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
4.1 Copy of Group Annuity Contract, Form 30363C, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
4.2 Copy of Group Annuity Certificate, Form 30360C, filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate filed electronically as Exhibit 4.4 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference.
4.5 Copy of Group Annuity Contract, Form 30363D, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference.
4.6 Copy of Group Annuity Certificate, Form 30360D, filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference.
4.7 Form of Deferred Annuity Contract, Form 30365E, filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference.
4.8 Form of Group Deferred Variable Annuity Contract, Form 34660, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No. 33-48701 is incorporated herein by reference.
22. Copy of List of Subsidiaries filed electronically as Exhibit 21 to Post-Effective Amendment No. 7 to Registration Statement No. 33-28976 is herein incorporated by reference.
27. Financial data schedule is filed electronically herewith.
(b) Reports on Form 8-K filed in the fourth quarter of 1996
No reports on Form 8-K were required to be filed by the Company for the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IDS LIFE INSURANCE COMPANY Registrant
3/14/97 By /s/ James A. Mitchell --------------------------------- Date James A. Mitchell, Chairman of the Board and Chief Executive Officer
3/14/97 By /s/ Melinda S. Urion --------------------------------- Date Melinda S. Urion, Executive Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
3/14/97 By /s/ David R. Hubers --------------------------------- Date David R. Hubers, Director
3/14/97 By /s/ Richard W. Kling --------------------------------- Date Richard W. Kling, President
3/14/97 By /s/ Paul F. Kolkman --------------------------------- Date Paul F. Kolkman, Executive Vice President
3/14/97 By /s/ James A. Mitchell ---------------------------------- Date James A. Mitchell, Chairman of the Board and Chief Executive Officer
3/14/97 By /s/ Stuart A. Sedlacek ----------------------------------- Date Stuart A. Sedlacek, Executive Vice President, Assured Assets
3/14/97 By /s/ Melinda S. Urion ----------------------------------- Date Melinda S. Urion, Executive Vice President and Controller
ANNUAL REPORT ON FORM 10-K
ITEM 8 and ITEM 14(a) (1) and (2) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
IDS LIFE INSURANCE COMPANY
MINNEAPOLIS, MINNESOTA
IDS LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of IDS Life Insurance Company are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
The following consolidated financial statement schedules of IDS Life Insurance Company are included in Item 14(d):
I. Summary of Investments - Other than Investments in Related Parties
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
Report of Independent Auditors The Board of Directors IDS Life Insurance Company
We have audited the accompanying consolidated balance sheets of IDS Life Insurance Company (a wholly owned subsidiary of American Express Financial Corporation) as of December 31, 1996 and 1995 and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IDS Life Insurance Company at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994.
Ernst & Young LLP
Minneapolis, Minnesota February 7, 1997
IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS
Dec. 31, Dec. 31, ASSETS 1996 1995 - ------ ---- --------- (thousands)
Investments: Fixed maturities: Held to maturity, at amortized cost (Fair value: 1996, $10,521,650; 1995, $11,878,377) .............. $10,236,379 $11,257,591 Available for sale, at fair value (Amortized cost: 1996, $11,008,622; 1995, $10,146,136) .............. 11,146,845 10,516,212 Mortgage loans on real estate ...................... 3,493,364 2,945,495 Policy loans ....................................... 459,902 424,019 Other investments .................................. 251,465 146,894
Total investments .................................. 25,587,955 25,290,211
Cash and cash equivalents .......................... 224,603 72,147 Amounts recoverable from reinsurers ................ 157,722 114,387 Amounts due from brokers ........................... 11,047 -- Other accounts receivable .......................... 44,089 39,108 Accrued investment income .......................... 343,313 348,008 Deferred policy acquisition costs .................. 2,330,805 2,025,725 Deferred income taxes .............................. 33,923 -- Other assets ....................................... 37,364 36,410 Separate account assets ............................ 18,535,160 14,974,082
Total assets ....................................... $47,305,981 $42,900,078 =========== ===========
IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (continued)
Dec. 31, Dec. 31 LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995 - ------------------------------------ ---- ---- (thousands)
Liabilities: Future policy benefits: Fixed annuities .................................... $21,838,008 $21,404,836 Universal life-type insurance ...................... 3,177,149 3,076,847 Traditional life insurance ......................... 209,685 209,249 Disability income and long-term care insurance ..... 424,200 327,157
Policy claims and other policyholders' funds ............................... 83,634 56,323 Deferred income taxes .............................. -- 112,904 Amounts due to brokers ............................. 261,987 121,618 Other liabilities .................................. 332,078 285,354 Separate account liabilities ....................... 18,535,160 14,974,082
Total liabilities .................................. 44,861,901 40,568,370
Stockholder's equity: Capital stock, $30 par value per share; 100,000 shares authorized, issued and outstanding .. 3,000 3,000 Additional paid-in capital ......................... 283,615 278,814 Net unrealized gain on investments ................. 86,102 230,129 Retained earnings .................................. 2,071,363 1,819,765
Total stockholder's equity ......................... 2,444,080 2,331,708
Total liabilities and stockholder's equity ......... $47,305,981 $42,900,078 =========== ===========
Commitments and contingencies (Note 6)
See accompanying notes to consolidated financial statements.
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ thousands)
1. Summary of significant accounting policies
Nature of business
IDS Life Insurance Company (the Company) is a stock life insurance company organized under the laws of the State of Minnesota. The Company is a wholly owned subsidiary of American Express Financial Corporation, which is a wholly owned subsidiary of American Express Company. The Company serves residents of all states except New York. IDS Life Insurance Company of New York is a wholly owned subsidiary of the Company and serves New York State residents. The Company also wholly owns American Enterprise Life Insurance Company, American Centurion Life Assurance Company (ACLAC) and American Partners Life Insurance Company.
The Company's principal products are deferred annuities and universal life insurance, which are issued primarily to individuals. It offers single premium and flexible premium deferred annuities on both a fixed and variable dollar basis. Immediate annuities are offered as well. The Company's insurance products include universal life (fixed and variable), whole life, single premium life and term products (including waiver of premium and accidental death benefits). The Company also markets disability income and long-term care insurance.
Basis of presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments
Fixed maturities that the Company has both the positive intent and the ability to hold to maturity are classified as held to maturity and carried at amortized cost. All other fixed maturities and all marketable equity securities are classified as available for sale and carried at fair value. Unrealized gains and losses on securities classified as available for sale are carried as a separate component of stockholder's equity, net of deferred taxes.
Realized investment gain or loss is determined on an identified cost basis.
Prepayments are anticipated on certain investments in mortgage-backed securities in determining the constant effective yield used to recognize interest income. Prepayment estimates are based on information received from brokers who deal in mortgage-backed securities.
Mortgage loans on real estate are carried at amortized cost less reserves for mortgage loan losses. The estimated fair value of the mortgage loans is determined by a discounted cash flow analysis using mortgage interest rates currently offered for mortgages of similar maturities.
Impairment of mortgage loans is measured as the excess of the loan's recorded investment over its present value of expected principal and interest payments discounted at the loan's effective interest rate, or the fair value of collateral. The amount of the impairment is recorded in a reserve for mortgage loan losses. The reserve for mortgage loans losses is maintained at a level that management believes is adequate to absorb estimated losses in the portfolio. The level of the reserve account is determined based on several factors, including historical experience, expected future principal and interest payments, estimated collateral values, and current and anticipated economic and political conditions. Management regularly evaluates the adequacy of the reserve for mortgage loan losses.
The Company generally stops accruing interest on mortgage loans for which interest payments are delinquent more than three months. Based on management's judgement as to the ultimate collectibility of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan.
The cost of interest rate caps and floors is amortized to investment income over the life of the contracts and payments received as a result of these agreements are recorded as investment income when realized. The amortized cost of interest rate caps and floors is included in other investments. Amounts paid or received under interest rate swap agreements are recognized as an adjustment to investment income.
Policy loans are carried at the aggregate of the unpaid loan balances which do not exceed the cash surrender values of the related policies.
When evidence indicates a decline, which is other than temporary, in the underlying value or earning power of individual investments, such investments are written down to the fair value by a charge to income.
Statements of cash flows
The Company considers investments with a maturity at the date of their acquisition of three months or less to be cash equivalents. These securities are carried principally at amortized cost which approximates fair value.
Supplementary information to the consolidated statements of cash flows for the years ended Dec. 31 is summarized as follows:
1996 1995 1994 --------- -------- ----- Cash paid during the year for: Income taxes $317,283 $191,011 $226,365 Interest on borrowings 4,119 5,524 1,553
Recognition of profits on annuity contracts and insurance policies
Profits on fixed deferred annuities are recognized by the Company over the lives of the contracts, using primarily the interest method. Profits represent the excess of investment income earned from investment of contract considerations over interest credited to contract owners and other expenses.
The retrospective deposit method is used in accounting for universal life-type insurance. This method recognizes profits over the lives of the policies in proportion to the estimated gross profits expected to be realized.
Premiums on traditional life, disability income and long-term care insurance policies are recognized as revenue when due, and related benefits and expenses are associated with premium revenue in a manner that results in recognition of profits over the lives of the insurance policies. This association is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.
Policyholder and contractholder charges include the monthly cost of insurance charges and issue and administrative fees. These charges also include the minimum death benefit guarantee fees received from the variable life insurance separate accounts. Management and other fees include investment management fees and mortality and expense risk fees from the variable annuity and variable life insurance separate accounts and underlying funds.
Deferred policy acquisition costs
The costs of acquiring new business, principally sales compensation, policy issue costs, underwriting and certain sales expenses, have been deferred on insurance and annuity contracts. The deferred acquisition costs for most single premium deferred annuities and installment annuities are amortized in relation to surrender charge revenue and a portion of the excess of investment income earned from investment of the contract considerations over the interest credited to contract owners. The costs for universal life-type insurance and certain installment annuities are amortized as a percentage of the estimated gross profits expected to be realized on the policies. For traditional life, disability income and long-term care insurance policies, the costs are amortized over an appropriate period in proportion to premium revenue.
Liabilities for future policy benefits
Liabilities for universal life-type insurance, single premium deferred annuities and installment annuities are accumulation values.
Liabilities for fixed annuities in a benefit status are based on the Progressive Annuity Table with interest at 5 percent, the 1971 Individual Annuity Table with interest at 7 percent or 8.25 percent, or the 1983a Table with various interest rates ranging from 5.5 percent to 9.5 percent, depending on year of issue.
Liabilities for future benefits on traditional life insurance are based on the net level premium method and anticipated rates of mortality, policy persistency and interest earnings. Anticipated mortality rates generally approximate the 1955-1960 Select and Ultimate Basic Table for policies issued prior to 1980, the 1965-1970 Select and Ultimate Basic Table for policies issued from 1981-1984 and the 1975-1980 Select and Ultimate Basic Table for policies issued after 1984. Anticipated policy persistency rates vary by policy form, issue age and policy duration with persistency on cash value plans generally anticipated to be better than persistency on term insurance plans. Anticipated interest rates are 4% for policies issued before 1974, 5.25% for policies issued from 1974-1980, and range from 10% to 6% depending on policy form, issue year and policy duration for policies issued after 1980.
Liabilities for future disability income policy benefits include both policy reserves and claim reserves. Policy reserves are based on the net level premium method and anticipated rates of morbidity, mortality, policy persistency and interest earnings. Anticipated morbidity rates are based on the 1964 Commissioners Disability Table for policies issued before 1996 and the 1985 CIDA table for policies issued in 1996. Anticipated mortality rates are based on the 1958 Commissioners Standard Ordinary Table for policies issued before 1996 and the 1975-1980 Basic Table for policies issued in 1996. Anticipated policy persistency rates vary by policy form, occupation class, issue age and policy duration. Anticipated interest rates are 3% for policies issued before 1996 and grade from 7.5% to 5% over five years for policies issued in 1996. Claim reserves are calculated on the basis of anticipated rates of claim continuance and interest earnings. Anticipated claim continuance rates are based on the 1964 Commissioners Disability Table for claims incurred before 1993 and the 1985 CIDA Table for claims incurred after 1992. Anticipated interest rates are 8% for claims incurred prior to 1992, 7% for claims incurred in 1992 and 6% for claims incurred after 1992.
Liabilities for future long-term care policy benefits include both policy reserves and claim reserves. Policy reserves are based on the net level premium method and anticipated rates of morbidity, mortality, policy persistency and interest earnings. Anticipated morbidity rates are based on the 1985 National Nursing Home Survey. Anticipated mortality rates are based on the 1983a Table. Anticipated policy persistency rates vary by policy form, issue age and policy duration. Anticipated interest rates are 9.5% grading to 7% over 10 years for policies issued from 1989-1992 and 7.75% grading to 7% over 4 years for policies issued after 1992. Claim reserves are calculated on the basis of anticipated rates of claim continuance and interest earnings. Anticipated claim continuance rates are based on the 1985 National Nursing Home Survey. Anticipated interest rates are 8% for claims incurred prior to 1992, 7% claims incurred in 1992 and 6% for claims incurred after 1992.
Reinsurance
The maximum amount of life insurance risk retained by the Company on any one life is $750 of life and waiver of premium benefits plus $50 of accidental death benefits. The maximum amount of disability income risk retained by the Company on any one life is $6 of monthly benefit for benefit periods longer than three years. The excesses are reinsured with other life insurance companies on a yearly renewable term basis. Graded premium whole life and long-term care policies are primarily reinsured on a coinsurance basis.
Federal income taxes
The Company's taxable income is included in the consolidated federal income tax return of American Express Company. The Company provides for income taxes on a separate return basis, except that, under an agreement between American Express Financial Corporation 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 American Express Financial Corporation to reimburse subsidiaries for all tax benefits.
Included in other liabilities at Dec. 31, 1996 and 1995 are $33,358 and ($13,415), respectively, receivable from/(payable to) American Express Financial Corporation for federal income taxes.
Separate account business
The separate account assets and liabilities represent funds held for the exclusive benefit of the variable annuity and variable life insurance contract owners.
The Company makes contractual mortality assurances to the variable annuity contract owners that the net assets of the separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitants and the beneficiaries from the mortality assumptions implicit in the annuity contracts. The Company makes periodic fund transfers to, or withdrawals from, the separate accounts for such actuarial adjustments for variable annuities that are in the benefit payment period. For variable life insurance, the Company guarantees that the rates at which insurance charges and administrative fees are deducted from contract funds will not exceed contractual maximums. The Company also guarantees that the death benefit will continue payable at the initial level regardless of investment performance so long as minimum premium payments are made.
Accounting changes
The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was effective Jan. 1, 1996. The new rule did not have a material impact on the Company's results of operations or financial condition. The Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting the new rule was to increase stockholder's equity by $181,269, net of tax, as of Jan. 1, 1994, but the adoption had no impact on the Company's net income.
Reclassification
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 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.
Net realized gain (loss) on investments for the years ended Dec. 31 is summarized as follows:
1996 1995 1994 -------- -------- --------
Fixed maturities ............ $ 8,736 $ 9,973 $ (1,575) Mortgage loans .............. (8,745) (13,259) (3,013) Other investments ........... (150) (1,612) 306 -------- -------- -------- $ (159) $ (4,898) $ (4,282) ======== ======== ========
Changes in net unrealized appreciation (depreciation) of investments for the years ended Dec. 31 are summarized as follows:
1996 1995 1994 ---------- ------------ ----------- Fixed maturities: Held to maturity ....... $ (335,515) $ 1,195,847 $(1,329,740) Available for sale ..... (231,853) 811,649 (720,449) Equity securities ......... (52) 3,118 (2,917)
The amortized cost, gross unrealized gains and losses and fair values of investments in fixed maturities and equity securities at Dec. 31, 1996 are as follows:
The amortized cost, gross unrealized gains and losses and fair values of investments in fixed maturities and equity securities at Dec. 31, 1995 are as follows:
The amortized cost and fair value of investments in fixed maturities at Dec. 31, 1996 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 $ 197,711 $ 200,134 Due from one to five years 2,183,374 2,294,335 Due from five to ten years 4,606,775 4,779,690 Due in more than ten years 1,123,824 1,146,642 Mortgage-backed securities 2,124,695 2,100,849 ------------ ------------ $10,236,379 $10,521,650
Amortized Fair Available for sale Cost Value
Due in one year or less $ 227,051 $ 229,650 Due from one to five years 851,428 899,098 Due from five to ten years 2,140,579 2,182,079 Due in more than ten years 571,522 581,371 Mortgage-backed securities 7,218,042 7,254,647 ------------ ------------ $11,008,622 $11,146,845
During the years ended Dec. 31, 1996, 1995 and 1994, fixed maturities classified as held to maturity were sold with amortized cost of $277,527, $333,508 and $61,290, respectively. Net gains and losses on these sales were not significant. The sale of these fixed maturities was due to significant deterioration in the issuers' creditworthiness.
As a result of adopting the FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," the Company reclassified securities with a book value of $91,760 and net unrealized gains of $881 from held to maturity to available for sale in December 1995.
In addition, fixed maturities available for sale were sold during 1996 with proceeds of $238,905 and gross realized gains and losses of $571 and $16,084, respectively. Fixed maturities available for sale were sold during 1995 with proceeds of $136,825 and gross realized gains and losses of $nil and $5,781, respectively. Fixed maturities available for sale were sold during 1994 with proceeds of $374,564 and gross realized gains and losses of $1,861 and $7,602, respectively.
At Dec. 31, 1996, bonds carried at $13,571 were on deposit with various states as required by law.
Net investment income for the years ended Dec. 31 is summarized as follows:
1996 1995 1994 --------- ------- -----
Interest on fixed maturities $1,666,929 $1,656,136 $1,556,756 Interest on mortgage loans 283,830 232,827 196,521 Other investment income 43,283 35,936 38,366 Interest on cash equivalents 5,754 5,363 6,872 ------------- ------- ----------- 1,999,796 1,930,262 1,798,515 Less investment expenses 34,434 22,953 16,642 ------------ --------- ---------- $1,965,362 $1,907,309 $1,781,873 ========== ========== ==========
At Dec. 31, 1996, investments in fixed maturities comprised 84 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 $1.9 billion which are rated by American Express Financial Corporation internal analysts using criteria similar to Moody's and S&P. A summary of investments in fixed maturities, at amortized cost, by rating on Dec. 31 is as follows:
Rating 1996 1995 ------ ----------- ----------- Aaa/AAA ....................... $ 9,460,134 $ 9,907,664 Aaa/AA ........................ 2,870 3,112 Aa/AA ......................... 241,914 279,403 Aa/A .......................... 192,631 154,846 A/A ........................... 2,949,895 3,104,122 A/BBB ......................... 1,034,661 871,782 Baa/BBB ....................... 4,531,515 4,417,654 Baa/BB ........................ 768,285 657,633 Below investment grade ........ 2,063,096 2,007,511 ----------- ----------- $21,245,001 $21,403,727
At Dec. 31, 1996, 95 percent of the securities rated Aaa/AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer are greater than 1 percent of the Company's total investments in fixed maturities.
At Dec. 31, 1996, approximately 13.7 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:
Dec. 31, 1996 Dec. 31, 1995 ------------------------- ------------------------ On Balance Commitments On Balance Commitments Region Sheet to Purchase Sheet to Purchase ------------------ ----------- ----------- ----------- ---------- East North Central $ 777,960 $ 19,358 $ 720,185 $ 67,206 West North Central 389,285 29,620 303,113 34,411 South Atlantic 891,852 35,007 732,529 111,967 Middle Atlantic 553,869 17,959 508,634 37,079 New England 310,177 14,042 244,816 40,452 Pacific 190,770 4,997 168,272 23,161 West South Central 105,173 11,246 61,860 27,978 East South Central 75,176 -- 58,462 10,122 Mountain 236,597 11,401 184,964 16,774 ---------- -------- -------- ------ 3,530,859 143,630 2,982,835 369,150 Less allowance for losses 37,495 -- 37,340 -- ---------- -------- ------- --- $3,493,364 $143,630 $2,945,495 $369,150 ========== ======== ========== ========
Dec. 31, 1996 Dec. 31, 1995 ------------------------- ------------------------ On Balance Commitments On Balance Commitments Property type Sheet to Purchase Sheet to Purchase - ----------------------- --------- --------- ----------- ----------- Department/retail stores $1,154,179 $ 68,032 $ 985,660 $ 134,538 Apartments 1,119,352 23,246 1,038,446 84,978 Office buildings 611,395 27,653 464,381 62,664 Industrial buildings 296,944 6,716 255,469 22,721 Hotels/motels 97,870 6,257 31,335 48,816 Nursing/retirement homes 88,226 1,877 80,864 4,378 Mixed Use 73,120 -- 53,169 -- Medical buildings 67,178 8,289 57,772 2,495 Other 22,595 1,560 15,739 8,560 ------------ ---------- --------- -------- 3,530,859 143,630 2,982,835 369,150 Less allowance for losses 37,495 -- 37,340 -- ------------ ------ --------- ------ $3,493,364 $143,630 $2,945,495 $369,150 ========== ======== ========== ========
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 the right to take possession of the property if the borrower fails to perform according to the terms of the agreement. The fair value of the mortgage loans is determined by a discounted cash flow analysis using mortgage interest rates currently offered for mortgages of similar maturities. Commitments to purchase mortgages are made in the ordinary course of business. The fair value of the mortgage commitments is $nil.
At Dec. 31, 1996 and 1995, the Company's recorded investment in impaired loans was $79,441 and $83,874 with a reserve of $16,162 and $19,307, respectively. During 1996 and 1995, the average recorded investment in impaired loans was $74,338 and $74,567, respectively.
The Company recognized $4,889 and $5,014 of interest income related to impaired loans for the year ended Dec. 31, 1996 and 1995, respectively.
The following table presents changes in the reserve for investment losses related to all loans:
1996 1995 --------- -------- Balance, Jan. 1 .................... $ 37,340 $ 35,252 Provision for investment losses .... 10,005 15,900 Loan payoffs ....................... (4,700) (11,900) Foreclosures ....................... (5,150) (1,350) Other .............................. -- (562) -------- -------- Balance, Dec. 31 ................... $ 37,495 $ 37,340 ======== ========
At Dec. 31, 1996, the Company had commitments to purchase affordable housing limited partnership investments of $28,476, which is recorded as a liability in the accompanying balance sheets. The total amounts committed in 1997 and 1998 are $25,234 and $3,242, respectively. The Company also had commitments to purchase real estate investments for $35,425. Commitments to purchase real estate investments are made in the ordinary course of business. The fair value of these commitments is $nil.
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.
Income tax expense consists of the following:
1996 1995 1994 ------ -------- ------- Federal income taxes: Current $260,357 $218,040 $186,508 Deferred (65,609) (33,810) (19,175) -------- -------- -------- 194,748 184,230 167,333 State income taxes-current 12,390 11,612 9,010 --------- ------- ------ Income tax expense $207,138 $195,842 $176,343 ======== ======== ========
Increases (decreases) to the federal tax provision applicable to pretax income based on the statutory rate are attributable to:
A portion of life insurance company income earned prior to 1984 was not subject to current taxation but was accumulated, for tax purposes, in a policyholders' surplus account. At Dec. 31, 1996, the Company had a policyholders' surplus account balance of $20,114. The policyholders' surplus account is only taxable if dividends to the stockholder exceed the stockholder's surplus account or if the Company is liquidated. Deferred income taxes of $7,040 have not been established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities as of Dec. 31 are as follows:
1996 1995 ------- ----- Deferred tax assets: Policy reserves $724,412 $600,176 Life insurance guarantee fund assessment reserve 29,854 26,785 Other 2,763 -- ----------- ------------- Total deferred tax assets 757,029 626,961 --------- -------
Deferred tax liabilities: Deferred policy acquisition costs 665,685 590,762 Unrealized gain on investments 48,486 129,653 Investments, other 8,935 17,152 Other -- 2,298 -------- ------- Total deferred tax liabilities 723,106 739,865 -------- ------- Net deferred tax assets (liabilities)$ 33,923 $(112,904) ========= =========
The Company is required to establish a "valuation allowance" for any portion of the deferred tax assets that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets and, therefore, no such valuation allowance has been established.
4. Stockholder's equity
During 1996, the Company received a $4,801 capital contribution from its parent, American Express Financial Corporation. During 1995, the Company received a $39,700 capital contribution from its parent in the form of investments in fixed maturities and mortgage loans. In addition, effective Jan. 1, 1995, the Company began consolidating the financial results of ACLAC. This change reflected the transfer of ownership of ACLAC from Amex Life Assurance Company (Amex Life), a former affiliate, to the Company prior to the sale of Amex Life to an unaffiliated third party on Oct. 2, 1995. This transfer of ownership to the Company has been reflected as a capital contribution of $17,114 in the accompanying financial statements. The effect of this change in reporting entity was not significant and prior periods have not been restated.
As discussed in Note 5, the Company entered into a reinsurance agreement with Amex Life during 1995. As a result of this transaction, a loss of $4,574 was realized and reported as a direct charge to retained earnings.
Other changes in the statements of stockholder's equity are primarily related to reinsurance transactions with affiliates.
Retained earnings available for distribution as dividends to the parent are limited to the Company's surplus as determined in accordance with accounting practices prescribed by state insurance regulatory authorities. Statutory unassigned surplus aggregated $1,261,592 as of Dec. 31, 1996 and $1,103,993 as of Dec. 31, 1995 (see Note 3 with respect to the income tax effect of certain distributions). In addition, any dividend distributions in 1997 in excess of approximately $351,306 would require approval of the Department of Commerce of the State of Minnesota.
Statutory net income for the years ended Dec. 31 and capital and surplus as of Dec. 31 are summarized as follows:
1996 1995 1994 ------ ------ ------ Statutory net income $ 365,585 $ 326,799 $ 294,699 Statutory capital and surplus 1,565,082 1,398,649 1,261,958
Dividends paid to American Express Financial Corporation were $165,000 in 1996, $180,000 in 1995, and $165,000 in 1994.
5. Related party transactions
The Company has loaned funds to American Express Financial Corporation under a collateral loan agreement. The balance of the loan was $11,800 and $25,800 at Dec. 31, 1996 and 1995, respectively. This loan can be increased to a maximum of $75,000 and pays interest at a rate equal to the preceding month's effective new money rate for the Company's permanent investments. It is collateralized by equity securities valued at $116,543 at Dec. 31, 1996. Interest income on related party loans totaled $780, $1,371 and $2,894 in 1996, 1995 and 1994, respectively.
The Company purchased a five year secured note from an affiliated company which had an outstanding balance of $nil and $19,444 at Dec. 31, 1996 and 1995, respectively. The note bears a fixed rate of 8.42 percent. Interest income on the above note totaled $1,637, $1,937 and $2,278 in 1996, 1995 and 1994, respectively.
The Company has a reinsurance agreement whereby it assumed 100 percent of a block of single premium life insurance business from Amex Life Assurance Company (Amex Life), a former affiliate. The accompanying consolidated balance sheets at Dec. 31, 1996 and 1995 include $758,812 and $764,663, respectively, of future policy benefits related to this agreement.
The Company has a reinsurance agreement to cede 50 percent of its long-term care insurance business to Amex Life. The accompanying consolidated balance sheets at Dec. 31, 1996 and 1995 include $134,121 and $95,484, respectively, of reinsurance receivables related to this agreement. Premiums ceded amounted to $32,917, $25,553 and $20,360 and reinsurance recovered from reinsurers amounted to $5,135, $4,998 and $3,022 for the years ended Dec. 31, 1996, 1995 and 1994, respectively.
The Company has a reinsurance agreement to assume deferred annuity contracts from Amex Life. At Oct. 1, 1995, a $803,618 block of deferred annuities and $28,327 of deferred policy acquisition costs were transferred to the Company. The accompanying consolidated balance sheet at Dec. 31, 1996 includes $828,298 of future policy benefits related to this agreement. Contracts with future policy benefits totaling $50,400 were still reinsured with the former affiliate at Dec. 31, 1996. The remaining contracts had been novated to Company contracts.
Until July 1, 1995, the Company participated in the IDS Retirement Plan of American Express Financial Corporation which covered all permanent employees age 21 and over who had met certain employment requirements. Effective July 1, 1995, the IDS Retirement Plan was merged with American Express Company's American Express Retirement Plan, which simultaneously was amended to include a cash balance formula and a lump sum distribution option. Employer contributions to the plan are based on participants' age, years of service and total compensation for the year. Funding of retirement costs for this plan complies with the applicable minimum funding requirements specified by ERISA. The Company's share of the total net periodic pension cost was $174, $155 and $156 in 1996, 1995 and 1994, respectively.
The Company also participates in defined contribution pension plans of American Express Company which cover all employees who have met certain employment requirements. Company contributions to the plans are a percent of either each employee's eligible compensation or basic contributions. Costs of these plans charged to operations in 1996, 1995 and 1994 were $990, $815 and $957, respectively.
The Company participates in defined benefit health care plans of American Express Financial Corporation that provide health care and life insurance benefits to retired employees and retired financial advisors. The plans include participant contributions and service related eligibility requirements. Upon retirement, such employees are considered to have been employees of American Express Financial Corporation. American Express Financial Corporation expenses these benefits and allocates the expenses to its subsidiaries. Accordingly, costs of such benefits to the Company are included in employee compensation and benefits and cannot be identified on a separate company basis.
Charges by American Express Financial Corporation for use of joint facilities, marketing services and other services aggregated $397,362, $377,139, and $335,183 for 1996, 1995 and 1994, respectively. Certain of these costs are included in deferred policy acquisition costs. In addition, the Company rents its home office space from American Express Financial Corporation on an annual renewable basis.
6. Commitments and contingencies
At Dec. 31, 1996 and 1995, traditional life insurance and universal life-type insurance in force aggregated $67,274,354 and $59,683,532, respectively, of which $3,875,921 and $3,771,204 were reinsured at the respective year ends. The Company also reinsures a portion of the risks assumed under disability income and long-term care policies. Under all reinsurance agreements, premiums ceded to reinsurers amounted to $48,250, $39,399 and $31,016 and reinsurance recovered from reinsurers amounted to $15,612, $14,088, and $10,778 for the years ended Dec. 31, 1996, 1995 and 1994. Reinsurance contracts do not relieve the Company from its primary obligation to policyholders.
A number of lawsuits have been filed against life and health insurers in jurisdictions in which the Company and its subsidiaries do business involving insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. In December 1996, an action of this type was brought against the Company and its parent, American Express Financial Corporation. The plaintiffs purport to represent a class consisting of all persons who replaced existing Company policies with new Company policies from and after Jan. 1, 1985. The complaint puts at issue various alleged sales practices and misrepresentations, alleged breaches of fiduciary duties and
alleged violations of consumer fraud statutes. Plaintiffs seek damages in an unspecified amount and seek to establish a claims resolution facility for the determination of individual issues. The Company and its parent believe they have meritorious defenses to the claims raised in the lawsuit. The outcome of any litigation cannot be predicted with certainty, particularly in the early stages of an action. In the opinion of management, however, the ultimate resolution of the above lawsuit and others filed against the Company should not have a material adverse effect on the Company's consolidated financial position.
During 1996, the Company settled the federal tax audit for 1987 through 1989 tax years. There was no material impact as a result of that audit. Also, the IRS is currently auditing the Company's 1990 through 1992 tax years. Management does not believe there will be a material impact as a result of this audit.
7. Lines of credit
The Company has available lines of credit with two banks and its parent aggregating $175,000, of which $100,000 is with its parent. The lines of credit are at 40 to 80 basis points over the lenders' cost of funds or equal to the prime rate, depending on which line of credit agreement is used. The $25,000 line of credit with one bank expired on Dec. 31, 1996 and the Company did not seek renewal. The $50,000 line of credit with the other bank expires on June 30, 1997 and the Company expects to seek renewal. Borrowings outstanding under these agreements were $nil at Dec. 31, 1996 and 1995.
8. 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 held for purposes other than trading are largely used to manage risk and, therefore, the cash flow and income effects of the derivatives are inverse to the effects of the underlying transactions.
Credit risk is the possibility that the counterparty will not fulfill the terms of the contract. The Company monitors credit exposure related to derivative financial instruments through established approval procedures, including setting concentration limits by counterparty and industry, and requiring collateral, where appropriate. A vast majority of the Company's counterparties are rated A or better by Moody's and Standard & Poor's.
Credit exposure related to interest rate caps and floors is measured by the replacement cost of the contracts. The replacement cost represents the fair value of the instruments.
The notional or contract amount of a derivative financial instrument is generally used to calculate the cash flows that are received or paid over the life of the agreement. Notional amounts are not recorded on the balance sheet. Notional amounts far exceed the related credit exposure.
The Company's holdings of derivative financial instruments are as follows:
Notional Carrying Fair Total Credit Dec. 31, 1996 Amount Value Value Exposure ------------- --------- ------- -------- ------------ Assets: Interest rate caps $ 4,000,000 $16,227 $ 7,439 $ 7,439 Interest rate floors 1,000,000 2,041 4,341 4,341 Interest rate swaps 1,000,000 -- (24,715) -- ---------- ------- -------- ------- $6,000,000 $18,268 $(12,935) $11,780 ========== ======= ======== ======= Dec. 31, 1995 Assets: Interest rate caps $5,100,000 $26,680 $ 8,366 $ 8,366 ========== ======= ======== =======
The fair values of derivative financial instruments are based on market values, dealer quotes or pricing models. The interest rate caps and floors expire on various dates from 1996 to 2001. The interest rate swaps are in effect through 2001.
Interest rate caps, swaps and floors are used principally to manage the Company's interest rate risk. These instruments are used to protect the margin between interest rates earned on investments and the interest rates credited to related annuity contract holders.
9. Fair values of financial instruments
The Company discloses fair value information for most on- and off-balance sheet financial instruments for which it is practicable to estimate that value. Fair values of life insurance obligations and all non-financial instruments, such as deferred acquisition costs are excluded. Off-balance sheet intangible assets, such as the value of the field force, are also excluded. Management believes the value of excluded assets is significant. The fair value of the Company, therefore, cannot be estimated by aggregating the amounts presented.
At Dec. 31, 1996 and 1995, the carrying amount and fair value of future policy benefits for fixed annuities exclude life insurance-related contracts carried at $1,112,155 and $1,070,598, respectively, and policy loans of $83,867 and $74,973, respectively. The fair value of these benefits is based on the status of the annuities at Dec. 31, 1996 and 1995. The fair value of deferred annuities is estimated as the carrying amount less any applicable surrender charges and related loans. The fair value for annuities in non-life contingent payout status is estimated as the present value of projected benefit payments at rates appropriate for contracts issued in 1996 and 1995.
At Dec. 31, 1996 and 1995, the fair value of liabilities related to separate accounts is estimated as the carrying amount less any applicable surrender charges and less variable insurance contracts carried at $1,177,073 and $765,463, respectively.
10.Segment information
The Company's operations consist of two business segments; first, individual and group life insurance, disability income and long-term care insurance, and second, annuity products designed for individuals, pension plans, small businesses and employer-sponsored groups. The consolidated condensed statements of income for the years ended Dec. 31, 1996, 1995 and 1994 and total assets at Dec. 31, 1996, 1995 and 1994 by segment are summarized as follows:
1996 1995 1994 ------ ------ ----- Net investment income: Life, disability income and long-term care insurance $ 262,998 $ 256,242 $ 247,047 Annuities 1,702,364 1,651,067 1,534,826 ----------- ----------- ------------ $ 1,965,362 $ 1,907,309 $ 1,781,873 =========== =========== ============ Premiums, charges and fees: Life, disability income and long-term care insurance $ 448,389 $ 384,008 $ 335,375 Annuities 308,873 249,557 193,370 ------------ ------------ ------------- $ 757,262 $ 633,565 $ 528,745 ============ ============ ============= Income before income taxes: Life, disability income and long-term care insurance $ 161,115 $ 125,402 $ 122,677 Annuities 460,758 440,278 394,117 Net loss on investments (159) (4,898) (4,282) ------------- ------------- -------------- $ 621,714 $ 560,782 $ 512,512 ============ ============ ============= Total assets: Life, disability income and long-term care insurance $ 7,028,906 $ 6,195,870 $ 5,269,188 Annuities 40,277,075 36,704,208 30,478,355 ----------- ----------- ----------- $47,305,981 $42,900,078 $35,747,543 =========== =========== ===========
Allocations of net investment income and certain general expenses are based on various assumptions and estimates.
Assets are not individually identifiable by segment and have been allocated principally based on the amount of future policy benefits by segment.
Capital expenditures and depreciation expense are not material, and consequently, are not reported.
IDS LIFE INSURANCE COMPANY SCHEDULE I - CONSOLIDATED SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES ($ thousands) AS OF DECEMBER 31, 1996
IDS LIFE INSURANCE COMPANY SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ($ thousands) FOR THE YEAR ENDED DECEMBER 31, 1996
IDS LIFE INSURANCE COMPANY SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ($ thousands) FOR THE YEAR ENDED DECEMBER 31, 1995
IDS LIFE INSURANCE COMPANY SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ($ thousands) FOR THE YEAR ENDED DECEMBER 31, 1994
IDS LIFE INSURANCE COMPANY SCHEDULE IV - REINSURANCE ($ thousands) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
IDS LIFE INSURANCE COMPANY SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS ($ thousands) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994