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 (formerly IDS 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, which issues fixed and variable annuity contracts through banks and thrift institutions and American Partners Life Insurance Company, which is currently inactive. In Fortune magazine's May 1994 listing of the 50 largest life insurance companies as ranked by assets, IDS Life Insurance Company ranked fifteenth.
The Company's principal products are deferred annuities and universal life insurance, 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. 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 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 vehicle. 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 Annuity provides for a surrender charge during the first six years after a purchase payment is made. At December 31, 1994, the Company had $28.2 billion of deferred annuities in force, an increase of 9 percent from the prior year end.
The Company offers a 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, 1994, the Company had $37.9 billion of universal life-type insurance in force, up 16 percent from December 31, 1993.
Assets held in segregated accounts which fund the variable annuity and variable life insurance products totaled $10.9 billion at December 31, 1994, a 21 percent increase from December 31, 1993.
IDS Life Insurance Company, IDS Life Insurance Company of New York, American Enterprise Life and American Partners Life are subject to comprehensive regulation by the Minnesota Department of Commerce (Insurance Division), the New York Department of Insurance, the Indiana Department of Insurance and the Arizona Department of Insurance, respectively. 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 rents 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
The Company is a defendant in various 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 J(2) (a) of Form 10-K. ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations 1994 Compared to 1993:
Consolidated net income increased 24 percent to $336 million in 1994, compared to $270 million in 1993. Earnings growth resulted primarily from increases in spread income, policyholder and contractholder charges, and management fees. These increases reflect higher average insurance and annuities in force during 1994. For the full year, investment margins were comparable to 1993 levels, although investment margins for the fourth quarter of 1994 were below prior year levels. It is expected that this trend will continue through the first half of 1995. As a result, the growth in 1995 earnings is expected to be less than that experienced in 1994.
Consolidated income before income taxes totaled $513 million in 1994, compared with $413 million in 1993. In 1994, $123 million was from the life, disability income, health and long-term care insurance segment, compared with $104 million in 1993. In 1994, $394 million was from the annuity segment, compared with $315 million in 1993. There was a $4.3 million net loss on investments in 1994, compared with a net loss on investments of $6.7 million in 1993.
Total premiums received increased to $5.7 billion in 1994, compared with $5.3 billion in 1993. This increase is primarily due to continued strong sales of variable annuities. In addition, the Company reported small increases in its fixed single premium deferred annuity line. Universal life-type insurance and variable universal life insurance premiums received also increased from the prior year.
Total revenues increased to $2.3 billion in 1994, compared with $2.2 billion in 1993. The increase is primarily due to increases in policyholder and contractholder charges, and management fees. Net investment income, the largest component of revenues, was basically unchanged from the prior year, reflecting a slight increase in total investments offset by a decrease in the rate earned on those investments.
Policyholder and contractholder charges, which consist primarily of cost of insurance charges on universal life-type policies, increased 19 percent to $220 million in 1994, compared with $184 million in 1993. This increase reflects higher total life insurance in force which grew 14 percent to $52.7 billion at December 31, 1994.
Management and other fees increased 37 percent to $164 million in 1994, compared with $120 million in 1993. This is primarily due to an increase in assets held in segregated asset accounts, which grew 21 percent to $10.9 billion at December 31, 1994, resulting from strong sales of variable products. 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 segregated asset accounts.
Total benefits and expenses decreased slightly to $1.8 billion in 1994. The largest component of expenses, interest credited to policyholder accounts for universal life-type insurance and investment contracts, decreased to $1.2 billion. This is primarily due to a decrease in interest credited rates, partially offset by higher aggregate amounts in force.
Amortization of deferred policy acquisition costs increased to $280 million in 1994, compared with $212 million in 1993. This increase is a result of a higher level of amortizable deferred costs and a high level of surrenders as a result of an exchange plan announced during the first quarter of 1994 and completed prior to the end of 1994.
Other insurance and operating expenses, which include non- capitalized commissions and indirect selling expenses, direct and indirect operating expenses, premium taxes and guaranty association expenses decreased to $210 million in 1994, compared with $242 million in 1993. This decrease primarily reflects a decrease in amounts accrued for future guaranty association assessments.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," are effective January 1, 1995. The new rules are not expected to have a material impact on the Company's results of operations or financial condition.
1993 Compared to 1992:
Consolidated income before income taxes totaled $413 million in 1993, compared with $316 million in 1992. In 1993, $104 million was from the life, disability income, health and long-term care insurance segment, compared with $96 million in 1992. In 1993, $315 million was from the annuity segment, compared with $223 million in 1992. The remaining $6.7 million loss in 1993 was a net loss on investments, compared with a net loss on investments of $3.7 million in 1992.
Total premiums received increased to $5.3 billion in 1993, compared with $4.4 billion in 1992. This increase is primarily due to strong sales of variable annuities due to the low interest rate environment. In addition, the Company reported small increases in its fixed single premium deferred annuity line. Universal life-type insurance and variable universal life insurance premiums received also increased from the prior year.
Total revenues increased to $2.2 billion in 1993, compared with $2.0 billion in 1992. Of this, net investment income was $1.8 billion in 1993, compared with $1.6 billion in 1992, reflecting an increase in invested assets. Total investments grew 14 percent to $21.9 billion at December 31, 1993, from $19.2 billion at December 31, 1992. Policyholder and contractholder charges, which consist primarily of cost of insurance charges on universal life-type policies, increased 18 percent to $184 million in 1993, compared with $156 million in 1992. This increase reflects higher total life insurance in force which grew 13 percent to $46.1 billion at December 31, 1993.
Management and other fees increased 41 percent to $120 million in 1993, compared with $85 million in 1992. This is primarily due to an increase in assets held in segregated asset accounts, which grew 45 percent to $9.0 billion at December 31, 1993, resulting from strong sales of variable products. 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 segregated asset accounts.
Total benefits and expenses increased to $1.8 billion in 1993, compared with $1.7 billion in 1992. The largest component of expenses, interest credited to policyholder accounts for universal life-type insurance and investment contracts, aggregated $1.2 billion and was essentially unchanged from the prior year. This reflected interest credited to higher accumulation values offset by lower interest credited rates.
Amortization of deferred policy acquisition costs increased to $212 million in 1993, compared with $140 million in 1992, reflecting prior years' growth of life insurance and annuity business and a cumulative adjustment driven by the long-term decrease in accrual rates on fixed annuities.
Other insurance and operating expenses, which include non- capitalized commissions and indirect selling expenses, direct and indirect operating expenses, premium taxes and guaranty association expenses increased to $242 million in 1993, compared with $216 million in 1992.
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 consistent margin 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, 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 and new investment purchases.
The Company has available lines of credit with three banks aggregating $100 million, which are used strictly as short-term sources of funds. Borrowings outstanding under the agreements were $nil at December 31, 1994. The Company also uses reverse repurchase agreements for short-term liquidity needs. There were no reverse repurchase agreements outstanding at December 31, 1994.
At December 31, 1994, investments in fixed maturities comprised 87 percent of the Company's total invested assets. Of the fixed maturity portfolio, approximately 47 percent is invested in GNMA, FNMA and FHLMC mortgage-backed securities which are considered AAA/Aaa quality.
At December 31, 1994, approximately 8.9 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 more "traditional" 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 December 31, 1994, net unrealized depreciation on fixed maturities held to maturity included $111 million of gross unrealized appreciation and $686 million of gross unrealized depreciation. Net unrealized depreciation on fixed maturities available for sale included $35 million of gross unrealized appreciation and $477 million of gross unrealized depreciation.
At December 31, 1994, the Company had an allowance for losses for mortgage loans totaling $35 million and for real estate totaling $8 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 from those states allowing a reduction in future premium taxes over a reasonable period of time. The asset will be amortized as future 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 1995, the Company paid a $70 million dividend to its parent. In 1994, 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 December 31, 1994, 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, long-term care and health 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 1994, 1993 or 1992. (See Note 10, Segment information, in the "Notes to Consolidated Financial Statements".)
Reinsurance
Reinsurance arrangements are used to reduce exposure to large losses. The maximum amount of risk retained by the Company on any one life is $750,000 of life and waiver of premium benefits plus $50,000 of accidental death benefits. The excesses are reinsured with other life insurance companies. At December 31, 1994, traditional life and universal life-type insurance in force aggregated $52.7 billion, of which $3.2 billion was reinsured.
Investments
Of the Company's consolidated total investments of $22.1 billion at December 31, 1994, 41 percent was invested in mortgage-backed securities, 45 percent in corporate and other bonds, 11 percent in primary mortgage loans on real estate, 1.8 percent in policy loans and the remaining 1.2 percent in other investments. 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 J(2) (c) of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Item omitted pursuant to General Instructions J(2) (c) of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item omitted pursuant to General Instructions J(2) (c) of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item omitted pursuant to General Instructions J(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) Listing of Exhibits
3.1 Articles of Incorporation of IDS Life Insurance Company are incorporated by reference to Exhibit A(6)(a) to Form N-8B-2, File Number 2-97637, filed April 28, 1986.
3.2 By-laws of IDS Life Insurance Company are incorporated by reference to Exhibit A(6)(b) to Form N-8B-2, File Number 2-97637, filed April 28, 1986.
10.1 Copy of Group Annuity Contract is incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-28976 filed on Form S-1 on or about October 3, 1990.
10.2 Copy of Group Annuity Certificate is incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to Registration Statement No. 33-28976 filed on Form S-1 on or about October 3, 1990.
10.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract is incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 to Registration Statement No. 33-28976 filed on Form S-1 on or about February 22, 1991.
10.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate is incorporated by reference to Exhibit 4.4 to Post-Effective Amendment No. 1 to Registration Statement No. 33-28976 filed on Form S-1 on or about February 22, 1991.
22. Copy of List of Subsidiaries is incorporated by reference to Exhibit 22 to Registration Statement No. 33-28976 filed on Form S-1 on or about May 30, 1989. (b) Reports on Form 8-K filed in the fourth quarter of 1994
No reports on Form 8-K were required to be filed by the Company for the quarter ended December 31, 1994.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate section of this report. 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
March 27, 1995 By _____________________________ Date James A. Mitchell, Chairman of the Board and Chief Executive Officer
March 27, 1995 By _____________________________ 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.
March 27, 1995 By _____________________________ Date David R. Hubers, Director
March 27, 1995 By _____________________________ Date Richard W. Kling, President
March 27, 1995 By _____________________________ Date Paul F. Kolkman, Executive Vice President
March 27, 1995 By _____________________________ Date James A. Mitchell, Chairman of the Board and Chief Executive Officer
March 27, 1995 By _____________________________ Date Stuart A. Sedlacek, Executive Vice President, Assured Assets
March 27, 1995 By _____________________________ 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, 1994
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
Responsibility for Preparation of Financial Statements
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
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
II. Supplementary Insurance Information
III. Reinsurance
IV. 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, 1994 and 1993 and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, 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 changes its method of accounting for certain investments in debt and equity securities in 1994.
Ernst & Young LLP
Minneapolis, Minnesota February 3, 1995 IDS Life Insurance Company
Responsibility for Preparation of Financial Statements
The management of IDS Life Insurance Company is responsible for the preparation of the financial statements and related notes included in this Form 10-K. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances, and include amounts based on the best judgment of management. Financial information included elsewhere in this Form 10-K is consistent with these financial statements.
In recognition of its responsibility for the integrity and objectivity of data in the financial statements, management maintains a system of internal accounting controls. This system includes an organizational structure with clearly defined lines of responsibility and delegation of authority. To ensure the effective administration of internal control, employees are carefully selected and trained, written policies and procedures are developed and disseminated, and appropriate communication channels are provided to foster an environment conducive to the effective functioning of controls.
The system is supported by an internal auditing function that reports its findings to management throughout the year. IDS Life Insurance Company's independent auditors are engaged to express an opinion on the year-end financial statements. They objectively and independently review the performance of management in carrying out its responsibility for reporting operating results and financial condition. With the coordinated support of the internal auditors, they review and test the system of internal accounting controls and the data contained in the financial statements.
IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS December 31,
IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ($ thousands)
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 engaged in the insurance and annuity business. The Company sells various forms of fixed and variable individual life insurance, group life insurance, individual and group disability income insurance, long-term care insurance, and single and installment premium fixed and variable annuities.
Basis of presentation
The Company is a wholly owned subsidiary of American Express Financial Corporation (formerly IDS Financial Corporation), which is a wholly owned subsidiary of American Express Company. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, IDS Life Insurance Company of New York, American Enterprise Life Insurance Company and American Partners Life Insurance Company. 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.
Investments
As of January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, 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. The effect of adopting SFAS No. 115 was to increase stockholder's equity by approximately $181 million, net of tax, as of January 1, 1994, but the adoption had no impact on the Company's net income.
Management determines the appropriate classification of fixed maturities at the time of purchase and reevaluates the classification at each balance sheet date.
1. Summary of significant accounting policies (continued)
Mortgage loans on real estate are carried principally at the unpaid principal balances of the related loans. Policy loans are carried at the aggregate of the unpaid loan balances which do not exceed the cash surrender values of the related policies. Other investments include interest rate caps and equity securities. 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. Equity securities are carried at market value and the related net unrealized appreciation or depreciation is reported as a credit or charge to stockholder's equity.
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.
Statement 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 statement of cash flows for the years ended December 31 is summarized as follows:
1994 1993 1992 Cash paid during the year for: Income taxes $226,365 $188,204 $140,445 Interest on borrowings 1,553 2,661 1,265
Recognition of profits on annuity contracts and insurance policies
The Company issues single premium deferred annuity contracts that provide for a service fee (surrender charge) at annually decreasing rates upon withdrawal of the annuity accumulation value by the contract owner. No sales fee is deducted from the contract considerations received on these contracts ("no load" annuities). All of the Company's single premium deferred annuity contracts provide for crediting the contract owners' accumulations at specified rates of interest. Such rates are revised by the Company from time to time based on changes in the market investment yield rates for fixed-income securities.
Profits on single premium deferred annuities and installment annuities are recognized by the Company over the lives of the contracts and represent the excess of investment income earned from investment of contract considerations over interest credited to contract owners and other expenses.
1. Summary of significant accounting policies (continued)
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, health and long-term care insurance policies are recognized as revenue when collected or 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.
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 single premium deferred annuities and installment annuities are amortized based upon 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 are amortized over the lives of the policies as a percentage of the estimated gross profits expected to be realized on the policies. For traditional life, disability income, health 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 have been computed principally by the net level premium method, based on anticipated rates of mortality (approximating the 1965-1970 Select and Ultimate Basic Table for policies issued after 1980 and the 1955-1960 Select and Ultimate Basic Table for policies issued prior to 1981) and the 1975-1980 Select and Ultimate Basic Table for term insurance policies issued after 1984, policy persistency derived from Company experience data (first year rates ranging from approximately 70 percent to 90 percent and increasing rates thereafter), and estimated future investment yields of 4 percent for policies issued before 1974 and 5.25 percent for policies issued from 1974 to 1980. Cash value plans issued in 1980 and later assume future investment rates that grade from 9.5 percent to 1. Summary of significant accounting policies (continued)
5 percent over 20 years. Term insurance issued from 1981 to 1984 assumes an 8 percent level investment rate, term insurance issued from 1985-1993 assumes investment rates that grade from 10 percent to 6 percent over 20 years and term insurance issued after 1993 assumes investment rates that grade from 8.7 percent to 6.57 percent over 7 years.
Liabilities for future disability income policy benefits have been computed principally by the net level premium method, based on the 1964 Commissioners Disability Table with the 1958 Commissioners Standard Ordinary Mortality Table at 3 percent interest for 1980 and prior, 8 percent interest for persons disabled from 1981 to 1991, 7.7 percent interest for persons disabled in 1992 and 6 percent interest for persons disabled after 1992.
Liabilities for future benefits on long-term care insurance have been computed principally by the net level premium method, using morbidity rates based on the 1985 National Nursing Home Survey and mortality rates based on the 1983a Table. The interest rate basis is 9.5 percent grading to 7 percent over ten years for policies issued from 1989 to 1992, 7.75 percent grading to 7 percent over four years for policies issued after 1992, 8 percent for claims incurred in 1989 to 1991, 7.7 percent for claims incurred in 1992 and 6.7 percent 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 policies and long term care 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 and its subsidiaries that American Express Financial Corporation will reimburse a subsidiary for any tax benefit.
Included in other receivables at December 31, 1994 is $22,034 receivable from American Express Financial Corporation for federal income taxes. Included in other liabilities at December 31, 1993 is $14,709 payable to American Express Financial Corporation for federal income taxes.
1. Summary of significant accounting policies (continued)
Segregated asset account business
The segregated asset account assets and liabilities represent funds held for the exclusive benefit of the variable annuity and variable life insurance contract owners. The Company receives investment management and mortality and expense assurance fees from the variable annuity and variable life insurance mutual funds and segregated asset accounts. The Company also deducts a monthly cost of insurance charge and receives a minimum death benefit guarantee fee and issue and administrative fee from the variable life insurance segregated asset accounts.
The Company makes contractual mortality assurances to the variable annuity contract owners that the net assets of the segregated asset 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 segregated asset accounts for such actuarial adjustments for variable annuities that are in the benefit payment period. The Company guarantees, for the variable life insurance policyholders, the contractual insurance rate and that the death benefit will never be less than the death benefit at the date of issuance.
Reclassification
Certain 1993 and 1992 amounts have been reclassified to conform to the 1994 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, preview of market indices, price levels of current offerings of comparable issues, price estimates and market data from independent brokers and financial files.
Net gain (loss) on investments for the years ended December 31 is summarized as follows:
1994 1993 1992
Fixed maturities $(1,575) $ 20,583 $ 22,075 Mortgage loans (3,013) (25,056) (13,444) Other investments 306 (2,264) (12,341) $(4,282) $ (6,737) $ (3,710) ===== ===== =====
Changes in net unrealized appreciation (depreciation) of investments for the years ended December 31 are summarized as follows: 2. Investments (continued)
1994 1993 1992 Fixed maturities: Held to maturity $(1,329,740) $ -- $ -- Available for sale (720,449) -- -- Investment securities -- 323,060 (128,683) Equity securities (2,917) (156) 300
The amortized cost, gross unrealized gains and losses and fair values of investments in fixed maturities and equity securities at December 31, 1994 are as follows:
The change in net unrealized gain (loss) on available for sale securities included as a separate component of stockholder's equity was $(275,822) in 1994.
The amortized cost, gross unrealized gains and losses and fair values of investments in fixed maturities carried at amortized cost at December 31, 1993 are as follows:
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.
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:
1994 1993 1992
Federal income taxes: Current $186,508 $180,558 $130,998 Deferred (19,175) (44,237) (30,385) 167,333 136,321 100,613
State income taxes-current 9,010 6,326 4,038 Income tax expense $176,343 $142,647 $104,651 ====== ====== ======
Increases (decreases) to the federal tax provision applicable to pretax income based on the statutory rate are attributable to: 3. Income taxes (continued)
A portion of life insurance company income earned prior to 1984 was not subject to current taxation but was accumulated, for tax purposes, in a "policyholders' surplus account." At December 31, 1994, the Company had a policyholders' surplus account balance of $19,032. 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 $6,661 have not been established because no distributions of such amounts are contemplated.
Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1994 1993
Deferred tax assets: Policy reserves $533,433 $453,436 Investments 116,736 -- Life insurance guarantee fund assessment reserve 32,235 35,000 Total deferred tax assets 682,404 488,436
Deferred tax liabilities: Deferred policy acquisition costs 553,722 509,868 Investments -- 10,151 Other 4,621 12,037 Total deferred tax liabilities 558,343 532,056 Net deferred tax assets (liabilities) $124,061 $(43,620) ====== ======
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
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 $1,020,981 as of December 31, 1994 and $922,246 as of December 31, 1993 (see Note 3 with respect to the income tax effect of certain distributions). In addition, any dividend distributions in 1995 in excess of approximately $288,601 would require approval of the Department of Commerce of the State of Minnesota.
Statutory net income for 1994, 1993 and 1992 and capital and surplus as of December 31, 1994, 1993 and 1992 are summarized as follows:
1994 1993 1992
Statutory net income $ 294,699 $ 275,015 $180,296 Statutory capital and surplus 1,261,958 1,157,022 714,942
Dividends paid to American Express Financial Corporation were $165,000 in 1994, $25,000 in 1993 and $20,000 in 1992.
5. Related party transactions
The Company has loaned funds to American Express Financial Corporation under three loan agreements. The balance of the first loan was $40,000 and $75,000 at December 31, 1994 and 1993, 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 equities valued at $110,034 at December 31, 1994. The second loan was used to fund the construction of the IDS Operations Center. This loan was paid off during 1994 and had an outstanding balance of $84,588 at December 31, 1993. The loan was secured by a first lien on the IDS Operations Center property and had an interest rate of 9.89 percent. The Company also had a loan to an affiliate which was used to fund construction of the IDS Learning Center. This loan was sold to the parent during 1994 and the balance outstanding was $22,573 at December 31, 1993. The loan was secured by a first lien on the IDS Learning Center property and had an interest rate of 9.82 percent. Interest income on the above loans totaled $2,894, $11,116 and $10,711 in 1994, 1993 and 1992, respectively.
The Company purchased a five year secured note from an affiliated company which had an outstanding balance of $23,333 and $27,222 at December 31, 1994 and 1993, respectively. The note bears a fixed rate of 8.42 percent. Interest income on the above note totaled $2,278, $2,605 and $2,278 in 1994, 1993 and 1992, respectively.
The Company has a reinsurance agreement whereby it assumed 100 percent of a block of single premium life insurance business from an affiliated company. The accompanying consolidated balance sheet at December 31, 1994 and 1993 includes $765,366 and $759,714, respectively, of future policy benefits related to this agreement. 5. Related party transactions (continued)
The accompanying consolidated statement of income includes revenue from policyholder charges of $8, $21 and $109, and expenses of $6,912, $4,931 and $5,897 related to this agreement for 1994, 1993 and 1992, respectively.
The Company has a reinsurance agreement to cede 50 percent of its long-term care insurance business to an affiliated company. The accompanying consolidated balance sheet at December 31, 1994 and 1993 includes $65,123 and $44,086, respectively, of reinsurance receivables related to this agreement. Premiums ceded amounted to $20,360, $16,230 and $12,499 and reinsurance recovered from reinsurers amounted to $62, $404 and $250 for the years ended December 31, 1994, 1993 and 1992, respectively.
The Company participates in the retirement plan of American Express Financial Corporation which covers all permanent employees age 21 and over who have met certain employment requirements. The benefits are based on years of service and the employee's monthly average of basic annual salary rates in effect on January 1 or such other date at determined by American Express Financial Corporation of the highest five consecutive annual salaries of the last 10 years. American Express Financial Corporation's policy is to fund retirement plan costs accrued subject to ERISA and federal income tax considerations. The Company's share of the total net periodic pension cost was $nil in 1994, 1993 and 1992.
The Company also participates in defined contribution pension plans of American Express Financial Corporation 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 1994, 1993 and 1992 were $957, $2,008 and $1,826, 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. At December 31, 1994, the total accumulated post retirement benefit obligation, determined in accordance with SFAS 106 and based on an assumed interest rate of 8.75 percent and a health care cost trend rate of 7 percent, has been recorded as a liability by American Express Financial Corporation.
Charges by American Express Financial Corporation for use of joint facilities, marketing services and other services aggregated $335,183, $243,346 and $204,675 for 1994, 1993 and 1992, respectively. Certain of these costs are included in deferred 5. Related party transactions (continued)
policy acquisition costs. In addition, the Company rents its home office space from American Express Financial Corporation on an annual renewable basis. Such rentals aggregated $965, $4,513 and $4,074 for 1994, 1993 and 1992, respectively.
6. Commitments and contingencies
At December 31, 1994 and 1993, traditional life insurance and universal life-type insurance in force aggregated $52,666,567 and $46,125,515, respectively, of which $3,246,608 and $3,038,426 were reinsured at the respective year ends. The Company also reinsures a portion of the risks assumed under disability income policies. Under the agreements, premiums ceded to reinsurers amounted to $29,489, $28,276 and $24,222 and reinsurance recovered from reinsurers amounted to $5,505, $3,345 and $6,766 for the years ended December 31, 1994, 1993 and 1992.
Reinsurance contracts do not relieve the Company from its primary obligation to policyholders.
The Company is a defendant in various lawsuits, none of which, in the opinion of the Company counsel, will result in a material liability.
The Company settled all remaining IRS audit issues for the tax years 1984 through 1986 in September of 1994. There was no material impact as a result of this audit. Also, the IRS is currently auditing the Company's 1987 through 1989 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 three banks aggregating $100,000 at 40 to 80 basis points over the banks' cost of funds or equal to the prime rate, depending on which line of credit agreement is used. Borrowings outstanding under these agreements were $nil and $1,519 at December 31, 1994 and 1993, respectively.
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 manages risks associated with these instruments as described below. The Company does not hold derivative instruments for trading purposes.
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.8. Derivative financial instruments (continued)
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.
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.
Credit exposure related to interest rate caps is measured by the replacement cost of the contracts. The replacement cost represents the fair value of the instruments. Financial futures contracts are settled in cash daily.
The fair values of derivative financial instruments are based on market values, dealer quotes or pricing models. The financial futures contracts expire in 1995. The interest rate caps expire on various dates from 1995 to 1999.
Financial futures contracts and interest rate caps are used principally to manage the Company's exposure to rising interest rates. These instruments are used primarily to protect the margin between interest rate earned on investments and the interest rate credited to related annuity contract holders.
Changes in the fair value of financial futures contracts are accounted for as adjustments to the carrying amount of the hedged investments and amortized over the remaining lives of such investments. The cost of interest rate caps is amortized to interest expense over the life of the contracts and payments received as a result of these agreements are recorded as a reduction of interest expense when realized. The amortized cost of interest rate cap contracts is included in other investments.
9. Fair values of financial instruments
The Company is required to disclose fair value information for most on- and off-balance sheet financial instruments for which it is practical to estimate that value. Certain financial instruments such as life insurance obligations, receivables and all non-financial instruments, such as deferred acquisition costs are 9. Fair values of financial instruments (continued)
excluded from required disclosure. 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 December 31, 1994 and 1993, the carrying amount and fair value of future policy benefits for fixed annuities exclude life insurance-related contracts carried at $971,897 and $913,127, respectively, and policy loans of $64,212 and $59,132, respectively. The fair value of these benefits is based on the status of the annuities at December 31, 1994 and 1993. 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 the rate appropriate for contracts issued in 1994 and 1993.
At December 31, 1994 and 1993 the fair value of liabilities related to segregated asset accounts is estimated as the carrying amount less variable insurance contracts carried at $482,374 and $346,276, respectively, and surrender charges, if applicable.
10. Segment information
The Company's operations consist of two business segments; first, individual and group life insurance, disability income, health and long-term care insurance, and second, annuity products designed for individuals, pension plans, small businesses and employer-sponsored groups. The consolidated statement of income for the years ended December 31, 1994, 1993 and 1992 and total assets at December 31, 1994, 1993 and 1992 by segment are summarized as follows:
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.