UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________
Commission file number 33-28976
IDS LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
Minnesota 41-0823832
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
829 AXP Financial Center, Minneapolis, Minnesota 55474
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 671-3131
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the act).
Yes [ ] No [X]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1) (a)
and (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
TABLE OF CONTENTS
Form 10-K
Item Number
PART I Page
1. Business................................................................................. 1
Introduction............................................................................. 1
Asset Accumulation and Investments: Product Features and Risks.......................... 2
Insurance: Product Features and Risks................................................... 3
General and Variable Account Assets...................................................... 5
Competitive Environment.................................................................. 7
Regulation............................................................................... 7
Ratings.................................................................................. 8
Risk-Based Capital....................................................................... 8
Liabilities for Future Policy Benefits................................................... 9
Deferred Policy Acquisition Costs........................................................ 9
2. Properties............................................................................... 9
3. Legal Proceedings........................................................................ 9
4. Submission of Matters to a Vote of Security Holders...................................... 10
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 10
6. Selected Financial Data.................................................................. 10
7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of
Operations............................................................................... 10
7A. Quantitative and Qualitative Disclosures About Market Risk............................... 23
8. Financial Statements and Supplementary Data.............................................. 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................... 24
9A. Controls and Procedures.................................................................. 24
PART III
14. Principal Accountant Fees and Services................................................... 24
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 25
Signatures............................................................................... 26
Index to Financial Statements............................................................ F-1
Exhibit Index............................................................................ E-1
PART I
ITEM 1. BUSINESS
Introduction
IDS Life Insurance Company is a stock life insurance company organized under the
laws of the State of Minnesota. IDS Life Insurance Company is a wholly owned
subsidiary of American Express Financial Corporation (AEFC), which is a wholly
owned subsidiary of American Express Company. IDS Life Insurance Company serves
residents of the District of Columbia and all states except New York. IDS Life
Insurance Company distributes its fixed and variable insurance and annuity
products almost exclusively through the American Express Financial Advisors Inc.
(AEFAI) retail sales force. IDS Life Insurance Company has four wholly owned
life insurance company subsidiaries: IDS Life Insurance Company of New York, a
New York stock life insurance company (IDS Life of New York); American Partners
Life Insurance Company, an Arizona stock life insurance company (American
Partners Life); American Enterprise Life Insurance Company, an Indiana stock
life insurance company (American Enterprise Life); and American Centurion Life
Assurance Company, a New York stock life insurance company (American Centurion
Life), that distribute their products through various distribution channels. IDS
Life of New York serves New York State residents and distributes its fixed and
variable insurance and annuity products exclusively through AEFAI's retail sales
force. American Enterprise Life provides clients of financial institutions and
regional and/or independent broker-dealers with American Express branded
financial products and wholesaling services to support its retail insurance and
annuity operations. American Enterprise Life underwrites fixed and variable
annuity contracts primarily through regional and national financial institutions
and regional and/or independent broker-dealers, in all states except New York
and New Hampshire. Effective in December 2004, American Enterprise Life received
a Certificate of Authority to transact business in the State of New Hampshire.
American Centurion Life offers fixed and variable annuity contracts directly to
American Express(R) Cardmembers and others in New York, as well as fixed and
variable annuity contracts for sale through non-affiliated representatives and
agents of third party distributors, in New York. American Partners Life offers
fixed and variable annuity contracts directly to American Express(R) Cardmembers
and others who reside in states other than New York. IDS Life Insurance Company
also owns IDS REO 1, LLC and IDS REO 2, LLC which hold real estate investments.
See Note 1 to the Consolidated Financial Statements for further discussion. IDS
Life Insurance Company and its six subsidiaries are referred to collectively as
"IDS Life" in this Form 10-K.
Business sold through AEFAI's retail distribution channel for IDS Life Insurance
Company and IDS Life of New York represents the majority of the insurance and
annuity business for IDS Life, whereas business sold through third party
distribution by American Enterprise Life and American Centurion Life and
business sold directly to consumers by American Partners Life and American
Centurion Life represent a smaller portion of the insurance and annuity business
for IDS Life.
On February 1, 2005, the American Express Company announced plans to pursue a
tax-free spin-off of the common stock of American Express Company's AEFC unit
through a special dividend to American Express common shareholders. The final
transaction, which is subject to certain conditions including receipt of a
favorable tax ruling and approval by American Express Company's Board of
Directors, is expected to close in the third quarter of 2005. In connection with
the spin-off, American Express Company intends to provide additional capital to
IDS Life's insurance businesses to confirm its current financial strength
ratings.
1
Asset Accumulation and Investments: Product Features and Risks
IDS Life offers fixed and variable annuities to a broad range of consumers
through multiple distribution channels. Variable and fixed annuities issued by
IDS Life may be deferred, where assets accumulate until the contract is
surrendered, the contract owner dies, or the contract owner begins receiving
benefits under an annuity payout option; or immediate, where payments begin
within one year of issue and continue for life or for a fixed period of time.
IDS Life is one of the largest issuers of annuities in the United States. For
the year ended December 31, 2004, IDS Life, on a consolidated basis, ranked
eleventh in new sales among the top variable annuity writers according to
VARDS(R), an independent annuity rating service. IDS Life posted fixed and
variable annuity cash sales in 2004 of $6.1 billion, a slight decrease from
2003, reflecting increased variable annuity sales, offset by decreased fixed
annuity sales. (See "Annuity Risks" section below for additional discussion).
Variable Annuities
A variable annuity provides a contract owner with investment returns linked to
the underlying investment accounts of the contract owner's choice. Variable
annuity products also offer a fixed account investment option with guaranteed
minimum interest crediting rates ranging from 0% to 4% at December 31, 2004.
Contract owners can also choose among various contract provisions, including
guaranteed minimum death benefit (GMDB) and guaranteed minimum income benefit
(GMIB) riders. The GMDB rider protects contract beneficiaries from a drop in
death benefits due to performance of the underlying subaccounts. The GMIB rider
guarantees, after a stipulated waiting period from contract issuance, minimum
annuity payments based on a specified rate of contract accumulation value growth
and predetermined annuity purchase rates. IDS Life also offers variable
annuities with death benefit provisions that gross up the amount payable by a
certain percentage of contract earnings; these are referred to as gain gross-up
(GGU) benefits. In addition, IDS Life offers contracts containing guaranteed
minimum withdrawal benefits (GMWB) provisions.
IDS Life's largest-selling variable annuities are the American Express
Retirement Advisor PlusSM series of variable annuities, which include the
American Express Retirement Advisor Advantage PlusSM Variable Annuity and the
American Express Retirement Advisor Select PlusSM Variable Annuity (the
"Retirement Advisor PlusSM Variable Annuities").
Fixed Annuities
IDS Life's fixed annuity products provide cash value that increases by a fixed
interest rate. The rate is periodically reset at the discretion of the issuing
company subject to certain policy terms relative to minimum interest crediting
rates. IDS Life resets interest rates based on a number of factors, including
interest rate scenario models and risk/return measures. The annuity contracts
issued by IDS Life provide guaranteed minimum interest crediting rates ranging
from 1.5% to 5% at December 31, 2004. In 2003 and in response to a declining
interest rate environment, several states adopted an interim regulation allowing
for a guaranteed minimum interest crediting rate of 1.5% and/or a model
regulation providing for a guaranteed rate that was indexed. A number of states
now follow the model regulation. In response, IDS Life filed a number of
contract changes in 2003 and 2004 to begin taking advantage of lower minimum
guarantees. IDS Life will continue to implement contract changes as states
continue to adopt the new model regulation or as the interim regulation sunsets.
Annuity Risks
The relative proportion between fixed and variable annuities sales is generally
driven by the relative performance of the equity and fixed income markets. In
times of lackluster performance in equity markets, fixed annuity sales are
generally stronger. In times of superior performance in equity markets, variable
annuity sales are generally stronger. In addition, investment management
performance is critical to the profitability of an annuity business.
Innovative features for annuity products have continued to evolve. These
features include GMDBs. Under the Retirement Advisor Advantage PlusSM Variable
Annuities, the standard GMDB provides that if the contract owner is
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age 75 or younger on the date the contract is issued, the beneficiary will
receive the greater of (i) contract value less any purchase payment credits
subject to recapture less a pro rata portion of any rider fees, or (ii) purchase
payments minus adjusted partial surrenders. If the contract owner is age 76 or
older at contract issue, the beneficiary will receive the contract value, less
any purchase payment credits subject to recapture and less a pro-rata portion of
any rider fees.
Additional optional GMDBs are also available. For example, American Express
Retirement Advisor Advantage PlusSM Variable Annuity contract owners age 76 or
older at contract issue may purchase the optional Return of Purchase Payment
Death Benefit for an additional charge which adds the return of purchase
payments less adjusted partial surrenders to the standard death benefit.
Contract owners may also purchase a maximum anniversary value death benefit or a
five-year maximum anniversary value death benefit for an additional charge.
These death benefit riders guarantee to pay the beneficiary the maximum account
value on any contract anniversary or any fifth contract anniversary, plus
subsequent purchase payments less adjusted partial surrenders. IDS Life contract
owner's also may purchase an enhanced earnings death benefit or an enhanced
earnings plus death benefit for an additional charge. These death benefit riders
are intended to provide additional benefits to offset expenses after the
contract owner's death.
American Enterprise Life and other subsidiaries of IDS Life Insurance Company
also offer variable annuities with a variety of guaranteed minimum death benefit
features and certain optional benefits. For example, American Enterprise Life
issues certain variable annuity contracts that contain a guaranteed minimum
income benefit (GMIB) feature which, if elected by the contract owner after a
stipulated waiting period from contract issuance, guarantees a minimum lifetime
annuity based on predetermined annuity purchase rates that may be in excess of
what the contract account value can purchase at then-current annuity purchase
rates. American Enterprise Life bears the risk that protracted under-performance
of the financial markets could result in guaranteed minimum income benefits
being higher than what accumulated contract owner account balances would
support.
The general account assets of IDS Life support these GMDBs, GGUs, and GMIBs (see
"General and Variable Account Assets - The General Account" section below). IDS
Life bears the risk that protracted under-performance of the financial markets
could result in GMDBs, GGUs, and GMIBs being higher than what current account
values would support. Actual experience may differ from IDS Life's estimates.
IDS Life's exposure to risk from these guarantees generally will increase when
equity markets decline.
Insurance: Product Features and Risks
IDS Life issues a wide range of insurance products, each described below. IDS
Life's sales of individual life insurance in 2004, as measured by scheduled
annual premiums and excluding lump sum and excess premiums, consisted of 87%
variable life, 3% universal life and 10% term life and whole life, based on
year-end cash sales reports. IDS Life issues only non-participating life
insurance policies, which do not pay dividends to policyholders from the
insurers' earnings.
Variable Life Insurance
IDS Life Insurance Company's and IDS Life of New York's biggest selling life
insurance products are variable life insurance policies. Variable life insurance
provides life insurance coverage along with investment returns linked to
underlying investment accounts of the policyholder's choice. These products also
offer a fixed account investment option with guaranteed minimum interest
crediting rates ranging from 4.0% to 4.5% at December 31, 2004. For the year
ended December 31, 2004, IDS Life ranked second in variable life insurance sales
on the basis of premiums, according to the Value Survey provided by Tillinghast,
a consulting firm that provides research, consulting and other services to
insurance and financial services companies worldwide. IDS Life's major source of
revenue from variable insurance is cost of insurance and other charges.
IDS Life Insurance Company's and IDS Life of New York's variable life insurance
products include American Express(R) Variable Universal Life IV/American
Express(R) Variable Universal Life IV - Estate Series, which are
3
individual flexible premium life insurance policies. The Estate Series policy is
available to policyholders with initial specified insurance coverage of $1
million or more. IDS Life Insurance Company and IDS Life of New York also issue
American Express Succession Select, a flexible premium survivorship variable
life insurance policy that insures two lives. Succession Select is often used
for estate planning purposes. Finally, IDS Life issues American Express(R)
Single Premium Variable Life, an individual single premium variable life
insurance policy.
Universal Life Insurance
IDS Life Insurance Company's and IDS Life of New York's universal life insurance
products provide life insurance coverage and cash value that increases by a
fixed interest rate. The rate is periodically reset at the discretion of the
issuing company subject to certain policy terms relative to minimum interest
crediting rates. Policies provide guaranteed minimum interest crediting rates
ranging from 4% to 5% at December 31, 2004.
IDS Life's universal life insurance products include Life Protection Plus, Life
Protection Select and Life Protection Select Estate Series. The Estate Series
policy is available to policyholders with initial specified insurance coverage
of $1 million or more.
Traditional Life Insurance Products
IDS Life Insurance Company's and IDS Life of New York's traditional life
insurance products include whole life insurance and term life insurance. Whole
life insurance combines a death benefit with a cash value that generally
increases gradually in amount over a period of years and does not pay a dividend
(non-participating). IDS Life Insurance Company and IDS Life of New York have
sold very little traditional whole life insurance in recent years. Term life
insurance provides only a death benefit, does not build up cash value and does
not pay a dividend. The policyholder chooses the term of coverage with
guaranteed premiums at the time of issue. During the chosen term, IDS Life
Insurance Company and IDS Life of New York cannot raise premium rates even if
claims experience were to deteriorate. At the end of the chosen term, coverage
continues with higher premiums until the maximum age is attained, at which point
the policy expires with no value.
Disability Income Insurance
IDS Life Insurance Company and IDS Life of New York also issue disability income
(DI) insurance. DI insurance provides monthly benefits to individuals who are
unable to earn income at either their occupation at time of disability (own
occupation) or at any suitable occupation (any occupation). Depending upon
occupational and medical underwriting criteria, applicants for DI insurance can
choose "own occupation" and "any occupation" coverage for varying benefit
periods up to age 65. Applicants may also choose various benefit riders to help
them integrate individual DI insurance benefits with Social Security or similar
benefit plans and to help them protect their DI insurance benefits from the risk
of inflation. IDS Life believes it has a significant presence in the DI
insurance market.
Long-Term Care Insurance
As of December 31, 2002, IDS Life Insurance Company and IDS Life of New York
generally discontinued underwriting long-term care (LTC) insurance. Although new
product sales were generally discontinued in the fourth quarter of 2002, IDS
Life Insurance Company and IDS Life of New York retained 50% of the risk on
existing contracts and ceded the remaining 50% of the risk to General Electric
Capital Assurance Company, one of the Genworth financial insurance companies. In
addition, in May 2003, IDS Life Insurance Company and IDS Life of New York began
outsourcing claims administration on their existing block of LTC policies to
General Electric Capital Assurance Company.
In 2004, IDS Life filed for approval to implement rate increases on its existing
block of nursing home only indemnity LTC insurance policies. Implementation of
these rate increases began in early 2005 and will continue throughout the year
as regulatory approvals are obtained.
4
Insurance Risks
Competitive factors applicable to the insurance business include product
features, the interest rates credited to products, the charges deducted from the
cash values of such products, investment performance, the financial strength of
the organization, distribution and management expenses, claims paying ratings
and the services provided to policyholders.
Reinsurance
IDS Life Insurance Company and IDS Life of New York reinsure a portion of the
insurance risks associated with their life and LTC insurance products through
reinsurance agreements with unaffiliated insurance companies. Reinsurance is
used in order to limit losses, minimize exposure to large risks, and provide
additional capacity for future growth and to effect business-sharing
arrangements. IDS Life Insurance Company and IDS Life of New York evaluate the
financial condition of reinsurers to minimize exposure to significant losses
from reinsurer insolvencies. IDS Life Insurance Company and IDS Life of New York
remain primarily liable as the direct insurers on all risks reinsured.
Generally, IDS Life Insurance Company and IDS Life of New York reinsure 90% of
the death benefit liability related to variable, universal and term life
insurance products. As a result, IDS Life Insurance Company and IDS Life of New
York retain, and are at risk for only, 10% of each policy's death benefit from
the first dollar of coverage. IDS Life Insurance Company began reinsuring risks
at this level beginning in 2001 for term life insurance and 2002 for variable
and universal life insurance. IDS Life of New York began reinsuring risks at
this level beginning in 2002 for term life insurance and 2003 for variable and
universal life insurance. Policies issued prior to these dates are not subject
to these same reinsurance levels. The maximum amount of life insurance risk
retained by IDS Life Insurance Company and IDS Life of New York is $750,000 on
any policy insuring a single life and $1.5 million on any flexible premium
survivorship variable life policy. For existing LTC policies, IDS Life Insurance
Company and IDS Life of New York retained 50% of the risk and the remaining 50%
of the risk was ceded to General Electric Capital Assurance Company. Risk on
variable life and universal life policies is reinsured on a yearly renewable
term basis. Risk on term life and LTC policies is reinsured on a coinsurance
basis.
IDS Life Insurance Company and IDS Life of New York retain all risk for new
claims on disability income contracts. Risk is currently managed by limiting the
amount of disability insurance written on any one individual. IDS Life Insurance
Company and IDS Life of New York also retain all risk on accidental death
benefit claims and waiver of premium provisions.
General and Variable Account Assets
Depending on the life insurance and annuity product purchased, the assets of IDS
Life policyholders and contractholders may be placed in either the general
account of IDS Life (the "general account") or, in the case of variable life
insurance and variable annuity products, in a separate account that invests in
underlying investment options (the "variable account").
The General Account
Assets supporting contract values associated with fixed account life insurance
and annuity products, as well as those associated with fixed account options
under variable insurance and annuity products (collectively, the "fixed
accounts"), are part of IDS Life's general account. Under fixed accounts, IDS
Life bears the investment risk. In investing their general account assets, IDS
Life seeks to maintain a dependable and targeted difference or "spread" between
the interest rate earned on general account assets and the interest rate IDS
Life credits to contract owners' fixed accounts. Historically, this spread has
been a major component driver of IDS Life's net income.
The general account assets also include funds accumulated through insurance
premiums and cost of insurance charges related to both fixed and variable
insurance products, as well as annuity contract charges. Historically, these
premiums and charges have been major sources of revenue for IDS Life.
5
In the general account, IDS Life through its investment manager, AEFC, primarily
invest in fixed maturity securities over a broad range of maturities for the
purpose of providing a targeted rate of return on their investments while
controlling risk. The majority of these fixed maturity securities are
interest-bearing investments such as government obligations, mortgage backed
obligations and various corporate debt instruments. IDS Life does not invest in
securities to generate trading profits.
IDS Life and its four life insurance company subsidiaries, through their
respective Boards of Directors' investment committees or staff functions, review
models projecting different interest rate scenarios, risk/return measures, and
their effect on profitability. They also review the distribution of assets in
the portfolio by type and credit risk sector. The objective is to structure the
investment security portfolio based upon the type and expected behavior of
products in the liability portfolio to meet contractual obligations and achieve
targeted levels of profitability within defined risk parameters.
IDS Life has the discretion to set the rate of interest credited to contract
owners' accounts subject to each contract's guaranteed minimum interest
crediting rate. As of December 31, 2004, this rate varied among fixed accounts
and was as low as 0% and as high as 6.4%. To the extent the yield on IDS Life's
invested general account asset portfolio declines below its target spread plus
the minimum guarantee, IDS Life's profitability would be negatively affected.
The interest rates credited to contract owners' fixed accounts generally reset
towards new business rates; therefore, margins may be negatively impacted by
increases in the general level of interest rates. Part of IDS Life's strategy
includes the use of derivatives, such as interest rate swaptions, for risk
management purposes. These derivatives help protect margins by increasing
investment returns if there is a sudden and severe rise in interest rates,
thereby lessening the impact of an increase in rates credited to contract
owners' fixed accounts. Conversely, in a low interest rate environment, such as
that experienced recently, margins may be negatively impacted as the interest
rates available on IDS Life's invested assets approach guaranteed minimum
interest rates on the insurance or annuity contracts inforce. This negative
impact may be compounded by the fact that many of these interest-bearing
investments are callable or pre-payable by the issuer and calls and prepayments
are more likely to occur in a low interest rate environment. In light of the
present environment in which interest rates are at historic lows, IDS Life
imposed fixed account allocation and transfer requirements for new variable
annuity sales in 2003. These requirements were relaxed slightly in 2004 with the
introduction of lower guaranteed minimum interest rates.
The Variable Accounts
Variable insurance and annuity products also offer variable account investment
options in addition to fixed account options. Under the variable account option,
contract owners bear the investment risk. The variable accounts are registered
as unit investment trusts under the Investment Company Act of 1940.
Generally, the variable accounts consist of a number of subaccounts, each of
which invests in shares of a particular fund. Contract owners can allocate their
payments among these variable subaccounts. The underlying funds are managed both
by internal and unaffiliated third-party money managers. These funds invest in
portfolios containing a variety of securities including common stocks, bonds,
managed assets and/or short-term securities. The value of the subaccounts
fluctuates with the investment return of the funds in which the subaccounts
invest.
IDS Life's major source of revenue from the variable annuities it sells are the
fees it receives, including mortality and expense risk and other fees. Before
the fourth quarter of 2003, these fees included investment advisory fees for
internally managed mutual funds. In the fourth quarter of 2003, AEFC replaced
IDS Life as the investment manager and assumed these duties for the mutual funds
and retained IDS Life and its non-New York subsidiaries to provide underlying
administrative services. Previous to this change, IDS Life received management
fees directly from the proprietary funds and was party to an agreement with AEFC
to compensate AEFC for the investment sub-advisory services AEFC provided these
proprietary funds. IDS Life's administrative service fees will vary with the
market values of these proprietary mutual funds. In addition to IDS Life's
administrative service fees, IDS Life receives mortality and expense risk fees
from the separate accounts based on the level of assets. In March 2004, a
similar
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structure for the New York subsidiaries was approved by the New York Insurance
Department effective as of February 1, 2004. Fees payable from AEFC to IDS Life
include administrative service fees.
Variable insurance and annuities are "separate account" rather than general
account products. State insurance law prescribes that separate accounts
constitute a separate operation from the general account and as such are only
available to fund the liabilities of the separate accounts. Under the
subaccounts of each variable account, IDS Life credits or charges income,
capital gains and losses only to that subaccount.
Competitive Environment
The insurance and annuity business is highly competitive, and IDS Life's
competitors consist of both stock and mutual insurance companies, as well as
other financial intermediaries marketing insurance products. IDS Life's annuity
business competes with numerous other insurance companies, as well as certain
banks, securities brokerage firms, independent financial advisors and other
financial intermediaries that market annuities, mutual funds and other
retirement-oriented products.
Competitive factors affecting the sale of insurance and annuity products
include:
o cost of insurance and other contract charges;
o mortality, expense and other contract charges;
o the level of premium rates;
o investment performance;
o the level of interest crediting rates;
o financial strength ratings from third party agencies such as A. M. Best;
o the breadth, quality and design of products and services offered;
o the quality of underwriting;
o the effectiveness of advertising and promotion campaigns;
o reputation and recognition in the marketplace;
o distribution capabilities and compensation; and
o the quality of customer service;
With respect to variable annuities, customers also focus on guaranteed payment
features that help to insulate them from equity market risk.
Regulation
The Minnesota Department of Commerce (Insurance Division), the Indiana
Department of Insurance, and the Arizona Department of Insurance, regulate IDS
Life Insurance Company, American Enterprise Life and American Partners Life,
respectively. The New York State Department of Insurance regulates American
Centurion Life and IDS Life of New York.
In addition to being regulated by their domiciliary regulators, IDS Life
Insurance Company and its subsidiaries are also regulated by each of the
insurance regulators in the states where each is authorized to transact the
business of insurance. These other states also regulate such matters as the
licensing of sales personnel and, in some cases, the marketing and contents of
insurance policies and annuity contracts. The primary purpose of such regulation
and supervision is to protect the interests of policyholders and
contractholders. Financial regulation of IDS Life is extensive. IDS Life's
financial and intercompany transactions (such as intercompany dividends, capital
contributions and investment activity) are often subject to pre-notification and
continuing evaluation by the domiciliary regulators. Virtually all states
require participation in insurance guaranty associations, which assess insurance
companies in order to fund claims of policyholders and contractholders of
insolvent insurance companies.
7
Insurance companies have recently been the subject of increasing regulatory,
legislative and judicial scrutiny. Numerous state and federal regulatory
agencies have commenced investigations regarding sales and marketing practices,
compensation arrangements and anticompetitive activities, and market timing and
late trading in connection with insurance, annuity and mutual fund products. IDS
Life has been contacted by regulatory agencies for information relating to some
of these investigations and is cooperating with those inquiries. IDS Life is
reviewing its compensation arrangements and other operations that may be
affected by these regulatory investigations, and the legal precedents and new
industry-wide legislation, rules and regulations that may arise from these
investigations.
At the federal level, there is periodic interest in enacting new regulations
relating to various aspects of the insurance industry, including taxation of
annuities and life insurance policies, accounting procedures, as well as the
treatment of persons differently because of gender, with respect to terms,
conditions, rates or benefits of an insurance policy. New federal regulation in
any of these areas could potentially have an adverse effect upon IDS Life. Also,
recent federal legislative proposals aimed at the promotion of tax-advantaged
savings through Lifetime Savings Accounts and Retirement Savings Accounts may
adversely impact IDS Life's sales of annuity and life insurance products if
enacted.
Ratings
IDS Life Insurance Company receives ratings from independent rating agencies.
Generally, its four insurance subsidiaries do not receive an individual rating,
but receive the same rating as IDS Life Insurance Company. These agencies
evaluate the financial soundness and claims-paying ability of insurance
companies based on a number of different factors. The ratings reflect each
agency's estimation of IDS Life's ability to meet its contractual obligations
such as making annuity payouts and paying death benefits and other distributions
from the contracts. As such, the ratings relate to IDS Life's general account
and not to the management or performance of the variable accounts of the
contracts.
Ratings are important to maintaining public confidence in IDS Life. Lowering of
IDS Life's ratings could have a material adverse effect on IDS Life Insurance
Company's and its four life insurance company subsidiaries' ability to market
their products and could lead to increased surrenders of their products. Rating
agencies continually review the financial performance and condition of insurers.
As of the end of 2004, IDS Life Insurance Company was rated "A+" (Superior) by
A.M. Best Company, Inc. and its claims-paying ability/financial strength was
rated "Aa3" (Excellent) by Moody's Investors Service, Inc. (Moody's), and "AA"
(Very Strong) by Fitch. On February 1, 2005, A.M. Best placed IDS Life's
financial strength rating of "A+" under review with negative implications,
Moody's affirmed IDS Life's financial strength rating at "Aa3" and Fitch lowered
IDS Life's financial strength rating to "AA-" and placed them on "Rating Watch
Negative" following American Express Company's announcement that it intends to
pursue a spin-off of its full ownership of AEFC, the holding company for IDS
Life. In connection with the spin-off, American Express Company intends to
provide additional capital to IDS Life to confirm its current financial strength
ratings.
The foregoing ratings reflect each rating agency's opinion of IDS Life Insurance
Company's financial strength, operating performance and ability to meet its
obligations to contract owners.
Risk-Based Capital
The National Association of Insurance Commissioners (NAIC) defines Risk-Based
Capital (RBC) requirements for life insurance companies. The RBC requirements
are to be used as minimum capital requirements by the NAIC and states to
identify companies that merit further regulatory action. At December 31, 2004,
IDS Life Insurance Company had total adjusted capital of approximately $2.7
billion on a statutory accounting basis. The Minnesota Department of Commerce,
IDS Life Insurance Company's primary insurance regulator, requires insurance
companies to maintain a minimum RBC called the "authorized control level RBC."
If total adjusted capital fell below the authorized control level RBC, the
Minnesota Department of Commerce would be authorized to exercise
8
management control over IDS Life Insurance Company. For IDS Life Insurance
Company, the authorized control level RBC was $372.9 million at December 31,
2004.
In addition, IDS Life Insurance Company, like other life insurance companies, is
expected to maintain capital at a level above which would require it to file an
action plan with the Minnesota Department of Commerce. This is referred to as
the "company action level RBC." For IDS Life Insurance Company, the company
action level RBC was $745.9 million at December 31, 2004.
As described above, IDS Life Insurance Company maintains levels of RBC far in
excess of the authorized control and company action levels required by the
Minnesota Department of Commerce. The level of capital maintained in IDS Life
Insurance Company is thought to be appropriate by management and is more
commensurate with standards necessary to maintain IDS Life Insurance Company's
ratings with the various credit and claims-paying rating agencies.
Liabilities for Future Policy Benefits
IDS Life must maintain adequate financial reserves to cover the insurance risks
associated with the insurance products it issues. Generally, reserves represent
estimated assets that IDS Life needs to provide adequately for future benefits
and expenses. See "Critical Accounting Policies" within management's discussion
and analysis below for further discussion regarding liabilities for future
policy benefits, which portions of such are incorporated by reference.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of insurance and annuity
products. These costs are deferred to the extent they are recoverable from
future profits. For insurance and annuity products, DAC are amortized over
periods approximating the lives of the business, principally as a percentage of
premiums or estimated gross profits or as a portion of interest margins
associated with the products. See "Critical Accounting Policies" within
management's discussion and analysis below for further discussion of DAC.
ITEM 2. PROPERTIES
IDS Life Insurance Company occupies office space in Minneapolis, Minnesota,
which is leased or owned by AEFC. IDS Life Insurance Company reimburses AEFC for
rent based on direct and indirect allocation methods. IDS Life of New York and
American Centurion Life rent office space in Albany, New York. Facilities
occupied by IDS Life are believed to be adequate for the purposes for which they
are used and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD) and several state attorneys general have brought
proceedings challenging several mutual fund and variable account financial
practices, including suitability generally, late trading, market timing,
disclosure of revenue sharing arrangements and inappropriate sales. IDS Life and
its subsidiaries have received requests for information and have been contacted
by regulatory authorities concerning its practices and is cooperating fully with
these inquiries.
In November 2002, IDS Life Insurance Company was named in a purported class
action entitled John Haritos, et al. v. American Express Financial Advisors Inc.
et al., No. 02 2255, United States District Court, District of Arizona. The
complaint originally named IDS Life Insurance Company as a defendant, but IDS
Life Insurance Company was dismissed when plaintiffs chose to file an Amended
Complaint not naming IDS Life Insurance Company. This action alleges that
defendants violated the Investment Advisors Act (IAA) of 1940, 15 U.S.C., in the
sale of financial
9
plans and various products including those of IDS Life Insurance Company. The
complaint seeks certification of a nationwide class, restitution, injunctive
relief, and punitive damages. In June 2004, the Court denied the Company's
motion to dismiss the action as a matter of law. The Court did indicate,
however, that the plaintiffs may not have a compelling case under the IAA.
Notwithstanding the Court's denial of the Company's motion to dismiss, the
Company believes that the plaintiffs' case suffers from various factual and
legal weaknesses and it intends to continue to defend the case vigorously. The
Company has filed a motion to dismiss the plaintiffs' Second Amended Complaint.
IDS Life and its subsidiaries are involved in a number of other legal and
arbitration proceedings concerning matters arising in connection with the
conduct of their respective business activities. IDS Life believes it has
meritorious defenses to each of these actions and intends to defend them
vigorously. IDS Life believes that it is not a party to, nor are any of its
properties the subject of, any pending legal or arbitration proceedings that
would have a material adverse effect on IDS Life's consolidated financial
condition, results of operations or liquidity. However, it is possible that the
outcome of any such proceedings could have a material impact on results of
operations in any particular reporting period as the proceedings are resolved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item omitted pursuant to General Instructions I(2) (c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Item omitted pursuant to General Instructions I(2) (a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IDS Life follows United States generally accepted accounting principles (GAAP),
and the following discussion is presented on a consolidated basis consistent
with GAAP.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. See the
Forward-Looking Statements section below.
Management's narrative analysis of the results of operations is presented in
lieu of management's discussion and analysis of financial condition and results
of operations, pursuant to General Instructions I(2) (a) of Form 10-K.
Results of Operations for the Years Ended December 31, 2004 and 2003
Pretax income rose 38 percent to $792.4 million for the year ended December 31,
2004. The increase primarily reflects increased net investment income, mortality
and expense risk and other fees, net realized gain on investments, lower
interest credited on investment contracts and universal life-type insurance
costs and lower amortization of deferred policy acquisition costs (DAC),
partially offset by higher other insurance and operating costs. See the DAC
section below for further discussion of DAC and related third quarter 2004 and
2003 adjustments.
10
IDS Life's effective tax rate rose to 29 percent in 2004 from 12 percent in 2003
primarily due to the impact of lower levels of tax-advantaged items in pretax
income during 2004, reduced low income housing credits as a result of the
December 2003 distribution of substantially all of IDS Life's interests in low
income housing investments to AEFC and the one-time effect of favorable
technical guidance related to the taxation of dividend income recognized in
2003. For 2003 and prior years, IDS Life's federal income taxes were reduced by
credits arising from low income housing investments.
Net income for the year ended December 31, 2004 reflects the $70.6 million
($108.6 million pretax) impact of IDS Life's January 1, 2004 adoption of the
American Institute of Certified Public Accountants Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration contracts and for Separate Accounts" (SOP 03-1). SOP 03-1 requires
insurance enterprises to establish liabilities for benefits that may become
payable under variable annuity death benefit guarantees or other insurance or
annuity contract provisions. See "Application of Recent Accounting Standards"
section in Note 1 to the Consolidated Financial Statements regarding the impact
of adoption of SOP 03-1.
Revenues
Total revenues increased $162 million or 5 percent primarily due to higher net
investment income, mortality and expense risk and other fees and net realized
gain on investments compared to 2003.
Net investment income increased $72.3 million or 4 percent. Net investment
income for the year ended December 31, 2003 includes $77.3 million of
amortization expense of certain low income housing investments. See effective
tax rate discussion above.
Contractholder and policyholder charges increased $24.2 million or 5 percent
reflecting increased cost of insurance charges on variable universal life
products as well as an increase in the amount of surrender charges on variable
annuity products.
Mortality and expense risk and other fees increased $39.8 million or 10 percent
reflecting higher average market values of separate account assets, and the
impact of the change from IDS Life to AEFC as investment manager of the
internally managed proprietary funds during the fourth quarter of 2003.
Concurrent with the investment manager change, IDS Life entered into an
agreement with AEFC to receive fees for the services, other than investment
management, that IDS Life continues to provide the underlying proprietary mutual
funds. IDS Life's administrative service fees will vary with the market values
of these proprietary mutual funds. Previous to this change, IDS Life received
management fees directly from the proprietary funds and was party to an
agreement with AEFC to compensate AEFC for the investment sub-advisory services
AEFC provided these proprietary funds. In addition to IDS Life's administrative
service fees, IDS Life receives mortality and expense risk fees from the
separate accounts based on the level of assets.
Net realized gain on investments was $27.3 million in 2004 compared to $4.4
million in 2003. For the year ended December 31, 2004, $49.5 million of total
investment gains were partially offset by $22.2 million of impairments and
losses. Included in these total net investment gains and losses are $48.4
million of gross realized gains and $17.5 million of gross realized losses from
sales of securities, as well as $0.1 million of other-than-temporary impairment
losses on investments, classified as Available-for-Sale.
For the year ended December 31, 2003, $257 million of total investment gains
were partially offset by $252.6 million of impairments and losses. Included in
these total net investment gains and losses are $255.3 million of gross realized
gains and $135.5 million of gross realized losses from sales of securities, as
well as $102.6 million of other-than-temporary impairment losses on investments,
classified as Available-for-Sale.
Benefits and Expenses
Total benefits and expenses decreased $55.8 million or 2 percent, reflecting
lower interest crediting rates and the effect on equity indexed annuities of
lower appreciation in the S&P 500 during 2004 versus 2003, a reduction in DAC
11
amortization in conjunction with the adoption of SOP 03-1 and third quarter DAC
adjustments, partially offset by higher other insurance and operating expenses.
Interest credited on investment contracts and universal life-type insurance
decreased $114.1 million or 9 percent, primarily due to lower interest crediting
rates and the effect on equity indexed annuities of lower appreciation in the
S&P 500 during 2004 versus 2003, partially offset by higher average accumulation
values of annuities and inforce levels of life insurance products.
DAC amortization expense decreased to $260.8 million in 2004 from $264.3 million
in 2003. The decrease reflects the first quarter 2004 $65.7 million pretax DAC
valuation benefit reflecting an adjustment associated with the lengthening of
amortization periods for certain insurance and annuity products in conjunction
with the adoption of SOP 03-1, partially offset by an estimated increase in DAC
amortization of $9.6 million, as a result of IDS Life's completed valuation
system conversion for its long-term care (LTC) insurance business during the
first quarter of 2004. In addition, DAC amortization expense was impacted by a
net $22 million DAC valuation benefit from the third quarter review of DAC as
compared to prior year.
Other insurance and operating expenses increased $50.8 million or 11 percent
reflecting increases in distribution costs and non-deferrable expenses related
to product management and business reinvestment initiatives. These increases
were partially offset by a reduction related to the change in investment manager
of the proprietary mutual funds from IDS Life to AEFC. Effective with this
change, the previously existing arrangement under which IDS Life compensated
AEFC for investment sub-advisory services were terminated.
Results of Operations for the Years Ended December 31, 2003 and 2002
Income before accounting change rose 33 percent to $507.6 million for year ended
December 31, 2003. Net income rose 44 percent to $552.1 million in 2003, up from
$382.2 million in 2002. Among other things described below, IDS Life's 2003
results reflect a $41.3 million reduction in tax expense due to adjustments
related to the finalization of the 2002 tax return filed during the third
quarter of 2003 and the publication of favorable technical guidance related to
the taxation of dividend income.
Net Income for 2003 also reflects the impact of IDS Life's adoption of Financial
Accounting Standard Board (FASB) Interpretation No. 46, "Consolidation of
Variable Interest Entities," revised December 2003 (FIN 46), which addresses the
consolidation of variable interest entities (VIEs). The impact of the FIN 46
adoption is discussed in more detail below.
Revenues
Total revenues increased $157.2 or 6 percent primarily due to higher net
investment income and disability income premium revenues, together with net
realized gains on investments versus net realized losses in 2002, partially
offset by lower mortality and expense risk and other fees revenues.
Total premium revenue increased $14.5 million or 4 percent reflecting a higher
number of disability income and traditional life insurance policies.
Net investment income increased $142.6 million or 9 percent in 2003 reflecting
higher levels of invested assets and the effect of appreciation in the S&P 500
on the value of options hedging equity indexed annuities this year versus
depreciation last year, which was offset in interest credited expenses. The
positive effects of the foregoing were partially offset by a lower average yield
on invested assets.
Net realized gain (loss) on investments was $4.4 million in 2003 compared to
($5.2 million) in 2002. For the year ended December 31, 2003, $257 million of
total investment gains were partially offset by $252.6 million of impairments
and losses. Included in these total net investment gains and losses were $255.3
million of gross realized gains and $135.5 million of gross realized losses from
sales of securities, as well as $102.6 million of other-than-temporary
investment impairment losses, classified as Available-for-Sale.
12
For the year ended December 31, 2002, $299.6 million of total investment gains
were more than offset by $304.8 million of impairments and losses. Included in
these total net investment gains and losses were $297.6 million of gross
realized gains and $137.4 million of gross realized losses from the sales of
securities, as well as $144.1 million of other-than-temporary investment
impairment losses (including $45 million related to directly-held WorldCom debt
holdings), classified as Available-for-Sale.
Mortality and expense risk and other fees decreased $14.3 million or 4 percent
reflecting lower average market values of separate account assets throughout
2003 compared to 2002. While equity markets increased in the second half of
2003, average market values of separate account assets for the full year of 2003
remained below 2002 levels. For 2003 and 2002, IDS Life provided mutual fund
management services for many of the mutual funds available as investment options
within IDS Life's variable annuity and variable life insurance products. IDS
Life also receives mortality and expense risk fees from the separate accounts
based on asset levels.
Benefits and Expenses
Total benefits and expenses increased $52.7 million or 2 percent, reflecting
higher average accumulation value of annuities and inforce levels and the effect
on equity indexed annuities of appreciation in the S&P 500 during 2003 versus
depreciation in 2002 and higher insurance and other operating expense. The 2003
increase also reflects the 2002 benefit of $7 million ($4 million after-tax),
which resulted from a reversal of a portion of the 2001 September 11th related
reserves as a result of lower than previously anticipated insured loss claims.
Disability and long-term care insurance liability for future policy benefit
expenses increased $7.9 million, or 6 percent, reflecting increases in
underlying policies in force.
Interest credited on investment contracts and universal life-type insurance
increased $78.7 million or 7 percent due to higher average accumulation value of
annuities and inforce levels and the effect on equity indexed annuities of
appreciation in the S&P 500 during 2003 versus depreciation in 2002, partially
offset by lower interest crediting rates.
DAC amortization expense decreased to $264.3 million for the year ended December
31, 2003 from $320.6 million for the year ended December 31, 2002. The decrease
reflects a net $18.0 million increase in DAC amortization expense in the third
quarter of 2002, compared to a net $1.8 million DAC amortization expense
reduction in the third quarter of 2003, both as a result of IDS Life's annual
third quarter review of various DAC assumptions and practices. DAC amortization
expense in 2003 was favorably impacted by recently improved equity market
performance during 2003 as compared to 2002. Additionally, faster-than-assumed
growth in customer asset values associated with IDS Life's variable annuity and
insurance products resulted in a reduction in DAC amortization expense during
2003, whereas declines in variable annuity and insurance customer asset values
resulted in an increase in DAC amortization expense during 2002. See the DAC
section below for further discussion of DAC and related third quarter 2003
adjustments.
Other insurance and operating expenses increased $26.4 million or 6 percent
reflecting the unfavorable impact of fewer capitalized costs due to the ongoing
impact of the third quarter 2002 comprehensive review of DAC-related practices.
These increases were partially offset by a reduction related to the change in
the previously existing arrangement between IDS Life and AEFC as noted above.
IDS Life's effective tax rate decreased to 12 percent in 2003 from 19 percent in
2002 reflecting a $41.3 million reduction in tax expense in 2003 related to the
finalization of the 2002 tax return filed during the third quarter of 2003 and
publication of favorable technical guidance related to the taxation of dividend
income. Partially offsetting this reduction in tax expense was the after-tax
impact of realized losses from sales of mortgage-backed securities as a result
of IDS Life's decision to make an adjustment to the level of such investments
during the third quarter of 2003, such that mortgage-backed securities were 32
percent of IDS Life's overall investment portfolio at December 31, 2003 compared
to 43 percent at December 31, 2002.
13
As described more fully in the "Liquidity and Capital Resources" section below,
the consolidation of FIN 46-related entities resulted in a cumulative effect of
accounting change that increased net income through a non-cash gain of $44.5
million ($68.4 million pretax) related to the consolidation of three secured
loan trusts (SLTs).
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
business, principally direct sales commissions and other distribution and
underwriting costs that have been deferred on the sale of annuity, life and
health insurance products. These costs are deferred to the extent they are
recoverable from future profits. For annuity and insurance products, DAC are
amortized over periods approximating the lives of the business, generally as a
percentage of premiums or estimated gross profits or as a portion of product
interest margins depending on the product's characteristics.
For IDS Life's annuity and insurance products, the projections underlying the
amortization of DAC require the use of certain assumptions, including interest
margins, mortality rates, persistency rates, maintenance expense levels and
customer asset value growth rates for variable products. Management routinely
monitors a wide variety of trends in the business, including comparisons of
actual and assumed experience. The customer asset value growth rate is the rate
at which contract values are assumed to appreciate in the future. The rate is
net of asset fees and anticipates a blend of equity and fixed income
investments. Management reviews and, where appropriate, adjusts its assumptions
with respect to customer asset value growth rates on a quarterly basis.
Management monitors other principal DAC assumptions, such as persistency,
mortality rates, interest margin and maintenance expense level assumptions, each
quarter. Unless management identifies a material deviation over the course of
the quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC might also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in an increase in DAC amortization expense while a decrease in amortization
percentage will result in a decrease in DAC amortization expense. The impact on
results of operations of changing assumptions with respect to the amortization
of DAC can be either positive or negative in any particular period and is
reflected in the period in which such changes are made. As a result of these
reviews, IDS Life took actions in both 2004 and 2003 that impacted DAC balance
and expenses.
In the third quarter 2004, these actions resulted in a net $24 million DAC
amortization expense reduction reflecting:
o A $27 million DAC amortization reduction reflecting lower than
previously assumed surrender and mortality rates on variable annuity
products, higher surrender charges collected on universal and variable
universal Life products and higher than previously assumed interest
rate spreads on annuity and universal life products. Variable annuity
surrender rates were reduced between 0 and 20%, depending on product
and duration. Additionally, there was an increase in surrender charge
revenue ranging from 60% to 80% for universal life products and 10% to
50% for certain variable annuity products. The mortality assumption was
changed from duration to an attained age basis. Interest rate spreads
were higher by approximately 40 basis points relative to previously
assumed spreads in 2003.
o A $3 million DAC amortization reduction reflecting a change to the
mid-term assumed growth rate on variable annuity and variable universal
life products.
o A $6 million DAC amortization increase primarily reflecting a reduction
in estimated future premiums on variable annuity products.
In the third quarter 2003, these actions resulted in a net $2 million DAC
amortization expense reduction reflecting:
14
o A $106 million DAC amortization reduction resulting from extending 10 -
15 year amortization periods for certain Flex Annuity contracts to 20
years based on current measurements of meaningful life in which
exchanges of Flex Annuity contracts for other IDS Life variable annuity
contracts are treated as continuations rather than terminations. The
Flex Annuity is an advisor-distributed variable annuity product sold
from 1986 - 1996. In reviewing the persistency of this business in
recent years, IDS Life had observed significant volumes persisting
beyond the end of the 10- and 15-year amortization periods. IDS Life
had maintained these amortization periods, however, due to uncertainty
over the impact of a program launched in April 2002 under which
eligible Flex Annuity contracts can be exchanged for new variable
annuity contracts offered by IDS Life. Exchange rates to date under
this program were less than those expected, and IDS Life concluded in
the third quarter of 2003 it would be appropriate to measure the
meaningful life of this business without anticipating future exchanges.
This is consistent with the measurement made for other IDS Life
products, and the resulting 20-year period is the same as that used for
other advisor-distributed variable annuity products.
o A $92 million DAC amortization increase resulting from the recognition
of a premium deficiency on IDS Life's Long-Term Care (LTC) business.
IDS Life has monitored this business closely in 2003 as claim and
persistency experience developed adversely. IDS Life discontinued sales
of its proprietary LTC product in the first quarter of 2003, and
outsourced claims administration on the existing book in the second
quarter of 2003. On the basis of updated analysis completed in the
third quarter of 2003, IDS Life concluded that the associated DAC was
not fully recoverable at current premium levels. The associated DAC
remaining after this $92 million reduction was $162 million.
o A $12 million net DAC amortization increase across IDS Life's Universal
Life, Variable Universal Life and annuity products. IDS Life updated a
number of DAC assumptions resulting in increases in amortization
totaling $26 million and decreases in amortization totaling $14
million. The largest single item was a $16 million increase in
amortization from reflecting lower than previously assumed spreads on
fixed contract values.
During the first quarter of 2004 and in conjunction with the adoption of SOP
03-1, IDS Life (1) established additional liabilities for insurance benefits
that may become payable under variable annuity death benefit guarantees or on
single pay universal life contracts, which prior to January 1, 2004, were
expensed when payable; and (2) extended the time periods over which DAC
associated with certain insurance and annuity products are amortized to coincide
with the liability funding periods in order to establish the proper
relationships between these liabilities and DAC associated with the same
contracts. As a result, IDS Life recognized a $108.6 million pretax charge due
to accounting change on establishing the future liability under death benefit
guarantees and recognized a $65.7 million pretax reduction in DAC amortization
expense to reflect the lengthening of the amortization periods for certain
products impacted by SOP 03-1. Additionally, IDS Life completed a valuation
system conversion for its LTC insurance business during the first quarter of
2004 which resulted in a $6.5 million pretax reduction of estimated LTC
liabilities for future policy benefits and an offsetting estimated $9.6 million
pretax increase in DAC amortization expense. This valuation adjustment was an
increase to the $92 million estimated premium deficiency IDS Life recognized in
the third quarter of 2003.
DAC balances for various insurance and annuity products sold by IDS Life are set
forth below:
December 31, (Millions) 2004 2003
----------------------------------------------------------------------
Life and health insurance $ 1,766 $ 1,602
Annuities 1,872 1,734
----------------------------------------------------------------------
Total $ 3,638 $ 3,336
----------------------------------------------------------------------
In addition to the DAC balances shown above and in conjunction with IDS Life's
adoption of SOP 03-1, sales inducement costs previously included in DAC were
reclassified from DAC and presented as a separate line item in the Consolidated
Balance Sheets. Deferred sales inducement costs were $303 million and $279
million at December
15
31, 2004 and 2003, respectively. Sales inducement costs consist of bonus
interest credits and deposit credits added to certain annuity contract values.
These benefits are capitalized to the extent they are incremental to amounts
that would be credited on similar contracts without the applicable feature. The
amounts capitalized are amortized using the same methodology and assumptions
used to amortize DAC.
Certain Critical Accounting Policies
IDS Life's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements. The following provides information about
certain critical accounting policies that are important to the Consolidated
Financial Statements and that involve estimates requiring significant management
assumptions and judgments about the effect of matters that are uncertain. These
policies relate to investment securities valuation, deferred policy acquisition
costs and liabilities for future policy benefits.
Investment Securities Valuation
Generally, investment securities are carried at fair value on the balance sheet
with unrealized gains (losses) recorded in other accumulated comprehensive
income (loss) within equity, net of income tax provisions (benefits) and net of
adjustments in assets and liability balances, such as deferred policy
acquisition costs (DAC), to reflect the expected impact on their carrying values
had the unrealized gains (losses) been realized immediately. At December 31,
2004, IDS Life had net unrealized pretax gains on Available-for-Sale securities
of $731.8 million. Gains and losses are recognized in results of operations upon
disposition of the securities. Losses are also recognized when management
determines that a decline in value is other-than-temporary, which requires
judgment regarding the amount and timing of recovery. Indicators of
other-than-temporary impairment for debt securities include issuer downgrade,
default or bankruptcy. IDS Life also considers the extent to which cost exceeds
fair value, the duration and size of that gap, and management's judgment about
the issuer's current and prospective financial condition. Approximately 90% of
the investment portfolio classified as Available-for-Sale is determined by
quoted market prices. As of December 31, 2004, there were $118.5 million in
gross unrealized losses that related to $7.9 billion of securities, of which
$2.2 billion has been in a continuous unrealized loss position for 12 months or
more. As part of IDS Life's ongoing monitoring process, management has
determined that substantially all of the gross unrealized losses on these
securities are attributable to changes in interest rates. Additionally, IDS Life
has the ability and intent to hold these securities for a time sufficient to
recover its amortized cost and has, therefore, concluded that none of these
securities are other-than-temporarily impaired at December 31, 2004.
Included in IDS Life's investment portfolio discussed above are structured
investments of various asset quality, including collateralized debt obligations
(CDOs) (backed by high-yield bonds and bank loans), which are not readily
marketable. The carrying values of these structured investments are based on
future cash flow projections that require management's judgment as to the amount
and timing of cash payments, defaults and recovery rates of the underlying
investments and, as such, are subject to change. The carrying value will vary if
the actual cash flows differ from projected due to actual defaults or changes in
estimated default or recovery rates. As an example, an increase in the near-term
default rate by 100 basis points, in and of itself, would reduce the cash flow
projections by approximately $10 million based on underlying investments as of
December 31, 2004. The level of change in near-term default rates would have to
be significantly higher than 100 basis points to cause a change in carrying
value of IDS Life's structured investments due to previously recognized
impairment losses coupled with subsequent improvement in actual default rates.
See "Application of Recent Accounting Standards" in Note 1 to the Consolidated
Financial Statements for a discussion of Emerging Issues Task Force (EITF) Issue
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" which when finalized by the FASB, may affect IDS Life's
investment securities valuation policy.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent the costs of acquiring new
insurance and annuity business, principally direct sales commissions and other
distribution and underwriting costs that have been deferred on the sale of
annuity, life and health insurance products. These costs are deferred to the
extent they are recoverable from future
16
profits. For annuity and insurance products, DAC are amortized over periods
approximating the lives of the business, principally as a percentage of premiums
or estimated gross profits or as a portion of product interest margins depending
on the product's characteristics.
For IDS Life's annuity and life and health insurance products, the DAC balances
at any reporting date are supported by projections that show management expects
there to be adequate premiums, estimated gross profits or interest margins after
that date to amortize the remaining DAC balances. These projections are
inherently uncertain because they require management to make assumptions about
financial markets, anticipated mortality and morbidity levels, and policyholder
behavior over periods extending well into the future. Projection periods used
for IDS Life's annuity business are typically 10 to 25 years, while projection
periods for IDS Life's life and health insurance products are often 50 years or
longer. Management regularly monitors financial market conditions and actual
policyholder behavior experience and compares them to its assumptions. For
annuity and universal life insurance products, the assumptions made in
projecting future results and calculating the DAC balance and DAC amortization
expense are management's best estimates. Management is required to update these
assumptions whenever it appears that, based on actual experience or other
evidence, earlier estimates should be revised. When assumptions are changed, the
percentage of estimated gross profits or portion of interest margins used to
amortize DAC might also change. A change in the required amortization percentage
is applied retrospectively; an increase in amortization percentage will result
in a decrease in DAC balance and an increase in DAC amortization expense while a
decrease in amortization percentage will result in an increase in DAC balance
and a decrease in DAC amortization expense. The impact on results of operations
of changing assumptions can be either positive or negative in any particular
period and is reflected in the period in which such changes are made.
For other life and health insurance products, the assumptions made in
calculating the DAC balance and DAC amortization expense are intended to provide
for adverse deviations in experience and are revised only if management
concludes experience will be so adverse that DAC is not recoverable. If
management concludes that DAC is not recoverable, DAC is reduced to the amount
that is recoverable based on best estimate assumptions.
For annuity and life and health insurance products, key assumptions underlying
these long-term projections include interest rates (both earning rates on
invested assets and rates credited to policyholder accounts), equity market
performance, mortality and morbidity rates and the rates at which policyholders
are expected to surrender their contracts, make withdrawals from their contracts
and make additional deposits to their contracts. Assumptions about interest
rates drive projected interest margins, while assumptions about rates credited
to policyholder accounts and equity market performance drive projected customer
asset value growth rates and assumptions about surrenders, withdrawals and
deposits comprise projected persistency rates. Management must also make
assumptions to project maintenance expenses associated with servicing its
annuity and insurance business during the DAC amortization period.
The customer asset value growth rate is the rate at which contract values are
assumed to appreciate in the future. The rate is net of asset fees and
anticipates a blend of equity and fixed income investments. Management reviews
and, where appropriate, adjusts its assumptions with respect to customer asset
value growth rates on a quarterly basis. IDS Life uses a mean reversion method
as a monthly guideline in setting near-term customer asset value growth rates
based on a long-term view of financial market performance as well as actual
historical performance. In periods when market performance results in actual
contract value growth at a rate that is different than that assumed, IDS Life
will reassess the near-term rate in order to continue to project its best
estimate of long-term growth. The near-term growth rate is reviewed to ensure
consistency with management's assessment of anticipated equity market
performance. Management is currently assuming a 7 percent long-term customer
asset value growth rate. If IDS Life increased or decreased its assumption
related to this growth rate by 100 basis points, the impact on the DAC
amortization expense would be a decrease or increase of approximately $50
million pretax.
Management monitors other principal DAC assumptions, such as persistency,
mortality, morbidity, interest margin and maintenance expense levels each
quarter and, when assessed independently, could impact IDS Life's DAC balances.
For example, if IDS Life increased or decreased its interest margin on its
universal life and on the fixed
17
portion of its variable universal life insurance products by 10 basis points,
the impact on the DAC amortization expense would be a decrease or increase of
approximately $5 million pretax. Additionally, if IDS Life extended or reduced
the amortization periods one year for variable annuities to reflect changes in
premium paying persistency and/or surrender assumptions, the impact on DAC
amortization expense would be a decrease or increase of approximately $20
million. The amortization impact of extending or reducing the amortization
period any additional years is not linear.
The analysis of DAC balances and the corresponding amortization is a dynamic
process that considers all relevant factors and assumptions discussed above.
Unless management identifies a material deviation over the course of the
quarterly monitoring, management reviews and updates these DAC assumptions
annually in the third quarter of each year. An assessment of sensitivity
associated with changes in any single assumption would not necessarily be an
indicator of future results.
Liabilities for Future Policy Benefits
Fixed Annuities and Variable Annuity Guarantees
Liabilities for fixed and variable deferred annuities are equal to accumulation
values which are the cumulative gross deposits, credited interest and fund
performance less withdrawals and mortality and expense risk charges.
The majority of the variable annuity contracts offered by IDS Life contain
guaranteed minimum death benefit (GMDB) provisions. When market values of the
customer's accounts decline, the death benefit payable on a contract with a GMDB
may exceed the contract accumulation value. IDS Life also offers variable
annuities with death benefit provisions that gross up the amount payable by a
certain percentage of contract earnings; these are referred to as gain gross-up
(GGU) benefits. In addition, IDS Life offers contracts containing guaranteed
minimum income benefit (GMIB) and guaranteed minimum withdrawal benefit (GMWB)
provisions.
Effective January 1, 2004, liabilities for variable annuity death and GMIB
benefits have been established under SOP 03-1. Actuarial models to simulate
various equity market scenarios are used to project these benefits and contract
assessments and include making significant assumptions related to customer asset
value growth rates, mortality, persistency and investment margins. These
assumptions, as well as their periodic review by management, are consistent with
those used for DAC purposes. Prior to the adoption of SOP 03-1, amounts paid in
excess of contract value were expensed. See "Application of Recent Accounting
Standards" section in Note 1 of the Consolidated Financial Statements regarding
the impact of the adoption of SOP 03-1.
Liabilities for equity indexed deferred annuities issued in 1999 or later are
equal to the accumulation of host contract values covering guaranteed benefits
and the market value of embedded equity options. Liabilities for equity indexed
deferred annuities issued before 1999 are equal to the present value of
guaranteed benefits and the intrinsic value of index-based benefits.
Liabilities for fixed annuities in a benefit or payout status are based on
future estimated payments using established industry mortality tables and
interest rates, ranging from 4.6% to 9.5% at December 31, 2004, depending on
year of issue, with an average rate of approximately 6.1% at December 31, 2004.
Life and Disability Policies
Liabilities for life insurance claims that have been reported but have not yet
been paid (unpaid claim liabilities) are equal to the death benefits payable
under the policies. For disability income and long-term care claims, unpaid
claim liabilities are equal to benefit amounts due and accrued including the
expense of reviewing claims and making benefit payment determinations.
Liabilities for claims that have occurred but have not been reported are
estimated based on periodic analysis of the actual lag between when a claim
occurs and when it is reported. Where applicable, amounts recoverable from other
insurers who share in the risk of the products offered (reinsurers) are
separately recorded as receivables.
18
Liabilities for fixed and variable universal life insurance are equal to
accumulation values which are the cumulative gross premiums, credited interest,
and fund performance less withdrawals and mortality and expense risk charges.
Liabilities for future benefits on term and whole life insurance are based on
the net level premium method, using anticipated premium payments, mortality
rates, policy persistency and interest rates earned on the assets supporting the
liability. Anticipated mortality rates are based on established industry
mortality tables, with modifications based on Company experience. Anticipated
policy premium payments and persistency rates vary by policy form, issue age and
policy duration. Anticipated interest rates range from 4% to 10% at December 31,
2004, depending on policy form, issue year and policy duration.
Liabilities for future disability income and long-term care policy benefits
include both policy reserves and claim reserves. Policy reserves are the amounts
needed to meet obligations for future claims and are based on the net level
premium method, using anticipated premium payments and morbidity, mortality,
policy persistency and discount rates. Anticipated morbidity and mortality rates
are based on established industry morbidity and mortality tables. Anticipated
policy persistency rates vary by policy form, issue age, policy duration and,
for disability income policies, occupation class. Anticipated discount rates for
disability income policy reserves at December 31, 2004 are 7.5% at policy issue
and grade to 5% over 5 years. Anticipated discount rates for long-term care
policy reserves at December 31, 2004 were 5.9% grading up to 8.9% over 30 years.
Claim reserves are the amounts needed to meet obligations for continuing claim
payments on already incurred claims. Claim reserves are calculated based on
claim continuance tables which estimate the likelihood that an individual will
continue to be eligible for benefits and anticipated interest rates earned on
assets supporting the reserves. Anticipated claim continuance rates are based on
established industry tables. Anticipated discount rates for claim reserves for
both disability income and long-term care range from 3% to 8% at December 31,
2004, with an average rate of approximately 5.2% at December 31, 2004. IDS Life
issues only non-participating life insurance policies, which do not pay
dividends to policyholders from the insurers' earnings.
Liquidity and Capital Resources
Capital Strategy
The liquidity requirements of IDS Life are generally met by funds provided by
deposits, premiums, investment income, proceeds from sales of investments as
well as maturities and periodic repayments of investments and capital
contributions from AEFC. The primary uses of funds are policy benefits,
commissions, other product-related acquisition and sales inducement costs,
operating expenses, policy loans, dividends to AEFC and investment purchases.
IDS Life routinely reviews its sources and uses of funds in order to meet its
ongoing obligations. During the second and fourth quarter of 2004, IDS Life
approved and paid dividends to AEFC of $430 million and $500 million,
respectively. IDS Life expects to continue to maintain adequate capital to meet
internal and external Risk-Based Capital requirements.
Funding Strategy
IDS Life, on a consolidated basis, has available lines of credit with AEFC
aggregating $295 million ($195 million committed and $100 million uncommitted).
There were no line of credit borrowings outstanding with AEFC at December 31,
2004 and 2003. At December 31, 2004 and 2003, IDS Life had outstanding reverse
repurchase agreements totaling $47 million and $67.5 million, respectively. Both
the line of credit and the reverse repurchase agreements are used strictly as
short-term sources of funds.
IDS Life's total assets and liabilities increased in 2004 primarily due to
higher investments, client contract reserves and separate account assets and
liabilities, which increased as a result of new client inflows and market
appreciation. Investments primarily include corporate debt and mortgage and
other asset-backed securities. IDS Life's corporate debt securities comprise a
diverse portfolio with the largest concentrations, accounting for approximately
66 percent of the portfolio, in the following industries: banking and finance,
utilities, and communications and media. Investments also include $4.3 billion
and $4.6 billion of mortgage loans on real estate, policy loans and other
19
investments at December 31, 2004 and 2003, respectively. Investments are
principally funded by sales of insurance and annuities and by reinvested income.
Maturities of these investment securities are largely matched with the expected
future payments of insurance and annuity obligations.
Investments include $2.2 billion and $2.4 billion of below investment grade
securities (excluding net unrealized appreciation and depreciation) at December
31, 2004 and 2003, respectively. These investments represent 8 percent and 9
percent of IDS Life's investment portfolio at December 31, 2004 and 2003,
respectively.
Separate account assets represent funds held for the exclusive benefit of
variable annuity contractholders and variable life insurance policyholders.
These assets are generally carried at market value, and separate account
liabilities are equal to separate account assets. IDS Life earns fees from the
related accounts.
Off-Balance Sheet Arrangements and Contractual Obligations
IDS Life has identified arrangements, obligations and other relationships that
may have a material current or future effect on its financial condition, changes
in financial condition, results of operations or liquidity and capital
resources.
Contractual Obligations
The contractual obligations identified in the table below include on-balance
sheet transactions that represent material expected or contractually committed
future obligations of IDS Life.
Payments due by year
- ---------------------------------------------------------------------------------------------------------------------------------
2006- 2008- 2010 and
(Millions) Total 2005 2007 2009 thereafter
- ---------------------------------------------------------------------------------------------------------------------------------
Insurance and annuities (1) $ 54,755 $ 3,366 $ 7,036 $ 6,937 $ 37,416
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 54,755 $ 3,366 $ 7,036 $ 6,937 $ 37,416
- ---------------------------------------------------------------------------------------------------------------------------------
(1) These scheduled payments are represented by reserves of $32.9 billion at
December 31, 2004 and are based on interest credited, mortality, morbidity,
lapse, surrender and premium payment assumptions. Actual payment obligations
may differ if experience varies from these assumptions. Separate account
liabilities have been excluded as associated contractual obligations would
be met by separate account assets.
IDS Life has off-balance sheet arrangements that include retained interests in
assets transferred to unconsolidated entities as more fully described below.
Consolidated Variable Interest Entities
Assets consolidated as a result of the December 31, 2003 adoption of FIN 46 were
$907 million. The newly consolidated assets consisted of $834 million of cash
and $73 million of derivatives, essentially all of which are restricted. The
effect of consolidating these assets on IDS Life's balance sheet was offset by
IDS Life's previously recorded carrying values of its investment in such
structures, which totaled $673 million, and $166 million of newly consolidated
liabilities.
The consolidation of FIN 46-related entities resulted in a cumulative effect of
accounting change that increased 2003 net income through a non-cash gain of
$44.5 million ($68.4 million pretax) related to the consolidation of the three
SLTs. One of the three SLTs originally consolidated was liquidated in 2004 and
the other two are in the process of being liquidated as of December 31, 2004.
The initial gain related to the application of FIN 46 for the SLTs had no cash
flow effect on IDS Life. The expected impact related to the liquidation of the
two remaining SLTs is a $4 million non-cash charge and has been included in the
2004 results of operations. However, further adjustments to that amount could
occur based on market movements and execution of the liquidation process. To the
extent further adjustments are incurred in the liquidation of the remaining SLT
portfolios, IDS Life's maximum cumulative exposure to pretax loss is represented
by the pretax net assets, which is $462 million at December 31, 2004.
20
Retained Interest in Assets Transferred to Unconsolidated Entities
As of December 31, 2004, IDS Life continued to hold investments in CDOs, some of
which are also managed by an affiliate, and were not consolidated pursuant to
the adoption of FIN 46 as IDS Life was not considered the primary beneficiary.
IDS Life invested in CDOs as part of its investment strategy in order to offer a
competitive rate to contractholders' accounts. IDS Life's exposure as an
investor is limited solely to its aggregate investment in the CDOs, and it has
no obligations or commitments, contingent or otherwise, that could require any
further funding of such investments. As of December 31, 2004, the carrying
values of the CDO residual tranches, managed by an affiliate, were $4.5 million.
IDS Life also has an interest in a CDO securitization with a carrying value of
$526.2 million of which $389.9 million is considered investment grade. CDOs are
illiquid investments. As an investor in the residual tranche of CDOs, IDS Life's
return correlates to the performance of portfolios of high-yield bonds and/or
bank loans comprising the CDOs.
The carrying value of the CDOs, as well as derivatives recorded on the balance
sheet as a result of consolidating the two SLTs, which are in the process of
being liquidated, and IDS Life's projected return are based on discounted cash
flow projections that require a significant degree of management judgment as to
assumptions primarily related to default and recovery rates of the high-yield
bonds and/or bank loans either held directly by the CDOs or in the reference
portfolio of the SLTs and, as such, are subject to change. Although the exposure
associated with IDS Life's investment in CDOs is limited to the carrying value
of such investments, the CDOs have significant volatility associated with them
because the amount of the initial value of the loans and/or other debt
obligations in the related portfolios is significantly greater than IDS Life's
exposure. In the event of significant deterioration of a portfolio, the relevant
CDO may be subject to early liquidation, which could result in further
deterioration of the investment return or, in severe cases, loss of the CDO
carrying amount. The derivatives recorded as a result of consolidating and now
liquidating certain SLTs under FIN 46 are primarily valued based on the expected
gains and losses from liquidating a reference portfolio of high-yield loans. As
previously mentioned, the exposure to loss related to these derivatives is
represented by the pretax net assets of the SLTs, which is $462 million at
December 31, 2004. Deterioration in the value of the reference portfolio would
likely result in deterioration of the consolidated derivative value. See Note 3
to the Consolidated Financial Statements for further discussion regarding the
consolidated SLTs.
Contingent Liquidity Planning
AEFC has developed a contingent funding plan that enables IDS Life to meet daily
customer obligations during periods in which its customers elect to withdraw
funds from their annuity and insurance contracts. This plan is designed to
ensure that IDS Life could meet these customer withdrawals by selling or
obtaining financing, through reverse repurchase agreements, of portions of its
investment securities portfolio.
Risk Management
IDS Life and its subsidiaries through their respective Board of Directors'
investment committees or staff functions, review models projecting different
interest rate scenarios, risk/return measures, and their effect on
profitability. They also review the distribution of assets in the portfolio by
type and credit risk sector. The objective is to structure the investment
security portfolios based upon the type and behavior of the liabilities
underlying the products, portfolios to achieve targeted levels of profitability
within defined risk parameters and to meet contractual obligations.
IDS Life has developed an asset/liability management approach with separate
investment objectives to support specific product liabilities, such as insurance
and annuity. As part of this approach, IDS Life develops specific investment
guidelines outlining the minimum required investment return and liquidity
requirements to support future benefit payments under its insurance and annuity
obligations. These same objectives must be consistent with management's overall
investment objectives for the general account investment portfolio.
IDS Life's owned investment securities are primarily invested in long-term and
intermediate-term fixed maturity securities to provide clients with a
competitive rate of return on their investments while controlling risk.
Investment in fixed maturity securities is designed to provide IDS Life with a
targeted margin between the yield earned on
21
investments and the interest rate credited to clients' accounts. IDS Life does
not trade in securities to generate short-term profits for its own account.
As part of IDS Life's investment process, management, with the assistance of its
investment advisors, conducts a quarterly review of investment performance. The
review process conducted by IDS Life's Investment Committee involves the review
of certain invested assets which the committee evaluates to determine whether or
not any investments are other than temporarily impaired and/or which specific
interest earning investments should be put on an interest non-accrual basis.
Interest Rate Risk
At IDS Life, interest rate exposures arise primarily within the fixed account
portion of its annuity and insurance products. Rates credited to customers'
accounts generally reset at shorter intervals than the yield on underlying
investments. Therefore, IDS Life's interest spread margins are affected by
changes in the general level of interest rates. The extent to which the level of
interest rates affects spread margins is managed primarily by a combination of
modifying the maturity structure of the investment portfolio and entering into
interest rate swaptions or other derivative instruments that effectively
lengthen the rate reset interval on customer liabilities. IDS Life has entered
into interest rate swaptions with notional amounts totaling $1.2 billion to
hedge the impact of increasing interest rates on forecasted fixed annuity sales.
The negative effect on IDS Life's pretax earnings of a 100 basis point increase
in interest rates, which assumes repricings and customer behavior based on the
application of proprietary models, to the book of business at December 31, 2004
and December 31, 2003 would be approximately $15.4 million and $19.6 million,
respectively.
Equity Market Risk
IDS Life has two primary exposures to the general level of equity markets. One
exposure is that IDS Life earns fees from variable annuity and variable life
insurance products. The amount of such fees is generally based on the value of
the portfolios, and thus is subject to fluctuation with the general level of
equity market values. To reduce the sensitivity of IDS Life's fee revenues to
the general performance of equity markets, IDS Life has from time to time
entered into various combinations of financial instruments that mitigate the
negative effect on fees that would result from a decline in the equity markets.
The second exposure is that IDS Life writes and purchases index options to
manage the margin related to certain annuity products that pay interest based
upon the relative change in a major stock market index between the beginning and
end of the annuity product's term. At December 31, 2004, equity-based
derivatives with a net notional amount of $260.8 million were outstanding to
hedge the margin related to certain annuity products that pay interest based
upon the relative change in a major stock market index.
The negative effect on IDS Life's pretax earnings of a 10 percent decline in
equity markets would be approximately $36.3 million and $39.3 million based on
annuity and insurance business inforce and equity index options as of December
31, 2004 and 2003, respectively.
Impact of Market-Volatility on Results of Operations
As discussed above, various aspects of IDS Life's business are impacted by
equity market levels and other market-based events. Several areas in particular
involve DAC and deferred sales inducements, recognition of guaranteed minimum
death benefits (GMDB) and certain other variable annuity benefits, asset
management fees and structured investments. The direction and magnitude of the
changes in equity markets can increase or decrease amortization of DAC and
deferred sales inducement benefits, incurred amounts under GMDB and other
variable annuity benefit provisions and asset management fees and
correspondingly affect results of operations in any particular period.
Similarly, the value of IDS Life's structured investment portfolios are impacted
by various market factors. Persistency of, or increases in, bond and loan
default rates, among other factors, could result in negative adjustments to the
market values of these investments in the future, which would adversely impact
results of operations.
22
Forward-Looking Statements
This report includes forward-looking statements, which are subject to risks and
uncertainties. The words "believe," "expect," "anticipate," "optimistic,"
"intend," "plan," "aim," "will," "may," "should," "could," "would," "likely,"
and similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which they are made. IDS Life
undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to: fluctuation in the
equity and fixed income markets, which can affect the amount and types of
investment products sold by IDS Life, and other fees received based on the value
of those assets; IDS Life's ability to recover Deferred Policy Acquisition Costs
(DAC), as well as the timing of such DAC amortization, in connection with the
sale of annuity and insurance products; changes in assumptions relating to DAC,
which could impact the amount of DAC amortization; the ability to improve
investment performance in IDS Life's businesses, including attracting and
retaining high-quality personnel; the success, timeliness and financial impact,
including costs, cost savings and other benefits including increased revenues,
of reengineering initiatives being implemented or considered by IDS Life,
including cost management, structural and strategic measures such as vendor,
process, facilities and operations consolidation, outsourcing (including, among
others, technologies operations), relocating certain functions to lower-cost
overseas locations, moving internal and external functions to the Internet to
save costs, and planned staff reductions relating to certain of such
reengineering actions; the ability to control and manage operating,
infrastructure, advertising and promotion and other expenses as business expands
or changes, including balancing the need for longer-term investment spending;
the potential negative effect on IDS Life's businesses and infrastructure,
including information technology, of terrorist attacks, disasters or other
catastrophic events in the future; IDS Life's ability to develop and roll out
new and attractive products to clients in a timely manner; successfully
cross-selling insurance and annuity products and services to AEFC's customer
base; fluctuations in interest rates, which impacts IDS Life's spreads in the
insurance and annuity businesses; credit trends and the rate of bankruptcies
which can affect returns on IDS Life's investment portfolios; lower than
anticipated spreads in the insurance and annuity business; the types and the
value of certain death benefit features on variable annuity contracts; the
affect of assessments and other surcharges for guaranty funds; the response of
reinsurance companies under reinsurance contracts; the impact of reinsurance
rates and the availability and adequacy of reinsurance to protect IDS Life
against losses; negative changes in IDS Life Insurance Company's and its four
life insurance company subsidiaries' credit ratings; increasing competition in
all of IDS Life's insurance and annuity business; the adoption of recently
issued rules related to the consolidation of variable interest entities,
including those involving SLTs that IDS Life invests in which could affect both
IDS Life's financial condition and results of operations; changes in laws or
government regulations; outcomes associated with litigation and compliance and
regulatory matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Items required under this section are included in the management's discussion
and analysis of financial condition and results of operations under the section
risk management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. Financial Statements.
See Index to Financial Statements at page F-1 hereof.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
IDS Life's management, with the participation of IDS Life's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of IDS
Life's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period covered by this report. Based
on such evaluation, IDS Life's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, IDS Life's disclosure
controls and procedures are effective. There have not been any changes in IDS
Life's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during IDS Life's fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, IDS Life's internal control over financial reporting.
PART III
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express Company has
appointed Ernst & Young LLP (Ernst & Young) as independent auditors to audit the
Consolidated Financial Statements of IDS Life for the years ended December 31,
2004 and 2005.
Fees Paid to the Registrant's Independent Auditor
The following table presents fees for professional services rendered by Ernst &
Young, LLP for the audit of IDS Life's financial statements for the years ended
December 31, 2004 and 2003 and other fees billed for other services rendered by
Ernst & Young, LLP during those periods.
(thousands) 2004 2003
- --------------------------------------------------------------------------------
Audit (1) $ 1,434 $ 1,894
Tax (2) - -
All Other (3) - -
- --------------------------------------------------------------------------------
Total $ 1,434 $ 1,894
================================================================================
(1) Audit fees include audit work performed in the review and preparation of
the financial statements, as well as, services that generally only the
independent auditor can be expected to provide, such as comfort letters,
statutory audits, attest services, consents and assistance with and review
of documents filed with the Securities and Exchange Commission.
(2) Tax fees included all services performed by the independent auditor's tax
personnel.
(3) All other fees included miscellaneous out-of-pocket expenses.
Policy on Pre-Approval of Services Provided by Independent Auditor
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the
engagement of Ernst & Young are subject to the specific pre-approval of the
Audit Committee of American Express Company. All audit and permitted non-audit
services to be performed by Ernst & Young for IDS Life required pre-approval by
the Audit Committee of American Express Company in accordance with pre-approval
procedures established by the Audit Committee of American Express Company. The
procedures require all proposed engagements of Ernst & Young for services to IDS
Life of any kind to be directed to the General Auditor of American Express
Company and then submitted for approval to the Audit Committee of American
Express Company prior to the beginning of any services.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Financial Statements and Financial Statement Schedules on
page F-1 hereof.
(2) Financial Statement Schedules
See Index to Financial Statements and Financial Statement Schedules on
page F-1 hereof.
All information on schedules to the Consolidated Financial Statements
required by Rule 7-05 in Article 7 of Regulation S-X is included in the
Consolidated Financial Statements or is not required. Therefore, all
schedules have been omitted.
(3) Exhibits
See Exhibit Index on pages E-1 through E-3 hereof.
(b) Reports on Form 8-K.
Form 8-K, filed November 24, 2004 (as amended by form 8-K/A
filed on December 9, 2004), items 4.01 and 9.01, reporting on
IDS Life Insurance Company's decision to dismiss the firm of
Ernst & Young LLP as IDS Life Insurance Company's independent
registered public accountants and approve the future
engagement of PricewaterhouseCoopers LLP as IDS Life Insurance
Company's independent registered public accountants for the
fiscal year ending December 31, 2005.
In addition, IDS Life Insurance Company filed a Form 8-K on
February 24, 2005, item 4.01, reporting on the American
Express Company's spin-off of AEFC. In view of the spin-off,
the Audit Committee of the Board of Directors of American
Express Company determined to hire Ernst & Young LLP to be the
independent registered public accountants for AEFC and its
subsidiaries, including IDS Life Insurance Company, for the
2005 audit.
25
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 14, 2005 By /s/ Mark E. Schwarzmann
- -------------- ----------------------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and Chief
Executive Officer
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 14, 2005 By /s/ Gumer C. Alvero
- -------------- ----------------------------------------
Date Gumer C. Alvero, Director and
Executive Vice President - Annuities
March 14, 2005 By /s/ Timothy V. Bechtold
- -------------- ----------------------------------------
Date Timothy V. Bechtold, Director and
President
March 14, 2005 By /s/ Arthur H. Berman
- -------------- ----------------------------------------
Date Arthur H. Berman, Director and
Executive Vice President - Finance
and Chief Financial Officer
March 14, 2005 By /s/ David K. Stewart
- -------------- ----------------------------------------
Date David K. Stewart, Vice President and
Controller
March 14, 2005 By /s/ Roger Natarajan
- -------------- ----------------------------------------
Date Roger Natarajan, Director
March 14, 2005 By /s/ Mark E. Schwarzmann
- -------------- ----------------------------------------
Date Mark E. Schwarzmann, Director,
Chairman of the Board and Chief
Executive Officer
26
IDS LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Item 14 (a))
Page Number
Consolidated Financial Statements:
Report of Management F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets at December 31, 2004 and 2003 F-4 to F-5
Consolidated Statements of Income for each of the three
years ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 2004, 2003 and 2002 F-7 to F-8
Consolidated Statements of Stockholder's Equity for each of
the three years ended December 31, 2004, 2003 and 2002 F-9 to F-11
Notes to Consolidated Financial Statements F-12 to F-37
Schedules:
All information on schedules to the Consolidated Financial Statements required
by Rule 7-05 in Article 7 of Regulation S-X is included in the Consolidated
Financial Statements and notes thereto or is not required. Therefore, all
schedules have been omitted.
F-1
Report of Management
The management of IDS Life Insurance Company is responsible for the preparation
and fair presentation of its Consolidated Financial Statements, which have been
prepared in conformity with U.S. generally accepted accounting principles, and
include amounts based on the best judgment of management. IDS Life Insurance
Company's management is also responsible for the accuracy and consistency of
other financial information included in this annual report.
In recognition of its responsibility for the integrity and objectivity of data
in the financial statements, IDS Life Insurance Company maintains a system of
internal control over financial reporting which is designed to provide
reasonable, but not absolute, assurance with respect to the reliability of IDS
Life Insurance Company's financial statements. The concept of reasonable
assurance is based on the notion that the cost of the internal control system
should not exceed the benefits derived.
The internal control system is founded on an ethical climate and includes: (i)
an organizational structure with clearly defined lines of responsibility,
policies and procedures; (ii) a Code of Conduct; and (iii) a careful selection
and training of employees. Internal auditors monitor and assess the
effectiveness of the internal control system and report their findings to
management and the Board of Directors throughout the year. IDS Life Insurance
Company's independent auditors are engaged to express an opinion on the year-end
financial statements and, with the coordinated support of the internal auditors,
review the financial records and related data and test the internal control
system over financial reporting to the extent they believed necessary to support
their report.
F-2
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003, 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, 2004. These financial statements are the
responsibility of IDS Life Insurance Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but n