-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UI5tlD+HF9Cxdwp8/8z1lyWDHb+ugZY+fku4Ex4ilFOfa56lqz8mCJN5LXxJSIXX WjeIcZAUADARkGZLZ5gtCQ== 0000820027-01-500052.txt : 20010402 0000820027-01-500052.hdr.sgml : 20010402 ACCESSION NUMBER: 0000820027-01-500052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDS LIFE INSURANCE CO CENTRAL INDEX KEY: 0000727892 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 410823832 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-28976 FILM NUMBER: 1587023 BUSINESS ADDRESS: STREET 1: IDS TOWER 10 STREET 2: T33/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6126713288 MAIL ADDRESS: STREET 1: IDS TOWER 10 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 FORMER COMPANY: FORMER CONFORMED NAME: IDS LIFE INSURANCE CO /MN DATE OF NAME CHANGE: 19920703 10-K 1 ids10k01.txt IDS LIFE INSURANCE COMPANY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 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 (Exact name of registrant as specified in its charter) MINNESOTA 41-0823832 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) IDS TOWER 10, MINNEAPOLIS, MINNESOTA 55440-0534 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (612) 671-3131 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] 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 PERMITTED ABBREVIATED NARRATIVE DISCLOSURE. PART I ITEM 1. BUSINESS IDS Life Insurance Company (the Company) is a stock life insurance company organized under the laws of the State of Minnesota. The Company is a wholly owned subsidiary of American Express Financial Corporation (AEFC), which is a wholly owned subsidiary of American Express Company. The Company serves residents of all states except New York. The Company is the fourteenth largest life insurance company in the United States, with consolidated assets at December 31, 2000 of $60.4 billion. IDS Life Insurance Company of New York and American Centurion Life Assurance Company are wholly owned subsidiaries of the Company and serve New York State residents. The Company also wholly owns American Enterprise Life Insurance Company, American Partners Life Insurance Company and American Express Corporation. The Company's principal products are deferred annuities and universal life insurance, which are issued primarily to individuals. It offers single premium and flexible premium deferred annuities on both a fixed and variable dollar basis. Immediate annuities are offered as well. The Company's insurance products include universal life (fixed and variable), whole life, single premium life and term products (including waiver of premium and accidental death benefits). The Company also markets disability income and long-term care insurance. The Company's fixed annuity contracts guarantee a minimum interest rate during the accumulation period (the time before annuity payments begin), although the Company has the option of paying a higher rate reflective of current market rates. The Company has also adopted a practice whereby the higher current rate is guaranteed for a specified period. The Company also offers fixed/variable annuity products offering the purchaser a choice among mutual funds with portfolios of equities, bonds, managed assets and/or short-term securities, and the Company's general account, as the underlying investment vehicles. With respect to funds applied to the variable portion of the annuity, the purchaser, rather than the Company, assumes the investment risks and receives the rewards inherent in the ownership of the underlying investments. At December 31, 2000, the Company had $48.2 billion of fixed and variable annuities in force, a decrease of 8 percent from the prior year end. The Company's principal insurance product is the flexible-premium, adjustable-benefit universal life insurance policy. In this type of insurance policy, premium payments either accumulate interest in a fixed account or purchase units in one or more variable accounts. The policyholder has access to the cash surrender value in whole or in part after the first year. The size of the cash value of the fund can also be controlled by the policyholder by increasing or decreasing premiums, subject only to maintaining a required minimum to keep the policy in force. Monthly deductions from the cash value of the policy are made for the cost of insurance, expense charges and any policy riders. At December 31, 2000, the Company had $79.1 billion of fixed and variable universal life-type insurance in force, up 11 percent from December 31, 1999. Assets held in separate accounts which fund the variable annuity and variable life insurance products totaled $32.3 billion at December 31, 2000, a 10 percent decrease from December 31, 1999. IDS Life Insurance Company, American Enterprise Life Insurance Company and American Partners Life Insurance Company are subject to comprehensive regulation by the Minnesota Department of Commerce (Insurance Division), the Indiana Department of Insurance and the Arizona Department of Insurance, respectively. IDS Life Insurance Company of New York and American Centurion Life Assurance Company are both subject to comprehensive regulation by the New York Department of Insurance. The laws of the other states in which the Company does business regulate such matters as the licensing of sales personnel and, in some cases, the marketing and contents of insurance policies and annuity contracts. The purpose of such regulation and supervision is primarily to protect the interests of policyholders. Recently there has been an increased focus on the variable annuity business by regulators. In the United States, the McCarran-Ferguson Act provides that the primary regulation of the insurance industry is left to the individual states. Typically, states regulate such matters as company licensing, agent licensing, cancellation or nonrenewal of policies, minimum health insurance policy benefits, life insurance cost disclosure, solicitation and replacement practices, unfair trade and claims practices, rates, forms, advertising, investment type and quality, minimum capital and surplus levels and changes in control. Virtually all states mandate participation in insurance guaranty associations, which assess insurance companies in order to fund claims of policyholders of insolvent insurance companies. In addition to state laws, the Company is affected by a variety of federal laws, and there is periodic federal interest in various aspects of the insurance industry including taxation of variable annuities and life insurance policies, solvency and accounting procedures, as well as the treatment of persons differently because of gender, with respect to terms, conditions, rates or benefits of an insurance contract. New federal regulation in any of these areas could potentially have an adverse effect upon the Company. As a distributor of variable contracts, the Company is registered as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. As the investment manager for various investment companies, the Company is registered as an investment advisor under applicable federal requirements. The insurance and annuity business is highly competitive and the Company's competitors consist of both stock and mutual insurance companies and other financial institutions. Competitive factors applicable to the business of the Company include the interest rates credited to its products, the charges deducted from the cash values of such products, the financial strength of the organization and the services provided to policyholders. ITEM 2. PROPERTIES The Company occupies office space in Minneapolis, Minnesota, which is leased by its parent, AEFC. The Company reimburses AEFC for rent based on direct and indirect allocation methods. IDS Life Insurance Company of New York and American Centurion Life Assurance Company rent office space in Albany, New York. Facilities occupied by the Company and its subsidiaries are believed to be adequate for the purposes for which they are used and are well maintained. ITEM 3. LEGAL PROCEEDINGS A number of lawsuits have been filed against life and health insurers in jurisdictions in which IDS Life and AEFC do business involving insurers' sales practices, alleged agent misconduct, failure to properly supervise agents and other matters. IDS Life and AEFC, like other life and health insurers, from time to time are involved in such litigation. On December 13, 1996, an action entitled Lesa Benacquisto and Daniel Benacquisto v. IDS Life Insurance Company and American Express Financial Corporation was commenced in Minnesota state court. The action is brought by individuals who replaced an existing IDS Life insurance policy with a new IDS Life policy. The plaintiffs purport to represent a class consisting of all persons who replaced existing IDS Life policies with new IDS Life policies from and after January 1, 1985. The complaint puts at issue various alleged sales practices and misrepresentations, alleged breaches of fiduciary duties and alleged violations of consumer fraud statutes. Plaintiffs seek damages in an unspecified amount and also seek to establish a claims resolution facility for the determination of individual issues. IDS Life and AEFC filed an answer to the complaint on February 18, 1997, denying the allegations. A second action, entitled Arnold Mork, Isabella Mork, Ronald Melchert and Susan Melchert v. IDS Life Insurance Company and American Express Financial Corporation was commenced in the same court on March 21, 1997. In addition to claims that are included in the Benacquisto lawsuit, the second action includes an allegation of improper replacement of an existing IDS Life annuity contract. It seeks similar relief to the initial lawsuit. On October 13, 1998, an action entitled Richard W. and Elizabeth J. Thoresen v. American Express Financial Corporation, American Centurion Life Assurance Company, American Enterprise Life Insurance Company, American Partners Life Insurance Company, IDS Life Insurance Company and IDS Life Insurance Company of New York was also commenced in Minnesota state court. The action was brought by individuals who purchased an annuity in a qualified plan. They allege that the sale of annuities in tax-deferred contributory retirement investment plans (e.g., IRAs) is never appropriate. The plaintiffs purport to represent a class consisting of all persons who made similar purchases. The plaintiffs seek damages in an unspecified amount, including restitution of allegedly lost investment earnings and restoration of contract values. In January 2000, AEFC reached an agreement in principle to settle the three class-action lawsuits described above. It is expected the settlement will provide $215 million of benefits to more than two million participants and for release by class members of all insurance and annuity market conduct claims dating back to 1985. In August, 2000 an action entitled Lesa Benacquisto, Daniel Benacquisto, Richard Thoresen, Elizabeth Thoresen, Arnold Mork, Isabella Mork, Ronald Melchert and Susan Melchert v. American Express Financial Corporation, American Express Financial Advisors, American Centurion Life Assurance Company, American Enterprise Life Insurance Company, American Partners Life Insurance Company, IDS Life Insurance Company and IDS Life Insurance Company of New York was commenced in the United States District Court for the District of Minnesota. The complaint put at issue various alleged sales practices and misrepresentations and allegations of violations of federal laws. In September, 2000 the plaintiffs filed a consolidated complaint in State Court alleging the same claims as the previous actions. On October 2, 2000 the District Court, Fourth Judicial District for the State of Minnesota, County of Hennepin and the United States District Court for the District of Minnesota entered an order conditionally certifying a class for settlement purposes, preliminarily approving the class settlement, directing the issuance of a class notice to the class and scheduling a hearing to determine the fairness of settlement for March, 2001. On March 6, 2001 the District Court, Fourth Judicial District for the State of Minnesota, County of Hennepin and the United States District Court for the District of Minnesota heard oral arguments on plaintiffs' motions for final approval of the class action settlement. Six motions to intervene were filed together with objections to the proposed settlement. We are awaiting a final order from the court. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 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 CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2000 Compared to 1999: Consolidated net income decreased 8 percent to $586 million in 2000, compared to $636 million in 1999. The decrease resulted primarily from a decrease in net investment income. This reflects decreases in investments owned and decreased investment yields during 2000. Consolidated income before income taxes totaled $807 million in 2000, compared with $904 million in 1999. Total premiums and investment contract deposits received increased to $6.9 billion in 2000, compared with $5.0 billion in 1999. This increase is primarily due to an increase in variable annuity deposits in 2000. Total revenues decreased to $3.0 billion in 2000, compared with $3.1 billion in 1999. Decreases in net investment income and net realized gains (losses) on investments were partially offset by increases in insurance premiums, policy and contractholder charges and management and other fees. Net investment income, the largest component of revenues, decreased by $189 million from the prior year, reflecting decreases in investments owned and investment yields. Policyholder and contractholder charges, which consist primarily of cost of insurance charges on universal life-type policies, increased 6 percent to $438 million in 2000, compared with $412 million in 1999. This increase reflects increased total life insurance in force, which grew 10 percent to $98 billion at December 31, 2000. Net realized loss on investments was $17 million in 2000, compared to a net realized gain of $27 million in 1999. The loss was primarily due to the loss on sales and writedowns of fixed maturity investments. Management and other fees increased 26 percent to $598 million in 2000, compared with $473 million in 1999. This is primarily due to an increase in separate account fees, which grew 25 percent to $543 million at December 31, 2000, due to market appreciation and sales. The Company provides investment management services for mutual funds used as investment options for variable annuities and variable life insurance. The Company also receives a mortality and expense risk fee from the separate accounts. Total benefits and expenses increased slightly to $2.2 billion in 2000. The largest component of expenses, interest credited to policyholder accounts for universal life-type insurance and investment contracts, decreased slightly to $1.2 billion, reflecting a decrease in fixed annuities in force. Amortization of deferred policy acquisition costs increased to $404 million, compared to $333 million in 1999. This increase was due primarily to the impact of changing prospective separate account investment performance assumptions. Other insurance and operating expenses increased slightly to $337 million in 2000, compared to $335 million in 1999. 1999 Compared to 1998: Consolidated net income increased 18 percent to $636 million in 1999, compared to $540 million in 1998. Earnings growth resulted primarily from increases in management fees and policyholder and contractholder charges. These increases reflect higher average insurance and annuities in force during 1999. Consolidated income before income taxes totaled $904 million in 1999, compared with $776 million in 1998. Total premiums and investment contract deposits received increased to $5.0 billion in 1999, compared with $4.4 billion in 1998. This increase is primarily due to an increase in variable annuity deposits in 1999. Total revenues increased to $3.1 billion in 1999, compared with $3.0 billion in 1998. The increase is primarily due to increased policyholder and contractholder charges and management fees. Net investment income, the largest component of revenues, decreased slightly from the prior year, reflecting decreases in investments owned and investment yields. Policyholder and contractholder charges, which consist primarily of cost of insurance charges on universal life-type policies, increased 7 percent to $412 million in 1999, compared with $384 million in 1998. This increase reflects increased total life insurance in force, which grew 10 percent to $89 billion at December 31, 1999. Net realized gain on investments increased to $27 million in 1999, compared to $7 million in 1998. The increase was primarily due to the sale of available for sale fixed maturity investments at a gain as well as a decrease in the allowance for mortgage loan losses based on management's regular evaluation of allowance adequacy. Management and other fees increased 18 percent to $473 million in 1999, compared with $401 million in 1998. This is primarily due to an increase in separate account assets, which grew 31 percent to $35.9 billion at December 31, 1999, due to market appreciation and sales. The Company provides investment management services for mutual funds used as investment options for variable annuities and variable life insurance. The Company also receives a mortality and expense risk fee from the separate accounts. Total benefits and expenses decreased slightly to $2.2 billion in 1999. The largest component of expenses, interest credited to policyholder accounts for universal life-type insurance and investment contracts, decreased to $1.2 billion, reflecting a decrease in fixed annuities in force. Amortization of deferred policy acquisition costs decreased to $333 million, compared to $383 million in 1998. This decrease was due primarily to the impact of changing prospective separate account investment performance assumptions. Other insurance and operating expenses increased 17 percent to $335 million in 1999, compared to $287 million in 1998. This increase is primarily a result of business growth and technology costs related to growth initiatives. Risk Management The sensitivity analysis of two different tests of market risk discussed below estimates the effects of hypothetical sudden and sustained changes in the applicable market conditions on the ensuing year's earnings based on year-end positions. The market changes, assumed to occur as of year-end, are a 100 basis point increase in market interest rates and a 10% decline in equity prices. Computations of the prospective effects of hypothetical interest rate and equity price changes are based on numerous assumptions, including relative levels of market interest rates and equity prices, as well as the levels of assets and liabilities. The hypothetical changes and assumptions will be different from what actually occurs in the future. Furthermore, the computations do not anticipate actions that may be taken by management if the hypothetical market changes actually occurred over time. As a result, actual earnings effects in the future will differ from those quantified below. The Company primarily invests in fixed income securities over a broad range of maturities for the purpose of providing fixed annuity clients with a competitive rate of return on their investments while minimizing risk, and to provide a dependable and targeted spread between the interest rate earned on investments and the interest rate credited to contractholders' accounts. The Company does not invest in securities to generate trading profits. The Company has an investment committee that holds regularly scheduled meetings and, when necessary, special meetings. At these meetings, the committee reviews models projecting different interest rate scenarios and their impact on profitability. The objective of the committee is to structure the investment security portfolio based upon the type and behavior of products in the liability portfolio so as to achieve targeted levels of profitability. Rates credited to contractholders' accounts are generally reset at shorter intervals than the maturity of underlying investments. Therefore, margins may be negatively impacted by increases in the general level of interest rates. Part of the committee's strategy includes the purchase of some types of derivatives, such as interest rate caps, swaps and floors, for hedging purposes. These derivatives protect margins by increasing investment returns if there is a sudden and severe rise in interest rates, thereby mitigating the impact of an increase in rates credited to contractholders' accounts. The negative effect on the Company'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, 2000, would be approximately $17 million. On a certain annuity product, the interest is credited to contractholders' accounts based upon the relative change in a major stock market index between the beginning and end of the product's term. As a means of hedging the Company's obligation under the provisions of this product, the committee's strategy is to purchase and write options on the major stock market index. The amount of the fee income the Company receives is based upon the daily market value of the separate account assets. As a result, the Company's fee income would be negatively impacted by a decline in the equity markets. Another part of the committee's strategy is to enter into index option collars (combination of puts and calls) for hedging purposes. These derivatives protect fee income by providing option income when there is a significant decline in the equity markets. The Company finances the cost of this protection through selling a portion of the upside potential from an increasing market through written options. The negative effect on the Company's pretax earnings of the 10% decline in equity prices would be approximately $45 million based on assets under management as of December 31, 2000. Liquidity and Capital Resources The liquidity requirements of the Company are met by funds provided by premiums, investment income, proceeds from sales of investments as well as maturities and periodic repayments of investment principal. The primary uses of funds are policy benefits, commissions and operating expenses, policy loans, dividends and investment purchases. The Company has available lines of credit with its parent aggregating $200 million ($100 million committed and $100 million uncommitted). The line of credit is used strictly as a short-term source of funds. Borrowings outstanding were $50,000 uncommitted at December 31, 2000. At December 31, 2000, outstanding reverse repurchase agreements totaled $30 million. At December 31, 2000, investments in fixed maturities comprised 79 percent of the Company's total invested assets. Of the fixed maturity portfolio, approximately 30 percent is invested in GNMA, FNMA and FHLMC mortgage-backed securities which are considered AAA/Aaa quality. At December 31, 2000, approximately 15 percent of the Company's investments in fixed maturities were below investment grade bonds. These investments may be subject to a higher degree of risk than the investment grade issues because of the borrower's generally greater sensitivity to adverse economic conditions, such as recession or increasing interest rates, and in certain instances, the lack of an active secondary market. Expected returns on below investment grade bonds reflect consideration of such factors. The Company has identified those fixed maturities for which a decline in fair value is determined to be other than temporary, and has written them down to fair value with a charge to earnings. In recent months, the industry-wide default rate on below-investment-grade bonds has increased significantly and this trend is expected to continue over the next several months and possibly beyond.* Additional investment security losses throughout the remainder of 2000 are likely but the amount of these losses is dependent on a number of factors and cannot be estimated at this time.* Management believes that there will not be a significant adverse impact on the Company's consolidated financial position.* * Statements in this discussion of the Company's liquidity and capital resources marked with an asterisk are forward-looking statements which are subject to risks and uncertainties. Important factors that could cause results to differ materially from these forward-looking statements include, among other things, changes in the ability of issuers of investment securities held by the Company to meet their debt obligations. At December 31, 2000, net unrealized depreciation on fixed maturities held to maturity included $124 million of gross unrealized appreciation and $116 million of gross unrealized depreciation. Net unrealized depreciation on fixed maturities available for sale included $188 million of gross unrealized appreciation and $719 million of gross unrealized depreciation. At December 31, 2000, the Company had an allowance for losses for mortgage loans totaling $11 million and for real estate investments totaling $nil. The economy and other factors have caused a number of insurance companies to go under regulatory supervision. This circumstance has resulted in assessments by state guaranty associations to cover losses to policyholders of insolvent or rehabilitated companies. Some assessments can be partially recovered through a reduction in future premium taxes in certain states. The Company established an asset for guaranty association assessments paid to those states allowing a reduction in future premium taxes over a reasonable period of time. The asset is being amortized as premium taxes are reduced. The Company has also estimated the potential effect of future assessments on the Company's financial position and results of operations and has established a reserve for such potential assessments. The Company has adopted Statement of Position 97-3 providing guidance when an insurer should recognize a liability for guaranty fund assessments. The SOP is effective for fiscal years beginning after December 15, 1998. Adoption did not have a material impact on the Company's results of operations or financial condition. In 2000, dividends paid to its parent were $410 million. The National Association of Insurance Commissioners has established risk-based capital standards to determine the capital requirements of a life insurance company based upon the risks inherent in its operations. These standards require the computation of a risk-based capital amount which is then compared to a company's actual total adjusted capital. The computation involves applying factors to various statutory financial data to address four primary risks: asset default, adverse insurance experience, interest rate risk and external events. These standards provide for regulatory attention when the percentage of total adjusted capital to authorized control level risk-based capital is below certain levels. As of December 31, 2000, the Company's total adjusted capital was well in excess of the levels requiring regulatory attention. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Items required under this section are included in the Mangement's Discussion and Analysis of financial condition and results of operations under the section titled risk management. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 1. Financial Statements and Schedules Required under Regulation S-X. Index to financial statements The following consolidated financial statements of IDS Life Insurance Company are included in Item 8: Report of Independent Auditors 18 Consolidated Balance Sheets at December 31, 2000 and 1999 19-20 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 21 Consolidated Statements of Stockholder's Equity for the years ended December 31, 2000, 1999 and 1998 22-23 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 24-25 Notes to Consolidated Financial Statements 26-43 All information on schedules to the consolidated financial statements required by Article 7 of Regulation S-X is included in the consolidated financial statements or is not required. Therefore, all schedules have been omitted. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item omitted pursuant to General Instructions I(2) (c) of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Item omitted pursuant to General Instructions I(2) (c) of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item omitted pursuant to General Instructions I(2) (c) of Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Item omitted pursuant to General Instructions I(2) (c) of Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements See Index to Financial Statements and Financial Statement Schedules on page 11. (2) Financial Statement Schedules See index to Financial Statements and Financial Statement Schedules. All information on schedules to the consolidated financial statements required by 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 3.1 Copy of Certificate of Incorporation of IDS Life Insurance Company filed electronically as Exhibit 3.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 3.2 Copy of the Amended By-laws of IDS Life Insurance Company filed electronically as Exhibit 3.2 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 3.3 Copy of Resolution of the Board of Directors of IDS Life Insurance Company, dated May 5, 1989, establishing IDS Life Account MGA filed electronically as Exhibit 3.3 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.1 Copy of Non-tax qualified Group Annuity Contract, Form 30363C, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.2 Copy of Non-tax qualified Group Annuity Certificate, Form 30360C, filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.3 Copy of Endorsement No. 30340C-GP to the Group Annuity Contract filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.4 Copy of Endorsement No. 30340C to the Group Annuity Certificate filed electronically as Exhibit 4.4 to Post-Effective Amendment No. 5 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.5 Copy of Tax qualified Group Annuity Contract, Form 30369C, filed electronically as Exhibit 4.5 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.6 Copy of Tax qualified Group Annuity Certificate, Form 30368C, filed electronically as Exhibit 4.6 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.7 Copy of Group IRA Annuity Contract, Form 30372C, filed electronically as Exhibit 4.7 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.8 Copy of Group IRA Annuity Certificate, Form 30371C, filed electronically as Exhibit 4.8 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.9 Copy of Non-tax qualified Individual Annuity Contract, Form 30365D, filed electronically as Exhibit 4.9 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.10 Copy of Endorsement No. 30379 to the Individual Annuity Contract, filed electronically as Exhibit 4.10 to Post Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.11 Copy of Tax qualified Individual Annuity Contract, Form 30370C, filed electronically as Exhibit 4.11 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.12 Copy of Individual IRA Annuity Contract, Form 30373C, filed electronically as Exhibit 4.12 to Post-Effective Amendment No. 10 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.13 Copy of Endorsement No. 33007 filed electronically as Exhibit 4.13 to Post-Effective Amendment No. 12 to Registration Statement No. 33-28976 is incorporated herein by reference. 4.14 Copy of Group Annuity Contract, Form 30363D, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference. 4.15 Copy of Group Annuity Certificate, Form 30360D, filed electronically as Exhibit 4.2 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference. 4.16 Form of Deferred Annuity Contract, Form 30365E, filed electronically as Exhibit 4.3 to Post-Effective Amendment No. 2 to Registration Statement No. 33-50968 is incorporated herein by reference. 4.17 Copy of Group Deferred Variable Annuity Contract, Form 34660, filed electronically as Exhibit 4.1 to Post-Effective Amendment No. 2 to Registration Statement No. 33-48701 is incorporated herein by reference. 4.18 Copy of Non-tax qualified Group Annuity Contract, Form 33111, filed electronically as Exhibit 4.1 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.19 Copy of Non-tax qualified Group Annuity Certificate, Form 33114, filed electronically as Exhibit 4.2 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.20 Copy of Tax qualified Group Annuity Contract, Form 33112, filed electronically as Exhibit 4.3 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.21 Copy of Tax qualified Group Annuity Certificate, Form 33115, filed electronically as Exhibit 4.4 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.22 Copy of Group IRA Annuity Contract, Form 33113, filed electronically as Exhibit 4.5 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.23 Copy of Group IRA Annuity Certificate, Form 33116, filed electronically as Exhibit 4.6 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.24 Copy of Non-tax qualified Individual Annuity Contract, Form 30484, filed electronically as Exhibit 4.7 to Post-Effective Amendment No. 1 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.25 Copy of Tax qualified Individual Annuity Contract, Form 30485, filed electronically as Exhibit 4.8 to Post-Effective Amendment No. 1 to Registration Statement No. 333-42793 is incorporated herein by reference. 4.26 Copy of Individual IRA Contract, Form 30486, filed electronically as Exhibit 4.9 to Post-Effective Amendment No. 1 to Registration Statement No. 333-42793 is incorporated herein by reference. 21. Copy of List of Subsidiaries filed electronically as Exhibit 21 to Post-Effective Amendment No. 7 to Registration Statement No. 33-28976 is herein incorporated by reference. 27. Financial data schedule is filed electronically herewith. (b) Reports on Form 8-K filed in the fourth quarter of 2000 No reports on Form 8-K were required to be filed by the Company for the quarter ended December 31, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDS LIFE INSURANCE COMPANY Registrant 3/12/2001 By /s/Richard W. Kling Date Richard W. Kling, President and Chief Executive Officer 3/12/2001 By /s/Philip C. Wentzel Date Philip C. Wentzel, Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 3/12/2001 By /s/Stuart A. Sedlacek Date Stuart A. Sedlacek, Executive Vice President 3/12/2001 By /s/Richard W. Kling Date Richard W. Kling, President and Chief Executive Officer 3/12/2001 By /s/Paul F. Kolkman Date Paul F. Kolkman, Executive Vice President 3/12/2001 By /s/Pamela J. Moret Date Pamela J. Moret, Chairman of the Board 3/12/2001 By /s/Paula R. Meyer Date Paula R. Meyer, Executive Vice President, Assured Assets 3/12/2001 By /s/Barry J. Murphy Date Barry J. Murphy, Executive Vice President, Client Service Report of Independent Auditors The Board of Directors IDS Life Insurance Company We have audited the accompanying consolidated balance sheets of IDS Life Insurance Company (a wholly-owned subsidiary of American Express Financial Corporation) as of December 31, 2000 and 1999, 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, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of IDS Life Insurance Company at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young February 8, 2001 Minneapolis, Minnesota IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS December 31, ($ thousands)
ASSETS 2000 1999 Investments: Fixed maturities: Held to maturity, at amortized cost (fair value: 2000, $6,471,798; 1999, $7,105,743) $ 6,463,613 $ 7,156,292 Available for sale, at fair value (amortized cost: 2000, $12,929,870; 1999, $13,703,137) 12,399,990 13,049,549 18,863,603 20,205,841 Mortgage loans on real estate 3,738,091 3,606,377 Policy loans 618,973 561,834 Other investments 635,880 506,797 Total investments 23,856,547 24,880,849 Cash and cash equivalents 316,974 32,333 Amounts recoverable from reinsurers 416,480 327,168 Amounts due from brokers 15,302 145 Other accounts receivable 42,324 48,578 Accrued investment income 334,928 343,449 Deferred policy acquisition costs 2,951,655 2,665,175 Deferred income taxes, net 136,588 216,020 Other assets 25,919 33,089 Separate account assets 32,349,347 35,894,732 Total assets $60,446,064 $64,441,538
IDS LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEETS (continued) December 31, ($ thousands, except share amounts)
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999 Liabilities: Future policy benefits: Fixed annuities $19,417,446 $20,552,159 Universal life-type insurance 3,410,871 3,391,203 Traditional life insurance 232,913 226,842 Disability income and long-term care insurance 1,012,247 811,941 Policy claims and other policyholders' funds 52,067 24,600 Amounts due to brokers 446,347 148,112 Other liabilities 459,422 579,678 Separate account liabilities 32,349,347 35,894,732 Total liabilities 57,380,660 61,629,267 Commitments and contingencies Stockholder's equity: Capital stock, $30 par value per share; 100,000 shares authorized, issued and outstanding 3,000 3,000 Additional paid-in capital 288,327 288,327 Accumulated other comprehensive loss, net of tax: Net unrealized securities losses (333,734) (411,230) Retained earnings 3,107,811 2,932,174 Total stockholder's equity 3,065,404 2,812,271 Total liabilities and stockholder's equity $60,446,064 $64,441,538
See accompanying notes. IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, ($ thousands)
2000 1999 1998 Revenues: Premiums: Traditional life insurance $ 56,187 $ 53,790 $ 53,132 Disability income and long-term care insurance 231,311 201,637 176,298 Total premiums 287,498 255,427 229,430 Policyholder and contractholder charges 438,127 411,994 383,965 Management and other fees 598,168 473,108 401,057 Net investment income 1,730,605 1,919,573 1,986,485 Net realized (loss) gain on investments (16,975) 26,608 6,902 Total revenues 3,037,423 3,086,710 3,007,839
Benefits and expenses: Death and other benefits: Traditional life insurance 29,042 29,819 29,835 Universal life-type insurance and investment contracts 131,467 118,561 108,349 Disability income and long-term care insurance 40,246 30,622 27,414 Increase in liabilities for future policy benefits: Traditional life insurance 5,765 7,311 6,052 Disability income and long-term care insurance 113,239 87,620 73,305 Interest credited on universal life-type insurance and investment contracts 1,169,641 1,240,575 1,317,124 Amortization of deferred policy acquisition costs 403,968 332,705 382,642 Other insurance and operating expenses 336,791 335,180 287,326 Total benefits and expenses 2,230,159 2,182,393 2,232,047 Income before income taxes 807,264 904,317 775,792 Income taxes 221,627 267,864 235,681 Net income $ 585,637 $ 636,453 $ 540,111
See accompanying notes. IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY Three years ended December 31, 2000 ($ thousands)
Accumulated Other Total Additional Comprehensive Stockholder's Capital Paid-In (Loss) Income, Retained Equity Stock Capital Net of Tax Earnings Balance, January 1, 1998 $2,865,816 $3,000 $290,847 $226,359 $2,345,610 Comprehensive income: Net income 540,111 -- -- -- 540,111 Unrealized holding losses arising during the year, net of deferred policy acquisition costs of $6,333 and taxes of $32,826 (60,964) -- -- (60,964) -- Reclassification adjustment for losses included in net income, net of tax of 4,189 -- -- 4,189 ($2,254) -- ----------------- Other comprehensive loss (56,775) -- -- (56,775) -- ----------------- ----------------- Comprehensive income 483,336 -- -- -- -- Other changes (2,520) -- (2,520) -- -- Cash dividends to parent (240,000) -- -- -- (240,000) ---------------------------------------------------------------------------- Balance, December 31, 1998 3,106,632 3,000 288,327 169,584 2,645,721 Comprehensive income: Net income 636,453 -- -- -- 636,453 Unrealized holding losses arising during the year, net of deferred policy acquisition costs of $28,444 and taxes of $304,936 (566,311) -- -- (566,311) -- Reclassification adjustment for gains included in net income, net of tax of $7,810 (14,503) -- -- (14,503) -- ----------------- -------------------- Other comprehensive loss (580,814) -- -- (580,814) -- ----------------- Comprehensive income 55,639 -- -- -- -- Cash dividends to parent (350,000) -- -- -- (350,000) ---------------------------------------------------------------------------- Balance, December 31, $2,812,271 $3,000 $288,327 $(411,230) $2,932,174 1999
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (continued) Three years ended December 31, 2000 ($ thousands)
Accumulated Other Total Additional Comprehensive Stockholder's Capital Paid-In (Loss) Income, Retained Equity Stock Capital Net of Tax Earnings Balance, December 31, 1999 $2,812,271 $3,000 $288,327 $(411,230) $2,932,174 Comprehensive income: Net income 585,637 -- -- -- 585,637 Unrealized holding gains arising during the year, net of deferred policy acquisition costs of $(5,154) and taxes of $(46,921) 87,138 -- -- 87,138 -- Reclassification adjustment for gains included in net income, net of tax of $5,192 (9,642) -- -- (9,642) -- ----------------- ----------------- ------------------- Other comprehensive income 77,496 -- -- 77,496 -- ----------------- Comprehensive income 663,133 -- -- -- -- Cash dividends to parent (410,000) -- -- -- (410,000) ----------------------------------------------------------------------------- Balance, December 31, 2000 $3,065,404 $3,000 $288,327 $(333,734) $3,107,811 ============================================================================= =============================================================================
See accompanying notes. IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, ($ thousands)
2000 1999 1998 Cash flows from operating activities: Net income $ 585,637 $ 636,453 $ 540,111 Adjustments to reconcile net income to net cash provided by operating activities: Policy loans, excluding universal life-type insurance: Issuance (61,313) (56,153) (53,883) Repayment 56,088 54,105 57,902 Change in amounts recoverable from reinsurers (89,312) (64,908) (56,544) Change in other accounts receivable 6,254 (615) (10,068) Change in accrued investment income 8,521 23,125 (9,184) Change in deferred policy acquisition costs, net (291,634) (140,379) (10,443) Change in liabilities for future policy benefits for traditional life, disability income and long-term care insurance 206,377 153,157 138,826 Change in policy claims and other policyholders' funds 27,467 (45,709) 1,964 Deferred income tax provision (benefit) 37,704 79,796 (19,122) Change in other liabilities (120,256) 169,395 64,902 Amortization of premium, (accretion of discount), net 37,909 (17,907) 9,170 Net realized loss (gain) on investments 16,975 (26,608) (6,902) Policyholder and contractholder charges, non-cash (151,745) (175,059) (172,396) Other, net (9,279) (5,324) 10,786 Net cash provided by operating activities $ 259,393 $ 583,369 $ 485,119
IDS LIFE INSURANCE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years ended December 31, ($ thousands)
2000 1999 1998 Cash flows from investing activities: Fixed maturities held to maturity: Purchases $ (4,487) $ (3,030) $ (1,020) Maturities, sinking fund payments and calls 589,742 741,949 1,162,731 Sales 50,067 66,547 236,963 Fixed maturities available for sale: Purchases (1,454,010) (3,433,128) (4,100,238) Maturities, sinking fund payments and calls 1,019,403 1,442,507 2,967,311 Sales 1,237,116 1,691,389 278,955 Other investments, excluding policy loans: Purchases (706,082) (657,383) (555,647) Sales 435,633 406,684 579,038 Change in amounts due from brokers (15,157) 182 8,073 Change in amounts due to brokers 298,236 (47,294) (186,052) Net cash provided by investing activities 1,450,461 208,423 390,114
Cash flows from financing activities: Activity related to universal life-type insurance and investment contracts: Considerations received 1,842,026 2,031,630 1,873,624 Surrenders and other benefits (3,974,966) (3,669,759) (3,792,612) Interest credited to account balances 1,169,641 1,240,575 1,317,124 Universal life-type insurance policy loans: Issuance (134,107) (102,239) (97,602) Repayment 82,193 67,881 67,000 Dividends paid (410,000) (350,000) (240,000) Net cash used in financing activities (1,425,213) (781,912) (872,466) Net increase in cash and cash equivalents 284,641 9,880 2,767 Cash and cash equivalents at beginning of year 32,333 22,453 19,686 Cash and cash equivalents at end of year $ 316,974 $ 32,333 $ 22,453
See accompanying notes IDS LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ thousands) 1. Summary of significant accounting policies Nature of business IDS Life Insurance Company (the Company) is a stock life insurance company organized under the laws of the State of Minnesota. The Company is a wholly-owned subsidiary of American Express Financial Corporation (AEFC), which is a wholly owned subsidiary of American Express Company. The Company serves residents of all states except New York. IDS Life Insurance Company of New York is a wholly owned subsidiary of the Company and serves New York State residents. The Company also wholly owns American Enterprise Life Insurance Company, American Centurion Life Assurance Company, American Partners Life Insurance Company and American Express Corporation. The Company's principal products are deferred annuities and universal life insurance, which are issued primarily to individuals. It offers single premium and flexible premium deferred annuities on both a fixed and variable dollar basis. Immediate annuities are offered as well. The Company's insurance products include universal life (fixed and variable), whole life, single premium life and term products (including waiver of premium and accidental death benefits). The Company also markets disability income and long-term care insurance. Basis of presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States which vary in certain respects from reporting practices prescribed or permitted by state insurance regulatory authorities (see Note 4). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investments Fixed maturities that the Company has both the positive intent and the ability to hold to maturity are classified as held to maturity and carried at amortized cost. All other fixed maturities and all marketable equity securities are classified as available for sale and carried at fair value. Unrealized gains and losses on securities classified as available for sale are reported as a separate component of accumulated other comprehensive income (loss), net of the related deferred policy acquisition costs effect and deferred taxes. The retrospective interest method is used for income recognition on investments in structured notes and residual beneficial interests in securitized financial assets. Realized investment gain or loss is determined on an identified cost basis. 1. Summary of significant accounting policies (continued) Prepayments are anticipated on certain investments in mortgage-backed securities in determining the constant effective yield used to recognize interest income. Prepayment estimates are based on information received from brokers who deal in mortgage-backed securities. When evidence indicates a decline, which is other than temporary, in the underlying value or earning power of individual investments, such investments are written down to the fair value by a charge to income. Mortgage loans on real estate are carried at amortized cost less reserves for mortgage loan losses. The estimated fair value of the mortgage loans is determined by a discounted cash flow analysis using mortgage interest rates currently offered for mortgages of similar maturities. Impairment of mortgage loans is measured as the excess of a loan's recorded investment over its present value of expected principal and interest payments discounted at the loan's effective interest rate, or the fair value of collateral. The amount of the impairment is recorded in a reserve for mortgage loan losses. The reserve for mortgage loan losses is maintained at a level that management believes is adequate to absorb estimated losses in the portfolio. The level of the reserve account is determined based on several factors, including historical experience, expected future principal and interest payments, estimated collateral values, and current economic and political conditions. Management regularly evaluates the adequacy of the reserve for mortgage loan losses. The Company generally stops accruing interest on mortgage loans for which interest payments are delinquent more than three months. Based on management's judgment as to the ultimate collectibility of principal, interest payments received are either recognized as income or applied to the recorded investment in the loan. The cost of interest rate caps and floors is amortized to investment income over the life of the contracts and payments received as a result of these agreements are recorded as investment income when realized. The amortized cost of interest rate caps and floors is included in other investments. Amounts paid or received under interest rate swap agreements are recognized as an adjustment to investment income. The Company may purchase and write index options to hedge the fee income earned on the management of equity securities in separate accounts and the underlying mutual funds. These index options are carried at market value and are included in other investments or other liabilities, as appropriate. Gains or losses on index options that qualify as hedges are deferred and recognized in management and other fees in the same period as the hedged fee income. The Company also uses index options to manage the risks related to a certain annuity product that pays interest based upon the relative change in a major stock market index between the beginning and end of the product's term. Purchased options used in conjunction with this product are reported in other investments and written options are included in other liabilities. The amortization of the cost of purchased options, the proceeds of written options and the changes in intrinsic value of the contracts are included in net investment income. Policy loans are carried at the aggregate of the unpaid loan balances which do not exceed the cash surrender values of the related policies. 1. Summary of significant accounting policies (continued) Statements of cash flows The Company considers investments with a maturity at the date of their acquisition of three months or less to be cash equivalents. These securities are carried principally at amortized cost, which approximates fair value. Supplementary information to the consolidated statements of cash flows for the years ended December 31 is summarized as follows:
2000 1999 1998 Cash paid during the year for: Income taxes $225,704 $214,940 $215,003 Interest on borrowings 3,299 4,521 14,529
Recognition of profits on annuity contracts and insurance policies Profits on fixed and variable deferred annuities are recognized by the Company over the lives of the contracts, using primarily the interest method. Profits on fixed annuities represent the excess of investment income earned from investment of contract considerations over interest credited to contract owners and other expenses. Profits on variable annuities represent the excess of contractholder charges over the costs of benefits provided and other expenses. The retrospective deposit method is used in accounting for fixed and variable universal life-type insurance. Under this method, profits are recognized over the lives of the policies in proportion to the estimated gross profits expected to be realized. Premiums on traditional life, disability income and long-term care insurance policies are recognized as revenue when due, and related benefits and expenses are associated with premium revenue in a manner that results in recognition of profits over the lives of the insurance policies. This association is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of policy acquisition costs. Policyholder and contractholder charges include the monthly cost of insurance charges, issue and administrative fees and surrender charges. These charges also include the minimum death benefit guarantee fees received from the variable life insurance separate accounts. Management and other fees include investment management fees from underlying proprietary mutual funds and mortality and expense risk fees received from the variable annuity and variable life insurance separate accounts. 1. Summary of significant accounting policies (continued) Deferred policy acquisition costs The costs of acquiring new business, principally sales compensation, policy issue costs, underwriting and certain sales expenses, have been deferred on insurance and annuity contracts. The deferred acquisition costs for most single premium deferred annuities and installment annuities are amortized using primarily the interest method. The costs for universal life-type insurance and certain installment annuities are amortized as a percentage of the estimated gross profits expected to be realized on the policies. For traditional life, disability income and long-term care insurance policies, the costs are amortized over an appropriate period in proportion to premium revenue. Amortization of deferred policy acquisition costs requires the use of assumptions including interest margins, mortality margins, persistency rates, maintenance expense levels and, for variable products, separate account performance. For universal life-type insurance and deferred annuities, actual experience is reflected in the Company's amortization models monthly. As actual experience differs from the current assumptions, management considers the need to change key assumptions underlying the amortization models prospectively. The impact of changing prospective assumptions is reflected in the period that such changes are made and is generally referred to as an unlocking adjustment. During 2000 and 1999, unlocking adjustments resulted in a net decrease in amortization of $12,300 and $56,800, respectively. Net unlocking adjustments in 1998 were not significant. Liabilities for future policy benefits Liabilities for universal-life type insurance and fixed and variable deferred annuities are accumulation values. Liabilities for equity indexed deferred annuities are determined as the present value of guaranteed benefits and the intrinsic value of index-based benefits. Liabilities for fixed annuities in a benefit status are based on established industry mortality tables and interest rates ranging from 5% to 9.5%, depending on year of issue. Liabilities for future benefits on traditional life insurance are based on the net level premium method, using anticipated mortality, policy persistency and interest earning rates. Anticipated mortality rates are based on established industry mortality tables. Anticipated policy persistency rates vary by policy form, issue age and policy duration with persistency on cash value plans generally anticipated to be better than persistency on term insurance plans. Anticipated interest rates range from 4% to 10%, 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 based on the net level premium method, using anticipated morbidity, mortality, policy persistency and interest earning 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 interest rates for disability income and long-term care policy reserves are 3% to 9.5% at policy issue and grade to ultimate rates of 5% to 7% over 5 to 10 years. 1. Summary of significant accounting policies (continued) Claim reserves are calculated based on claim continuance tables and anticipated interest earnings. Anticipated claim continuance rates are based on established industry tables. Anticipated interest rates for claim reserves for both disability income and long-term care range from 5% to 8%. Reinsurance The maximum amount of life insurance risk retained by the Company is $750 on any policy insuring a single life and $1,500 on any policy insuring a joint-life combination. The Company retains only 20% of the mortality risk on new variable universal life insurance policies. Risk not retained is reinsured with other life insurance companies, primarily on a yearly renewable term basis. Long-term care policies are primarily reinsured on a coinsurance basis. The Company retains all accidental death benefit, disability income and waiver of premium risk. Federal income taxes The Company's taxable income is included in the consolidated federal income tax return of American Express Company. The Company provides for income taxes on a separate return basis, except that, under an agreement between AEFC and American Express Company, tax benefit is recognized for losses to the extent they can be used on the consolidated tax return. It is the policy of AEFC and its subsidiaries that AEFC will reimburse subsidiaries for all tax benefits. Included in other liabilities at December 31, 2000 and 1999 are $41,059 and $852 receivable from, respectively, AEFC for federal income taxes. Separate account business The separate account assets and liabilities represent funds held for the exclusive benefit of the variable annuity and variable life insurance contract owners. The Company receives investment management fees from the proprietary mutual funds used as investment options for variable annuities and variable life insurance. The Company receives mortality and expense risk fees from the separate accounts. The Company makes contractual mortality assurances to the variable annuity contract owners that the net assets of the separate accounts will not be affected by future variations in the actual life expectancy experience of the annuitants and beneficiaries from the mortality assumptions implicit in the annuity contracts. The Company makes periodic fund transfers to, or withdrawals from, the separate account assets for such actuarial adjustments for variable annuities that are in the benefit payment period. The Company also guarantees that the rates at which administrative fees are deducted from contract funds will not exceed contractual maximums. For variable life insurance, the Company guarantees that the rates at which insurance charges and administrative fees are deducted from contract funds will not exceed contractual maximums. The Company also guarantees that the death benefit will continue payable at the initial level regardless of investment performance so long as minimum premium payments are made. 1. Summary of significant accounting policies (continued) Accounting changes In June 1998, the Financial Accounting Standards Board (FASB) issued, and subsequently amended, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which the company adopted on January 1, 2001. This Statement establishes accounting and reporting standards for derivative instruments, including some embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of a derivative will be recorded in income or directly to equity, depending on the instrument's designated use. A one-time opportunity to reclassify held-to-maturity investments to available-for-sale is allowed without tainting the remaining securities in the held-to-maturity portfolio. The Company has elected to take this opportunity to reclass its held-to-maturity investments to available-for-sales. As of January 1, 2001, the cumulative impact of applying the Statement's accounting requirements will not have a material impact on the Company's financial position or results of operations. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," superceding SFAS Statement No. 125. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The company does not expect SFAS No. 140 to have a material impact on the company's financial position or results of operations. In July 2000, the FASB's Emerging Issues Task Force (EITF) issued a consensus on Issue 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests in Securitized Financial Assets." The consensus must be adopted for fiscal quarters beginning after March 15, 2001, with earlier adoption permitted. Issue 99-20 prescribes new procedures for recording interest income and measuring impairment on retained and purchased beneficial interests. The rule primarily affects certain AEFA high-yield investments contained in off-balance sheet trusts whose cash flows have been negatively effected by credit experience. As of January 1, 2001, the rule would require AEFA to adjust the carrying amount of these investments downward by approximately $30 milllion through recognition of an impairment charge. Reclassifications Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentations. 2. Investments Fair values of investments in fixed maturities represent quoted market prices and estimated values when quoted prices are not available. Estimated values are determined by established procedures involving, among other things, review of market indices, price levels of current offerings of comparable issues, price estimates and market data from independent brokers and financial files. The amortized cost, gross unrealized gains and losses and fair values of investments in fixed maturities and equity securities at December 31, 2000 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Held to maturity Cost Gains Losses Value U.S. Government agency obligations $ 38,302 $ 3,455 $ 80 $ 41,677 State and municipal obligations 7,678 16 -- 7,694 Corporate bonds and obligations 5,248,517 111,466 114,330 5,245,653 Mortgage-backed securities 1,169,116 9,130 1,472 1,176,774 $ 6,463,613 $ 124,067 $ 115,882 $6,471,798 Gross Gross Amortized Unrealized Unrealized Fair Available for sale Cost Gains Losses Value U.S. Government agency obligations $ 96,408 $ 6,134 $ 268 $ 102,274 State and municipal obligations 12,848 247 -- 13,095 Corporate bonds and obligations 7,586,423 123,691 693,303 7,016,811 Mortgage-backed securities 5,234,191 57,697 24,078 5,267,810 Total fixed maturities 12,929,870 187,769 717,649 12,399,990 Equity securities -- 1,496 10,333 11,829 $12,941,699 $ 187,769 $ 719,145 $12,410,323
2. Investments (continued) The amortized cost, gross unrealized gains and losses and fair values of investments in fixed maturities and equity securities at December 31, 1999 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Held to maturity Cost Gains Losses Value U.S. Government agency obligations $ 37,613 $ 236 $ 2,158 $ 35,691 State and municipal obligations 9,681 150 -- 9,831 Corporate bonds and obligations 5,713,475 91,571 113,350 5,691,696 Mortgage-backed securities 1,395,523 4,953 31,951 1,368,525 $ 7,156,292 $ 96,910 $147,459 $7,105,743 Gross Gross Amortized Unrealized Unrealized Fair Available for sale Cost Gains Losses Value U.S. Government agency obligations $ 46,325 $ 612 $ 2,231 $ 44,706 State and municipal obligations 13,226 519 191 13,554 Corporate bonds and obligations 7,960,352 60,120 560,450 7,460,022 Mortgage-backed securities 5,683,234 9,692 161,659 5,531,267 Total fixed maturities 13,703,137 70,943 724,531 13,049,549 Equity securities 16 -- 3,000 3,016 $13,706,137 $ 70,959 $724,531 $13,052,565
The amortized cost and fair value of investments in fixed maturities at December 31, 2000 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Held to maturity Cost Value Due from one to five years $ 2,930,737 $ 2,935,736 Due from five to ten years 1,807,979 1,800,940 Due in more than ten years 555,781 558,348 Mortgage-backed securities 1,169,116 1,176,774 $ 6,463,613 $ 6,471,798 Amortized Fair Available for sale Cost Value Due from one to five years $ 420,233 $ 464,106 Due from five to ten years 4,675,249 4,266,932 Due in more than ten years 2,600,197 2,401,142 Mortgage-backed securities 5,234,191 5,267,810 $12,929,870 $12,399,990
2. Investments (continued) During the years ended December 31, 2000, 1999 and 1998, fixed maturities classified as held to maturity were sold with amortized cost of $53,169, $68,470 and $230,036, respectively. Net gains and losses on these sales were not significant. The sale of these fixed maturities was due to significant deterioration in the issuers' credit worthiness. Fixed maturities available for sale were sold during 2000 with proceeds of $1,237,116 and gross realized gains and losses of $25,101 and $10,267, respectively. Fixed maturities available for sale were sold during 1999 with proceeds of $1,691,389 and gross realized gains and losses of $36,568 and $14,255, respectively. Fixed maturities available for sale were sold during 1998 with proceeds of $278,955 and gross realized gains and losses of $15,658 and $22,102, respectively. At December 31, 2000, bonds carried at $14,472 were on deposit with various states as required by law. At December 31, 2000, investments in fixed maturities comprised 79 percent of the Company's total invested assets. These securities are rated by Moody's and Standard & Poor's (S&P), except for securities carried at approximately $3.5 billion which are rated by AEFC's internal analysts using criteria similar to Moody's and S&P. A summary of investments in fixed maturities, at amortized cost, by rating on December 31 is as follows:
Rating 2000 1999 Aaa/AAA $ 6,559,188 $ 7,144,280 Aaa/AA 32,001 1,920 Aa/AA 220,446 301,728 Aa/A 327,147 314,168 A/A 2,494,621 2,598,300 A/BBB 747,636 1,014,566 Baa/BBB 5,828,847 6,319,549 Baa/BB 287,583 348,849 Below investment grade 2,896,014 2,816,069 $19,393,483 $20,859,429
At December 31, 2000, 88 percent of the securities rated Aaa/AAA are GNMA, FNMA and FHLMC mortgage-backed securities. No holdings of any other issuer are greater than one percent of the Company's total investments in fixed maturities. 2. Investments (continued) At December 31, 2000, approximately 16 percent of the Company's invested assets were mortgage loans on real estate. Summaries of mortgage loans by region of the United States and by type of real estate are as follows:
December 31, 2000 December 31, 1999 On Balance Commitments On Balance Commitments Region Sheet to Purchase Sheet to Purchase East North Central $ 691,694 $ 18,868 $ 715,998 $ 10,380 West North Central 564,576 7,621 555,635 42,961 South Atlantic 884,723 7,667 867,838 23,317 Middle Atlantic 378,702 13,813 428,051 1,806 New England 279,147 4,604 259,243 4,415 Pacific 318,727 921 238,299 3,466 West South Central 173,158 28,548 144,607 4,516 East South Central 49,176 2,763 43,841 -- Mountain 409,677 10,209 381,148 9,380 3,749,580 95,014 3,634,660 100,241 Less allowance for losses 11,489 -- 28,283 -- $3,738,091 $ 95,014 $3,606,377 $100,241
December 31, 2000 December 31, 1999 On Balance Commitments On Balance Commitments Property type Sheet to Purchase Sheet to Purchase Department/retail stores $1,174,763 $ 11,130 $1,158,712 $ 33,829 Apartments 780,228 -- 887,538 11,343 Office buildings 1,085,948 59,941 931,234 26,062 Industrial buildings 323,766 23,943 309,845 5,525 Hotels/motels 100,680 -- 103,625 -- Medical buildings 128,101 -- 114,045 -- Nursing/retirement homes 49,822 -- 45,935 -- Mixed use 87,537 -- 66,893 -- Other 18,735 -- 16,833 23,482 3,749,580 95,014 3,634,660 100,241 Less allowance for losses 11,489 -- 28,283 -- $3,738,091 $ 95,014 $3,606,377 $100,241
Mortgage loan fundings are restricted by state insurance regulatory authorities to 80 percent or less of the market value of the real estate at the time of origination of the loan. The Company holds the mortgage document, which gives it the right to take possession of the property if the borrower fails to perform according to the terms of the agreement. Commitments to purchase mortgages are made in the ordinary course of business. The fair value of the mortgage commitments is $nil. 2. Investments (continued) At December 31, 2000 and 1999, the Company's recorded investment in impaired loans was $24,999 and $21,375, respectively, with allowances of $4,350 and $5,750, respectively. During 2000 and 1999, the average recorded investment in impaired loans was $27,063 and $23,815, respectively. The Company recognized $1,033, $1,190 and $1,809 of interest income related to impaired loans for the years ended December 31, 2000, 1999 and 1998 respectively. The following table presents changes in the allowance for losses related to all loans:
2000 1999 1998 Balance, January 1 $28,283 $39,795 $38,645 Provision (reduction) for investment losses (14,894) (9,512) 7,582 Loan payoffs (1,200) (500) (800) Foreclosures and writeoffs (700) (1,500) (5,632) Balance, December 31 $11,489 $28,283 $39,795
At December 31, 2000, the Company had no commitments to purchase investments other than mortgage loans. Net investment income for the years ended December 31 is summarized as follows:
2000 1999 1998 Interest on fixed maturities $1,473,560 $1,598,059 $1,676,984 Interest on mortgage loans 286,611 285,921 301,253 Other investment income 1,750 70,892 43,518 Interest on cash equivalents 8,084 5,871 5,486 1,770,005 1,960,743 2,027,241 Less investment expenses 39,400 41,170 40,756 $1,730,605 $1,919,573 $1,986,485
Net realized (loss) gain on investments for the years ended December 31 is summarized as follows:
2000 1999 1998 Fixed maturities $ (34,857) $ 8,802 $ 9,946 Mortgage loans 15,845 10,211 (5,933) Other investments 2,037 7,596 2,889 $ (16,975) $ 26,608 $ 6,902
Changes in net unrealized appreciation (depreciation) of investments for the years ended December 31 are summarized as follows:
2000 1999 1998 Fixed maturities available for sale $99,706 $(921,778) $(93,474) Equity securities (1,428) (142) (203)
3. Income taxes The Company qualifies as a life insurance company for federal income tax purposes. As such, the Company is subject to the Internal Revenue Code provisions applicable to life insurance companies. The income tax expense (benefit) for the years ended December 31 consists of the following:
2000 1999 1998 Federal income taxes: Current $176,397 $178,444 $244,946 Deferred 37,704 79,796 (16,602) 214,101 258,240 228,344 State income taxes-current 7,526 9,624 7,337 Income tax expense $221,627 $267,864 $235,681
Increases (decreases) to the income tax provision applicable to pretax income based on the statutory rate are attributable to:
2000 1999 1998 -------------------------- ------------------------- ------------------------- Provision Rate Provision Rate Provision Rate Federal income taxes based on the statutory rate $282,542 35.0% $316,511 35.0% $271,527 35.0% Tax-excluded interest and dividend income (3,788) (0.5) (9,626) (1.1) (12,289) (1.6) State taxes, net of federal benefit 4,892 0.6 6,256 0.7 4,769 0.6 Affordable housing credits (54,569) (6.8) (31,000) (3.4) (19,688) (2.5) Other, net (7,450) (0.8) (14,277) (1.6) (8,638) (1.1) Total income taxes $221,627 27.5% $267,864 29.6% $235,681 30.4%
A portion of life insurance company income earned prior to 1984 was not subject to current taxation but was accumulated, for tax purposes, in a policyholders' surplus account. At December 31, 2000, the Company had a policyholders' surplus account balance of $20,114. The policyholders' surplus account is only taxable if dividends to the stockholder exceed the stockholder's surplus account or if the Company is liquidated. Deferred income taxes of $7,040 have not been established because no distributions of such amounts are contemplated. 3. Income taxes (continued) Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
2000 1999 Deferred tax assets: Policy reserves $ 730,239 $ 733,647 Unrealized loss on available for sale investments 179,702 221,431 Investments, other 34,600 1,873 Life insurance guaranty fund assessment reserve 1,365 4,789 Total deferred tax assets 945,906 961,740 Deferred tax liabilities: Deferred policy acquisition costs 796,292 740,837 Other 13,026 4,883 Total deferred tax liabilities 809,318 745,720 Net deferred tax assets $ 136,588 $ 216,020
The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets and, therefore, no such valuation allowance has been established. 4. Stockholder's equity Retained earnings available for distribution as dividends to the parent are limited to the Company's surplus as determined in accordance with accounting practices prescribed by state insurance regulatory authorities. Statutory unassigned surplus aggregated $1,527,543 as of December 31, 2000 and $1,693,356 as of December 31, 1999 (see Note 3 with respect to the income tax effect of certain distributions). In addition, any dividend distributions in 2001 in excess of approximately $344,973 would require approval of the Department of Commerce of the State of Minnesota. Statutory net income for the years ended December 31 and capital and surplus as of December 31 are summarized as follows:
2000 1999 1998 Statutory net income $ 344,973 $ 478,173 $ 429,903 Statutory capital and surplus 1,778,306 1,978,406 1,883,405
The National Association of Insurance Commissioners (NAIC) revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual will be effective January 1, 2001. The domiciliary states of the Company and its insurance subsidiaries have adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that the Company and its insurance subsidiaries use to prepare their statutory-basis financial statements. Management believes the impact of these changes to the Company's and its subsidiaries' statutory-basis capital and surplus as of January 1, 2001 will not be significant. 5. Related party transactions The Company loans funds to AEFC under a collateral loan agreement. The balance of the loan was $nil at December 31, 2000 and 1999. This loan can be increased to a maximum of $75,000 and pays interest at a rate equal to the preceding month's effective new money rate for the Company's permanent investments. Interest income on related party loans totaled $nil in 2000, 1999 and 1998. The Company participates in the American Express Company Retirement Plan which covers all permanent employees age 21 and over who have met certain employment requirements. Employer contributions to the plan are based on participants' age, years of service and total compensation for the year. Funding of retirement costs for this plan complies with the applicable minimum funding requirements specified by ERISA. The Company's share of the total net periodic pension cost was $250, $223 and $211 in 2000, 1999 and 1998, respectively. The Company also participates in defined contribution pension plans of American Express Company which cover all employees who have met certain employment requirements. Company contributions to the plans are a percent of either each employee's eligible compensation or basic contributions. Costs of these plans charged to operations in 2000, 1999 and 1998 were $1,707, $1,906 and $1,503, respectively. The Company participates in defined benefit health care plans of AEFC that provide health care and life insurance benefits to retired employees and retired financial advisors. The plans include participant contributions and service related eligibility requirements. Upon retirement, such employees are considered to have been employees of AEFC. AEFC expenses these benefits and allocates the expenses to its subsidiaries. The Company's share of postretirement benefits in 2000, 1999 and 1998 was $1,136, $1,147 and $1,352, respectively. Charges by AEFC for use of joint facilities, technology support, marketing services and other services aggregated $582,836, $485,177 and $411,337 for 2000, 1999 and 1998, respectively. Certain of these costs are included in deferred policy acquisition costs. 6. Commitments and contingencies At December 31, 2000, 1999 and 1998, traditional life insurance and universal life-type insurance in force aggregated $98,060,472, $89,271,957 and $81,074,928 respectively, of which $17,429,851, $8,281,576 and $4,912,313 were reinsured at the respective year ends. The Company also reinsures a portion of the risks assumed under disability income and long-term care policies. Under all reinsurance agreements, premiums ceded to reinsurers amounted to $89,506, $76,970 and $66,378 and reinsurance recovered from reinsurers amounted to $32,500, $27,816, and $20,982 for the years ended December 31, 2000, 1999 and 1998, respectively. Reinsurance contracts do not relieve the Company from its primary obligation to policyholders. 6. Commitments and contingencies (continued) In January 2000, AEFC reached an agreement in principle to settle three class-action lawsuits related to the sales of insurance and annuity products, anticipated to provide for approximately $215 million of benefits. The Company had been named as a co-defendant in all three of these lawsuits. In September 2000, the court gave preliminary approval to the proposed settlement and AEFC has mailed notices to all of the over two million class members. A fairness hearing is scheduled for March 2001, with final approval anticipated in the second quarter, pending any legal appeals. The anticipated costs of settlement remain unchanged from 1999. The portion of the settlement allocated to the Company did not have a material impact on the Company's financial position or results of operations. The agreement also provides for release by class members of all insurance and annuity market conduct claims dating back to 1985 and is subject to a number of contingencies, including final court approval. The Company is named as a defendant in various other lawsuits. The outcome of any litigation cannot be predicted with certainty. In the opinion of management, however, the ultimate resolution of these lawsuits, taken in aggregate should not have a material adverse effect on the Company's consolidated financial position. The IRS routinely examines the Company's federal income tax returns and is currently conducting an audit for the 1993 through 1996 tax years. Management does not believe there will be a material adverse effect on the Company's consolidated financial position as a result of these audits. 7. Lines of credit The Company has available lines of credit with its parent aggregating $200,000 ($100,000 committed and $100,000 uncommitted). The interest rate for any borrowings is established by reference to various indices plus 20 to 45 basis points, depending on the term. Borrowings outstanding under this agreement were $50,000 uncommitted at December 31, 2000 and 1999, respectively. 8. Derivative financial instruments The Company enters into transactions involving derivative financial instruments to manage its exposure to interest rate risk and equity market risk, including hedging specific transactions. The Company does not hold derivative instruments for trading purposes. The Company manages risks associated with these instruments as described below. Market risk is the possibility that the value of the derivative financial instruments will change due to fluctuations in a factor from which the instrument derives its value, primarily an interest rate or equity market index. The Company is not impacted by market risk related to derivatives held for non-trading purposes beyond that inherent in cash market transactions. Derivatives held for purposes other than trading are largely used to manage risk and, therefore, the cash flow and income effects of the derivatives are inverse to the effects of the underlying transactions. 8. Derivative financial instruments (continued) Credit risk is the possibility that the counterparty will not fulfill the terms of the contract. The Company monitors credit risk related to derivative financial instruments through established approval procedures, including setting concentration limits by counterparty, and requiring collateral, where appropriate. A vast majority of the Company's counterparties are rated A or better by Moody's and Standard & Poor's. Credit risk related to interest rate caps and floors and index options is measured by the replacement cost of the contracts. The replacement cost represents the fair value of the instruments. The notional or contract amount of a derivative financial instrument is generally used to calculate the cash flows that are received or paid over the life of the agreement. Notional amounts are not recorded on the balance sheet. Notional amounts far exceed the related credit risk. The Company's holdings of derivative financial instruments are as follows:
Notional or Contract Carrying Fair Total Credit December 31, 2000 Amount Amount Value Exposure Assets: Interest rate caps $ 1,500,000 $ 6,127 $ 1,174 $ 1,174 Interest rate floors 1,000,000 121 531 531 Options purchased 265,848 44,139 51,701 51,701 Financial futures purchased 5 -- 7,209 -- Liabilities: Options written 104,324 (3,098) (4,138) -- Financial futures sold 7 -- 9,011 -- Off balance sheet: Interest rate swaps 1,000,000 -- (10,942) -- $ 47,289 $ 54,546 $ 53,406
Notional or Contract Carrying Fair Total Credit December 31, 1999 Amount Amount Value Exposure Assets: Interest rate caps $ 2,500,000 $ 9,685 $ 12,773 $ 12,773 Interest rate floors 1,000,000 602 319 319 Options purchased 180,897 49,789 61,745 61,745 Liabilities: Options purchased/written 43,262 (1,677) (2,402) -- Off balance sheet: Interest rate swaps 1,267,000 -- (17,582) -- $ 58,399 $ 54,853 $74,837
The fair values of derivative financial instruments are based on market values, dealer quotes or pricing models. The interest rate caps, floors and swaps expire on various dates from 2001 to 2003. The purchased and written options expire on various dates from 2001 to 2006. 8. Derivative financial instruments (continued) Interest rate caps, swaps and floors are used principally to manage the Company's interest rate risk. These instruments are used to protect the margin between interest rates earned on investments and the interest rates credited to related annuity contract holders. The Company also uses interest rate swaps to manage interest rate risk related to the level of fee income earned on the management of fixed income securities in separate accounts and the underlying mutual funds. The amount of fee income received is based upon the daily market value of the separate account and mutual fund assets. As a result, changing interest rate conditions could impact the Company's fee income significantly. The Company entered into interest rate swaps to hedge anticipated fee income for 2000 related to separate accounts and mutual funds which invest in fixed income securities. Interest was reported in management and other fees. The Company offers an annuity product that pays interest based upon the relative change in a major stock market index between the beginning and end of the product's term. As a means of hedging its obligation under the provisions of this product, the Company purchases and writes options on the major stock market index. The Company also writes financial futures and purchases and writes options to manage the equity market risk related to seed money the Company has invested in certain separate accounts and the underlying mutual funds. Index options are used to manage the equity market risk related to the fee income that the Company receives from its separate accounts and the underlying mutual funds. The amount of the fee income received is based upon the daily market value of the separate account and mutual fund assets. As a result, the Company's fee income could be impacted significantly by fluctuations in the equity market. The Company entered into index option collars (combination of puts and calls) to hedge anticipated fee income for 2000 and 1999 related to separate accounts and mutual funds which invest in equity securities. Testing demonstrated the impact of these instruments on the income statement closely correlates with the amount of fee income the Company realizes. At December 31, 2000 , deferred gains on purchased put and written call index options were $1,005 and $449, respectively. At December 31, 1999, there were no deferred gains or losses on purchased put or written call index options. 9. Fair values of financial instruments The Company discloses fair value information for most on- and off-balance sheet financial instruments for which it is practicable to estimate that value. Fair values of life insurance obligations and all non-financial instruments, such as deferred acquisition costs are excluded. Off-balance sheet intangible assets, such as the value of the field force, are also excluded. Management believes the value of excluded assets and liabilities is significant. The fair value of the Company, therefore, cannot be estimated by aggregating the amounts presented. 9. Fair values of financial instruments (continued)
2000 1999 Carrying Fair Carrying Fair Financial Assets Value Value Value Value Investments: Fixed maturities (Note 2): Held to maturity $ 6,463,613 $ 6,471,798 $ 7,156,292 $ 7,105,743 Available for sale 12,399,990 12,399,990 13,049,549 13,049,549 Mortgage loans on real estate (Note 2) 3,738,091 3,821,825 3,606,377 3,541,958 Other: Equity securities (Note 2) 10,333 10,333 3,016 3,016 Derivative financial Instruments (Note 8) 50,387 60,615 60,076 74,837 Other 1,130 1,130 2,258 2,258 Cash and cash equivalents (Note 1) 316,974 316,974 32,333 32,333 Separate account assets (Note 1) 32,349,347 32,349,347 35,894,732 35,894,732
2000 1999 Carrying Fair Carrying Fair Financial Liabilities Value Value Value Value Future policy benefits for fixed annuities $18,020,824 $17,479,187 $19,189,170 $18,591,859 Derivative financial instruments (Note 8) 3,098 6,069 1,677 19,984 Separate account liabilities 28,791,949 27,822,667 31,869,184 31,016,081
At December 31, 2000 and 1999, the carrying amount and fair value of future policy benefits for fixed annuities exclude life insurance-related contracts carried at $1,300,018 and $1,270,094, respectively, and policy loans of $96,603 and $92,895, respectively. The fair value of these benefits is based on the status of the annuities at December 31, 2000 and 1999. The fair value of deferred annuities is estimated as the carrying amount less any applicable surrender charges and related loans. The fair value for annuities in non-life contingent payout status is estimated as the present value of projected benefit payments at rates appropriate for contracts issued in 2000 and 1999. At December 31, 2000 and 1999, the fair value of liabilities related to separate accounts is estimated as the carrying amount less any applicable surrender charges and less variable insurance contracts carried at $3,557,398 and $4,025,548, respectively. -----END PRIVACY-ENHANCED MESSAGE-----