QuickLinks-- Click here to rapidly navigate through this documentUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549- ------------------------------------------------------------------------------FORM 10-Q
Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
[x]
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY REPORT PURSUANT TO SECTION 13 PERIOD ENDED MARCH 31, 2003
OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 333-100029
Allstate Life Insurance Company of New York
(Exact
ALLSTATE LIFE INSURANCE COMPANY
OF
NEW YORK
(Exact name of registrant as specified in its charter)
New York 36-2608394
(State of Incorporation) (I.R.S. Employer Identification No.)
One Allstate Drive
Farmingville, New York 11738
(Address of principal executive offices) (Zip code)
| New York (State of Incorporation) | 36-2608394 (I.R.S. Employer Identification No.) | |
One Allstate Drive Farmingville, New York (Address of principal executive offices) | 11738 (Zip Code) |
Registrant's telephone number, including arearea code: 516-451-5300
Registrant516/451-5300
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/ý No / /o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of October 31, 2002,April 30, 2003 the Registrant had 100,000 common shares, $25 par value, outstanding, all of which are held by Allstate Life Insurance Company.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2003
| PART 1. | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | |||
Condensed Statements of Operations for the Three Month | 3 | |||
Condensed Statements of Financial Position as of | 4 | |||
Condensed Statements of Cash Flows for the | 5 | |||
Notes to Condensed Financial Statements (unaudited) | 6 | |||
Independent Accountants' Review Report | 11 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 | ||
Item 4. | Controls and Procedures | 22 | ||
PART II. | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 22 | ||
Item 6. | Exhibits and Reports on Form 8-K | 22 |
2
Item 1. Financial Statements
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF OPERATIONS
| | Three Months Ended March 31, | ||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2003 | 2002 | |||||
| | (unaudited) | ||||||
| Revenues | |||||||
| Premiums | $ | 16,328 | $ | 23,120 | |||
| Contract charges | 12,991 | 12,357 | |||||
| Net investment income | 62,664 | 53,852 | |||||
| Realized capital gains and losses | (4,057 | ) | (2,607 | ) | |||
| 87,926 | 86,722 | ||||||
Costs and expenses | |||||||
| Contract benefits | 38,388 | 42,170 | |||||
| Interest credited to contractholder funds | 24,515 | 19,688 | |||||
| Amortization of deferred policy acquisition costs | 6,669 | 1,842 | |||||
| Operating costs and expenses | 9,726 | 10,142 | |||||
| 79,298 | 73,842 | ||||||
Income from operations before income tax expense | 8,628 | 12,880 | |||||
Income tax expense | 2,961 | 4,407 | |||||
Net income | $ | 5,667 | $ | 8,473 | |||
See notes to condensed financial statements.
3
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF FINANCIAL POSITION
| (in thousands, except par value data) | March 31, 2003 | December 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | (unaudited) | | |||||||
| Assets | |||||||||
| Investments | |||||||||
| Fixed income securities, at fair value (amortized cost $3,356,574 and $3,283,274) | $ | 3,842,538 | $ | 3,736,416 | |||||
| Mortgage loans | 348,088 | 323,142 | |||||||
| Short-term | 144,154 | 104,200 | |||||||
| Policy loans | 33,820 | 33,758 | |||||||
| Total investments | 4,368,600 | 4,197,516 | |||||||
Cash | 15,306 | 21,686 | |||||||
| Deferred policy acquisition costs | 166,405 | 166,925 | |||||||
| Accrued investment income | 42,419 | 42,197 | |||||||
| Reinsurance recoverables | 2,168 | 2,146 | |||||||
| Current income taxes receivable | — | 914 | |||||||
| Other assets | 15,382 | 10,244 | |||||||
| Separate Accounts | 515,422 | 537,204 | |||||||
| Total assets | $ | 5,125,702 | $ | 4,978,832 | |||||
Liabilities | |||||||||
| Reserve for life-contingent contract benefits | $ | 1,585,681 | $ | 1,556,627 | |||||
| Contractholder funds | 2,189,330 | 2,051,429 | |||||||
| Current income taxes payable | 5,270 | — | |||||||
| Deferred income taxes | 94,758 | 94,771 | |||||||
| Other liabilities and accrued expenses | 174,622 | 188,371 | |||||||
| Payable to affiliates, net | 3,529 | 5,471 | |||||||
| Reinsurance payable to parent | 1,145 | 1,144 | |||||||
| Separate Accounts | 515,422 | 537,204 | |||||||
| Total liabilities | 4,569,757 | 4,435,017 | |||||||
| Commitments and Contingent Liabilities (Note 3) | |||||||||
Shareholder's equity | |||||||||
| Common stock, $25 par value, 100,000 shares authorized and outstanding | 2,500 | 2,500 | |||||||
| Additional capital paid-in | 55,787 | 55,787 | |||||||
| Retained income | 321,540 | 315,873 | |||||||
| Accumulated other comprehensive income: | |||||||||
| Unrealized net capital gains and losses and net gains and losses on derivative financial instruments | 176,118 | 169,655 | |||||||
| Total accumulated other comprehensive income | 176,118 | 169,655 | |||||||
| Total shareholder's equity | 555,945 | 543,815 | |||||||
| Total liabilities and shareholder's equity | $ | 5,125,702 | $ | 4,978,832 | |||||
See notes to condensed financial statements.
4
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF CASH FLOWS
| | Three Months Ended March 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2003 | 2002 | ||||||||
| | (unaudited) | |||||||||
| Net income | $ | 5,667 | $ | 8,473 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Amortization and other non-cash items | (12,163 | ) | (12,043 | ) | ||||||
| Realized capital gains and losses | 4,057 | 2,607 | ||||||||
| Interest credited to contractholder funds | 24,515 | 19,688 | ||||||||
| Changes in: | ||||||||||
| Life-contingent contract benefits and contractholder funds | 2,661 | 12,809 | ||||||||
| Deferred policy acquisition costs | (6,160 | ) | (8,509 | ) | ||||||
| Income taxes payable | 2,691 | 4,117 | ||||||||
| Other operating assets and liabilities | (3,055 | ) | 6,040 | |||||||
| Net cash provided by operating activities | 18,213 | 33,182 | ||||||||
Cash flows from investing activities | ||||||||||
| Proceeds from sales of fixed income securities | 39,200 | 54,041 | ||||||||
| Investment collections | ||||||||||
| Fixed income securities | 77,951 | 46,097 | ||||||||
| Mortgage loans | 1,936 | 10,452 | ||||||||
| Investment purchases | ||||||||||
| Fixed income securities | (199,553 | ) | (164,187 | ) | ||||||
| Mortgage loans | (26,900 | ) | (32,101 | ) | ||||||
| Change in short-term investments, net | (40,748 | ) | (33,099 | ) | ||||||
| Change in policy loans, net | (62 | ) | (41 | ) | ||||||
| Net cash used in investing activities | (148,176 | ) | (118,838 | ) | ||||||
Cash flows from financing activities | ||||||||||
| Contractholder fund deposits | 159,433 | 128,378 | ||||||||
| Contractholder fund withdrawals | (35,850 | ) | (45,902 | ) | ||||||
| Net cash provided by financing activities | 123,583 | 82,476 | ||||||||
Net decrease in cash | (6,380 | ) | (3,180 | ) | ||||||
| Cash at beginning of period | 21,686 | 7,375 | ||||||||
| Cash at end of period | $ | 15,306 | $ | 4,195 | ||||||
See notes to condensed financial statements.
5
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(unaudited)
1. Basis of Presentation
The accompanying condensed financial statements include the accounts of Allstate Life Insurance Company of New York ("the Company"(the "Company"), a wholly ownedwholly-owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly ownedwholly-owned by Allstate Insurance Company ("AIC"), a wholly ownedwholly-owned subsidiary of The Allstate Corporation (the "Corporation").
The condensed financial statements and notes as of September 30, 2002,March 31, 2003, and for the three-month and nine-month periods ended September 30,March 31, 2003 and 2002 and 2001, are unaudited. The condensed financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. TheseThe condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Allstate Life Insurance Company of New York Annual Report on Form 10-K for the year ended December 31, 2001.2002. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
To conform withto the 20022003 and year-end 20012002 presentations, certain amounts in the prior year's condensed financial statements have been reclassified.
Non-cash transactions of $256 thousand have been excluded from prior period
investment purchases and collections on the condensed statements of cash flows
to conform to the current period presentation.
Non-cash investment exchanges and modifications, which primarily reflect refinancings of fixed income securities, totaled $5 millionthousand for the ninethree months ended September 30,March 31, 2002. There were no non-cash investment exchanges and modifications for the ninethree months ended September
30, 2001.
New Accounting StandardMarch 31, 2003.
Adopted accounting standard
In June 2001,November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee or modification of a previously issued guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on either the financial position or results of operations of the Company.
Pending accounting standard
In April 2003, the FASB issued Statement of Financial Accounting StandardStandards ("SFAS") No. 142, "Goodwill149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". The statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other Intangible Assets", which eliminates the requirement to amortize goodwill,contracts and requires that goodwillfor hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and separately identified intangible assets with
indefinite lives be evaluated for impairment on an annual basis (or more
frequently if impairment indicators arise) on a fair value basis.Hedging Activities". The Company adopted SFAS No. 142 effective January 1, 2002 and as a result,is currently in the Company's
2001 results do not reflectprocess of evaluating the impact of this statement on the non-amortization provisionsCondensed Statements of SFAS No. 142. Had the Company adopted the non-amortization provisions on January
1, 2001, the impact would have been immaterial to Net income (unamortized
goodwill was $160 thousand at September 30, 2002). During the second quarter of
2002, the Company completed the initial goodwill impairment test required by
SFAS No. 142Operations and concluded that goodwill was not impaired. The Company utilized
several widely accepted valuation techniques, including discounted cash flow and
market multiple and trading analyses, to estimate the fair value of its acquired
businesses.
Pending Accounting StandardFinancial Position.
Exposure drafts
On July 31, 2002, the American Institute of Certified Public Accountants issued an exposure draft Statement of Position ("SOP") entitled "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts". The accounting guidance contained in the proposed SOP applies to several of the Company's products and product features. The proposed effective date of the SOP is fiscal years beginning after December 15, 2003, with earlier adoption encouraged. Initial application shouldIf adopted early, the provisions of the SOP must be applied as of the beginning of the fiscal year; therefore,year. Accordingly, if the SOP were adopted during an interim period of 2003, prior interim periods shouldwould be restated. Most provisionsA provision of the proposed SOP will have a minimal impact to the Company. With respect to
guaranteed minimum income benefits (contract features that guarantee a minimum
amount for annuitization), the Company's policy of not recognizing any liability
during the accumulation phase is consistent with the SOP. However, a provision
that requires the establishment of a liability in addition to the account balance for contracts and contract features that containprovide guaranteed death or other insurance benefits, whichbenefits. The final SOP may also require a liability for guaranteed income benefits. These liabilities are not currently recognized as a liability by the Company, and their establishment may have a material impact on the condensed statementCondensed Statements of operations
Operations
6
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
depending on the market conditions at the time of adoption. Contractsadoption, but is not expected to have a material impact on the Company's Condensed Statements of Financial Position.
The Emerging Issues Task Force ("EITF") issued Topic No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", which attempts to define other-than-temporary impairment and highlight its application to investment securities accounted for under either the cost or equity method under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The issue summary, which has yet to be finalized, proposes that if, at the evaluation date, the fair value of an investment security is less than its carrying value then an impairment exists for which a determination must be made as to whether that impairment is other-than-temporary. The impairment would likely be affected by this provision ofconsidered other-than-temporary if the SOP are thoseinvestment's carrying value exceeds its fair value for a period exceeding one year or more. If it is determined that specify that the amounts
assessed against the contractholder each period for the insurance benefit
feature are not proportionatean impairment is other-than-temporary, then an impairment loss should be recognized equal to the insurance coverage provided fordifference between the period.
These contract provisions are commonly referredinvestment's carrying value and its fair value at the reporting date. The estimated impact to the Company's Condensed Statements of Operations and Financial Position is not determinable until such time as guaranteed minimum death
benefits.
a final consensus is reached.
2. Reinsurance
The Company purchases reinsurance to limit aggregate and single losses on large risks. The Company alsocontinues to have primary liability as the direct insurer for risks reinsured. Estimating amounts of reinsurance recoverable is impacted by the uncertainties involved in the establishment of loss reserves. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company cedes a portion of the mortality risk on certain term life policies with a pool of non-affiliated reinsurers. TheAdditionally, the Company continueshas a reinsurance agreement through which it primarily cedes re-investment related risk on its structured settlement annuities to have
primary liability asALIC. Under the direct insurer for risks reinsured. Theterms of the agreement, the Company followspays a comprehensive evaluation process involving credit scoring and capacitypremium to select reinsurers. Estimating amountsALIC that varies with the aggregate structured settlement annuity reserve balance. In return, ALIC guarantees that the yield on the portion of reinsurance recoverable is impacted by
the uncertainties involved in the establishment of reserves for contract
benefits. Failure of reinsurers to honor their obligations could result in
losses to the Company.Company's investment portfolio that supports structured settlement annuity liabilities will not fall below contractually determined rates.
Amounts recoverable from reinsurers are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. The Company has reinsurance agreements with its
parent, ALIC, to reinsure a portion of its premiums, contract charges and
contract benefits. No single non-affiliate reinsurer had a material obligation to the Company nor is the Company's business substantially dependent upon any reinsurance contract. The effects of reinsurance on Premiumspremiums and Contractcontract charges and Contract benefits wereare as follows:
| Three months ended March 31, | |||||||||
| (in thousands) | 2003 | 2002 | |||||||
| Premiums and contract charges | |||||||||
| Direct | $ | 30,975 | $ | 36,744 | |||||
| Assumed—non-affiliate | 43 | 140 | |||||||
| Ceded | |||||||||
| Affiliate | (1,148 | ) | (1,185 | ) | |||||
| Non-affiliate | (551 | ) | (222 | ) | |||||
| Premiums and contract charges, net of reinsurance | $ | 29,319 | $ | 35,477 | |||||
7
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The effects of reinsurance on contract benefits are as follows:
| | Three months ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2003 | 2002 | |||||||
| Contract benefits | |||||||||
| Direct | $ | 39,044 | $ | 42,947 | |||||
| Assumed—non-affiliate | 7 | 41 | |||||||
| Ceded | |||||||||
| Affiliate | (68 | ) | (529 | ) | |||||
| Non-affiliate | (595 | ) | (289 | ) | |||||
| Contract benefits, net of reinsurance | $ | 38,388 | $ | 42,170 | |||||
Excluded from the table above are premiums ceded to ALIC of $634 thousand and $576 thousand for the three months ended March 31, 2003 and 2002, respectively, under the terms of the structured settlement annuity reinsurance agreement. These premiums are recorded as investment expense and reflected in Net investment income.
3. Commitments and Contingent Liabilities
Regulation, and Legal Proceedings and Guarantees
Regulation
The Company's businessCompany is subject to the effects of a changing social, economic and regulatory environment.conditions. State and federal regulatory initiatives and proceedings have varied and have included employee benefit regulations, removal ofefforts to remove barriers preventing banks from engaging in the securities and insurance businesses, to change tax law changeslaws affecting the taxation of insurance companies and the tax treatment of insurance products and itswhich may impact on the relative desirability of various personal investment vehiclesproducts and theto expand overall expansion of regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Legal proceedings
The Company sells its products through a variety of distribution channels including Allstate agencies. Consequently, the outcome of some legal proceedings that involve AIC regarding the Allstate agencies may have an impact on the Company.
AIC is defending various lawsuits involving worker classification issues. Examples of these lawsuits include a number of putative class actions challenging the overtime exemption claimed by AIC under the Fair Labor Standards Act or state wage and hour laws. These class actions mirror similar lawsuits filed recently against other carriers in the industry and other employers. Another example involves the worker classification of staff working in agencies. In this putative class action, plaintiffs seek damages under the Employee Retirement Income Security Act ("ERISA") and the Racketeer Influenced and Corrupt Organizations Act alleging that agency secretaries were terminated as employees by AIC and rehired by agencies throughthough outside staffing vendors for the purpose of avoiding the payment of employee benefits. A putative nationwide class action filed by former employee agents also includes a worker classification issue; these agents are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. AIC has been vigorously defending these and various other worker classification lawsuits. The outcome of these disputes is currently uncertain.
In addition, on August 6, 2002, a petition was filed with the National
Labor Relations Board ("NLRB") by the United Exclusive Allstate Agents, Office
and Professional Employees International Union, seeking certification as the
collective bargaining representative of all Allstate agents in the United
States. AIC is opposing the petition on a number of grounds, including that the
agents are independent contractors and, therefore, the NLRB lacks jurisdiction
over the issue. The outcome is currently uncertain.
AIC is also defending certain matters relating to its agency program reorganization announced in 1999. These matters include an investigation by the U.S. Department of Labor and a lawsuit filed in December 2001 by the U.S. Equal Employment Opportunity Commission ("EEOC") with respect to allegations of retaliation under the Age Discrimination in Employment Act, the Americans with Disabilities Act and Title VII of the Civil Rights Act of 1964. A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, breach of contract and age discrimination. AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization. In addition, AIC is defending certain matters relating to its life agency program reorganization announced in 2000. These matters
8
include an investigation by the EEOC with respect to allegations of age discrimination and retaliation. AIC is cooperating fully with the agency investigation and will continue to vigorously defend these and other claims related to the life agency program reorganization. The outcome of these disputes is currently uncertain.
The court has approved a settlement, which is not material, in a previously
reported, statewide class action that alleged that ALIC violated insurance
statues in the sale of credit insurance.
8
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Various other legal and regulatory actions are currently pending that involve AICthe Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the potential target of an increasing number of class action lawsuits and other types of litigation, some of which involve claims for substantial and/or indeterminate amounts (including punitive and treble damages) and the outcomes of which are unpredictable. This litigation is based on a variety of issues including insurance and claim settlement practices. However, at this time, based on their present status, it is the opinion of management that the ultimate liability, if any, in one or more of these other actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company.
Guarantees
In the normal course of business, the Company provides standard indemnifications to counterparties in contracts in connection with numerous transactions, including indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Because the obligated amounts of the indemnifications are not explicitly stated in many cases, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
In addition, the Company indemnifies its directors, officers, non-officer employees and other individuals to the extent provided in its charter and by-laws. Since these indemnifications are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under these indemnifications.
The aggregate liability balance related to all guarantees was not material as of March 31, 2003.
9
4. Other Comprehensive Income
The components of other comprehensive income on a pretax and after-tax basis for the three months ended March 31, are as follows:
| | Three months ended March 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | ||||||||||||||||||
| (in thousands) | Pretax | Tax | After-tax | Pretax | Tax | After-tax | ||||||||||||||
| Unrealized capital gains and losses | ||||||||||||||||||||
| Unrealized holding gains (losses) arising during the period | $ | 5,710 | $ | (1,997 | ) | $ | 3,713 | $ | (11,092 | ) | $ | 3,882 | $ | (7,210 | ) | |||||
| Less: reclassification adjustments | (4,231 | ) | 1,481 | (2,750 | ) | (2,100 | ) | 735 | (1,365 | ) | ||||||||||
| Unrealized net capital gains (losses) | 9,941 | (3,478 | ) | 6,463 | (8,992 | ) | 3,147 | (5,845 | ) | |||||||||||
Net gains (losses) on derivatives financial instruments arising during the period | — | — | — | (400 | ) | 140 | (260 | ) | ||||||||||||
| Less: reclassification adjustments | — | — | — | 400 | (140 | ) | 260 | |||||||||||||
| Net gains (losses) on derivative financial instruments | — | — | — | — | — | — | ||||||||||||||
| Other comprehensive income (loss) | $ | 9,941 | $ | (3,478 | ) | 6,463 | $ | (8,992 | ) | $ | 3,147 | (5,845 | ) | |||||||
| Net income | 5,667 | 8,473 | ||||||||||||||||||
| Comprehensive income | $ | 12,130 | $ | 2,628 | ||||||||||||||||
10
ITEM
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholder of
Allstate Life Insurance Company of New York:
We have reviewed the accompanying condensed statement of financial position of Allstate Life Insurance Company of New York (the "Company", an affiliate of The Allstate Corporation) as of March 31, 2003, and the related condensed statements of operations and cash flows for the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the statement of financial position of Allstate Life Insurance Company of New York as of December 31, 2002, and the related statements of operations and comprehensive income, shareholder's equity, and cash flows for the year then ended, not presented herein. In our report dated February 5, 2003, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of financial position as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Chicago, Illinois
May 13, 2003
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30,MARCH 31, 2003 AND 2002 AND 2001
The following discussion highlights significant factors influencing results of operations and changes in financial position of Allstate Life Insurance Company of New York (the "Company"). It should be read in conjunction with the condensed financial statements and related notes thereto found under Part I. Item 1. contained herein and with the discussion, analysis, financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company of New York Annual Report on Form 10-K for the
year ended December 31, 2001, which includes a discussion of the Company's
Critical Accounting Policies.2002. To conform withto the 20022003 and year-end 20012002 presentation, certain prior year amounts have been reclassified.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets a diversified group of products to meet consumers'
lifetime needs in the areas of protection and retirement solutions in the state
of New York through Allstate agencies, financial services firms, direct
marketing and specialized brokers. The Company's products include term life
insurance; whole life insurance; annuities such as fixed deferred annuities,
market value adjusted annuities and treasury-linked annuities; variable deferred
annuities; immediate annuities; and other protection products such as accidental
death and hospital indemnity.
The Company
Management has identified itselfthe Company as a single segment entity.
The assets and liabilities related to variable annuity contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried at
the fair value of the assets. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and
thereforefollowing discussion uses some "non-GAAP" measures that are not included in the Company's condensed statements of operations.
Revenues to the Company from the Separate Accounts consist of contract
maintenance and administration fees and mortality, surrender and expense
charges.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death, variable annuity contractholders
bear the investment risk that the Separate Accounts' funds may not meet their
stated objectives.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
FINANCIAL HIGHLIGHTS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
(in thousands) 2002 2001 2002 2001
----------- ----------- ------------ -----------
Statutory premiums and deposits $ 317,187 $ 158,389 $ 723,660 $ 520,589
=========== =========== ============ ===========
Investments $ 4,003,652 $ 3,236,303 $ 4,003,652 $ 3,236,303
Separate Accounts Assets 511,227 529,094 511,227 529,094
----------- ----------- ------------ -----------
Investments, including Separate Accounts Assets $ 4,514,879 $ 3,765,397 $ 4,514,879 $ 3,765,397
=========== =========== ============ ===========
GAAP Premiums $ 12,881 $ 29,445 $ 65,655 $ 76,438
Contract charges 12,930 10,150 37,537 30,621
Net investment income 59,188 51,377 170,569 150,072
Contract benefits 35,983 53,629 126,483 138,795
Interest credited to contractholder funds 23,042 19,075 64,472 53,557
Amortization of deferred policy acquisition costs ("DAC") 11,368 1,476 18,441 4,079
Operating costs and expenses 7,694 7,113 26,208 22,907
----------- ----------- ------------ -----------
Operating income before tax 6,912 9,679 38,157 37,793
Income tax expensebased on operations 2,313 3,369 13,086 13,142
----------- ----------- ------------ -----------
Operating income (1) 4,599 6,310 25,071 24,651
Realized capital gains and losses, after-tax (2) (5,989) 1,338 (6,744) (980)
Cumulative effect of change in accounting principle,
after-tax - - - (147)
----------- ----------- ------------ -----------
Net (loss) income $ (1,390) $ 7,648 $ 18,327 $ 23,524
=========== =========== ============ ===========
(1) For a complete definition of operating income, see the operating income
discussion beginning on page 14
(2) Reconciliation of Realized capital gains and losses
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
(in thousands) 2002 2001 2002 2001
------------- ---------------- --------------- ------------
Realized capital gains and losses $ (10,231) $ 2,804 $ (11,696) $ 352
Reclassification of Amortization of DAC 851 (707) 1,140 (1,889)
Reclassification of Income tax benefit (expense) 3,391 (759) 3,812 557
------------- ---------------- --------------- ------------
Realized capital gains and losses, after-tax $ (5,989) $ 1,338 $ (6,744) $ (980)
============= ================ =============== ============
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
Statutory premiums and deposits
Statutory premiums and deposits is a measure used by management to analyze
sales trends. Statutory premiums and deposits includes premiums on insurance
policies and premiums and deposits on annuities determined in conformity with
statutory accounting practices prescribed or permitted by the insurance
regulatory authorities of the state of New York, and all other funds received
from customers on deposit-type products which are accounted for by the Company
on a generally accepted accounting principles ("GAAP") basis. These non-GAAP measures are listed and reconciled to the most directly comparable GAAP measures near the end of this Item 2 under the heading "Non-GAAP and Operating Measures."
RESULTS OF OPERATIONS
Summarized financial data and key operating measures as liabilities,
rather than as revenue. Statutory accounting practices,of and for the Company's
definition of statutory premiums and deposits, differ in material aspects from
GAAP. The Company's method of calculating statutory premiums and deposits may
also be different from the method used by other companies and therefore
comparability may be limited.
The following table summarizes statutory premiums and deposits by product
line:
| (in thousands) | 2003 | 2002 | |||||
| GAAP Premiums | $ | 16,328 | $ | 23,120 | |||
| Contract charges | 12,991 | 12,357 | |||||
| Net investment income | 62,664 | 53,852 | |||||
| Contract benefits | 38,388 | 42,170 | |||||
| Interest credited to contractholder funds | 24,515 | 19,688 | |||||
| Amortization of DAC | 6,322 | 1,830 | |||||
| Operating costs and expenses | 9,726 | 10,142 | |||||
| Income tax expense on operations | 4,570 | 5,345 | |||||
| Operating income | 8,462 | 10,154 | |||||
| Realized capital gains and losses, after-tax(1) | (2,795 | ) | (1,681 | ) | |||
| Net income | $ | 5,667 | $ | 8,473 | |||
| Premiums and deposits | $ | 189,963 | $ | 190,968 | |||
| Investments | $ | 4,368,600 | $ | 3,342,642 | |||
| Separate Accounts Assets | 515,422 | 626,523 | |||||
| Investments, including Separate Accounts Assets | $ | 4,884,022 | $ | 3,969,165 | |||
| For the three months ended March 31, | |||||||
| (in thousands) | 2003 | 2002 | |||||
| Realized capital gains and losses | $ | (4,057 | ) | $ | (2,607 | ) | |
| Reclassification of DAC amortization | (347 | ) | (12 | ) | |||
| Income tax benefit | 1,609 | 938 | |||||
| Realized capital gains and losses, after-tax | $ | (2,795 | ) | $ | (1,681 | ) | |
Premiums and variable annuities
partially offset by decreased sales of immediate annuities.
Total statutory premiums and deposits increased 39.0% to $723.7 millioncontract charges, included in the first nine monthsCondensed Statements of 2002 from $520.6 million in the same period of 2001.
This increase was due to growth in sales of fixed annuities, variable annuities
and interest-sensitive life insurance, partially offset by decreased sales of
immediate annuities.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001Operations, represent GAAP premiums and contract charges
Under GAAP, premiums represent premiums generated from traditional life and other insurance products and immediate annuities with life contingencies which have significant mortality or morbidity risk, and contractrisk. Contract charges are generated from interest-sensitive life insurance products, variable annuities, fixed annuities and other investment products for which deposits are classified as contractholder funds or Separate Accounts liabilities. Contract charges are assessed against the contractholder account balance for maintenance, administration, cost of insurance and early surrender.surrender prior to the contractually specified dates.
12
The following table summarizes GAAP premiums and contract charges:
| For the three months ended March 31, (in thousands) | 2003 | 2002 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| GAAP premiums | ||||||||||
| Life insurance | ||||||||||
| Traditional life | $ | 5,444 | $ | 5,101 | ||||||
| Other | 2,294 | 2,197 | ||||||||
| Total life insurance | 7,738 | 7,298 | ||||||||
| Annuities | ||||||||||
| Immediate annuities with life contingencies | 8,590 | 15,822 | ||||||||
| Total annuities | 8,590 | 15,822 | ||||||||
| Total GAAP premiums | 16,328 | 23,120 | ||||||||
Contract charges | ||||||||||
| Life insurance | ||||||||||
| Interest-sensitive life | 9,489 | 8,890 | ||||||||
| Total life insurance | 9,489 | 8,890 | ||||||||
| Annuities | ||||||||||
| Fixed annuities | 366 | 133 | ||||||||
| Variable annuities | 2,291 | 2,740 | ||||||||
| Immediate annuities without life contingencies | 845 | 594 | ||||||||
| Total annuities | 3,502 | 3,467 | ||||||||
| Total contract charges | 12,991 | 12,357 | ||||||||
| Premiums and contract charges | $ | 29,319 | $ | 35,477 | ||||||
Total premiums 12,881 29,445 65,655 76,438
--------- ----------- --------- ------------
Contract charges
Interest-sensitive life 9,131 6,749 27,090 20,455
Variable annuities 2,923 2,496 8,209 7,092
Investment contracts 876 905 2,238 3,074
--------- ----------- --------- ------------
Total contract charges 12,930 10,150 37,537 30,621
--------- ----------- --------- ------------
Total GAAP premiums and contract charges $ 25,811 $ 39,595 $ 103,192 $ 107,059
========= =========== ========= ============
Total contract charges.
Incharges increased 5.1% due to a 6.7% increase in contract charges on interest-sensitive life in the thirdfirst quarter and first nine months of 2002, total premiums
decreased 56.3% and 14.1% respectively,2003 compared to the same period of 20012002 as a result of higher cost of insurance charges from increased inforce business resulting from new sales. Contract charges earned on annuities remained stable as increased contract charges from fixed and immediate annuities were offset by decreased variable annuity contract charges as a result of surrenders and declines in account balances resulting from poor equity market performance during the prior twelve months, partially offset by new deposits.
13
The following table summarizes GAAP premiums and contract charges by distribution channel.
| For the three months ended March 31, (in thousands) | 2003 | 2002 | ||||||
|---|---|---|---|---|---|---|---|---|
| GAAP premiums | ||||||||
| Allstate agencies | $ | 5,364 | $ | 5,102 | ||||
| Specialized brokers | 8,590 | 15,822 | ||||||
| Independent agents | 243 | — | ||||||
| Direct marketing | 2,131 | 2,196 | ||||||
| Total GAAP premiums | 16,328 | 23,120 | ||||||
| Contract charges | ||||||||
| Allstate agencies | 9,574 | 9,052 | ||||||
| Financial services firms (financial institutions and broker/dealers) | 2,545 | 2,711 | ||||||
| Specialized brokers | 845 | 594 | ||||||
| Independent agents | 27 | — | ||||||
| Total contract charges | 12,991 | 12,357 | ||||||
| Premiums and contract charges | $ | 29,319 | $ | 35,477 | ||||
Premiums and deposits, an operating measure, by product are presented in the following table.
| For the three months ended March 31, (in thousands) | 2003 | 2002 | ||||||
|---|---|---|---|---|---|---|---|---|
| Life insurance | ||||||||
| Traditional life | $ | 5,016 | $ | 4,957 | ||||
| Interest-sensitive life | 13,979 | 13,696 | ||||||
| Other | 2,323 | 2,183 | ||||||
| Total life insurance | 21,318 | 20,836 | ||||||
Annuities | ||||||||
| Fixed annuities | 95,063 | 58,739 | ||||||
| Variable annuities | 52,132 | 82,721 | ||||||
| Immediate annuities | 21,450 | 28,672 | ||||||
| Total annuities | 168,645 | 170,132 | ||||||
| Total Premiums and deposits | $ | 189,963 | $ | 190,968 | ||||
Total Premiums and deposits decreased 0.5% to $190.0 million in the first quarter of 2003 from $191.0 million in the first quarter of 2002. Increased sales of fixed annuities for the quarter were offset by decreased sales of variable annuities due to declines inthe poor equity market conditions and decreased sales of immediate annuities with life contingencies and
traditional life premiums. Declines in the sales of immediate annuities with
life contingencies were due to a change in the mix of immediate annuities sold
and due to market conditions. The decline in traditional life premiums is
related to the Company entering into a reinsurance agreement for certain of its
direct marketing credit life insurance products and lower term life insurance
premiums.
Total contract charges increased 27.4% during the third quarter of 2002,
and 22.6% for the first nine months of 2002, compared to the same periods in
2001 due to growth in interest-sensitive life account values in force and
contract charge rate increases. Contract charges on variable annuities, which
are generally calculated as a percentage of each account value, increased 17.1%
and 15.8% for the third quarter and first nine months of 2002, respectively, as a result of competitive pricing in the New York market. Fixed annuity sales were driven by increased sales through financial institutions and new products such the Allstate® Treasury Linked Annuity.
14
The following table summarizes Premiums and deposits by distribution channel.
| For the three months ended March 31, (in thousands) | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Allstate agencies | $ | 24,987 | $ | 26,424 | |||
| Financial services firms (financial institutions and broker/dealers) | 141,370 | 133,757 | |||||
| Specialized brokers | 21,116 | 28,600 | |||||
| Direct marketing | 2,174 | 2,187 | |||||
| Independent agents | 316 | — | |||||
| Total Premiums and deposits | $ | 189,963 | $ | 190,968 | |||
Premiums and deposits through Allstate agencies decreased 5.4% in the first quarter of 2003 compared to the first quarter of 2002 driven primarily by decreased sales of variable annuities and transfers from thepartially offset by increased sales of fixed account contract option more than offsetting declines in account values asannuities.
Operating income, a result of equity market declines.
Operating income
Operating incomenon-GAAP measure, is a measure used by the Company's management to evaluate
profitability. Operating income is defined as Income before the cumulative
effect of changes in accounting principles, after-tax, and excluding the
after-tax effects of realized capital gains and losses. In this management
measure, the effects of realized capital gains and losses and certain other
items have been excluded due to the volatility between periods and because such
data is often excluded when evaluating the overall financial performance and
profitability of insurers. These operating results should not be considered as a
substitute for any GAAP measure of performance. A reconciliation of operating
income to net income is providedpresented in the table on page 12. The Company's method
of calculating operating income may be different from the method used by other
companies and therefore comparability may be limited.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
following table.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(in thousands) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Investment margin $ 11,921 $ 10,974 $ 37,011 $ 33,164
Mortality margin 7,548 1,044 26,909 14,178
Maintenance charges 5,200 5,323 15,377 14,649
Surrender charges 1,305 927 3,509 2,788
DAC amortization 11,369 1,476 18,442 4,079
Operating costs and expenses 7,693 7,113 26,207 22,907
Income tax expense on operations 2,313 3,369 13,086 13,142
---------- --------- ---------- -----------
Operating income $ 4,599 $ 6,310 $ 25,071 $ 24,651
========== ========= =========== ===========
| For the three months ended March 31, | |||||||
| (in thousands) | 2003 | 2002 | |||||
| Investment margin | $ | 14,525 | $ | 11,607 | |||
| Mortality margin | 8,306 | 10,215 | |||||
| Maintenance charges | 5,069 | 4,597 | |||||
| Surrender charges | 1,180 | 1,052 | |||||
| Amortization of DAC | (6,322 | ) | (1,830 | ) | |||
| Operating costs and expenses | (9,726 | ) | (10,142 | ) | |||
| Income tax expense on operations | (4,570 | ) | (5,345 | ) | |||
| Operating income | $ | 8,462 | $ | 10,154 | |||
Operating income decreased 27.1% in16.7% to $8.5 million for the thirdfirst quarter of 2003 compared to $10.2 million for the same period in 2002 from the
third quarteras a lower mortality margin and increased Amortization of 2001 due primarily to an increase in deferred policy
acquisition costs ("DAC") amortization and higher Operating costs and expenses,
partlyDAC more than offset by increases in the investment and mortality margins. Operating
income increased 1.7% in the first nine months of 2002, over the same period in
the prior year, due to increases in the investment and mortality margins
partially offset by increased amortization of DAC and higher Operating costs and
expenses.margin.
Investment margin, which represents the excess of net investment income earned over interest credited to policyholders and contractholders, increased 8.6%25.1% in the thirdfirst quarter of 2002 and 11.6% for the first nine months of 20022003 compared to the same periods last year.period in 2002. The increase in both periods is a result of growth22.9% higher portfolio balances at March 31, 2003 compared to March 31, 2002, excluding assets invested in invested assets, driven bySeparate Accounts and unrealized net capital gains on fixed income securities. The higher portfolio balance at March 31, 2003 is a result of product sales of fixed and immediate annuities,
lessexceeding contract benefits, andmaturities, surrenders and withdrawals. Invested assets increased
22.8% as of September 30, 2002 compared to September 30, 2001.withdrawals during the previous 12 months. The impact of thisthe growth of the portfolio was partlypartially offset by a decline in invested assetsportfolio yields from lower reinvestmentmarket interest rates resultingaffecting the yield on the investment of cash flows from market conditions.operations. Management actions taken in
2001 and 2002 to reduce crediting rates where contractually allowedon in-force contracts have partially offset the impact of declining portfolio yields on the investment margin. However, investment margins on certain life-contingent contracts and other products with guaranteed crediting rates are compressed in a declining interest rate environment. This is due to the level and duration of the guaranteed rates on these products compared to the declining yield on invested assets supporting them. In addition, assets in the Company's portfolio that do not support specific products further compress the investment margin ofin a declining interest rate environment as they earn lower investment yields.
15
The following table summarizes the decline in invested
asset yields.weighted average investment yield, interest crediting rates and investment spreads for the three months ended March 31.
| | Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||
| Interest-sensitive life | 6.9 | % | 7.0 | % | 4.9 | % | 5.0 | % | 2.0 | % | 2.0 | % | |
| Fixed-rate contracts | 7.1 | 7.6 | 5.7 | 6.4 | 1.4 | 1.2 | |||||||
The following table summarizes contractholder funds and the reserve for life-contingent contract benefits associated with the weighted average investment yield and weighted average interest crediting rates at March 31.
| (in thousands) | 2003 | 2002 | ||||
| Interest-sensitive life | $ | 280,627 | $ | 261,085 | ||
| Fixed rate contracts | 3,246,014 | 2,508,239 | ||||
| 3,526,641 | 2,769,324 | |||||
| FAS 115/133 market value adjustment | 165,702 | 6 | ||||
| Life-contingent contracts and other | 82,668 | 78,072 | ||||
| Total Contractholder funds and Reserve for life-contingent contract benefits | $ | 3,775,011 | $ | 2,847,402 | ||
The following table summarizes investment margin by product group.
| For the three months ended March 31, | ||||||
| (in thousands) | 2003 | 2002 | ||||
| Life insurance | $ | 2,488 | $ | 2,191 | ||
| Annuities | 12,037 | 9,416 | ||||
| Investment margin | $ | 14,525 | $ | 11,607 | ||
Mortality margin, which represents premiums and cost of insurance charges less related policy benefits, increased 623.0%was 18.7% lower in the thirdfirst quarter of 2002 and
89.8% for the first nine months of 2002 compared to the same periods last year.
The mortality margins in the third quarter and first nine months of 2001 reflect
the impact of the September 11, 2001 attack on the World Trade Center in New
York City. New premiums and cost of insurance contract charges on new business
have improved the mortality margin compared to the same periods in the prior
year. Mortality and morbidity loss experience can cause benefit payments to
fluctuate from period to period while underwriting and pricing guidelines are
based on a long-term view of the trends in mortality and morbidity.
Variable annuities have contract provisions that provide a benefit of a
minimum account value at death, which are referred to as guaranteed minimum
death benefits ("GMDBs"). In addition, certain variable annuity contracts have
provisions that provide for a future minimum income annuitization value used to
determine the contractholder's payout benefits, which are referred to as
guaranteed minimum income benefits ("GMIBs"). At any point in time, the value or
amount of these guarantees is dependent upon the investment performance of the
underlying Separate Accounts, and is not proportional to the amount of periodic
fees assessed against the contractholder for these benefits. The Company is
responsible for meeting these guaranteed benefits and receives any fees assessed
for these benefits. Net cash payments for GMDBs were $702 thousand and $2.0
million for the quarter and the nine months ended September 30, 2002,
respectively. This compares to net cash payments of $252 thousand and $545
thousand for the three and nine month periods ended September 30, 2001. The
aggregate amount of the Company's GMDB in excess of the related account values,
payable if all contractholders were to have died as of September 30, 2002, is
estimated to be $237.0 million compared to $120.5 million at December 31, 2001.
As of September 30, 2002, approximately two-thirds of this exposure is related
to the return of customer deposits while the remaining one-third is attributable
to some form of enhanced death benefit greater than customer deposits.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
Amortization of DAC for the Company is dependent on the nature of the
insurance contract and requires judgment on both the period and rate of
amortization. DAC amortization periods for products with significant mortality
or morbidity risk are determined when the products are sold, and are related to
the periods in which premiums are received on these products. Amortization is
recognized in proportion to the pattern of expected gross profits for
interest-sensitive life insurance and investment products, which is dependent on
expected investment returns and product profitability experience and the
estimated lives of the contracts. The recoverability of DAC on
interest-sensitive life insurance and certain investment products is reviewed
regularly in the aggregate, using current assumptions. The average lives of the
contracts are considerably shorter than the stated amortization period due to
withdrawals, surrenders and other policy terminations. The average long-term
rate of assumed future investment yield of the Separate Accounts assets related
to variable annuity contracts used in estimating expected gross margin is 8.0%
after fees. When market returns vary from the 8% long-term expectation or mean,
the Company assumes a reversion to this mean over a seven-year period, which
includes two prior years and five future years. The assumed returns over this
period are limited to a range between 0% and 13.25% after fees.
The steep and sustained decline in the equity markets for the nine months
ended September 30, 2002 resulted in accelerated DAC amortization (called "DAC
unlocking") on variable annuities, totaling $6.9 million in the third quarter.
Improved persistency on fixed annuities partially offset the variable annuity
DAC unlocking, for a net pre-tax acceleration of DAC amortization adjustment of
$6.0 million in the third quarter of 2002. Future volatility in the equity
markets of similar or greater magnitude may result in non-symmetrical increases
or decreases in the amortization of DAC.
The following table summarizes the DAC asset balance by product.
Amortization September 30, December 31,
(in thousands) Period 2002 2001
---------------- ------------------- -----------------
Traditional Life 7-30 year $ 30,838 $ 27,757
Other various 3,345 3,946
------------------- -----------------
34,183 31,703
Interest-sensitive life 30 years 58,818 59,574
Fixed annuity 15 years 11,245 14,701
Variable annuity 15 years 58,972 50,637
------------------- -----------------
129,035 124,912
------------------- -----------------
Total DAC $ 163,218 $ 156,615
=================== =================
DAC amortization increased $9.9 million during the third quarter of 2002
and $14.4 million during the first nine months of 2002 compared to the same
periods of 2001 due DAC unlocking in the third quarter of 2002 and ongoing
growth of the business in force.
Operating costs and expenses increased 8.2% during the third quarter of
2002 and 14.4% for the first nine months of 2002 compared to the same periods in
2001 due to distribution expenses incurred on new growth initiatives and
increased administrative expenses.
Net investment income
Pretax net investment income increased 15.2% in the third quarter of 20022003 compared to the same period in 2002 as 2002 results benefited from lower death benefits and reinsurance recoverables arising from the tragic events of September 11, 2001. ForPolicy benefits paid include cash payments on variable annuity products for guaranteed minimum death benefits ("GMDB") totaling $1.2 million and $0.8 million for the three months ended March 31, 2003 and 2002, respectively. The GMDB payments in the first nine monthsquarter of 2002, pretax
net investment income2003 were $0.4 million more than payments of $0.8 million in the fourth quarter of 2002. The increase in GMDB payments reflects poor equity market performance since the first quarter of 2002.
The following table summarizes mortality margin by product group.
| For the three months ended March 31, | ||||||
| (in thousands) | 2003 | 2002 | ||||
| Life insurance | $ | 8,411 | $ | 8,028 | ||
| Annuities | (105 | ) | 2,187 | |||
| Mortality margin | $ | 8,306 | $ | 10,215 | ||
Amortization of DAC increased 13.7%245.5% in the first quarter of 2003 compared to the same period last year.in 2002 due to continued growth of business inforce and the deceleration of DAC amortization by $2.6
16
million in the first quarter of 2002 as a result of changes in assumptions used in the Company's DAC amortization models. DAC is subject to recoverability testing at the end of each reporting period. The Company performs its evaluation on an aggregated basis consistent with the nature of the underlying products. Fixed annuities, variable annuities, and interest-sensitive life insurance products are aggregated for purposes of evaluating DAC recoverability. DAC is amortized on these products with interest over the lives of the policies in relation to the present value of estimated gross profits ("EGP"). The most significant assumptions involved in estimating future gross profits include expected Separate Accounts fund performance after fees, surrender rates, lapse rates, and investment and mortality margins. The Company's long-term expectation of Separate Accounts fund performance after fees is approximately 8%, which is consistent with its pricing assumptions. Whenever actual Separate Accounts fund performance based on the two most recent years varies from the 8% expectation, the Company projects performance levels over the next five years such that the mean return over that seven year period equals the long-term 8% expectation. This process is commonly referred to as a reversion to the mean.
In evaluating the assumptions used to amortize DAC for investment and interest-sensitive life products, the Company's historical practice has been to perform a comprehensive evaluation during the first quarter of each calendar year and to revise its best estimate assumptions based on historical results and revised expectations about future performance. Any resulting DAC unlocking adjustments are reflected currently in the condensed financial statements. In the ensuing quarters, the assumptions are re-evaluated and revised whenever those revisions would have a material impact on the results of operations of the Company.
In the first quarter of 2003, the Company performed its annual comprehensive evaluation of DAC assumptions and concluded that, due to sustained poor performance of the equity markets coupled with an expectation of moderate future performance due to continuing weakness in the U.S. economy and uncertainty in the geopolitical environment, it was no longer reasonably possible that variable annuity fund returns would revert to the expected long-term mean within the time horizon used in the Company's reversion to the mean model. As a result, the Company unlocked its DAC assumptions as of March 31, 2003 for all investment products, including variable and fixed annuities, and interest-sensitive life products, to be consistent across all product lines. Prospectively, the Company will continue to evaluate these assumptions in this manner.
The unlocking of DAC assumptions in the first quarter resulted in an aggregate acceleration of DAC amortization amounting to $325 thousand before tax. The most significant assumption changes were resetting the variable annuity reversion to the mean calculation as of March 31, 2003, such that future equity market performance during the five year reversion period was reduced from 13.25% after fees to the long-term assumed return of 8% after fees. The Company will continue to employ a seven-year reversion evaluation process in succeeding periods with an assumed long-term return after fees of 8%, a reversion to the mean floor of 0% and a revised cap of 12.75%.
Operating costs and expenses decreased 4.1% in the first quarter of 2003 compared to the first quarter of 2002. Increased expenses related to employee benefit costs including pension expenses were offset by decreased premium taxes and fees.
INVESTMENT RESULTS
Pre-tax Net investment income increased 16.4% in the first quarter of 2003 compared to the same period in 2002. The increase was due to higher investmentportfolio balances resulting from positive cash flows from operating and financing activities, partially offset by slightly lower portfolio yields. Lower portfolio yields were due to funds from operations
and reinvestmentsnew investments being made at rates lower than current portfolio yields as a result of the low interest rate environment. The portfolio balance, excluding assets invested at current market rates. At September 30, 2002
investment balances, excludingin Separate Accounts and unrealized net unrealizedcapital gains and
losses on fixed income securities, increased 22.8% compared to September 30,
2001.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 200122.9% from March 31, 2002.
After-tax realized capital gains and losses
After-tax realized capital losses were $6.0$(2.8) million forin the thirdfirst quarter of 20022003 compared to after-tax realized capital gains of $1.3$(1.7) million in the same period last year. After-tax realized capital losses were $6.7 million for the
first nine months of 2002 compared to $980 thousand in the same period last
year.2002. After-tax realized capital gains and losses are presented net of
17
the effects of DAC amortization, to the extent that such effects resulted from the recognition of realized capital gains and losses.
The following table describesshows the factors impactingactivity driving the after-tax realized capital gains and losses results:
| For the three months ended March 31, | |||||||
| (in thousands) | 2003 | 2002 | |||||
| Investment write-downs | $ | (3,542 | ) | $ | (527 | ) | |
| Sales | 63 | (889 | ) | ||||
| Valuation of derivative instruments | 406 | 3 | |||||
| Settlement of derivative instruments | 498 | (260 | ) | ||||
| Subtotal | (2,575 | ) | (1,673 | ) | |||
| Reclassification of Amortization of DAC | (220 | ) | (8 | ) | |||
| Total realized capital gains and losses, after-tax | $ | (2,795 | ) | $ | (1,681 | ) | |
For a further discussion of realized capital gains and losses, see page 19.
"Investments".
INVESTMENTS
The composition of the Company's investment portfolio at September 30, 2002March 31, 2003 is presented in the following table:
Percent
(in thousands) to total
--------------
Fixed income securities table below.
| (in thousands) | Carrying value | Percent of total | |||||
| Fixed income securities(1) | $ | 3,842,538 | 88.0 | % | |||
| Mortgage loans | 348,088 | 8.0 | |||||
| Short-term | 144,154 | 3.3 | |||||
| Policy loans | 33,820 | 0.7 | |||||
| Total | $ | 4,368,600 | 100.0 | % | |||
Total investments increased to $4.37 billion at September 30, 2002.
Total investments were $4.00 billion at September 30, 2002 compared to
$3.23March 31, 2003 from $4.20 billion at December 31, 2001. The increase was2002 due to amounts invested
from positive cash flows generated from operationsoperating and financing activities and increased unrealized capital gains. At September 30, 2002, unrealized capital gains on the fixed income securities portfolio were $391.0generated in a lower interest rate environment.
Total investment balances related to funds associated with securities lending decreased to $143.0 million compared to $216.2at March 31, 2003 from $160.0 million at December 31, 2001.2002.
The Unrealized net capital gains on fixed income securities at March 31, 2003 were $486.0 million, an increase of $32.8 million or 7.2% since December 31, 2002. The net unrealized gain for the fixed income portfolio was comprised of $506.1 million of unrealized gains and $20.1 million of unrealized losses at March 31, 2003, compared to a net unrealized gain for the fixed income portfolio totaling $453.1 million at December 31, 2002, comprised of $479.5 million of unrealized gains and $26.4 of unrealized losses. At September 30, 2002, 96.9%March 31, 2003, the unrealized losses for the fixed income portfolio were concentrated in the corporate fixed income portfolio. Corporate fixed income portfolio net unrealized gains totaled $208.7 million comprised of $228.1 million of unrealized gains and $19.4 million of unrealized losses. The unrealized losses for the corporate fixed income portfolio were concentrated in the transportation and public utilities sectors. These sectors comprised $15.6 million or 80.2% of the unrealized losses and $75.0 million or 32.9%, of the unrealized gains in the corporate fixed income portfolio.
Approximately 95.3% of the Company's fixed income securities portfolio wasis rated investment grade, which is defined by the Company as a security having a rating from the National Association of Insurance Commissioners ("NAIC") of 1 or 2, a Moody's equivalent rating of Aaa, Aa, A or Baa, a Standard & Poor's equivalent rating of AAA, AA, A or BBB, or a comparable Company internal rating.
Total investment balances related to
18
The Company monitors the collateral from securities lending
increased to $181.1 million at September 30, 2002 from $140.3 million at
December 31, 2001.
Fixedquality of its fixed income securities include bonds, mortgage-backed and asset-backed
securities. Allportfolio, in part, by categorizing certain investments as problem, restructured or potential problem. Problem fixed income securities are carried at fair value and are
classified as available for sale. The fair valuesecurities in default with respect to principal and/or interest and/or securities issued by companies that have gone into bankruptcy subsequent to the Company's acquisition of publicly tradedthe security. Restructured fixed income securities is based on quotedhave modified terms and conditions that were not at current market pricesrates or dealer quotes. The difference
between amortized cost and fair valueterms at the time of the restructuring. Potential problem fixed income securities net of
deferred income taxes, certain life and annuity deferred policy acquisition
costs, and certain reserves for life-contingent contract benefits, is reflected
as a componentare current with respect to contractual principal and/or interest, but because of other comprehensive income.
The fair valuefacts and circumstances, management has serious concerns regarding the borrower's ability to pay future principal and interest in accordance with the contractual terms of non-publicly tradedthe security, which causes management to believe these securities at September 30, 2002 was
$707.2 million. The fair value of non-publicly traded securities, which are
privately placed corporate obligations, is based on either widely accepted
pricing valuation models which utilize internally developed ratings and
independent third party data (e.g., term structures and current publicly traded
bond prices)may be classified as inputsproblem or independent third party pricing sources. The valuation
models use indicative information such as ratings, industry, coupon, and
maturity along with related third party data and publicly traded bond prices to
determine security specific spreads. These spreads are then adjusted for
illiquidity based on historical analysis and broker surveys. Periodic changesrestructured in fair values are reported as a component of other comprehensive income and are
reclassified to net income only when supported by the consummation of a
transaction with an unrelated third party.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001future.
The following table presents the amortized cost, gross unrealized gainssummarizes problem and losses and fair value forpotential problem fixed income securities.
| (in thousands) | March 31, 2003 | December 31, 2002 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized cost | Fair value | Percent of total Fixed Income portfolio | Amortized cost | Fair value | Percent of total Fixed Income portfolio | |||||||||||
| Problem | $ | 23,325 | $ | 21,373 | 0.6 | % | $ | 23,395 | $ | 21,177 | 0.5 | % | |||||
| Potential problem | 12,358 | 9,036 | 0.2 | 6,212 | 6,651 | 0.2 | |||||||||||
| Total net carrying value | $ | 35,683 | $ | 30,409 | 0.8 | % | $ | 29,607 | $ | 27,828 | 0.7 | % | |||||
| Cumulative write-downs recognized | $ | 20,881 | $ | 15,446 | |||||||||||||
As of March 31, 2003, the
Corporate fixed income portfolios.
The Company monitors the quality of its fixed income portfolio, in part, by
categorizing certain investments as problem, restructured, or potential problem.
Problem fixed income securities are generally securities in default with respect
to principal and/or interest and/or securities issued by companies that have
entered bankruptcy subsequent to the Company's acquisition of the security.
Restructured fixed income securities have modified terms and conditions that
were not reflective of current market rates or terms at the time of the
restructuring. Potential problem fixed income securities are current with
respect to contractual principal and/or interest, but because of other facts and
circumstances, the Company has concerns regarding the borrower's ability to pay
future interest and principal in accordance with contractual terms, which causes
the Company to believe these securities may be classified as problem or
restructured in the future. Provisions for losses are recognized for declines in
value of fixed income securities that are deemed other than temporary. The
following table summarizes the balances of problem and potential problem fixed
income securities.
(in thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Percent of Percent of
total Fixed total Fixed
Amortized Fair Income Amortized Fair Income
cost value portfolio cost Value portfolio
--------- ----- ----------- --------- ----- -----------
Problem $ 25,610 $ 19,479 0.5% $ 6,711 $ 5,279 0.2%
Potential problem 3,407 3,106 0.1 - - -
-------- -------- ----------- --------- ------- -----------
Total net carrying value $ 29,017 $ 22,585 0.6% $ 6,711 $ 5,279 0.2%
======== ======== =========== ========= ======= ===========
Cumulative write-downs recognized $ 13,444 $ 174
======== =========
The following table describes the components of thepre-tax realized capital gains and losses.
| For the three months ended March 31, | ||||||||
| (in thousands) | 2003 | 2002 | ||||||
| Investment write-downs | $ | (5,580 | ) | $ | (822 | ) | ||
| Sales | ||||||||
| Fixed income securities | 99 | (1,785 | ) | |||||
| Other | — | 400 | ||||||
| Total sales | 99 | (1,385 | ) | |||||
Valuation of derivative instruments | 640 | 5 | ||||||
| Settlements of derivative instruments | 784 | (405 | ) | |||||
| Total pre-tax realized capital gains and losses | $ | (4,057 | ) | $ | (2,607 | ) | ||
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
The following list details the five largest losses from write-downs by
issuer, the related circumstances giving rise to the loss and a discussion of
how those circumstances may have impacted other material investments held.
o A $6.96 million write-down on a global energy company and power
generator, which missed coupon payments in September due to severely
constrained liquidity.
o A $1.88 million write-down on senior unsecured securities issued by a
seismic data and related geophysical services company that has been
experiencing liquidity pressures. The circumstances of this impairment
are not expected to have a material impact on the other investments.
o A $1.66 million write-down on securities issued by a major U.S.
airline that filed for bankruptcy. We have no other securities of this
issuer and currently expect to hold our existing positions until they
recover in value or mature. The U.S. airline industry is under stress
and we are monitoring our investments in airlines closely,
particularly with regard to collateral values.
o A $1.43 million write-down on collateralized debt obligation notes.
The loss resulted from the decline in value of the portfolio of
high-yield bonds securing the notes.
o A $1.26 million write-down on a major U.S. airline that may file for
bankruptcy. The loss primarily relates to an unsecured issue whose
collateral value is insufficient.
There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if an impairment is other than temporary.
These risks and uncertainties include the risks that:
o The economic outlook is worse than anticipated and has a greater
adverse impact on a particular issuer than anticipated;
o The Company's assessment of a particular issuer's ability to meet all
of its contractual obligations changes; and
o New information is obtained or facts and circumstances change that
cause a change in the Company's ability or intent to hold a security
to maturity or until it recovers in value.
These risks and uncertainties could result in a charge to earnings in
future periods to the extent that losses are realized. The charge to earnings
would not have a significant impact on Shareholder's equity since the majority
of the portfolio is held at fair value and as a result, the related unrealized
gain (loss), net of tax, is currently reflected as Accumulated other
comprehensive income in Shareholder's equity.
Separate Accounts
Separate Accounts assets and liabilities decreased 15.2% to $511.2 million
at September 30, 2002 from December 31, 2001. The decrease was primarily
attributable to declines in the fair value of the Separate Accounts investment
portfolios due to equity market conditions, surrenders and withdrawals and
expense charges, partially offset by sales of variable annuity contracts and
transfers from the fixed account contract option to variable Separate Accounts
funds.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
The Company's capital resources consist of shareholder's equity. The following table summarizes the Company's capital resources:
resources.
September 30, December 31,
(in thousands) 2002 2001
------------------ -------------------
Common stock and retained income $ 358,308 $ 339,981
Accumulated other comprehensive income 159,269 118,995
----------------- ------------------
Total shareholder's equity $ 517,577 $ 458,976
================= ==================
| (in thousands) | March 31, 2003 | December 31, 2002 | |||||
| Common stock, retained earnings and other shareholder's equity items | $ | 379,827 | $ | 374,160 | |||
| Accumulated other comprehensive income | 176,118 | 169,655 | |||||
| Total shareholder's equity | $ | 555,945 | $ | 543,815 | |||
Shareholder's equity
Shareholder's equity increased $12.1 million in the first nine monthsquarter of 20022003 when compared to December 31, 2001,2002 due to netan increase of $6.4 million in Accumulated other comprehensive income and an increase in unrealized net
capital gains.
Debt
The Company had no outstanding debt at September 30, 2002 and December 31,
2001.
Financial Ratings and Strength
Insurance financial strength ratings are an important factor in establishing
the competitive positionto Net income of insurance companies and generally may be expected to
have an effect on an insurance company's sales. On an ongoing basis, rating
agencies review the financial performance and condition of insurers. A multiple
level downgrade, while not expected, could have a material adverse effect on the
Company's business, financial condition and results of operations.$5.7 million.
Liquidity
The Company's insurance financial strength was rated Aa2, AA+, and A+ by Moody's, Standard &
Poor's and A.M. Best, respectively, at September 30, 2002.
In October 2002, Standard & Poor's affirmed its ratings and its negative
outlook for ALIC and its rated subsidiaries and affiliates, including the
Company. The outlook had been changed in February 2002 from "stable" to
"negative" as part of an ongoing life insurance industry review being conducted
by Standard & Poor's. Since December 31, 2001, there have been no ratings
changes for ALIC or the Company from A.M. Best or Moody's.
Liquidity
The principal, potential sources of funds for the Company include the following
activities:
Premiums and deposits
Reinsurance recoveries
Receipts of principal, interest and dividends on investments
Sales of investments
Capital contributions from ALIC
Inter-company loans
The principal, potential uses of funds for the Company include the following
activities:
Payment of contract benefits, maturities, surrenders and withdrawals
Reinsurance cessions and payments
Operating expenses
Purchase of investments
Repayment of inter-company loans
Dividends to ALIC
Management believes thatoperations typically generate substantial positive cash flows from operating and investing activitiesoperations as most premiums are received in advance of the Companytime when claim and benefit payments are adequaterequired. These positive operating cash flows are expected to satisfycontinue to meet the liquidity requirements of these
operations based on the current liability structure and considering a variety of
reasonably foreseeable stress scenarios.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
The maturity structure of the Company's fixed income securities, which
represent 87.6% of the Company's total investments, is managed to meet the
anticipated cash flow requirements of the underlying liabilities.Company.
A portion of the Company's diversified product portfolio, primarily fixed annuities and interest-sensitive life insurance products, is subject to discretionary
surrenders and withdrawals byat the discretion of contractholders. Total surrenders and withdrawals
for the three month period and nine month period ended September 30, 2002 were
$45.5 million and $127.7 million compared with $27.1 million and $75.8 million
for the same periods last year. As the Company's interest-sensitive life
insurance policies and annuity contracts in-force grow and age, the dollarThe total amount of surrenders and withdrawals could increase. Whilewere $41.5 million and $48.5 million for the overall amountfirst quarter of 2003 and 2002, respectively. The decrease was driven primarily from decreased surrenders may increase inof fixed annuities resulting from the future, a significant increase in the level of
surrenders relative to total contractholder account balances is not anticipated.current low interest rate environment.
The Company has entered into an inter-company loan agreement with the Corporation. The amount of inter-company loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. No amounts were outstanding for the Company under the inter-company loan agreement at September 30, 2002 andMarch 31, 2003 or December 31, 2001, respectively.
2002. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate results based on management's estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-lookingThe Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.
These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," "intends," "believes," "likely," and other words with similar meanings. These statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Forward-looking
statements are based on management's current expectations of future events. The
Company cannot guarantee that any forward-looking statement will be accurate.
However, managementManagement believes that our forward-lookingthese statements are based on reasonable current expectationsestimates, assumptions and assumptions. We assume no obligation to
update any forward-looking statements as a result of new informationplans. However, if the estimates, assumptions or future
events or developments.
Ifplans underlying the expectations or assumptions underlying our forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. In addition to the normal risks of business, the Company is subject to significant risk factors,risks and uncertainties, including those listed below which apply to it as an insurance business and a provider of other financial services.
o New York requires insurers to participate in guaranty funds for impaired or
insolvent insurance companies. Such funds periodically assess losses to all
insurance companies doing business in the state. These assessments may be
material to the Company's financial results.
o There is uncertainty involved in estimating the availability of
non-affiliate reinsurance and the collectibility of reinsurance and
recoverables. This uncertainty arises from a number of factors, including
whether losses meet the qualifying conditions of the reinsurance contracts
and if the reinsurers have the financial capacity and willingness to pay.
o Currently, the Corporation is examining the potential exposure of its
insurance operations to acts of terrorism. The Corporation is also
examining how best to address this exposure considering the interests of
policyholders, shareholders, the lending community, regulators and others.
The Company's life insurance policies and annuities do not have exclusions
for terrorist events. In the event that a terrorist act occurs, the Company
may be adversely impacted, depending on the nature of the event. With
respect to the Company's investment portfolio, in the event that commercial
insurance coverage for terrorism becomes unavailable or too expensive,
there could be significant adverse impacts on some portion of the Company's
portfolio, particularly in sectors such as airlines and real estate. For
example, certain debt obligations might be adversely affected due to the
inability to obtain coverage to restore the related real estate or other
property, thereby creating the potential for increased default risk.
o Changes in market interest rates can have an adverse impact on the value of
the investment portfolio, investment income, product sales, results of
operations and retention of existing business. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing the fair values of fixed income securities.
Declining market interest rates could have an adverse impact on the
Company's investment income as the Company reinvests proceeds from positive
cash flows from operations and proceeds from maturities, calls and
repayments of investments into new investments that could be yielding less
than the portfolio's average rate.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
o Changes in interest rates could also reduce the profitability of the
Company's spread-based products, particularly interest-sensitive life
insurance and investment products, as the difference between the amount
that the Company is required to pay on such products and the rate of return
earned on the related investments could be reduced. Changes in market
interest rates as compared to rates offered on some of the Company's
products could make those products less attractive if competitive
investment margins are not maintained, leading to lower sales and/or
changes in the level of surrenders and withdrawals for these products. The
Company's products generally have the flexibility to adjust crediting rates
to reflect higher or lower investment returns. However, this flexibility is
limited by contractual minimum crediting rates. Additionally, unanticipated
surrenders could cause acceleration of amortization of DAC or impact the
recoverability of DAC and thereby increase expenses and reduce current
period profitability. The Company seeks to limit its exposure to this risk
by offering a diverse group of products, periodically reviewing and
revising crediting rates and providing for surrender charges in the event
of early withdrawal.
o
20
RISK FACTORS
The following risk factor should be considered in addition to the risk factors identified in the Management's Discussion and Analysis of Financial Condition and Results of Operations, under the heading "Forward-Looking Statements and Risk Factors" in the Company's Form 10-K filed on March 28, 2003.
NON-GAAP AND OPERATING MEASURES
In addition to information presented in the condensed financial statements, the Company uses some "non-GAAP" measures that are not based on GAAP. Management believes that investor understanding of the Company's performance is enhanced by the disclosure of these measures. The Company's method of calculating these measures may differ from volatile
market conditions, underlying fund performancethat used by other companies and therefore comparability may be limited.
Non-GAAP Measure
Operating income is Net income excluding the effects of Realized capital gains and losses, after-tax. Management uses this measure in its evaluation of results of operations and believes that this information provides investors with a more complete analysis when considered along with Net income. This is because Operating income shows the trends in our business separate from the net effect of Realized capital gains and losses, which are generally driven by business decisions that are independent of the insurance underwriting process and may vary significantly between periods. In addition, investors often separately evaluate such data when reviewing the performance of distributors could cause contract charges earned byinsurers. In this computation, the Companynet effect of Realized capital gains and losses, after-tax, includes that portion of DAC amortization, only to decreasethe extent that it resulted from the recognition of Realized capital gains and leadlosses. Net income is the most directly comparable GAAP measure. The following table reconciles Operating income to an increaseNet income for the first quarter of exposure to pay guaranteed minimum death2003 and income benefits and could also result in increased statutory reserves for
these benefits, leading to a reduction2002.
21
| (in thousands) | 2003 | 2002 | |||||
| Operating income | $ | 8,462 | $ | 10,154 | |||
Realized capital gains and losses | (4,057 | ) | (2,607 | ) | |||
| Reclassification of DAC amortization | (347 | ) | (12 | ) | |||
| Income tax benefit | 1,609 | 938 | |||||
| Realized capital gains and losses, after-tax | (2,795 | ) | (1,681 | ) | |||
| Net income | $ | 5,667 | $ | 8,473 | |||
Operating Measure
Management believes that investors' understanding of the Company's statutory capitalperformance is enhanced by disclosure of the following operating financial measure. The Company's method of calculating this measure may differ from that used by other companies and surplus. In addition, ittherefore comparability may be limited.
Premiums and deposits is possible that the assumptions and
projectionsan operating measure used by the Company in establishing pricesCompany's management to analyze production trends for the guaranteed
minimum death benefitssales. Premiums and guaranteed minimum income benefitsdeposits includes premiums on variable
annuities, particularly assumptionsinsurance policies and projections about investment
performance, do not accurately anticipate the level of costs the Company
will ultimately incur in providing those benefits, resulting in adverse
mortality margin trends that may have a material effect on results of
operations.
o Conditions in the U.S. and international stock markets can have an impact
on the Company's variable annuity sales. In general, sales of variable
annuities increase when the stock markets are rising over an extended
period of time and decrease when stock markets are falling over an extended
period of time.
o In order to meet the anticipated cash flow requirements of its obligations
to policyholders, from time to time the Company manages the effective
duration gap between investments and liabilities for contractholder funds
and reserves for life-contingent contract benefits. Adjustments made to
modify durations may have an impact on the value of the investment
portfolio, investment income, interest credited to contractholder funds and
the investment margin.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not be made until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums to be received over
the assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premiums received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations.
o Under current U.S. tax law and regulations, deferred and immediate annuities, and life insurance, including interest-sensitive products, are
accorded favorable policyholder tax treatment. Any legislative or
regulatory changes that adversely alter this treatment are likely to
negatively affect the demand for these products. In addition, recent
changes in the federal estate tax laws may reduce the demand for the types
of life insurance used in estate planning.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
o The Company is affiliated with various entities registered under the
federal securities laws as broker-dealers, investment advisers and/or
investment companies. These entities are subject to the regulatory
jurisdiction of the Securities and Exchange Commission, the National
Association of Securities Dealers and/or, in some cases, state securities
administrators. The laws regulating the securities products and activities
of the entities are complex, numerous and subject to change. As with any
highly regulated industry, there is some degree of risk of regulatory
non-compliance; however the Company has in place various legal and
compliance personnel, procedures and systems designed to reasonably assure
compliance with these requirements.
o The Company distributes its products under agreements with other members of
the financial services industry that are not affiliated with the Company.
Termination of one or more of these agreements due to, for example, changes
in control of any of these entities, could have a detrimental effect on the
Company's sales. This risk may be exacerbated due to the enactment of the
Gramm-Leach-Bliley Act of 1999, which eliminated many federal and state law
barriers to affiliations among banks, securities firms, insurersall deposits and other financial service providers.
o The events of September 11, 2001, and the resulting disruption in the
financial markets revealed weaknesses in the physical and operational
infrastructure that underlies the U.S. and worldwide financial systems.
Those weaknesses did not impair the Company's liquidity in the wake of
September 11, 2001. However, if an event of similar or greater magnitude
occurred in the future and if the weaknesses in the physical and
operational infrastructure of the U.S. and worldwide financial systems are
not remedied, the Company could encounter significant difficulties in
transferring funds buying and selling securities and engaging in other
financial transactions that support its liquidity.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophereceived from customers on deposit-type products which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade of AIC's insurance financial
strength rating from Aa2, AA and A+ (from Moody's, Standard & Poor's and
A.M. Best, respectively) to below Baa/BBB/B, or a downgrade in ALIC's or
the Company's insurance financial strength rating from Aa2, AA+ and A+
(from Moody's, Standard & Poor's and A.M. Best, respectively) to below
Aa3/AA-/A-. In the event of a downgrade of the Corporation's or AIC's
rating, ALIC and its subsidiaries including the Company, could also
experience a similar downgrade.
o Insurance financial strength ratings are an important factor in
establishing the competitive position of insurance companies and generally
may be expected to have an effect on an insurance company's business. On an
ongoing basis, rating agencies review the financial performance and
condition of insurers and could downgrade or change a company's ratings due
to, for example, a decline in the value of a company's investment portfolio
or increased liabilities due to additional GMDB and GMIB exposure resulting
from market declines. A multiple level downgrade of the Corporation, AIC,
ALIC or the Company, while not expected, could have a material adverse
affect on the Company's sales, including the competitiveness of the
Company's product offerings, its ability to market products, and its
financial condition and results of operations. Also, the rating agencies
have a variety of policies and practices regarding the relationships among
ratings of affiliated entities. As such, the ratings of the Company or ALIC
could be affected by changes in ratings of AIC and/or the Corporation.
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain insurance financial
strength ratings. These restrictions affect the Company's ability to pay
shareholder dividends to ALIC and to use its capital in other ways.
o The Company currently has Separate Accounts liabilities which contain death
benefit features covered by the exposure draft Statement of Position
("SOP") entitled "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts".
The Company does not currently hold liabilities for death benefit features
covered by the SOP. If the SOP is adopted, the Company's establishment of
liabilities with respect to the contracts could have a material impact on
the statement of operations; however, the market values at the time of
adoption will affect the amount of the liability required.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
o Portions of the non-exchange traded marketable investment securities are accounted for at fair value using internally developed, widely accepted
valuation modelsunder GAAP as direct increases to liabilities, rather than as revenue.
The following table illustrates where Premiums and independent third party data as model inputs. Changesdeposits are reflected in the fair valuecondensed financial statements for the three months ended March 31.
| (in thousands) | 2003 | 2002 | ||||
| Premiums | $ | 16,328 | $ | 23,120 | ||
| Deposits to contractholder funds(1) | 159,433 | 128,378 | ||||
| Deposits to Separate Accounts and other | 14,202 | 39,470 | ||||
| Total Premiums and deposits | $ | 189,963 | $ | 190,968 | ||
22
Item 4. Controls and Procedures
Based upon the Corporation's, AIC's, ALIC's and the Company's operating income, net
income, assets, liabilities, shareholder's equity or debt-to-capital ratio.
o Following enactmentevaluation of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the United States insurance business in an effort to determine the
proper role of state insurance regulation in the U.S. financial services
industry. In addition, members of Congress have introduced or discussed
measures to permit optional federal chartering, and thus regulation, of
some types of insurance business, such as life insurance and annuities. We
cannot predict whether any state or federal measures will be adopted to
change the nature or scope of the regulation of the insurance business or
what effect any such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition, grandfathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o Like other members of the insurance industry, the Company is the potential
target of an increasing number of class action lawsuits and other types of
litigation based on a variety of issues, some of which involve claims for
substantial and/or indeterminate amounts (including punitive and treble
damages) and the outcomes of which are unpredictable. GAAP prescribes when
the Company has a contingent liability and may reserve for particular
risks, including litigation exposures. Therefore, results for a given
period could be significantly adversely affected when a reserve is
established for litigation.
o In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
o The design of any system of controls and procedures, including internal
controls and disclosure controls and procedures is based in part upon
assumptions about the likelihood of future events. As a result, there can
be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
o The impact of The Sarbanes-Oxley Act of 2002 on the business of the Company
is being evaluated but cannot be completely determined at this time,
particularly as it relates to split-dollar life insurance products.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2002 AND 2001
Item 4. Controls and Procedures
Within theconducted within 90 days prior to the date of the filing of this report, and under
the supervision and with the participation of the Company's management,
including the principal executive officer and principal financial officer, the
Company evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures with respect to its quarterly reports on Form
10-Q and its current reports on Form 8-K to be filed with the Securities and
Exchange Commission ("SEC"). Based upon that evaluation, the principal executive officer and the principal financial officer concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's quarterlyperiodic reports on Form 10-Qfiled with the Securities and its current reports on Form 8-K. "Disclosure
controls and procedures" are thoseExchange Commission. However, the design of any system of controls and procedures is based in part upon assumptions about the likelihood of future events and there can be no assurance that are designed to
ensure that information required to be disclosed by the Companyany design will succeed in the reports
that it files or submitsachieving its stated goals under the Securities Exchange Actall potential future conditions, regardless of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. They include controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under that Act is accumulated and communicated to the Company's
management, including the principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.how remote.
In addition, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their evaluation.
26
PART II - II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGSLegal Proceedings
The discussion "Regulation, Legal Proceedings and Legal Proceedings"Guarantees" in Part I, Item 1, Note 3 of this Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 15—Acknowledgement of awareness from Deloitte & Touche LLP, dated May 13, 2003, concerning unaudited interim financial information
Exhibit 99.1—Certifications Pursuant to 18 United States Code § 1350
None.
27
SIGNATURES
23
SIGNATURE
Pursuant to the requirements 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.
Allstate Life Insurance Company of New York
(Registrant)
November 14, 2002 By /s/ Samuel H. Pilch
Samuel H. Pilch
(chief accounting officer and duly
authorized officer of the Registrant)
| Allstate Life Insurance Company of New York (Registrant) | ||||
May 13, 2003 | By | /s/ SAMUEL H. PILCH Samuel H. Pilch (chief accounting officer and duly authorized officer of the registrant) | ||
24
CERTIFICATIONS
I, Casey J. Sylla, certify that:
Date: November 14, 2002
/s/ Casey J. Sylla
Chairman of the Board and President
I.May 13, 2003
| /s/ CASEY J. SYLLA Casey J. Sylla Chairman of the Board and President |
25
I, Steven E. Shebik, certify that:
Date: November 14, 2002
/s/ Steven E. Shebik
Vice President
29
CERTIFICATION
Pursuant to 18 United States Code ss. 1350
Each of the undersigned hereby certifies that to his knowledge the
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2002 of
Allstate Life Insurance Company of New York (the "Company") filed with the
Securities and Exchange Commission fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date: November 14, 2002
/s/ Casey J. Sylla
Casey J. Sylla
Chairman of the Board and President
/s/ Steven E. Shebik
Steven E. Shebik
Vice President
30
May 13, 2003
| /s/ STEVEN E. SHEBIK Steven E. Shebik Vice President and Chief Financial Officer |