UNITED 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.
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 | |
OR | |
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 name of registrant as specified in its charter)
New York | 36-2608394 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
11788-5107 | ||
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:516/451-5300631/357-8920
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 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 April 30,October 31, 2003, the Registrantregistrant 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-QMarch 31,September 30, 2003
PART | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | |||
Condensed Statements of Operations for the | ||||
Condensed Statements of Financial Position as of | ||||
Condensed Statements of Cash Flows for the | ||||
Notes to Condensed Financial Statements (unaudited) | ||||
Independent Accountants' Review Report | ||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 4. | Controls and Procedures | |||
PART | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | |||
Item 6. | Exhibits and Reports on Form 8-K |
2
PART 1.I. FINANCIAL INFORMATION
ItemITEM 1. Financial StatementsFINANCIAL 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 | |||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||
| (Unaudited) | (Unaudited) | ||||||||||||
Revenues | ||||||||||||||
Premiums | $ | 14,189 | $ | 13,483 | $ | 44,451 | $ | 67,429 | ||||||
Contract charges | 12,721 | 12,930 | 39,394 | 37,537 | ||||||||||
Net investment income | 66,612 | 58,586 | 193,999 | 168,795 | ||||||||||
Realized capital gains and losses | (1,276 | ) | (10,231 | ) | (4,492 | ) | (11,696 | ) | ||||||
92,246 | 74,768 | 273,352 | 262,065 | |||||||||||
Costs and expenses | ||||||||||||||
Contract benefits | 38,278 | 36,358 | 119,712 | 127,517 | ||||||||||
Interest credited to contractholder funds | 26,557 | 22,667 | 78,349 | 63,438 | ||||||||||
Amortization of deferred policy acquisition costs | 7,527 | 10,517 | 23,649 | 17,301 | ||||||||||
Operating costs and expenses | 11,452 | 7,694 | 26,788 | 26,208 | ||||||||||
83,814 | 77,236 | 248,498 | 234,464 | |||||||||||
Loss on disposition of operations | 4,312 | — | 4,312 | — | ||||||||||
Income (loss) from operations before income tax expense (benefit) | 4,120 | (2,468 | ) | 20,542 | 27,601 | |||||||||
Income tax expense (benefit) | 1,267 | (1,078 | ) | 6,934 | 9,274 | |||||||||
Net income (loss) | $ | 2,853 | $ | (1,390 | ) | $ | 13,608 | $ | 18,327 | |||||
See notes to condensed financial statements.
31
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF FINANCIAL POSITION
(in thousands, except par value data) | (in thousands, except par value data) | March 31, 2003 | December 31, 2002 | (in thousands, except par value data) | September 30, 2003 | December 31, 2002 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (unaudited) | | | (Unaudited) | | |||||||||||
Assets | Assets | Assets | |||||||||||||||
Investments | Investments | Investments | |||||||||||||||
Fixed income securities, at fair value (amortized cost $3,356,574 and $3,283,274) | $ | 3,842,538 | $ | 3,736,416 | Fixed income securities, at fair value (amortized cost $3,754,573 and $3,283,274) | $ | 4,288,345 | $ | 3,736,416 | ||||||||
Mortgage loans | 348,088 | 323,142 | Mortgage loans | 369,365 | 323,142 | ||||||||||||
Short-term | 144,154 | 104,200 | Short-term | 140,580 | 104,200 | ||||||||||||
Policy loans | 33,820 | 33,758 | Policy loans | 33,797 | 33,758 | ||||||||||||
Total investments | 4,368,600 | 4,197,516 | Total investments | 4,832,087 | 4,197,516 | ||||||||||||
Cash | Cash | 15,306 | 21,686 | Cash | 6,811 | 21,686 | |||||||||||
Deferred policy acquisition costs | Deferred policy acquisition costs | 166,405 | 166,925 | Deferred policy acquisition costs | 165,719 | 166,925 | |||||||||||
Accrued investment income | Accrued investment income | 42,419 | 42,197 | Accrued investment income | 46,560 | 42,197 | |||||||||||
Reinsurance recoverables | Reinsurance recoverables | 2,168 | 2,146 | Reinsurance recoverables | 4,234 | 2,146 | |||||||||||
Current income taxes receivable | Current income taxes receivable | — | 914 | Current income taxes receivable | 3,619 | 914 | |||||||||||
Other assets | Other assets | 15,382 | 10,244 | Other assets | 22,054 | 10,244 | |||||||||||
Separate Accounts | Separate Accounts | 515,422 | 537,204 | Separate Accounts | 588,452 | 537,204 | |||||||||||
Total assets | $ | 5,125,702 | $ | 4,978,832 | Total assets | $ | 5,669,536 | $ | 4,978,832 | ||||||||
Liabilities | Liabilities | Liabilities | |||||||||||||||
Contractholder funds | Contractholder funds | $ | 2,545,399 | $ | 2,051,429 | ||||||||||||
Reserve for life-contingent contract benefits | Reserve for life-contingent contract benefits | $ | 1,585,681 | $ | 1,556,627 | Reserve for life-contingent contract benefits | 1,642,679 | 1,556,627 | |||||||||
Contractholder funds | 2,189,330 | 2,051,429 | |||||||||||||||
Current income taxes payable | 5,270 | — | |||||||||||||||
Deferred income taxes | Deferred income taxes | 94,758 | 94,771 | Deferred income taxes | 95,381 | 94,771 | |||||||||||
Other liabilities and accrued expenses | Other liabilities and accrued expenses | 174,622 | 188,371 | Other liabilities and accrued expenses | 226,577 | 188,371 | |||||||||||
Payable to affiliates, net | Payable to affiliates, net | 3,529 | 5,471 | Payable to affiliates, net | 3,237 | 5,471 | |||||||||||
Reinsurance payable to parent | Reinsurance payable to parent | 1,145 | 1,144 | Reinsurance payable to parent | 1,124 | 1,144 | |||||||||||
Separate Accounts | Separate Accounts | 515,422 | 537,204 | Separate Accounts | 588,452 | 537,204 | |||||||||||
Total liabilities | 4,569,757 | 4,435,017 | Total liabilities | 5,102,849 | 4,435,017 | ||||||||||||
Commitments and Contingent Liabilities (Note 3) | Commitments and Contingent Liabilities (Note 3) | Commitments and Contingent Liabilities (Note 3) | |||||||||||||||
Shareholder's equity | Shareholder's equity | Shareholder's equity | |||||||||||||||
Common stock, $25 par value, 100,000 shares authorized and outstanding | 2,500 | 2,500 | |||||||||||||||
Common stock, $25 par value, 100 thousand shares authorized, issued and outstanding | Common stock, $25 par value, 100 thousand shares authorized, issued and outstanding | 2,500 | 2,500 | ||||||||||||||
Additional capital paid-in | Additional capital paid-in | 55,787 | 55,787 | Additional capital paid-in | 55,787 | 55,787 | |||||||||||
Retained income | Retained income | 321,540 | 315,873 | Retained income | 329,481 | 315,873 | |||||||||||
Accumulated other comprehensive income: | Accumulated other comprehensive income: | Accumulated other comprehensive income: | |||||||||||||||
Unrealized net capital gains and losses and net gains and losses on derivative financial instruments | 176,118 | 169,655 | Unrealized net capital gains and losses | 178,919 | 169,655 | ||||||||||||
Total accumulated other comprehensive income | 176,118 | 169,655 | Total accumulated other comprehensive income | 178,919 | 169,655 | ||||||||||||
Total shareholder's equity | 555,945 | 543,815 | Total shareholder's equity | 566,687 | 543,815 | ||||||||||||
Total liabilities and shareholder's equity | $ | 5,125,702 | $ | 4,978,832 | Total liabilities and shareholder's equity | $ | 5,669,536 | $ | 4,978,832 | ||||||||
See notes to condensed financial statements.
42
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 | ||||||
| Nine Months Ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
Cash flows from operating activities | |||||||||||
Net income | $ | 13,608 | $ | 18,327 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Amortization and other non-cash items | (36,760 | ) | (36,046 | ) | |||||||
Realized capital gains and losses | 4,492 | 11,696 | |||||||||
Interest credited to contractholder funds | 78,349 | 63,438 | |||||||||
Changes in: | |||||||||||
Contract benefit and other insurance reserves | 13,382 | 32,573 | |||||||||
Deferred policy acquisition costs | (22,172 | ) | (24,101 | ) | |||||||
Income taxes payable | (7,083 | ) | 2,947 | ||||||||
Other operating assets and liabilities | (1,697 | ) | 10,372 | ||||||||
Net cash provided by operating activities | 42,119 | 79,206 | |||||||||
Cash flows from investing activities | |||||||||||
Proceeds from sales of fixed income securities | 200,613 | 185,066 | |||||||||
Investment collections | |||||||||||
Fixed income securities | 179,900 | 136,888 | |||||||||
Mortgage loans | 21,967 | 14,995 | |||||||||
Investment purchases | |||||||||||
Fixed income securities | (805,583 | ) | (759,169 | ) | |||||||
Mortgage loans | (69,214 | ) | (62,276 | ) | |||||||
Change in short-term investments, net | (32,976 | ) | (38,697 | ) | |||||||
Change in other investments, net | 3,051 | 1,238 | |||||||||
Change in policy loans, net | (39 | ) | (73 | ) | |||||||
Net cash used in investing activities | (502,281 | ) | (522,028 | ) | |||||||
Cash flows from financing activities | |||||||||||
Contractholder fund deposits | 579,411 | 573,023 | |||||||||
Contractholder fund withdrawals | (134,124 | ) | (121,467 | ) | |||||||
Net cash provided by financing activities | 445,287 | 451,556 | |||||||||
Net (decrease) increase in cash | (14,875 | ) | 8,734 | ||||||||
Cash at beginning of period | 21,686 | 7,375 | |||||||||
Cash at end of period | $ | 6,811 | $ | 16,109 | |||||||
See notes to condensed financial statements.
53
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"), a wholly-owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly-owned by Allstate Insurance Company ("AIC"), a wholly-owned subsidiary of The Allstate Corporation (the "Corporation").
The condensed financial statements and notes as of March 31,September 30, 2003, and for the three-month and nine-month periods ended March 31,September 30, 2003 and 2002 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. TheThese 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, 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 to the 2003 and year-end 2002 presentations, certain amounts in the prior year's condensed financial statements have been reclassified.
Non-cash investment exchanges and modifications, which primarily reflect refinancings of fixed income securities, totaled $5 thousandmillion for the threenine months ended March 31,September 30, 2002. There were no non-cash investment exchanges and modifications for the threenine months ended March 31,September 30, 2003.
Adopted accounting standard
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
In November 2002,April 2003, 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 StandardsStandard ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". The statement amends, clarifies and clarifiescodifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and utilized for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". While this statement applies primarily to certain derivative contracts and embedded derivatives entered into or modified after June 30, 2003, it also codifies conclusions previously reached by the FASB at various dates on certain implementation issues. The Company is currently inimpact of adopting the process of evaluating the impactprovisions of this statement onwere not material to the Company's Condensed Statements of Operations andor Financial Position.
Exposure draftsPending accounting standards
Statement of Position 03-01
OnIn July 31, 2002,2003, the American Institute of Certified Public Accountants issued an exposure draft Statement of Position ("SOP") 03-01 entitled "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts".Accounts." The accounting guidance contained in the proposed SOP applies to severaladdresses three areas: separate accounts presentation and valuation, accounting for sales inducements such as bonus interest, and the classification and valuation of the Company's products and product features.certain long duration liabilities. The proposed effective date of the SOP is for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. If adopted early, the provisions
Based on management's review of the SOP, must be applied as of the beginning ofmost significant impact to the fiscal year. Accordingly, ifCompany is the SOP were adopted during an interim period of 2003, prior interim periods would be restated. A provision of the proposed SOP that requires the establishment of a liability in addition to the account balance for contracts and contract features that provide guaranteed death or other insurance benefits. The final SOP may also require a liability forbenefits and guaranteed income benefits. These liabilities areThis liability will be determined based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience. The Company does not currently recognized byrecognize these liabilities. The Company is currently evaluating the provisions of the statement. The Company and their establishmentplans to adopt the provisions of the statement no later than January 1, 2004. The effect of adoption may have a material impact on the Condensed Statements of OperationsOperations. However, the amounts may vary based on market
64
depending on the market conditions at the time of adoption, butconditions. Adoption is not expected to have a material impact on the Company's Condensed Statements of Financial Position.
Proposed standard
Emerging Issues Task Force Topic No. 03-01
The Emerging Issues Task Force ("EITF") issueddiscussed 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 underboth SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". and Accounting Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stocks." The current 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 considered other-than-temporary if the investment's carrying value exceeds its fair value for a period exceeding one year or more. If it is determined that an impairment is other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's carrying value and its fair value at the reporting date. TheIn recent deliberations, the EITF discussed different models to assess whether impairment is other-than-temporary for different types of investments (e.g. SFAS 115 marketable equity securities, SFAS 115 debt securities, and equity and cost method investments subject to APB Opinion No. 18). Due to the uncertainty of the final model or models that may be adopted, the estimated impact to the Company's Condensed Statements of Operations and Financial Position is presently not determinable until such time as a final consensus is reached.determinable.
2. Reinsurance
The Company purchases reinsurance to limit aggregate and single losses on large risks. The Company follows a comprehensive evaluation process involving credit scoring and capacity to select reinsurers. The Company continues 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. Additionally, the Company has a reinsurance agreement through which it primarily cedes re-investment related risk on its structured settlement annuities to ALIC. Under the terms of the agreement, the Company pays a premium to ALIC that varies with the aggregate structured settlement annuity reserve balance. In return, ALIC guarantees that the yield on the portion of the 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. No single 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 premiums and contract charges are as follows:
Three months ended March 31, | | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (in thousands) | 2003 | 2002 | (in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Premiums and contract charges | Premiums and contract charges | Premiums and contract charges | ||||||||||||||||||||||
Direct | Direct | $ | 30,975 | $ | 36,744 | Direct | $ | 28,874 | $ | 27,860 | $ | 89,414 | $ | 108,965 | ||||||||||
Assumed—non-affiliate | Assumed—non-affiliate | 43 | 140 | Assumed—non-affiliate | 103 | 72 | 210 | 318 | ||||||||||||||||
Ceded | Ceded | Ceded | ||||||||||||||||||||||
Affiliate | (1,148 | ) | (1,185 | ) | Affiliate | (1,128 | ) | (1,154 | ) | (3,418 | ) | (3,507 | ) | |||||||||||
Non-affiliate | (551 | ) | (222 | ) | Non-affiliate | (939 | ) | (365 | ) | (2,361 | ) | (810 | ) | |||||||||||
Premiums and contract charges, net of reinsurance | $ | 29,319 | $ | 35,477 | Premiums and contract charges, net of reinsurance | $ | 26,910 | $ | 26,413 | $ | 83,845 | $ | 104,966 | |||||||||||
75
The effects of reinsurance on contract benefits are as follows:
| | Three months ended March 31, | | Three Months Ended September 30, | Nine Months Ended September30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (in thousands) | 2003 | 2002 | (in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
Contract benefits | Contract benefits | Contract benefits | ||||||||||||||||||||||
Direct | Direct | $ | 39,044 | $ | 42,947 | Direct | $ | 40,791 | $ | 36,991 | $ | 124,024 | $ | 129,267 | ||||||||||
Assumed—non-affiliate | Assumed—non-affiliate | 7 | 41 | Assumed—non-affiliate | 1 | 6 | 36 | 51 | ||||||||||||||||
Ceded | Ceded | Ceded | ||||||||||||||||||||||
Affiliate | (68 | ) | (529 | ) | Affiliate | (1,312 | ) | (225 | ) | (1,425 | ) | (791 | ) | |||||||||||
Non-affiliate | (595 | ) | (289 | ) | Non-affiliate | (1,202 | ) | (414 | ) | (2,923 | ) | (1,010 | ) | |||||||||||
Contract benefits, net of reinsurance | $ | 38,388 | $ | 42,170 | Contract benefits, net of reinsurance | $ | 38,278 | $ | 36,358 | $ | 119,712 | $ | 127,517 | |||||||||||
Excluded from the table above are premiums ceded to ALIC of $634$647 thousand, $602 thousand, $1.9 million and $576 thousand$1.8 million for the three monthsand nine month periods ended March 31,September 30, 2003 and 2002, respectively, under the terms of the structured settlement annuity reinsurance agreement.agreement described above. These premiums are recorded as investment expense and reflected in Net investment income.income in the Condensed Statements of Operations.
3. Regulation, Legal Proceedings and Guarantees
Regulation
The Company is subject to changing social, economic and regulatory conditions. State and federal regulatory initiatives and proceedings have varied and have included efforts to remove barriers preventing banks from engaging in the securities and insurance businesses, to change tax laws affecting the taxation of insurance companies and the tax treatment of either insurance products whichor competing non-insurance products that may impact the relative desirability of various personal investment products and to expand overall regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
Legal proceedings
TheLegal proceedings involving Allstate agencies and AIC may impact the Company, even when the Company is not directly involved because the Company sells its products through a variety of distribution channels including Allstate agencies. Consequently, information about the outcomemore significant of some legalthese proceedings that involve AIC regarding the Allstate agencies may have an impact on the Company.is provided below.
AIC is defending various lawsuits involving worker classification issues. Examples of theseThese lawsuits include a number of putative class actions and one certified class action 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 examplelawsuit 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 thoughthrough 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.
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
6
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.
Various other legal and regulatory actions are currently pending that involve the 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 serving at the request of the Company as a director or officer 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,September 30, 2003.
97
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 | ||||||||||||||||
| Three Months Ended September 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | (37,442 | ) | $ | 13,105 | $ | (24,337 | ) | $ | 36,822 | $ | (12,887 | ) | $ | 23,935 | |||||
Less: reclassification adjustments | (1,277 | ) | 446 | (831 | ) | (10,279 | ) | 3,598 | (6,681 | ) | ||||||||||
Unrealized net capital gains (losses) | (36,165 | ) | 12,659 | (23,506 | ) | 47,101 | (16,485 | ) | 30,616 | |||||||||||
Other comprehensive income (loss) | $ | (36,165 | ) | $ | 12,659 | (23,506 | ) | $ | 47,101 | $ | (16,485 | ) | 30,616 | |||||||
Net income | 2,853 | (1,390 | ) | |||||||||||||||||
Comprehensive income (loss) | $ | (20,653 | ) | $ | 29,226 | |||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | 10,720 | $ | (3,751 | ) | $ | 6,969 | $ | 51,445 | $ | (18,006 | ) | $ | 33,439 | ||||||
Less: reclassification adjustments | (3,531 | ) | 1,236 | (2,295 | ) | (10,515 | ) | 3,680 | (6,835 | ) | ||||||||||
Unrealized net capital gains (losses) | 14,251 | (4,987 | ) | 9,264 | 61,960 | (21,686 | ) | 40,274 | ||||||||||||
Other comprehensive income (loss) | $ | 14,251 | $ | (4,987 | ) | 9,264 | $ | 61,960 | $ | (21,686 | ) | 40,274 | ||||||||
Net income | 13,608 | 18,327 | ||||||||||||||||||
Comprehensive income | $ | 22,872 | �� | $ | 58,601 | |||||||||||||||
105. Disposition of operations
During the third quarter of 2003, the Company announced its intention to exit the Direct Response distribution business. Based on its decision to sell the business, the Company has recorded an estimated loss on the disposition of $4.3 million ($2.7 million, after-tax).
8
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,September 30, 2003, and the related condensed statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and the condensed statements of cash flows for the three-monthnine-month periods ended March 31,September 30, 2003 and 2002. These financial statements are the responsibility of the Company's management.
We conducted our reviewreviews 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,reviews, 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, IllinoisMayNovember 13, 2003
119
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHTHREE-MONTH AND NINE-MONTH PERIODS ENDED MARCH 31,SEPTEMBER 30, 2003 AND 2002
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 2002. To conform to the 2003 and year-end 2002 presentation, certain prior year amounts have been reclassified.
Management has identified the Company as a single segment entity.
The following discussion uses some "non-GAAP" measures that are not based on generally accepted accounting principles ("GAAP"). 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 of and for the three months ended March 31, areis presented in the following table.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
GAAP Premiums | $ | 16,328 | $ | 23,120 | ||||||||||||||||
Premiums | $ | 14,189 | $ | 13,483 | $ | 44,451 | $ | 67,429 | ||||||||||||
Contract charges | 12,991 | 12,357 | 12,721 | 12,930 | 39,394 | 37,537 | ||||||||||||||
Net investment income | 62,664 | 53,852 | 66,612 | 58,586 | 193,999 | 168,795 | ||||||||||||||
Contract benefits | 38,388 | 42,170 | 38,278 | 36,358 | 119,712 | 127,517 | ||||||||||||||
Interest credited to contractholder funds | 24,515 | 19,688 | 26,557 | 22,667 | 78,349 | 63,438 | ||||||||||||||
Amortization of DAC | 6,322 | 1,830 | 7,925 | 11,368 | 22,493 | 18,441 | ||||||||||||||
Operating costs and expenses | 9,726 | 10,142 | 11,452 | 7,694 | 26,788 | 26,208 | ||||||||||||||
Income tax expense on operations | 4,570 | 5,345 | ||||||||||||||||||
Operating income | 8,462 | 10,154 | ||||||||||||||||||
Income tax expense | 3,169 | 2,313 | 10,577 | 13,086 | ||||||||||||||||
Loss on disposition of operations, after-tax | (2,735 | ) | — | (2,735 | ) | — | ||||||||||||||
Realized capital gains and losses, after-tax(1) | (2,795 | ) | (1,681 | ) | (553 | ) | (5,989 | ) | (3,582 | ) | (6,744 | ) | ||||||||
Net income | $ | 5,667 | $ | 8,473 | ||||||||||||||||
Premiums and deposits | $ | 189,963 | $ | 190,968 | ||||||||||||||||
Net income (loss) | $ | 2,853 | $ | (1,390 | ) | $ | 13,608 | $ | 18,327 | |||||||||||
Investments | $ | 4,368,600 | $ | 3,342,642 | $ | 4,832,087 | $ | 4,003,652 | $ | 4,832,087 | $ | 4,003,652 | ||||||||
Separate Accounts Assets | 515,422 | 626,523 | ||||||||||||||||||
Separate Accounts assets | 588,452 | 511,227 | 588,452 | 511,227 | ||||||||||||||||
Investments, including Separate Accounts Assets | $ | 4,884,022 | $ | 3,969,165 | ||||||||||||||||
Investments, including Separate Accounts assets | $ | 5,420,539 | $ | 4,514,879 | $ | 5,420,539 | $ | 4,514,879 | ||||||||||||
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 | ) | |
REVENUES
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | |||||||||
Premiums | $ | 14,189 | $ | 13,483 | $ | 44,451 | $ | 67,429 | |||||
Contract charges | 12,721 | 12,930 | 39,394 | 37,537 | |||||||||
Net investment income | 66,612 | 58,586 | 193,999 | 168,795 | |||||||||
Realized capital gains and losses | (1,276 | ) | (10,231 | ) | (4,492 | ) | (11,696 | ) | |||||
Total revenues | $ | 92,246 | $ | 74,768 | $ | 273,352 | $ | 262,065 | |||||
Total revenues increased 23.4% in the third quarter of 2003 compared to the third quarter of 2002, due to higher Net investment income and lower net realized capital losses. Total revenues rose 4.3% in the first nine months of 2003 compared to the first nine months of 2002. The increase was due to higher Net investment income, increased Contract charges and lower net realized capital losses partially offset by decreased Premiums and contract charges,from immediate annuities with life contingencies.
10
OPERATIONS
Premiums included in the Condensed Statements of Operations, represent GAAP premiums generated from traditional life, and other insurance products and immediate annuities with life contingencies, whichand other insurance products that have significant mortality or morbidity risk.
Contract charges are generated from interest-sensitive life products, variable annuities, fixed annuities and other investment products for which deposits are classified as contractholderContractholder funds or Separate Accounts liabilities. Contract charges are assessed against thethese contractholder account balancevalues for maintenance, administration, cost of insurance and surrender prior to the contractually specified dates. As a result, changes in Contractholder funds and Separate Accounts are considered in the evaluation of growth and as indicators of future levels of revenues.
12 The following table summarizes premiums and contract charges by product.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Premiums | ||||||||||||||||
Life insurance | ||||||||||||||||
Traditional life | $ | 5,393 | $ | 5,296 | $ | 16,467 | $ | 15,856 | ||||||||
Other | 2,037 | 2,082 | 6,405 | 6,574 | ||||||||||||
Total life insurance | 7,430 | 7,378 | 22,872 | 22,430 | ||||||||||||
Annuities | ||||||||||||||||
Fixed annuities—immediate annuities with life contingencies | 6,759 | 6,105 | 21,579 | 44,999 | ||||||||||||
Total annuities | 6,759 | 6,105 | 21,579 | 44,999 | ||||||||||||
Total Premiums | 14,189 | 13,483 | 44,451 | 67,429 | ||||||||||||
Contract charges | ||||||||||||||||
Life insurance | ||||||||||||||||
Interest-sensitive life | 8,727 | 9,131 | 28,173 | 27,090 | ||||||||||||
Total life insurance | 8,727 | 9,131 | 28,173 | 27,090 | ||||||||||||
Annuities | ||||||||||||||||
Fixed annuities—deferred | 467 | 233 | 1,307 | 571 | ||||||||||||
Fixed annuities—immediate annuities without life contingencies | 922 | 643 | 2,683 | 1,667 | ||||||||||||
Variable annuities | 2,605 | 2,923 | 7,231 | 8,209 | ||||||||||||
Total annuities | 3,994 | 3,799 | 11,221 | 10,447 | ||||||||||||
Total Contract charges | 12,721 | 12,930 | 39,394 | 37,537 | ||||||||||||
Premiums and contract charges | $ | 26,910 | $ | 26,413 | $ | 83,845 | $ | 104,966 | ||||||||
11
The following table summarizes GAAP premiumsPremiums and contract charges.charges by distribution channel.
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 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||
Premiums | ||||||||||||||
Allstate agencies | $ | 5,310 | $ | 5,272 | $ | 16,219 | $ | 15,833 | ||||||
Financial services firms (financial institutions and broker/dealers) | — | — | 34 | — | ||||||||||
Specialized brokers | 6,724 | 6,105 | 21,544 | 44,999 | ||||||||||
Independent agents | 476 | 25 | 1,099 | 26 | ||||||||||
Direct marketing | 1,679 | 2,081 | 5,555 | 6,571 | ||||||||||
Total Premiums | 14,189 | 13,483 | 44,451 | 67,429 | ||||||||||
Contract charges | ||||||||||||||
Allstate agencies | 8,789 | 9,175 | 28,515 | 27,312 | ||||||||||
Financial services firms (financial institutions and broker/dealers) | 2,961 | 3,104 | 8,083 | 8,549 | ||||||||||
Specialized brokers | 922 | 643 | 2,683 | 1,667 | ||||||||||
Independent agents | 49 | 8 | 113 | 9 | ||||||||||
Total Contract charges | 12,721 | 12,930 | 39,394 | 37,537 | ||||||||||
Premiums and contract charges | $ | 26,910 | $ | 26,413 | $ | 83,845 | $ | 104,966 | ||||||
Total GAAP premiums decreased 29.4%Premiums increased 5.2% to $16.3$14.2 million in the firstthird quarter of 2003 from $23.1$13.5 million in the firstthird quarter of 2002. This decrease was2002, due to decreased premiums onan increase in sales of immediate annuities with life contingencies. Consumer preferencesSales of immediate annuities with life contingencies fluctuate due to consumer preference as well as market and marketcompetitive conditions, which drive the level and mix of immediate annuities sold with or without life contingencies.
Total Contract charges were $12.7 million in the third quarter of 2003 compared to $12.9 million in the third quarter of 2002. Higher fixed annuity contract charges were more than offset by a decline in variable annuities and interest-sensitive life insurance contract charges. The variable annuity daily average account values during the third quarter of 2003 were lower than the daily average account values during the third quarter of 2002, as poor equity market performance during the prior year and surrenders offset increases from new business and market appreciation since March of 2003.
For the first nine months of 2003, Premiums and Contract charges decreased 20.1% compared to the first nine months of 2002. The decrease is due to decreased sales of immediate annuities with life contingencies resulting in volatility in reported revenues. Premiums from competitive market conditions and lower variable annuity contract charges from lower average account values, partially offset by slightly higher traditional life products increased 6.7%insurance premiums, and higher contract charges related to interest-sensitive life insurance and fixed annuities.
Contractholder funds, included in the Condensed Statements of Financial Position represent interest-bearing liabilities arising from the sale of interest-sensitive life and fixed annuities. The balance of the Contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, surrenders, withdrawals and contract charges for mortality or administrative expenses.
12
The following table shows the changes in Contractholder funds.
| Changes from July 1 to September 30, | Changes from January 1 to September 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||
Contractholder funds, beginning balance | $ | 2,407,026 | $ | 1,666,106 | $ | 2,051,429 | $ | 1,438,640 | ||||||
Deposits: | ||||||||||||||
Fixed annuities (immediate and deferred)(1) | 146,433 | 272,476 | 498,863 | 527,369 | ||||||||||
Interest-sensitive life | 27,567 | 13,863 | 80,548 | 45,654 | ||||||||||
Interest credited | 26,557 | 22,667 | 78,349 | 63,438 | ||||||||||
Maturities, surrenders and other adjustments | (62,184 | ) | (48,880 | ) | (163,790 | ) | (148,869 | ) | ||||||
Contractholder funds, ending balance | $ | 2,545,399 | $ | 1,926,232 | $ | 2,545,399 | $ | 1,926,232 | ||||||
The increase in Contractholder funds of $138.4 million for the three months ended March 31,September 30, 2003 as acompared to the $260.1 million increase during the same period in 2002 is the result of growthfixed annuity deposits in both periods partially offset by a decrease in new deposits to the fixed portion of variable annuities. Deposits for the fixed portion of variable annuities included in Contractholder funds decreased $107.9 million in the number of policies inforce from new business.
Total contract charges increased 5.1% due to a 6.7% increase in contract charges on interest-sensitive life in the firstthird quarter of 2003 compared to the same period in 2002.
For the first nine months of 2003, the change in Contractholder funds compared to the first nine months of 2002 as a result ofreflects trends consistent with those for the three months ended September 30. Decreased deposits into variable annuity fixed account investment options and slightly 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 fixedsurrenders and immediate annuitiesmaturities were offset by decreasedfixed annuity deposits and increased interest-sensitive life deposits from new business.
Separate Accounts liabilities, included in the Condensed Statements of Financial Position, are legally segregated from the Company's general account assets and represent the contractholders' claims to the related Separate Accounts assets. Separate Accounts liabilities primarily arise from the sale of variable annuityannuities and variable life insurance. The balance of the Separate Accounts liabilities is equal to the cumulative deposits received plus the investment performance of the related assets less the cumulative contract surrenders, withdrawals, net transfers to/from the general account and cumulative 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.for mortality or administrative expenses.
13
The following table summarizes GAAP premiums and contract charges by distribution channel.shows the changes in Separate Accounts.
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 | ||||
| Changes from July 1 to September 30, | Changes from January 1 to September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | |||||||||
Separate Accounts liabilities, beginning balance | $ | 575,684 | $ | 589,029 | $ | 537,204 | $ | 602,657 | |||||
Deposits | 22,408 | 20,699 | 50,316 | 93,980 | |||||||||
Investment results | 13,437 | (73,690 | ) | 60,692 | (123,856 | ) | |||||||
Contract charges | (2,041 | ) | (1,905 | ) | (5,699 | ) | (6,018 | ) | |||||
Surrenders and other adjustments | (21,036 | ) | (22,906 | ) | (54,061 | ) | (55,536 | ) | |||||
Separate Accounts liabilities, ending balance | $ | 588,452 | $ | 511,227 | $ | 588,452 | $ | 511,227 | |||||
Premiums and deposits, an operating measure, by product are presented Increases in Separate Accounts liabilities 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 Premiumsthird quarter 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 the poor equity market conditions and decreased sales of immediate annuities 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 quarternine months of 2003 compared to the same periods in the prior year were primarily driven by strong equity market performance resulting in improved investment results during both periods and lower transfers into the fixed account investment options and surrenders.
Net investment income increased 13.7% in the third quarter and 14.9% in the first quarternine months of 2002 driven primarily by decreased2003
13
compared to the same periods in the prior year. The increase in both periods was due to higher portfolio balances resulting from increased positive cash flows from product sales of variable annuitiesand deposits, partially offset by increased saleslower portfolio yields. The lower portfolio yields were primarily due to investment purchases of fixed annuities.income securities with interest rates lower than the current portfolio average. Investments as of September 30, 2003, excluding unrealized net capital gains on fixed income securities, increased 19.0% from September 30, 2002.
OperatingAnalysis of net income a non-GAAP measure, is presented in the following table.
For the three months ended March 31, | ||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Investment margin | $ | 14,525 | $ | 11,607 | $ | 16,015 | $ | 11,319 | $ | 45,933 | $ | 35,237 | ||||||||
Mortality margin | 8,306 | 10,215 | 6,222 | 8,150 | 14,808 | 28,683 | ||||||||||||||
Maintenance charges | 5,069 | 4,597 | 5,210 | 5,200 | 15,448 | 15,377 | ||||||||||||||
Surrender charges | 1,180 | 1,052 | 1,240 | 1,305 | 3,594 | 3,509 | ||||||||||||||
Amortization of DAC | (6,322 | ) | (1,830 | ) | (7,925 | ) | (11,369 | ) | (22,493 | ) | (18,442 | ) | ||||||||
Operating costs and expenses | (9,726 | ) | (10,142 | ) | (11,452 | ) | (7,693 | ) | (26,788 | ) | (26,207 | ) | ||||||||
Income tax expense on operations | (4,570 | ) | (5,345 | ) | ||||||||||||||||
Loss on disposition of operations, after-tax | (2,735 | ) | — | (2,735 | ) | — | ||||||||||||||
Income tax expense | (3,169 | ) | (2,313 | ) | (10,577 | ) | (13,086 | ) | ||||||||||||
Realized capital gains and losses, after-tax | (553 | ) | (5,989 | ) | (3,582 | ) | (6,744 | ) | ||||||||||||
Operating income | $ | 8,462 | $ | 10,154 | ||||||||||||||||
Net income (loss) | $ | 2,853 | $ | (1,390 | ) | $ | 13,608 | $ | 18,327 | |||||||||||
Operating income decreased 16.7% to $8.5 million for the first quarter of 2003 compared to $10.2 million for the same period in 2002 as a lower mortality margin and increased Amortization of DAC more than offset increases in the investment margin.
Investment margin which represents the excess of investment income earned over interest credited to policyholders and contractholders and interest expense. Investment margin increased 25.1%41.5% in the firstthird quarter of 2003 compared to the same period in 2002. The increase is a result2002 and increased 30.4% in the first nine months of 22.9% higher portfolio balances at March 31, 2003 compared to March 31, 2002, excluding assets invested in Separate Accountsthe first nine months of 2002. Growth and unrealized net capital gains on fixed income securities. The higher portfolio balance at March 31, 2003 is a result of product sales exceeding contract benefits, maturities, surrenders and withdrawals during the previous 12 months. The impact of the growth of the portfolio was partially offset by a decline in portfolio yields from lower market interest rates affecting the yield on the investment of cash flows from operations. Managementmanagement actions taken to reduce crediting rates on in-force contracts havewhere possible were partially offset by the impact of declining portfoliodecline in 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 thecapital, traditional and interest-sensitive life and certain investment margin in a decliningcontracts with fixed interest rate environment as they earn lower investment yields.crediting rates.
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The following table summarizes the annualized weighted average investment yield, interest crediting rates and investment spreads for the three months ended March 31.September 30.
| Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Interest-sensitive life | 6.9 | % | 7.0 | % | 4.9 | % | 5.0 | % | 2.0 | % | 2.0 | % | 6.6 | % | 6.9 | % | 4.9 | % | 4.9 | % | 1.7 | % | 2.0 | % | ||
Fixed-rate contracts | 7.1 | 7.6 | 5.7 | 6.4 | 1.4 | 1.2 | ||||||||||||||||||||
Fixed annuities—deferred | 6.0 | 6.6 | 3.7 | 4.8 | 2.3 | 1.8 | ||||||||||||||||||||
Fixed annuities—immediate | 7.6 | 7.9 | 6.9 | 6.9 | 0.7 | 1.0 | ||||||||||||||||||||
Investments supporting capital, traditional life and other products | 6.2 | 6.7 | N/A | N/A | N/A | N/A |
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The following table summarizes the annualized weighted average investment yield, interest crediting rates and investment spreads for the nine months ended September 30.
| Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||
Interest-sensitive life | 6.7 | % | 7.0 | % | 5.0 | % | 5.0 | % | 1.7 | % | 2.0 | % | |
Fixed annuities—deferred | 6.1 | 6.8 | 3.9 | 5.0 | 2.2 | 1.8 | |||||||
Fixed annuities—immediate | 7.7 | 8.0 | 6.9 | 6.9 | 0.8 | 1.1 | |||||||
Investments supporting capital, traditional life and other products | 6.3 | 6.8 | N/A | N/A | N/A | N/A |
The decline in the weighted average investment spreads for the interest-sensitive life and immediate annuities were due to lower reinvestment yields than the portfolio average in both periods.
The following table summarizes contractholderContractholder funds and the reserveReserve for life-contingent contract benefits associated with the weighted average investment yield and weighted average interest crediting rates at March 31.September 30.
(in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest-sensitive life | $ | 280,627 | $ | 261,085 | $ | 293,087 | $ | 270,670 | ||||
Fixed rate contracts | 3,246,014 | 2,508,239 | ||||||||||
Fixed annuities—deferred | 1,772,336 | 1,180,696 | ||||||||||
Fixed annuities—immediate | 1,827,784 | 1,742,008 | ||||||||||
3,526,641 | 2,769,324 | 3,893,207 | 3,193,374 | |||||||||
FAS 115/133 market value adjustment | 165,702 | 6 | 192,510 | 108,806 | ||||||||
Life-contingent contracts and other | 82,668 | 78,072 | 102,361 | 86,611 | ||||||||
Total Contractholder funds and Reserve for life-contingent contract benefits | $ | 3,775,011 | $ | 2,847,402 | $ | 4,188,078 | $ | 3,388,791 | ||||
The following table summarizes investment margin by product group.
For the three months ended March 31, | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Life insurance | $ | 2,488 | $ | 2,191 | $ | 2,565 | $ | 2,953 | $ | 7,279 | $ | 7,689 | ||||||
Annuities | 12,037 | 9,416 | 13,450 | 8,366 | 38,654 | 27,548 | ||||||||||||
Investment margin | $ | 14,525 | $ | 11,607 | $ | 16,015 | $ | 11,319 | $ | 45,933 | $ | 35,237 | ||||||
Mortality margin, which represents premiums and cost of insurance charges less related policy benefits, was 18.7%$6.2 million or 23.7% lower in the firstthird quarter of 2003 compared to the third quarter of 2002. The decrease in mortality margin is primarily due to higher death claims on life insurance policies combined with lower death claims on immediate annuities with life contingencies. These decreases were partially offset by growth from new business and lower death benefits on variable annuities. Variable annuity guaranteed minimum death benefits ("GMDB") payments of $.5 million in the third quarter of 2003 decreased $.2 million compared to the same period in 2002. Variable annuity GMDB payments have decreased each quarter of 2003 as equity market improvements since the first quarter of 2003 have reduced the net amount at risk.
For the first nine months of 2003, mortality margin was $14.8 million or 48.4% below the first nine months of 2002. The decline reflects the favorable mortality margin in the first half of 2002 as 2002 results benefited from lowerfavorable death benefitsclaims on immediate annuities with life contingencies and the recognition of reinsurance recoverables arising from the tragic events of September 11, 2001. Policy benefits paid include cash paymentsThe strengthening of reserves on certain traditional
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life insurance policies in the second quarter of 2003 contributed significantly to the decline as did higher variable annuity products for guaranteed minimum death benefits ("GMDB") totaling $1.2 million and $0.8 million forin the three months ended March 31, 2003 and 2002, respectively.first half of 2003. The GMDB payments in the first quarternine months of 2003 were $0.4$2.5 million more than payments of $0.8compared to $2.0 million in the fourth quarterfirst nine months 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, | ||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Life insurance | $ | 8,411 | $ | 8,028 | $ | 7,710 | $ | 8,894 | $ | 17,864 | $ | 26,251 | ||||||
Annuities | (105 | ) | 2,187 | (1,488 | ) | (744 | ) | (3,056 | ) | 2,432 | ||||||||
Mortality margin | $ | 8,306 | $ | 10,215 | $ | 6,222 | $ | 8,150 | $ | 14,808 | $ | 28,683 | ||||||
Amortization of DAC increased 245.5%decreased 30.3% in the firstthird quarter of 2003 compared to the same period in 2002 and increased 22.0% in the first nine months of 2003 compared to the first nine months of 2002. The decline in the third quarter compared to the same period of the prior year is primarily due to continued growthacceleration of business inforce and the deceleration ofamortization, commonly known as DAC amortization by $2.6
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unlocking, which was $6.3 million in the firstthird quarter of 2002, as a result of changespartially offset by the increased amortization related to and in assumptions usedproportion with the growth in the Company's DACfixed and variable annuity investment margins. The increase for the nine months ended September 30, 2003 compared to the same period in the prior year was primarily due to increased amortization models. DAC is subjectdue to recoverability testing at the end of each reporting period. The Company performs its evaluation on an aggregated basis consistent with the naturegrowth of the underlying products. Fixed annuities, variable annuities, and interest-sensitive life insurance products are aggregated for purposesinvestment margin partially offset by the $4.9 million 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.prior year period.
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% inincreased 48.9% during the firstthird quarter of 2003 compared to the firstthird quarter of 2002. Increased expenses related to employee benefit costs including pension expenses were offset by decreased premium taxes2002 and fees.
INVESTMENT RESULTS
Pre-tax Net investment incomeincreased 16.4% in2.2% during the first quarternine months of 2003 compared to the same period inof 2002. The increase in the third quarter of 2003 over the comparable period in the prior year is a result of certain distribution and technology expenses, higher employee related benefit expenses and increased taxes licenses and fees. The increase in the first nine months of 2003 from the comparable period in 2002 was due to higher portfolio balances resultingemployee related benefit expenses and increased taxes licenses and fees.
Loss on disposition of operations resulted from positive cash flows from operating and financing activities, partially offset by lower portfolio yields. Lower portfolio yields were duethe Company's recent announcement to new investments being made at rates lower than current portfolio yields as a resultexit the Direct Response distribution business. Based on its decision to sell the business, the Company has recorded an estimated loss on the disposition of the low interest rate environment. The portfolio balance, excluding assets invested in Separate Accounts and unrealized net capital gains on fixed income securities, increased 22.9% from March 31, 2002.$2.7 million, after-tax.
After-tax realizedRealized capital gains and losses were $(2.8) millionare presented in the first quarter of 2003 compared to $(1.7) million in the same period in 2002.following table. After-tax realized capital gains and losses are presented net of
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the effects of DAC amortization to the extent that such amortization effects resulted from the recognition of realized capital gains and losses.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2003 | 2002 | 2003 | 2002 | |||||||||
Investment write-downs | $ | (295 | ) | $ | (11,920 | ) | $ | (7,547 | ) | $ | (13,676 | ) | |
Sales of fixed income securities | (2,726 | ) | 1,238 | (1,100 | ) | 737 | |||||||
Valuation of derivative instruments | 728 | — | 972 | 5 | |||||||||
Settlement of derivative instruments | 1,017 | 451 | 3,183 | 1,238 | |||||||||
Realized capital gains and losses, pretax | (1,276 | ) | (10,231 | ) | (4,492 | ) | (11,696 | ) | |||||
Reclassification of amortization of DAC | 398 | 851 | (1,156 | ) | 1,140 | ||||||||
Income tax benefit | 325 | 3,391 | 2,066 | 3,812 | |||||||||
Realized capital gains and losses, after-tax | $ | (553 | ) | $ | (5,989 | ) | $ | (3,582 | ) | $ | (6,744 | ) | |
The following table shows the activity driving the after-tax realized capital gains and losses results.16
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 "Investments".
INVESTMENTS
The composition of the investment portfolio at March 31,September 30, 2003 is presented in the table below.following table.
(in thousands) | (in thousands) | Carrying value | Percent of total | (in thousands) | Investments | Percent of total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fixed income securities(1) | Fixed income securities(1) | $ | 3,842,538 | 88.0 | % | Fixed income securities(1) | $ | 4,288,345 | 88.8 | % | ||||
Mortgage loans | Mortgage loans | 348,088 | 8.0 | Mortgage loans | 369,365 | 7.6 | ||||||||
Short-term | Short-term | 144,154 | 3.3 | Short-term | 140,580 | 2.9 | ||||||||
Policy loans | Policy loans | 33,820 | 0.7 | Policy loans | 33,797 | 0.7 | ||||||||
Total | $ | 4,368,600 | 100.0 | % | Total | $ | 4,832,087 | 100.0 | % | |||||
Total investments increased to $4.37$4.83 billion at March 31,September 30, 2003 from $4.20 billion at December 31, 2002 due to positive cash flows generated from operating and financing activities, and increased unrealized gains on fixed income securities generated in a lower interest rate environment.environment and increased funds associated with securities lending.
Total investment balances related to funds associated with securities lending decreasedincreased to $143.0$181.6 million at March 31,September 30, 2003 from $160.0 million at December 31, 2002.
The Unrealized net capital gains on fixed income securities at March 31,September 30, 2003 were $486.0$533.8 million, an increase of $32.8$80.6 million or 7.2%17.8% since December 31, 2002. The net unrealized gain for the fixed income portfolio wastotaled $533.8 million, comprised of $506.1$549.9 million of unrealized gains and $20.1$16.1 million of unrealized losses at March 31,September 30, 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 million of unrealized losses. At March 31,September 30, 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$259.8 million comprised of $228.1$272.1 million of unrealized gains and $19.4$12.3 million of unrealized losses. The unrealized losses for the corporate fixed income portfolio were concentrated in the transportation, banking and public utilities sectors. These sectors comprised $15.6$8.0 million or 80.2%65.2% of the unrealized losses and $75.0$122.9 million or 32.9%45.2%, of the unrealized gains in the corporate fixed income portfolio.
Approximately 95.3%95.9% of the Company's fixed income securities portfolio is 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.
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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 securities 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 the security. Restructured fixed income securities have modified terms and conditions that were not at 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, management has serious concerns regarding the borrower's ability to pay future principal and interest in accordance with the contractual terms of the security, which causes management to believe these securities may be classified as problem or restructured in the future.
17
The following table summarizes problem, restructured and potential problem fixed income securities.
(in thousands) | March 31, 2003 | December 31, 2002 | September 30, 2003 | December 31, 2002 | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amortized cost | Fair value | Percent of total Fixed Income portfolio | Amortized cost | Fair value | Percent of total Fixed Income portfolio | 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 | % | $ | 14,816 | $ | 13,862 | 0.3 | % | $ | 23,395 | $ | 21,177 | 0.5 | % | ||||||||||
Restructured | 5,880 | 6,237 | 0.1 | — | — | — | ||||||||||||||||||||||||||||
Potential problem | 12,358 | 9,036 | 0.2 | 6,212 | 6,651 | 0.2 | 12,732 | 12,674 | 0.3 | 6,212 | 6,651 | 0.2 | ||||||||||||||||||||||
Total net carrying value | $ | 35,683 | $ | 30,409 | 0.8 | % | $ | 29,607 | $ | 27,828 | 0.7 | % | $ | 33,428 | $ | 32,773 | 0.7 | % | $ | 29,607 | $ | 27,828 | 0.7 | % | ||||||||||
Cumulative write-downs recognized | $ | 20,881 | $ | 15,446 | $ | 6,938 | $ | 15,446 | ||||||||||||||||||||||||||
As of March 31,September 30, 2003, the balance of fixed income securities that the Company categorizes as problemrestructured or potential problem increased from the balance as of year-end 2002 while the balance of fixed income securities categorized as problem decreased from the balance at year-end 2002. The increase in potential problem assets primarily resulted from company-specific poor operating fundamentals as well as liquidity constraints in the transportation sector of the market in 2003.utility sector. The Company expects the eventual recoveryevaluated each of these securities but evaluated each security through its watch list process at March 31,September 30, 2003 and recorded write-downs where appropriate.on securities that are deemed to be other than temporarily impaired. Approximately $5.3 million$655 thousand of net unrealized losses at March 31,September 30, 2003 are related to securities that the Company has included in the problem, restructured or potential problem categories. These securities represent 0.8%0.7% of the fixed income portfolio. The Company concluded, through its watch list monitoring process, that these unrealized losses were temporary in nature. While it is possible for these balances tomay increase in the future, particularly if economic conditions continue to be unfavorable, management expects that the total amount of securities in these categories is expected towill remain a relatively low percentage of the total fixed income securities portfolio. The Company had no fixed income securities categorized as restructured at March 31, 2003 or December 31, 2002.
The following table describes the components of pre-taxpretax realized capital gains and losses.losses are described in the table on page 16. Sales of fixed income securities in the third quarter and first nine months of 2003 resulted from actions taken to reduce credit exposure to certain issuers or industries and to provide liquidity for the purchase of investments that better meet certain investment objectives. Sales also include fees received from prepayments of fixed income securities and mortgage loans totaling $180 thousand and $201 thousand for the third quarter and first nine months of 2003, respectively, compared to $1.6 million and $4.2 million for the same periods of 2002, respectively.
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 | ) | ||
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CAPITAL RESOURCES AND LIQUIDITY
Capital Resourcesresources consist of shareholder's equity. The following table summarizes the Company's capital resources.
(in thousands) | (in thousands) | March 31, 2003 | December 31, 2002 | (in thousands) | September 30, 2003 | December 31, 2002 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Common stock, retained earnings and other shareholder's equity items | Common stock, retained earnings and other shareholder's equity items | $ | 379,827 | $ | 374,160 | Common stock, retained earnings and other shareholder's equity items | $ | 387,768 | $ | 374,160 | ||||
Accumulated other comprehensive income | Accumulated other comprehensive income | 176,118 | 169,655 | Accumulated other comprehensive income | 178,919 | 169,655 | ||||||||
Total shareholder's equity | $ | 555,945 | $ | 543,815 | Total shareholder's equity | $ | 566,687 | $ | 543,815 | |||||
Shareholder's equity increased $12.1$22.9 million in the first quarternine months of 2003 when compared to December 31, 2002 due to Net income of $13.6 million and to an increase of $6.4$9.3 million in Accumulated other comprehensive income.
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Financial Ratings and Strength In June 2003, Standard & Poor's revised the insurance financial strength rating of Allstate Life Insurance Company ("ALIC") and its rated subsidiaries and affiliates, including the Company, from AA+ to AA and revised the rating outlook from negative to stable. Standard & Poor's stated that the rating change was due to several factors including their negative outlook on the life insurance industry, the recent decline in ALIC's Net income and to Net incometheir view that a subsidiary's rating cannot exceed the rating of $5.7 million.its parent. ALIC's rating is now the same rating as that of AIC, the parent of ALIC. Moody's and A.M. Best's insurance financial strength ratings of the Company, ALIC and AIC remain unchanged. In reaffirming the A+ ratings of the Company, ALIC and AIC, A.M. Best assigned a positive rating outlook for these companies' ratings.
Liquidity
The Company's operations typically generate substantial positive cash flows from operations as most premiums and deposits are received in advance of the time when claim and benefit payments are required. These positive operating cash flows are expected to continue to meet the liquidity requirements of the Company.
The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. The payment of shareholder dividends by the Company without prior approval of the state insurance regulator in any calendar year is limited to formula amounts based on statutory surplus and statutory net gain from operations, determined in accordance with statutory accounting practices, for the immediately preceding calendar year. In the twelve-month period ending September 30, 2003, the Company has not paid any dividends. The maximum amount of dividends that the Company can distribute during 2003 without prior approval of the New York State Insurance Department is $16.3 million.
A portion of the Company's diversified product portfolio, primarily fixed annuities and interest-sensitive life insurance products, is subject to surrenderssurrender and withdrawalswithdrawal at the discretion of contractholders.contractholders and therefore represents a significant potential use of cash in each fiscal period. These surrenders and withdrawals for the three-month and nine-month periods ended September 30, 2003 were $59.0 million and $141.3 million compared to $45.4 million and $127.7 million for the same periods last year. The total amount of surrenders and withdrawals were $41.5 million and $48.5 million for the first quarternine months of 2003 represented 3.4% of the Reserve for life-contingent contract benefits and 2002, respectively. The decrease was driven primarily from decreased surrendersContractholder funds balance at September 30, 2003, compared to 3.8% in the first nine months of fixed annuities resulting from the current low interest rate environment.last year.
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 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 March 31,September 30, 2003 or December 31, 2002. The Corporation uses commercial paper borrowings
RECENT DEVELOPMENTS
FORWARD-LOOKING STATEMENTS
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. The 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," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets" and other words with similar meanings. These statements may address, among
19
other things, the Company's strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Management believes that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the 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 additionFactors which could cause actual results to differ materially from those suggested by such forward-looking statements, include but are not limited to those discussed or identified in this document (including the normal risks of business,risk factor described below) and in the Company is subject to significant risks and uncertainties, including those listed below which apply to it as an insurance business and a provider of other financial services.Company's public filings with the SEC.
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RISK FACTORSFACTOR
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"Factors Affecting The Company," in Part II Item 7 of the Company's Form 10-K filed on March 28,31, 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 that 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 insurers. In this computation, the net effect of Realized capital gains and losses, after-tax, includes that portion of DAC amortization, only to the extent that it resulted from the recognition of Realized capital gains and losses. Net income is the most directly comparable GAAP measure. The following table reconciles Operating income to Net income for the first quarter of 2003 and 2002.
2120
(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 performance 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 therefore comparability may be limited.
Premiums and deposits is an operating measure used by the Company's management to analyze production trends for sales. Premiums and deposits includes premiums on insurance policies and annuities, and all deposits and other funds received from customers on deposit-type products which are accounted for under GAAP as direct increases to liabilities, rather than as revenue.
The following table illustrates where Premiums and deposits are reflected in the condensed 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 | ||
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Item 4. Controls and Procedures
Based upon With the participation of our principal executive officer and principal financial officer, we carried out an evaluation of the Company'seffectiveness of the design and operation of our disclosure controls and procedures conducted within 90 days prior to the dateas of the filingend of the period covered by this report,report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that theseour 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'sour periodic reports filed with the Securities and Exchange 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 any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and are effective at the "reasonable assurance" level.
In addition,During the last fiscal quarter, there werehave been no significant changes in the Company'sour internal controlscontrol over financial reporting that have materially affected, or in other factors that could significantlyare reasonably likely to materially affect, theseour internal controls subsequent to the date of their evaluation.control over financial reporting.
PART II—II. OTHER INFORMATION
Item 1. Legal Proceedings
The discussion "Regulation, Legal Proceedings and 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
An Exhibit 15—AcknowledgementIndex has been filed as part 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 § 1350this report on page E-1.
None.None
2321
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) | |||||
By | /s/ SAMUEL H. PILCH Samuel H. Pilch (chief accounting officer and duly authorized officer of the |
2422
CERTIFICATIONSI, Casey J. Sylla, certify that:1.I have reviewed this quarterly report on Form 10-Q of Allstate Life Insurance Company of New York;2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a)Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;b)Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); andc)Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):a)All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and6.The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: May 13, 2003Exhibit No. Description 15 /s/ CASEY J. SYLLA Casey J. SyllaChairmanAcknowledgement of the Board and Presidentawareness from Deloitte & Touche LLP dated November 13, 2003, concerning unaudited interim financial information.
31.1
Rule 15d-14(a) Certification of Principal Executive Officer
31.2
Rule 15d-14(a) Certification of Principal Financial Officer
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Section 1350 Certifications25E-1I, Steven E. Shebik, certify that:1.I have reviewed this quarterly report on Form 10-Q of Allstate Life Insurance Company of New York;2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a)Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;b)Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); andc)Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):a)All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and6.The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: May 13, 2003/s/ STEVEN E. SHEBIK Steven E. ShebikVice President and Chief Financial Officer