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 | |
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.) | |
100 Motor Parkway, Suite 132 Hauppauge, New York | 11788 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:631/357-8920631-357-8920
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,July 31, 2004 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,June 30, 2004
| | | |
---|---|---|---|
PART | FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | ||
Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended | 3 | ||
Condensed Statements of Financial Position as of | 4 | ||
Condensed Statements of Cash Flows for the | 5 | ||
Notes to Condensed Financial Statements (unaudited) | 6 | ||
Report of Independent | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 4. | Controls and Procedures | ||
PART II. | OTHER INFORMATION | ||
Item 1. | Legal Proceedings | ||
Item 6. | Exhibits and Reports on Form 8-K |
PART 1.I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF OPERATIONS
| | Three Months Ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (in thousands) | 2004 | 2003 | (in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
| | (unaudited) | | (unaudited) | ||||||||||||||||||
Revenues | Revenues | Revenues | ||||||||||||||||||||
Premiums | $ | 16,651 | $ | 16,328 | Premiums | $ | 19,969 | $ | 13,934 | $ | 36,620 | $ | 30,262 | |||||||||
Contract charges | 14,112 | 12,991 | Contract charges | 14,576 | 13,682 | 28,688 | 26,673 | |||||||||||||||
Net investment income | 70,395 | 63,298 | Net investment income | 72,676 | 65,356 | 143,071 | 128,654 | |||||||||||||||
Realized capital gains and losses | (653 | ) | (4,691 | ) | Realized capital gains and losses | (2,886 | ) | 208 | (3,539 | ) | (4,483 | ) | ||||||||||
100,505 | 87,926 | 104,335 | 93,180 | 204,840 | 181,106 | |||||||||||||||||
Costs and expenses | Costs and expenses | Costs and expenses | ||||||||||||||||||||
Contract benefits | 42,924 | 38,388 | Contract benefits | 44,916 | 43,046 | 87,840 | 81,434 | |||||||||||||||
Interest credited to contractholder funds | 27,651 | 24,515 | Interest credited to contractholder funds | 30,535 | 27,277 | 58,186 | 51,792 | |||||||||||||||
Amortization of deferred policy acquisition costs | (109 | ) | 6,669 | Amortization of deferred policy acquisition costs | 8,817 | 9,453 | 8,708 | 16,122 | ||||||||||||||
Operating costs and expenses | 9,958 | 9,726 | ||||||||||||||||||||
�� | Operating costs and expenses | 10,300 | 5,610 | 20,258 | 15,336 | |||||||||||||||||
80,424 | 79,298 | 94,568 | 85,386 | 174,992 | 164,684 | |||||||||||||||||
Gain on disposition of operations | Gain on disposition of operations | 1,058 | — | Gain on disposition of operations | — | — | 1,058 | — | ||||||||||||||
Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax | Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax | 21,139 | 8,628 | Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax | 9,767 | 7,794 | 30,906 | 16,422 | ||||||||||||||
Income tax expense | Income tax expense | 7,502 | 2,961 | Income tax expense | 3,592 | 2,706 | 11,094 | 5,667 | ||||||||||||||
Income before cumulative effect of change in accounting principle, after-tax | Income before cumulative effect of change in accounting principle, after-tax | 13,637 | 5,667 | Income before cumulative effect of change in accounting principle, after-tax | 6,175 | 5,088 | 19,812 | 10,755 | ||||||||||||||
Cumulative effect of change in accounting principle, after-tax | Cumulative effect of change in accounting principle, after-tax | (7,586 | ) | — | Cumulative effect of change in accounting principle, after-tax | — | — | (7,586 | ) | — | ||||||||||||
Net income | Net income | $ | 6,051 | $ | 5,667 | Net income | $ | 6,175 | $ | 5,088 | $ | 12,226 | $ | 10,755 | ||||||||
See notes to condensed financial statements.
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, 2004 | December 31, 2003 | (in thousands, except par value data) | June 30, 2004 | December 31, 2003 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (unaudited) | | | (unaudited) | | |||||||||||
Assets | Assets | Assets | |||||||||||||||
Investments | Investments | Investments | |||||||||||||||
Fixed income securities, at fair value (amortized cost $4,088,180 and $3,935,447) | $ | 4,681,297 | $ | 4,415,327 | Fixed income securities, at fair value (amortized cost $4,365,670 and $3,935,447) | $ | 4,694,455 | $ | 4,415,327 | ||||||||
Mortgage loans | 385,386 | 385,643 | Mortgage loans | 403,725 | 385,643 | ||||||||||||
Short-term | 123,078 | 22,756 | Short-term | 76,104 | 22,756 | ||||||||||||
Policy loans | 34,524 | 34,107 | Policy loans | 34,336 | 34,107 | ||||||||||||
Other | 4,849 | — | Other | 7,285 | — | ||||||||||||
Total investments | 5,229,134 | 4,857,833 | Total investments | 5,215,905 | 4,857,833 | ||||||||||||
Cash | Cash | 10,322 | 10,731 | Cash | 14,148 | 10,731 | |||||||||||
Deferred policy acquisition costs | Deferred policy acquisition costs | 164,290 | 187,437 | Deferred policy acquisition costs | 243,019 | 187,437 | |||||||||||
Accrued investment income | Accrued investment income | 49,428 | 47,818 | Accrued investment income | 51,291 | 47,818 | |||||||||||
Reinsurance recoverables | Reinsurance recoverables | 5,375 | 4,584 | Reinsurance recoverables | 5,228 | 4,584 | |||||||||||
Current income taxes receivable | Current income taxes receivable | 6,330 | 8,170 | Current income taxes receivable | 8,624 | 8,170 | |||||||||||
Other assets | Other assets | 14,770 | 15,004 | Other assets | 51,580 | 15,004 | |||||||||||
Separate Accounts | Separate Accounts | 686,639 | 665,875 | Separate Accounts | 710,363 | 665,875 | |||||||||||
Total assets | $ | 6,166,288 | $ | 5,797,452 | Total assets | $ | 6,300,158 | $ | 5,797,452 | ||||||||
Liabilities | Liabilities | Liabilities | |||||||||||||||
Reserve for life-contingent contract benefits | Reserve for life-contingent contract benefits | $ | 1,754,407 | $ | 1,683,771 | Reserve for life-contingent contract benefits | $ | 1,659,453 | $ | 1,683,771 | |||||||
Contractholder funds | Contractholder funds | 2,814,594 | 2,658,325 | Contractholder funds | 3,084,086 | 2,658,325 | |||||||||||
Deferred income taxes | Deferred income taxes | 94,736 | 81,657 | Deferred income taxes | 64,924 | 81,657 | |||||||||||
Other liabilities and accrued expenses | Other liabilities and accrued expenses | 249,479 | 168,081 | Other liabilities and accrued expenses | 259,257 | 168,081 | |||||||||||
Payable to affiliates, net | Payable to affiliates, net | 2,032 | 5,061 | Payable to affiliates, net | 6,839 | 5,061 | |||||||||||
Reinsurance payable to parent | Reinsurance payable to parent | 1,094 | 1,108 | Reinsurance payable to parent | 1,082 | 1,108 | |||||||||||
Separate Accounts | Separate Accounts | 686,639 | 665,875 | Separate Accounts | 710,363 | 665,875 | |||||||||||
Total liabilities | 5,602,981 | 5,263,878 | Total liabilities | 5,786,004 | 5,263,878 | ||||||||||||
Commitments and Contingent Liabilities (Note 4) | Commitments and Contingent Liabilities (Note 4) | Commitments and Contingent Liabilities (Note 4) | |||||||||||||||
Shareholder's equity | Shareholder's equity | Shareholder's equity | |||||||||||||||
Common stock, $25 par value, 100 thousand shares authorized and outstanding | Common stock, $25 par value, 100 thousand shares authorized and outstanding | 2,500 | 2,500 | Common stock, $25 par value, 100 thousand shares authorized 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 | 342,614 | 336,563 | Retained income | 348,789 | 336,563 | |||||||||||
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 | 162,406 | 138,724 | Unrealized net capital gains and losses and net gains and losses on derivative financial instruments | 107,078 | 138,724 | ||||||||||||
Total accumulated other comprehensive income | 162,406 | 138,724 | Total accumulated other comprehensive income | 107,078 | 138,724 | ||||||||||||
Total shareholder's equity | 563,307 | 533,574 | Total shareholder's equity | 514,154 | 533,574 | ||||||||||||
Total liabilities and shareholder's equity | $ | 6,166,288 | $ | 5,797,452 | Total liabilities and shareholder's equity | $ | 6,300,158 | $ | 5,797,452 | ||||||||
See notes to condensed financial statements.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF CASH FLOWS
| | Three Months Ended March 31, | | Six Months Ended June 30, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (in thousands) | 2004 | 2003 | (in thousands) | 2004 | 2003 | ||||||||||||||
| | (unaudited) | | (unaudited) | ||||||||||||||||
Cash flows from operating activities | Cash flows from operating activities | Cash flows from operating activities | ||||||||||||||||||
Net income | Net income | $ | 6,051 | $ | 5,667 | Net income | $ | 12,226 | $ | 10,755 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||
Amortization and other non-cash items | (12,004 | ) | (12,163 | ) | Amortization and other non-cash items | (24,511 | ) | (24,699 | ) | |||||||||||
Realized capital gains and losses | 653 | 4,691 | Realized capital gains and losses | 3,539 | 4,483 | |||||||||||||||
Gain on disposition of operations | (1,058 | ) | — | Gain on disposition of operations | (1,058 | ) | — | |||||||||||||
Cumulative effect of change in accounting principle | 7,586 | — | Cumulative effect of change in accounting principle | 7,586 | — | |||||||||||||||
Interest credited to contractholder funds | 27,651 | 24,515 | Interest credited to contractholder funds | 58,186 | 51,792 | |||||||||||||||
Changes in: | Changes in: | |||||||||||||||||||
Life-contingent contract benefits and contractholder funds | 6,809 | 2,661 | Life-contingent contract benefits and contractholder funds | 15,929 | 8,347 | |||||||||||||||
Deferred policy acquisition costs | (14,546 | ) | (6,160 | ) | Deferred policy acquisition costs | (28,212 | ) | (15,679 | ) | |||||||||||
Income taxes payable | 6,252 | 2,691 | Income taxes payable | 3,938 | (4,151 | ) | ||||||||||||||
Other operating assets and liabilities | 5,584 | (3,689 | ) | Other operating assets and liabilities | 11,026 | (4,215 | ) | |||||||||||||
Net cash provided by operating activities | 32,978 | 18,213 | Net cash provided by operating activities | 58,649 | 26,633 | |||||||||||||||
Cash flows from investing activities | Cash flows from investing activities | Cash flows from investing activities | ||||||||||||||||||
Proceeds from sales of fixed income securities | Proceeds from sales of fixed income securities | 233,910 | 97,988 | |||||||||||||||||
Investment collections | Investment collections | |||||||||||||||||||
Proceeds from sales of fixed income securities | 90,702 | 39,200 | Fixed income securities | 102,448 | 136,319 | |||||||||||||||
Investment collections | Mortgage loans | 6,403 | 4,287 | |||||||||||||||||
Investment purchases | Investment purchases | |||||||||||||||||||
Fixed income securities | 46,547 | 77,951 | Fixed income securities | (763,912 | ) | (578,200 | ) | |||||||||||||
Mortgage loans | 3,237 | 1,936 | Mortgage loans | (24,474 | ) | (44,596 | ) | |||||||||||||
Investment purchases | ||||||||||||||||||||
Fixed income securities | (267,897 | ) | (199,553 | ) | ||||||||||||||||
Mortgage loans | (3,000 | ) | (26,900 | ) | ||||||||||||||||
Change in short-term investments, net | (39,594 | ) | (41,458 | ) | ||||||||||||||||
Change in other investments, net | (163 | ) | 648 | |||||||||||||||||
Change in short-term investments, net | Change in short-term investments, net | 4,884 | 19,149 | |||||||||||||||||
Change in other investments, net | Change in other investments, net | 379 | 1,137 | |||||||||||||||||
Net cash used in investing activities | (170,168 | ) | (148,176 | ) | Net cash used in investing activities | (440,362 | ) | (363,916 | ) | |||||||||||
Cash flows from financing activities | Cash flows from financing activities | Cash flows from financing activities | ||||||||||||||||||
Contractholder fund deposits | Contractholder fund deposits | 195,768 | 159,433 | Contractholder fund deposits | 510,088 | 405,411 | ||||||||||||||
Contractholder fund withdrawals | Contractholder fund withdrawals | (58,987 | ) | (35,850 | ) | Contractholder fund withdrawals | (124,958 | ) | (80,199 | ) | ||||||||||
Net cash provided by financing activities | 136,781 | 123,583 | Net cash provided by financing activities | 385,130 | 325,212 | |||||||||||||||
Net decrease in cash | (409 | ) | (6,380 | ) | ||||||||||||||||
Net increase (decrease) in cash | Net increase (decrease) in cash | 3,417 | (12,071 | ) | ||||||||||||||||
Cash at beginning of period | Cash at beginning of period | 10,731 | 21,686 | Cash at beginning of period | 10,731 | 21,686 | ||||||||||||||
Cash at end of period | Cash at end of period | $ | 10,322 | $ | 15,306 | Cash at end of period | $ | 14,148 | $ | 9,615 | ||||||||||
See notes to condensed financial statements.
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,June 30, 2004, and for the three-month and six-month periods ended March 31,June 30, 2004 and 2003 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. These condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. 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 2004 and year-end 2003 presentations, certain amounts in the prior year's condensed financial statements have been reclassified.
Adopted accounting standard
Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" ("SOP 03-1")
On January 1, 2004, the Company adopted SOP 03-1. The major provisions of the SOP affecting the Company require:
Effects of adoption
The cumulative effect of the change in accounting principle from implementing SOP 03-1 was a loss of $7.6 million, after-tax ($11.7 million, pre-tax). It was comprised of an increase in contractholder funds and reserve for life-contingent contract benefits reserves (primarily for variable annuity contracts) of $942 thousand, pre-tax, and a reduction in DAC and deferred sales inducements ("DSI") of $10.7 million, pre-tax.
The SOP requires consideration of a range of potential results to estimate the cost of variable annuity death benefits and income benefits, which generally necessitates the use of stochastic modeling techniques. To maintain consistency with the assumptions used in the establishment of reserves for variable annuity guarantees, the Company utilized the results of this stochastic modeling to estimate expected gross profits, which form the basis for determining the amortization of DAC and DSI. This new modeling approach resulted in a lower estimate of expected gross profits, and therefore resulted in a write-down of DAC and DSI.
In 2004, DSI and related amortization is classified within the Condensed Statements of Financial Position and Operations as other assets and interest credited to contractholder funds, respectively. The amounts are provided below.
Liabilities for contract guarantees
The Company offers various guarantees to variable contractholders including a return of no less than (a) total deposits made on the contract less any customer withdrawals, (b) total deposits made on the contract less any customer withdrawals plus a minimum return or (c) the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death (death benefits), upon annuitization (income benefits), or at specified dates during the accumulation period.period (accumulation benefits). The Company hedges accumulation benefits for all contracts issued.
The table below presents information regarding the Company's variable contracts with guarantees. The Company's variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts' separate accounts with guarantees.
($ in millions) | ($ in millions) | March 31, 2004 | ($ in millions) | June 30, 2004 | ||||
---|---|---|---|---|---|---|---|---|
In the event of death | In the event of death | In the event of death | ||||||
Account value | $ | 685 | Account value | $ | 709 | |||
Net amount at risk(1) | $ | 109 | Net amount at risk(1) | $ | 107 | |||
Average attained age of contractholders | 62 years | Average attained age of contractholders | 63 years | |||||
At annuitization | At annuitization | At annuitization | ||||||
Account value | $ | 36 | Account value | $ | 37 | |||
Net amount at risk(2) | $ | — | Net amount at risk(2) | $ | — | |||
Weighted average waiting period until annuitization options available | 9 years | Weighted average waiting period until annuitization options available | 9 years | |||||
Accumulation at specified dates | Accumulation at specified dates | Accumulation at specified dates | ||||||
Account value | $ | 12 | Account value | $ | 12 | |||
Net amount at risk(3) | $ | — | Net amount at risk(3) | $ | — | |||
Weighted average waiting period until guarantee date | 11 years | Weighted average waiting period until guarantee date | 11 years |
Account balances of variable contracts' separate accounts with guarantees were invested as follows:
(in millions) | March 31, 2004 | June 30, 2004 | ||||
---|---|---|---|---|---|---|
Equity securities (including mutual funds) | $ | 660 | $ | 679 | ||
Cash and cash equivalents | 25 | 30 | ||||
Total variable contracts' separate account assets with guarantees | $ | 685 | $ | 709 | ||
The following summarizes the liabilities for guarantees:
(in thousands) | Liability for guarantees related to death benefits | Liability/(Asset) related to guaranteed minimum accumulation benefits ("GMAB")(1) | Liability for guarantees related to income benefits | Total | Liability for guarantees related to death benefits | Liability for guarantees related to income benefits | Total | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance, January 1, 2004 | $ | 868 | $ | — | $ | 74 | $ | 942 | $ | 868 | $ | 74 | $ | 942 | |||||||||
Incurred guaranteed benefits | 458 | (12 | ) | 1 | 447 | 910 | 3 | 913 | |||||||||||||||
Paid guarantee benefits | (432 | ) | — | — | (432 | ) | (969 | ) | — | (969 | ) | ||||||||||||
Balance, March 31, 2004(3) | $ | 894 | $ | (12 | ) | $ | 75 | $ | 957 | ||||||||||||||
Balance, June 30, 2004(1) | $ | 809 | $ | 77 | $ | 886 | |||||||||||||||||
The liability for death and income benefit guarantees is established equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all
expected contract charges. For guarantees in the event of death, benefits represent the current guaranteed minimum death payments in excess of the current account balance. For guarantees at annuitization, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.
Projected benefits and contract charges used in determining the liability for guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant's attained age.
The liability for guarantees will be re-evaluated periodically, and adjustments will be made to the liability balance through a charge or credit to contract benefits.
Deferred sales inducements
Costs related to sales inducements offered on sales to new customers, principally on investment contracts and primarily in the form of additional credits to the customer's account value or enhancements to interest credited for a specified period, which are beyond amounts currently being credited to existing contracts, are deferred and recorded as other assets. All other sales inducements are expensed as incurred and included in interest credited to contractholder funds on the Condensed Statements of Operations. DSI is amortized to income using the same methodology and assumptions as DAC, and included in interest credited to contractholder funds. DSI is periodically reviewed for recoverability and written down when necessary.
DSI activity for the threesix months ended March 31,June 30, 2004 was as follows:
(in thousands) | | | ||||||
---|---|---|---|---|---|---|---|---|
Balance, January 1, 2004 | $ | 2,369 | $ | 2,369 | ||||
Sales inducements deferred | 420 | 867 | ||||||
Amortization charged to income | (1 | ) | (384 | ) | ||||
Effects of unrealized gains and losses | (721 | ) | 465 | |||||
Balance, March 31, 2004 | $ | 2,067 | ||||||
Balance, June 30, 2004 | $ | 3,317 | ||||||
Pending accounting standard
Emerging Issues Task Force Topic No. 03-01,03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF No. 03-01"03-1")
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF No. 03-01,03-1, which is effective for reportingfiscal periods beginning after June 15, 2004. EITF No. 03-0103-1 requires that when the fair value of an investment security is less than its carrying value an impairment exists for which a determination must be made as to whether the impairment is other-than-temporary. An impairment loss should be recognized equal to the difference between the investment's carrying value and its fair value when an impairment is other-than-temporary. Subsequent to an other-than temporary impairment loss, a debt security should be accounted for in accordance with Statement of Position No. 03-3, "Accounting for Loans and Certain Debt Securities Acquired in a Transfer", which allows the accretion of the discount between the carrying value and expected value of a security if the amount and timing of the recognition of that difference in cash is reasonably estimable. EITF 03-1 also indicates that although not presumptive a pattern of selling investments prior to the forecasted recovery may call into question an investor's intent to hold the security until it recovers in value.
The EITF No. 03-0103-1 impairment model applies to all investment securities accounted for under Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and to investment securities accounted for under the cost method to the extent an impairment indicator exists or the reporting entity has estimated the fair value of the investment security in connection with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments".
The disclosures required for investment securities accounted for underfinal consensus on EITF 03-1 included additional disclosure requirements incremental to those adopted by the cost methodCompany effective December 31, 2003 that are effective for annual periods for fiscal years ending after June 15, 2004.
The adoptionCompany is currently evaluating the impact of EITF 03-1 on its process for determining other-than-temporary impairment for the affected securities. More specifically, the Company is analyzing whether subsequent to adoption its portfolio management practices for certain securities classified as
available-for-sale pursuant to SFAS No. 03-01115 could be interpreted as a pattern of selling thereby affecting its designated intent to hold such investments for the period necessary to allow for the forecasted recovery of fair value pursuant to the requirements of EITF 03-1. As a result of this analysis, the Company may potentially reclassify to realized capital gains and losses the unrealized net capital gains and losses associated with certain securities classified as available-for-sale.
Adoption of this standard may:
Adoption of this standard is not expected to result inhave a material changeimpact on shareholder's equity since fluctuations in the Company's Condensed Statements of Operations or Financial Position.fair value are already recorded in accumulated other comprehensive income.
2. Other Investments
In 2004, the Company entered into interest rate cap agreements, financial futures contracts and foreign currency swap agreements that are used to reduce exposure to rising or falling interest rates relative to certain annuity contracts. The Company has also entered into foreign currency swap agreements that are usedcontracts or to managechange the foreign currency risk associated with certaininterest rate characteristics of existing assets. Bothassets or liabilities. All are used for asset-liability management.
In exchange for a premium, interest rate cap agreements provide the holder with the right to receive at a future date, the amount, if any, by which a specified market interest rate exceeds the fixed cap rate applied to a notional amount. Hedge accounting is not applied to these derivative contracts. The fair values of the instruments are reported as other investments and the related gains and losses from the changes in fair value and the accrued periodic settlements are recognized in realized capital gains and losses.
Financial futures contracts are commitments to purchase or sell designated financial instruments at a future date for a specified price or yield. Hedge accounting is not applied to these derivative contracts. The fair values of the instruments are reported as other investments and the related gains and losses from the changes in fair value, some of which are recognized through daily cash settlements, are classified consistent with the risks being economically hedged and are reported as realized capital gains and losses or contract benefits.
Under cash flow hedge accounting, the Company designates its foreign currency swap agreements as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. The Company's cash flow exposure is associated with an existing asset. The fair value of the instruments is reported as other liabilities and accrued expenses and the changes in fair value of the instruments are reported in accumulated other comprehensive income on the Condensed Statements of Financial Position. Amounts are reclassified to net investment income or realized capital gains and losses as the hedge transaction affects net income. Accrued periodic settlements on instruments used in cash flow hedges are reported in net investment income.
| March 31, 2004 | June 30, 2004 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Notional amount | Fair value | Realized capital gain (loss) | Notional amount | Fair value | Realized capital gain (loss) | |||||||||||||
Interest rate cap agreements | $ | 122,000 | $ | 4,800 | $ | (587 | ) | $ | 129,200 | $ | 7,198 | $ | 1,755 | ||||||
Financial futures contracts | 26,500 | 248 | 600 | ||||||||||||||||
Foreign currency swap agreements | 7,500 | (36 | ) | — | 7,500 | (240 | ) | — |
3. Reinsurance
The effects of reinsurance on premiums and contract charges are as follows:
| | Three months ended March 31, | | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | (in thousands) | 2004 | 2003 | (in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||||||||||
Premiums and contract charges | Premiums and contract charges | Premiums and contract charges | ||||||||||||||||||||||
Direct | Direct | $ | 34,490 | $ | 30,975 | Direct | $ | 38,677 | $ | 29,565 | $ | 73,167 | $ | 60,540 | ||||||||||
Assumed—non-affiliate | Assumed—non-affiliate | 185 | 43 | Assumed—non-affiliate | 117 | 64 | 302 | 107 | ||||||||||||||||
Ceded | Ceded | Ceded | ||||||||||||||||||||||
Affiliate | (1,097 | ) | (1,148 | ) | Affiliate | (1,086 | ) | (1,142 | ) | (2,183 | ) | (2,290 | ) | |||||||||||
Non-affiliate | (2,815 | ) | (551 | ) | Non-affiliate | (3,163 | ) | (871 | ) | (5,978 | ) | (1,422 | ) | |||||||||||
Premiums and contract charges, net of reinsurance | $ | 30,763 | $ | 29,319 | Premiums and contract charges, net of reinsurance | $ | 34,545 | $ | 27,616 | $ | 65,308 | $ | 56,935 | |||||||||||
The effects of reinsurance on contract benefits are as follows:
| Three months ended March 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | |||||||
Contract benefits | |||||||||
Direct | $ | 44,358 | $ | 39,044 | |||||
Assumed—non-affiliate | 33 | 7 | |||||||
Ceded | |||||||||
Affiliate | 1,051 | (68 | ) | ||||||
Non-affiliate | (2,518 | ) | (595 | ) | |||||
Contract benefits, net of reinsurance | $ | 42,924 | $ | 38,388 | |||||
Excluded from the table above are premiums ceded to ALIC of $671 thousand and $634 thousand for the three months ended March 31, 2004 and 2003, respectively, under the terms of the structured settlement annuity reinsurance agreement. These premiums are reflected in realized capital gains and losses.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | |||||||||||
Contract benefits | |||||||||||||||
Direct | $ | 46,370 | $ | 44,189 | $ | 90,728 | $ | 83,233 | |||||||
Assumed—non-affiliate | 45 | 28 | 78 | 35 | |||||||||||
Ceded | |||||||||||||||
Affiliate | (1,034 | ) | (45 | ) | 17 | (113 | ) | ||||||||
Non-affiliate | (465 | ) | (1,126 | ) | (2,983 | ) | (1,721 | ) | |||||||
Contract benefits, net of reinsurance | $ | 44,916 | $ | 43,046 | $ | 87,840 | $ | 81,434 | |||||||
4. Guarantees and Contingent Liabilities
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 and other individuals to the extent provided in its charter and by-laws. Since these indemnifications are generally not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under these indemnifications.
The aggregate liability balance related to all guarantees was not material as of March 31,June 30, 2004.
Regulation
The Company is subject to changing social, economic and regulatory conditions. Recent state and federal regulatory initiatives and proceedings have included efforts to remove barriers preventing banks from engaging in the securities and insurance businesses, change tax laws affecting the taxation of insurance companies and the tax treatment of insurance products or competing non-insurance products that may impact the relative desirability of various personal investment products and otherwise expand overall regulation of insurance products and the insurance industry. The ultimate changes and eventual effects of these initiatives on the Company's business, if any, are uncertain.
Regulatory bodies have contacted the parent of the Company and have requested information relating to variable insurance products, including such areas as market timing and late trading and sales practices. The Company believes that these inquiries are similar to those made to many financial services companies as part of an industry-wide investigation by various regulatory agencies into the practices, policies and procedures relating to variable insurance products sales and subaccount trading practices. The Company's parent has and will continue to respond to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company's financial position.
Legal Proceedings
Background
The Company and certain of its affiliates are named as defendants in a number of lawsuits and other legal proceedings arising out of various aspects of its business. As background to the "Proceedings" described below, please note the following:
Proceedings
Legal 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 more significant of these proceedings is provided below.
AIC is defending various lawsuits involving worker classification issues. These 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. Plaintiffs seek monetary relief, such as penalties and liquidated damages, and non-monetary relief, such as injunctive relief and an accounting. These class actions mirror similar lawsuits filed recently against other carriers in the industry and other employers. 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 thesethis 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, a lawsuit filed in December 2001
by the U.S. Equal Employment Opportunity Commission ("EEOC") alleging retaliation under federal civil rights laws and a class action filed in August 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act, breach of contract and ERISA violations. In April 2004, the U.S. Department of Labor notified AIC that it has closed its investigation and contemplates no further action on this matter at this time. In March 2004, in the EEOC and class action lawsuits, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court's declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids
the release must return to AIC "any and all benefits received by the [agent] in exchange for signing the release." The court also "concluded that, on the undisputed facts of record, there is no basis for claims of age discrimination." The EEOC and plaintiffs have asked the court to clarify and/or reconsider its memorandum and order. The case otherwise remains pending. A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA. This matter was dismissed with prejudice in March 2004 by the trial court but may still be subject to further proceedings which may include appeals.on appeal. In these matters, plaintiffs seek compensatory and punitive damages, and equitable relief. 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 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.
Other actions
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 target of an increasing number of lawsuits, some of which involve claims for substantial and/or indeterminate amounts. This litigation is based on a variety of issues including insurance and claim settlement practices. The outcome of these disputes is currently unpredictable. 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.
5. Other Comprehensive Income
The components of other comprehensive income on a pretax and after-tax basis are as follows:
| Three Months Ended March 31, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||||||||||
(in thousands) | Pretax | Tax | After-tax | Pretax | Tax | After-tax | Pretax | Tax | After-tax | Pretax | Tax | After-tax | |||||||||||||||||||||||||
Unrealized capital gains and losses and net gains and losses on derivative financial instruments | |||||||||||||||||||||||||||||||||||||
Unrealized capital gains and losses | |||||||||||||||||||||||||||||||||||||
Unrealized holding gains (losses) arising during the period | $ | 35,782 | $ | (12,523 | ) | $ | 23,259 | $ | 5,076 | $ | (1,775 | ) | $ | 3,301 | $ | (87,752 | ) | $ | 30,712 | $ | (57,040 | ) | $ | 40,691 | $ | (14,244 | ) | $ | 26,447 | ||||||||
Less: reclassification adjustments | (616 | ) | 216 | (400 | ) | (4,865 | ) | 1,703 | (3,162 | ) | (2,427 | ) | 848 | (1,579 | ) | 216 | (76 | ) | 140 | ||||||||||||||||||
Unrealized net capital gains (losses) | 36,398 | (12,739 | ) | 23,659 | 9,941 | (3,478 | ) | 6,463 | (85,325 | ) | 29,864 | (55,461 | ) | 40,475 | (14,168 | ) | 26,307 | ||||||||||||||||||||
Net gains (losses) on derivatives financial instruments arising during the period | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Net gains (losses) on derivative financial instruments arising during the period | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Less: reclassification adjustments | (36 | ) | 13 | (23 | ) | — | — | — | (204 | ) | 71 | (133 | ) | — | — | — | |||||||||||||||||||||
Unrealized net gains (losses) on derivative instruments | 36 | (13 | ) | 23 | — | — | — | ||||||||||||||||||||||||||||||
Unrealized net gains (losses) on derivative financial instruments | 204 | (71 | ) | 133 | — | — | — | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | $ | 36,434 | $ | (12,752 | ) | 23,682 | $ | 9,941 | $ | (3,478 | ) | 6,463 | $ | (85,121 | ) | $ | 29,793 | (55,328 | ) | $ | 40,475 | $ | (14,168 | ) | 26,307 | ||||||||||||
Net income | 6,051 | 5,667 | 6,175 | 5,088 | |||||||||||||||||||||||||||||||||
Comprehensive income (loss) | $ | 29,733 | $ | 12,130 | $ | (49,153 | ) | $ | 31,395 | ||||||||||||||||||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | |||||||||||||||||
(in thousands) | Pretax | Tax | After-tax | Pretax | Tax | After-tax | |||||||||||||
Unrealized capital gains and losses | |||||||||||||||||||
Unrealized holding gains (losses) arising during the period | $ | (51,087 | ) | $ | 17,881 | $ | (33,206 | ) | $ | 45,806 | $ | (16,032 | ) | $ | 29,774 | ||||
Less: reclassification adjustments | (2,160 | ) | 756 | (1,404 | ) | (4,610 | ) | 1,614 | (2,996 | ) | |||||||||
Unrealized net capital gains (losses) | (48,927 | ) | 17,125 | (31,802 | ) | 50,416 | (17,646 | ) | 32,770 | ||||||||||
Net gains (losses) on derivative financial instruments arising during the period | — | — | — | — | — | — | |||||||||||||
Less: reclassification adjustments | (240 | ) | 84 | (156 | ) | — | — | — | |||||||||||
Unrealized net gains (losses) on derivative financial instruments | 240 | (84 | ) | 156 | — | — | — | ||||||||||||
Other comprehensive income (loss) | $ | (48,687 | ) | $ | 17,041 | (31,646 | ) | $ | 50,416 | $ | (17,646 | ) | 32,770 | ||||||
Net income | 12,226 | 10,755 | |||||||||||||||||
Comprehensive income (loss) | $ | (19,420 | ) | $ | 43,525 | ||||||||||||||
REPORT OF INDEPENDENT ACCOUNTANTS' REVIEW REPORTREGISTERED PUBLIC ACCOUNTING FIRM
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,June 30, 2004, and the related condensed statements of operations for the three-month and six-month periods ended June 30, 2004 and 2003, and the condensed statements of cash flows for the three-monthsix-month periods ended March 31,June 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management.
We conducted our reviewreviews in accordance with standards established byof the American Institute of Certified Public Accountants.Company Accounting Oversight Board (United States). 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 inof the United States of America,Public Company Accounting Oversight Board (United States), 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 interim 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 inof the United States of America,Public Company Accounting Oversight Board (United States), the statement of financial position of Allstate Life Insurance Company of New York as of December 31, 2003, 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 4, 2004, 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, 2003 is fairly stated, in all material respects, in relation to the statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Chicago, IllinoisMay 7,August 10, 2004
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED MARCH 31,JUNE 30, 2004 AND 2003
OVERVIEW
The following discussion highlights significant factors influencing the financial position and results of operations of Allstate Life Insurance Company of New York (referred to in this document as "we", "our", "us" or the "Company"). It should be read in conjunction with the condensed financial statements and 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 2003. We operate as a single segment entity, based onconsistent with the mannerway in which we use financial information is used internally to evaluate business performance and to determine the allocation of resources.
To conform to the 2004 and year-end 2003 presentation, certain prior year amounts have been reclassified.
RESULTS OF OPERATIONS
Premiums represent revenues generated from traditional life, immediate annuities with life contingencies and other insurance products that have significant mortality or morbidity risk.
Contract charges are revenues generated from interest-sensitive life products, variable annuities, fixed annuities and other investment products for which deposits are classified as contractholder funds or separate accounts liabilities on the Condensed Statements of Financial Position. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to the contractually specified dates. As a result, changes in contractholder funds and separate accounts liabilities are considered in the evaluation of growth and as indicators of future levels of revenues.
The following table summarizes premiums and contract charges by product.
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Premiums | ||||||||||||||||||
Traditional life | $ | 5,455 | $ | 5,444 | $ | 5,746 | $ | 5,630 | $ | 11,201 | $ | 11,074 | ||||||
Immediate annuities with life contingencies | 10,444 | 8,590 | 13,597 | 6,230 | 24,041 | 14,820 | ||||||||||||
Other | 752 | 2,294 | 626 | 2,074 | 1,378 | 4,368 | ||||||||||||
Total premiums | 16,651 | 16,328 | 19,969 | 13,934 | 36,620 | 30,262 | ||||||||||||
Contract charges | ||||||||||||||||||
Interest-sensitive life | 9,428 | 9,489 | 9,982 | 9,957 | 19,410 | 19,446 | ||||||||||||
Fixed annuities | 1,537 | 1,211 | 1,495 | 1,390 | 3,032 | 2,601 | ||||||||||||
Variable annuities | 3,147 | 2,291 | 3,099 | 2,335 | 6,246 | 4,626 | ||||||||||||
Total contract charges | 14,112 | 12,991 | 14,576 | 13,682 | 28,688 | 26,673 | ||||||||||||
Premiums and contract charges | $ | 30,763 | $ | 29,319 | $ | 34,545 | $ | 27,616 | $ | 65,308 | $ | 56,935 | ||||||
The following table summarizes premiums and contract charges by distribution channel.
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Premiums | ||||||||||||||||||
Allstate agencies | $ | 5,357 | $ | 5,364 | $ | 5,654 | $ | 5,545 | $ | 11,011 | $ | 10,909 | ||||||
Financial institutions and broker/dealers | 107 | — | — | 34 | 107 | 34 | ||||||||||||
Specialized brokers | 10,337 | 8,590 | 13,597 | 6,230 | 23,934 | 14,820 | ||||||||||||
Independent agents | 699 | 243 | 786 | 380 | 1,485 | 623 | ||||||||||||
Direct marketing | 151 | 2,131 | ||||||||||||||||
Direct response | (68 | ) | 1,745 | 83 | 3,876 | |||||||||||||
Total premiums | 16,651 | 16,328 | ||||||||||||||||
Total Premiums | 19,969 | 13,934 | 36,620 | 30,262 | ||||||||||||||
Contract charges | ||||||||||||||||||
Allstate agencies | 9,483 | 9,574 | 10,073 | 10,152 | 19,556 | 19,726 | ||||||||||||
Financial institutions and broker/dealers | 3,433 | 2,545 | 3,513 | 2,577 | 6,946 | 5,122 | ||||||||||||
Specialized brokers | 1,128 | 845 | 934 | 916 | 2,062 | 1,761 | ||||||||||||
Independent agents | 68 | 27 | 56 | 37 | 124 | 64 | ||||||||||||
Total contract charges | 14,112 | 12,991 | 14,576 | 13,682 | 28,688 | 26,673 | ||||||||||||
Premiums and contract charges | $ | 30,763 | $ | 29,319 | $ | 34,545 | $ | 27,616 | $ | 65,308 | $ | 56,935 | ||||||
Total premiums increased 2.0%43.3% to $16.7$20.0 million in the second quarter of 2004 and 21.0% to $36.6 million in the first quartersix months of 2004 compared to the same periodperiods of 2003. The increase was primarilyincreases in both periods were the result of increased premiums on immediate annuities with life contingencies partially offset by decreased premiums resulting from the disposal of the majority of our direct response distribution business.
Contract charges increased 8.6%6.5% to $14.1$14.6 million in the second quarter of 2004 and 7.6% to $28.7 million in the first quartersix months of 2004 compared to the same periodperiods of 2003. The increase wasincreases in both periods were primarily dueattributable to higher contract charges on variable annuities as a result of overallaverage higher account values duringin the first quarter of 2004 compared to the prior period.current periods from new business and investment returns.
Contractholder funds represent interest-bearing liabilities arising from the sale of individual products, such as interest-sensitive life and fixed annuities. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.
The following table shows the changes in contractholder funds.
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | |||||
Contractholder funds, beginning balance | $ | 2,658,325 | $ | 2,051,429 | |||
Impact of adoption of SOP 03-1(1) | 2,031 | — | |||||
Deposits: | |||||||
Fixed annuities (immediate and deferred) | 145,387 | 107,286 | |||||
Interest-sensitive life | 24,822 | 13,979 | |||||
Variable annuity and life deposits allocated to fixed accounts | 25,559 | 37,484 | |||||
Total deposits | 195,768 | 158,749 | |||||
Interest credited | 27,716 | 24,515 | |||||
Benefits, withdrawals and other adjustments | |||||||
Benefits and withdrawals | (47,988 | ) | (37,664 | ) | |||
Contract charges | (9,882 | ) | (9,520 | ) | |||
Net transfers (to) from separate accounts | (11,467 | ) | 868 | ||||
Other adjustments | 91 | 953 | |||||
Total benefits, withdrawals and other adjustments | (69,246 | ) | (45,363 | ) | |||
Contractholder funds, ending balance | $ | 2,814,594 | $ | 2,189,330 | |||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | |||||||||
Contractholder funds, beginning balance | $ | 2,814,594 | $ | 2,189,330 | $ | 2,658,325 | $ | 2,051,429 | |||||
Impact of adoption of SOP 03-1(1) | — | — | 2,031 | — | |||||||||
Deposits: | |||||||||||||
Fixed annuities (immediate and deferred) | 257,012 | 195,439 | 402,399 | 302,725 | |||||||||
Interest-sensitive life | 26,210 | 13,803 | 51,032 | 27,782 | |||||||||
Variable annuity and life deposits allocated to fixed accounts | 31,098 | 37,420 | 56,657 | 74,904 | |||||||||
Total deposits | 314,320 | 246,662 | 510,088 | 405,411 | |||||||||
Interest credited | 30,235 | 27,277 | 57,951 | 51,792 | |||||||||
Benefits, withdrawals and other adjustments | |||||||||||||
Benefits and withdrawals | (56,205 | ) | (40,884 | ) | (104,193 | ) | (78,548 | ) | |||||
Contract charges | (10,446 | ) | (10,073 | ) | (20,328 | ) | (19,593 | ) | |||||
Net transfers to separate accounts | (9,927 | ) | (4,652 | ) | (21,394 | ) | (3,784 | ) | |||||
Other adjustments | 1,515 | (634 | ) | 1,606 | 319 | ||||||||
Total benefits, withdrawals and other adjustments | (75,063 | ) | (56,243 | ) | (144,309 | ) | (101,606 | ) | |||||
Contractholder funds, ending balance | $ | 3,084,086 | $ | 2,407,026 | $ | 3,084,086 | $ | 2,407,026 | |||||
Contractholder funds deposits increased 23.3%27.4% in the second quarter and 25.8% in the first quartersix months of 2004 compared to the same period ofperiods in 2003, and average contractholder funds, after reflectingexcluding the impact of adopting SOP 03-1, increased 29.1%28.3% in the second quarter and 28.8% in the first six months of 2004 compared to the same periods in 2003 due to significant increases in fixed annuity deposits. Fixed annuity deposits increased 35.5% primarily due31.5% and 32.9% in the second quarter and first six months of 2004, respectively, compared to competitive pricing.the same periods in 2003. The increases were attributable to higher consumer demand resulting from increasing interest rates.
Benefits and withdrawals increased 27.4%37.5% in the second quarter and 32.7% in the first quartersix months of 2004 compared to the same period ofperiods in 2003. Benefits and withdrawals for the second quarter and first six months of 2004 represent 1.8%an annualized withdrawal rate of 8.0% and 7.8%, respectively, based on the beginning of period contractholder funds balance comparablecompared to 2003. Actual surrenders7.5% and 7.7% for the second quarter and first six months of 2003, respectively. Surrenders and withdrawals compare favorablyhave been comparable to our pricing assumptions.
Separate accounts liabilities represent contractholders' claims to the related legally segregated separate accounts assets. Separate accounts liabilities primarily arise from the sale of variable annuity contracts and variable life insurance policies. The following table shows the changes in separate accounts liabilities.
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
Separate accounts liabilities, beginning balance | $ | 665,875 | $ | 537,204 | $ | 686,639 | $ | 515,422 | $ | 665,875 | $ | 537,204 | ||||||||
Variable annuity and life deposits | 51,289 | 52,132 | 59,943 | 49,840 | 111,232 | 101,972 | ||||||||||||||
Variable annuity and life deposits allocated to fixed accounts | (25,559 | ) | (37,484 | ) | (31,098 | ) | (37,420 | ) | (56,657 | ) | (74,904 | ) | ||||||||
Net deposits | 25,730 | 14,648 | 28,845 | 12,420 | 54,575 | 27,068 | ||||||||||||||
Investment results | 15,380 | (12,632 | ) | 2,223 | 59,888 | 17,603 | 47,256 | |||||||||||||
Contract charges | (2,386 | ) | (1,767 | ) | (2,466 | ) | (1,891 | ) | (4,852 | ) | (3,658 | ) | ||||||||
Net transfers from (to) fixed accounts | 11,467 | (868 | ) | |||||||||||||||||
Net transfers from fixed accounts | 9,927 | 4,652 | 21,394 | 3,784 | ||||||||||||||||
Surrenders and benefits | (29,427 | ) | (21,163 | ) | (14,805 | ) | (14,807 | ) | (44,232 | ) | (35,970 | ) | ||||||||
Separate accounts liabilities, ending balance | $ | 686,639 | $ | 515,422 | $ | 710,363 | $ | 575,684 | $ | 710,363 | $ | 575,684 | ||||||||
Separate accounts liabilities increased $20.8$23.7 million and $44.5 million during the second quarter and first quartersix months of 2004, respectively, compared to a decline of $21.8$60.3 million and $38.5 million during the same periodsecond quarter and first six months of 2003, reflectingrespectively, as a significant improvement inresult of net deposits, transfers from fixed accounts and positive investment results, partially offset by surrenders, benefits paid to contractholders and net deposits. The increase in variable annuity net deposits resulted from lower initial deposits on variable annuity contracts being invested in the general account investment option due to improved equity market performance.contract charges. Variable annuity contractholders often allocate a significant portion of their initial variable annuity deposits into a fixed rate investment option. The level of this activity is reflected above in the deposits allocated to the fixed accounts, while all other transfer activity between the fixed and separate accounts investments options is reflected in net transfers from (to) fixed accounts. The liability for the fixed portion of variable annuity contracts is reflected in contractholder funds.
Net investment income increased 11.2% in both the second quarter and in the first quartersix months of 2004 compared to the same periodperiods in 2003, primarily due to the effect of higher portfolio balances partially offset by lower portfolio yields. Higher portfolio balances resulted from the investment of cash flows from operating and financing activities. Investment balancesTotal investments as of March 31,June 30, 2004 excludingincreased 8.9% from June 30, 2003 due primarily to contractholder deposits, partially offset by a decline in unrealized net capital gains increased 19.4% from March 31, 2003. The lower portfolio yields were primarily due to purchases ofon fixed income securities with yields lower than the current portfolio average.securities.
We reclassified reinsurance premiums paid to ALIC for the stop loss reinsurance agreement entered into in 2002, which meets the accounting definition of a derivative under Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", from net investment income to realized capital gains and losses so that they are reported consistently with the corresponding fair value adjustments on this agreement. Net investment income was increased by $634 thousand for the three months ended March 31, 2003 as a result.
Net income analysis is presented in the following table.
| Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | |||||
Premiums and contract charges | $ | 30,763 | $ | 29,319 | |||
Net investment income(1) | 70,402 | 63,298 | |||||
Contract benefits(2) | (42,931 | ) | (38,388 | ) | |||
Interest credited to contractholder funds(2) | (27,647 | ) | (24,515 | ) | |||
Gross margin | 30,587 | 29,714 | |||||
Amortization of DAC and DSI | 1,549 | (6,322 | ) | ||||
Operating costs and expenses | (9,958 | ) | (9,726 | ) | |||
Income tax expense | (7,839 | ) | (4,802 | ) | |||
Realized capital gains and losses, after-tax | (434 | ) | (2,977 | ) | |||
DAC and DSI amortization expense on realized capital gains and losses, after-tax | (952 | ) | (220 | ) | |||
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax | (4 | ) | — | ||||
Gain on disposition of operations, after-tax | 688 | — | |||||
Cumulative effect of change in accounting principle, after-tax | (7,586 | ) | — | ||||
Net income | $ | 6,051 | $ | 5,667 | |||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | |||||||||
Premiums | $ | 19,969 | $ | 13,934 | $ | 36,620 | $ | 30,262 | |||||
Contract charges(1) | 14,570 | 13,682 | 28,678 | 26,673 | |||||||||
Net investment income | 72,676 | 65,356 | 143,071 | 128,654 | |||||||||
Periodic settlements and accruals on non-hedge derivative instruments | 69 | — | 76 | — | |||||||||
Contract benefits | (44,916 | ) | (43,046 | ) | (87,840 | ) | (81,434 | ) | |||||
Interest credited to contractholder funds(2) | (30,152 | ) | (27,277 | ) | (57,802 | ) | (51,792 | ) | |||||
Gross margin | 32,216 | 22,649 | 62,803 | 52,363 | |||||||||
Amortization of DAC and DSI | (8,401 | ) | (8,246 | ) | (6,852 | ) | (14,568 | ) | |||||
Operating costs and expenses | (10,300 | ) | (5,610 | ) | (20,258 | ) | (15,336 | ) | |||||
Income tax expense | (5,046 | ) | (3,069 | ) | (12,885 | ) | (7,871 | ) | |||||
Realized capital gains and losses, after-tax | (1,797 | ) | 130 | (2,231 | ) | (2,847 | ) | ||||||
DAC and DSI amortization expense on realized capital gains and losses, after-tax | (454 | ) | (766 | ) | (1,406 | ) | (986 | ) | |||||
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax | (43 | ) | — | (47 | ) | — | |||||||
Gain on disposition of operations, after-tax | — | — | 688 | — | |||||||||
Cumulative effect of change in accounting principle, after-tax | — | — | (7,586 | ) | — | ||||||||
Net income | $ | 6,175 | $ | 5,088 | $ | 12,226 | $ | 10,755 | |||||
Gross margin, a non-GAAP measure, represents premiums, contract charges and net investment income, less contract benefits and interest credited to contractholder funds. We use gross margin as a component of our evaluation of the profitability of our life insurance and financial product portfolio. Additionally, for many of our products, including fixed annuities, variable life and annuities,contracts, and interest-sensitive life insurance, the amortization of DAC and DSI is determined based on actual and expected gross margin. Gross margin is comprised of four components that are utilized to further analyze the business; they include thebusiness: investment margin, mortalitybenefit margin, and maintenance charges and surrender charges. We believe gross margin and its components are useful to investors because they allow for the evaluation of income components separately and in the aggregate when reviewing performance. Gross margin, investment margin and mortalitybenefit margin should not be considered as a substitute for net income and do not reflect the overall profitability of the business. Net income is the GAAP measure that is most directly comparable to these margins. Gross margin is reconciled to GAAP net income in the table above.
The components of gross margin are reconciled to the corresponding financial statement line items in the following table.
| Three Months Ended March 31, 2004 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | Investment Margin | Mortality Margin | Maintenance Charges | Surrender Charges | Gross Margin | |||||||||||
Premiums | $ | — | $ | 16,651 | $ | — | $ | — | $ | 16,651 | ||||||
Contract charges | — | 7,270 | 5,566 | 1,276 | 14,112 | |||||||||||
Net investment income(1) | 70,402 | — | — | — | 70,402 | |||||||||||
Contract benefits(2) | (24,676 | ) | (18,255 | ) | — | — | (42,931 | ) | ||||||||
Interest credited to contractholder funds(2) | (27,647 | ) | — | — | — | (27,647 | ) | |||||||||
$ | 18,079 | $ | 5,666 | $ | 5,566 | $ | 1,276 | $ | 30,587 | |||||||
Three Months Ended March 31, 2003 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment Margin | Mortality Margin | Maintenance Charges | Surrender Charges | Gross Margin | |||||||||||
Premiums | $ | — | $ | 16,328 | $ | — | $ | — | $ | 16,328 | ||||||
Contract charges | — | 6,742 | 5,069 | 1,180 | 12,991 | |||||||||||
Net investment income | 63,298 | — | — | — | 63,298 | |||||||||||
Contract benefits | (23,624 | ) | (14,764 | ) | — | — | (38,388 | ) | ||||||||
Interest credited to contractholder funds | (24,515 | ) | — | — | — | (24,515 | ) | |||||||||
$ | 15,159 | $ | 8,306 | $ | 5,069 | $ | 1,180 | $ | 29,714 | |||||||
| Three Months Ended June 30, | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment Margin | Benefit Margin | Maintenance Charges | Surrender Charges | Gross Margin | ||||||||||||||||||||||||||
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Premiums | $ | — | $ | — | $ | 19,969 | $ | 13,934 | $ | — | $ | — | $ | — | $ | — | $ | 19,969 | $ | 13,934 | |||||||||||
Contract charges(1) | — | — | 7,463 | 7,338 | 6,022 | 5,170 | 1,085 | 1,174 | 14,570 | 13,682 | |||||||||||||||||||||
Net investment income | 72,676 | 65,356 | — | — | — | — | — | — | 72,676 | 65,356 | |||||||||||||||||||||
Periodic settlements and accruals on non-hedge derivative instruments(2) | 69 | — | — | — | — | — | — | — | 69 | — | |||||||||||||||||||||
Contract benefits | (23,908 | ) | (22,053 | ) | (21,008 | ) | (20,993 | ) | — | — | — | — | (44,916 | ) | (43,046 | ) | |||||||||||||||
Interest credited to contractholder funds(3) | (30,152 | ) | (27,277 | ) | — | — | — | — | — | — | (30,152 | ) | (27,277 | ) | |||||||||||||||||
$ | 18,685 | $ | 16,026 | $ | 6,424 | $ | 279 | $ | 6,022 | $ | 5,170 | $ | 1,085 | $ | 1,174 | $ | 32,216 | $ | 22,649 | ||||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment Margin | Benefit Margin | Maintenance Charges | Surrender Charges | Gross Margin | ||||||||||||||||||||||||||
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||
Premiums | $ | — | $ | — | $ | 36,620 | $ | 30,262 | $ | — | $ | — | $ | — | — | $ | 36,620 | $ | 30,262 | ||||||||||||
Contract charges(1) | — | — | 14,729 | 14,080 | 11,588 | 10,239 | 2,361 | 2,354 | 28,678 | 26,673 | |||||||||||||||||||||
Net investment income | 143,071 | 128,654 | — | — | — | — | — | — | 143,071 | 128,654 | |||||||||||||||||||||
Periodic settlements and accruals on non-hedge derivative instruments(2) | 76 | — | — | — | — | — | — | — | 76 | — | |||||||||||||||||||||
Contract benefits | (48,581 | ) | (45,677 | ) | (39,259 | ) | (35,757 | ) | — | — | — | — | (87,840 | ) | (81,434 | ) | |||||||||||||||
Interest credited to contractholder funds(3) | (57,802 | ) | (51,792 | ) | — | — | — | — | — | — | (57,802 | ) | (51,792 | ) | |||||||||||||||||
$ | 36,764 | $ | 31,185 | $ | 12,090 | $ | 8,585 | $ | 11,588 | $ | 10,239 | $ | 2,361 | $ | 2,354 | $ | 62,803 | $ | 52,363 | ||||||||||||
Gross margin increased 2.9% during42.2% in the second quarter and 19.9% in the first quartersix months of 2004 compared to the same periodperiods of 2003 due to increased benefit margin, investment margin, and higher maintenance and surrender charges, partly offset by a decrease in the mortality margin.charges.
Investment margin is a component of gross margin, both of which are non-GAAP measures. Investment margin represents the excess of net investment income over interest credited to contractholder funds and the implied interest on life-contingent immediate annuities included in our reserve for life-contingent contract benefits. We use investment margin to evaluate our profitability related to the difference between investment returns on assets supporting certain products and amounts credited to customers ("spread") during the fiscal period.
Investment margin by product group is shown in the following table.
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||
Life insurance | $ | 2,900 | $ | 2,488 | $ | 2,782 | $ | 2,226 | $ | 5,682 | $ | 4,714 | ||||||
Annuities | 15,179 | 12,671 | 15,903 | 13,800 | 31,082 | 26,471 | ||||||||||||
Total investment margin | $ | 18,079 | $ | 15,159 | $ | 18,685 | $ | 16,026 | $ | 36,764 | $ | 31,185 | ||||||
Investment margin increased 19.3%16.6% in the second quarter and 17.9% in the first quartersix months of 2004 compared to the same periodperiods of 2003 due to a 28.6%an increase in contractholder funds.funds and improved yields on investments supporting capital, traditional life and other products. The increase wasincreases in both periods were partially offset by a decline in the interest-sensitive life investment spread, as investment yield declines were not fully offset by crediting rate reductions.
The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the three months ended March 31.June 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 | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
Interest-sensitive life | 6.3 | % | 6.9 | % | 4.9 | % | 5.0 | % | 1.4 | % | 1.9 | % | 6.1 | % | 6.5 | % | 4.8 | % | 5.0 | % | 1.3 | % | 1.5 | % | ||
Fixed annuities—deferred | 5.7 | 6.3 | 3.4 | 4.1 | 2.3 | 2.2 | 5.6 | 6.1 | 3.4 | 3.9 | 2.2 | 2.2 | ||||||||||||||
Fixed annuities—immediate | 7.6 | 7.7 | 6.8 | 6.9 | 0.8 | 0.8 | 7.6 | 7.8 | 6.8 | 6.9 | 0.8 | 0.9 | ||||||||||||||
Investments supporting capital, traditional life and other products | 6.2 | 6.2 | n/a | n/a | n/a | n/a | 5.9 | 4.8 | n/a | n/a | n/a | n/a |
The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the six months ended June 30.
| Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||
Interest-sensitive life | 6.2 | % | 6.7 | % | 4.8 | % | 5.0 | % | 1.4 | % | 1.7 | % | |
Fixed annuities—deferred | 5.6 | 6.2 | 3.4 | 4.0 | 2.2 | 2.2 | |||||||
Fixed annuities—immediate | 7.6 | 7.8 | 6.8 | 6.9 | 0.8 | 0.9 | |||||||
Investments supporting capital, traditional life and other products | 6.0 | 4.7 | n/a | n/a | n/a | n/a |
The following table summarizes the liabilities for these contracts and policies.
| March 31, | June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | ||||||||
Interest-sensitive life | $ | 324,558 | $ | 280,627 | $ | 342,433 | $ | 284,778 | ||||
Fixed annuities—deferred | 1,987,193 | 1,450,658 | 2,228,769 | 1,651,308 | ||||||||
Fixed annuities—immediate | 1,885,729 | 1,786,122 | 1,913,051 | 1,808,396 | ||||||||
4,197,480 | 3,517,407 | 4,484,253 | 3,744,482 | |||||||||
FAS 115/133 market value adjustment | 268,106 | 165,702 | 154,940 | 250,610 | ||||||||
Life-contingent contracts and other | 103,415 | 91,902 | 104,346 | 99,415 | ||||||||
Total contractholder funds and reserve for life-contingent contract benefits | $ | 4,569,001 | $ | 3,775,011 | $ | 4,743,539 | $ | 4,094,507 | ||||
MortalityBenefit margin is a component of gross margin, both of which are non-GAAP measures. MortalityBenefit margin represents premiums and cost of insurance contract charges less contract benefits excludingbenefits. Benefit margin excludes the implied interest on life-contingent immediate annuities, which is included in the calculation of investment margin.margin, and mortality charges on variable annuities, which are included as a component of maintenance charges. We use mortalitybenefit margin to evaluate our underwriting performance, as it reflects the profitability of our products with respect to mortality or morbidity risk during a fiscal period.
MortalityBenefit margin by product group is shown in the following table.
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
Life insurance | $ | 7,218 | $ | 8,411 | $ | 7,851 | $ | 1,743 | $ | 15,069 | $ | 10,154 | ||||||||
Annuities | (1,552 | ) | (105 | ) | (1,427 | ) | (1,464 | ) | (2,979 | ) | (1,569 | ) | ||||||||
Total mortality margin | $ | 5,666 | $ | 8,306 | ||||||||||||||||
Total benefit margin | $ | 6,424 | $ | 279 | $ | 12,090 | $ | 8,585 | ||||||||||||
MortalityBenefit margin was $5.7increased $6.1 million in the firstsecond quarter of 2004 reflecting a $2.6 million or 31.8% decline compared to the same period in 2003 due to strengthening of reserves for certain traditional life insurance policies in the second quarter of 2003. The decline was primarilyFor the first six months of 2004, the benefit margin increased $3.5 million or 40.8% from the first six months of 2003 due to the disposal of the majority of our direct response distribution business and fewer deaths on our life contingentlife-contingent immediate annuities partially offset by improved mortality on our other life products.as well as the effects of reserve strengthening in the second quarter of 2003.
As required by SOP 03-1, as of January 1, 2004, a reserve was established for guaranteed minimum death benefits ("GMDBs") and guaranteed minimum income benefits ("GMIBs"), which in previous periods, in the case of GMDBs, were expensed as paid. Under the SOP, we anticipate that the mortalitybenefit margin will be less volatile in the future, as contract benefit expense pertaining to GMDBs and GMIBs will not be impacted by GMDB and GMIBproportionate to the related revenue rather than cash payments made during eachthe period. Included in the benefit margin for the second quarter and first six months of 2004 is an addition to the reserve for guarantees of $0.5 million and $0.9 million, respectively. Included in the benefit margin for the second quarter and first six months of 2003 are GMDB payments of $0.8 million and $2.0 million, respectively. For further explanation of the impacts of the adoption of this accounting guidance, see Note 1 ofto the Condensed Financial Statements. Included in the mortality margin for the first quarter of 2004 is an addition to the reserve for GMDBs and GMIBs of $0.4 million. Included in the mortality margin for first quarter of 2003 are GMDB and GMIB payments of $1.2 million.
Amortization of DAC and DSI decreased $7.9 million duringincreased 1.9% in the firstsecond quarter of 2004 compared to the same period of 2003. Increased2003 as higher gross margin on fixed annuities and variable products resulted in increased amortization, which was partially offset by the elimination of DAC amortization on the direct response distribution business that was sold in January of 2004. Amortization of DAC and DSI decreased 53.0% in the first quartersix months of 2004 compared to the first quartersix months of 2003 was more than offset bydue to a deceleration of amortization (commonly called "DAC unlocking") on interest-sensitive life and fixed annuities of $10.2 million in the
first quarter of 2004 compared to an acceleration of amortization of $325 thousand in the same period of 2003. The deceleration of amortization is a result of favorable projected mortality in our interest-sensitive life products.
The adoption of SOP 03-1 required a new modeling approach for estimating expected future gross profits that are used when determining the amortization of DAC. Because of this new modeling approach, effective January 1, 2004, the variable annuity DAC and DSI assets were reduced by $10.7 million. This reduction was recognized as a cumulative effect of a change in accounting principle. For further explanation of the impacts of the adoption of this accounting guidance, see Note 1 of the Condensed Financial Statements.
Operating costs and expenses decreased 2.4%increased 83.6% in the second quarter and 32.1% for the first quartersix months of 2004 compared to the first quartersame periods of 2003. The decreaseincrease in total operating costs and expenses was primarily duereflects higher non-deferrable sales expenses in the second quarter of 2004 and reinsurance expense credits in the second quarter of 2003. For the first six months of 2004 compared to 2003, higher trail commissions and employee expenses were partially offset by the disposal of the majority of our direct response distribution business, which was partially offset by higher trail commissions and employee expenses.business.
INVESTMENTS
An important component of our financial results is the return on our investment portfolio. The investment portfolio is managed based upon the business and its corresponding liability structure. The composition of the investment portfolio at March 31,June 30, 2004 is presented in the table below.
(in thousands) | Carrying value | Percent of total | |||||
---|---|---|---|---|---|---|---|
Fixed income securities(1) | $ | 4,681,297 | 89.5 | % | |||
Mortgage loans | 385,386 | 7.4 | |||||
Short-term | 123,078 | 2.4 | |||||
Other | 39,373 | 0.7 | |||||
Total | $ | 5,229,134 | 100.0 | % | |||
(in thousands) | Carrying value | Percent of total | |||||
---|---|---|---|---|---|---|---|
Fixed income securities(1) | $ | 4,694,455 | 90.0 | % | |||
Mortgage loans | 403,725 | 7.7 | |||||
Short-term | 76,104 | 1.5 | |||||
Policy loans | 34,336 | 0.7 | |||||
Other | 7,285 | 0.1 | |||||
Total | $ | 5,215,905 | 100.0 | % | |||
Total investments increased to $5.23$5.22 billion at March 31,June 30, 2004 from $4.86 billion at December 31, 2003 due to positive cash flows from operating and financing activities increased unrealized gains on fixed income securities and increased funds associated with securities lending.lending partially offset by decreased unrealized gains on fixed income securities.
Total investment balancesinvestments at amortized costs related to collateral associated with securities lending increased to $177.5$176.0 million at March 31,June 30, 2004 from $134.5 million at December 31, 2003.
At March 31,June 30, 2004, 95.9%96.1% of the fixed income securities portfolio was rated investment grade, which is defined 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,Baa; an S&P equivalent rating of AAA, AA, A or BBB,BBB; or a comparable internal rating when an external rating is not available.
The unrealized net capital gains on fixed income securities at March 31,June 30, 2004 were $593.1$328.8 million, an increasea decrease of $113.2$151.1 million or 23.6%31.5% since December 31, 2003. The net unrealized gain was comprised of $605.8$389.3 million of unrealized gains and $12.7$60.5 million of unrealized losses at March 31,June 30, 2004. This is compared to a net unrealized gain for the fixed income portfolio totaling $479.9 million at December 31, 2003, comprised of $498.8 million of unrealized gains and $18.9 million of unrealized losses. The total decrease in net unrealized gains for the fixed income portfolio was $151.1 million, of which $142.6 million or 94.4% was related to investment grade securities. The total increase in gross unrealized losses for the fixed income portfolio was $41.5 million, of which $35.7 million or 86.1% was related to investment grade securities.
Of the gross unrealized losses in the fixed income portfolio at March 31,June 30, 2004, 69.4%$51.9 million or 85.8% were related to investment grade securities and are believed to be a result of the interest rate environment. Of the remaining $8.6 million of losses in the fixed income portfolio, $6.5 million or 75.6% was
concentrated in the corporate fixed income portfolio. The losses wereportfolio and was primarily comprised of securities in the transportation, bankingconsumer goods and capital goodsenergy sectors. The gross unrealized losses in these sectors were primarily company specific orand interest rate related. Approximately 32.4%$4.4 million of the gross unrealized losses onin the corporate fixed income portfolio were associated with the airline industry for which values were depressed due to company specific issues and economic issues related to fuel costs. While weWe expect eventual recovery of these securities and the related sectors, wesectors. Every security was included every security in our portfolio monitoring process.
Our portfolio monitoring process identifies and evaluates fixed income securities whose carrying value may be other than temporarily impaired. The process includes a quarterly review of all securities using a screening process to identify those securities whose fair value compared to amortized cost for fixed income securities is below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings downgrades or payment defaults.
We also monitor the quality of our fixed income portfolio by categorizing certain investments as "problem", "restructured" or "potential problem." Problem fixed income securities are securities in default with respect to principal or interest and/or securities issued by companies that have gone into bankruptcy subsequent to our acquisition of the security. Restructured fixed income securities have rates and terms that are not consistent with market rates or terms prevailing 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, we have serious concerns regarding the borrower's ability to pay
future principal and interest, which causes us to believe these securities may be classified as problem or restructured in the future.
The following table summarizes problem, restructured and potential problem fixed income securities.
| June 30, 2004 | December 31, 2003 | ||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | March 31, 2004 | December 31, 2003 | 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 | $ | 13,178 | $ | 12,997 | 0.3 | % | $ | 13,186 | $ | 12,533 | 0.3 | % | $ | 12,948 | $ | 12,308 | 0.3 | % | $ | 13,186 | $ | 12,533 | 0.3 | % | ||||||||||
Restructured | 5,407 | 6,006 | 0.1 | 5,701 | 6,303 | 0.1 | 5,399 | 5,893 | 0.1 | 5,701 | 6,303 | 0.1 | ||||||||||||||||||||||
Potential problem | 17,120 | 17,043 | 0.4 | 17,899 | 17,843 | 0.4 | 15,709 | 14,698 | 0.3 | 17,899 | 17,843 | 0.4 | ||||||||||||||||||||||
Total net carrying value | $ | 35,705 | $ | 36,046 | 0.8 | % | $ | 36,786 | $ | 36,679 | 0.8 | % | $ | 34,056 | $ | 32,899 | 0.7 | % | $ | 36,786 | $ | 36,679 | 0.8 | % | ||||||||||
Cumulative write-downs recognized | $ | 5,415 | $ | 4,817 | $ | 5,061 | $ | 4,817 | ||||||||||||||||||||||||||
We have not experienced significant changesa decrease in the amortized cost of fixed income securities categorized as problem, restructured and potential problem as of March 31,June 30, 2004 compared to December 31, 2003. The decrease was primarily related to the sale of holdings in these categories due to specific developments causing a change in our outlook and intent to hold those securities.
We also evaluated each of these securities through our portfolio monitoring process and recorded write-downs when appropriate. We further concluded that any remaining unrealized losses on these securities were temporary in nature. While these balances may increase in the future, particularly if economic conditions are unfavorable, we expect that the total amount of securities in these categories will remain low relative to the total fixed income securities portfolio.
Net Realized Capital Gains and Losses The following table presents the components of realized capital gains and losses and the related tax effect.
| Three Months Ended March 31, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | ||||||||||||||
Investment write-downs | $ | (639 | ) | $ | (5,580 | ) | $ | (245 | ) | $ | (1,672 | ) | $ | (884 | ) | $ | (7,252 | ) | ||
Sales | 1,827 | 99 | ||||||||||||||||||
Dispositions | (5,866 | ) | 1,527 | (4,039 | ) | 1,626 | ||||||||||||||
Valuation of derivative instruments | (1,184 | ) | 640 | 2,563 | (1,029 | ) | 708 | (1,023 | ) | |||||||||||
Settlement of derivative instruments | (657 | ) | 150 | 662 | 1,382 | 676 | 2,166 | |||||||||||||
Realized capital gains and losses, pretax | (653 | ) | (4,691 | ) | (2,886 | ) | 208 | (3,539 | ) | (4,483 | ) | |||||||||
Income tax benefit | 219 | 1,714 | ||||||||||||||||||
Income tax benefit (expense) | 1,089 | (78 | ) | 1,308 | 1,636 | |||||||||||||||
Realized capital gains and losses, after-tax | $ | (434 | ) | $ | (2,977 | ) | $ | (1,797 | ) | $ | 130 | $ | (2,231 | ) | $ | (2,847 | ) | |||
Dispositions in the above table also include sales and other transactions such as calls and prepayments. We may sell securities during the period in which fair value has declined below amortized cost. Recognizing in certain situations new factors such as negative developments, subsequent credit deterioration, relative value opportunities, market liquidity concerns and portfolio reallocations, we can subsequently change our previous intent to continue holding a security. Sales
The losses on dispositions in the above table also include dispositions such as call and prepayment transactions.second quarter of 2004 were related to sales of securities that were sold in recognition of relative value opportunities. The proceeds from these sales were reinvested in higher yielding securities.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources consist of shareholder's equity. The following table summarizes our capital resources.
(in thousands) | (in thousands) | March 31, 2004 | December 31, 2003 | (in thousands) | June 30, 2004 | December 31, 2003 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Common stock, retained earnings and other shareholder's equity items | Common stock, retained earnings and other shareholder's equity items | $ | 400,901 | $ | 394,850 | Common stock, retained earnings and other shareholder's equity items | $ | 407,076 | $ | 394,850 | ||||
Accumulated other comprehensive income | Accumulated other comprehensive income | 162,406 | 138,724 | Accumulated other comprehensive income | 107,078 | 138,724 | ||||||||
Total shareholder's equity | $ | 563,307 | $ | 533,574 | Total shareholder's equity | $ | 514,154 | $ | 533,574 | |||||
Shareholder's equity increaseddecreased in the first quartersix months of 2004 when compared to December 31, 2003 due to an increase in accumulated other comprehensivedecreased unrealized gains on fixed income and tosecurities partially offset by net income.
Financial Ratings and Strength Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks and the current level of operating leverage. There have been no changes to our insurance financial strength ratings since December 31, 2003. However, in February 2004, A.M. Best revised the outlook to stable from positive for the insurance financial strength ratings of ALIC and certain rated ALIC subsidiaries and affiliates, including the Company.
Liquidity Sources and Uses
Increased operating cash flows in the first quartersix months of 2004 when compared to the first quartersix months of 2003 primarily relate to increases in premiums and investment income. Cash flows used in investing activities increased in the first quartersix months of 2004 as a result of the investment of higher financing cash flow and higher operating cash flows.
Higher cash flow from financing activities during the first quartersix months of 2004 when compared to the first quartersame period of 2003 reflects an increase in deposits received from contractholders, partially offset by
benefits and withdrawals from contractholders' accounts. For quantification of the changes in contractholder funds, see the Results of Operations section of the MD&A.
We have entered into an inter-company loan agreement with The Allstate Corporation (the "Corporation"). The amount of inter-company loans available to us is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. We had no amounts outstanding under the inter-company loan agreement at March 31,June 30, 2004 or December 31, 2003. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" that anticipate results based on our 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. We assume 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 other things, our strategy for growth, product development, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe 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. Factors which could cause actual results to differ materially from those suggested by such forward-looking statements are incorporated in this Part I, Item 2 by reference to the information set forth in our Annual Report on Form 10-K, Part II, Item 7, under the caption "Forward-Looking Statements and Risk Factors."
Item 4. Controls and Procedures
With the participation of our principal executive officer and principal financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our 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.
During the fiscal quarter ended March 31,June 30, 2004, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information required for this Part II, Item 1 is incorporated by reference to the discussion under the heading "Regulation" and under the heading "Legal proceedings" in Note 4 of the Company's Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
An Exhibit Index has been filed as part of this report on page E-1.
None.
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 Group Vice President and Controller (chief accounting officer and duly authorized officer of the Registrant) |
Exhibit No. | Description | |
---|---|---|
Amended and Restated Service and Expense Agreement among Allstate Insurance Company. The Allstate Corporation and Certain Affiliates, effective January 1, 2004. (As of August 9, 2004, some regulatory approvals and board approval are pending.) Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company's Form 10-Q for the quarter ended June 30, 2004. | ||
10.2 | Automatic Annuity Reinsurance Agreement between Allstate Life Insurance Company of New York and Allstate Life Insurance Company, effective January 2, 2004. | |
15 | Acknowledgement of awareness from Deloitte & Touche LLP dated | |
31.1 | Rule 15d-14(a) Certification of Principal Executive Officer | |
31.2 | Rule 15d-14(a) Certification of Principal Financial Officer | |
32 | Section 1350 Certifications |