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 JUNE 30, 2004

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934


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


11788

(Address of principal executive offices)

(Zip Code)

Registrant'sRegistrant’s telephone number, including area code:631-357-8920


 

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 JulyOctober 31, 2004 the Registrant had 100,000 common shares, $25 par value, outstanding, all of which are held by Allstate Life Insurance Company.






ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JuneSeptember 30, 2004




PART I.I

FINANCIAL INFORMATION


Item 1.


Financial Statements




Item 1.


Financial Statements

3

Condensed Statements of Operations for the Three-Month and Six-MonthNine-Month Periods Ended JuneSeptember 30, 2004 and 2003 (unaudited)



3



Condensed Statements of Financial Position as of JuneSeptember 30, 2004 (unaudited) and December 31, 2003



4



Condensed Statements of Cash Flows for the Six-MonthNine-Month Periods Ended JuneSeptember 30, 2004 and 2003 (unaudited)



5



Notes to Condensed Financial Statements (unaudited)



6



Report of Independent Registered Public Accounting Firm



14


Item 2.


Management's

Management’s Discussion and Analysis of Financial Condition and Results of Operations



15


Item 4.


Controls and Procedures



27


PART II.


OTHER INFORMATION




Item 1.

PART II


Legal Proceedings

OTHER INFORMATION



27


Item 1.

Legal Proceedings

27

Item 6.


Exhibits and Reports on Form 8-K



27

2




PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF OPERATIONS

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

24,800

 

$

14,189

 

$

61,420

 

$

44,451

 

Contract charges

 

15,446

 

12,721

 

44,134

 

39,394

 

Net investment income

 

77,126

 

67,259

 

220,197

 

195,913

 

Realized capital gains and losses

 

(4,805

)

(1,923

)

(8,344

)

(6,406

)

 

 

112,567

 

92,246

 

317,407

 

273,352

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Contract benefits

 

50,474

 

38,278

 

138,314

 

119,712

 

Interest credited to contractholder funds

 

34,253

 

26,557

 

92,439

 

78,349

 

Amortization of deferred policy acquisition costs

 

6,590

 

7,527

 

15,298

 

23,649

 

Operating costs and expenses

 

10,004

 

11,452

 

30,262

 

26,788

 

 

 

101,321

 

83,814

 

276,313

 

248,498

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on disposition of operations

 

 

(4,312

)

1,058

 

(4,312

)

 

 

 

 

 

 

 

 

 

 

Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax

 

11,246

 

4,120

 

42,152

 

20,542

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

3,644

 

1,267

 

14,738

 

6,934

 

 

 

 

 

 

 

 

 

 

 

Income before cumulative effect of change in accounting principle, after-tax

 

7,602

 

2,853

 

27,414

 

13,608

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in accounting principle, after-tax

 

 

 

(7,586

)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

7,602

 

$

2,853

 

$

19,828

 

$

13,608

 

See notes to condensed financial statements.

3



ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF FINANCIAL POSITION

(in thousands, except par value data)

 

September 30,
2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Investments

 

 

 

 

 

Fixed income securities, at fair value (amortized cost $4,648,546 and $3,935,447)

 

$

5,170,629

 

$

4,415,327

 

Mortgage loans

 

440,511

 

385,643

 

Short-term

 

114,874

 

22,756

 

Policy loans

 

34,572

 

34,107

 

Other

 

5,001

 

 

 

 

 

 

 

 

Total investments

 

5,765,587

 

4,857,833

 

 

 

 

 

 

 

Cash

 

25,004

 

10,731

 

Deferred policy acquisition costs

 

216,326

 

187,437

 

Accrued investment income

 

54,455

 

47,818

 

Reinsurance recoverables

 

6,755

 

4,584

 

Current income taxes receivable

 

1,602

 

8,170

 

Other assets

 

25,442

 

15,004

 

Separate Accounts

 

710,425

 

665,875

 

Total assets

 

$

6,805,596

 

$

5,797,452

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Reserve for life-contingent contract benefits

 

$

1,760,334

 

$

1,683,771

 

Contractholder funds

 

3,416,919

 

2,658,325

 

Deferred income taxes

 

88,837

 

81,657

 

Other liabilities and accrued expenses

 

258,431

 

168,081

 

Payable to affiliates, net

 

2,594

 

5,061

 

Reinsurance payable to parent

 

1,071

 

1,108

 

Separate Accounts

 

710,425

 

665,875

 

Total liabilities

 

6,238,611

 

5,263,878

 

 

 

 

 

 

 

Commitments and Contingent Liabilities (Note 4)

 

 

 

 

 

 

 

 

 

 

 

Shareholder’s equity

 

 

 

 

 

Common stock, $25 par value, 100 thousand shares authorized and outstanding

 

2,500

 

2,500

 

Additional capital paid-in

 

55,787

 

55,787

 

Retained income

 

356,391

 

336,563

 

Accumulated other comprehensive income:

 

 

 

 

 

Unrealized net capital gains and losses and net gains and losses on derivative financial instruments

 

152,307

 

138,724

 

Total accumulated other comprehensive income

 

152,307

 

138,724

 

Total shareholder’s equity

 

566,985

 

533,574

 

Total liabilities and shareholder’s equity

 

$

6,805,596

 

$

5,797,452

 

See notes to condensed financial statements.

4



ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

CONDENSED STATEMENTS OF CASH FLOWS

 

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

(in thousands)

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

19,828

 

$

13,608

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization and other non-cash items

 

(37,624

)

(36,760

)

Realized capital gains and losses

 

8,344

 

6,406

 

(Gain) loss on disposition of operations

 

(1,058

)

4,312

 

Cumulative effect of change in accounting principle

 

7,586

 

 

Interest credited to contractholder funds

 

92,439

 

78,349

 

Changes in:

 

 

 

 

 

Life-contingent contract benefits and contractholder funds

 

28,950

 

13,382

 

Deferred policy acquisition costs

 

(47,149

)

(22,172

)

Income taxes payable

 

10,519

 

(7,083

)

Other operating assets and liabilities

 

(426

)

(6,009

)

Net cash provided by operating activities

 

81,409

 

44,033

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sales of fixed income securities

 

342,905

 

200,613

 

Investment collections

 

 

 

 

 

Fixed income securities

 

145,165

 

179,900

 

Mortgage loans

 

21,129

 

21,967

 

Investment purchases

 

 

 

 

 

Fixed income securities

 

(1,204,327

)

(805,583

)

Mortgage loans

 

(74,900

)

(69,214

)

Change in short-term investments, net

 

7,581

 

(32,976

)

Change in other investments, net

 

1,203

 

1,098

 

Net cash used in investing activities

 

(761,244

)

(504,195

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Contractholder fund deposits

 

895,148

 

579,411

 

Contractholder fund withdrawals

 

(201,040

)

(134,124

)

Net cash provided by financing activities

 

694,108

 

445,287

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

14,273

 

(14,875

)

Cash at beginning of period

 

10,731

 

21,686

 

Cash at end of period

 

$

25,004

 

$

6,811

 

See notes to condensed financial statements.

5



ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF OPERATIONS

 
 Three Months Ended
June 30,

 Six Months Ended
June 30,

 
(in thousands)
 2004
 2003
 2004
 2003
 
 
 (unaudited)

 
Revenues             
 Premiums $19,969 $13,934 $36,620 $30,262 
 Contract charges  14,576  13,682  28,688  26,673 
 Net investment income  72,676  65,356  143,071  128,654 
 Realized capital gains and losses  (2,886) 208  (3,539) (4,483)
  
 
 
 
 
   104,335  93,180  204,840  181,106 
  
 
 
 
 
Costs and expenses             
 Contract benefits  44,916  43,046  87,840  81,434 
 Interest credited to contractholder funds  30,535  27,277  58,186  51,792 
 Amortization of deferred policy acquisition costs  8,817  9,453  8,708  16,122 
��Operating costs and expenses  10,300  5,610  20,258  15,336 
  
 
 
 
 
   94,568  85,386  174,992  164,684 
  
 
 
 
 
Gain on disposition of operations      1,058   

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

 

 

3,592

 

 

2,706

 

 

11,094

 

 

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

 

 


 

 


 

 

(7,586

)

 


 
  
 
 
 
 
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)
 June 30,
2004

 December 31,
2003

 
 (unaudited)

  
Assets      
Investments      
 Fixed income securities, at fair value (amortized cost $4,365,670 and $3,935,447) $4,694,455 $4,415,327
 Mortgage loans  403,725  385,643
 Short-term  76,104  22,756
 Policy loans  34,336  34,107
 Other  7,285  
  
 
  Total investments  5,215,905  4,857,833

Cash

 

 

14,148

 

 

10,731
Deferred policy acquisition costs  243,019  187,437
Accrued investment income  51,291  47,818
Reinsurance recoverables  5,228  4,584
Current income taxes receivable  8,624  8,170
Other assets  51,580  15,004
Separate Accounts  710,363  665,875
  
 
   Total assets $6,300,158 $5,797,452
  
 
Liabilities      
Reserve for life-contingent contract benefits $1,659,453 $1,683,771
Contractholder funds  3,084,086  2,658,325
Deferred income taxes  64,924  81,657
Other liabilities and accrued expenses  259,257  168,081
Payable to affiliates, net  6,839  5,061
Reinsurance payable to parent  1,082  1,108
Separate Accounts  710,363  665,875
  
 
   Total liabilities  5,786,004  5,263,878
  
 
Commitments and Contingent Liabilities (Note 4)      
Shareholder's equity      
Common stock, $25 par value, 100 thousand shares authorized and outstanding  2,500  2,500
Additional capital paid-in  55,787  55,787
Retained income  348,789  336,563
Accumulated other comprehensive income:      
 Unrealized net capital gains and losses and net gains and losses on derivative financial instruments  107,078  138,724
  
 
   Total accumulated other comprehensive income  107,078  138,724
  
 
   Total shareholder's equity  514,154  533,574
  
 
   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

 
 Six Months Ended
June 30,

 
(in thousands)
 2004
 2003
 
 
 (unaudited)

 
Cash flows from operating activities       
Net income $12,226 $10,755 
Adjustments to reconcile net income to net cash provided by operating activities:       
 Amortization and other non-cash items  (24,511) (24,699)
 Realized capital gains and losses  3,539  4,483 
 Gain on disposition of operations  (1,058)  
 Cumulative effect of change in accounting principle  7,586   
 Interest credited to contractholder funds  58,186  51,792 
 Changes in:       
  Life-contingent contract benefits and contractholder funds  15,929  8,347 
  Deferred policy acquisition costs  (28,212) (15,679)
  Income taxes payable  3,938  (4,151)
  Other operating assets and liabilities  11,026  (4,215)
  
 
 
   Net cash provided by operating activities  58,649  26,633 
  
 
 
Cash flows from investing activities       
Proceeds from sales of fixed income securities  233,910  97,988 
Investment collections       
  Fixed income securities  102,448  136,319 
  Mortgage loans  6,403  4,287 
Investment purchases       
  Fixed income securities  (763,912) (578,200)
  Mortgage loans  (24,474) (44,596)
Change in short-term investments, net  4,884  19,149 
Change in other investments, net  379  1,137 
  
 
 
   Net cash used in investing activities  (440,362) (363,916)
  
 
 
Cash flows from financing activities       
Contractholder fund deposits  510,088  405,411 
Contractholder fund withdrawals  (124,958) (80,199)
  
 
 
   Net cash provided by financing activities  385,130  325,212 
  
 
 

Net increase (decrease) in cash

 

 

3,417

 

 

(12,071

)
Cash at beginning of period  10,731  21,686 
  
 
 
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)

1.   Basis of Presentation

 

The accompanying condensed financial statements include the accounts of Allstate Life Insurance Company of New York (the "Company"“Company”), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"(“ALIC”), which is wholly-owned by Allstate Insurance Company ("AIC"(“AIC”), a wholly-owned subsidiary of The Allstate Corporation (the "Corporation"“Corporation”).

 

The condensed financial statements and notes as of JuneSeptember 30, 2004, and for the three-month and six-monthnine-month periods ended JuneSeptember 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'sCompany’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,presentation, certain amounts in the prior year'syear’s condensed financial statements have been reclassified.

Adopted accounting standardstandards

Statement of Position 03-1, "Accounting“Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" ("Accounts” (“SOP 03-1"03-1”)

 

On January 1, 2004, the Company adopted SOP 03-1.  The major provisions of the SOP affecting the Company require:

Establishment of reserves primarily related to death benefit and income benefit guarantees provided under variable annuity contracts;

Deferral of sales inducements that meet certain criteria, and amortization using the same method used for deferred policy acquisition costs ("DAC"(“DAC”).

    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 benefits reserves (primarily for variable annuity contracts) of $942 thousand, pre-tax, and a reduction in DAC and deferred sales inducements ("DSI"(“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 (accumulation benefits). The Company hedgesTo manage the risk associated with its accumulation benefits, for all contracts issued.the Company cedes 100% of these obligations to ALIC.

6



 

The table below presents information regarding the Company'sCompany’s variable contracts with guarantees.  The Company'sCompany’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'contracts’ separate accounts with guarantees.

($ in millions)
 June 30, 2004
In the event of death   
 Account value $709
 Net amount at risk(1) $107
 Average attained age of contractholders  63 years
At annuitization   
 Account value $37
 Net amount at risk(2) $
 Weighted average waiting period until annuitization options available  9 years
Accumulation at specified dates   
 Account value $12
 Net amount at risk(3) $
 Weighted average waiting period until guarantee date  11 years

($ in millions)

 

September 30,
2004

 

In the event of death

 

 

 

Account value

 

$

709

 

Net amount at risk(1)

 

$

111

 

Average attained age of contractholders

 

63 years

 

At annuitization

 

 

 

Account value

 

$

37

 

Net amount at risk(2)

 

$

 

Weighted average waiting period until annuitization options available

 

9 years

 

Accumulation at specified dates

 

 

 

Account value

 

$

53

 

Net amount at risk(3)

 

$

 

Weighted average waiting period until guarantee date

 

11 years

 

(1)

Defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.

(2)

Defined as the present value of the minimum guaranteed annuity payments determined in accordance with the terms of the contract in excess of the current account balance.

(3)

Defined as the present value of the guaranteed minimum accumulation balance in excess of the current account balance.

 


Account balances of variable contracts'contracts’ separate accounts with guarantees were invested as follows:

(in millions)
 June 30, 2004
Equity securities (including mutual funds) $679
Cash and cash equivalents  30
  
Total variable contracts' separate account assets with guarantees $709
  

 

(in millions)

 

September 30, 2004

 

Equity securities (including mutual funds)

 

$

678

 

Cash and cash equivalents

 

31

 

Total variable contracts’ separate account assets with guarantees

 

$

709

 

The following summarizes the liabilities for guarantees:

(in thousands)
 Liability for
guarantees
related to
death benefits

 Liability for
guarantees
related to
income benefits

 Total
 
Balance, January 1, 2004 $868 $74 $942 
Incurred guaranteed benefits  910  3  913 
Paid guarantee benefits  (969)   (969)
  
 
 
 
Balance, June 30, 2004(1) $809 $77 $886 
  
 
 
 

(in thousands)

 

Liability for
guarantees
 related to
death benefits

 

Liability for
guarantees
related to
income benefits

 

Total

 

Balance, January 1, 2004

 

$

868

 

$

74

 

$

942

 

Incurred guaranteed benefits

 

1,340

 

4

 

1,344

 

Paid guarantee benefits

 

(1,699

)

 

(1,699

)

Balance, September 30, 2004(1)

 

$

509

 

$

78

 

$

587

 

(1)

Included in the total reserve balance are reserves for variable annuity death benefits of $809$509 thousand, variable annuity income benefits of $14$15 thousand and other guarantees of $63 thousand.

 


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 ofrelated to death benefits, benefits represent the current guaranteed minimum death benefit payments in excess of the current account balance.  For

7



guarantees at annuitization,related to income benefits, 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'sannuitant’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.

    Guarantees related to accumulation benefits are considered to be derivative financial instruments; therefore, the liability for accumulation benefits is established based on its fair value.

    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'scustomer’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 sixnine months ended JuneSeptember 30, 2004 was as follows:

(in thousands)
  
 
Balance, January 1, 2004 $2,369 
Sales inducements deferred  867 
Amortization charged to income  (384)
Effects of unrealized gains and losses  465 
  
 
Balance, June 30, 2004 $3,317 
  
 

Pending accounting standard

(in thousands)

 

 

 

Balance, January 1, 2004

 

$

2,165

 

Sales inducements deferred

 

1,149

 

Amortization charged to income

 

(527

)

Effects of unrealized gains and losses

 

(65

)

Balance, September 30, 2004

 

$

2,722

 

Emerging Issues Task Force TopicIssue No. 03-1, "The“The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("Investments” (“EITF 03-1”) and Financial Accounting Standards Board (“FASB”) Staff Position No. 03-1"EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP EITF 03-1-1”)

 

In March 2004, the Emerging Issues Task Force ("EITF"(“EITF”) reached a final consensus on EITF No. 03-1, which iswas to be effective for fiscal periods beginning after June 15, 2004.  EITF No. 03-1 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 temporary or other-than-temporary.  An impairment loss should be recognized equal to the difference between the investment'sinvestment’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“Accounting for Loans and Certain Debt Securities Acquired in a Transfer"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 recognitionreceipt of that difference inthe expected cash flows 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'sinvestor’s intent to hold the security until it recovers in value.value or otherwise matures.

 

The EITF 03-1 impairment model applies to all investment securities accounted for under Statement of Financial Accounting Standard ("SFAS"(“SFAS”) No. 115, "Accounting“Accounting for Certain Investments in Debt and Equity Securities"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".

method.  The final consensus on EITF 03-1 included additional disclosure requirements incremental to those adopted by the Company effective December 31, 2003 that arewill be effective for fiscal years ending after June 15,December 31, 2004.

8



In September 2004, the FASB issued FSP EITF Issue 03-1-1, which deferred the effective date of the impairment measurement and recognition provisions contained in paragraphs 10-20 of EITF 03-1 until proposed FSP EITF 03-1-a is issued. (See Pending accounting standard.)

Pending and recently issued accounting standards

American Institute of Certified Public Accountants (“AICPA”) Technical Practice Aid (“TPA”) re. SOP 03-1

In September 2004, the staff of the AICPA, aided by industry experts, issued a set of technical questions and answers on financial accounting and reporting issues related to SOP 03-1 that will be included in the AICPA’s TPAs.  The TPA addresses a number of issues related to SOP 03-1 including when it is necessary to establish a liability in addition to the account balance for certain contracts that meet the definition of an insurance contract and have amounts assessed against the contractholder in a manner that is expected to result in profits in earlier years and losses in subsequent years from the insurance benefit function.  The Company is currentlyin the process of evaluating the impact of the TPA.  The impact of the TPA is not expected to be material to the Company’s Condensed Statements of Operations or Financial Position.

FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP EITF Issue 03-1-a”)

In September 2004, the FASB issued proposed FSP EITF 03-1-a, that addresses the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of increases in interest rates, and/or credit sector spread.  Thereafter, in connection with its decision to defer the effective date of paragraphs 10—20 of EITF 03-1 onthrough the issuance of FSP EITF Issue 03-1-1, the FASB requested from its process for determining other-than-temporary impairment forconstituents information about both the affected securities. More specifically,issues set forth in FSP EITF 03-1-a as well as the issues that arose during the FSP EITF 03-1-b, “Effective Date of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, comment letter process.

Due to the uncertainty as to how all of the relevant outstanding issues will be resolved, the Company is analyzing whether subsequentunable to adoption its portfolio management practices for certain securities classified as


available-for-sale pursuant to SFAS No. 115 could be interpreted as a patterndetermine the impact 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 requirementsadopting paragraphs 10-20 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.

03-1 until final implementation guidance is issued.  Adoption of this standard may:

    Accelerateparagraphs 10-20 of EITF 03-1 may have a material impact on the timingCompany’s Condensed Statements of recognition of certain impairment losses or otherwise result in impairment losses being recognized when they previously may not have been;

    Result in the designation of certain investment securities as trading;

    Increase the volatility of net income due to:

    The potential recognition of unrealized losses in situations where the Company anticipates a full recovery of certain unrealized lossesOperation but does not desire to elect a permanent intent to hold the affected securities, regardless of internal and external facts and circumstances, until such time as they fully recover or mature; and

    Changes in the timing of the recognition of the difference between carrying value and expected settlement value of those debt securities for which an other-than-temporary impairment is taken.

        Adoption of this standard is not expected to have a material impact on shareholder's equitythe Company’s Condensed Statements of Financial Position since fluctuations in 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 or to change the interest rate characteristics of existing assets 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 or other liabilities and accrued expenses 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'sCompany’s cash flow exposure is associated with an existing asset.  The fair value of the instruments is reported as other investments or 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.

 
 June 30, 2004
(in thousands)
 Notional
amount

 Fair value
 Realized
capital
gain (loss)

Interest rate cap agreements $129,200 $7,198 $1,755
Financial futures contracts  26,500  248  600
Foreign currency swap agreements  7,500  (240) 

9



 

 

September 30, 2004

 

Nine Months
Ended
September 30,
2004

 

(in thousands)

 

Notional
amount

 

Fair value

 

Realized capital
gain (loss)

 

Interest rate cap agreements

 

$

145,800

 

$

4,384

 

$

(1,058

)

Financial futures contracts

 

26,500

 

(45

)

1,366

 

Foreign currency swap agreements

 

7,500

 

 

 

3.   Reinsurance

 

The effects of reinsurance on premiums and contract charges are as follows:

 
 Three Months Ended
June 30,

 Six Months Ended
June 30,

 
(in thousands)
 2004
 2003
 2004
 2003
 
Premiums and contract charges             
Direct $38,677 $29,565 $73,167 $60,540 
Assumed—non-affiliate  117  64  302  107 
Ceded             
 Affiliate  (1,086) (1,142) (2,183) (2,290)
 Non-affiliate  (3,163) (871) (5,978) (1,422)
  
 
 
 
 
  Premiums and contract charges, net of reinsurance $34,545 $27,616 $65,308 $56,935 
  
 
 
 
 

 

(in thousands)

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Premiums and contract charges

 

 

 

 

 

 

 

 

 

Direct

 

$

43,167

 

$

28,874

 

$

116,334

 

$

89,414

 

Assumed – non-affiliate

 

84

 

103

 

386

 

210

 

Ceded

 

 

 

 

 

 

 

 

 

Affiliate

 

8

 

(1,128

)

(2,175

)

(3,418

)

Non-affiliate

 

(3,013

)

(939

)

(8,991

)

(2,361

)

Premiums and contract charges, net of reinsurance

 

$

40,246

 

$

26,910

 

$

105,554

 

$

83,845

 

The effects of reinsurance on contract benefits are as follows:

 
 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 
  
 
 
 
 

(in thousands)

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Contract benefits

 

 

 

 

 

 

 

 

 

Direct

 

$

52,576

 

$

40,791

 

$

143,304

 

$

124,024

 

Assumed – non-affiliate

 

57

 

1

 

135

 

36

 

Ceded

 

 

 

 

 

 

 

 

 

Affiliate

 

(283

)

(1,312

)

(266

)

(1,425

)

Non-affiliate

 

(1,876

)

(1,202

)

(4,859

)

(2,923

)

Contract benefits, net of reinsurance

 

$

50,474

 

$

38,278

 

$

138,314

 

$

119,712

 

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.

 

10



The aggregate liability balance related to all guarantees was not material as of JuneSeptember 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'sCompany’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'sCompany’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'sCompany’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“Proceedings” sub-section below, please note the following:

These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to, the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies, the fact that some of these matters are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined, the fact that some of these matters involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear, and the current challenging legal environment faced by large corporations and insurance companies.

In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages.  In some cases, the monetary damages sought include punitive damages or are not specified.  Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings.  In our experience, monetary demands in plaintiffs'plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, to the Company.

For the reasons specified above, it is not possible to make meaningful estimates of the amount or range of loss that could result from these matters at this time.  The Company reviews these matters on an on-going basis and follows the provisions of SFAS No. 5, "Accounting“Accounting for Contingencies"Contingencies”, when making accrual and disclosure decisions.  When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

In the opinion of the Company'sCompany’s management, while some of these matters may be material to the Company'sCompany’s operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on the financial condition of the Company.

11



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. A putative nationwide class action filed by former employee agents 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. This matter was dismissed with prejudice in late March 2004 by the trial court but will be the subject of further proceedings on appeal.  AIC has been vigorously defending this 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"(“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.violations, and a lawsuit filed in October 2004 by the EEOC alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization.  AIC is also defending another action, in which a class was certified in June 2004, filed by former employee agents who terminated their employment prior to the agency program reorganization.  These plaintiffs have asserted claims under ERISA and for constructive discharge, and are seeking the benefits provided in connection with the reorganization.  AIC has asked the court to reconsider its class certification ruling.    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. Inlate March 2004, in the first EEOC lawsuit and class action lawsuits,lawsuit, 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'scourt’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“any and all benefits received by the [agent] in exchange for signing the release."  The court also "concluded“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 stillwill be the subject toof further proceedings 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.  The outcome of these disputes is currently uncertain.

Other actionsMatters

 

The Corporation and its affiliates have received interrogatories and demands to produce information from several regulatory and enforcement authorities.  These authorities are seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, are seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging.  Published press reports have indicated that numerous demands of this nature have been sent to insurance companies as part of industry-wide investigations.  The Corporation intends to cooperate fully with these and any similar requests for information.

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 increasinga 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.

12



5.     Other Comprehensive Income

 

The components of other comprehensive income on a pretax and after-tax basis are as follows:

 
 Three 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 $(87,752)$30,712 $(57,040)$40,691 $(14,244)$26,447
Less: reclassification adjustments  (2,427) 848  (1,579) 216  (76) 140
  
 
 
 
 
 
Unrealized net capital gains (losses)  (85,325) 29,864  (55,461) 40,475  (14,168) 26,307
Net gains (losses) on derivative financial instruments arising during the period            
Less: reclassification adjustments  (204) 71  (133)     
  
 
 
 
 
 
Unrealized net gains (losses) on derivative financial instruments  204  (71) 133      
  
 
 
 
 
 
Other comprehensive income (loss) $(85,121)$29,793  (55,328)$40,475 $(14,168) 26,307
  
 
    
 
   

Net income

 

 

 

 

 

 

 

 

6,175

 

 

 

 

 

 

 

 

5,088
        
       

Comprehensive income (loss)

 

 

 

 

 

 

 

$

(49,153

)

 

 

 

 

 

 

$

31,395
        
       

 

 

Three Months Ended September 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

 

$

64,736

 

$

(22,658

)

$

42,078

 

$

(38,089

)

$

13,332

 

$

(24,757

)

Less: reclassification adjustments

 

(5,089

)

1,781

 

(3,308

)

(1,924

)

673

 

(1,251

)

Unrealized net capital gains (losses)

 

69,825

 

(24,439

)

45,386

 

(36,165

)

12,659

 

(23,506

)

Net gains (losses) on derivative financial instruments arising during the period

 

 

 

 

 

 

��

Less: reclassification adjustments for derivative instruments

 

240

 

(84

)

156

 

 

 

 

Unrealized net gains (losses) on derivative financial instruments

 

(240

)

84

 

(156

)

 

 

 

Other comprehensive income (loss)

 

$

69,585

 

$

(24,355

)

45,230

 

$

(36,165

)

$

12,659

 

(23,506

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

7,602

 

 

 

 

 

2,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

$

52,832

 

 

 

 

 

$

(20,653

)

 

 

Nine Months Ended September 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

 

$

14,564

 

$

(5,098

)

$

9,466

 

$

8,806

 

$

(3,081

)

$

5,725

 

Less: reclassification adjustments

 

(6,334

)

2,217

 

(4,117

)

(5,445

)

1,906

 

(3,539

)

Unrealized net capital gains (losses)

 

20,898

 

(7,315

)

13,583

 

14,251

 

(4,987

)

9,264

 

Net gains (losses) on derivative financial instruments arising during the period

 

 

 

 

 

 

 

Less: reclassification adjustments for derivative instruments

 

 

 

 

 

 

 

Unrealized net gains (losses) on derivative financial instruments

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

$

20,898

 

$

(7,315

)

13,583

 

$

14,251

 

$

(4,987

)

9,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

19,828

 

 

 

 

 

13,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

 

 

 

 

$

33,411

 

 

 

 

 

$

22,872

 

13



 
 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 REGISTERED 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"“Company”, an affiliate of The Allstate Corporation) as of JuneSeptember 30, 2004, and the related condensed statements of operations for the three-month and six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003, and the condensed statements of cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2004 and 2003.  These interim financial statements are the responsibility of the Company'sCompany’s management.

 

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the 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 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 of the 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'sshareholder’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

/s/ Deloitte & Touche LLP

Chicago, Illinois

November 10, 2004

Chicago, Illinois
August 10, 200414



Item 2.  MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTHNINE-MONTH PERIODS ENDED JUNESEPTEMBER 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"“we”, "our"“our”, "us"“us” or the "Company"“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, consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources.

RESULTS OF OPERATIONS

 

Premiumsrepresent 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
June 30,

 Six Months Ended
June 30,

(in thousands)
 2004
 2003
 2004
 2003
Premiums            
Traditional life $5,746 $5,630 $11,201 $11,074
Immediate annuities with life contingencies  13,597  6,230  24,041  14,820
Other  626  2,074  1,378  4,368
  
 
 
 
Total premiums  19,969  13,934  36,620  30,262

Contract charges

 

 

 

 

 

 

 

 

 

 

 

 
Interest-sensitive life  9,982  9,957  19,410  19,446
Fixed annuities  1,495  1,390  3,032  2,601
Variable annuities  3,099  2,335  6,246  4,626
  
 
 
 
Total contract charges  14,576  13,682  28,688  26,673
  
 
 
 
Premiums and contract charges $34,545 $27,616 $65,308 $56,935
  
 
 
 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

 

 

 

 

 

 

 

 

Traditional life

 

$

6,838

 

$

5,393

 

$

18,039

 

$

16,467

 

Immediate annuities with life contingencies

 

17,263

 

6,759

 

41,304

 

21,579

 

Other

 

699

 

2,037

 

2,077

 

6,405

 

Total premiums

 

24,800

 

14,189

 

61,420

 

44,451

 

 

 

 

 

 

 

 

 

 

 

Contract charges

 

 

 

 

 

 

 

 

 

Interest-sensitive life

 

10,611

 

8,727

 

30,021

 

28,173

 

Fixed annuities

 

1,462

 

1,389

 

4,494

 

3,990

 

Variable annuities

 

3,373

 

2,605

 

9,619

 

7,231

 

Total contract charges

 

15,446

 

12,721

 

44,134

 

39,394

 

Premiums and contract charges

 

$

40,246

 

$

26,910

 

$

105,554

 

$

83,845

 

15



The following table summarizes premiums and contract charges by distribution channel.

 
 Three Months Ended
June 30,

 Six Months Ended
June 30,

(in thousands)
 2004
 2003
 2004
 2003
Premiums            
Allstate agencies $5,654 $5,545 $11,011 $10,909
Financial institutions and broker/dealers    34  107  34
Specialized brokers  13,597  6,230  23,934  14,820
Independent agents  786  380  1,485  623
Direct response  (68) 1,745  83  3,876
  
 
 
 
Total Premiums  19,969  13,934  36,620  30,262

Contract charges

 

 

 

 

 

 

 

 

 

 

 

 
Allstate agencies  10,073  10,152  19,556  19,726
Financial institutions and broker/dealers  3,513  2,577  6,946  5,122
Specialized brokers  934  916  2,062  1,761
Independent agents  56  37  124  64
  
 
 
 
Total contract charges  14,576  13,682  28,688  26,673
  
 
 
 
Premiums and contract charges $34,545 $27,616 $65,308 $56,935
  
 
 
 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

 

 

 

 

 

 

 

 

Allstate agencies

 

$

6,731

 

$

5,310

 

$

17,742

 

$

16,219

 

Financial institutions and broker/dealers

 

 

 

107

 

34

 

Specialized brokers

 

17,262

 

6,724

 

41,196

 

21,544

 

Independent agents

 

865

 

476

 

2,350

 

1,099

 

Direct response

 

(58

)

1,679

 

25

 

5,555

 

Total premiums

 

24,800

 

14,189

 

61,420

 

44,451

 

 

 

 

 

 

 

 

 

 

 

Contract charges

 

 

 

 

 

 

 

 

 

Allstate agencies

 

10,201

 

8,789

 

29,757

 

28,515

 

Financial institutions and broker/dealers

 

4,397

 

2,961

 

11,343

 

8,083

 

Specialized brokers

 

782

 

922

 

2,844

 

2,683

 

Independent agents

 

66

 

49

 

190

 

113

 

Total contract charges

 

15,446

 

12,721

 

44,134

 

39,394

 

 

 

 

 

 

 

 

 

 

 

Premiums and contract charges

 

$

40,246

 

$

26,910

 

$

105,554

 

$

83,845

 

Total premiums increased 43.3%75.0% to $20.0$24.8 million in the secondthird quarter of 2004 and 21.0%38.2% to $36.6$61.4 million in the first sixnine months of 2004 compared to the same periods of 2003.  The increases 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 6.5%21.4% to $14.6$15.4 million in the secondthird quarter of 2004 and 7.6%12.0% to $28.7$44.1 million in the first sixnine months of 2004 compared to the same periods of 2003.  The increases in both periods were primarily attributable to higher contract charges on interest-sensitive life products and variable annuities as a result of average higher account values in the 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.

16



 

The following table shows the changes in contractholder funds.

 
 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

 
  
 
 
 
 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

Contractholder funds, beginning balance

 

$

3,084,086

 

$

2,407,026

 

$

2,658,325

 

$

2,051,429

 

 

 

 

 

 

 

 

 

 

 

Impact of adoption of SOP 03-1(1)

 

 

 

2,031

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Fixed annuities (immediate and deferred)

 

340,560

 

114,040

 

742,959

 

416,765

 

Interest-sensitive life

 

24,937

 

16,163

 

75,969

 

43,945

 

Variable annuity and life deposits allocated to fixed accounts

 

19,562

 

43,797

 

76,219

 

118,701

 

Total deposits

 

385,059

 

174,000

 

895,147

 

579,411

 

 

 

 

 

 

 

 

 

 

 

Interest credited

 

34,124

 

26,557

 

92,075

 

78,349

 

 

 

 

 

 

 

 

 

 

 

Benefits, withdrawals and other adjustments

 

 

 

 

 

 

 

 

 

Benefits and withdrawals

 

(66,800

)

(49,744

)

(170,993

)

(128,292

)

Contract charges

 

(10,756

)

(10,727

)

(31,084

)

(30,320

)

Net transfers to separate accounts

 

(9,388

)

(5,285

)

(30,782

)

(9,069

)

Other adjustments

 

594

 

3,572

 

2,200

 

3,891

 

Total benefits, withdrawals and other adjustments

 

(86,350

)

(62,184

)

(230,659

)

(163,790

)

 

 

 

 

 

 

 

 

 

 

Contractholder funds, ending balance

 

$

3,416,919

 

$

2,545,399

 

$

3,416,919

 

$

2,545,399

 

(1)

The increase in contractholder funds due to the adoption of AICPA Statement of Position 03-1, "Accounting“Accounting and Reporting by Insurance Enterprises for Certain TraditionalNontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-1) primarilyAccounts” (“SOP 03-1”) reflects the establishment of reserves for certain liabilities that are primarily related to death benefit and income benefit guarantees provided under variable annuity contracts and the reclassification of deferred sales inducements from contractholder funds to other assets.

 


Contractholder funds deposits increased 27.4%121.3% in the secondthird quarter and 25.8%54.5% in the first six months of 2004 compared to the same periods in 2003, and average contractholder funds, excluding the impact of adopting SOP 03-1, increased 28.3% in the second quarter and 28.8% in the first sixnine months of 2004 compared to the same periods in 2003 due to significantincreased fixed annuity and interest-sensitive life deposits in both periods. These new deposits contributed to increases in fixed annuity deposits.average contractholder funds, excluding the impact of adopting SOP 03-1, of 31.3% in the third quarter and 32.2% in the first nine months of 2004 compared to the same periods in 2003.  Fixed annuity deposits increased 31.5%198.6% and 32.9%78.3% in the secondthird quarter and first sixnine months of 2004, respectively, compared to the same periods in 2003.  The increases were attributable to higherstrong consumer demand resulting from increasing interest rates.and competitive pricing.

 

Benefits and withdrawals increased 37.5%34.3% in the secondthird quarter and 32.7%33.3% in the first sixnine months of 2004 compared to the same periods in 2003.  Benefits and withdrawals for the secondthird quarter and first sixnine months of 2004 represent an annualized withdrawal rate of 8.0%8.7% and 7.8%8.6%, respectively, based on the beginning of period contractholder funds balance compared to 7.5% and 7.7%8.3% for both the secondthird quarter and the first sixnine months of 2003, respectively. Surrenders2003.  Benefits and withdrawals have been comparable to our pricing assumptions.

 

Separate accounts liabilities represent contractholders'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.

17



 
 Three Months Ended
June 30,

 Six Months Ended
June 30,

 
(in thousands)
 2004
 2003
 2004
 2003
 
Separate accounts liabilities, beginning balance $686,639 $515,422 $665,875 $537,204 

Variable annuity and life deposits

 

 

59,943

 

 

49,840

 

 

111,232

 

 

101,972

 
Variable annuity and life deposits allocated to fixed accounts  (31,098) (37,420) (56,657) (74,904)
  
 
 
 
 
Net deposits  28,845  12,420  54,575  27,068 

Investment results

 

 

2,223

 

 

59,888

 

 

17,603

 

 

47,256

 
Contract charges  (2,466) (1,891) (4,852) (3,658)
Net transfers from fixed accounts  9,927  4,652  21,394  3,784 
Surrenders and benefits  (14,805) (14,807) (44,232) (35,970)
  
 
 
 
 
Separate accounts liabilities, ending balance $710,363 $575,684 $710,363 $575,684 
  
 
 
 
 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

Separate accounts liabilities, beginning balance

 

$

710,363

 

$

575,684

 

$

665,875

 

$

537,204

 

 

 

 

 

 

 

 

 

 

 

Variable annuity and life deposits

 

40,179

 

67,014

 

151,411

 

168,986

 

Variable annuity and life deposits allocated to fixed accounts

 

(19,562

)

(43,797

)

(76,219

)

(118,701

)

Net deposits

 

20,617

 

23,217

 

75,192

 

50,285

 

 

 

 

 

 

 

 

 

 

 

Investment results

 

(5,992

)

13,436

 

11,611

 

60,692

 

Contract charges

 

(2,614

)

(2,040

)

(7,466

)

(5,698

)

Net transfers from fixed accounts

 

9,388

 

5,285

 

30,782

 

9,069

 

Surrenders and benefits

 

(21,337

)

(27,130

)

(65,569

)

(63,100

)

 

 

 

 

 

 

 

 

 

 

Separate accounts liabilities, ending balance

 

$

710,425

 

$

588,452

 

$

710,425

 

$

588,452

 

Separate accounts liabilities increased $23.7 million$62 thousand and $44.5$44.6 million during the secondthird quarter and first sixnine months of 2004, respectively, compared to $60.3$12.8 million and $38.5$51.2 million during the secondthird quarter and first sixnine months of 2003, respectively, as a resultrespectively.  Net cash inflows were offset by surrenders and benefits and unfavorable investment results in the third quarter of 2004.  Deposits, net deposits, transfers from fixed accounts and positivefavorable investment results were partially offset by surrenders and benefits paid to contractholders and contract charges.charges during the first nine months of 2004.      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 fixed accounts.  The liability for the fixed portion of variable annuity contracts is reflected in contractholder funds.

 

Net investment income increased 11.2%14.7% in both the secondthird quarter of 2004 and 12.4% in the first sixnine months of 2004 compared to the same periods in 2003,2003.  The increases in both periods were primarily due tothe result of 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. Total investments as of JuneSeptember 30, 2004 increased 8.9%19.3% from JuneSeptember 30, 2003 due primarily to contractholder deposits, partially offset by a decline in unrealized capital gains on fixed income securities. The lower portfolio yields were primarily due to purchases, including reinvestments, of fixed income securities with yields lower than the current portfolio average.

18



 

Net income analysis is presented in the following table.

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

24,800

 

$

14,189

 

$

61,420

 

$

44,451

 

Contract charges(1)

 

15,443

 

12,721

 

44,121

 

39,394

 

Net investment income

 

77,126

 

67,259

 

220,197

 

195,913

 

Periodic settlements and accruals on non-hedge derivative instruments(2)

 

141

 

 

217

 

 

Contract benefits

 

(50,474

)

(38,278

)

(138,314

)

(119,712

)

Interest credited to contractholder funds(3)

 

(34,110

)

(26,557

)

(91,912

)

(78,349

)

Gross margin

 

32,926

 

29,334

 

95,729

 

81,697

 

 

 

 

 

 

 

 

 

 

 

Amortization of DAC and DSI

 

(7,787

)

(7,925

)

(14,639

)

(22,493

)

Operating costs and expenses

 

(10,004

)

(11,452

)

(30,262

)

(26,788

)

Income tax expense

 

(5,037

)

(3,406

)

(17,922

)

(11,277

)

Realized capital gains and losses, after-tax

 

(3,067

)

(1,216

)

(5,298

)

(4,063

)

DAC and DSI amortization expense on realized capital gains and losses, after-tax

 

661

 

253

 

(745

)

(733

)

Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax

 

(90

)

 

(137

)

 

(Loss) gain on disposition of operations, after-tax

 

 

(2,735

)

688

 

(2,735

)

Cumulative effect of change in accounting principle, after-tax

 

 

 

(7,586

)

 

Net income

 

$

7,602

 

$

2,853

 

$

19,828

 

$

13,608

 

(1)

 
 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 
  
 
 
 
 
(1)
Beginning in 2004, amortization of deferred loads on interest-sensitive life products related to capital gains is excluded from contract charges for purposes of calculating gross margin.  Amortization of deferred loads related to capital gains totaled $6$3 thousand and $10$13 thousand for the secondthird quarter and the first sixnine months of 2004.

(2)

          Periodic settlements and accruals of non-hedge derivative instruments are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations.

(3)Beginning in 2004, amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin.  Amortization of DSI totaled $383$143 thousand in the secondthird quarter of 2004 and $384$527 thousand for the first sixnine months of 2004.  The prior period hasPrior periods have not been restated.


 


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 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: investment margin, benefit margin, 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 benefit 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.

19



 
 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 
  
 
 
 
 
 
 
 
 
 
 

 

 

Three Months Ended September 30,

 

(in thousands)

 

Investment
Margin

 

Benefit
Margin

 

Maintenance
Charges

 

Surrender
Charges

 

Gross
Margin

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

Premiums

 

$

 

$

 

$

24,800

 

$

14,189

 

$

 

$

 

$

 

$

 

$

24,800

 

$

14,189

 

Contract charges(1)

 

 

 

7,359

 

6,271

 

6,459

 

5,210

 

1,625

 

1,240

 

15,443

 

12,721

 

Net investment income

 

77,126

 

67,259

 

 

 

 

 

 

 

77,126

 

67,259

 

Periodic settlements and accruals on non-hedge derivative instruments(2)

 

141

 

 

 

 

 

 

 

 

141

 

 

Contract benefits

 

(24,519

)

(24,040

)

(25,955

)

(14,238

)

 

 

 

 

(50,474

)

(38,278

)

Interest credited to contractholder funds(3)

 

(34,110

)

(26,557

)

 

 

 

 

 

 

(34,110

)

(26,557

)

 

 

$

18,638

 

$

16,662

 

$

6,204

 

$

6,222

 

$

6,459

 

$

5,210

 

$

1,625

 

$

1,240

 

$

32,926

 

$

29,334

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

Investment
Margin

 

Benefit
Margin

 

Maintenance
Charges

 

Surrender
Charges

 

Gross
Margin

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

Premiums

 

$

 

$

 

$

61,420

 

$

44,451

 

$

-

 

$

 

$

-

 

$

 

$

61,420

 

$

44,451

 

Contract charges(1)

 

 

 

22,088

 

20,352

 

18,047

 

15,448

 

3,986

 

3,594

 

44,121

 

39,394

 

Net investment income

 

220,197

 

195,913

 

 

 

 

 

 

 

220,197

 

195,913

 

Periodic settlements and accruals on non-hedge derivative instruments(2)

 

217

 

 

 

 

 

 

 

 

217

 

 

Contract benefits

 

(73,100

)

(69,717

)

(65,214

)

(49,995

)

 

 

 

 

(138,314

)

(119,712

)

Interest credited to contractholder funds(3)

 

(91,912

)

(78,349

)

 

 

 

 

 

 

(91,912

)

(78,349

)

 

 

$

55,402

 

$

47,847

 

$

18,294

 

$

14,808

 

$

18,047

 

$

15,448

 

$

3,986

 

$

3,594

 

$

95,729

 

$

81,697

 

(1)

Beginning in 2004, amortization of deferred loads on interest-sensitive life products related to capital gains is excluded from contract charges for purposes of calculating gross margin.  Amortization of deferred loads related to capital gains totaled $6$3 thousand and $10$13 thousand for the secondthird quarter and the first sixnine months of 2004.

(2)

Periodic settlements and accruals on non-hedge derivative instruments are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations.

(3)

Beginning in 2004, amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin.  Amortization of DSI totaled $383$143 thousand in the secondthird quarter of 2004 and $384$527 thousand for the first sixnine months of 2004.  The prior period hasPrior periods have not been restated.



20



Gross margin increased 42.2%12.2% in the secondthird quarter of 2004 and 19.9%17.2% in the first sixnine months of 2004 compared to the same periods of 2003 due to increased benefit margin, investment margin and higher maintenance and surrender charges.

 

Investment marginis 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 reserve for life-contingent contract benefits.  We use investment margin to evaluate profitability related to the difference between investment returns on assets supporting certain products and amounts credited to customers ("spread"(“spread”) during thea fiscal period.

 

Investment margin by product group is shown in the following table.

 
 Three Months Ended
June 30,

 Six Months Ended
June 30,

(in thousands)
 2004
 2003
 2004
 2003
Life insurance $2,782 $2,226 $5,682 $4,714
Annuities  15,903  13,800  31,082  26,471
  
 
 
 
Total investment margin $18,685 $16,026 $36,764 $31,185
  
 
 
 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

Life insurance

 

$

2,357

 

$

2,565

 

$

8,039

 

$

7,279

 

Annuities

 

16,281

 

14,097

 

47,363

 

40,568

 

Total investment margin

 

$

18,638

 

$

16,662

 

$

55,402

 

$

47,847

 

Investment margin increased 16.6%11.9% in the secondthird quarter and 17.9%15.8% in the first sixnine months of 2004 compared to the same periods of 20032003.  The increases in both periods were primarily due to an increase in contractholder funds partially offset by declines in the fixed annuity and improvedinterest-sensitive life investment spreads as investment yields were not fully offset by crediting rate reductions. In the first nine months of 2004, the yield decline on the investments supporting capital, traditional life and other products. The increases in both periods were partiallyproducts also offset by a decline in the interest-sensitive life investment spread, as investment yield declines were not fully offset by crediting rate reductions.increase due to growth compared to the first nine months of the prior year.

 

The following table summarizes the annualized weighted average investment yield, interest crediting rates and investment spreads for the three months ended JuneSeptember 30.

 
 Weighted Average
Investment Yield

 Weighted Average
Interest Crediting Rate

 Weighted Average
Investment Spread

 
 
 2004
 2003
 2004
 2003
 2004
 2003
 
Interest-sensitive life 6.1%6.5%4.8%5.0%1.3%1.5%
Fixed annuities—deferred 5.6 6.1 3.4 3.9 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 5.9 4.8 n/a n/a n/a n/a 

 

 

Weighted Average
Investment Yield

 

Weighted Average
Interest Crediting Rate

 

Weighted Average
Investment Spreads

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

Interest-sensitive life

 

6.0

%

6.6

%

4.9

%

4.9

%

1.1

%

1.7

%

Fixed annuities – deferred

 

5.6

 

6.0

 

3.6

 

3.7

 

2.0

 

2.3

 

Fixed annuities – immediate

 

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

 

 

The following table summarizes the annualized weighted average investment yield, interest crediting rates and investment spreads for the sixnine months ended JuneSeptember 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 

 

 

Weighted Average
Investment Yield

 

Weighted Average
Interest Crediting Rate

 

Weighted Average
Investment Spreads

 

 

 

2004

 

2003

 

2004

 

2003

 

2004

 

2003

 

Interest-sensitive life

 

6.1

%

6.7

%

5.0

%

5.0

%

1.1

%

1.7

%

Fixed annuities – deferred

 

5.6

 

6.1

 

3.5

 

3.9

 

2.1

 

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

 

6.1

 

6.3

 

N/A

 

N/A

 

N/A

 

N/A

 

 

21



The following table summarizes the liabilities for these contracts and policies.

 
 June 30,
(in thousands)
 2004
 2003
Interest-sensitive life $342,433 $284,778
Fixed annuities—deferred  2,228,769  1,651,308
Fixed annuities—immediate  1,913,051  1,808,396
  
 
   4,484,253  3,744,482

FAS 115/133 market value adjustment

 

 

154,940

 

 

250,610
Life-contingent contracts and other  104,346  99,415
  
 
Total contractholder funds and reserve for life-contingent contract benefits $4,743,539 $4,094,507
  
 

 

 

 

September 30,

 

(in thousands)

 

2004

 

2003

 

 

 

 

 

 

 

Interest-sensitive life

 

$

355,827

 

$

293,087

 

Fixed annuities – deferred

 

2,532,664

 

1,772,336

 

Fixed annuities – immediate

 

1,948,364

 

1,827,784

 

 

 

4,836,855

 

3,893,207

 

FAS 115/133 market value adjustment

 

232,530

 

192,510

 

Life-contingent contracts and other

 

107,858

 

102,361

 

Total contractholder funds and reserve for life-contingent contract benefits

 

$

5,177,243

 

$

4,188,078

 

Benefit marginis a component of gross margin, both of which are non-GAAP measures.  Benefit marginrepresents premiums and cost of insurance contract charges less contract benefits.  Benefit margin excludes the implied interest on life-contingent immediate annuities, which is included in the calculation of investment margin, and mortality charges on variable annuities, which are included as a component of maintenance charges.  We use the benefit margin to evaluate underwriting performance, as it reflects the profitability of our products with respect to mortality or morbidity risk during a fiscal period.

 

Benefit margin by product group is shown in the following table.

 
 Three Months Ended
June 30,

 Six Months Ended
June 30,

 
(in thousands)
 2004
 2003
 2004
 2003
 
Life insurance $7,851 $1,743 $15,069 $10,154 
Annuities  (1,427) (1,464) (2,979) (1,569)
  
 
 
 
 
Total benefit margin $6,424 $279 $12,090 $8,585 
  
 
 
 
 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

Life insurance

 

$

8,351

 

$

7,710

 

$

23,420

 

$

17,864

 

Annuities

 

(2,147

)

(1,488

)

(5,126

)

(3,056

)

Total benefit margin

 

$

6,204

 

$

6,222

 

$

18,294

 

$

14,808

 

Benefit margin increased $6.1 milliondecreased 0.3% in the secondthird quarter of 2004 compared to the same period in 2003 due to strengtheningas growth from new business was partially offset by the disposal of reserves for certain traditional life insurance policies in the second quartermajority of 2003.our direct response distribution business and fewer deaths on our life-contingent immediate annuities.    For the first sixnine months of 2004, the benefit margin increased $3.5 million or 40.8% from23.5% compared to the first six monthssame period of 2003 due toas the disposal of the majority of our direct response distribution business and fewer deaths on our life-contingent immediate annuities as well ashad a less adverse impact on the effects of2004 benefit margin than the reserve strengthening inon certain traditional life insurance policies had on the second quarter of 2003.2003 benefit margin.

 

As required by SOP 03-1, as of January 1, 2004, a reserve was established for guaranteed minimum death benefits ("GMDBs"(“GMDBs”) and guaranteed minimum income benefits ("GMIBs"(“GMIBs”), which in.  In previous periods in the case of GMDBs were expensed as paid.paid and no costs were recognizable for GMIBs.  Under the SOP, we anticipate that the benefit margin will be less volatile in the future, as contract benefit expense pertaining to GMDBs and GMIBs will be proportionate to the related revenue rather than cash payments made during the period.  Included in the benefit margin for the secondthird quarter and first sixnine months of 2004 is an additionare additions to the reserve for guarantees of $0.5$0.4 million and $0.9$1.3 million, respectively.  Included in the benefit margin for the secondthird quarter and first sixnine months of 2003 are GMDB payments of $0.8$0.5 million and $2.0$2.5 million, respectively.  For further explanation of the impacts of the adoption of this accounting guidance, see Note 1 to the Condensed Financial Statements.

 

Amortization of DAC and DSI increased 1.9% decreased 1.7% in the secondthird quarter of 2004 compared to the same period of 2003 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 2004.2004 was largely offset by higher amortization reflective of increased gross margins on fixed and variable annuities.    Amortization of DAC and DSI decreased 53.0%34.9% in the first sixnine months of 2004 compared to the first six months of 2003same period in the prior year due to a deceleration of amortization (commonly called "DAC unlocking"

22



“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 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.

 

Operating costs and expenses increased 83.6% decreased 12.6% in the secondthird quarter and 32.1%increased 13.0% for the first sixnine months of 2004 compared to the same periods of 2003.in the prior year.  The increasedecrease in total operating costs and expenses reflectsin the third quarter of 2004 compared to the same period in the prior year was primarily the result of the disposal of the majority of our direct response distribution business partially offset by higher non-deferrable sales expenses in the second quarter of 2004 and reinsurance expense credits in the second quarter of 2003.expenses.  For the first sixnine months of 2004 compared to 2003,the same period in the prior year, higher trail commissionsnon-deferrable sales and employee expenses were partially offset by the disposal of the majority of our direct response distribution business.business and reinsurance expense credits recognized in the second quarter of 2003.

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 JuneSeptember 30, 2004 is presented in the table below.

(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%
  
 
 

(in thousands)

 

Carrying
value

 

Percent
of total

 

 

 

 

 

 

 

Fixed income securities (1)

 

$5,170,629

 

89.7

%

Mortgage loans

 

440,511

 

7.6

 

Short-term

 

114,874

 

2.0

 

Policy loans

 

34,572

 

0.6

 

Other

 

5,001

 

0.1

 

Total

 

$5,765,587

 

100.0

%

(1)

Fixed income securities are carried at fair value.  Amortized cost basis for these securities was $4.37$4.65 billion.

 


Total investments increased to $5.22$5.77 billion at JuneSeptember 30, 2004 from $4.86 billion at December 31, 2003 due to positive cash flows from operating and financing activities and increased funds associated with securities lending partially offset by decreasedand increased unrealized gains on fixed income securities.

 

Total investments at amortized costs related to collateral associated with securities lending increased to $176.0$203.9 million at JuneSeptember 30, 2004 from $134.5 million at December 31, 2003.

 

At JuneSeptember 30, 2004, 96.1%96.2% 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"(“NAIC”) of 1 or 2, a Moody'sMoody’s equivalent rating of Aaa, Aa, A or Baa; an S&P equivalent rating of AAA, AA, A or BBB; or a comparable internal rating when an external rating is not available.available.

 

The unrealized net capital gains on fixed income securities at JuneSeptember 30, 2004 were $328.8$522.1 million, a decreasean increase of $151.1$42.2 million or 31.5%8.8 % since December 31, 2003. The net unrealized gain was comprised of $389.3$538.0 million of unrealized gains and $60.5$15.9 million of unrealized losses at JuneSeptember 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 JuneSeptember 30, 2004, $51.9$12.4 million or 85.8%78.0% were related to investment grade securities and are believed to be primarily a result of the interest rate environment.  Of the remaining $8.6$3.5 million of losses in the fixed income portfolio, $6.5$1.7 million or 75.6%48.6% was


concentrated in the corporate fixed income portfolio, and$1.8 million or 51.4% was primarily comprised of securitiesconcentrated in the transportation, consumer goods and energy sectors. The gross unrealized losses in these sectors were primarily company specific and interest rate related.asset backed securities portfolio.  Approximately $4.4$0.8 million of the gross unrealized losses in the

23



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.  We expect eventual recovery of these securities and the related sectors.securities. Every security was included 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"“problem”, "restructured"“restructured” or "potential“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'sborrower’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)
 Amortized
cost

 Fair
value

 Percent
of total
Fixed
Income
portfolio

 Amortized
cost

 Fair
value

 Percent
of total
Fixed
Income
portfolio

 
Problem $12,948 $12,308 0.3%$13,186 $12,533 0.3%
Restructured  5,399  5,893 0.1  5,701  6,303 0.1 
Potential problem  15,709  14,698 0.3  17,899  17,843 0.4 
  
 
 
 
 
 
 
Total net carrying value $34,056 $32,899 0.7%$36,786 $36,679 0.8%
  
 
 
 
 
 
 
Cumulative write-downs recognized $5,061      $4,817      
  
      
      

 

(in thousands)

 

September 30, 2004

 

December 31, 2003

 

 

 

Amortized
cost

 

Fair
value

 

Percent
of total
Fixed
Income
portfolio

 

Amortized
cost

 

Fair
value

 

Percent
of total
Fixed
Income
portfolio

 

Problem

 

$

12,904

 

$

12,402

 

0.2

%

$

13,186

 

$

12,533

 

0.3

%

Restructured

 

5,390

 

6,109

 

0.1

 

5,701

 

6,303

 

0.1

 

Potential problem

 

16,907

 

15,095

 

0.3

 

17,899

 

17,843

 

0.4

 

Total net carrying value

 

$

35,201

 

$

33,606

 

0.6

%

$

36,786

 

$

36,679

 

0.8

%

Cumulative write-downs recognized

 

$

5,698

 

 

 

 

 

$

4,817

 

 

 

 

 

We have experienced a decrease in the amortized cost of fixed income securities categorized as problem, restructured and potential problem as of JuneSeptember 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.

24



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
June 30,

 Six Months Ended
June 30,

 
(in thousands)
 2004
 2003
 2004
 2003
 
Investment write-downs $(245)$(1,672)$(884)$(7,252)
Dispositions  (5,866) 1,527  (4,039) 1,626 
Valuation of derivative instruments  2,563  (1,029) 708  (1,023)
Settlement of derivative instruments  662  1,382  676  2,166 
  
 
 
 
 
Realized capital gains and losses, pretax  (2,886) 208  (3,539) (4,483)
Income tax benefit (expense)  1,089  (78) 1,308  1,636 
  
 
 
 
 
Realized capital gains and losses, after-tax $(1,797)$130 $(2,231)$(2,847)
  
 
 
 
 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(in thousands)

 

2004

 

2003

 

2004

 

2003

 

Investment write-downs

 

$

(2,518

)

$

(295

)

$

(3,402

)

$

(7,547

)

Dispositions

 

739

 

(2,726

)

(3,300

)

(1,100

)

Valuation of derivative instruments

 

(3,934

)

81

 

(3,226

)

(942

)

Settlement of derivative instruments

 

908

 

1,017

 

1,584

 

3,183

 

Realized capital gains and losses, pretax

 

(4,805

)

(1,923

)

(8,344

)

(6,406

)

Income tax benefit

 

1,738

 

707

 

3,046

 

2,343

 

Realized capital gains and losses, after-tax

 

$

(3,067

)

$

(1,216

)

$

(5,298

)

$

(4,063

)

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 incost for fixed income securities.  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.

        The  Included in losses on dispositionsfrom written down investments is $2.5 million related to airline industry holdings, all of which was recognized in the secondthird 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.2004.

CAPITAL RESOURCES AND LIQUIDITY

Capital Resourcesconsist of shareholder'sshareholder’s equity.  The following table summarizes our capital resources.

(in thousands)
 June 30, 2004
 December 31, 2003
Common stock, retained earnings and other shareholder's equity items $407,076 $394,850
Accumulated other comprehensive income  107,078  138,724
  
 
 Total shareholder's equity $514,154 $533,574
  
 

 

(in thousands)

 

September 30,
2004

 

December 31,
2003

 

 

 

 

 

 

 

Common stock, retained earnings and other shareholder’s equity items

 

$

414,678

 

$

394,850

 

Accumulated other comprehensive income

 

152,307

 

138,724

 

Total shareholder’s equity

 

$

566,985

 

$

533,574

 

Shareholder'sShareholder’s equity decreased increased in the first sixnine months of 2004 when compared to December 31, 2003 due to decreasednet income and increases in unrealized net capital gains on fixed income securities partially offset by net income.securities.

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 sixnine months of 2004 when compared to the first sixnine months of 2003 primarily relate to increases in premiums and investment income.  Cash flows used in investing activities increased in the first sixnine 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 sixnine months of 2004 when compared to the same period of 2003 reflects an increase in deposits received from contractholders, partially offset by


benefits and withdrawals from contractholders'contractholders’ accounts.  For quantification of the changes in contractholder funds, see the Results of Operations section of the MD&A.

 

25



We have entered into an inter-company loan agreement with The Allstate Corporation (the "Corporation"“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 JuneSeptember 30, 2004 or December 31, 2003.  The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.

FORWARD-LOOKING STATEMENTS AND RISK FACTOR

This document contains "forward-looking statements"“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"“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“Forward-Looking Statements and Risk Factors."

Any decrease in our financial strength ratings may have an adverse effect on our competitive position.

                  Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business.  On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital; a change in a rating agency’s determination of the amount of risk-adjusted capital required to maintain a particular rating; an increase in the perceived risk of an insurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be under the insurer’s control. The insurance financial strength ratings of both Allstate Insurance Company and ALIC, as well as the Company, are A+, Aa2 and AA (from A.M. Best, Moody’s and Standard and Poor’s, respectively).  Because all of these ratings are subject to continuous review, the retention of these ratings cannot be assured.  A multiple level downgrade in any of these ratings could have a material adverse effect on our sales, our competitiveness, the marketability of our product offerings and our liquidity, operating results and financial condition.

26



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"“reasonable assurance” level.

 

During the fiscal quarter ended JuneSeptember 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"“Regulation” and under the heading "Legal proceedings"“Legal proceedings” in Note 4 of the Company'sCompany’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.

Item 6.    Exhibits and Reports on Form 8-K

    (a)
    Exhibits

      An Exhibit Index has been filed as part of this report on page E-1.

    (b)
    Reports on Form 8-K

      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)


August

(Registrant)

November 10, 2004


By


By

/s/ SAMUEL H. PILCH      


Samuel H. Pilch

Samuel H. Pilch

Group Vice President and Controller

(chief accounting officer and duly

authorized officer of the Registrant)

27



Exhibit No.


Description


10.1

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

15



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 AugustNovember 10, 2004, concerning unaudited interim financial information.


31.1



31.1

Rule 15d-14(a) Certification of Principal Executive Officer


31.2



31.2

Rule 15d-14(a) Certification of Principal Financial Officer


32



32

Section 1350 Certifications

E-1