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)
OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
| |
Commission file number: 333-100029
(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 |
| |
(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 July 31, 200429, 2005 the Registrant had 100,000 common shares, $25 par value, outstanding, all of which are held by Allstate Life Insurance Company.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART | FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | ||
Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2005 | 3 | ||
Condensed Statements of Financial Position as of June 30, | 4 | ||
Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2005 and 2004 | 5 | ||
Notes to Condensed Financial Statements (unaudited) | 6 | ||
Report of Independent Registered Public Accounting Firm | 10 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
Item 4. | Controls and Procedures | 24 | |
PART II. |
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Item 1. | Legal Proceedings | 24 | |
Item 6. | Exhibits | 24 |
2
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 | ||||||
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (unaudited) |
| (unaudited) |
| ||||||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Premiums |
| $ | 16,174 |
| $ | 19,969 |
| $ | 36,167 |
| $ | 36,620 |
|
Contract charges |
| 15,976 |
| 14,576 |
| 31,235 |
| 28,688 |
| ||||
Net investment income |
| 88,503 |
| 72,676 |
| 174,995 |
| 143,071 |
| ||||
Realized capital gains and losses |
| (2,632 | ) | (2,886 | ) | (8,509 | ) | (3,539 | ) | ||||
|
| 118,021 |
| 104,335 |
| 233,888 |
| 204,840 |
| ||||
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|
|
|
|
|
|
|
|
| ||||
Costs and expenses |
|
|
|
|
|
|
|
|
| ||||
Contract benefits |
| 42,901 |
| 44,916 |
| 89,984 |
| 87,840 |
| ||||
Interest credited to contractholder funds |
| 39,438 |
| 30,535 |
| 75,664 |
| 58,186 |
| ||||
Amortization of deferred policy acquisition costs |
| 11,157 |
| 8,817 |
| 12,088 |
| 8,708 |
| ||||
Operating costs and expenses |
| 13,078 |
| 10,300 |
| 22,270 |
| 20,258 |
| ||||
|
| 106,574 |
| 94,568 |
| 200,006 |
| 174,992 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gain on disposition of operations |
| 1 |
| — |
| 1 |
| 1,058 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income from operations before income tax expense and cumulative effect of change in accounting principle, |
| 11,448 |
| 9,767 |
| 33,883 |
| 30,906 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense |
| 4,508 |
| 3,592 |
| 13,058 |
| 11,094 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before cumulative effect of change in accounting principle, after-tax |
| 6,940 |
| 6,175 |
| 20,825 |
| 19,812 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cumulative effect of change in accounting principle, after-tax |
| — |
| — |
| — |
| (7,586 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 6,940 |
| $ | 6,175 |
| $ | 20,825 |
| $ | 12,226 |
|
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) | 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 | |||||
|
| June 30, |
| December 31, |
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(in thousands, except par value data) |
| 2005 |
| 2004 |
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|
| (unaudited) |
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Assets |
|
|
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|
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Investments |
|
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|
|
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Fixed income securities, at fair value (amortized cost $5,451,437 and $5,012,977) |
| $ | 6,111,363 |
| $ | 5,545,647 |
|
Mortgage loans |
| 536,908 |
| 480,280 |
| ||
Short-term |
| 66,059 |
| 111,509 |
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Policy loans |
| 35,806 |
| 34,948 |
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Other |
| 2,399 |
| 4,638 |
| ||
Total investments |
| 6,752,535 |
| 6,177,022 |
| ||
|
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|
|
|
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Cash |
| 2,841 |
| 8,624 |
| ||
Deferred policy acquisition costs |
| 254,462 |
| 238,173 |
| ||
Accrued investment income |
| 59,460 |
| 55,821 |
| ||
Reinsurance recoverables |
| 10,930 |
| 8,422 |
| ||
Current income taxes receivable |
| 2,684 |
| 367 |
| ||
Other assets |
| 22,647 |
| 17,665 |
| ||
Separate Accounts |
| 851,253 |
| 792,550 |
| ||
Total assets |
| $ | 7,956,812 |
| $ | 7,298,644 |
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|
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|
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Liabilities |
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|
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Reserve for life-contingent contract benefits |
| $ | 1,911,139 |
| $ | 1,782,451 |
|
Contractholder funds |
| 4,135,238 |
| 3,802,846 |
| ||
Deferred income taxes |
| 94,191 |
| 90,760 |
| ||
Other liabilities and accrued expenses |
| 277,354 |
| 180,904 |
| ||
Payable to affiliates, net |
| 10,741 |
| 8,831 |
| ||
Reinsurance payable to parent |
| 963 |
| 1,067 |
| ||
Separate Accounts |
| 851,253 |
| 792,550 |
| ||
Total liabilities |
| 7,280,879 |
| 6,659,409 |
| ||
Commitments and Contingent Liabilities (Note 3) |
|
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|
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|
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Shareholder’s equity |
|
|
|
|
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Common stock, $25 par value, 100 thousand shares authorized and outstanding |
| 2,500 |
| 2,500 |
| ||
Additional capital paid-in |
| 120,000 |
| 120,000 |
| ||
Retained income |
| 382,269 |
| 361,480 |
| ||
Accumulated other comprehensive income: |
|
|
|
|
| ||
Unrealized net capital gains and losses |
| 171,164 |
| 155,255 |
| ||
Total accumulated other comprehensive income |
| 171,164 |
| 155,255 |
| ||
Total shareholder’s equity |
| 675,933 |
| 639,235 |
| ||
Total liabilities and shareholder’s equity |
| $ | 7,956,812 |
| $ | 7,298,644 |
|
See notes to condensed financial statements.
4
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 | ||||||
|
| Six Months Ended June 30, |
| ||||
(in thousands) |
| 2005 |
| 2004 |
| ||
|
| (unaudited) |
| ||||
Cash flows from operating activities |
|
|
|
|
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Net income |
| $ | 20,825 |
| $ | 12,226 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Amortization and other non-cash items |
| (28,457 | ) | (24,511 | ) | ||
Realized capital gains and losses |
| 8,509 |
| 3,539 |
| ||
Gain on disposition of operations |
| (1 | ) | (1,058 | ) | ||
Cumulative effect of change in accounting principle |
| — |
| 7,586 |
| ||
Interest credited to contractholder funds |
| 75,664 |
| 58,186 |
| ||
Changes in: |
|
|
|
|
| ||
Life-contingent contract benefits and contractholder funds |
| 17,867 |
| 15,929 |
| ||
Deferred policy acquisition costs |
| (25,822 | ) | (28,212 | ) | ||
Income taxes payable |
| (7,434 | ) | 3,938 |
| ||
Other operating assets and liabilities |
| (4,438 | ) | 11,026 |
| ||
Net cash provided by operating activities |
| 56,713 |
| 58,649 |
| ||
|
|
|
|
|
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Cash flows from investing activities |
|
|
|
|
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Proceeds from sales of fixed income securities |
| 303,080 |
| 233,910 |
| ||
Investment collections |
|
|
|
|
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Fixed income securities |
| 84,532 |
| 102,448 |
| ||
Mortgage loans |
| 38,902 |
| 6,403 |
| ||
Investment purchases |
|
|
|
|
| ||
Fixed income securities |
| (687,867 | ) | (763,912 | ) | ||
Mortgage loans |
| (93,054 | ) | (24,474 | ) | ||
Change in short-term investments, net |
| 37,382 |
| 4,884 |
| ||
Change in other investments, net |
| (969 | ) | 379 |
| ||
Net cash used in investing activities |
| (317,994 | ) | (440,362 | ) | ||
|
|
|
|
|
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Cash flows from financing activities |
|
|
|
|
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Contractholder fund deposits |
| 500,093 |
| 510,088 |
| ||
Contractholder fund withdrawals |
| (244,595 | ) | (124,958 | ) | ||
Net cash provided by financing activities |
| 255,498 |
| 385,130 |
| ||
|
|
|
|
|
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Net (decrease) increase in cash |
| (5,783 | ) | 3,417 |
| ||
Cash at beginning of period |
| 8,624 |
| 10,731 |
| ||
Cash at end of period |
| $ | 2,841 |
| $ | 14,148 |
|
See notes to condensed financial statements.
5
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS(Unaudited)
(unaudited)
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-ownedwholly owned by Allstate Insurance Company ("AIC"(“AIC”), a wholly-ownedwholly owned subsidiary of The Allstate Corporation (the "Corporation"“Corporation”).
The condensed financial statements and notes as of June 30, 2004,2005 and for the three-month and six-month periods ended June 30, 20042005 and 20032004 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, 2003.2004. 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,2005 presentation, certain amounts in the prior year'syear’s condensed financial statements and notes have been reclassified.
Adopted accounting standard
Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1")
On January 1, 2004, the Company adopted SOP 03-1. The major provisions of the SOP affecting the Company require:
Effects of adoption
The cumulative effect of the change in accounting principle from implementing SOP 03-1 was a loss of $7.6 million, after-tax ($11.7 million, pre-tax). It was comprised of an increase in contractholder funds and benefits reserves (primarily for variable annuity contracts) of $942 thousand, pre-tax, and a reduction in DAC and deferred sales inducements ("DSI") of $10.7 million, pre-tax.
The SOP requires consideration of a range of potential results to estimate the cost of variable annuity death benefits and income benefits, which generally necessitates the use of stochastic modeling techniques. To maintain consistency with the assumptions used in the establishment of reserves for variable annuity guarantees, the Company utilized the results of this stochastic modeling to estimate expected gross profits, which form the basis for determining the amortization of DAC and DSI. This new modeling approach resulted in a lower estimate of expected gross profits, and therefore resulted in a write-down of DAC and DSI.
In 2004, DSI and related amortization is classified within the Condensed Statements of Financial Position and Operations as other assets and interest credited to contractholder funds, respectively. The amounts are provided below.
Liabilities for contract guarantees
The Company offers various guarantees to variable contractholders including a return of no less than (a) total deposits made on the contract less any customer withdrawals, (b) total deposits made on the contract less any customer withdrawals plus a minimum return or (c) the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death (death benefits), upon annuitization (income benefits), or at specified dates during the accumulation period (accumulation benefits). The Company hedges accumulation benefits for all contracts issued.
The table below presents information regarding the Company's variable contracts with guarantees. The Company's variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts' separate accounts with guarantees.
($ in millions) | 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 |
Account balances of variable 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 | |
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 | ||||
The liability for death and income benefit guarantees is established equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges. For guarantees in the event of death, benefits represent the current guaranteed minimum death payments in excess of the current account balance. For guarantees at annuitization, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.
Projected benefits and contract charges used in determining the liability for guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant's attained age.
The liability for guarantees will be re-evaluated periodically, and adjustments will be made to the liability balance through a charge or credit to contract benefits.
Deferred sales inducements
Costs related to sales inducements offered on sales to new customers, principally on investment contracts and primarily in the form of additional credits to the customer's account value or enhancements to interest credited for a specified period, which are beyond amounts currently being credited to existing contracts, are deferred and recorded as other assets. All other sales inducements are expensed as incurred and included in interest credited to contractholder funds on the Condensed Statements of Operations. DSI is amortized to income using the same methodology and assumptions as DAC, and included in interest credited to contractholder funds. DSI is periodically reviewed for recoverability and written down when necessary.
DSI activity for the six months ended June 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
Emerging Issues Task Force Topic No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF No. 03-1")
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF No. 03-1, which is 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 other-than-temporary. An impairment loss should be recognized equal to the difference between the investment's carrying value and its fair value when an impairment is other-than-temporary. Subsequent to an other-than temporary impairment loss, a debt security should be accounted for in accordance with Statement of Position No. 03-3, "Accounting for Loans and Certain Debt Securities Acquired in a Transfer", which allows the accretion of the discount between the carrying value and expected value of a security if the amount and timing of the recognition of that difference in cash is reasonably estimable. EITF 03-1 also indicates that although not presumptive a pattern of selling investments prior to the forecasted recovery may call into question an investor's intent to hold the security until it recovers in value.
The EITF 03-1 impairment model applies to all investment securities accounted for under Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and to investment securities accounted for under the cost method to the extent an impairment indicator exists or the reporting entity has estimated the fair value of the investment security in connection with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments".
The final consensus on EITF 03-1 included additional disclosure requirements incremental to those adopted by the Company effective December 31, 2003 that are effective for fiscal years ending after June 15, 2004.
The Company is currently evaluating the impact of EITF 03-1 on its process for determining other-than-temporary impairment for the affected securities. More specifically, the Company is analyzing whether subsequent to adoption its portfolio management practices for certain securities classified as
available-for-sale pursuant to SFAS No. 115 could be interpreted as a pattern of selling thereby affecting its designated intent to hold such investments for the period necessary to allow for the forecasted recovery of fair value pursuant to the requirements of EITF 03-1. As a result of this analysis, the Company may potentially reclassify to realized capital gains and losses the unrealized net capital gains and losses associated with certain securities classified as available-for-sale.
Adoption of this standard may:
Adoption of this standard is not expected to have a material impact on shareholder's equity since fluctuations in fair value are already recorded in accumulated other comprehensive income.
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 and the related gains and losses from the changes in fair value, some of which are recognized through daily cash settlements, are classified consistent with the risks being economically hedged and are reported as realized capital gains and losses or contract benefits.
Under cash flow hedge accounting, the Company designates its foreign currency swap agreements as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. The Company's cash flow exposure is associated with an existing asset. The fair value of the instruments is reported as other liabilities and accrued expenses and the changes in fair value of the instruments are reported in accumulated other comprehensive income on the Condensed Statements of Financial Position. Amounts are reclassified to net investment income or realized capital gains and losses as the hedge transaction affects net income. Accrued periodic settlements on instruments used in cash flow hedges are reported in net investment income.
| 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 | ) | — |
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 | |||||||
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Premiums and contract charges |
|
|
|
|
|
|
|
|
| ||||
Direct |
| $ | 36,185 |
| $ | 38,677 |
| $ | 75,855 |
| $ | 73,167 |
|
Assumed – non-affiliate |
| 290 |
| 117 |
| 502 |
| 302 |
| ||||
Ceded |
|
|
|
|
|
|
|
|
| ||||
Affiliate |
| (1,172 | ) | (1,086 | ) | (2,352 | ) | (2,183 | ) | ||||
Non-affiliate |
| (3,153 | ) | (3,163 | ) | (6,603 | ) | (5,978 | ) | ||||
Premiums and contract charges, net of reinsurance |
| $ | 32,150 |
| $ | 34,545 |
| $ | 67,402 |
| $ | 65,308 |
|
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 | |||||||
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Contract benefits |
|
|
|
|
|
|
|
|
| ||||
Direct |
| $ | 45,829 |
| $ | 46,370 |
| $ | 94,870 |
| $ | 90,728 |
|
Assumed – non-affiliate |
| 96 |
| 45 |
| 156 |
| 78 |
| ||||
Ceded |
|
|
|
|
|
|
|
|
| ||||
Affiliate |
| (726 | ) | (1,034 | ) | (1,188 | ) | 17 |
| ||||
Non-affiliate |
| (2,298 | ) | (465 | ) | (3,854 | ) | (2,983 | ) | ||||
Contract benefits, net of reinsurance |
| $ | 42,901 |
| $ | 44,916 |
| $ | 89,984 |
| $ | 87,840 |
|
In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $722 thousand and $682 thousand for second quarter of 2005 and 2004, respectively and $1.42 million and $1.35 million for the first six months of 2005 and 2004, respectively, under the terms of the structured settlement annuity reinsurance agreement. These amounts are reflected as a component of realized capital gains and losses on the Condensed Statements of Operations as the treaty is recorded as a derivative instrument pursuant to the requirements of Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities.”
6
Guarantees
In the normal course of business, the Company provides standard indemnifications to counterparties in contracts in connection with numerous transactions, including acquisitions and divestures. The types of indemnifications typically provided include 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,Consequently, 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.
The aggregate liability balance related to all guarantees was not material as of June 30, 2004.2005.
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 securitiesimpose additional regulations regarding agent 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 productsbroker compensation 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's parent has and will continue to respond to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company's financial position.
Legal and Regulatory Proceedings and Inquiries
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. In addition, from time to time regulatory examinations or inquiries are pending involving the Company. As background to the "Proceedings" described“Proceedings” sub-section below, please note the following:
•
•
•
7
reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.
•
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.in the following paragraph.
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. 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, filed by former employee agents who terminated their employment prior to the agency program reorganization. These plaintiffs have asserted breach of contract and ERISA claims and are seeking actual damages including benefits under Allstate employee benefit plans and payments provided in connection with the reorganization, as well as punitive damages. 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.ERISA, including a worker classification issue. These plaintiffs 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 March 2004 by the trial court, but may still bewas the subject toof further proceedings on appeal.appeal, and has been reversed and remanded to the trial court in April 2005. 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.
The Company is currently undergoing a periodic market conduct examination by state insurance regulators. Regulators are focusing, as they have with other insurers, on the Company’s compliance with the state’s replacement sales and record-keeping processes with regard to life insurance and annuities among other issues. The ultimate outcome of this examination is currently uncertain.
Other actionsMatters
The Corporation and some of its subsidiaries, including the Company, have received interrogatories and demands for information from regulatory and enforcement authorities relating to various insurance products and practices. The areas of inquiry include variable annuity market timing and late trading. The Corporation and some of its subsidiaries, including the Company, have also received interrogatories and demands for information from authorities seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging. The Company believes that these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various authorities into the practices, policies and procedures relating to
8
insurance and financial services products. The Corporation and its subsidiaries have responded and will continue to respond to these inquiries
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 and proceedings, some of which involve claims for substantial and/or indeterminate amounts. This litigation isThese actions are based on a variety of issues including insurance and claim settlementtarget a range of the Company’s 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 otherthe actions described in this “Other Matters” subsection in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial positioncondition of the Company.
5.4. 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 June 30, |
| ||||||||||||||||
(in thousands) |
| 2005 |
| 2004 |
| ||||||||||||||
|
| Pretax |
| Tax |
| After- |
| Pretax |
| Tax |
| After- |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized holding gains (losses) arising during the period, net of related offsets |
| $ | 71,377 |
| $ | (24,982 | ) | $ | 46,395 |
| $ | (87,752 | ) | $ | 30,712 |
| $ | (57,040 | ) |
Less: reclassification adjustments |
| 1,898 |
| (665 | ) | 1,233 |
| (2,631 | ) | 919 |
| (1,712 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other comprehensive income (loss) |
| $ | 69,479 |
| $ | (24,317 | ) | 45,162 |
| $ | (85,121 | ) | $ | 29,793 |
| (55,328 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 6,940 |
|
|
|
|
| 6,175 |
| ||||||
Comprehensive income (loss) |
|
|
|
|
| $ | 52,102 |
|
|
|
|
| $ | (49,153 | ) |
|
| Six months ended June 30, |
| ||||||||||||||||
(in thousands) |
| 2005 |
| 2004 |
| ||||||||||||||
|
| Pretax |
| Tax |
| After- |
| Pretax |
| Tax |
| After- |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Unrealized holding gains (losses) arising during the period, net of related offsets |
| $ | 17,361 |
| $ | (6,076 | ) | $ | 11,285 |
| $ | (51,087 | ) | $ | 17,881 |
| $ | (33,206 | ) |
Less: reclassification adjustments |
| (7,114 | ) | 2,490 |
| (4,624 | ) | (2,400 | ) | 840 |
| (1,560 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other comprehensive income (loss) |
| $ | 24,475 |
| $ | (8,566 | ) | 15,909 |
| $ | (48,687 | ) | $ | 17,041 |
| (31,646 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 20,825 |
|
|
|
|
| 12,226 |
| ||||||
Comprehensive income (loss) |
|
|
|
|
| $ | 36,734 |
|
|
|
|
| $ | (19,420 | ) |
9
| 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 June 30, 2004,2005, and the related condensed statements of operations for the three-month and six-month periods ended June 30, 20042005 and 2003,2004, and the condensed statements of cash flows for the six-month periods ended June 30, 20042005 and 2003.2004. These interim financial statements are the responsibility of the Company'sCompany’s management.
We conducted our reviews in accordance with the 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 the 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 auditingthe 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, 2003,2004, 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 4,24, 2005, which report includes an explanatory paragraph relating to a change in the Company’s method of accounting for certain nontraditional long-duration contracts and for separate accounts in 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, 20032004 is fairly stated, in all material respects, in relation to the statement of financial position from which it has been derived.
/s/ Deloitte & Touche LLP
Chicago, Illinois
/s/ Deloitte & Touche LLP | |
Chicago, Illinois | |
August 8, 2005 |
10 2004
Item 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 20042005 AND 20032004
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 2003.2004. We operate as a single segment entity, consistent withbased on the waymanner in which we use financial information is used internally to evaluate business performance and to determine the allocation of resources.
We will pursue the following to improve return on equity: maintain and develop focused top-tier products, deepen distribution partner relationships, improve our cost structure, advance our enterprise risk management program and leverage the strength of the Allstate brand name across products and distribution channels. The execution of our business strategies has and may continue to involve simplifying our business model by changing the number and selection of products being marketed, for example, the sale of substantially all of our direct response distribution business in 2004; terminating underperforming distribution relationships; reducing policy administration software systems; and other actions that we may determine are appropriate to successfully execute our business strategies.
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 and variable annuities,and 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.liabilities. 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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
|
|
|
|
|
|
|
| ||||
Traditional life |
| $ | 6,245 |
| $ | 5,746 |
| $ | 12,105 |
| $ | 11,201 |
|
Immediate annuities with life contingencies |
| 8,823 |
| 13,597 |
| 22,042 |
| 24,041 |
| ||||
Accident and health and other |
| 1,106 |
| 626 |
| 2,020 |
| 1,378 |
| ||||
Total premiums |
| 16,174 |
| 19,969 |
| 36,167 |
| 36,620 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Contract charges |
|
|
|
|
|
|
|
|
| ||||
Interest-sensitive life |
| 10,524 |
| 9,982 |
| 20,469 |
| 19,410 |
| ||||
Fixed annuities |
| 1,634 |
| 1,495 |
| 3,427 |
| 3,032 |
| ||||
Variable annuities |
| 3,818 |
| 3,099 |
| 7,339 |
| 6,246 |
| ||||
Total contract charges |
| 15,976 |
| 14,576 |
| 31,235 |
| 28,688 |
| ||||
Premiums and contract charges |
| $ | 32,150 |
| $ | 34,545 |
| $ | 67,402 |
| $ | 65,308 |
|
11
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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
|
|
|
|
|
|
|
| ||||
Allstate agencies |
| $ | 6,171 |
| $ | 5,654 |
| $ | 11,909 |
| $ | 11,011 |
|
Broker dealers |
| — |
| — |
| 36 |
| 107 |
| ||||
Specialized brokers |
| 8,823 |
| 13,597 |
| 22,005 |
| 23,934 |
| ||||
Independent agents |
| 1,180 |
| 786 |
| 2,217 |
| 1,485 |
| ||||
Direct marketing |
| — |
| (68 | ) | — |
| 83 |
| ||||
Total premiums |
| 16,174 |
| 19,969 |
| 36,167 |
| 36,620 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Contract charges |
|
|
|
|
|
|
|
|
| ||||
Allstate agencies |
| 10,218 |
| 10,073 |
| 19,924 |
| 19,556 |
| ||||
Broker dealers |
| 2,845 |
| 2,611 |
| 5,588 |
| 5,329 |
| ||||
Banks |
| 2,308 |
| 902 |
| 4,108 |
| 1,617 |
| ||||
Specialized brokers |
| 487 |
| 934 |
| 1,398 |
| 2,062 |
| ||||
Independent agents |
| 118 |
| 56 |
| 217 |
| 124 |
| ||||
Total contract charges |
| 15,976 |
| 14,576 |
| 31,235 |
| 28,688 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Premiums and contract charges |
| $ | 32,150 |
| $ | 34,545 |
| $ | 67,402 |
| $ | 65,308 |
|
Total premiums increased 43.3% to $20.0 milliondeclined 19.0% and 1.2% in the second quarter of 2004 and 21.0% to $36.6 million in the first six months of 20042005, respectively, compared to the same periods of 2003. The increases in2004. In both periods, increased traditional life and accident and health premiums were the result of increasedmore than offset by lower 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.sold through specialized brokers.
Contract charges increased 6.5% to $14.6 million9.6% and 8.9% in the second quarter of 2004 and 7.6% to $28.7 million in the first six months of 20042005, respectively, compared to the same periods of 2003.2004. The increases in both periods were primarily attributabledue to higher contract charges on variable annuities asand interest-sensitive life products and, to a lesser extent, fixed annuities. Higher variable annuity contract charges were the result of increased average higher account values induring the current periods of 2005 compared to the same periods of 2004, reflecting positive investment results and net deposits on variable annuity and life contracts. The increase in the interest-sensitive life contract charges were attributable to in-force business growth resulting from new businessdeposits and investment returns.credited interest more than offsetting surrenders and benefits. Fixed annuity contract charges for the second quarter and first six months of 2005 reflect higher surrender charges compared with the same periods in the prior year.
12
Contractholder funds represent interest-bearing liabilities arising from the sale of individual products, such asfixed annuities, interest-sensitive life and variable annuity and life deposits allocated to fixed annuities.accounts. The balance of contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.
The following table shows the changes in contractholder funds.
| Three Months Ended 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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Contractholder funds, beginning balance |
| $ | 4,033,796 |
| $ | 2,814,594 |
| $ | 3,802,846 |
| $ | 2,658,325 |
|
|
|
|
|
|
|
|
|
|
| ||||
Impact of adoption of SOP 03-1(1) |
| — |
| — |
| — |
| 2,031 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
| ||||
Fixed annuities (immediate and deferred) |
| 187,430 |
| 257,012 |
| 431,374 |
| 402,399 |
| ||||
Interest-sensitive life |
| 26,639 |
| 26,210 |
| 48,826 |
| 51,032 |
| ||||
Variable annuity and life deposits allocated to fixed accounts |
| 14,870 |
| 31,098 |
| 33,981 |
| 56,657 |
| ||||
Total deposits |
| 228,939 |
| 314,320 |
| 514,181 |
| 510,088 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest credited |
| 42,956 |
| 30,235 |
| 82,620 |
| 57,951 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Benefits, withdrawals and other adjustments |
|
|
|
|
|
|
|
|
| ||||
Benefits |
| (17,900 | ) | (11,149 | ) | (34,497 | ) | (19,894 | ) | ||||
Surrenders and partial withdrawals |
| (132,973 | ) | (45,056 | ) | (191,289 | ) | (84,299 | ) | ||||
Contract charges |
| (10,335 | ) | (10,446 | ) | (20,447 | ) | (20,328 | ) | ||||
Net transfers to separate accounts |
| (9,524 | ) | (9,927 | ) | (18,739 | ) | (21,394 | ) | ||||
Other adjustments |
| 279 |
| 1,515 |
| 563 |
| 1,606 |
| ||||
Total benefits, withdrawals and other adjustments |
| (170,453 | ) | (75,063 | ) | (264,409 | ) | (144,309 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Contractholder funds, ending balance |
| $ | 4,135,238 |
| $ | 3,084,086 |
| $ | 4,135,238 |
| $ | 3,084,086 |
|
(1)
Contractholder funds deposits increased 27.4%decreased 27.2% in the second quarter and 25.8%increased slightly in the first six months of 20042005 compared to the same periods in 2003,2004. The decline in the second quarter was due primarily to lower deposits on fixed annuities as a result of increased competition from certificates of deposit. The slight increase in the first six months was due primarily to higher deposits on deferred fixed annuities resulting from strong competitive position, almost entirely offset by lower variable annuity and averagelife deposits allocated to fixed accounts and, to a lesser extent, decreased deposits on interest-sensitive life products. Average contractholder funds, excluding the impact of adopting SOP 03-1, increased 28.3%38.5% in the second quarter and 28.8%38.2% in the first six months of 20042005 compared to the same periods in 2003 due to significant increases in fixed annuity deposits.2004. Fixed annuity deposits increased 31.5% and 32.9%declined 27.1% in the second quarter and increased 7.2% in the first six months of 2004, respectively,2005 compared to the same periods in 2003. Thethe prior year. Increases in short-term interest rates without corresponding increases were attributablein longer term rates has generally reduced the competitiveness of fixed annuity products relative to higher consumer demand resulting from increasing interest rates.shorter term deposit products such as money market funds and certificates of deposit. A continuation of this environment could reduce the level of expected fixed annuity deposits.
Benefits
Surrenders and partial withdrawals increased 37.5%195.1% in the second quarter and 32.7%126.9% in the first six months of 20042005 compared to the same periods in 2003. Benefits and withdrawals for the second quarter and first six months of 2004 representreflecting an annualized withdrawal rate of 8.0%13.2% in the second quarter and 7.8%, respectively,10.1% in the first six months of 2005 based on the beginning of period contractholder funds balance comparedbalance. This compares to 7.5% and 7.7% for thean annualized withdrawal rate of 6.4% in second quarter and 6.3% in the first six months of 2003, respectively.2004. The increases in the annualized withdrawal rates were primarily attributable to higher surrenders on the fixed account option on certain variable annuity contracts. The
13
funds subject to these surrenders were invested in prior years when the crediting rate on our fixed investment option was attractive relative to short-term market interest rates. Contractholders withdrew their funds at an increased rate due to the rise in short-term market interest rates, which were not accompanied by a structural rise in crediting rates. Fixed annuity surrenders and withdrawals are also contributing to the increase due to the growth and aging of our in-force business. Surrenders and withdrawals have been comparable tomay vary with changes in interest rates and equity market conditions and the aging of our pricing assumptions.in-force contracts.
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.
| 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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Separate accounts liabilities, beginning balance |
| $ | 809,274 |
| $ | 686,639 |
| $ | 792,550 |
| $ | 665,875 |
|
|
|
|
|
|
|
|
|
|
| ||||
Variable annuity and life deposits |
| 49,397 |
| 59,943 |
| 106,228 |
| 111,232 |
| ||||
Variable annuity and life deposits allocated to fixed accounts |
| (14,870 | ) | (31,098 | ) | (33,981 | ) | (56,657 | ) | ||||
Net deposits |
| 34,527 |
| 28,845 |
| 72,247 |
| 54,575 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Investment results |
| 18,081 |
| 2,223 |
| 6,279 |
| 17,603 |
| ||||
Contract charges |
| (3,234 | ) | (2,466 | ) | (6,220 | ) | (4,852 | ) | ||||
Net transfers from fixed accounts |
| 9,524 |
| 9,927 |
| 18,739 |
| 21,394 |
| ||||
Surrenders and benefits |
| (16,919 | ) | (14,805 | ) | (32,342 | ) | (44,232 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Separate accounts liabilities, ending balance |
| $ | 851,253 |
| $ | 710,363 |
| $ | 851,253 |
| $ | 710,363 |
|
Separate accounts liabilities increased $23.7$58.7 million as of June 30, 2005 compared to December 31, 2004. Variable annuity and $44.5 million duringlife deposits in the second quarter and first six months of 2004,2005 decreased 17.6% and 4.5%, respectively, compared to $60.3 millionthe same periods in the prior year. However, net deposits increased 19.7% and $38.5 million during32.4% in the second quarter and first six months of 2003,2005, respectively, as a result of netthe decline in the variable and life deposits transfers from fixed accounts and positive investment results, partiallywas more than offset by surrenders, benefits paida lower percentage of deposits being allocated to contractholders and contract charges.fixed accounts. Variable annuity contractholders often allocate a significant portion of their initial variable annuity depositscontract deposit 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%21.8% in both the second quarterthree months ended June 30, 2005 and 22.3% in the first six months of 20042005 compared to the same periods in 2003,2004. The increases in both periods were primarily due to the effect of higher portfolio balances, partially offset by lower portfolio yields. Higher portfolio balances resulted from the investment of cash flows from operating and financing activities. Total investmentsactivities related primarily to deposits from fixed annuities and interest-sensitive life policies. Investments as of June 30, 20042005 increased 8.9%9.3% from June 30, 2003December 31, 2004. The lower portfolio yields were primarily due primarily to contractholder deposits, partially offset by a decline in unrealized capital gains onpurchases, including reinvestments, of fixed income securities.securities with yields lower than the current portfolio average.
14
Net income analysis is presented in the following table.
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Premiums |
| $ | 16,174 |
| $ | 19,969 |
| $ | 36,167 |
| $ | 36,620 |
|
Contract charges(1) |
| 15,976 |
| 14,573 |
| 31,235 |
| 28,678 |
| ||||
Net investment income |
| 88,503 |
| 72,676 |
| 174,995 |
| 143,071 |
| ||||
Periodic settlements and accruals on non-hedge derivative instruments (2) |
| 270 |
| 69 |
| 484 |
| 76 |
| ||||
Contract benefits |
| (42,901 | ) | (44,916 | ) | (89,984 | ) | (87,840 | ) | ||||
Interest credited to contractholder funds(3) |
| (38,733 | ) | (30,155 | ) | (74,727 | ) | (57,802 | ) | ||||
Gross margin |
| 39,289 |
| 32,216 |
| 78,170 |
| 62,803 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization of DAC and DSI |
| (10,390 | ) | (8,401 | ) | (13,893 | ) | (6,852 | ) | ||||
Operating costs and expenses |
| (13,078 | ) | (10,300 | ) | (22,270 | ) | (20,258 | ) | ||||
Income tax expense |
| (6,218 | ) | (5,046 | ) | (16,137 | ) | (12,885 | ) | ||||
Realized capital gains and losses, after-tax |
| (1,550 | ) | (1,797 | ) | (5,285 | ) | (2,231 | ) | ||||
DAC and DSI amortization expense on realized capital gains and losses, after-tax |
| (950 | ) | (454 | ) | 539 |
| (1,406 | ) | ||||
Reclassification of periodic settlements and accruals on non-hedge derivative instruments, after-tax |
| (164 | ) | (43 | ) | (300 | ) | (47 | ) | ||||
Gain on disposition of operations, after-tax |
| 1 |
| — |
| 1 |
| 688 |
| ||||
Cumulative effect of change in accounting principle, after-tax |
| — |
| — |
| — |
| (7,586 | ) | ||||
Net income |
| $ | 6,940 |
| $ | 6,175 |
| $ | 20,825 |
| $ | 12,226 |
|
(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 | |||||
(2)
(3)Amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin. Amortization of DSI totaled $383$705 thousand and $380 thousand in the second quarter ofthree months ended June 30, 2005 and 2004, respectively, and $937 thousand and $384 thousand forin the first six months of 2004. The prior period has not been restated.
Gross margin, a non-GAAP measure, represents premiums, contract charges, and net investment income and periodic settlements and accruals on non-hedge derivative instruments, less contract benefits and interest credited to contractholder funds.funds excluding amortization of DSI. We reclassify periodic settlements and accruals on non-hedge derivative instruments into gross margin to report them in a manner consistent with the economically hedged investments, replicated assets or product attributes (e.g. net investment income or interest credited to contractholder funds) and by doing so, appropriately reflect trends in product performance. 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,life and annuities, 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 fourthree components that are utilized to further analyze the business: investment margin, benefit margin, maintenanceand contract charges and surrender charges.fees. 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.
15
The components of gross margin are reconciled to the corresponding financial statement line items in the following table.
|
| Three Months Ended June 30, |
| ||||||||||||||||||||||
|
| Investment |
| Benefit |
| Contract Charges and |
| Gross |
| ||||||||||||||||
(in thousands) |
| 2005 |
| 2004 (4) |
| 2005 |
| 2004 (4) |
| 2005 |
| 2004 (4) |
| 2005 |
| 2004 |
| ||||||||
Premiums |
| $ | — |
| $ | — |
| $ | 16,174 |
| $ | 19,969 |
| $ | — |
| $ | — |
| $ | 16,174 |
| $ | 19,969 |
|
Contract charges (1) |
| — |
| — |
| 8,185 |
| 7,701 |
| 7,791 |
| 6,872 |
| 15,976 |
| 14,573 |
| ||||||||
Net investment income |
| 88,503 |
| 72,676 |
| — |
| — |
| — |
| — |
| 88,503 |
| 72,676 |
| ||||||||
Periodic settlements and accruals on non-hedge derivative |
| 270 |
| 69 |
| — |
| — |
| — |
| — |
| 270 |
| 69 |
| ||||||||
Contract benefits |
| (24,754 | ) | (23,905 | ) | (18,147 | ) | (21,011 | ) | — |
| — |
| (42,901 | ) | (44,916 | ) | ||||||||
Interest credited to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
contractholder funds(3) |
| (38,733 | ) | (30,155 | ) | — |
| — |
| — |
| — |
| (38,733 | ) | (30,155 | ) | ||||||||
|
| $ | 25,286 |
| $ | 18,685 |
| $ | 6,212 |
| $ | 6,659 |
| $ | 7,791 |
| $ | 6,872 |
| $ | 39,289 |
| $ | 32,216 |
|
|
| Six Months Ended June 30, |
| ||||||||||||||||||||||
|
| Investment |
| Benefit |
| Contract Charges and |
| Gross |
| ||||||||||||||||
(in thousands) |
| 2005 |
| 2004 (4) |
| 2005 |
| 2004 (4) |
| 2005 |
| 2004 (4) |
| 2005 |
| 2004 |
| ||||||||
Premiums |
| $ | — |
| $ | — |
| $ | 36,167 |
| $ | 36,620 |
| $ | — |
| $ | — |
| $ | 36,167 |
| $ | 36,620 |
|
Contract charges (1) |
| — |
| — |
| 16,030 |
| 15,180 |
| 15,205 |
| 13,498 |
| 31,235 |
| 28,678 |
| ||||||||
Net investment income |
| 174,995 |
| 143,071 |
| — |
| — |
| — |
| — |
| 174,995 |
| 143,071 |
| ||||||||
Periodic settlements and accruals on non-hedge derivative instruments (2) |
| 484 |
| 76 |
| — |
| — |
| — |
| — |
| 484 |
| 76 |
| ||||||||
Contract benefits |
| (50,161 | ) | (48,581 | ) | (39,823 | ) | (39,259 | ) | — |
| — |
| (89,984 | ) | (87,840 | ) | ||||||||
Interest credited to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
contractholder funds(3) |
| (74,727 | ) | (57,802 | ) | — |
| — |
| — |
| — |
| (74,727 | ) | (57,802 | ) | ||||||||
|
| $ | 50,591 |
| $ | 36,764 |
| $ | 12,374 |
| $ | 12,541 |
| $ | 15,205 |
| $ | 13,498 |
| $ | 78,170 |
| $ | 62,803 |
|
| 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 | ||||||||||||
(1)
(2)
(3)
Gross margin increased 42.2% in the second quarter and 19.9% in the first six months of 2005 and 2004, respectively.
(4)The prior period has been restated to conform to the current period presentation. In connection therewith, contract charges related to guaranteed minimum death, income, accumulation and withdrawal benefits on variable annuities have been reclassified to benefit margin from maintenance charges. Additionally, amounts previously presented as maintenance charges and surrender charges are now presented in the aggregate as contract charges and fees. These reclassifications did not result in a change in gross margin.
16
Gross margin increased 22.0% in the second quarter of 2005 and 24.5% in the first six months of 2005 compared to the same period of 2004. The increases in both periods of 2003were mostly due to increased benefit margin,higher investment margin, and higher maintenance charges.margin.
Investment marginis a component of gross margin, both of which are non-GAAP measures. Investment margin represents the excess of net investment income and periodic settlements and accruals on non-hedge derivative instruments over interest credited to contractholder funds and the implied interest on life-contingent immediate annuities included in the reserve for life-contingent contract benefits. Amortization of DSI is excluded from interest credited to contractholder funds for purposes of calculating gross margin. We use investment margin to evaluate our profitability related to the difference between investment returns on assets supporting certain products and amounts credited to customers ("spread"(“spread”) during the 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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Annuities |
| $ | 22,998 |
| $ | 15,903 |
| $ | 46,009 |
| $ | 31,082 |
|
Life insurance |
| 2,288 |
| 2,782 |
| 4,582 |
| 5,682 |
| ||||
Total investment margin |
| $ | 25,286 |
| $ | 18,685 |
| $ | 50,591 |
| $ | 36,764 |
|
Investment margin increased 16.6%35.3% in the second quarter of 2005 and 17.9%37.6% in the first six months of 20042005 compared to the same periods of 20032004 due to an increase inincreased average contractholder funds, slightly higher investment spreads on investments supporting deferred fixed annuities and improvedincreased yields on investments supporting capital, traditional life and other products. The increases in both periods were partially offset by a decline in the interest-sensitive life investment spread, as investment yield declines were not fully offset by crediting rate reductions.
The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the three months ended June 30.
| Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||
Interest-sensitive life | 6.1 | % | 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 |
| Weighted Average |
| Weighted Average |
| ||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
Interest-sensitive life |
| 5.8 | % | 6.1 | % | 4.6 | % | 4.8 | % | 1.2 | % | 1.3 | % |
Fixed annuities – deferred annuities |
| 5.5 |
| 5.6 |
| 3.2 |
| 3.4 |
| 2.3 |
| 2.2 |
|
Fixed annuities – immediate annuities with and without life contingencies |
| 7.6 |
| 7.6 |
| 6.8 |
| 6.8 |
| 0.8 |
| 0.8 |
|
Investments supporting capital, traditional life and other products |
| 6.2 |
| 5.9 |
| N/A |
| N/A |
| N/A |
| N/A |
|
The following table summarizes the weighted average investment yield, interest crediting rates and investment spreads for the six months ended June 30.
| Weighted Average Investment Yield | Weighted Average Interest Crediting Rate | Weighted Average Investment Spread | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||
Interest-sensitive life | 6.2 | % | 6.7 | % | 4.8 | % | 5.0 | % | 1.4 | % | 1.7 | % | |
Fixed annuities—deferred | 5.6 | 6.2 | 3.4 | 4.0 | 2.2 | 2.2 | |||||||
Fixed annuities—immediate | 7.6 | 7.8 | 6.8 | 6.9 | 0.8 | 0.9 | |||||||
Investments supporting capital, traditional life and other products | 6.0 | 4.7 | n/a | n/a | n/a | n/a |
|
| Weighted Average |
| Weighted Average |
| Weighted Average |
| ||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
|
Interest-sensitive life |
| 5.7 | % | 6.2 | % | 4.5 | % | 4.8 | % | 1.2 | % | 1.4 | % |
Fixed annuities – deferred annuities |
| 5.5 |
| 5.6 |
| 3.2 |
| 3.4 |
| 2.3 |
| 2.2 |
|
Fixed annuities – immediate annuities with and without life contingencies |
| 7.5 |
| 7.6 |
| 6.7 |
| 6.8 |
| 0.8 |
| 0.8 |
|
Investments supporting capital, traditional life and other products |
| 6.2 |
| 6.0 |
| N/A |
| N/A |
| N/A |
| N/A |
|
17
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 | ||
|
| Six Months Ended |
| ||||
(in thousands) |
| 2005 |
| 2004 |
| ||
Fixed annuities – immediate annuities with life contingencies |
| $ | 1,806,477 |
| $ | 1,564,347 |
|
Other life contingent contracts and other |
| 104,662 |
| 95,106 |
| ||
Reserve for life-contingent contract benefits |
| $ | 1,911,139 |
| $ | 1,659,453 |
|
|
|
|
|
|
| ||
Interest-sensitive life |
| $ | 397,691 |
| $ | 342,817 |
|
Fixed annuities – deferred annuities |
| 3,218,620 |
| 2,227,589 |
| ||
Fixed annuities – immediate annuities without life contingencies |
| 518,584 |
| 513,609 |
| ||
Other |
| 343 |
| 71 |
| ||
Contractholder funds |
| $ | 4,135,238 |
| $ | 3,084,086 |
|
Benefit marginis a component of gross margin, both of which are non-GAAP measures. Benefit margin represents life and life-contingent immediate annuity premiums, and cost of insurance contract charges and variable annuity contract charges for contract guarantees 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.margin. We use the benefit margin to evaluate our underwriting performance, as it reflects the profitability of our products with respect to mortality or morbidity risk during a fiscal period.
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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004(1) |
| 2005 |
| 2004(1) |
| ||||
Life insurance |
| $ | 8,333 |
| $ | 7,851 |
| $ | 15,524 |
| $ | 15,069 |
|
Annuities |
| (2,121 | ) | (1,192 | ) | (3,150 | ) | (2,528 | ) | ||||
Total benefit margin |
| $ | 6,212 |
| $ | 6,659 |
| $ | 12,374 |
| $ | 12,541 |
|
(1) The prior period has been restated to conform to the current period presentation.
Benefit margin increased $6.1 milliondeclined 6.7% in the second quarter of 2004 compared to the same period in 2003 due to strengthening of reserves for certain traditional life insurance policies in the second quarter of 2003. For the first six months of 2004, the benefit margin increased $3.5 million or 40.8% from the first six months of 2003 due to the disposal of the majority of our direct response distribution business2005 and fewer deaths on our life-contingent immediate annuities as well as the effects of reserve strengthening in the second quarter of 2003.
As required by SOP 03-1, as of January 1, 2004, a reserve was established for guaranteed minimum death benefits ("GMDBs") and guaranteed minimum income benefits ("GMIBs"), which in previous periods, in the case of GMDBs, were expensed as paid. Under the SOP, we anticipate that the 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 second quarter and first six months of 2004 is an addition to the reserve for guarantees of $0.5 million and $0.9 million, respectively. Included in the benefit margin for the second quarter and first six months of 2003 are GMDB payments of $0.8 million and $2.0 million, respectively. For further explanation of the impacts of the adoption of this accounting guidance, see Note 1 to the Condensed Financial Statements.
Amortization of DAC and DSI increased 1.9% in the second 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. Amortization of DAC and DSI decreased 53.0%1.3% in the first six months of 2004 compared to the first six months of 2003 due to a deceleration of amortization (commonly called "DAC unlocking") on interest-sensitive life and fixed annuities of $10.2 million in the
first quarter of 2004 compared to an acceleration of amortization of $325 thousand in the same period of 2003.
The 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% in the second quarter and 32.1% for the first six months of 20042005 compared to the same periods of 2003.2004. The increasedecline in total operating costsboth periods was mostly due to unfavorable mortality experience on immediate annuities with life contingencies, partially offset by growth of our in-force life business.
Upon the adoption of Statement of Position No. 03-1, “Accounting and expenses reflects higher non-deferrable sales expensesReporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”, on January 1, 2004, reserves were established for death and income benefits provided under variable annuities and other secondary guarantees. Annuity benefit margin will continue to be adversely impacted by certain closed blocks of life-contingent immediate annuities whose benefit payments are anticipated to extend beyond their original pricing expectations. The annuity benefit margin in future periods will fluctuate based on the timing of annuitant deaths on these life-contingent immediate annuities and the annual evaluation of assumptions used in our valuation models for variable annuity guarantees.
18
Amortization of DAC and DSI, excluding amortization related to realized capital gains and losses, increased 23.7% or $1.99 million in the second quarter of 2004three months ended June 30, 2005 and reinsurance expense credits102.8% or $7.04 million in the second quarter of 2003. For the first six months of 20042005 compared to 2003,the same periods of 2004. The increases in both periods were primarily the result of higher trail commissionsgross margins on deferred fixed annuities. For the six-month period, this impact was partially offset by adjustments recorded in connection with our annual comprehensive evaluation of the assumptions used in our valuation models for all investment products, including variable and employeefixed annuities and interest-sensitive and variable life products.
In the first quarter of 2005, as a result of our annual evaluation of assumptions, we recorded DAC and DSI deceleration (commonly referred to as “DAC and DSI unlocking”) of $7.3 million, which included deceleration of $2.8 million on interest-sensitive and variable life products and deceleration of $4.5 million for variable annuities. The amortization deceleration on variable annuities was mostly attributable to better than anticipated equity market performance and persistency.
In the prior year, the comparable DAC and DSI unlocking was a net deceleration of amortization of $10.2 million. This deceleration of amortization was the result of favorable projected mortality on our interest-sensitive life products and resulted in the total DAC and DSI amortization being favorable relative to net income.
Operating costs and expenses increased 27.0% in the three months ended June 30, 2005 and 9.9% in the first six months of 2005 compared to the same periods of 2004. The increases were primarily attributable to higher technology, distribution and administrative expenses, which were incurred to support growth in the Company’s in-force business. For the six-month period, these increases were partially offset by lower guaranty fund assessments and expenses related to taxes, licenses and fees in the disposalfirst quarter of 2005 compared to the majorityfirst quarter of our direct response distribution business.2004.
19
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 June 30, 20042005 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 | % | |||
|
| Carrying |
| Percent |
| |
(in thousands) |
| value |
| of total |
| |
|
|
|
|
|
| |
Fixed income securities (1) |
| $ | 6,111,363 |
| 90.5 | % |
Mortgage loans |
| 536,908 |
| 8.0 |
| |
Short-term |
| 66,059 |
| 1.0 |
| |
Policy loans |
| 35,806 |
| 0.5 |
| |
Other |
| 2,399 |
| — |
| |
Total |
| $ | 6,752,535 |
| 100.0 | % |
(1)
Total investments increased to $5.22$6.75 billion at June 30, 20042005 from $4.86$6.18 billion at December 31, 20032004 due to positive cash flows from operating and financing activities, higher unrealized capital gains on fixed income securities and increased funds associated with securities lending partially offset by decreased unrealized gains on fixed income securities.transactions.
Total investments at amortized costscost related to collateral, associated withdue to securities lending transactions, increased to $176.0$246 million at June 30, 20042005 from $134.5$133 million at December 31, 2003.2004.
At June 30, 2004, 96.1%2005, 96.3% 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's equivalent rating of Aaa, Aa, A or Baa; an S&P equivalentBaa from Moody’s or a rating of AAA, AA, A or BBB;BBB from S&P, Fitch or Dominion; or a comparable internal rating whenif an externalexternally provided rating is not available.
The unrealized net capital gains on fixed income securities at June 30, 20042005 were $328.8$659.9 million, a decreasean increase of $151.1$127.3 million or 31.5%23.9% since December 31, 2003.2004. The net unrealized gain was comprised of $389.3$668.1 million of unrealized gains and $60.5$8.2 million of unrealized losses at June 30, 2004.2005. This is compared to a net unrealized gain for the fixed income portfolio totaling $479.9$532.7 million at December 31, 2003,2004, comprised of $498.8$545.5 million of unrealized gains and $18.9$12.8 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 June 30, 2004, $51.92005, $6.0 million or 85.8%73.5% were related to investment grade securities and are believed to be primarily a result of thea rising interest rate environment. Of the remaining $8.6$2.2 million of losses in the fixed income portfolio, $6.5$2.0 million or 75.6% was
concentrated94.5% were in the corporate fixed income portfolio and wasportfolio. The $2.0 million of corporate fixed income gross unrealized losses were primarily comprised of securities in the transportation, consumer goodscommunications, utilities, financial services and energytransportation sectors. The gross unrealized losses in these sectors were primarily company specific and interest rate related. Approximately $4.4 million$919 thousand of the total gross unrealized losses in the corporate fixed income portfolio were associated with the airlineautomobile industry, for which valuesincludes direct debt issuances of automobile manufacturers, captive automotive financing companies and automobile parts and equipment sellers. Values in the automobile industry were primarily depressed due to company specific issues and economic issues related to fuel costs.conditions. 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 recognize impairment on securities in an unrealized loss position for which we do not have the intent and ability to hold until recovery.
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
20
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 | |||||||||||||
We have experienced a decrease in the amortized cost of fixed income securities categorized as problem, restructured and potential problem as of June 30, 2004 compared to December 31, 2003. The decrease was primarily related to the sale of holdings in these categories due to specific developments causing a change in our outlook and intent to hold those securities.
(in thousands) |
| June 30, 2005 |
| December 31, 2004 |
| |||||||||||
|
| Amortized |
| Fair |
| Percent |
| Amortized |
| Fair |
| Percent |
| |||
Problem |
| $ | 10,609 |
| 11,538 |
| 0.2 | % | $ | 10,637 |
| $ | 10,813 |
| 0.2 | % |
Restructured |
| — |
| — |
| — |
| 5,396 |
| 6,151 |
| 0.1 |
| |||
Potential problem |
| 15,192 |
| 15,428 |
| 0.2 |
| 11,231 |
| 10,539 |
| 0.2 |
| |||
Total net carrying value |
| $ | 25,801 |
| 26,966 |
| 0.4 | % | $ | 27,264 |
| $ | 27,503 |
| 0.5 | % |
Cumulative write-downs recognized |
| $ | 5,682 |
|
|
|
|
| $ | 4,606 |
|
|
|
|
|
We also evaluated each of these securities through our portfolio monitoring process at June 30, 2005 and recorded write-downs when appropriate. We further concluded that any remaining unrealized losses on these securities were temporary in nature.nature and that we have the intent and ability to hold until recovery. While these balances may increase in the future, particularly if economic conditions are unfavorable, we expectmanagement expects that the total amount of securities in these categories will remain low relative to the total fixed income securities portfolio.
Net Realized Capital Gains and Losses The following table presents the components of realized capital gains and losses and the related tax effect.
| Three Months Ended 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 |
| Six Months Ended |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
Investment write-downs |
| $ | (1,076 | ) | $ | (245 | ) | $ | (1,469 | ) | $ | (884 | ) |
Dispositions |
| 4,979 |
| (5,866 | ) | (3,044 | ) | (4,039 | ) | ||||
Valuation of derivative instruments |
| (3,719 | ) | 2,563 |
| (3,478 | ) | 708 |
| ||||
Settlement of derivative instruments |
| (2,816 | ) | 662 |
| (518 | ) | 676 |
| ||||
Realized capital gains and losses, pretax |
| (2,632 | ) | (2,886 | ) | (8,509 | ) | (3,539 | ) | ||||
Income tax benefit |
| 1,082 |
| 1,089 |
| 3,224 |
| 1,308 |
| ||||
Realized capital gains and losses, after-tax |
| $ | (1,550 | ) | $ | (1,797 | ) | $ | (5,285 | ) | $ | (2,231 | ) |
Dispositions in the above table also include sales, losses recognized in anticipation of 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 inIn 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
A changing interest rate environment will also drive changes in our portfolio duration targets at a tactical level. A duration target and range is established with an economic view of liabilities relative to a long-term portfolio view. Tactical duration adjustments within management’s approved ranges are accomplished through both cash market transactions and derivative activities that generate realized gains and losses and through new purchases. As a component of our approach to managing portfolio duration, realized gains and losses on dispositionsderivative instruments are most appropriately considered in conjunction with the unrealized gains and losses on the fixed income portfolio. This approach mitigates the impacts of general interest rate changes to the overall financial condition of the Company.
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In the first quarter of 2005, because of an anticipated rise in interest rates as well as changes in existing market conditions and long-term asset return assumptions, certain changes were planned within various portfolios. They included continued asset-liability management strategies; on-going comprehensive reviews of our portfolios; and changes being made to our strategic asset allocation, including a decision to pursue yield enhancement strategies. At that time we identified, in total, approximately $216 million of securities, all of which were in an unrealized loss position, which we would consider selling to achieve these objectives. As a result, we recognized $5.6 million of write-downs due to a change in intent to hold these securities until recovery. Securities related to $1.2 million of the write-downs were sold during the second quarter, and we continue to consider selling securities with a carrying value of 2004 were relatedapproximately $0.3 million having write-downs of $0.1 million. The remaining securities with $4.3 million of write-downs recognized in the first quarter have been re-designated as being held to salesrecovery within the available-for-sale category, primarily as a consequence of the lower than expected interest rate environment. Of this amount, $3.7 million of write-downs relates to $158 million of affected securities that were soldidentified in recognitionconnection with yield enhancement strategies. The difference between the current carrying value and par value of relative value opportunities. The proceeds from these sales were reinvestedthe re-designated securities will be recognized in higher yielding securities.net investment income over the remaining life of the securities, pursuant to the guidance in Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”.
Capital Resourcesconsist of shareholder's equity.shareholder’s equity, representing funds deployed or available to be deployed to support business operations. 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) |
| June 30, 2005 |
| December 31, 2004 |
| |||
|
|
|
|
|
| |||
Common stock, retained earnings and other shareholder’s equity items |
| $ | 504,769 |
| $ | 483,980 |
| |
Accumulated other comprehensive income |
| 171,164 |
| 155,255 |
| |||
Total shareholder’s equity |
| $ | 675,933 |
| $ | 639,235 |
| |
Shareholder'sShareholder’s equity decreased increased in the first six months of 20042005 when compared to December 31, 2003 due to decreased2004 as a result of net income and higher unrealized gains on fixed income securities partially offset by net income.capital gains.
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.2004.
Liquidity Sources and Uses
IncreasedAs reflected in our Condensed Statements of Cash Flows, lower operating cash flows in the first six months of 20042005 when compared to the first six months of 20032004 primarily relate to increases inhigher policy benefits and acquisition costs paid and lower premiums, andpartially offset by increased investment income. Cash flows used in investing activities increaseddecreased in the first six months of 2004 as a result of2005 due to the investment of higherlower financing cash flow and higher operating cash flows.
Higher
Lower cash flow from financing activities during the first six months of 20042005 when compared to the same periodfirst six months of 2003 reflects an increase in2004 reflect lower variable annuity and life deposits received from contractholders,allocated to fixed accounts and higher fixed annuity withdrawals, partially offset by
benefits and withdrawals from contractholders' accounts. higher deposits on fixed annuities. For quantification of the changes in contractholder funds, see the Results of Operations section of the MD&A.
We have entered into an inter-company loan agreement with The Allstate Corporation (the "Corporation").the 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 June 30, 20042005 or December 31, 2003.2004. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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 include but are not limited to those discussed or identified in this document (including the risks described below) and 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."Factors”.
Actions taken to simplify our business model and improve profitability may not be successful and may result in losses and costs
We are pursuing strategies intended to improve our return on equity. Actions that we have taken and may continue to take include changing the number and selection of products being marketed, terminating underperforming distribution relationships, reducing policy administration software systems, and other actions that we may determine are appropriate to successfully execute our business strategies. The actions that we have taken and may take in the future may not achieve their intended outcome and could result in lower premiums and contract charges, restructuring costs, losses on disposition or losses related to the discontinuance of individual products or distribution relationships.
Our ability to manage the investment margin for spread-based products is dependent upon maintaining profitable spreads between investment yields and interest crediting rates. As interest rates decrease or remain at low levels, proceeds from investments that have matured, prepaid or sold may be reinvested at lower yields, reducing investment margin. Lowering interest-crediting rates can offset decreases in investment margin on some products. However, these changes could be limited by market conditions, regulatory or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in asset yields. Decreases in the rates offered on products could make those products less attractive, leading to lower sales and/or changes in the level of surrenders and withdrawals for these products. Non-parallel shifts in interest rates, such as increases in short-term rates without accompanying increases in medium- and long-term rates, can influence customer demand for fixed annuities, which could impact the level and profitability of new customer deposits. Increases in market interest rates can also have negative effects, for example by increasing the attractiveness of other investments, which can lead to higher surrenders at a time when the investment asset values are lower as a result of the increase in interest rates. For certain products, principally fixed annuity and interest-sensitive life products, the earned rate on assets could lag behind market yields. We may react to market conditions by increasing crediting rates, which could narrow spreads. Unanticipated surrenders could result in DAC unlocking or affect the recoverability of DAC and thereby increase expenses and reduce profitability.
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WithEvaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we carried outconducted 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 toproviding reasonable assurance that material information required to be includeddisclosed in our periodic reports filed with or submitted to the Securities and Exchange Commission. However,Commission under the design of any system of controlsSecurities Exchange Act is made known to management, including the principal executive officer and procedures is basedthe principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in part upon assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and are effective at the "reasonable assurance" level.
Internal Control over Financial Reporting. During the fiscal quarter ended June 30, 2004,2005, there have beenwere 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.
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 and Regulatory Proceedings and Inquiries” in Note 43 of the Company'sCompany’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.
(a)
An Exhibit Index has been filed as part of this report on page E-1.
None.
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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 8, 2005 | By | /s/ Samuel H. Pilch | ||
Samuel H. Pilch | ||||
Controller | ||||
(chief accounting officer and duly | ||||
authorized officer of the |
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Description | ||||||
10.1 | Amended and Restated Service and Expense Agreement | |||||
10.2 | New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and | |||||
15 | Acknowledgement of awareness from Deloitte & Touche LLP dated August | |||||
31.1 | Rule 15d-14(a) Certification of Principal Executive Officer | |||||
31.2 | Rule 15d-14(a) Certification of Principal Financial Officer | |||||
32 | Section 1350 Certifications |
E-1