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.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-61846
Allstate Life Insurance Company of New York
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 36-2608394
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Allstate Drive 11738
Farmingville, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 516/451-5300
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 2002, Registrant had 100,000 shares of common stock
outstanding, par value $25 per share, all of which shares are held by Allstate
Life Insurance Company.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2002
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the Three Month Periods Ended
March 31, 2002 and 2001 (unaudited) 3
Condensed Statements of Financial Position as of March 31, 2002 (unaudited)
and December 31, 2001 4
Condensed Statements of Cash Flows for the Three Month Periods Ended
March 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
2002 2001
------- --------
(in thousands) (unaudited)
REVENUES
Premiums $ 22,544 $ 20,214
Contract charges 12,357 10,354
Net investment income 54,428 48,486
Realized capital gains and losses (2,607) 777
-------- --------
86,722 79,831
-------- --------
COSTS AND EXPENSES
Contract benefits 42,406 43,140
Interest credited to contractholders' funds 19,452 12,643
Amortization of deferred policy acquisition costs 1,842 1,696
Operating costs and expenses 10,142 7,744
-------- --------
73,842 65,223
-------- --------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 12,880 14,608
Income tax expense 4,407 5,055
-------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 8,473 9,553
Cumulative effect of change in accounting for derivative financial
instruments, after-tax - (147)
-------- --------
NET INCOME $ 8,473 $ 9,406
======== ========
See notes to condensed financial statements.
3
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF FINANCIAL POSITION
March 31, December 31,
(in thousands, except par value data) 2002 2001
---- ----
(unaudited)
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $2,757,237 and $2,678,265) $ 2,940,731 $ 2,894,461
Mortgage loans 264,763 242,727
Short-term 103,947 57,507
Policy loans 33,201 33,160
----------- -----------
Total investments 3,342,642 3,227,855
Cash 4,195 7,375
Deferred policy acquisition costs 175,334 156,615
Accrued investment income 35,292 33,601
Reinsurance recoverables, net 1,082 1,146
Other assets 13,670 13,800
Separate Accounts 626,523 602,657
----------- -----------
TOTAL ASSETS $ 4,198,738 $ 4,043,049
=========== ===========
LIABILITIES
Reserve for life-contingent contract benefits $ 1,322,888 $ 1,317,816
Contractholder funds 1,524,514 1,428,113
Current income taxes payable 10,165 6,049
Deferred income taxes 61,466 64,612
Other liabilities and accrued expenses 185,666 164,399
Payable to affiliates, net 5,912 427
Separate Accounts 626,523 602,657
----------- -----------
TOTAL LIABILITIES 3,737,134 3,584,073
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
SHAREHOLDER'S EQUITY
Common stock, $25 par value, 100,000 shares authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 45,787 45,787
Retained income 300,167 291,694
Accumulated other comprehensive income:
Unrealized net capital gains and losses 113,150 118,995
----------- -----------
Total accumulated other comprehensive income 113,150 118,995
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 461,604 458,976
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 4,198,738 $ 4,043,049
=========== ===========
See notes to condensed financial statements.
4
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
---------
(in thousands) 2002 2001
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,473 $ 9,406
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and other non-cash items (12,043) (12,519)
Realized capital gains and losses 2,607 (777)
Cumulative effect of change in accounting for derivative financial
instruments - 147
Interest credited to contractholder funds 19,452 12,643
Changes in:
Life-contingent contract benefits and contractholder funds 8,817 16,159
Deferred policy acquisition costs (8,509) (12,876)
Income taxes payable 4,117 4,596
Other operating assets and liabilities 6,040 14,380
-------- --------
Net cash provided by operating activities 28,954 31,159
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities 59,425 23,200
Investment collections
Fixed income securities 46,097 17,710
Mortgage loans 10,452 1,489
Investments purchases
Fixed income securities (169,571) (96,791)
Mortgage loans (32,101) -
Change in short-term investments, net (33,099) (42,254)
Change in policy loans, net (41) (513)
-------- --------
Net cash used in investing activities (118,838) (97,159)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 128,367 121,578
Contractholder fund withdrawals (41,663) (51,411)
-------- --------
Net cash provided by financing activities 86,704 70,167
-------- --------
NET (DECREASE) INCREASE IN CASH (3,180) 4,167
CASH AT BEGINNING OF PERIOD 7,375 2,162
-------- --------
CASH AT END OF PERIOD $ 4,195 $ 6,329
======== ========
See notes to condensed financial statements.
5
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Allstate Life Insurance Company of New York (the "Company"), a wholly owned
subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by
Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate
Corporation (the "Corporation").
The condensed financial statements and notes as of March 31, 2002, and for
the three month periods ended March 31, 2002 and 2001, are unaudited. The
condensed financial statements reflect all adjustments (consisting only of
normal recurring accruals) which are, in the opinion of management, necessary
for the fair presentation of the financial position, results of operations and
cash flows for the interim periods. The condensed financial statements and notes
should be read in conjunction with the financial statements and notes thereto
included in the Allstate Life Insurance Company of New York Annual Report on
Form 10-K for the year ended December 31, 2001. The results of operations for
the interim periods should not be considered indicative of results to be
expected for the full year. To conform with the 2002 presentation, certain prior
year amounts have been reclassified.
2. NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and other
Intangible Assets", which eliminates the requirement to amortize goodwill, and
requires that goodwill and separately identified intangible assets with
indefinite lives be evaluated for impairment on an annual basis (or more
frequently if impairment indicators arise) on a fair value as opposed to an
undiscounted basis. With respect to goodwill amortization the Company adopted
SFAS No. 142 effective January 1, 2002. The result of the application of the
non-amortization provisions of SFAS 142 for goodwill is not material for the
three months ended March 31, 2002. At March 31, 2002, the Company had goodwill
of $160 thousand. Pursuant to transition provisions of SFAS No. 142, the Company
will complete its test for goodwill impairment during the second quarter of 2002
and, if impairment is indicated, record such impairment as a cumulative effect
of accounting change effective January 1, 2002. The cumulative effect of
accounting change recorded is not expected to be material to the results of
operations or financial position of the Company.
6
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis are as follows:
Three Months Ended March 31,
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(in thousands) 2002 2001
------------------------------------ --------------------------------------
After- After-
Pretax Tax tax Pretax Tax tax
Unrealized capital gains and losses and
net losses and gains on derivative
financial instruments:
Unrealized holding (losses) gains
arising during the period $ (11,092) $ 3,882 $ (7,210) $ 11,314 $ (3,960) $ 7,354
Less: reclassification adjustments (2,100) 735 (1,365) 265 (93) 172
--------- ------- -------- ---------- ---------- ----------
Unrealized net capital (losses) gains (8,992) 3,147 (5,845) 11,049 (3,867) 7,182
Net (losses) gains on derivative
financial instruments arising during
the period (400) 140 (260) 512 (179) 333
Less: reclassification adjustments (400) 140 (260) 512 (179) 333
--------- ------- -------- ---------- ---------- ----------
Net (losses) gains on derivative
financial instruments
- - - - - -
--------- ------- -------- ---------- ---------- ----------
Other comprehensive (loss) income $ (8,992) $ 3,147 (5,845) $ 11,049 $ (3,867) 7,182
========= ======= =========== ===========
Net income 8,473 9,406
--------- ----------
Comprehensive income $ 2,628 $ 16,588
========= ==========
7
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social,
economic and regulatory environment. State and federal initiatives have varied
and have included employee benefit regulations, removal of barriers preventing
banks from engaging in the securities and insurance businesses, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and the overall expansion of regulation. The ultimate
changes and eventual effects, if any, of these initiatives are uncertain.
From time to time, the Company is involved in pending and threatened
litigation in the normal course of business in which claims for monetary damages
are asserted. In the opinion of management, the ultimate liability, if any, in
one or more of these actions in excess of amounts currently reserved is not
expected to have a material effect on the results of operations, liquidity or
financial position of the Company.
5. REINSURANCE
The Company purchases reinsurance to limit aggregate and single losses on
large risks. The Company continues to have primary liability as the direct
insurer for risks reinsured. Estimating amounts of reinsurance recoverable is
impacted by the uncertainties involved in the establishment of loss reserves.
Failure of reinsurers to honor their obligations could result in losses to the
Company. The Company cedes a portion of the mortality risk on certain term life
policies with a pool of reinsurers.
Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. No single reinsurer had a material obligation to
the Company nor is the Company's business substantially dependent upon any
reinsurance contract. The effects of reinsurance on premiums written and earned
were as follows:
Three Months Ended
March 31,
------------------------------
------------------------------
(in thousands) 2002 2001
------------ -----------
Premiums and contract charges
Direct $ 36,744 $ 31,611
Assumed - non-affiliate 140 196
Ceded
Affiliate (1,761) (1,019)
Non-affiliate (222) (220)
----------- ---------
Premiums and contract charges, net of reinsurance $ 34,901 $ 30,568
=========== =========
Three Months Ended
March 31,
------------------------------
------------------------------
(in thousands) 2002 2001
------------ -----------
Contract benefits
Direct $ 43,183 $ 43,381
Assumed - non-affiliate 41 2
Ceded
Affiliate (529) (54)
Non-affiliate (289) (189)
---------- ---------
Contract benefits, net of reinsurance $ 42,406 $ 43,140
========== =========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
The following discussion highlights significant factors influencing results
of operations and changes in financial position of Allstate Life Insurance
Company of New York (the "Company"). It should be read in conjunction with the
condensed financial statements and related notes thereto found under Part I Item
1 contained herein and with the discussion, analysis, financial statements and
notes thereto in Part I Item 1 and Part II Items 7 and 8 of the Allstate Life
Insurance Company of New York Annual Report on Form 10-K for the year ended
December 31, 2001. To conform with the 2002 presentation, certain prior year
amounts have been reclassified.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets a diversified group of products to meet consumers'
lifetime needs in the areas of protection and retirement solutions in the state
of New York through a combination of Allstate agencies, financial services
firms, direct marketing and specialized brokers. The Company's life products
include term life; whole life and universal life; annuities such as fixed
annuities, market value adjusted annuities, variable annuities and immediate
annuities; and other protection products such as accidental death and hospital
indemnity.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable annuity contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried at
the fair value of the assets. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and
therefore, are not included in the Company's condensed statements of operations.
Revenues to the Company from the Separate Accounts consist of contract
maintenance and administration fees and mortality, surrender and expense
charges.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
contractholders bear the investment risk that the Separate Accounts' funds may
not meet their stated objectives.
The Company utilizes an alternative method of presenting its operating
results in the following discussion that differs from the presentation of the
financial information in the condensed financial statements. This presentation
allows for an alternative analysis of results of operations. The net effects of
realized capital gains and losses, after-tax, have been excluded from operating
income due to the volatility between periods and because such data is often
excluded when evaluating the overall financial performance of insurers. Realized
capital gains and losses, after-tax, is presented net of the effects of deferred
policy acquisition costs ("DAC") to the extent that such effects resulted from
the recognition of realized capital gains and losses. Operating income should
not be considered a substitute for any measure of performance under accounting
principles generally accepted in the United States of America ("GAAP"). The
Company's method of calculating operating income may be different from the
method used by other companies and therefore comparability may be limited.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
FINANCIAL HIGHLIGHTS
For the three months ended March 31,
(in thousands) 2002 2001
------------ ------------
------------ ------------
Statutory premiums and deposits $ 190,392 $ 167,772
============= ============
Investments $ 3,342,642 $ 2,956,000
Separate Accounts assets 626,523 521,902
------------- ------------
Investments, including Separate Accounts assets $ 3,969,165 $ 3,477,902
============= ============
GAAP Premiums $ 22,544 $ 20,214
Contract charges 12,357 10,354
Net investment income 54,428 48,486
Contract benefits 42,406 43,140
Interest credited to contractholders' funds 19,452 12,643
Amortization of deferred policy acquisition costs 1,830 1,530
Operating costs and expenses 10,142 7,744
------------- ------------
Operating income before tax 15,499 13,997
Income tax expense 5,345 4,836
------------- ------------
Operating income (1) 10,154 9,161
Realized capital gains and losses, after-tax(2) (1,681) 392
Cumulative effect of change in accounting principle, after-tax - (147)
------------- ------------
Net income $ 8,473 $ 9,406
============= ============
(1) For a complete definition of operating income, see the operating income
discussion beginning on page 12.
(2) Reconciliation of Realized capital gains and losses
Three Months
Ended March 31,
(in thousands)
2002 2001
--------- ----------
Realized capital gains and losses $ (2,607) $ 777
Reclassification of Amortization of DAC (12) (166)
Reclassification of Income tax benefit (expense) 938 (219)
--------- ----------
Realized capital gains and losses, after-tax $ (1,681) $ 392
========= ==========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
STATUTORY PREMIUMS AND DEPOSITS
Statutory premiums and deposits is a measure used by management to analyze
sales trends. Statutory premiums and deposits includes premiums on insurance
policies and premiums and deposits on annuities determined in conformity with
statutory accounting practices prescribed or permitted by the insurance
regulatory authorities of the state of New York, and all other funds received
from customers on deposit-type products which are treated as liabilities. The
statutory accounting practices differ in certain, material aspects from GAAP.
The following table summarizes statutory premiums and deposits by product line:
For the three months ended March 31,
(in thousands) 2002 2001
------------ -----------
------------ -----------
LIFE PRODUCTS
Interest-sensitive $ 13,696 $ 12,241
Traditional 4,957 5,602
Other 2,183 2,119
----------- ---------
Total life products 20,836 19,962
----------- ---------
INVESTMENT PRODUCTS
Investment contracts
Fixed annuity 58,811 53,027
Immediate annuity 28,024 28,825
Variable Separate Accounts 82,721 65,958
----------- ---------
Total investment products 169,556 147,810
----------- ---------
TOTAL $ 190,392 $ 167,772
=========== =========
Total statutory premiums and deposits increased 13.5% to $190.4 million in
the first three months of 2002 compared to the same period last year. The
increase in statutory premiums and deposits was primarily due to increased sales
of variable and fixed investment products and interest-sensitive life products.
These increases were partially offset by decreased sales of immediate annuity
products and traditional life products. Statutory premiums and deposits of
variable Separate Accounts and fixed annuity products increased 25.4% and 10.9%,
respectively, compared to the same period last year. Variable annuities, which
are included in variable Separate Accounts, increased due to the introduction of
a new product and new wholesaling initiatives through the banking channel. Fixed
annuity products increased due to increased marketing. Interest-sensitive life
products increased 11.9%, compared to the same period last year, due to
increased focus on investment products sold within the Allstate agencies
channel.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
GAAP PREMIUMS AND CONTRACT CHARGES
Under GAAP, premiums represent premium generated from traditional life
products and immediate annuities with life contingencies which have significant
mortality or morbidity risk and contract charges generated from
interest-sensitive life products and investment contracts which classify
deposits as contractholder funds. Contract charges are assessed against the
contractholder account balance for maintenance, administration, cost of
insurance and early surrender. The following table summarizes GAAP premiums and
contract charges:
For the three months ended March 31,
(in thousands) 2002 2001
---------- -------------
PREMIUMS
Traditional life $ 5,101 $ 5,656
Immediate annuities with life contingencies 15,246 12,440
Other 2,197 2,118
------------ -----------
Total premiums $ 22,544 $ 20,214
============ ===========
CONTRACT CHARGES
Interest-sensitive life $ 8,890 $ 6,880
Variable Separate Accounts 2,737 2,272
Investment contracts 730 1,202
------------ -----------
Total contract charges $ 12,357 $ 10,354
============ ===========
Total premiums for the first three months of 2002 increased 11.5% when
compared to the same period last year, due to an increase in premiums from
immediate annuities with life contingencies partially offset by a decrease in
premiums from traditional life. Total sales of immediate annuities increased
over 2001 levels, but under GAAP accounting requirements, only those with life
contingencies are recognized in premiums. Those without life contingencies, or
period certain, are directly recorded as liabilities and generate contract
charges. Market conditions and consumer preferences drive the mix of immediate
annuities sold with or without life contingencies. The decrease in sales of
traditional products resulted, in part, due to market conditions.
Total contract charges for the first three months of 2002 increased 19.3%
when compared to the same period last year, due to increased contract charges on
interest-sensitive life and variable Separate Accounts products partially offset
by a decrease in investment contract charges. Contract charges on
interest-sensitive life products increased due to the growth in-force business
and an increase in rate charges and fees. Contract charges on variable Separate
Accounts products are generally calculated as a percentage of account value and
therefore are impacted by market volatility. Investment contract charges
decreased due to market conditions.
OPERATING INCOME
Operating income is a measure used by management to evaluate profitability.
Operating income is defined as income before the cumulative effect of changes in
accounting principle, after-tax, excluding the after-tax effects of realized
capital gains and losses. In this management measure, the effects of realized
capital gains and losses have been excluded due to the volatility between
periods and because such data is often excluded when evaluating the overall
financial performance and profitability of other insurers. These operating
results should not be considered as a substitute for any GAAP measure of
performance. A reconciliation of operating income to net income is provided in
the table on page 10. The Company's method of calculating operating income may
be different from the method used by other companies and therefore comparability
may be limited.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
For the three months ended March 31
(in thousands) 2002 2001
----------- -------------
----------- -------------
Investment margin $ 12,183 $ 11,113
Mortality margin 9,639 6,851
Maintenance charges 4,597 4,334
Surrender charges 1,052 973
Costs and expenses (11,972) (9,274)
Income tax expense on operations (5,345) (4,836)
---------- -----------
OPERATING INCOME $ 10,154 $ 9,161
========== ===========
Operating income increased 10.8% in the first three months of 2002 compared
to the same period last year primarily due to increases in the mortality margin
and in investment margin.
Investment margin, which represents the excess of investment income earned
over interest credited to policyholders and contractholders, increased 9.6% in
the first three months of 2002 compared to the same period last year. The
increase was primarily due to a larger asset base from additional sales of fixed
annuities partially offset by an increase in interest credited.
Mortality margin, which represents premiums and cost of insurance charges
in excess of related policy benefits, increased 40.7% in the first three months
of 2002 compared to the same period last year. The increase in mortality margin
was due to an increase in premiums and insurance charges from new business and a
lower number of death benefits on payout annuities. Mortality and morbidity loss
experience can cause benefit payments to fluctuate from period to period while
underwriting and pricing guidelines utilize a long-term view of the trends in
mortality and morbidity when determining premium rates and cost of insurance
charges.
Costs and expenses increased 29.1% during the first three months of 2002
compared to the same period last year due to higher DAC amortization,
distribution expenses incurred on new growth initiatives and administrative
expenses.
NET INVESTMENT INCOME
Net investment income for the first three months of 2002 increased 12.3%
to $54.4 million compared to the same period last year. The increase was due to
higher investment balances partially offset by slightly lower yields. Investment
balances, excluding Separate Accounts and unrealized gains and losses on fixed
income securities, grew 17.1% in the first three months of 2001 as compared to
same period last year.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
AFTER-TAX REALIZED CAPITAL GAINS AND LOSSES
After-tax realized capital losses were $1.7 million in first three months
of 2002 compared to after-tax realized capital gains of $392 thousand in the
same period last year. After-tax realized capital gains and losses are presented
net of the effects of DAC amortization, to the extent that such effects resulted
from the recognition of realized capital gains and losses. The following table
describes the factors impacting the realized capital gains and losses results:
For the three months ended March 31,
(in thousands) 2002 2001
--------------- ---------------
--------------- ---------------
Portfolio trading $ (889) $ 170
Investment write-downs (528) -
Valuation of derivative securities (257) 329
------------- -------------
Subtotal $ (1,674) $ 499
Reclassification of amortization of DAC (7) (107)
------------- -------------
Total realized capital gains and losses, after-tax $ (1,681) $ 392
============= =============
Period to period fluctuations in realized capital gains and losses are the
result of timing of sales decisions reflecting management's decision on
positioning the portfolio, as well as assessments of individual securities and
overall market conditions.
INVESTMENTS
The composition of the Company's investment portfolio at March 31, 2002, is
presented in the following table.
Percent
(in thousands) to total
Fixed income securities (1) $ 2,940,731 88.0%
Mortgage loans 264,763 7.9
Short-term 103,947 3.1
Policy loans 33,201 1.0
----------- -----
Total $ 3,342,642 100.0%
=========== =====
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $2.76 billion at March 31, 2002 and $2.68 billion at
December 31, 2001.
Total investments were $3.34 billion at March 31, 2002 compared to $3.23
billion at December 31, 2001. The increase was due to amounts invested from
positive cash flows generated from operations partially offset by lower
unrealized capital gains. At March 31, 2002, unrealized capital gains on the
fixed income securities portfolio were $183.5 million compared to $216.2 million
at December 31, 2001. Investment balances at March 31, 2002, excluding
unrealized gains and losses on fixed income securities, increased 4.9% from
December 31, 2001.
At March 31, 2002, 97.0% of the Company's fixed income securities portfolio
was rated investment grade, which is defined by the Company as a security having
from the National Association of Insurance Commissioners ("NAIC") rating of 1 or
2, a Moody's rating of Aaa, Aa, A, Baa, or a comparable Company internal rating.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
SEPARATE ACCOUNTS
Separate Accounts assets and liabilities increased 4.0% to $626.5 million
at March 31, 2002 from the December 31, 2001 balance. The increase was primarily
attributable to additional deposits and transfers from the fixed account fund to
variable Separate Accounts funds partially offset by surrenders and withdrawals.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
The Company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources:
March 31, December 31,
(in thousands) 2002 2001
---- ----
Common stock and retained income $ 348,454 $ 339,981
Other comprehensive income 113,150 118,995
------------ -----------
Total shareholder's equity $ 461,604 $ 458,976
============ ===========
SHAREHOLDER'S EQUITY
Shareholder's equity increased for March 31, 2002 due to net income
partially offset by a decrease in unrealized net capital gains.
DEBT
The Company had no outstanding debt at March 31, 2002 and December 31,
2001. The Company has entered into an inter-company loan agreement with the
Corporation. The amount of inter-company loans available to the Company is at
the discretion of the Corporation. The maximum amount of loans the Corporation
will have outstanding to all its eligible subsidiaries at any given point in
time is limited to $1.00 billion. No amounts were outstanding for the Company
under the inter-company loan agreement at March 31, 2002 and December 31, 2001.
The Corporation uses commercial paper borrowings and can use bank lines of
credit to fund inter-company borrowings.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and, generally, may
be expected to have an effect on an insurance company's sales. On an ongoing
basis, rating agencies review the financial performance and condition of
insurers. A multiple level downgrade, while not expected, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's current financial strength ratings are listed below:
Rating Agency Rating Rating Structure
------------- ------ ----------------
Moody's Investors Service, Inc. Aa2 Second highest of nine ratings
("Excellent") categories and mid-range within the
category based on modifiers (e.g.,
Aa1, Aa2 and Aa3 are "Excellent")
Standard & Poor's Ratings Services AA+ Second highest of nine ratings
("Very Strong") categories and highest within the
category based on modifiers (e.g.,
AA+, AA and AA- are "Very Strong")
A.M. Best Company, Inc. A+ Highest of nine ratings categories
("Superior") and second highest within the
category based on modifiers (e.g.,
A++ and A+ are "Superior" while A
and A- are "Excellent")
In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings.
Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and
affiliates to "negative" from "stable". This revision is part of an ongoing life
insurance industry review recently initiated by Standard & Poor's. Moody's and
A.M. Best reaffirmed their ratings and outlook for the Company.
LIQUIDITY
The principal sources of funds for the Company are statutory premiums and
deposits; receipts of principal and interest from the investment portfolio;
capital contributions from ALIC; and intercompany loans from the Corporation.
The primary uses of these funds are purchases of investments and the payment of
policyholder claims, contract maturities, benefits, surrenders and withdrawals,
operating costs, income taxes, dividends to ALIC and the repayment of
intercompany loans to the Corporation. Management believes that cash flows from
operating and investing activities of the Company are adequate to satisfy
liquidity requirements of these operations based on the current liability
structure and considering a variety of reasonably foreseeable stress scenarios.
The maturity structure of the Company's fixed income securities, which
represent 88.0% of the Company's total investments, is managed to meet the
anticipated cash flow requirements of the underlying liabilities. A portion of
the Company's diversified product portfolio, primarily fixed deferred annuity
and interest-sensitive life insurance products, is subject to discretionary
surrenders and withdrawals by contractholders. Total surrenders and withdrawals
for the three month period ended March 31, 2002 were $48.5 million compared with
$25.4 million for the same period last year. As the Company's interest-sensitive
life policies and annuity contracts in-force grow and age, the dollar amount of
surrenders and withdrawals could increase. While the overall amount of
surrenders may increase in the future, a significant increase in the level of
surrenders relative to total contractholder account balances is not anticipated.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate results
based on management's plans are subject to uncertainty. These statements are
made subject to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or current
facts and may be identified by their use of words like "plans," "expects,"
"will," "anticipates," "estimates," "intends," "believes," "likely," and other
words with similar meanings. These statements may address, among other things,
the Company's strategy for growth, product development, regulatory approvals,
market position, expenses, financial results and reserves. Forward-looking
statements are based on management's current expectations of future events. The
Company cannot guarantee that any forward-looking statement will be accurate.
However, management believes that our forward-looking statements are based on
reasonable, current expectations and assumptions. We assume no obligation to
update any forward-looking statements as a result of new information or future
events or developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual results
could differ materially from those communicated in these forward-looking
statements. In addition to the normal risks of business, the Company is subject
to significant risk factors, including those listed below which apply to it as
an insurance business and provider of other financial services.
o There is uncertainty involved in estimating the availability of reinsurance
and the collectibility of reinsurance and recoverables. This uncertainty
arises from a number of factors, including whether losses meet the
qualifying conditions of the reinsurance contracts and if the reinsurers
have the financial capacity and willingness to pay.
o Currently, the Corporation is examining the potential exposure, if any, of
its insurance operations from acts of terrorism. The Corporation is also
examining how best to address this exposure, if any, considering the
interests of policyholders, shareholders, the lending community, regulators
and others. The Company does not have exclusions for terrorist events
included in its life insurance policies. In the event that a terrorist act
occurs, the Company may be adversely impacted, depending on the nature of
the event. With respect to the Company's investment portfolio, in the event
that commercial insurance coverage for terrorism becomes unavailable or
very expensive, there could be significant adverse impacts on some portion
of the Company's portfolio, particularly in sectors such as airlines and
real estate. For example, commercial mortgages or certain debt obligations
might be adversely affected due to the inability to obtain coverage to
restore the related real estate or other property, thereby creating the
potential for increased default risk.
o Changes in market interest rates can have adverse effects on the Company's
investment portfolio, investment income, product sales, results of
operations and retention of existing business. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
Declining market interest rates could have an adverse impact on the
Company's investment income as the Company reinvests proceeds from positive
cash flows from operations and from maturing and called investments into
new investments that could be yielding less than the portfolio's average
rate. Changes in interest rates could also reduce the profitability from
spread-based products, particularly fixed annuities, as the difference
between the amount that the Company is required to pay on such products and
the rate of return earned on the general account investments could be
reduced. Changes in market interest rates as compared to rates offered on
some of the Company's products could make those products less attractive if
competitive investment margins are not maintained, leading to lower sales
and/or changes in the level of surrenders and withdrawals on these
products. Additionally, unanticipated surrenders could cause acceleration
of amortization of DAC and thereby increase expenses and reduce current
period profitability. The Company seeks to limit its exposure to this risk
on the Company's products by offering a diverse group of products,
periodically reviewing and revising crediting rates and providing for
surrender charges in the event of early withdrawal.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o The impact of decreasing Separate Accounts balances resulting from volatile
market conditions, underlying fund performance and sales management
performance could cause contract charges realized by the Company to
decrease and lead to an increase of exposure of the Company to pay
guaranteed minimum death benefits.
o In order to meet the anticipated cash flow requirements of its obligations
to policyholders, from time to time the Company adjusts the effective
duration of investments, liabilities for contractholder funds and reserves
for life-contingent contract benefits. Those adjustments may have an impact
on the value of the investment portfolio, investment income, interest
credited on contractholder funds and the investment margin.
o The Company amortizes DAC related to contractholder funds in proportion to
gross profits over the estimated lives of the contract periods.
Periodically, the Company updates its assumptions underlying the gross
profits, which include estimated future fees, investment margins and
expenses, in order to reflect actual experience. Updates to these
assumptions result in adjustments to the cumulative amortization of DAC.
These adjustments may have a material effect on the results of operations.
o It is possible that the assumptions and projections used by the Company in
establishing prices for the guaranteed minimum death benefits on variable
annuity contracts, particularly assumptions and projections about
investment performance, do not accurately anticipate the level of costs the
Company will ultimately incur in providing those benefits.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not be made until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations.
o Under current U.S. tax law and regulations, deferred and immediate
annuities and life insurance, including interest-sensitive products,
receive favorable policyholder tax treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance used
in estate planning.
o The Company distributes some of its products under agreements with other
members of the financial services industry that are not affiliated with the
Company. Termination of one or more these agreements due to, for example,
changes in control of any of these entities, could have a detrimental
effect on the Company's sales. This risk may be exacerbated due to the
enactment of the Gramm-Leach-Bliley Act of 1999, which eliminated many
federal and state law barriers to affiliations among banks, securities
firms, insurers and other financial service providers.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophe which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade in AIC's financial strength rating
from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best,
respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard &
Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a
downgrade of the Corporations' rating, ALIC and its subsidiaries could also
experience a similar downgrade.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o The events of September 11 and the resulting disruption in the financial
markets revealed weaknesses in the physical and operational infrastructure
that underlies the U.S. and worldwide financial systems. Those weaknesses
did not impair the Company's liquidity in the wake of the September 11.
However, if an event of similar or greater magnitude occurred in the future
and if the weaknesses in the physical and operational infrastructure of the
U.S. and worldwide financial systems are not remedied, the Company could
encounter significant difficulties in transferring funds, buying and
selling securities and engaging in other financial transactions that
support its liquidity.
o Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers. A multiple level downgrade of either
the Company or ALIC, while not expected, could have a material adverse
effect on the Company's sales, including the competitiveness of the
Company's product offerings, its ability to market products, and its
financial condition and results of operations.
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends to ALIC and use its capital in other ways.
o A portion of the unrealized capital gains and losses included as a
component of shareholder's equity relating to non-exchange traded
marketable investment securities accounted for at fair value are internally
developed using widely accepted valuation models and independent third
party data as model inputs. A decrease in these values would negatively
impact the Corporation's debt-to-capital ratio.
o Following enactment of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the U.S. insurance business in an effort to determine the proper
role of state insurance regulation in the U.S. financial services industry.
We cannot predict whether any state or federal measures will be adopted to
change the nature or scope of the regulation of the insurance business or
what affect any such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition grand-fathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
19
PART II - Other Information
Item 1. Legal Proceedings
The discussion "Regulation and Legal Proceedings" in Part I, Item 1,
Note 4 of this Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
(b) Reports on Form 8-K
None.
20
SIGNATURES
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.
Dated May 13, 2002 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
(Registrant)
/s/THOMAS J. WILSON, II
Thomas J. Wilson, II
CHAIRMAN OF THE BOARD AND PRESIDENT
(Authorized Officer of Registrant)
/s/SAMUEL H. PILCH
Samuel H. Pilch
GROUP VICE PRESIDENT AND CONTROLLER
(Chief Accounting Officer)
21
Exhibit Index
EXHIBIT NO. DESCRIPTION
3(i)(A) Certificate of Amendment of the Restated Charter of Allstate Life
Insurance Company of New York dated December 17, 1999.
3(i)(B) Certificate of Amendment of the Restated Certificate of
Incorporation of Allstate Life Insurance Company of New York dated
November 3, 1995. Incorporated herein by reference to Exhibit 3(i) to
Allstate Life Insurance Company of New York's Annual Report on Form
10-K for the year ended December 31, 1998.
3(ii) Amended By-Laws of Allstate Life Insurance Company of New York
dated December 16, 1998. Incorporated herein by reference to Exhibit
3(ii) to Allstate Life Insurance Company of New York's Annual Report
on Form 10-K for the year ended December 31, 1998.
10.1 Service Agreement effective as of July 1, 1989 between Allstate
Insurance Company and Allstate Life Insurance Company of New York.
10.2 Investment Advisory Agreement and Amendment to Service Agreement as of
January 1, 2002 between Allstate Insurance Company, Allstate
Investments, LLC and Allstate Life Insurance Company of New York.
10.3 Tax Sharing Agreement dated as of November 12, 1996 among The Allstate
Corporation and certain affiliates. Incorporated herein by reference
to Exhibit 10.4 to Northbrook Life Insurance Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
E-1