ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
Supplement Dated May 1, 2011
To the following Prospectuses, as supplemented
ALLSTATE PROVIDER PROSPECTUS DATED MAY 1, 2002
SELECTDIRECTIONS PROSPECTUS DATED APRIL 30, 2005
AIM LIFETIME PLUS PROSPECTUS DATED APRIL 30, 2005
AIM LIFETIME PLUS II PROSPECTUS DATED APRIL 30, 2005
CUSTOM PORTFOLIO PROSPECTUS DATED APRIL 30, 2005
The following information supplements the prospectus for your variable
annuity contract issued by Allstate Life Insurance Company of New York.
SUPPLEMENTAL INFORMATION ABOUT
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX
PAGE
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Item 3(c) Risk Factors.......................................................................... 1
Item 11(a) Description of Business............................................................... 9
Item 11(b) Description of Property............................................................... 11
Item 11(c) Legal Proceedings..................................................................... 11
Item 11(e) Financial Statements and Notes to Financial Statements................................ 12
Item 11(f) Selected Financial Data............................................................... 71
Item 11(h) Management's Discussion and Analysis of Financial Condition and Results of Operations. 71
Item 11(i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 106
Item 11(j) Quantitative and Qualitative Disclosures About Market Risk............................ 106
Item 11(k) Directors, Executive Officers, Promoters and Control Persons.......................... 106
Item 11(l) Executive Compensation................................................................ 110
Item 11(m) Security Ownership of Certain Beneficial Owners and Management........................ 133
Item 11(n) Transactions with Related Persons, Promoters and Certain Control Persons.............. 134
Other Information................................................................................. 136
ITEM 3(C). RISK FACTORS
This document contains "forward-looking statements" that anticipate results
based on our estimates, assumptions and plans that are subject to uncertainty.
These statements are made subject to the safe-harbor provisions of the Private
Securities Litigation Reform Act of 1995. We assume no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
These forward-looking statements do not relate strictly to historical or
current facts and may be identified by their use of words like "plans,"
"seeks," "expects," "will," "should," "anticipates," "estimates," "intends,"
"believes," "likely," "targets" and other words with similar meanings. These
statements may address, among other things, our strategy for growth, product
development, investment results, 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.
In addition to the normal risks of business, we are subject to significant
risks and uncertainties, including those listed below, which apply to us as an
insurer and a provider of other financial services. These risks
1
constitute our cautionary statements under the Private Securities Litigation
Reform Act of 1995 and readers should carefully review such cautionary
statements as they identify certain important factors that could cause actual
results to differ materially from those in the forward-looking statements and
historical trends. These cautionary statements are not exclusive and are in
addition to other factors discussed elsewhere in this document, in our filings
with the Securities and Exchange Commission ("SEC") or in materials
incorporated therein by reference.
CHANGES IN UNDERWRITING AND ACTUAL EXPERIENCE COULD MATERIALLY AFFECT
PROFITABILITY AND FINANCIAL CONDITION
Our product pricing includes long-term assumptions regarding investment
returns, mortality, morbidity, persistency and operating costs and expenses of
the business. We establish target returns for each product based upon these
factors and the average amount of capital that we must hold to support in-force
contracts taking into account rating agencies and regulatory requirements. We
monitor and manage our pricing and overall sales mix to achieve target new
business returns on a portfolio basis, which could result in the
discontinuation or de-emphasis of products or distribution relationships and a
decline in sales. Profitability from new business emerges over a period of
years depending on the nature and life of the product and is subject to
variability as actual results may differ from pricing assumptions.
Additionally, many of our products have fixed or guaranteed terms that limit
our ability to increase revenues or reduce benefits, including credited
interest, once the product has been issued.
Our profitability depends on the adequacy of investment spreads, the
management of market and credit risks associated with investments, the
sufficiency of premiums and contract charges to cover mortality and morbidity
benefits, the persistency of policies to ensure recovery of acquisition
expenses, and the management of operating costs and expenses within anticipated
pricing allowances. Legislation and regulation of the insurance marketplace and
products could also affect our profitability and financial condition.
CHANGES IN RESERVE ESTIMATES MAY ADVERSELY AFFECT OUR OPERATING RESULTS
The reserve for life-contingent contract benefits is computed on the basis
of long-term actuarial assumptions of future investment yields, mortality,
morbidity, persistency and expenses. We periodically review the adequacy of
these reserves on an aggregate basis and if future experience differs
significantly from assumptions, adjustments to reserves and amortization of
deferred policy acquisition costs ("DAC") may be required which could have a
material adverse effect on our operating results.
CHANGES IN MARKET INTEREST RATES MAY LEAD TO A SIGNIFICANT DECREASE IN THE
SALES AND PROFITABILITY OF SPREAD-BASED PRODUCTS
Our ability to manage our spread-based products, such as fixed annuities, is
dependent upon maintaining profitable spreads between investment yields and
interest crediting rates. When market interest rates decrease or remain at
relatively low levels, proceeds from investments that have matured or have been
prepaid or sold may be reinvested at lower yields, reducing investment spread.
Lowering interest crediting rates on some products in such an environment can
partially offset decreases in investment yield. However, these changes could be
limited by market conditions, regulatory minimum rates or contractual minimum
rate guarantees on many contracts and may not match the timing or magnitude of
changes in investment yields. Decreases in the interest crediting rates offered
on products could make those products less attractive, leading to lower sales
and/or changes in the level of policy loans, surrenders and withdrawals.
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 to our customers, which can lead to higher surrenders at a
time when our fixed income investment asset values are lower as a result of the
increase in interest rates. This could lead to the sale of fixed income
securities at a loss.
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For certain products, principally fixed annuity and interest-sensitive life
products, the earned rate on assets could lag behind rising market yields. We
may react to market conditions by increasing crediting rates, which could
narrow spreads and reduce profitability. Unanticipated surrenders could result
in accelerated amortization of DAC or affect the recoverability of DAC and
thereby increase expenses and reduce profitability.
CHANGES IN ESTIMATES OF PROFITABILITY ON INTEREST-SENSITIVE LIFE, FIXED
ANNUITIES AND OTHER INVESTMENT PRODUCTS MAY ADVERSELY AFFECT OUR PROFITABILITY
AND FINANCIAL CONDITION THROUGH THE AMORTIZATION OF DAC
DAC related to interest-sensitive life, fixed annuities and other investment
contracts is amortized in proportion to actual historical gross profits and
estimated future gross profits ("EGP") over the estimated lives of the
contracts. The principal assumptions for determining the amount of EGP are
investment returns, including capital gains and losses on assets supporting
contract liabilities, interest crediting rates to contractholders, and the
effects of persistency, mortality, expenses, and hedges if applicable. Updates
to these assumptions (commonly referred to as "DAC unlocking") could adversely
affect our profitability and financial condition.
REDUCING OUR CONCENTRATION IN FIXED ANNUITIES MAY ADVERSELY AFFECT REPORTED
RESULTS
We have been pursuing strategies to reduce our concentration in fixed
annuities. Lower new sales of these products, as well as our ongoing risk
mitigation and return optimization programs, could negatively impact investment
portfolio levels, complicate settlement of expiring contracts including forced
sales of assets with unrealized capital losses, and affect insurance reserves
deficiency testing.
A LOSS OF KEY PRODUCT DISTRIBUTION RELATIONSHIPS COULD MATERIALLY AFFECT SALES,
RESULTS OF OPERATIONS OR CASH FLOWS
Certain products are distributed under agreements with other members of the
financial services industry that are not affiliated with us. Termination of one
or more of these agreements due to, for example, a change in control of one of
these distributors or market conditions that make it difficult to achieve our
target return on certain products, resulting in relatively uncompetitive
pricing, or a decision by us to discontinue selling products through a
distribution channel, could have a detrimental effect on the sales, results of
operations or cash flows if it were to result in an elevated level of
surrenders of in-force contracts sold through terminated distribution
relationships.
CHANGES IN TAX LAWS MAY DECREASE SALES AND PROFITABILITY OF PRODUCTS AND
ADVERSELY AFFECT OUR FINANCIAL CONDITION
Under current federal and state income tax law, certain products we offer,
primarily life insurance and annuities, receive favorable tax treatment. This
favorable treatment may give certain of our products a competitive advantage
over noninsurance products. Congress from time to time considers legislation
that would reduce or eliminate the favorable policyholder tax treatment
currently applicable to life insurance and annuities. Congress also considers
proposals to reduce the taxation of certain products or investments that may
compete with life insurance or annuities. Legislation that increases the
taxation on insurance products or reduces the taxation on competing products
could lessen the advantage or create a disadvantage for certain of our products
making them less competitive. Such proposals, if adopted, could have a material
adverse effect on our profitability and financial condition or ability to sell
such products and could result in the surrender of some existing contracts and
policies. In addition, changes in the federal estate tax laws could negatively
affect the demand for the types of life insurance used in estate planning.
RISKS RELATING TO INVESTMENTS
WE ARE SUBJECT TO MARKET RISK AND DECLINES IN CREDIT QUALITY WHICH MAY
ADVERSELY IMPACT INVESTMENT INCOME, CAUSE ADDITIONAL REALIZED LOSSES, AND CAUSE
INCREASED UNREALIZED LOSSES
Although we continually reevaluate our risk mitigation and return
optimization programs, we remain subject to the risk that we will incur losses
due to adverse changes in interest rates, credit spreads and equity prices.
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Adverse changes to these rates, spreads and prices may occur due to changes in
the liquidity of a market or market segment, insolvency or financial distress
of key market makers or participants, or changes in market perceptions of
credit worthiness and/or risk tolerance.
We are subject to risks associated with potential declines in credit quality
related to specific issuers or specific industries and a general weakening in
the economy, which are typically reflected through credit spreads. Credit
spread is the additional yield on fixed income securities above the risk-free
rate (typically defined as the yield on U.S. Treasury securities) that market
participants require to compensate them for assuming credit, liquidity and/or
prepayment risks. Credit spreads vary (i.e. increase or decrease) in response
to the market's perception of risk and liquidity in a specific issuer or
specific sector and are influenced by the credit ratings, and the reliability
of those ratings, published by external rating agencies. Although we use
derivative financial instruments to manage certain of these risks, the
effectiveness of such instruments is subject to the same risks.
A decline in market interest rates or credit spreads could have an adverse
effect on our investment income as we invest cash in new investments that may
earn less than the portfolio's average yield. In a declining interest rate
environment, borrowers may prepay or redeem securities more quickly than
expected as they seek to refinance at lower rates. A decline could also lead us
to purchase longer-term or riskier assets in order to obtain adequate
investment yields resulting in a duration gap when compared to the duration of
liabilities. An increase in market interest rates or credit spreads could have
an adverse effect on the value of our investment portfolio by decreasing the
fair values of the fixed income securities that comprise a substantial majority
of our investment portfolio. A decline in the quality of our investment
portfolio as a result of adverse economic conditions or otherwise could cause
additional realized losses on securities.
DETERIORATING FINANCIAL PERFORMANCE IMPACTING SECURITIES COLLATERALIZED BY
RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS, COLLATERALIZED CORPORATE LOANS, AND
COMMERCIAL MORTGAGE LOANS MAY LEAD TO WRITE-DOWNS AND IMPACT OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Changes in residential or commercial mortgage delinquencies, loss severities
or recovery rates, declining residential or commercial real estate prices,
corporate loan delinquencies or recovery rates, changes in credit or bond
insurer strength ratings and the quality of service provided by service
providers on securities in our portfolio could lead us to determine that
write-downs are necessary in the future.
CONCENTRATION OF OUR INVESTMENT PORTFOLIO IN ANY PARTICULAR SEGMENT OF THE
ECONOMY MAY HAVE ADVERSE EFFECTS ON OUR OPERATING RESULTS AND FINANCIAL
CONDITION
The concentration of our investment portfolio in any particular industry,
collateral type, group of related industries or geographic sector could have an
adverse effect on our investment portfolio and consequently on our results of
operations and financial condition. Events or developments that have a negative
impact on any particular industry, group of related industries or geographic
region may have a greater adverse effect on the investment portfolio to the
extent that the portfolio is concentrated rather than diversified.
THE DETERMINATION OF THE AMOUNT OF REALIZED CAPITAL LOSSES RECORDED FOR
IMPAIRMENTS OF OUR INVESTMENTS IS HIGHLY SUBJECTIVE AND COULD MATERIALLY IMPACT
OUR OPERATING RESULTS AND FINANCIAL CONDITION
The determination of the amount of realized capital losses recorded for
impairments vary by investment type and is based upon our periodic evaluation
and assessment of known and inherent risks associated with the respective asset
class. Such evaluations and assessments are revised as conditions change and
new information becomes available. We update our evaluations regularly and
reflect changes in other-than-temporary impairments in our results of
operations. The assessment of whether other-than-temporary impairments have
occurred is based on our case-by-case evaluation of the underlying reasons for
the decline in fair value. There can be no assurance that we have accurately
assessed the level of or amounts recorded for other-than-temporary impairments
taken in
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our financial statements. Furthermore, historical trends may not be indicative
of future impairments and additional impairments may need to be recorded in the
future.
THE DETERMINATION OF THE FAIR VALUE OF OUR FIXED INCOME AND EQUITY SECURITIES
IS HIGHLY SUBJECTIVE AND COULD MATERIALLY IMPACT OUR OPERATING RESULTS AND
FINANCIAL CONDITION
In determining fair values we generally utilize market transaction data for
the same or similar instruments. The degree of management judgment involved in
determining fair values is inversely related to the availability of market
observable information. The fair value of assets may differ from the actual
amount received upon sale of an asset in an orderly transaction between market
participants at the measurement date. Moreover, the use of different valuation
assumptions may have a material effect on the assets' fair values. The
difference between amortized cost or cost and fair value, net of deferred
income taxes, certain DAC, certain deferred sales inducement costs ("DSI"), and
certain reserves for life-contingent contract benefits, is reflected as a
component of accumulated other comprehensive income in shareholder's equity.
Changing market conditions could materially effect the determination of the
fair value of securities and unrealized net capital gains and losses could vary
significantly. Determining fair value is highly subjective and could materially
impact our operating results and financial condition.
RISKS RELATING TO THE INSURANCE INDUSTRY
OUR FUTURE RESULTS ARE DEPENDENT IN PART ON OUR ABILITY TO SUCCESSFULLY OPERATE
IN AN INSURANCE INDUSTRY THAT IS HIGHLY COMPETITIVE
The insurance industry is highly competitive. Our competitors include other
insurers and, because some of our products include a savings or investment
component, securities firms, investment advisers, mutual funds, banks and other
financial institutions. Many of our competitors have well-established national
reputations and market similar products. Because of the competitive nature of
the insurance industry, including competition for producers such as exclusive
and independent agents, there can be no assurance that we will continue to
effectively compete with our industry rivals, or that competitive pressures
will not have a material adverse effect on our business, operating results or
financial condition. Furthermore, certain competitors operate using a mutual
insurance company structure and therefore may have dissimilar profitability and
return targets. Our ability to successfully operate may also be impaired if we
are not effective in filling critical leadership positions, in developing the
talent and skills of our human resources, in assimilating new executive talent
into our organization, or in deploying human resource talent consistently with
our business goals.
DIFFICULT CONDITIONS IN THE ECONOMY GENERALLY COULD ADVERSELY AFFECT OUR
BUSINESS AND OPERATING RESULTS
As with most businesses, we believe difficult conditions in the economy,
such as significant negative macroeconomic trends, including relatively high
and sustained unemployment, reduced consumer spending, lower home prices, and
substantial increases in delinquencies on consumer debt, including defaults on
home mortgages, and the relatively low availability of credit could have an
adverse effect on our business and operating results.
General economic conditions could adversely affect us in the form of
consumer behavior and pressure investment results. Consumer behavior changes
could include decreased demand for our products. In addition, holders of some
of our interest-sensitive life insurance and annuity products may engage in an
elevated level of discretionary withdrawals of contractholder funds. Our
investment results could be adversely affected as deteriorating financial and
business conditions affect the issuers of the securities in our investment
portfolio.
THERE CAN BE NO ASSURANCE THAT ACTIONS OF THE U.S. FEDERAL GOVERNMENT, FEDERAL
RESERVE AND OTHER GOVERNMENTAL AND REGULATORY BODIES FOR THE PURPOSE OF
STABILIZING THE FINANCIAL MARKETS AND STIMULATING THE ECONOMY WILL ACHIEVE THE
INTENDED EFFECT
In response to the financial crises affecting the banking system, the
financial markets and the broader economy in recent years, the U.S. federal
government, the Federal Reserve and other governmental and
5
regulatory bodies have taken actions such as purchasing mortgage-backed and
other securities from financial institutions, investing directly in banks,
thrifts and bank and savings and loan holding companies and increasing federal
spending to stimulate the economy. There can be no assurance as to the long
term impact such actions will have on the financial markets or on economic
conditions, including potential inflationary affects. Continued volatility and
any further economic deterioration could materially and adversely affect our
business, financial
condition and results of operations.
LOSSES FROM LITIGATION MAY BE MATERIAL TO OUR OPERATING RESULTS OR CASH FLOWS
AND FINANCIAL CONDITION
As is typical for a large company, we are involved in various legal actions,
including class action litigation challenging a range of company practices and
coverage provided by our insurance products. In the event of an unfavorable
outcome in one or more of these matters, the ultimate liability may be in
excess of amounts currently reserved and may be material to our operating
results or cash flows for a particular quarter or annual period and to our
financial condition.
WE ARE SUBJECT TO EXTENSIVE REGULATION AND POTENTIAL FURTHER RESTRICTIVE
REGULATION MAY INCREASE OUR OPERATING COSTS AND LIMIT OUR GROWTH
As an insurance company, we are subject to extensive laws and regulations.
These laws and regulations are complex and subject to change. Moreover, they
are administered and enforced by a number of different governmental
authorities, including state insurance regulators, state securities
administrators, the SEC, Financial Industry Regulatory Authority, the U.S.
Department of Justice, and state attorneys general, each of which exercises a
degree of interpretive latitude. Consequently, we are subject to the risk that
compliance with any particular regulator's or enforcement authority's
interpretation of a legal issue may not result in compliance with another's
interpretation of the same issue, particularly when compliance is judged in
hindsight. In addition, there is risk that any particular regulator's or
enforcement authority's interpretation of a legal issue may change over time to
our detriment, or that changes in the overall legal environment may, even
absent any particular regulator's or enforcement authority's interpretation of
a legal issue changing, cause us to change our views regarding the actions we
need to take from a legal risk management perspective, thus necessitating
changes to our practices that may, in some cases, limit our ability to grow and
improve the profitability of our business. Furthermore, in some cases, these
laws and regulations are designed to protect or benefit the interests of a
specific constituency rather than a range of constituencies. For example, state
insurance laws and regulations are generally intended to protect or benefit
purchasers or users of insurance products. In many respects, these laws and
regulations limit our ability to grow and improve the profitability of our
business.
In recent years, the state insurance regulatory framework has come under
public scrutiny and members of Congress have discussed proposals to provide for
federal chartering of insurance companies. We can make no assurances regarding
the potential impact of state or federal measures that may change the nature or
scope of insurance regulation.
REGULATORY REFORMS, AND THE MORE STRINGENT APPLICATION OF EXISTING REGULATIONS,
MAY MAKE IT MORE EXPENSIVE FOR US TO CONDUCT OUR BUSINESS
The federal government has enacted comprehensive regulatory reforms for
financial services entities. As part of a larger effort to strengthen the
regulation of the financial services market, certain reforms are applicable to
the insurance industry, including the establishment of a Federal Insurance
Office within the Department of Treasury.
These regulatory reforms and any additional legislation or regulatory
requirements imposed upon us in connection with the federal government's
regulatory reform of the financial services industry, and any more stringent
enforcement of existing regulations by federal authorities, may make it more
expensive for us to conduct our business.
6
REINSURANCE MAY BE UNAVAILABLE AT CURRENT LEVELS AND PRICES, WHICH MAY LIMIT
OUR ABILITY TO WRITE NEW BUSINESS
Market conditions beyond our control impact the availability and cost of the
reinsurance we purchase. No assurances can be made that reinsurance will remain
continuously available to us to the same extent and on the same terms and rates
as is currently available. If we were unable to maintain our current level of
reinsurance or purchase new reinsurance protection in amounts that we consider
sufficient and at prices that we consider acceptable, we would have to either
accept an increase in our exposure risk, reduce our insurance writings, or
develop or seek other alternatives.
REINSURANCE SUBJECTS US TO THE CREDIT RISK OF OUR REINSURERS AND MAY NOT BE
ADEQUATE TO PROTECT US AGAINST LOSSES ARISING FROM CEDED INSURANCE, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS AND FINANCIAL CONDITION
The collectability of reinsurance recoverables is subject to uncertainty
arising from a number of factors, including changes in market conditions,
whether insured losses meet the qualifying conditions of the reinsurance
contract and whether reinsurers, or their affiliates, have the financial
capacity and willingness to make payments under the terms of a reinsurance
treaty or contract. Our inability to collect a material recovery from a
reinsurer could have a material adverse effect on our operating results and
financial condition.
A LARGE SCALE PANDEMIC, THE CONTINUED THREAT OF TERRORISM OR ONGOING MILITARY
ACTIONS MAY HAVE AN ADVERSE EFFECT ON THE LEVEL OF CLAIM LOSSES WE INCUR, THE
VALUE OF OUR INVESTMENT PORTFOLIO, OUR COMPETITIVE POSITION, MARKETABILITY OF
PRODUCT OFFERINGS, LIQUIDITY AND OPERATING RESULTS
A large scale pandemic, the continued threat of terrorism, within the United
States and abroad, or ongoing military and other actions and heightened
security measures in response to these types of threats, may cause significant
volatility and losses in our investment portfolio from declines in the equity
markets and from interest rate changes in the United States, Europe and
elsewhere, and result in loss of life, property damage, disruptions to commerce
and reduced economic activity. Some of the assets in our investment portfolio
may be adversely affected by declines in the equity markets and reduced
economic activity caused by a large scale pandemic or the continued threat of
terrorism. Additionally, a large scale pandemic or terrorist act could have a
material adverse effect on the sales, profitability, competitiveness,
marketability of product offerings, liquidity, and operating results.
A DOWNGRADE IN OUR FINANCIAL STRENGTH RATINGS MAY HAVE AN ADVERSE EFFECT ON OUR
COMPETITIVE POSITION, THE MARKETABILITY OF OUR PRODUCT OFFERINGS, AND OUR
LIQUIDITY, OPERATING RESULTS AND FINANCIAL CONDITION
Financial strength ratings are important factors in establishing the
competitive position of insurance companies and generally have an effect on an
insurance company's business. On an ongoing basis, rating agencies review the
financial performance and condition of insurers and could downgrade or change
the outlook on an insurer's ratings due to, for example, a change in an
insurer's statutory capital; a change in a rating agency's determination of the
amount of risk-adjusted capital required to maintain a particular rating; an
increase in the perceived risk of an insurer's investment portfolio; a reduced
confidence in management or a host of other considerations that may or may not
be under the insurer's control. Our insurance financial strength ratings from
A.M. Best, Standard & Poor's and Moody's are, subject to continuous review, and
the retention of current ratings cannot be assured. A downgrade in any of these
ratings could have a material adverse effect on our sales, our competitiveness,
the marketability of our product offerings, and our liquidity, operating
results and financial condition.
ADVERSE CAPITAL AND CREDIT MARKET CONDITIONS MAY SIGNIFICANTLY AFFECT OUR
ABILITY TO MEET LIQUIDITY NEEDS OR OUR ABILITY TO OBTAIN CREDIT ON ACCEPTABLE
TERMS
In periods of extreme volatility and disruption in the capital and credit
markets, liquidity and credit capacity may be severely restricted. In such
circumstances, our ability to obtain capital to fund operating expenses may be
7
limited, and the cost of any such capital may be significant. Our access to
additional financing will depend on a variety of factors such as market
conditions, the general availability of credit, the overall availability of
credit to our industry, our credit ratings and credit capacity, as well as
lenders' perception of our long- or short-term financial prospects. Similarly,
our access to funds may be impaired if regulatory authorities or rating
agencies take negative actions against us. If a combination of these factors
were to occur, our internal sources of liquidity may prove to be insufficient
and in such case, we may not be able to successfully obtain additional
financing on favorable terms.
CHANGES IN ACCOUNTING STANDARDS ISSUED BY THE FINANCIAL ACCOUNTING STANDARDS
BOARD ("FASB") OR OTHER STANDARD-SETTING BODIES MAY ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our financial statements are subject to the application of generally
accepted accounting principles, which are periodically revised, interpreted
and/or expanded. Accordingly, we are required to adopt new guidance or
interpretations, or could be subject to existing guidance as we enter into new
transactions, which may have a material adverse effect on our results of
operations and financial condition that is either unexpected or has a greater
impact than expected. For a description of changes in accounting standards that
are currently pending and, if known, our estimates of their expected impact,
see Note 2 of the financial statements.
THE CHANGE IN OUR UNRECOGNIZED TAX BENEFIT DURING THE NEXT 12 MONTHS IS SUBJECT
TO UNCERTAINTY
We have disclosed our estimate of net unrecognized tax benefits and the
reasonably possible increase or decrease in its balance during the next 12
months in Note 12 of the financial statements. However, actual results may
differ from our estimate for reasons such as changes in our position on
specific issues, developments with respect to the governments' interpretations
of income tax laws or changes in judgment resulting from new information
obtained in audits or the appeals process.
THE OCCURRENCE OF EVENTS UNANTICIPATED IN OUR DISASTER RECOVERY SYSTEMS AND
MANAGEMENT CONTINUITY PLANNING OR A SUPPORT FAILURE FROM EXTERNAL PROVIDERS
DURING A DISASTER COULD IMPAIR OUR ABILITY TO CONDUCT BUSINESS EFFECTIVELY
The occurrence of a disaster such as a natural catastrophe, an industrial
accident, a terrorist attack or war, events unanticipated in our disaster
recovery systems, or a support failure from external providers, could have an
adverse effect on our ability to conduct business and on our results of
operations and financial condition, particularly if those events affect our
computer-based data processing, transmission, storage, and retrieval systems.
In the event that a significant number of our managers could be unavailable in
the event of a disaster, our ability to effectively conduct our business could
be severely compromised.
LOSS OF KEY VENDOR RELATIONSHIPS OR FAILURE OF A VENDOR TO PROTECT PERSONAL
INFORMATION OF OUR CUSTOMERS, CLAIMANTS OR EMPLOYEES COULD AFFECT OUR OPERATIONS
We rely on services and products provided by many vendors in the United
States and abroad. These include, for example, vendors of computer hardware and
software. In the event that one or more of our vendors suffers a bankruptcy or
otherwise becomes unable to continue to provide products or services, or fails
to protect personal information of our customers, claimants or employees, we
may suffer operational impairments and financial losses.
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ITEM 11(A).DESCRIPTION OF BUSINESS
Allstate Life Insurance Company of New York ("Allstate Life of New York" or
"ALNY") was incorporated in 1967 as a stock life insurance company under the
laws of the State of New York. In 1984, Allstate Life of New York was purchased
by Allstate Life Insurance Company ("ALIC"). Allstate Life of New York is a
wholly owned subsidiary of ALIC, a stock life insurance company incorporated
under the laws of the State of Illinois. ALIC is a wholly owned subsidiary of
Allstate Insurance Company ("AIC"), a stock property-liability insurance
company organized under the laws of the State of Illinois. All of the
outstanding capital stock of AIC is owned by Allstate Insurance Holdings, LLC,
which is wholly owned by The Allstate Corporation (the "Corporation" or
"Allstate"), a publicly owned holding company incorporated under the laws of
the State of Delaware. The Allstate Corporation is the largest publicly held
personal lines insurer in the United States. Widely known through the "You're
In Good Hands With Allstate(R)" slogan, Allstate is reinventing protection and
retirement to help individuals in approximately 16 million households protect
what they have today and better prepare for tomorrow. Customers can access
Allstate products and services such as auto insurance and homeowners insurance
through more than 13,000 exclusive Allstate agencies and financial
representatives in the United States and Canada. Allstate is the 2/nd/ largest
personal property and casualty insurer in the United States on the basis of
2009 statutory direct premiums earned. In addition, according to A.M. Best, it
is the nation's 16/th/ largest issuer of life insurance business on the basis
of 2009 ordinary life insurance in force and 21/st/ largest on the basis of
2009 statutory admitted assets.
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In our reports, we occasionally refer to statutory financial information.
All domestic United States insurance companies are required to prepare
statutory-basis financial statements. As a result, industry data is available
that enables comparisons between insurance companies, including competitors
that are not subject to the requirement to prepare financial statements in
conformity with accounting principles generally accepted in the United States
of America ("GAAP"). We frequently use industry publications containing
statutory financial information to assess our competitive position.
We provide life insurance, retirement and investment products, and voluntary
accident and health insurance products. Our principal products are
interest-sensitive, traditional and variable life insurance; fixed annuities,
including deferred and immediate; and voluntary accident and health insurance.
We sell products through multiple intermediary distribution channels,
including Allstate exclusive agencies and exclusive financial specialists,
independent agents (including workplace enrolling agents) and specialized
structured settlement brokers. Through March 31, 2010, we also sold products
through banks and broker-dealers. Although we continue to service in force
contracts sold through these distribution channels, we no longer solicit new
sales through direct relationships with banks or broker-dealers.
We compete on a wide variety of factors, including the scope of our
distribution systems, the types of our product offerings, the recognition of
our brand, our financial strength and ratings, our differentiated product
features and prices, and the level of customer service that we provide.
The market for life insurance, retirement and investment products continues
to be highly fragmented and competitive. As of December 31, 2010, there were
approximately 470 groups of life insurance companies in the United States, most
of which offered one or more similar products. In addition, because many of
these products include a savings or investment component, our competition
includes domestic and foreign securities firms, investment advisors, mutual
funds, banks and other financial institutions. Competitive pressure continues
to grow due to several factors, including cross marketing alliances between
unaffiliated businesses, as well as consolidation activity in the financial
services industry.
Allstate Life of New York is subject to extensive regulation, primarily, but
not exclusively, from the New York State Insurance Department. The method,
extent and substance of such regulation generally has its source in statutes
that establish standards and requirements for conducting the business of
insurance and that delegate regulatory authority to the New York State
Insurance Department. In general, such regulation is intended for the
protection of those who purchase or use insurance products. These rules have a
substantial effect on our business and relate to a wide variety of matters,
including insurance company licensing and examination, agent licensing, price
setting, trade practices, policy forms, statutory accounting methods, corporate
governance, the nature and amount of investments, claims practices,
participation in guaranty funds, reserve adequacy, insurer solvency,
transactions with affiliates, the payment of dividends, and underwriting
standards. For a discussion of statutory financial information, see Note 13 of
the financial statements. For a discussion of regulatory contingencies, see
Note 11 of the financial statements. Notes 11 and 13 are incorporated in this,
Item 11(a) by reference.
In recent years, the state insurance regulatory framework has come under
increased federal scrutiny. Legislation that would provide for increased
federal regulation of insurance, including the federal chartering of insurance
companies, has been proposed. Moreover, as part of an effort to strengthen the
regulation of the financial services market, the Dodd-Frank Wall Street Reform
and Consumer Protection Act was enacted. Hundreds of regulations must be
promulgated and implemented pursuant to this new law, and we cannot predict
what the final regulations will require, but do not expect a material impact on
Allstate Life of New York's operations. The new law also creates the Federal
Office of Insurance ("FIO") within the Treasury Department. The FIO will
monitor the insurance industry, provide advice to the new Financial Stability
Oversight Council, represent the U.S. on international insurance matters and
study the current regulatory system and submit a report to Congress in 2012. In
addition, state legislators and insurance regulators continue to examine the
appropriate nature and scope of state insurance regulation. We cannot predict
whether any specific state or federal measures
10
will be adopted to change the nature or scope of the regulation of insurance or
what effect any such measures would have on Allstate Life of New York.
ITEM 11(B).DESCRIPTION OF PROPERTY
Allstate Life of New York occupies office space in Hauppauge, New York and
Northbrook, Illinois that is owned or leased by Allstate Insurance Company.
Expenses associated with these facilities are allocated to us on both a direct
and indirect basis, depending on the nature and use. We believe that these
facilities are suitable and adequate for our operations.
ITEM 11(C).LEGAL PROCEEDINGS
Information required for Item 11(c) is incorporated by reference to the
discussion under the heading "Regulation and Compliance" and under the heading
"Legal and regulatory proceedings and inquiries" in Note 11 of the financial
statements.
11
ITEM 11(E).FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) -----------------------------
2010 2009 2008
-------- -------- ---------
REVENUES
Premiums (net of reinsurance ceded of $30,578, $29,907 and $18,215)............ $ 45,087 $ 47,659 $ 59,248
Contract charges (net of reinsurance ceded of $29,092, $25,999 and
$18,780)..................................................................... 52,063 51,834 61,108
Net investment income.......................................................... 368,695 372,395 402,931
Realized capital gains and losses:
Total other-than-temporary impairment losses................................ (45,075) (52,207) (117,790)
Portion of loss recognized in other comprehensive income.................... 2,479 1,131 --
-------- -------- ---------
Net other-than-temporary impairment losses recognized in
earnings.............................................................. (42,596) (51,076) (117,790)
Sales and other realized capital gains and losses........................... (3,253) 196,544 40,585
-------- -------- ---------
Total realized capital gains and losses................................. (45,849) 145,468 (77,205)
-------- -------- ---------
419,996 617,356 446,082
COSTS AND EXPENSES
Contract benefits (net of reinsurance ceded of $25,524, $5,510 and
$40,307)..................................................................... 182,786 170,075 184,192
Interest credited to contractholder funds (net of reinsurance ceded of $8,457,
$8,757 and $10,485).......................................................... 168,085 201,549 191,208
Amortization of deferred policy acquisition costs.............................. 16,437 148,450 17,778
Operating costs and expenses................................................... 36,540 41,183 40,869
-------- -------- ---------
403,848 561,257 434,047
Loss on disposition of operations.............................................. -- -- (358)
-------- -------- ---------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE............................... 16,148 56,099 11,677
Income tax expense............................................................. 5,851 19,729 4,005
-------- -------- ---------
NET INCOME..................................................................... 10,297 36,370 7,672
-------- -------- ---------
OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX
Change in unrealized net capital gains and losses.............................. 109,160 153,340 (174,102)
-------- -------- ---------
COMPREHENSIVE INCOME (LOSS).................................................... $119,457 $189,710 $(166,430)
======== ======== =========
See notes to financial statements.
12
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
($ IN THOUSANDS, EXCEPT PAR VALUE DATA) ----------------------
2010 2009
---------- ----------
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $6,000,293 and
$6,073,235).................................................................... $6,300,109 $6,073,765
Mortgage loans................................................................... 501,476 543,007
Equity securities, at fair value (cost $99,348 and $100,168)..................... 124,559 123,311
Limited partnership interests.................................................... 4,814 --
Short-term, at fair value (amortized cost $198,601 and $348,456)................. 198,601 348,453
Policy loans..................................................................... 41,862 40,569
Other............................................................................ 18,776 10,292
---------- ----------
Total investments............................................................ 7,190,197 7,139,397
Cash................................................................................ 6,534 8,977
Deferred policy acquisition costs................................................... 169,937 213,325
Reinsurance recoverables............................................................ 309,498 327,173
Accrued investment income........................................................... 69,673 69,557
Current income taxes receivable..................................................... 14,387 18,032
Other assets........................................................................ 15,873 24,686
Separate Accounts................................................................... 577,756 587,044
---------- ----------
TOTAL ASSETS................................................................. $8,353,855 $8,388,191
========== ==========
LIABILITIES
Contractholder funds................................................................ $4,688,791 $4,990,879
Reserve for life-contingent contract benefits....................................... 1,990,214 1,875,579
Deferred income taxes............................................................... 102,308 37,887
Other liabilities and accrued expenses.............................................. 158,069 180,061
Payable to affiliates, net.......................................................... 6,709 6,591
Reinsurance payable to parent....................................................... 3,667 3,266
Separate Accounts................................................................... 577,756 587,044
---------- ----------
TOTAL LIABILITIES............................................................ 7,527,514 7,681,307
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 11)
SHAREHOLDER'S EQUITY
Common stock, $25 par value, 100 thousand shares authorized, issued and
outstanding....................................................................... 2,500 2,500
Additional capital paid-in.......................................................... 140,529 140,529
Retained income..................................................................... 550,102 539,805
Accumulated other comprehensive income:
Unrealized net capital gains and losses:
Unrealized net capital gains and losses on fixed income securities with
OTTI....................................................................... 1,488 (2,452)
Other unrealized net capital gains and losses................................ 209,780 18,038
Unrealized adjustment to DAC, DSI and insurance reserves..................... (78,058) 8,464
---------- ----------
Total unrealized net capital gains and losses............................. 133,210 24,050
---------- ----------
Total accumulated other comprehensive income.......................... 133,210 24,050
---------- ----------
TOTAL SHAREHOLDER'S EQUITY............................................ 826,341 706,884
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................ $8,353,855 $8,388,191
========== ==========
See notes to financial statements.
13
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) -----------------------------
2010 2009 2008
-------- --------- ---------
COMMON STOCK............................................. $ 2,500 $ 2,500 $ 2,500
-------- --------- ---------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year............................... 140,529 140,000 140,000
Forgiveness of payable due to an affiliate (see Note 4).. -- 529 --
-------- --------- ---------
Balance, end of year..................................... 140,529 140,529 140,000
-------- --------- ---------
RETAINED INCOME
Balance, beginning of year............................... 539,805 482,982 473,184
Net income............................................... 10,297 36,370 7,672
Cumulative effect of change in accounting principle...... -- 20,376 --
Forgiveness of payable due to an affiliate (see Note 4).. -- 77 --
Gain on purchase of investments from parent (see Note 4). -- -- 2,126
-------- --------- ---------
Balance, end of year..................................... 550,102 539,805 482,982
-------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year............................... 24,050 (108,914) 65,188
Cumulative effect of change in accounting principle...... -- (20,376) --
Change in unrealized net capital gains and losses........ 109,160 153,340 (174,102)
-------- --------- ---------
Balance, end of year..................................... 133,210 24,050 (108,914)
-------- --------- ---------
TOTAL SHAREHOLDER'S EQUITY............................... $826,341 $ 706,884 $ 516,568
======== ========= =========
See notes to financial statements.
14
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) -----------------------------------
2010 2009 2008
----------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 10,297 $ 36,370 $ 7,672
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and other non-cash items.............................. (35,349) (50,399) (80,807)
Realized capital gains and losses.................................. 45,849 (145,468) 77,205
Loss on disposition of operations.................................. -- -- 358
Interest credited to contractholder funds.......................... 168,085 201,549 191,208
Changes in:
Policy benefit and other insurance reserves.................... (18,993) (20,919) (7,034)
Deferred policy acquisition costs.............................. (8,267) 115,890 (33,612)
Income taxes................................................... 9,288 (10,125) 383
Other operating assets and liabilities......................... (3,523) (21,232) (16,998)
----------- ----------- ---------
Net cash provided by operating activities................... 167,387 105,666 138,375
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales
Fixed income securities............................................ 1,032,677 1,850,519 640,634
Equity securities.................................................. 69,836 204 --
Limited partnership interests...................................... 6 -- --
Mortgage loans..................................................... 7,480 12,580 12,175
Investment collections
Fixed income securities............................................ 327,791 309,185 162,268
Mortgage loans..................................................... 57,603 141,726 52,030
Investment purchases
Fixed income securities............................................ (1,272,428) (2,250,840) (668,526)
Equity securities.................................................. (50,006) (100,215) --
Limited partnership interests...................................... (4,965) -- --
Mortgage loans..................................................... (45,491) (10,000) (41,141)
Change in short-term investments, net................................. 129,007 95,366 (421,483)
Change in policy loans and other investments, net..................... (33,138) 21,425 7,585
Disposition of operations............................................. -- -- (2,500)
----------- ----------- ---------
Net cash provided by (used in) investing activities......... 218,372 69,950 (258,958)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits.......................................... 158,042 296,991 615,564
Contractholder fund withdrawals....................................... (546,244) (468,595) (497,372)
----------- ----------- ---------
Net cash (used in) provided by financing activities......... (388,202) (171,604) 118,192
----------- ----------- ---------
NET (DECREASE) INCREASE IN CASH....................................... (2,443) 4,012 (2,391)
CASH AT BEGINNING OF YEAR............................................. 8,977 4,965 7,356
----------- ----------- ---------
CASH AT END OF YEAR................................................... $ 6,534 $ 8,977 $ 4,965
=========== =========== =========
See notes to financial statements
15
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
BASIS OF PRESENTATION
The accompanying 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"). All of the outstanding common stock of AIC is owned
by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate
Corporation (the "Corporation"). These financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
NATURE OF OPERATIONS
The Company sells life insurance, retirement and investment products and
voluntary accident and health insurance to customers in the State of New York.
The principal products are interest-sensitive, traditional and variable life
insurance; fixed annuities including deferred and immediate; and voluntary
accident and health insurance. The following table summarizes premiums and
contract charges by product.
2010 2009 2008
($ IN THOUSANDS) ------- ------- --------
PREMIUMS
Traditional life insurance..................... $20,215 $20,159 $ 29,597
Immediate annuities with life contingencies.... 14,610 17,934 21,451
Accident and health insurance.................. 10,262 9,566 8,200
------- ------- --------
TOTAL PREMIUMS.............................. 45,087 47,659 59,248
CONTRACT CHARGES
Interest-sensitive life insurance.............. 48,453 47,071 54,972
Fixed annuities................................ 3,610 4,763 6,136
------- ------- --------
TOTAL CONTRACT CHARGES...................... 52,063 51,834 61,108
------- ------- --------
TOTAL PREMIUMS AND CONTRACT CHARGES..... $97,150 $99,493 $120,356
======= ======= ========
The Company distributes its products to individuals through multiple
distribution channels, including Allstate exclusive agencies, which include
exclusive financial specialists, independent agents (including workplace
enrolling agents) and specialized structured settlement brokers.
The Company has exposure to market risk as a result of its investment
portfolio. Market risk is the risk that the Company will incur realized and
unrealized net capital losses due to adverse changes in interest rates, credit
spreads or equity prices. Interest rate risk is the risk that the Company will
incur a loss due to adverse changes in interest rates relative to the interest
rate characteristics of its interest bearing assets and liabilities. This risk
arises from many of the Company's primary activities, as it invests substantial
funds in interest-sensitive assets and issues interest-sensitive liabilities.
Interest rate risk includes risks related to changes in U.S. Treasury yields
and other key risk-free reference yields. Credit spread risk is the risk that
the Company will incur a loss due to adverse changes in credit spreads. This
risk arises from many of the Company's primary activities, as the Company
invests substantial funds in spread-sensitive fixed income assets. Equity price
risk is the risk that the Company will incur losses due to adverse changes in
the general levels of the equity markets.
16
The Company monitors economic and regulatory developments that have the
potential to impact its business. The ability of banks to affiliate with
insurers may have a material adverse effect on all of the Company's product
lines by substantially increasing the number, size and financial strength of
potential competitors. Furthermore, federal and state laws and regulations
affect the taxation of insurance companies and life insurance and annuity
products. Congress from time to time considers legislation that would reduce or
eliminate the favorable policyholder tax treatment currently applicable to life
insurance and annuities. Congress also considers proposals to reduce the
taxation of certain products or investments that may compete with life
insurance or annuities. Legislation that increases the taxation on insurance
products or reduces the taxation on competing products could lessen the
advantage or create a disadvantage for certain of the Company's products making
them less competitive. Such proposals, if adopted, could have an adverse effect
on the Company's financial position or ability to sell such products and could
result in the surrender of some existing contracts and policies. In addition,
changes in the federal estate tax laws could negatively affect the demand for
the types of life insurance used in estate planning.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds, residential mortgage-backed
securities ("RMBS"), commercial mortgage-backed securities ("CMBS"),
asset-backed securities ("ABS") and redeemable preferred stocks. Fixed income
securities, which may be sold prior to their contractual maturity, are
designated as available for sale and are carried at fair value. The difference
between amortized cost and fair value, net of deferred income taxes, certain
deferred policy acquisition costs ("DAC"), certain deferred sales inducement
costs ("DSI") and certain reserves for life-contingent contract benefits, is
reflected as a component of accumulated other comprehensive income. Cash
received from calls, principal payments and make-whole payments is reflected as
a component of proceeds from sales and cash received from maturities and
pay-downs is reflected as a component of investment collections within the
Statements of Cash Flows.
Equity securities include exchange traded funds. Equity securities are
designated as available for sale and are carried at fair value. The difference
between cost and fair value, net of deferred income taxes, is reflected as a
component of accumulated other comprehensive income.
Mortgage loans are carried at outstanding principal balances, net of
unamortized premium or discount and valuation allowances. Valuation allowances
are established for impaired loans when it is probable that contractual
principal and interest will not be collected. Valuation allowances for impaired
loans reduce the carrying value to the fair value of the collateral less costs
to sell or the present value of the loan's expected future repayment cash flows
discounted at the loan's original effective interest rate.
Investments in limited partnership interests, including interests in private
equity/debt funds, where the Company's interest is so minor that it exercises
virtually no influence over operating and financial policies, are accounted for
in accordance with the cost method of accounting; otherwise, investments in
limited partnership interests are accounted for in accordance with the equity
method of accounting.
Short-term investments, including money market funds, commercial paper and
other short-term investments, are carried at fair value. Policy loans are
carried at the respective unpaid principle balances. Other investments consist
of notes due from related party and derivatives. Notes due from related party
are carried at outstanding principal balances. Derivatives are carried at fair
value.
Investment income consists primarily of interest, dividends, income from
certain limited partnership interests and income from certain derivative
transactions. Interest is recognized on an accrual basis using the effective
yield method and dividends are recorded at the ex-dividend date. Interest
income for certain RMBS, CMBS and ABS is determined considering estimated
principal repayments obtained from third party data sources
17
and internal estimates. Actual prepayment experience is periodically reviewed
and effective yields are recalculated when differences arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. For beneficial interests in securitized financial assets
not of high credit quality, the effective yield is recalculated on a
prospective basis. For all other RMBS, CMBS and ABS, the effective yield is
recalculated on a retrospective basis. For other-than-temporarily impaired
fixed income securities, the effective yield method utilizes the difference
between the amortized cost basis at impairment and the cash flows expected to
be collected. Accrual of income is suspended for other-than-temporarily
impaired fixed income securities when the timing and amount of cash flows
expected to be received is not reasonably estimable. Accrual of income is
suspended for mortgage loans that are in default or when full and timely
collection of principal and interest payments is not probable. Cash receipts on
investments on nonaccrual status are generally recorded as a reduction of
carrying value. Income from investments in limited partnership interests
accounted for utilizing the cost method of accounting is recognized upon
receipt of amounts distributed by the partnerships as investment income.
Realized capital gains and losses include gains and losses on investment
sales, write-downs in value due to other-than-temporary declines in fair value,
adjustments to valuation allowances on mortgage loans, periodic changes in the
fair value and settlements of certain derivatives including hedge
ineffectiveness, and income from limited partnership interests accounted for
utilizing the equity method of accounting ("EMA limited partnerships").
Realized capital gains and losses on investment sales include calls and
prepayments and are determined on a specific identification basis. Income from
EMA limited partnerships is recognized based on the financial results of the
partnership and the Company's proportionate investment interest, and is
recognized on a delay due to the availability of the related financial
statements. Income recognition on private equity/debt funds is generally on a
three month delay.
The Company recognizes other-than-temporary impairment losses on fixed
income securities in earnings when a security's fair value is less than its
amortized cost and the Company has made the decision to sell or it is more
likely than not the Company will be required to sell the fixed income security
before recovery of its amortized cost basis. Additionally, if the Company does
not expect to receive cash flows sufficient to recover the entire amortized
cost basis of a fixed income security, the credit loss component of the
impairment is recorded in earnings, with the remaining amount of the unrealized
loss related to other factors recognized in other comprehensive income ("OCI").
The Company recognizes other-than-temporary impairment losses on equity
securities in earnings when the decline in fair value is considered other than
temporary including when the Company does not have the intent and ability to
hold the equity security for a period of time sufficient to recover its cost
basis.
DERIVATIVE AND EMBEDDED DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments include interest rate swaps and caps,
foreign currency swaps, and a reinvestment related risk transfer reinsurance
agreement with ALIC that meets the accounting definition of a derivative (see
Note 4). Derivatives required to be separated from the host instrument and
accounted for as derivative financial instruments ("subject to bifurcation")
are embedded in certain fixed income securities and reinsured variable annuity
contracts (see Note 7).
All derivatives are accounted for on a fair value basis and reported as
other investments, other assets, other liabilities and accrued expenses or
contractholder funds. Embedded derivative instruments subject to bifurcation
are also accounted for on a fair value basis and are reported together with the
host contract. The change in fair value of derivatives embedded in certain
fixed income securities and subject to bifurcation is reported in realized
capital gains and losses. The change in fair value of derivatives embedded in
annuity product contracts and subject to bifurcation is reported in contract
benefits. Cash flows from embedded derivatives requiring bifurcation and
derivatives receiving hedge accounting are reported consistently with the host
contracts and hedged risks, respectively, within the Statements of Cash Flows.
Cash flows from other derivatives are reported in cash flows from investing
activities within the Statements of Cash Flows.
18
When derivatives meet specific criteria, they may be designated as
accounting hedges and accounted for as fair value, cash flow, foreign currency
fair value or foreign currency cash flow hedges. The hedged item may be either
all or a specific portion of a recognized asset, liability or an unrecognized
firm commitment attributable to a particular risk for fair value hedges. At the
inception of the hedge, the Company formally documents the hedging relationship
and risk management objective and strategy. The documentation identifies the
hedging instrument, the hedged item, the nature of the risk being hedged and
the methodology used to assess the effectiveness of the hedging instrument in
offsetting the exposure to changes in the hedged item's fair value attributable
to the hedged risk. For a cash flow hedge, this documentation includes the
exposure to changes in the variability in cash flows attributable to the hedged
risk. The Company does not exclude any component of the change in fair value of
the hedging instrument from the effectiveness assessment. At each reporting
date, the Company confirms that the hedging instrument continues to be highly
effective in offsetting the hedged risk. Ineffectiveness in fair value hedges
and cash flow hedges, if any, is reported in realized capital gains and losses.
CASH FLOW HEDGES For hedging instruments used in cash flow hedges, the
changes in fair value of the derivatives representing the effective portion of
the hedge are reported in accumulated other comprehensive income. Amounts are
reclassified to net investment income or realized capital gains and losses as
the hedged or forecasted transaction affects net income. Accrued periodic
settlements on derivatives used in cash flow hedges are reported in net
investment income. The amount reported in accumulated other comprehensive
income for a hedged transaction is limited to the lesser of the cumulative gain
or loss on the derivative less the amount reclassified to net income, or the
cumulative gain or loss on the derivative needed to offset the cumulative
change in the expected future cash flows on the hedged transaction from
inception of the hedge less the derivative gain or loss previously reclassified
from accumulated other comprehensive income to net income. If the Company
expects at any time that the loss reported in accumulated other comprehensive
income would lead to a net loss on the combination of the hedging instrument
and the hedged transaction which may not be recoverable, a loss is recognized
immediately in realized capital gains and losses. If an impairment loss is
recognized on an asset or an additional obligation is incurred on a liability
involved in a hedge transaction, any offsetting gain in accumulated other
comprehensive income is reclassified and reported together with the impairment
loss or recognition of the obligation.
TERMINATION OF HEDGE ACCOUNTING If, subsequent to entering into a hedge
transaction, the derivative becomes ineffective (including if the hedged item
is sold or otherwise extinguished, the occurrence of a hedged forecasted
transaction is no longer probable or the hedged asset becomes
other-than-temporarily impaired), the Company may terminate the derivative
position. The Company may also terminate derivative instruments or redesignate
them as non-hedge as a result of other events or circumstances.
When a derivative instrument used in a cash flow hedge of an existing asset
or liability is no longer effective or is terminated, the gain or loss
recognized on the derivative is reclassified from accumulated other
comprehensive income to net income as the hedged risk impacts net income. If
the derivative instrument is not terminated when a cash flow hedge is no longer
effective, the future gains and losses recognized on the derivative are
reported in realized capital gains and losses. When a derivative instrument
used in a cash flow hedge of a forecasted transaction is terminated because it
is probable the forecasted transaction will not occur, the gain or loss
recognized on the derivative is immediately reclassified from accumulated other
comprehensive income to realized capital gains and losses in the period that
hedge accounting is no longer applied.
NON-HEDGE DERIVATIVE FINANCIAL INSTRUMENTS The Company has certain
derivatives for which hedge accounting is not applied. The income statement
effects, including fair value gains and losses and accrued periodic
settlements, of these derivatives are reported on the Statements of Operations
and Comprehensive Income either in realized capital gains and losses or in a
single line item together with the results of the associated asset or liability
for which risks are being managed.
19
SECURITIES LOANED
The Company's business activities include securities lending transactions,
which are used primarily to generate net investment income. The proceeds
received in conjunction with securities lending transactions are reinvested in
short-term investments or fixed income securities. These transactions are
short-term in nature, usually 30 days or less.
The Company receives cash collateral for securities loaned in an amount
generally equal to 102% of the fair value of securities and records the related
obligations to return the collateral in other liabilities and accrued expenses.
The carrying value of these obligations approximates fair value because of
their relatively short-term nature. The Company monitors the market value of
securities loaned on a daily basis and obtains additional collateral as
necessary under the terms of the agreements to mitigate counterparty credit
risk. The Company maintains the right and ability to redeem the securities
loaned on short notice. Substantially all of the Company's securities loaned
are placed with large banks.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES, AND RELATED BENEFITS AND
INTEREST CREDITED
Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Premiums from these products are recognized as revenue when
due from policyholders. Benefits are reflected in contract benefits and
recognized in relation to premiums, so that profits are recognized over the
life of the policy.
Immediate annuities with life contingencies, including certain structured
settlement annuities, provide insurance protection over a period that extends
beyond the period during which premiums are collected. Premiums from these
products are recognized as revenue when received at the inception of the
contract. Benefits and expenses are recognized in relation to premiums. Profits
from these policies come from investment income, which is recognized over the
life of the contract.
Interest sensitive life contracts, such as universal life and single premium
life, are insurance contracts whose terms are not fixed and guaranteed. The
terms that may be changed include premiums paid by the contractholder, interest
credited to the contractholder account balance and contract charges assessed
against the contractholder account balance. Premiums from these contracts are
reported as contractholder fund deposits. Contract charges consist of fees
assessed against the contractholder account balance for the cost of insurance
(mortality risk), contract administration and surrender of the contract prior
to contractually specified dates. These contract charges are recognized as
revenues when assessed against the contractholder account balance. Contract
benefits include life-contingent benefit payments in excess of the
contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed
annuities, including market value adjusted annuities and immediate annuities
without life contingencies, are considered investment contracts. Consideration
received for such contracts is reported as contractholder fund deposits.
Contract charges for investment contracts consist of fees assessed against the
contractholder account balance for maintenance, administration and surrender of
the contract prior to contractually specified dates, and are recognized when
assessed against the contractholder account balance.
Interest credited to contractholder funds represents interest accrued or
paid on interest-sensitive life contracts and investment contracts. Crediting
rates for certain fixed annuities and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions
subject to contractually guaranteed minimum rates. Interest credited also
includes amortization of DSI expenses. DSI is amortized into interest credited
using the same method used to amortize DAC.
Contract charges for variable life and variable annuity products consist of
fees assessed against the contractholder account balances for contract
maintenance, administration, mortality, expense and surrender of the
20
contract prior to contractually specified dates. Contract benefits incurred for
variable annuity products include guaranteed minimum death, income, withdrawal
and accumulation benefits. All of the Company's variable annuity business is
ceded through reinsurance agreements and the contract charges and contract
benefits related thereto are reported net of reinsurance ceded.
DEFERRED POLICY ACQUISITION AND SALES INDUCEMENT COSTS
Costs that vary with and are primarily related to acquiring life insurance
and investment contracts are deferred and recorded as DAC. These costs are
principally agents' and brokers' remuneration and certain underwriting
expenses. DSI costs, which are deferred and recorded as other assets, relate to
sales inducements offered on sales to new customers, principally on annuity and
interest-sensitive life contracts. These sales inducements are primarily in the
form of additional credits to the customer's account balance or enhancements to
interest credited for a specified period which are in excess of the rates
currently being credited to similar contracts without sales inducements. All
other acquisition costs are expensed as incurred and included in operating
costs and expenses on the Statements of Operations and Comprehensive Income.
Amortization of DAC is included in amortization of deferred policy acquisition
costs on the Statements of Operations and Comprehensive Income and is described
in more detail below. DSI is amortized into income using the same methodology
and assumptions as DAC and is included in interest credited to contractholder
funds on the Statements of Operations and Comprehensive Income. DAC and DSI are
periodically reviewed for recoverability and adjusted if necessary.
For traditional life insurance, DAC is amortized over the premium paying
period of the related policies in proportion to the estimated revenues on such
business. Assumptions used in amortization of DAC and reserve calculations are
established at the time the policy is issued and are generally not revised
during the life of the policy. Any deviations from projected business in force
resulting from actual policy terminations differing from expected levels and
any estimated premium deficiencies may result in a change to the rate of
amortization in the period such events occur. Generally, the amortization
periods for these policies approximates the estimated lives of the policies.
For interest-sensitive life, fixed annuities and other investment contracts,
DAC and DSI are amortized in proportion to the incidence of the total present
value of gross profits, which includes both actual historical gross profits
("AGP") and estimated future gross profits ("EGP") expected to be earned over
the estimated lives of the contracts. The amortization is net of interest on
the prior period DAC balance using rates established at the inception of the
contracts. Actual amortization periods generally range from 15-30 years;
however, incorporating estimates of the rate of customer surrenders, partial
withdrawals and deaths generally results in the majority of the DAC being
amortized during the surrender charge period, which is typically 10-20 years
for interest-sensitive life and 5-10 years for fixed annuities. The cumulative
DAC and DSI amortization is reestimated and adjusted by a cumulative charge or
credit to results of operations when there is a difference between the
incidence of actual versus expected gross profits in a reporting period or when
there is a change in total EGP. When DAC or DSI amortization or a component of
gross profits for a quarterly period is potentially negative (which would
result in an increase of the DAC or DSI balance) as a result of negative AGP,
the specific facts and circumstances surrounding the potential negative
amortization are considered to determine whether it is appropriate for
recognition in the financial statements. Negative amortization is only recorded
when the increased DAC or DSI balance is determined to be recoverable based on
facts and circumstances. Recapitalization of DAC and DSI is limited to the
originally deferred costs plus interest.
AGP and EGP consist primarily of the following components: contract charges
for the cost of insurance less mortality costs and other benefits; investment
income and realized capital gains and losses less interest credited; and
surrender and other contract charges less maintenance expenses. The principal
assumptions for determining the amount of EGP are investment returns, including
capital gains and losses on assets supporting contract liabilities, interest
crediting rates to contractholders, and the effects of persistency, mortality,
expenses, and hedges if applicable. For products whose supporting investments
are exposed to capital losses in excess of the
21
Company's expectations which may cause periodic AGP to become temporarily
negative, EGP and AGP utilized in DAC and DSI amortization may be modified to
exclude the excess capital losses.
The Company performs quarterly reviews of DAC and DSI recoverability for
interest-sensitive life, fixed annuities and other investment contracts in the
aggregate using current assumptions. If a change in the amount of EGP is
significant, it could result in the unamortized DAC and DSI not being
recoverable, resulting in a charge which is included as a component of
amortization of deferred policy acquisition costs or interest credited to
contractholder funds, respectively.
The DAC and DSI balances presented include adjustments to reflect the amount
by which the amortization of DAC and DSI would increase or decrease if the
unrealized capital gains or losses in the respective product investment
portfolios were actually realized. The adjustments are recorded net of tax in
accumulated other comprehensive income. DAC, DSI and deferred income taxes
detemined on unrealized capital gains and losses and reported in accumulated
other comprehensive income recognize the impact on shareholder's equity
consistently with the amounts that would be recognized in the income statement
on realized capital gains and losses.
Customers of the Company may exchange one insurance policy or investment
contract for another offered by the Company, or make modifications to an
existing investment or life contract issued by the Company. These transactions
are identified as internal replacements for accounting purposes. Internal
replacement transactions determined to result in replacement contracts that are
substantially unchanged from the replaced contracts are accounted for as
continuations of the replaced contracts. Unamortized DAC and DSI related to the
replaced contracts continue to be deferred and amortized in connection with the
replacement contracts. For interest-sensitive life insurance and investment
contracts, the EGP of the replacement contracts are treated as a revision to
the EGP of the replaced contract in the determination of amortization of DAC
and DSI. For traditional life insurance policies, any changes to unamortized
DAC that result from replacement contracts are treated as prospective
revisions. Any costs associated with the issuance of replacement contracts are
characterized as maintenance costs and expensed as incurred.
Internal replacement transactions determined to result in a substantial
change to the replaced contracts are accounted for as an extinguishment of the
replaced contracts, and any unamortized DAC and DSI related to the replaced
contracts are eliminated with a corresponding charge to amortization of
deferred policy acquisition costs or interest credited to contractholder funds,
respectively.
REINSURANCE
In the normal course of business, the Company seeks to limit aggregate and
single exposure to losses on large risks by purchasing reinsurance (see Note
9). The Company has also used reinsurance to effect the disposition of certain
blocks of business. The amounts reported in the Statements of Financial
Position as reinsurance recoverables include amounts billed to reinsurers on
losses paid as well as estimates of amounts expected to be recovered from
reinsurers on insurance liabilities and contractholder funds that have not yet
been paid. Reinsurance recoverables on unpaid losses are estimated based upon
assumptions consistent with those used in establishing the liabilities related
to the underlying reinsured contracts. Insurance liabilities are reported gross
of reinsurance recoverables. Reinsurance premiums are generally reflected in
income in a manner consistent with the recognition of premiums on the reinsured
contracts. Reinsurance does not extinguish the Company's primary liability
under the policies written. Therefore, the Company regularly evaluates the
financial condition of its reinsurers and establishes allowances for
uncollectible reinsurance recoverables as appropriate.
The Company has a reinsurance treaty with ALIC through which it primarily
cedes reinvestment related risk on its structured settlement annuities. The
terms of the treaty meet the accounting definition of a derivative.
Accordingly, the treaty is recorded in the Statement of Financial Position at
fair value. Changes in the fair value of the treaty and premiums paid to ALIC
are recognized in realized capital gains and losses (see Note 4).
22
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
unrealized capital gains and losses on certain investments, DAC, differences in
tax bases of invested assets and insurance reserves. A deferred tax asset
valuation allowance is established when there is uncertainty that such assets
will be realized.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits payable under insurance
policies, including traditional life insurance, life-contingent immediate
annuities and voluntary accident and health products, is computed on the basis
of long-term actuarial assumptions of future investment yields, mortality,
morbidity, policy terminations and expenses (see Note 8). These assumptions,
which for traditional life insurance are applied using the net level premium
method, include provisions for adverse deviation and generally vary by
characteristics such as type of coverage, year of issue and policy duration. To
the extent that unrealized gains on fixed income securities would result in a
premium deficiency if those gains were realized, the related increase in
reserves for certain immediate annuities with life contingencies is recorded
net of tax as a reduction of unrealized net capital gains included in
accumulated other comprehensive income.
CONTRACTHOLDER FUNDS
Contractholder funds represent interest-bearing liabilities arising from the
sale of products such as interest-sensitive life and fixed annuities.
Contractholder funds are comprised primarily of deposits received and interest
credited to the benefit of the contractholder less surrenders and withdrawals,
mortality charges and administrative expenses (see Note 8). Contractholder
funds also include reserves for secondary guarantees on interest-sensitive life
insurance and certain guarantees on reinsured variable annuity contracts.
SEPARATE ACCOUNTS
Separate accounts assets are carried at fair value. The assets of the
separate accounts are legally segregated and available only to settle separate
account contract obligations. Separate accounts liabilities represent the
contractholders' claims to the related assets and are carried at an amount
equal to the separate accounts 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 Statements of
Operations and Comprehensive Income. Deposits to and surrenders and withdrawals
from the separate accounts are reflected in separate accounts liabilities and
are not included in cash flows.
Absent any contract provision wherein the Company provides a guarantee,
variable annuity and variable life insurance contractholders bear the
investment risk that the separate accounts' funds may not meet their stated
investment objectives. All of the Company's variable annuity business was
reinsured beginning in 2006.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to invest and financial guarantees have off-balance-sheet risk
because their contractual amounts are not recorded in the Company's Statements
of Financial Position (see Note 7 and Note 11).
ADOPTED ACCOUNTING STANDARDS
DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS
In January 2010, the Financial Accounting Standards Board ("FASB") issued
new accounting guidance which expands disclosure requirements relating to fair
value measurements. The guidance adds requirements for
23
disclosing amounts of and reasons for significant transfers into and out of
Levels 1 and 2 and requires gross rather than net disclosures about purchases,
sales, issuances and settlements relating to Level 3 measurements. The guidance
also provides clarification that fair value measurement disclosures are
required for each class of assets and liabilities. Disclosures about the
valuation techniques and inputs used to measure fair value for measurements
that fall in either Level 2 or Level 3 are also required. The Company adopted
the provisions of the new guidance as of December 31, 2010, except for
disclosures about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements, which are required for
fiscal years beginning after December 15, 2010. Disclosures are not required
for earlier periods presented for comparative purposes. The new guidance
affects disclosures only; and therefore, the adoption had no impact on the
Company's results of operations or financial position.
DISCLOSURES ABOUT THE CREDIT QUALITY OF FINANCING RECEIVABLES AND THE ALLOWANCE
FOR CREDIT LOSSES
In July 2010, the FASB issued guidance requiring expanded disclosures
relating to the credit quality of financing receivables and the related
allowances for credit losses. The new guidance requires a greater level of
disaggregated information, as well as additional disclosures about credit
quality indicators, past due information and modifications of its financing
receivables. The new guidance is effective for reporting periods ending after
December 15, 2010, except for disclosures related to troubled debt
restructurings which have been deferred until reporting periods ending after
December 15, 2011. The new guidance affects disclosures only; and therefore,
the adoption as of December 31, 2010 had no impact on the Company's results of
operations or financial position.
PENDING ACCOUNTING STANDARDS
CONSOLIDATION ANALYSIS CONSIDERING INVESTMENTS HELD THROUGH SEPARATE ACCOUNTS
In April 2010, the FASB issued guidance clarifying that an insurer is not
required to combine interests in investments held in a qualifying separate
account with its interests in the same investments held in the general account
when performing a consolidation evaluation. The guidance is effective for
fiscal years beginning after December 15, 2010 with early adoption permitted.
The adoption of this guidance is not expected to have a material impact on the
Company's results of operations or financial position.
ACCOUNTING FOR COSTS ASSOCIATED WITH ACQUIRING OR RENEWING INSURANCE CONTRACTS
In October 2010, the FASB issued guidance modifying the definition of the
types of costs incurred by insurance entities that can be capitalized in the
acquisition of new and renewal contracts. The guidance specifies that the costs
must be based on successful efforts. The guidance also specifies that
advertising costs only should be included as deferred acquisition costs if the
direct-response advertising accounting criteria are met. The new guidance is
effective for reporting periods beginning after December 15, 2011 and should be
applied prospectively, with retrospective application permitted. The Company is
in process of evaluating the impact of adoption on the Company's results of
operations and financial position.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investment exchanges, including modifications of certain fixed
income securities, totaled $41.6 million and $53.6 million for the years ended
December 31, 2010 and 2009, respectively. There were no non-cash investment
exchanges or modifications in 2008.
Liabilities for collateral received in conjunction with the Company's
securities lending activities were $128.0 million, $149.4 million and $117.3
million as of December 31, 2010, 2009 and 2008, respectively, and are reported
in other liabilities and accrued expenses in the Statements of Financial
Position. The accompanying
24
cash flows are included in cash flows from operating activities in the
Statements of Cash Flows along with the activities resulting from management of
the proceeds, which for the years ended December 31 are as follows:
2010 2009 2008
($ IN THOUSANDS) --------- --------- ---------
NET CHANGE IN PROCEEDS MANAGED
Net change in fixed income securities......... $ -- $ -- $ 36,778
Net change in short-term investments.......... 21,379 (32,065) 44,063
--------- --------- ---------
Operating cash flow provided (used)........ $ 21,379 $ (32,065) $ 80,841
========= ========= =========
NET CHANGE IN LIABILITIES
Liabilities for collateral, beginning of year. $(149,362) $(117,297) $(198,138)
Liabilities for collateral, end of year....... (127,983) (149,362) (117,297)
--------- --------- ---------
Operating cash flow (used) provided........ $ (21,379) $ 32,065 $ (80,841)
========= ========= =========
In 2010 and 2009, the Company sold mortgage loans with carrying values of
$19.9 million and $8.3 million, respectively, to an affiliate in exchange for
notes receivable with a principal sum equal to the mortgage loans (see Note 4).
In addition, in 2009, a payable associated with postretirement benefit
obligations due to AIC totaling $606 thousand was forgiven. The forgiveness of
the payable reflects a non-cash financing activity.
4. RELATED PARTY TRANSACTIONS
BUSINESS OPERATIONS
The Company uses services performed by its affiliates, AIC, ALIC and
Allstate Investments LLC, and business facilities owned or leased and operated
by AIC in conducting its business activities. In addition, the Company shares
the services of employees with AIC. The Company reimburses its affiliates for
the operating expenses incurred on behalf of the Company. The Company is
charged for the cost of these operating expenses based on the level of services
provided. Operating expenses, including compensation, retirement and other
benefit programs (see Note 14), allocated to the Company were $45.6 million,
$50.4 million and $54.3 million in 2010, 2009 and 2008, respectively. A portion
of these expenses relate to the acquisition of business, which are deferred and
amortized into income as described in Note 2.
STRUCTURED SETTLEMENT ANNUITIES
The Company issued $8.6 million, $9.1 million and $12.9 million of
structured settlement annuities, a type of immediate annuity, in 2010, 2009 and
2008, respectively, at prices determined using interest rates in effect at the
time of purchase, to fund structured settlements in matters involving AIC. Of
these amounts, $989 thousand, $806 thousand and $866 thousand relate to
structured settlement annuities with life contingencies and are included in
premium income for 2010, 2009 and 2008, respectively.
In most cases, these annuities were issued under a "qualified assignment"
whereby prior to July 1, 2001 Allstate Settlement Corporation ("ASC"), and on
and subsequent to July 1, 2001 Allstate Assignment Corporation ("AAC"), both
wholly owned subsidiaries of ALIC, purchased annuities from the Company and
assumed AIC's obligation to make future payments.
Reserves recorded by the Company for annuities issued to ASC and AAC,
including annuities to fund structured settlements in matters involving AIC,
were $2.04 billion and $1.99 billion at December 31, 2010 and 2009,
respectively.
BROKER-DEALER AGREEMENTS
The Company has a service agreement with Allstate Distributors, LLC
("ADLLC"), a broker-dealer company owned by ALIC, whereby ADLLC promotes and
markets products sold by the Company. In return for
25
these services, the Company recorded expense of $1.2 million, $2.5 million and
$4.1 million in 2010, 2009 and 2008, respectively.
The Company receives distribution services from Allstate Financial Services,
LLC ("AFS"), an affiliated broker-dealer company, for certain variable life
insurance contracts sold by Allstate exclusive agencies. For these services,
the Company incurred commission and other distribution expenses of $306
thousand, $358 thousand and $838 thousand in 2010, 2009 and 2008, respectively.
REINSURANCE TRANSACTIONS
The Company has reinsurance agreements with ALIC whereby a portion of the
Company's premiums and policy benefits are ceded to ALIC (see Note 9).
In 2008, additional expenses were recorded relating to a rescission of
reinsurance coverage due to the nonpayment of premium for certain traditional
and interest-sensitive life insurance policies reinsured to ALIC in accordance
with an agreement between the Company and ALIC (the "rescission"). The
rescission resulted in a reduction to 2008 net income of $4.1 million, which
included contract benefits of $7.1 million, accretion of DAC of $876 thousand
and an income tax benefit of $2.2 million. The Company paid $8.7 million to
ALIC in order to return amounts previously received from ALIC for ceded
contract benefits on policies subject to the rescission of coverage.
The Company has a reinsurance treaty through which it primarily cedes
reinvestment related risk on its structured settlement annuities to ALIC. Under
the terms of the treaty, the Company pays a premium to ALIC that varies with
the aggregate structured settlement annuity statutory reserve balance. In
return, ALIC guarantees that the yield on the portion of the Company's
investment portfolio that supports structured settlement annuity liabilities
will not fall below contractually determined rates. The Company ceded premium
related to structured settlement annuities to ALIC of $3.5 million, $3.4
million and $3.3 million for the years ended December 31, 2010, 2009 and 2008,
respectively. At December 31, 2010 and 2009, the carrying value of the
structured settlement reinsurance treaty was $(4.9) million and $(5.1) million,
respectively, which is recorded in other assets. The premiums ceded and changes
in the fair value of the reinsurance treaty are reflected as a component of
realized capital gains and losses on the Statements of Operations and
Comprehensive Income as the treaty is recorded as a derivative instrument.
INCOME TAXES
The Company is a party to a federal income tax allocation agreement with the
Corporation (see Note 12).
INTERCOMPANY LOAN AGREEMENT
The Company has an intercompany loan agreement with the Corporation. The
amount of intercompany 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 billion. The Corporation may use commercial paper borrowings,
bank lines of credit and repurchase agreements to fund intercompany borrowings.
The Company had no amounts outstanding under the intercompany loan agreement as
of December 31, 2010 and 2009.
NOTES RECEIVABLE-INVESTMENT SALES
In 2009, the Company entered into an asset purchase agreement with Road Bay
Investments, LLC ("RBI"), a subsidiary of ALIC, which allows RBI to purchase
from the Company mortgage loans or participations in mortgage loans with an
aggregate fair value of up to $50 million. As consideration for the sale of the
assets, RBI issues notes to the Company. As security for the performance of
RBI's obligations under the agreement and
26
notes, RBI granted a pledge of and security interest in RBI's right, title and
interest in the mortgage loans and their proceeds. The notes due from RBI are
classified as other investments in the Statements of Financial Position.
In March 2010, the Company sold to RBI mortgage loans with a carrying value
of $13.7 million on the date of sale, and RBI issued the Company a 7.00% note
due March 26, 2017 for the same amount. The Company subsequently received $9.8
million cash payments from RBI on this note. In November 2010, the Company sold
to RBI mortgage loans with a carrying value of $2.7 million on the date of
sale, and RBI issued the Company a 7.50% note due November 18, 2017 for the
same amount. In December 2010, the Company sold to RBI mortgage loans with a
carrying value of $3.5 million on the date of sale, and RBI issued the Company
a 6.50% note due December 14, 2017 for the same amount.
In September 2009, the Company sold to RBI mortgage loans with a carrying
value of $8.3 million on the date of sale, and RBI issued the Company a 7.00%
note due September 25, 2016 for the same amount.
In 2010 and 2009, the Company recorded net investment income on the notes
due from RBI of $1.1 million and $154 thousand, respectively.
INVESTMENT PURCHASE
In September 2008, the Company purchased investments from its parent ALIC.
The Company paid $199.1 million in cash for the investments, which included
fixed income securities with a fair value on the date of sale of $197.5 million
and $1.6 million of accrued investment income. Since the transaction was
between affiliates under common control, the fixed income securities were
recorded at the amortized cost basis on the date of sale of $200.8 million. The
difference between the fair value and the amortized cost basis of these
investments on the date of sale, was recorded as an increase to retained income
of $2.1 million after-tax ($3.3 million pre-tax).
POSTRETIREMENT BENEFIT PLANS
Effective September 30, 2009, the Corporation became the sponsor of a group
medical plan and a group life insurance plan to provide covered benefits to
certain retired employees ("postretirement benefits"). Prior to September 30,
2009, AIC was the sponsor of these plans. In connection with the change in the
sponsorship, amounts payable by the Company to the previous plan sponsor, AIC,
totaling $606 thousand were forgiven. The forgiveness of this liability was
recorded as an increase in additional capital paid-in of $529 thousand and an
increase to retained income of $77 thousand.
27
5. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses and fair value for
fixed income securities are as follows:
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
($ IN THOUSANDS) ---------- -------- --------- ----------
DECEMBER 31, 2010
U.S. government and agencies..... $ 288,835 $ 69,934 $ (201) $ 358,568
Municipal........................ 874,967 16,539 (37,772) 853,734
Corporate........................ 3,545,565 235,383 (27,856) 3,753,092
Foreign government............... 268,603 61,683 (683) 329,603
RMBS............................. 579,801 20,859 (10,362) 590,298
CMBS............................. 294,494 5,832 (33,282) 267,044
ABS.............................. 138,832 2,917 (3,185) 138,564
Redeemable preferred stock....... 9,196 10 -- 9,206
---------- -------- --------- ----------
Total fixed income securities. $6,000,293 $413,157 $(113,341) $6,300,109
========== ======== ========= ==========
DECEMBER 31, 2009
U.S. government and agencies..... $ 534,590 $ 51,977 $ (365) $ 586,202
Municipal........................ 929,688 12,502 (63,780) 878,410
Corporate........................ 3,173,030 158,579 (60,407) 3,271,202
Foreign government............... 241,141 50,715 (1,000) 290,856
RMBS............................. 666,118 11,539 (25,985) 651,672
CMBS............................. 472,835 1,884 (127,978) 346,741
ABS.............................. 46,588 5 (6,549) 40,044
Redeemable preferred stock....... 9,245 -- (607) 8,638
---------- -------- --------- ----------
Total fixed income securities. $6,073,235 $287,201 $(286,671) $6,073,765
========== ======== ========= ==========
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows as of
December 31, 2010:
AMORTIZED FAIR
COST VALUE
($ IN THOUSANDS) ---------- ----------
Due in one year or less................ $ 171,840 $ 174,578
Due after one year through five years.. 1,466,444 1,556,583
Due after five years through ten years. 1,568,007 1,726,852
Due after ten years.................... 2,075,369 2,113,234
---------- ----------
5,281,660 5,571,247
RMBS and ABS........................... 718,633 728,862
---------- ----------
Total............................... $6,000,293 $6,300,109
========== ==========
Actual maturities may differ from those scheduled as a result of prepayments
by the issuers. Because of the potential for prepayment on RMBS and ABS, they
are not categorized by contractual maturity. CMBS are categorized by
contractual maturity because they generally are not subject to prepayment risk.
28
NET INVESTMENT INCOME
Net investment income for the years ended December 31 is as follows:
2010 2009 2008
($ IN THOUSANDS) -------- -------- --------
Fixed income securities.............. $341,612 $338,563 $362,671
Mortgage loans....................... 30,374 36,658 41,949
Equity securities.................... 2,626 1,751 --
Short-term and other................. 4,452 5,038 12,949
-------- -------- --------
Investment income, before expense. 379,064 382,010 417,569
Investment expense................ (10,369) (9,615) (14,638)
-------- -------- --------
Net investment income......... $368,695 $372,395 $402,931
======== ======== ========
REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses by asset type for the years ended
December 31 are as follows:
2010 2009 2008
($ IN THOUSANDS) -------- -------- --------
Fixed income securities.............. $(19,445) $114,122 $(55,775)
Mortgage loans....................... (2,534) (5,327) (2,049)
Equity securities.................... 19,009 110 --
Limited partnership interests........ (146) -- --
Derivatives.......................... (42,733) 36,526 (19,381)
Other................................ -- 37 --
-------- -------- --------
Realized capital gains and losses. $(45,849) $145,468 $(77,205)
======== ======== ========
Realized capital gains and losses by transaction type for the years ended
December 31 are as follows:
2010 2009 2008
($ IN THOUSANDS) -------- -------- ---------
Impairment write-downs................... $(31,370) $(30,255) $ (38,528)
Change in intent write-downs............. (11,226) (20,821) (79,262)
-------- -------- ---------
Net other-than-temporary impairment
("OTTI") losses recognized in earnings. (42,596) (51,076) (117,790)
Sales.................................... 39,937 160,294 59,966
Valuation of derivative instruments...... (37,932) 29,831 (29,525)
Settlement of derivative instruments..... (5,112) 6,419 10,144
EMA limited partnership income........... (146) -- --
-------- -------- ---------
Realized capital gains and losses..... $(45,849) $145,468 $ (77,205)
======== ======== =========
Gross gains of $32.7 million, $180.8 million and $62.4 million and gross
losses of $17.2 million, $23.1 million and $8.8 million were realized on sales
of fixed income securities during 2010, 2009 and 2008, respectively.
29
Other-than-temporary impairment losses by asset type for the year ended
December 31 are as follows:
2010 2009
--------------------------- ---------------------------
INCLUDED INCLUDED
GROSS IN OCI NET GROSS IN OCI NET
($ IN THOUSANDS) -------- -------- -------- -------- -------- --------
Fixed income securities:
Municipal................................ $ (8,328) $ -- $ (8,328) $ (2,298) $ -- $ (2,298)
Corporate................................ (7,500) 141 (7,359) (17,993) (938) (18,931)
RMBS..................................... (3,146) (1,882) (5,028) (6,494) 3,895 (2,599)
CMBS..................................... (23,179) 4,220 (18,959) (19,458) (1,826) (21,284)
-------- ------- -------- -------- ------- --------
Total fixed income securities........ (42,153) 2,479 (39,674) (46,243) 1,131 (45,112)
Mortgage loans.............................. (2,922) -- (2,922) (5,950) -- (5,950)
Equity securities........................... -- -- -- (14) -- (14)
-------- ------- -------- -------- ------- --------
Other-than-temporary impairment
losses............................. $(45,075) $ 2,479 $(42,596) $(52,207) $ 1,131 $(51,076)
======== ======= ======== ======== ======= ========
The total amount of other-than-temporary impairment losses included in
accumulated other comprehensive income at the time of impairment for fixed
income securities as of December 31, which were not included in earnings, are
presented in the following table. The amount excludes $14.6 million and $8.7
million as of December 31, 2010 and 2009, respectively, of net unrealized gains
related to changes in valuation of the fixed income securities subsequent to
the impairment measurement date.
2010 2009
($ IN THOUSANDS) -------- --------
Corporate..... $ (300) $ (1,197)
RMBS.......... (7,791) (11,296)
CMBS.......... (4,220) --
-------- --------
Total....... $(12,311) $(12,493)
======== ========
Rollforwards of the cumulative credit losses recognized in earnings for
fixed income securities held as of December 31 are as follows:
2010 2009
($ IN THOUSANDS) -------- --------
Beginning balance......................................................................... $(25,493) $ --
Beginning balance of cumulative credit loss for securities held as of April 1, 2009....... -- (33,493)
Additional credit loss for securities previously other-than-temporarily impaired.......... (2,050) (3,328)
Additional credit loss for securities not previously other-than-temporarily impaired...... (26,398) (17,665)
Reduction in credit loss for securities disposed or collected............................. 28,071 28,993
Reduction in credit loss for securities the Company has made the decision to sell or more
likely than not will be required to sell................................................ 1,698 --
Change in credit loss due to accretion of increase in cash flows.......................... -- --
-------- --------
Ending balance............................................................................ $(24,172) $(25,493)
======== ========
The Company uses its best estimate of future cash flows expected to be
collected from the fixed income security, discounted at the security's original
or current effective rate, as appropriate, to calculate a recovery value and
determine whether a credit loss exists. The determination of cash flow
estimates is inherently subjective and methodologies may vary depending on
facts and circumstances specific to the security. All reasonably available
information relevant to the collectability of the security, including past
events, current conditions, and reasonable and supportable assumptions and
forecasts, are considered when developing the estimate of cash flows expected
to be collected. That information generally includes, but is not limited to, the
30
remaining payment terms of the security, prepayment speeds, foreign exchange
rates, the financial condition and future earnings potential of the issue or
issuer, expected defaults, expected recoveries, the value of underlying
collateral, vintage, geographic concentration, available reserves or escrows,
current subordination levels, third party guarantees and other credit
enhancements. Other information, such as industry analyst reports and
forecasts, sector credit ratings, financial condition of the bond insurer for
insured fixed income securities, and other market data relevant to the
realizability of contractual cash flows, may also be considered. The estimated
fair value of collateral will be used to estimate recovery value if the Company
determines that the security is dependent on the liquidation of collateral for
ultimate settlement. If the estimated recovery value is less than the amortized
cost of the security, a credit loss exists and an other-than-temporary
impairment for the difference between the estimated recovery value and
amortized cost is recorded in earnings. The portion of the unrealized loss
related to factors other than credit remains classified in accumulated other
comprehensive income. If the Company determines that the fixed income security
does not have sufficient cash flow or other information to estimate a recovery
value for the security, the Company may conclude that the entire decline in
fair value is deemed to be credit related and the loss is recorded in earnings.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses included in accumulated other
comprehensive income are as follows:
GROSS UNREALIZED
FAIR ------------------ UNREALIZED NET
VALUE GAINS LOSSES GAINS (LOSSES)
($ IN THOUSANDS) ---------- -------- --------- --------------
DECEMBER 31, 2010
Fixed income securities/(1)/.......................... $6,300,109 $413,157 $(113,341) $ 299,816
Equity securities..................................... 124,559 25,211 -- 25,211
Short-term investments................................ 198,601 1 (1) --
---------
Unrealized net capital gains and losses, pre-tax... 325,027
Amounts recognized for:
Insurance reserves/(2)/............................ (115,141)
DAC and DSI/(3)/................................... (4,947)
---------
Amounts recognized................................. (120,088)
Deferred income taxes.............................. (71,729)
---------
Unrealized net capital gains and losses, after-tax. $ 133,210
=========
--------
/(1)/Unrealized net capital gains and losses for fixed income securities as of
December 31, 2010 comprises $2.3 million related to unrealized net capital
gains on fixed income securities with OTTI and $297.5 million related to
other unrealized net capital gains and losses.
/(2)/The insurance reserves adjustment represents the amount by which the
reserve balance would increase if the net unrealized gains in the
applicable product portfolios were realized and reinvested at current
lower interest rates, resulting in a premium deficiency. Although the
Company evaluates premium deficiencies on the combined performance of life
insurance and immediate annuities with life contingencies, the adjustment
primarily relates to structured settlement annuities with life
contingencies, in addition to certain payout annuities with life
contingencies.
/(3)/The DAC and DSI adjustment balance represents the amount by which the
amortization of DAC and DSI would increase or decrease if the unrealized
gains or losses in the respective product portfolios were realized.
31
GROSS UNREALIZED
FAIR ------------------ UNREALIZED NET
VALUE GAINS LOSSES GAINS (LOSSES)
- ---------- -------- --------- --------------
DECEMBER 31, 2009
Fixed income securities/(1)/.......................... $6,073,765 $287,201 $(286,671) $ 530
Equity securities..................................... 123,311 23,143 -- 23,143
Short-term investments................................ 348,453 1 (4) (3)
Derivative instruments................................ -- 309 -- 309
--------
Unrealized net capital gains and losses, pre-tax... 23,979
Amounts recognized for:
Insurance reserves................................. (40,551)
DAC and DSI........................................ 53,572
--------
Amounts recognized................................. 13,021
Deferred income taxes.............................. (12,950)
--------
Unrealized net capital gains and losses, after-tax. $ 24,050
========
--------
/(1)/Unrealized net capital gains and losses for fixed income securities as of
December 31, 2009 comprises $(3.8) million related to unrealized net
capital losses on fixed income securities with OTTI and $4.3 million
related to other unrealized net capital gains and losses.
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
The change in unrealized net capital gains and losses for the years ended
December 31 is as follows:
2010 2009 2008
($ IN THOUSANDS) --------- --------- ---------
Fixed income securities........................................... $ 299,286 $ 280,616 $(622,315)
Equity securities................................................. 2,068 23,143 --
Short-term investments............................................ 3 (68) 65
Derivative instruments............................................ (309) (1,440) 2,515
--------- --------- ---------
Total.......................................................... 301,048 302,251 (619,735)
Amounts recognized for:
Insurance reserves............................................. (74,590) 115,384 105,911
DAC and DSI.................................................... (58,519) (213,075) 245,975
--------- --------- ---------
(Decrease) increase in amounts recognized...................... (133,109) (97,691) 351,886
Deferred income taxes.......................................... (58,779) (71,596) 93,747
--------- --------- ---------
Increase (decrease) in unrealized net capital gains and losses. $ 109,160 $ 132,964 $(174,102)
========= ========= =========
PORTFOLIO MONITORING
The Company has a comprehensive portfolio monitoring process to identify and
evaluate each fixed income and equity security whose carrying value may be
other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company
assesses whether management with the appropriate authority has made the
decision to sell or whether it is more likely than not the Company will be
required to sell the security before recovery of the amortized cost basis for
reasons such as liquidity, contractual or regulatory purposes. If a security
meets either of these criteria, the security's decline in fair value is
considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security
and it is not more likely than not the Company will be required to sell the
fixed income security before recovery of its amortized cost basis, the Company
evaluates whether it expects to receive cash flows sufficient to recover the
entire amortized cost basis
32
of the security. The Company calculates the estimated recovery value by
discounting the best estimate of future cash flows at the security's original
or current effective rate, as appropriate, and compares this to the amortized
cost of the security. If the Company does not expect to receive cash flows
sufficient to recover the entire amortized cost basis of the fixed income
security, the credit loss component of the impairment is recorded in earnings,
with the remaining amount of the unrealized loss related to other factors
recognized in other comprehensive income.
For equity securities, the Company considers various factors, including
whether it has the intent and ability to hold the equity security for a period
of time sufficient to recover its cost basis. Where the Company lacks the
intent and ability to hold to recovery, or believes the recovery period is
extended, the equity security's decline in fair value is considered other than
temporary and is recorded in earnings. For equity securities managed by a third
party, the Company has contractually retained its decision making authority as
it pertains to selling equity securities that are in an unrealized loss
position.
The Company's portfolio monitoring process includes a quarterly review of
all securities to identify instances where the fair value of a security
compared to its amortized cost (for fixed income securities) or cost (for
equity securities) is below established thresholds. The process also includes
the monitoring of other impairment indicators such as ratings, ratings
downgrades and payment defaults. The securities identified, in addition to
other securities for which the Company may have a concern, are evaluated for
potential other-than-temporary impairment using all reasonably available
information relevant to the collectability or recovery of the security.
Inherent in the Company's evaluation of other-than-temporary impairment for
these fixed income and equity securities are assumptions and estimates about
the financial condition and future earnings potential of the issue or issuer.
Some of the factors considered in evaluating whether a decline in fair value is
other than temporary are: 1) the financial condition, near-term and long-term
prospects of the issue or issuer, including relevant industry specific market
conditions and trends, geographic location and implications of rating agency
actions and offering prices; 2) the specific reasons that a security is in an
unrealized loss position, including overall market conditions which could
affect liquidity; and 3) the length of time and extent to which the fair value
has been less than amortized cost or cost.
33
The following table summarizes the gross unrealized losses and fair value of
fixed income securities by the length of time that individual securities have
been in a continuous unrealized loss position. There are no equity securities
with gross unrealized losses as of December 31, 2010.
LESS THAN 12 MONTHS 12 MONTHS OR MORE
------------------------------ ---------------------------- TOTAL
NUMBER UNREALIZED NUMBER FAIR UNREALIZED UNREALIZED
($ IN THOUSANDS) OF ISSUES FAIR VALUE LOSSES OF ISSUES VALUE LOSSES LOSSES
---------------- --------- ---------- ---------- --------- -------- ---------- ----------
DECEMBER 31, 2010
Fixed income securities
U.S. government and agencies........... 1 $ 4,182 $ (201) -- $ -- $ -- $ (201)
Municipal.............................. 39 227,428 (6,528) 31 171,400 (31,244) (37,772)
Corporate.............................. 79 383,290 (17,054) 20 97,202 (10,802) (27,856)
Foreign government..................... 2 43,918 (683) -- -- -- (683)
RMBS................................... 35 8,883 (110) 35 45,913 (10,252) (10,362)
CMBS................................... 1 9,968 (57) 15 117,978 (33,225) (33,282)
ABS.................................... 5 9,937 (39) 3 18,914 (3,146) (3,185)
--- ---------- -------- --- -------- --------- ---------
Total fixed income securities/(1)/.... 162 $ 687,606 $(24,672) 104 $451,407 $ (88,669) $(113,341)
=== ========== ======== === ======== ========= =========
Investment grade fixed income securities. 138 $ 635,094 $(22,220) 70 $367,032 $ (60,013) $ (82,233)
Below investment grade fixed income
securities.............................. 24 52,512 (2,452) 34 84,375 (28,656) (31,108)
--- ---------- -------- --- -------- --------- ---------
Total fixed income securities.......... 162 $ 687,606 $(24,672) 104 $451,407 $ (88,669) $(113,341)
=== ========== ======== === ======== ========= =========
DECEMBER 31, 2009
Fixed income securities
U.S. government and agencies........... 9 $ 209,201 $ (365) -- $ -- $ -- $ (365)
Municipal.............................. 31 258,153 (8,197) 46 244,537 (55,583) (63,780)
Corporate.............................. 83 401,910 (11,534) 77 343,942 (48,873) (60,407)
Foreign government..................... 3 36,618 (1,000) -- -- -- (1,000)
RMBS................................... 24 68,199 (1,158) 41 81,536 (24,827) (25,985)
CMBS................................... 3 20,648 (339) 34 239,448 (127,639) (127,978)
ABS.................................... 6 20,200 (105) 3 17,776 (6,444) (6,549)
Redeemable preferred stock............. -- -- -- 1 8,639 (607) (607)
--- ---------- -------- --- -------- --------- ---------
Total fixed income securities/(1)/.... 159 $1,014,929 $(22,698) 202 $935,878 $(263,973) $(286,671)
=== ========== ======== === ======== ========= =========
Investment grade fixed income securities. 151 $ 995,984 $(19,518) 150 $837,804 $(227,091) $(246,609)
Below investment grade fixed income
securities.............................. 8 18,945 (3,180) 52 98,074 (36,882) (40,062)
--- ---------- -------- --- -------- --------- ---------
Total fixed income securities.......... 159 $1,014,929 $(22,698) 202 $935,878 $(263,973) $(286,671)
=== ========== ======== === ======== ========= =========
--------
/(1)/Gross unrealized losses resulting from factors other than credit on fixed
income securities with other-than-temporary impairments for which the
Company has recorded a credit loss in earnings total zero for the less
than 12 month category and $7.0 million for the 12 months or greater
category as of December 31, 2010 and $464 thousand for the less than 12
month category and $6.1 million for the 12 months or greater category as
of December 31, 2009.
As of December 31, 2010, $55.4 million of unrealized losses are related to
securities with an unrealized loss position less than 20% of amortized cost,
the degree of which suggests that these securities do not pose a high risk of
being other-than-temporarily impaired. Of the $55.4 million, $49.3 million are
related to unrealized losses on investment grade fixed income securities.
Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa
from Moody's, a rating of AAA, AA, A or BBB from Standard & Poor's ("S&P"),
Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or
a comparable internal rating if an externally provided rating is not available.
Unrealized losses on investment grade securities are principally related to
widening credit spreads or rising interest rates since the time of initial
purchase.
As of December 31, 2010, the remaining $57.9 million of unrealized losses
are related to securities in unrealized loss positions greater than or equal to
20% of amortized cost. Investment grade fixed income securities comprising
$32.9 million of these unrealized losses were evaluated based on factors such
as expected cash flows and the financial condition and near-term and long-term
prospects of the issue or issuer and were
34
determined to have adequate resources to fulfill contractual obligations. Of
the $57.9 million, $25.0 million are related to below investment grade fixed
income securities and had been in an unrealized loss position for a period of
twelve or more consecutive months as of December 31, 2010. Unrealized losses on
below investment grade securities are principally related to CMBS and RMBS and
were the result of wider credit spreads resulting from higher risk premiums
since the time of initial purchase, largely due to macroeconomic conditions and
credit market deterioration, including the impact of lower real estate
valuations.
RMBS, CMBS and ABS in an unrealized loss position were evaluated based on
actual and projected collateral losses relative to the securities' positions in
the respective securitization trusts, security specific expectations of cash
flows, and credit ratings. This evaluation also takes into consideration credit
enhancement, measured in terms of (i) subordination from other classes of
securities in the trust that are contractually obligated to absorb losses
before the class of security the Company owns, (ii) the expected impact of
other structural features embedded in the securitization trust beneficial to
the class of securities the Company owns, such as overcollateralization and
excess spread, and (iii) for RMBS and ABS in an unrealized loss position,
credit enhancements from reliable bond insurers, where applicable. Municipal
bonds in an unrealized loss position were evaluated based on the quality of the
underlying securities, taking into consideration credit enhancements from
reliable bond insurers, where applicable.
As of December 31, 2010, the Company has not made the decision to sell and
it is not more likely than not the Company will be required to sell fixed
income securities with unrealized losses before recovery of the amortized cost
basis.
LIMITED PARTNERSHIPS
As of December 31, 2010, the carrying value of equity method limited
partnership interests totaled $2.4 million. The Company recognizes an
impairment loss for equity method investments when evidence demonstrates that
the loss is other than temporary. Evidence of a loss in value that is other
than temporary may include the absence of an ability to recover the carrying
amount of the investment or the inability of the investee to sustain a level of
earnings that would justify the carrying amount of the investment. The Company
had no write-downs related to equity method limited partnership interests in
2010.
As of December 31, 2010, the carrying value for cost method limited
partnership interests was $2.4 million. To determine if an other-than-temporary
impairment has occurred, the Company evaluates whether an impairment indicator
has occurred in the period that may have a significant adverse effect on the
carrying value of the investment. Impairment indicators may include:
significantly reduced valuations of the investments held by the limited
partnerships; actual recent cash flows received being significantly less than
expected cash flows; reduced valuations based on financing completed at a lower
value; completed sale of a material underlying investment at a price
significantly lower than expected; or any other adverse events since the last
financial statements received that might affect the fair value of the
investee's capital. Additionally, the Company's portfolio monitoring process
includes a quarterly review of all cost method limited partnerships to identify
instances where the net asset value is below established thresholds for certain
periods of time, as well as investments that are performing below expectations,
for further impairment consideration. If a cost method limited partnership is
other-than-temporarily impaired, the carrying value is written down to fair
value, generally estimated to be equivalent to the reported net asset value of
the underlying funds. The Company had no write-downs related to cost method
investments in 2010.
MORTGAGE LOANS
The Company's mortgage loans are commercial mortgage loans collateralized by
a variety of commercial real estate property types located throughout the
United States and totaled, net of valuation allowance, $501 million and $543
million as of December 31, 2010 and 2009, respectively. Substantially all of
the commercial mortgage loans are non-recourse to the borrower. The following
table shows the principal geographic distribution
35
of commercial real estate represented in the Company's mortgage portfolio. No
other state represented more than 5% of the portfolio as of December 31.
2010 2009
(% OF MORTGAGE PORTFOLIO CARRYING VALUE) ---- ----
California.................. 24.2% 24.8%
Illinois.................... 14.6 13.9
Texas....................... 9.5 2.8
Arizona..................... 7.4 7.0
Pennsylvania................ 5.3 7.0
The types of properties collateralizing the mortgage loans as of December 31
are as follows:
2010 2009
(% OF MORTGAGE PORTFOLIO CARRYING VALUE) ----- -----
Warehouse..................... 35.1% 39.8%
Office buildings.............. 29.4 31.4
Retail........................ 19.4 15.7
Apartment complex............. 11.9 10.0
Other......................... 4.2 3.1
----- -----
Total...................... 100.0% 100.0%
===== =====
The contractual maturities of the mortgage loan portfolio as of December 31,
2010 are as follows:
NUMBER CARRYING
OF LOANS VALUE PERCENT
($ IN THOUSANDS) -------- -------- -------
2011........... 8 $ 32,489 6.5%
2012........... 6 22,784 4.5
2013........... 15 70,030 14.0
2014........... 13 62,616 12.5
Thereafter..... 60 313,557 62.5
--- -------- -----
Total....... 102 $501,476 100.0%
=== ======== =====
Mortgage loans are evaluated for impairment on a specific loan basis through
a quarterly credit monitoring process and review of key credit quality
indicators. Mortgage loans are considered impaired when it is probable that the
Company will not collect the contractual principal and interest. Valuation
allowances are established for impaired loans to reduce the carrying value to
the fair value of the collateral less costs to sell or the present value of the
loan's expected future repayment cash flows discounted at the loan's original
effective interest rate. Impaired mortgage loans may not have a valuation
allowance when the fair value of the collateral less costs to sell is higher
than the carrying value. Mortgage loan valuation allowances are charged off
when there is no reasonable expectation of recovery.
Accrual of income is suspended for mortgage loans that are in default or
when full and timely collection of principal and interest payments is not
probable. Cash receipts on mortgage loans on nonaccrual status are generally
recorded as a reduction of carrying value.
Debt service coverage ratio is considered a key credit quality indicator
when mortgage loans are evaluated for impairment. Debt service coverage ratio
represents the amount of estimated cash flows from the property available to
the borrower to meet principal and interest payment obligations. Debt service
coverage ratio estimates are updated annually or more frequently if conditions
are warranted based on the Company's credit
36
monitoring process. The following table reflects the carrying value of
non-impaired fixed rate and variable rate mortgage loans as of December 31,
2010, summarized by debt service coverage ratio distribution:
FIXED RATE VARIABLE RATE
MORTGAGE LOANS MORTGAGE LOANS TOTAL
($ IN THOUSANDS) -------------- -------------- --------
DEBT SERVICE COVERAGE RATIO DISTRIBUTION
Below 1.0................................ $ 13,361 $ -- $ 13,361
1.0 - 1.25............................... 140,835 -- 140,835
1.26 - 1.50.............................. 128,978 -- 128,978
Above 1.50............................... 206,694 4,485 211,179
-------- ------ --------
Total non-impaired mortgage loans..... $489,868 $4,485 $494,353
======== ====== ========
Mortgage loans with a debt service coverage ratio below 1.0 that are not
considered impaired primarily relate to instances where the borrower has the
financial capacity to fund the revenue shortfalls from the properties for the
foreseeable term, the decrease in cash flows from the properties is considered
temporary, or there are other risk mitigating circumstances such as additional
collateral, escrow balances or borrower guarantees.
The net carrying value of impaired mortgage loans as of December 31 is as
follows:
2010 2009
($ IN THOUSANDS) ------ -------
Impaired mortgage loans with a valuation allowance.... $7,123 $23,956
Impaired mortgage loans without a valuation allowance. -- --
------ -------
Total impaired mortgage loans......................... $7,123 $23,956
====== =======
Valuation allowance on impaired mortgage loans........ $1,670 $ 4,250
The average balance of impaired loans was $11.1 million, $17.0 million and
$1.9 million during 2010, 2009 and 2008, respectively.
The rollforward of the valuation allowance on impaired mortgage loans for
the years ended December 31 is as follows:
2010 2009 2008
($ IN THOUSANDS) ------- ------- ----
Beginning balance................... $ 4,250 $ 449 $ --
Net increase in valuation allowance. 2,922 5,264 449
Charge offs......................... (5,502) (1,463) --
------- ------- ----
Ending balance...................... $ 1,670 $ 4,250 $449
======= ======= ====
The carrying value of past due mortgage loans as of December 31, 2010 is
$3.6 million, all of which are less than 90 days past due. There are no
mortgage loans in the process of foreclosure.
MUNICIPAL BONDS
The Company maintains a diversified portfolio of municipal bonds. The
following table shows the principal geographic distribution of municipal bond
issuers represented in the Company's portfolio as of December 31. No other
state represents more than 5% of the portfolio.
2010 2009
(% OF MUNICIPAL BOND PORTFOLIO CARRYING VALUE) ---- ----
California.................... 21.6% 21.7%
Texas......................... 12.1 10.8
Illinois...................... 5.1 8.7
37
CONCENTRATION OF CREDIT RISK
As of December 31, 2010, the Company is not exposed to any credit
concentration risk of a single issuer and its affiliates greater than 10% of
the Company's shareholder's equity.
SECURITIES LOANED
The Company's business activities include securities lending programs with
third parties, mostly large banks. As of December 31, 2010 and 2009, fixed
income securities with a carrying value of $124.5 million and $145.0 million,
respectively, were on loan under these agreements. In return, the Company
receives cash that it invests and includes in short-term investments and fixed
income securities, with an offsetting liability recorded in other liabilities
and accrued expenses to account for the Company's obligation to return the
collateral. Interest income on collateral, net of fees, was $487 thousand, $681
thousand and $5.1 million in 2010, 2009 and 2008, respectively.
OTHER INVESTMENT INFORMATION
Included in fixed income securities are below investment grade assets
totaling $388.3 million and $227.4 million as of December 31, 2010 and 2009,
respectively.
As of December 31, 2010, fixed income securities and short-term investments
with a carrying value of $2.7 million were on deposit with regulatory
authorities as required by law.
There were no fixed income securities that were non-income producing as of
December 31, 2010.
6. FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The hierarchy for inputs used in
determining fair value maximizes the use of observable inputs and minimizes the
use of unobservable inputs by requiring that observable inputs be used when
available. Assets and liabilities recorded on the Statements of Financial
Position at fair value are categorized in the fair value hierarchy based on the
observability of inputs to the valuation techniques as follows:
LEVEL 1:Assets and liabilities whose values are based on unadjusted quoted
prices for identical assets or liabilities in an active market that the
Company can access.
LEVEL 2:Assets and liabilities whose values are based on the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in
markets that are not active; or
c) Valuation models whose inputs are observable, directly or indirectly,
for substantially the full term of the asset or liability.
LEVEL 3:Assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. Unobservable inputs
reflect the Company's estimates of the assumptions that market
participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations
where fair value is based on internally developed pricing models or inputs that
are unobservable in the market, the determination of fair value
38
requires more judgment. The degree of judgment exercised by the Company in
determining fair value is typically greatest for instruments categorized in
Level 3. In many instances, valuation inputs used to measure fair value fall
into different levels of the fair value hierarchy. The category level in the
fair value hierarchy is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. The Company uses
prices and inputs that are current as of the measurement date, including during
periods of market disruption. In periods of market disruption, the ability to
observe prices and inputs may be reduced for many instruments.
The Company has two types of situations where investments are classified as
Level 3 in the fair value hierarchy. The first is where quotes continue to be
received from independent third-party valuation service providers and all
significant inputs are market observable; however, there has been a significant
decrease in the volume and level of activity for the asset when compared to
normal market activity such that the degree of market observability has
declined to a point where categorization as a Level 3 measurement is considered
appropriate. The indicators considered in determining whether a significant
decrease in the volume and level of activity for a specific asset has occurred
include the level of new issuances in the primary market, trading volume in the
secondary market, the level of credit spreads over historical levels,
applicable bid-ask spreads, and price consensus among market participants and
other pricing sources.
The second situation where the Company classifies securities in Level 3 is
where specific inputs significant to the fair value estimation models are not
market observable. This occurs in two primary instances. The first relates to
the Company's use of broker quotes. The second relates to auction rate
securities ("ARS") backed by student loans for which a key input, the
anticipated date liquidity will return to this market, is not market observable.
Certain assets are not carried at fair value on a recurring basis, including
investments such as mortgage loans, limited partnership interests and policy
loans. Accordingly, such investments are only included in the fair value
hierarchy disclosure when the investment is subject to remeasurement at fair
value after initial recognition and the resulting remeasurement is reflected in
the financial statements. In addition, derivatives embedded in fixed income
securities are not disclosed in the hierarchy as free-standing derivatives
since they are presented with the host contracts in fixed income securities.
In determining fair value, the Company principally uses the market approach
which generally utilizes market transaction data for the same or similar
instruments. To a lesser extent, the Company uses the income approach which
involves determining fair values from discounted cash flow methodologies. For
the majority of Level 2 and Level 3 valuations, a combination of the market and
income approaches is used.
SUMMARY OF SIGNIFICANT VALUATION TECHNIQUES FOR ASSETS AND LIABILITIES MEASURED
AT FAIR VALUE ON A RECURRING BASIS
Level 1 measurements
. Fixed income securities: Comprise U.S. Treasuries. Valuation is based on
unadjusted quoted prices for identical assets in active markets that the
Company can access.
. Equity securities: Comprise actively traded, exchange-listed U.S. equity
securities. Valuation is based on unadjusted quoted prices for identical
assets in active markets that the Company can access.
. Short-term: Comprise actively traded money market funds that have daily
quoted net asset values for identical assets that the Company can access.
. Separate account assets: Comprise actively traded mutual funds that have
daily quoted net asset values for identical assets that the Company can
access. Net asset values for the actively traded mutual funds in which
the separate account assets are invested are obtained daily from the
fund managers.
39
Level 2 measurements
. Fixed income securities:
U.S. GOVERNMENT AND AGENCIES: The primary inputs to the valuation
include quoted prices for identical or similar assets in markets that
are not active, contractual cash flows, benchmark yields and credit
spreads.
MUNICIPAL: The primary inputs to the valuation include quoted prices for
identical or similar assets in markets that are not active, contractual
cash flows, benchmark yields and credit spreads.
CORPORATE, INCLUDING PRIVATELY PLACED: The primary inputs to the
valuation include quoted prices for identical or similar assets in
markets that are not active, contractual cash flows, benchmark yields
and credit spreads. Also included are privately placed securities valued
using a discounted cash flow model that is widely accepted in the
financial services industry and uses market observable inputs and inputs
derived principally from, or corroborated by, observable market data.
The primary inputs to the discounted cash flow model include an interest
rate yield curve, as well as published credit spreads for similar assets
in markets that are not active that incorporate the credit quality and
industry sector of the issuer.
FOREIGN GOVERNMENT: The primary inputs to the valuation include quoted
prices for identical or similar assets in markets that are not active,
contractual cash flows, benchmark yields and credit spreads.
RMBS--U.S. GOVERNMENT SPONSORED ENTITIES ("U.S. AGENCY"), PRIME
RESIDENTIAL MORTGAGE-BACKED SECURITIES ("PRIME") AND ALT-A RESIDENTIAL
MORTGAGE-BACKED SECURITIES ("ALT-A"); ABS--AUTO AND OTHER: The primary
inputs to the valuation include quoted prices for identical or similar
assets in markets that are not active, contractual cash flows, benchmark
yields, prepayment speeds, collateral performance and credit spreads.
CMBS: The primary inputs to the valuation include quoted prices for
identical or similar assets in markets that are not active, contractual
cash flows, benchmark yields, collateral performance and credit spreads.
REDEEMABLE PREFERRED STOCK: The primary inputs to the valuation include
quoted prices for identical or similar assets in markets that are not
active, contractual cash flows, benchmark yields, underlying stock
prices and credit spreads.
. Short-term: The primary inputs to the valuation include quoted prices
for identical or similar assets in markets that are not active,
contractual cash flows, benchmark yields and credit spreads. For certain
short-term investments, amortized cost is used as the best estimate of
fair value.
. Other investments: Free-standing exchange listed derivatives that are
not actively traded are valued based on quoted prices for identical
instruments in markets that are not active.
Over-the-counter ("OTC") derivatives, including interest rate swaps and
foreign currency swaps, are valued using models that rely on inputs such
as interest rate yield curves, currency rates, and counterparty credit
spreads that are observable for substantially the full term of the
contract. The valuation techniques underlying the models are widely
accepted in the financial services industry and do not involve
significant judgment.
Level 3 measurements
. Fixed income securities:
MUNICIPAL: ARS backed by student loans that have become illiquid due to
failures in the auction market are valued using a discounted cash flow
model that is widely accepted in the financial services industry and
uses significant non-market observable inputs, including estimates of
future coupon rates if auction failures continue, the anticipated date
liquidity will return to the market and illiquidity
40
premium. Also included are municipal bonds that are not rated by third
party credit rating agencies but are rated by the National Association
of Insurance Commissioners ("NAIC"), and other high-yield municipal
bonds. The primary inputs to the valuation of these municipal bonds
include quoted prices for identical or similar assets in markets that
exhibit less liquidity relative to those markets supporting Level 2 fair
value measurements, contractual cash flows, benchmark yields and credit
spreads.
CORPORATE, INCLUDING PRIVATELY PLACED: Valued based on non-binding
broker quotes.
RMBS--SUBPRIME RESIDENTIAL MORTGAGE-BACKED SECURITIES ("SUBPRIME"),
ALT-A AND PRIME: The primary inputs to the valuation included quoted
prices for identical or similar assets in markets that exhibit less
liquidity relative to those markets supporting Level 2 fair value
measurements, contractual cash flows, benchmark yields, prepayment
speeds, collateral performance and credit spreads. Also included are
Subprime, Prime and Alt-A securities that are valued based on
non-binding broker quotes. Due to the reduced availability of actual
market prices or relevant observable inputs as a result of the decrease
in liquidity that has been experienced in the market for these
securities, Subprime and certain Alt-A securities are categorized as
Level 3.
CMBS: The primary inputs to the valuation include quoted prices for
identical or similar assets in markets that exhibit less liquidity
relative to those markets supporting Level 2 fair value measurements,
contractual cash flows, benchmark yields, collateral performance and
credit spreads. Also included are CMBS that are valued based on
non-binding broker quotes. Due to the reduced availability of actual
market prices or relevant observable inputs as a result of the decrease
in liquidity that has been experienced in the market for these
securities, certain CMBS are categorized as Level 3.
ABS--COLLATERALIZED DEBT OBLIGATIONS ("CDO"): Valued based on
non-binding broker quotes received from brokers who are familiar with
the investments. Due to the reduced availability of actual market prices
or relevant observable inputs as a result of the decrease in liquidity
that has been experienced in the market for these securities, all CDO
are categorized as Level 3.
ABS--AUTO AND OTHER: The primary inputs to the valuation include quoted
prices for identical or similar assets in markets that exhibit less
liquidity relative to those markets supporting Level 2 fair value
measurements, contractual cash flows, benchmark yields, prepayment
speeds, collateral performance and credit spreads. Also included are ABS
that are valued based on non-binding broker quotes. Due to the reduced
availability of actual market prices or relevant observable inputs as a
result of the decrease in liquidity that has been experienced in the
market for these securities, certain ABS are categorized as Level 3.
. Other investments: Certain OTC derivatives, such as interest rate caps,
are valued using models that are widely accepted in the financial
services industry. These are categorized as Level 3 as a result of the
significance of non-market observable inputs such as volatility. Other
primary inputs include interest rate yield curves.
. Other assets: Includes a structured settlement annuity reinsurance
agreement accounted for as a derivative instrument. Valued internally
utilizing a model that uses interest rate and volatility assumptions to
generate stochastically determined cash flows. This item is categorized
as Level 3 as a result of the significance of non-market observable
inputs.
. Contractholder funds: Derivatives embedded in certain life and annuity
contracts are valued internally using models widely accepted in the
financial services industry that determine a single best estimate of
fair value for the embedded derivatives within a block of contractholder
liabilities. The models primarily use stochastically determined cash
flows based on the contractual elements of embedded derivatives and
applicable market data, such as interest rate yield curves and equity
index volatility assumptions. These are categorized as Level 3 as a
result of the significance of non-market observable inputs.
41
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS
Mortgage loans written-down to fair value in connection with recognizing
impairments are valued based on the fair value of the underlying collateral
less costs to sell. Limited partnership interests written-down to fair value in
connection with recognizing other-than-temporary impairments are valued using
net asset values.
The following table summarizes the Company's assets and liabilities measured
at fair value on a recurring and non-recurring basis as of December 31, 2010:
QUOTED PRICES
IN ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT COUNTERPARTY BALANCE
IDENTICAL OBSERVABLE UNOBSERVABLE AND CASH AS OF
ASSETS INPUTS INPUTS COLLATERAL DECEMBER 31,
(LEVEL 1) (LEVEL 2) (LEVEL 3) NETTING 2010
($ IN THOUSANDS) ------------- ----------- ------------ ------------ ------------
ASSETS
Fixed income securities:
U.S. government and agencies........ $ 79,679 $ 278,889 $ -- $ 358,568
Municipal........................... -- 750,365 103,369 853,734
Corporate........................... -- 3,527,885 225,207 3,753,092
Foreign government.................. -- 329,603 -- 329,603
RMBS................................ -- 510,235 80,063 590,298
CMBS................................ -- 125,175 141,869 267,044
ABS................................. -- 97,713 40,851 138,564
Redeemable preferred stock.......... -- 9,206 -- 9,206
-------- ---------- -------- ----------
Total fixed income securities... 79,679 5,629,071 591,359 6,300,109
Equity securities.................... 124,559 -- -- 124,559
Short-term investments............... 5,731 192,870 -- 198,601
Other investments:
Free-standing derivatives......... -- -- 469 $ (58) 411
Separate account assets.............. 577,756 -- -- 577,756
Other assets......................... -- -- (4,870) (4,870)
-------- ---------- -------- ----- ----------
TOTAL RECURRING BASIS ASSETS.... 787,725 5,821,941 586,958 (58) 7,196,566
Non-recurring basis/(1)/............. -- -- 7,123 7,123
-------- ---------- -------- ----- ----------
TOTAL ASSETS AT FAIR VALUE........... $787,725 $5,821,941 $594,081 $ (58) $7,203,689
======== ========== ======== ===== ==========
% of total assets at fair value...... 10.9% 80.8% 8.3% --% 100.0%
LIABILITIES
Contractholder funds:
Derivatives embedded in annuity
contracts......................... $ -- $ -- $(17,544) $ (17,544)
Other liabilities:
Free-standing derivatives........... -- -- (3,480) $ 58 (3,422)
-------- ---------- -------- ----- ----------
TOTAL LIABILITIES AT FAIR VALUE...... $ -- $ -- $(21,024) $ 58 $ (20,966)
======== ========== ======== ===== ==========
% of total liabilities at fair value. --% --% 100.3% (0.3)% 100.0%
--------
/(1)/Includes mortgage loans written-down to fair value in connection with
recognizing other-than-temporary impairments.
42
The following table summarizes the Company's assets and liabilities measured
at fair value on a recurring and non-recurring basis as of December 31, 2009:
QUOTED PRICES
IN ACTIVE SIGNIFICANT
MARKETS FOR OTHER SIGNIFICANT COUNTERPARTY BALANCE
IDENTICAL OBSERVABLE UNOBSERVABLE AND CASH AS OF
ASSETS INPUTS INPUTS COLLATERAL DECEMBER 31,
(LEVEL 1) (LEVEL 2) (LEVEL 3) NETTING 2009
($ IN THOUSANDS) ------------- ----------- ------------ ------------ ------------
ASSETS
Fixed income securities:
U.S. government and agencies........ $ 335,264 $ 250,938 $ -- $ 586,202
Municipal........................... -- 754,667 123,743 878,410
Corporate........................... -- 3,069,927 201,275 3,271,202
Foreign government.................. -- 290,856 -- 290,856
RMBS................................ -- 612,548 39,124 651,672
CMBS................................ -- 173,647 173,094 346,741
ABS................................. -- 22,268 17,776 40,044
Redeemable preferred stock.......... -- 8,638 -- 8,638
---------- ---------- -------- ----------
Total fixed income securities... 335,264 5,183,489 555,012 6,073,765
Equity securities.................... 123,311 -- -- 123,311
Short-term investments............... 11,247 337,206 -- 348,453
Other investments:
Free-standing derivatives......... -- 368 2,013 $(344) 2,037
Separate account assets.............. 587,044 -- -- 587,044
Other assets......................... -- -- (5,059) (5,059)
---------- ---------- -------- ----- ----------
TOTAL RECURRING BASIS ASSETS.... 1,056,866 5,521,063 551,966 (344) 7,129,551
Non-recurring basis/(1)/............. -- -- 13,861 13,861
---------- ---------- -------- ----- ----------
TOTAL ASSETS AT FAIR VALUE........... $1,056,866 $5,521,063 $565,827 $(344) $7,143,412
========== ========== ======== ===== ==========
% of total assets at fair value...... 14.8% 77.3% 7.9% --% 100.0%
LIABILITIES
Contractholder funds:
Derivatives embedded in annuity
contracts......................... $ -- $ -- $(13,211) $ (13,211)
Other liabilities:
Free-standing derivatives........... -- (3,917) (2,885) $ 344 (6,458)
---------- ---------- -------- ----- ----------
TOTAL LIABILITIES AT FAIR VALUE...... $ -- $ (3,917) $(16,096) $ 344 $ (19,669)
========== ========== ======== ===== ==========
% of total liabilities at fair value. --% 19.9% 81.8% (1.7)% 100.0%
--------
/(1)/Includes mortgage loans written-down to fair value in connection with
recognizing other-than-temporary impairments.
43
The following table presents the rollforward of Level 3 assets and
liabilities held at fair value on a recurring basis during the year ended
December 31, 2010.
TOTAL REALIZED AND
UNREALIZED GAINS (LOSSES)
INCLUDED IN:
------------------------
OCI ON
BALANCE AS OF STATEMENT OF PURCHASES, SALES, TRANSFERS TRANSFERS BALANCE AS
DECEMBER 31, NET FINANCIAL ISSUANCES AND INTO OUT OF OF DECEMBER 31,
2009 INCOME/(1)/ POSITION SETTLEMENTS, NET LEVEL 3 LEVEL 3 2010
($ IN THOUSANDS) ------------- ---------- ------------ ----------------- --------- --------- ---------------
ASSETS
Fixed income securities:
Municipal................. $123,743 $ (408) $ (245) $(11,242) $ 804 $ (9,283) $103,369
Corporate................. 201,275 (817) 6,957 7,708 58,519 (48,435) 225,207
RMBS...................... 39,124 (5,817) 12,277 38,659 -- (4,180) 80,063
CMBS...................... 173,094 (22,210) 78,944 (16,859) 9,647 (80,747) 141,869
ABS....................... 17,776 (6) 4,869 48,555 -- (30,343) 40,851
-------- -------- -------- -------- ------- --------- --------
Total fixed income
securities.............. 555,012 (29,258) 102,802 66,821 68,970 (172,988) 591,359
Other investments:
Free-standing
derivatives, net......... (872) (3,997) -- 1,858 -- -- (3,011)/(2)/
Other assets.............. (5,059) 189 -- -- -- -- (4,870)
-------- -------- -------- -------- ------- --------- --------
TOTAL RECURRING
LEVEL 3 ASSETS.......... $549,081 $(33,066) $102,802 $ 68,679 $68,970 $(172,988) $583,478
======== ======== ======== ======== ======= ========= ========
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts........ $(13,211) $ (4,333) $ -- $ -- $ -- $ -- $(17,544)
-------- -------- -------- -------- ------- --------- --------
TOTAL RECURRING
LEVEL 3 LIABILITIES..... $(13,211) $ (4,333) $ -- $ -- $ -- $ -- $(17,544)
======== ======== ======== ======== ======= ========= ========
--------
/(1)/The effect to net income totals $(37.4) million and is reported in the
Statements of Operations and Comprehensive Income as follows: $(41.2)
million in realized capital gains and losses, $8.1 million in net
investment income and $4.3 million in contract benefits.
/(2)/Comprises $469 thousand of assets and $3.5 million of liabilities.
Transfers between level categorizations may occur due to changes in the
availability of market observable inputs, which generally are caused by changes
in market conditions such as liquidity, trading volume or bid-ask spreads.
Transfers between level categorizations may also occur due to changes in the
valuation source. For example, in situations where a fair value quote is not
provided by the Company's independent third-party valuation service provider
and as a result the price is stale or has been replaced with a broker quote,
the security is transferred into Level 3. Transfers in and out of level
categorizations are reported as having occurred at the beginning of the quarter
in which the transfer occurred. Therefore, for all transfers into Level 3, all
realized and changes in unrealized gains and losses in the quarter of transfer
are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during 2010.
During 2010, certain CMBS and ABS were transferred into Level 2 from Level 3
as a result of increased liquidity in the market and the availability of market
observable quoted prices for similar assets. When transferring these securities
into Level 2, the Company did not change the source of fair value estimates or
modify the estimates received from independent third-party valuation service
providers or the internal valuation approach. Accordingly, for securities
included within this group, there was no change in fair value in conjunction
with the transfer resulting in a realized or unrealized gain or loss.
Transfers into Level 3 during 2010, including those related to Corporate
fixed income securities, included situations where a fair value quote was not
provided by the Company's independent third-party valuation service
44
provider and as a result the price was stale or had been replaced with a broker
quote resulting in the security being classified as Level 3. Transfers out of
Level 3 during 2010, including those related to Corporate fixed income
securities, included situations where a broker quote was used in the prior
period and a fair value quote became available from the Company's independent
third-party valuation service provider in the current period. A quote utilizing
the new pricing source was not available as of the prior period, and any gains
or losses related to the change in valuation source for individual securities
were not significant.
The following table provides the total gains and (losses) included in net
income during 2010 for Level 3 assets and liabilities still held as of
December 31, 2010.
($ IN THOUSANDS)
ASSETS
Fixed income securities:
Municipal................................... $ 169
Corporate................................... 11,553
RMBS........................................ (4,483)
CMBS........................................ (7,784)
-------
Total fixed income securities........... (545)
Other investments:
Free-standing derivatives, net.............. (2,868)
Other assets................................ 189
-------
TOTAL RECURRING LEVEL 3 ASSETS.......... $(3,224)
=======
LIABILITIES
Contractholder funds:
Derivatives embedded in annuity contracts... $(4,333)
-------
TOTAL RECURRING LEVEL 3 LIABILITIES..... $(4,333)
=======
The amounts in the table above represent gains and losses included in net
income during 2010 for the period of time that the asset or liability was
determined to be in Level 3. These gains and losses total $(7.6) million in
2010 and are reported in the Statements of Operations and Comprehensive Income
as follows: $(15.6) million in realized capital gains and losses, $12.3 million
in net investment income and $4.3 million in contract benefits.
45
The following table presents the rollforward of Level 3 assets and
liabilities held at fair value on a recurring basis during the year ended
December 31, 2009.
TOTAL REALIZED AND
UNREALIZED GAINS
(LOSSES) INCLUDED IN:
-----------------------
OCI ON PURCHASES, NET
BALANCE AS OF STATEMENT OF SALES, ISSUANCES TRANSFERS IN BALANCE AS OF
DECEMBER 31, NET FINANCIAL AND AND/OR (OUT) DECEMBER 31,
2008 INCOME/(1)/ POSITION SETTLEMENTS, NET OF LEVEL 3 2009
($ IN THOUSANDS) ------------- ---------- ------------ ---------------- ------------ -------------
ASSETS
Fixed income securities:
Municipal.................... $ 97,784 $ (150) $ 6,371 $ (3,932) $ 23,670 $ 123,743
Corporate.................... 1,092,115 11,445 121,540 (111,828) (911,997) 201,275
Foreign government........... -- -- 42 4,974 (5,016) --
RMBS......................... 78,202 (1,877) 4,014 (17,839) (23,376) 39,124
CMBS......................... 46,236 (27,157) 82,059 (10,148) 82,104 173,094
ABS.......................... 20,202 13 2,142 (4,581) -- 17,776
---------- -------- -------- --------- --------- ---------
Total fixed income
securities................. 1,334,539 (17,726) 216,168 (143,354) (834,615) 555,012
Other investments:
Free-standing derivatives,
net......................... (4,736) 2,045 -- 1,819 -- (872)/(2)/
Other assets................. (1,829) (3,230) -- -- -- (5,059)
---------- -------- -------- --------- --------- ---------
TOTAL RECURRING
LEVEL 3 ASSETS............. $1,327,974 $(18,911) $216,168 $(141,535) $(834,615) $(549,081)
========== ======== ======== ========= ========= =========
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts........... $ (30,051) $ 15,975 $ -- $ 865 $ -- $ (13,211)
---------- -------- -------- --------- --------- ---------
TOTAL RECURRING
LEVEL 3 LIABILITIES........ $ (30,051) $ 15,975 $ -- $ 865 $ -- $ (13,211)
========== ======== ======== ========= ========= =========
TOTAL
GAINS (LOSSES)
INCLUDED IN NET
INCOME FOR
FINANCIAL
INSTRUMENTS
STILL HELD AS OF
DECEMBER 31,
2009/(3)/
($ IN THOUSANDS) ----------------
ASSETS
Fixed income securities:
Municipal.................... $ (160)
Corporate.................... 4,091
Foreign government........... --
RMBS......................... (1,846)
CMBS......................... (17,109)
ABS.......................... --
--------
Total fixed income
securities................. (15,024)
Other investments:
Free-standing derivatives,
net......................... 4,280
Other assets................. (3,230)
--------
TOTAL RECURRING
LEVEL 3 ASSETS............. $(13,974)
========
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts........... $ 15,975
--------
TOTAL RECURRING
LEVEL 3 LIABILITIES........ $ 15,975
========
--------
/(1)/The effect to net income totals $(2.9) million and is reported in the
Statements of Operations and Comprehensive Income as follows:
$(27.5) million in realized capital gains and losses, $8.6 million in net
investment income and $(16.0) million in contract benefits.
/(2)/Comprises $2.0 million of assets and $2.9 million of liabilities.
/(3)/The amounts represent gains and losses included in net income for the
period of time that the asset or liability was determined to be in Level
3. These gains and losses total $2.0 million and are reported in the
Statements of Operations and Comprehensive Income as follows:
$(22.2) million in realized capital gains and losses, $8.2 million in net
investment income and $(16.0) million in contract benefits.
46
The following table presents the rollforward of Level 3 assets and
liabilities held at fair value on a recurring basis during the year ended
December 31, 2008.
TOTAL REALIZED AND
UNREALIZED GAINS
(LOSSES) INCLUDED IN:
----------------------
OCI ON PURCHASES, NET
BALANCE AS OF STATEMENT OF SALES, ISSUANCES TRANSFERS IN BALANCE AS OF
JANUARY 1, NET FINANCIAL AND AND/OR (OUT) DECEMBER 31,
2008 INCOME/(1)/ POSITION SETTLEMENTS, NET OF LEVEL 3 2008
($ IN THOUSANDS) ------------- ---------- ------------ ---------------- ------------ -------------
ASSETS
Fixed income securities:
Municipal.................... $ 33,200 $ -- $ (11,066) $ (22,250) $ 97,900 $ 97,784
Corporate.................... 1,249,898 5,947 (115,386) (76,075) 27,731 1,092,115
RMBS......................... 119,238 (7,847) (12,879) (20,310) -- 78,202
CMBS......................... 36,794 (29,092) (57,164) (23,105) 118,803 46,236
ABS.......................... 30,768 269 (7,549) (3,286) -- 20,202
---------- -------- --------- --------- -------- ----------
Total fixed income
securities................. 1,469,898 (30,723) (204,044) (145,026) 244,434 1,334,539
Other investments:
Free-standing derivatives,
net......................... (980) (7,124) -- 3,368 -- (4,736)/(2)/
Other assets................. (1,733) (96) -- -- -- (1,829)
---------- -------- --------- --------- -------- ----------
TOTAL RECURRING
LEVEL 3 ASSETS............. $1,467,185 $(37,943) $(204,044) $(141,658) $244,434 $1,327,974
========== ======== ========= ========= ======== ==========
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts........... $ 174 $(30,389) $ -- $ 164 $ -- $ (30,051)
---------- -------- --------- --------- -------- ----------
TOTAL RECURRING
LEVEL 3 LIABILITIES........ $ 174 $(30,389) $ -- $ 164 $ -- $ (30,051)
========== ======== ========= ========= ======== ==========
TOTAL
GAINS (LOSSES)
INCLUDED IN NET
INCOME FOR
FINANCIAL
INSTRUMENTS
STILL HELD AS OF
DECEMBER 31,
2008/(3)/
($ IN THOUSANDS) ----------------
ASSETS
Fixed income securities:
Municipal.................... $ --
Corporate.................... (7,065)
RMBS......................... (7,655)
CMBS......................... (22,438)
ABS.......................... --
--------
Total fixed income
securities................. (37,158)
Other investments:
Free-standing derivatives,
net......................... (1,424)
Other assets................. (96)
--------
TOTAL RECURRING
LEVEL 3 ASSETS............. $(38,678)
========
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts........... $(30,389)
--------
TOTAL RECURRING
LEVEL 3 LIABILITIES........ $(30,389)
========
--------
/(1)/The effect to net income totals $(68.3) million and is reported in the
Statements of Operations and Comprehensive Income as follows:
$(45.9) million in realized capital gains and losses, $8.0 million in net
investment income and $30.4 million in contract benefits.
/(2)/Comprises $0.7 million of assets and $5.4 million of liabilities.
/(3)/The amounts represent gains and losses included in net income for the
period of time that the asset or liability was determined to be in Level
3. These gains and losses total $(69.1) million and are reported in the
Statements of Operations and Comprehensive Income as follows:
$(46.5) million in realized capital gains and losses, $7.8 million in net
investment income and $30.4 million in contract benefits.
Presented below are the carrying values and fair value estimates of
financial instruments not carried at fair value.
FINANCIAL ASSETS
DECEMBER 31, 2010 DECEMBER 31, 2009
------------------- -------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
($ IN THOUSANDS) -------- ---------- -------- ----------
MORTGAGE LOANS.............................. $501,476 $488,248 $543,007 $431,116
LIMITED PARTNERSHIP INTERESTS -- COST BASIS. 2,355 2,347 -- --
NOTES DUE FROM RELATED PARTY................ 18,365 18,365 8,255 8,243
The fair value of mortgage loans is based on discounted contractual cash
flows or if the loans are impaired due to credit reasons, the fair value of
collateral less costs to sell. Risk adjusted discount rates are selected using
47
current rates at which similar loans would be made to borrowers with similar
characteristics, using similar types of properties as collateral. The fair
value of limited partnership interests accounted for on the cost basis is
determined using reported net asset values of the underlying funds. The fair
value of notes due from related party, which are reported in other investments,
is based on discounted cash flow calculations using current interest rates for
instruments with comparable terms.
FINANCIAL LIABILITIES
DECEMBER 31, 2010 DECEMBER 31, 2009
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
($ IN THOUSANDS) ---------- ---------- ---------- ----------
CONTRACTHOLDER FUNDS ON INVESTMENT CONTRACTS. $3,770,279 $3,748,501 $4,082,995 $3,974,490
LIABILITY FOR COLLATERAL..................... 127,983 127,983 149,362 149,362
The fair value of contractholder funds on investment contracts is based on
the terms of the underlying contracts utilizing prevailing market rates for
similar contracts adjusted for the Company's own credit risk. Deferred
annuities included in contractholder funds are valued using discounted cash
flow models which incorporate market value margins, which are based on the cost
of holding economic capital, and the Company's own credit risk. Immediate
annuities without life contingencies are valued at the present value of future
benefits using market implied interest rates which include the Company's own
credit risk. The liability for collateral is valued at carrying value due to
its short-term nature.
7. DERIVATIVE FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Company primarily uses derivatives for risk management. In addition, the
Company has derivatives embedded in non-derivative host contracts that are
required to be separated from the host contracts and accounted for at fair
value. With the exception of non-hedge embedded derivatives, all of the
Company's derivatives are evaluated for their ongoing effectiveness as either
accounting hedge or non-hedge derivative financial instruments on at least a
quarterly basis. The Company does not use derivatives for trading purposes.
Non-hedge accounting is generally used for "portfolio" level hedging strategies
where the terms of the individual hedged items do not meet the strict
homogeneity requirements to permit the application of hedge accounting.
Asset-liability management is a risk management strategy that is principally
employed to balance the respective interest-rate sensitivities of the Company's
assets and liabilities. Depending upon the attributes of the assets acquired
and liabilities issued, derivative instruments such as interest rate swaps and
caps are utilized to change the interest rate characteristics of existing
assets and liabilities to ensure the relationship is maintained within
specified ranges and to reduce exposure to rising or falling interest rates.
The Company uses foreign currency swaps primarily to reduce foreign currency
risk associated with holding foreign currency denominated investments. The
Company also has a reinsurance treaty that is recorded as a derivative
instrument, under which it primarily cedes reinvestment related risk on its
structured settlement annuities to ALIC.
When derivatives meet specific criteria, they may be designated as
accounting hedges and accounted for as fair value, cash flow, foreign currency
fair value or foreign currency cash flow hedges. The Company designates certain
of its foreign currency swap contracts 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. Amounts are
reclassified to net investment income or realized capital gains and losses as
the hedged item affects net income.
The Company's primary embedded derivatives are guaranteed minimum
accumulation and withdrawal benefits in reinsured variable annuity contracts,
and conversion options in fixed income securities, which provide the Company
with the right to convert the instrument into a predetermined number of shares
of common stock.
48
The notional amounts specified in the contracts are used to calculate the
exchange of contractual payments under the agreements and are generally not
representative of the potential for gain or loss on these agreements.
Fair value, which is equal to the carrying value, is the estimated amount
that the Company would receive or pay to terminate the derivative contracts at
the reporting date. The carrying value amounts for OTC derivatives are further
adjusted for the effects, if any, of legally enforceable master netting
agreements and are presented on a net basis, by counterparty agreement, in the
Statements of Financial Position.
For cash flow hedges, gains and losses are amortized from accumulated other
comprehensive income and are reported in net income in the same period the
forecasted transactions being hedged impact net income. For embedded
derivatives in fixed income securities, net income includes the change in fair
value of the embedded derivative and accretion income related to the host
instrument. For non-hedge derivatives, net income includes changes in fair
value and accrued periodic settlements, when applicable.
The following table provides a summary of the volume and fair value
positions of derivative instruments as well as their reporting location in the
Statement of Financial Position as of December 31, 2010. None of these
derivatives are designated as accounting hedging instruments.
ASSET DERIVATIVES
-----------------------------------------------------------------
VOLUME- FAIR
NOTIONAL VALUE, GROSS GROSS
BALANCE SHEET LOCATION AMOUNT NET ASSET LIABILITY
($ IN THOUSANDS) ---------------------------- -------- -------- ------- ---------
INTEREST RATE CONTRACTS
Interest rate cap
agreements............... Other investments $ 57,600 $ 411 $ 444 $ (33)
EMBEDDED DERIVATIVE FINANCIAL
INSTRUMENTS
Conversion options......... Fixed income securities 2,000 124 124 --
OTHER CONTRACTS
Structured settlement
annuity reinsurance
agreement................ Other assets -- (4,870) (4,870) --
-------- -------- ------- --------
TOTAL ASSET DERIVATIVES....... $ 59,600 $ (4,335) $(4,302) $ (33)
======== ======== ======= ========
LIABILITY DERIVATIVES
-----------------------------------------------------------------
VOLUME- FAIR
NOTIONAL VALUE, GROSS GROSS
BALANCE SHEET LOCATION AMOUNT NET ASSET LIABILITY
---------------------------- -------- -------- ------- ---------
INTEREST RATE CONTRACTS
Interest rate cap Other liabilities & accrued
agreements............... expenses $247,500 $ (3,422) $ 25 $ (3,447)
EMBEDDED DERIVATIVE FINANCIAL
INSTRUMENTS
Guaranteed accumulation
benefits................. Contractholder funds 184,186 (15,128) -- (15,128)
Guaranteed withdrawal
benefits................. Contractholder funds 37,736 (2,416) -- (2,416)
-------- -------- ------- --------
TOTAL LIABILITY DERIVATIVES... $469,422 $(20,966) $ 25 $(20,991)
======== ======== ======= ========
TOTAL DERIVATIVES............. $529,022 $(25,301)
======== ========
49
The following table provides a summary of the volume and fair value
positions of derivative instruments as well as their reporting location in the
Statement of Financial Position as of December 31, 2009. None of these
derivatives are designated as accounting hedging instruments.
ASSET DERIVATIVES
- -----------------------------------------------------------------
VOLUME- FAIR
NOTIONAL VALUE, GROSS GROSS
BALANCE SHEET LOCATION AMOUNT NET ASSET LIABILITY
($ IN THOUSANDS) ---------------------------- -------- -------- ------- ---------
INTEREST RATE CONTRACTS
Interest rate cap
agreements............... Other investments $ 52,000 $ 1,670 $ 1,670 $ --
FOREIGN CURRENCY CONTRACTS
Foreign currency swap
agreements............... Other investments 3,103 367 367 --
OTHER CONTRACTS
Structured settlement
annuity reinsurance
agreement................ Other assets -- (5,059) (5,059) --
-------- -------- ------- --------
TOTAL ASSET DERIVATIVES....... $ 55,103 $ (3,022) $(3,022) $ --
======== ======== ======= ========
LIABILITY DERIVATIVES
-----------------------------------------------------------------
VOLUME- FAIR
NOTIONAL VALUE, GROSS GROSS
BALANCE SHEET LOCATION AMOUNT NET ASSET LIABILITY
---------------------------- -------- -------- ------- ---------
INTEREST RATE CONTRACTS
Interest rate swap Other liabilities & accrued
agreements............... expenses $400,000 $ (3,917) $ -- $ (3,917)
Interest rate cap Other liabilities & accrued
agreements............... expenses 275,500 (2,541) 344 (2,885)
EMBEDDED DERIVATIVE FINANCIAL
INSTRUMENTS
Guaranteed accumulation
benefits................. Contractholder funds 186,459 (11,024) -- (11,024)
Guaranteed withdrawal
benefits................. Contractholder funds 43,469 (2,187) -- (2,187)
-------- -------- ------- --------
TOTAL LIABILITY DERIVATIVES... $905,428 $(19,669) $ 344 $(20,013)
======== ======== ======= ========
TOTAL DERIVATIVES............. $960,531 $(22,691)
======== ========
The following table provides a summary of the impacts of the Company's
foreign currency contracts in cash flow hedging relationships in the Statements
of Operations and Comprehensive Income and the Statements of Financial Position
for the years ended December 31. Amortization of net losses from accumulated
other comprehensive income related to cash flow hedges is expected to be zero
during the next twelve months.
2010 2009
($ IN THOUSANDS) ---- -------
EFFECTIVE PORTION
Loss recognized in OCI on derivatives during the period...................... $ -- $(1,107)
Gain recognized in OCI on derivatives during the term of the hedging
relationship............................................................... -- 309
(Loss) gain reclassified from AOCI into income (net investment income)....... (2) 57
Gain reclassified from AOCI into income (realized capital gains and losses).. 311 276
INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING
Gain recognized in income on derivatives (realized capital gains and losses). -- --
50
For cash flow hedges, unrealized net pre-tax gains and losses included in
accumulated other comprehensive income were zero and $309 thousand as of
December 31, 2010 and 2009, respectively. The net pre-tax changes in
accumulated other comprehensive income due to cash flow hedges were $(309)
thousand, $(1.4) million and $2.5 million in 2010, 2009 and 2008, respectively.
The following table presents gains and losses from valuation and settlements
reported on derivatives not designated as accounting hedging instruments in the
Statements of Operations and Comprehensive Income for the years ended
December 31. There was no hedge ineffectiveness in 2010, 2009 or 2008.
TOTAL GAIN (LOSS)
REALIZED CAPITAL GAINS RECOGNIZED IN NET
AND LOSSES CONTRACT BENEFITS INCOME ON DERIVATIVES
--------------------- ---------------- --------------------
2010 2009 2010 2009 2010 2009
($ IN THOUSANDS) -------- ------- ------- ------- -------- -------
Interest rate contracts....................... $(40,261) $42,886 $ -- $ -- $(40,261) $42,886
Embedded derivative financial instruments..... 494 -- (4,334) 16,841 (3,840) 16,841
Other contracts-structured settlement annuity
reinsurance agreement....................... (3,277) (6,636) -- -- (3,277) (6,636)
-------- ------- ------- ------- -------- -------
Total...................................... $(43,044) $36,250 $(4,334) $16,841 $(47,378) $53,091
======== ======= ======= ======= ======== =======
The Company manages its exposure to credit risk by utilizing highly rated
counterparties, establishing risk control limits, executing legally enforceable
master netting agreements ("MNAs") and obtaining collateral where appropriate.
The Company uses MNAs for OTC derivative transactions, including interest rate
swap, foreign currency swap and interest rate cap agreements. These agreements
permit either party to net payments due for transactions covered by the
agreements. Under the provisions of the agreements, collateral is either
pledged or obtained when certain predetermined exposure limits are exceeded. As
of December 31, 2010, the Company pledged $3.7 million in securities to
counterparties, all of which was collateral posted under MNAs for contracts
without credit-risk-contingent liabilities. The Company has not incurred any
losses on derivative financial instruments due to counterparty nonperformance.
Counterparty credit exposure represents the Company's potential loss if all
of the counterparties concurrently fail to perform under the contractual terms
of the contracts and all collateral, if any, becomes worthless. This exposure
is measured by the fair value of OTC derivative contracts with a positive fair
value at the reporting date reduced by the effect, if any, of legally
enforceable master netting agreements.
The following table summarizes the counterparty credit exposure as of
December 31 by counterparty credit rating as it relates to interest rate swap,
foreign currency swap and interest rate cap agreements.
2010 2009
($ IN THOUSANDS) ---------------------------------------------- ----------------------------------------------
NUMBER OF EXPOSURE, NUMBER OF EXPOSURE,
COUNTER- NOTIONAL CREDIT NET OF COUNTER- NOTIONAL CREDIT NET OF
RATING/(1)/ PARTIES AMOUNT EXPOSURE/(2)/ COLLATERAL/(2)/ PARTIES AMOUNT EXPOSURE/(2)/ COLLATERAL/(2)/
---------- --------- -------- ------------ -------------- --------- -------- ------------ --------------
A+.......... 1 $ 1,600 $ 10 $ 10 -- $ -- $ -- $ --
A........... 2 56,000 401 401 1 55,103 2,037 2,037
---- ------- ---- ---- -- ------- ------ ------
Total....... 3 $57,600 $411 $411 1 $55,103 $2,037 $2,037
==== ======= ==== ==== == ======= ====== ======
--------
/(1)/Rating is the lower of S&P or Moody's ratings.
/(2)/Only OTC derivatives with a net positive fair value are included for each
counterparty.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the
derivative financial instruments the Company currently holds, as these
instruments may become less valuable due to adverse changes in market
conditions. To limit this risk, the
51
Company's senior management has established risk control limits. In addition,
changes in fair value of the derivative financial instruments that the Company
uses for risk management purposes are generally offset by the change in the
fair value or cash flows of the hedged risk component of the related assets,
liabilities or forecasted transactions.
Certain of the Company's derivative instruments contain
credit-risk-contingent termination events, cross-default provisions and credit
support annex agreements. Credit-risk-contingent termination events allow the
counterparties to terminate the derivative on certain dates if the Company's
financial strength credit ratings by Moody's or S&P fall below a certain level
or in the event the Company is no longer rated by both Moody's and S&P.
Credit-risk-contingent cross-default provisions allow the counterparties to
terminate the derivative instruments if the Company defaults by pre-determined
threshold amounts on certain debt instruments. Credit-risk-contingent credit
support annex agreements specify the amount of collateral the Company must post
to counterparties based on the Company's financial strength credit ratings by
Moody's or S&P, or in the event the Company is no longer rated by both Moody's
and S&P.
The following summarizes the fair value of derivative instruments with
termination, cross-default or collateral credit-risk-contingent features that
are in a liability position as of December 31, as well as the fair value of
assets and collateral that are netted against the liability in accordance with
provisions within legally enforceable MNAs.
2010 2009
($ IN THOUSANDS) ---- -------
Gross liability fair value of contracts containing credit-risk-contingent features.............. $ 34 $ 3,327
Gross asset fair value of contracts containing credit-risk-contingent features and subject to
MNAs.......................................................................................... (34) (12)
Collateral posted under MNAs for contracts containing credit-risk-contingent features........... -- (2,999)
---- -------
Maximum amount of additional exposure for contracts with credit-risk-contingent features if all
features were triggered concurrently.......................................................... $ -- $ 316
==== =======
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The contractual amounts of off-balance-sheet financial instruments relating
to commitments to invest in limited partnership interests totaled $98.1 million
as of December 31, 2010. The contractual amounts represent the amount at risk
if the contract is fully drawn upon, the counterparty defaults and the value of
any underlying security becomes worthless. Unless noted otherwise, the Company
does not require collateral or other security to support off-balance-sheet
financial instruments with credit risk.
Commitments to invest generally represent commitments to acquire financial
interests or instruments. The Company enters into these agreements to allow for
additional participation in certain limited partnership investments. Because
the equity investments in the limited partnerships are not actively traded, it
is not practical to estimate the fair value of these commitments.
There were no off-balance-sheet financial instruments as of December 31,
2009.
52
8. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
As of December 31, the reserve for life-contingent contract benefits
consists of the following:
2010 2009
($ IN THOUSANDS) ---------- ----------
Immediate fixed annuities:
Structured settlement annuities..................... $1,800,217 $1,701,522
Other immediate fixed annuities..................... 18,663 14,913
Traditional life insurance............................. 162,678 150,400
Accident and health insurance.......................... 6,616 6,286
Other.................................................. 2,040 2,458
---------- ----------
Total reserve for life-contingent contract benefits. $1,990,214 $1,875,579
========== ==========
The following table highlights the key assumptions generally used in
calculating the reserve for life-contingent contract benefits:
PRODUCT MORTALITY INTEREST RATE
------- -------------------------------------- ------------------
Structured settlement annuities U.S. population with projected Interest rate
calendar year improvements; mortality assumptions range
rates adjusted for each impaired life from 3.3% to 9.2%
based on reduction in life expectancy
Other immediate fixed annuities Interest rate
1983 individual annuity mortality assumptions range
table; Annuity 2000 mortality table from 1.1% to 11.5%
with internal modifications;
Traditional life insurance Actual company experience plus loading Interest rate
assumptions range
from 4.0% to 8.0%
Accident and health insurance Actual company experience plus loading
Other:
Variable annuity guaranteed minimum death 100% of Annuity 2000 mortality table Interest rate
benefits/(1)/ assumptions range
from 4.2% to 5.2%
PRODUCT MORTALITY ESTIMATION METHOD
------- -------------------------------------- -----------------------
Structured settlement annuities U.S. population with projected Present value of
calendar year improvements; mortality contractually specified
rates adjusted for each impaired life future benefits
based on reduction in life expectancy
Other immediate fixed annuities Present value of
1983 individual annuity mortality expected future
table; Annuity 2000 mortality table benefits based on
with internal modifications; historical experience
Traditional life insurance Actual company experience plus loading Net level premium
reserve method using
the Company's
withdrawal experience
rates
Accident and health insurance Actual company experience plus loading Unearned premium;
additional contract
reserves for mortality
risk
Other:
Variable annuity guaranteed minimum death 100% of Annuity 2000 mortality table Projected benefit ratio
benefits/(1)/ applied to cumulative
assessments
--------
/(1)/In 2006, the Company disposed of its variable annuity business through a
reinsurance agreement with The Prudential Insurance Company of America, a
subsidiary of Prudential Financial, Inc. (collectively "Prudential").
To the extent that unrealized gains on fixed income securities would result
in a premium deficiency had those gains actually been realized, a premium
deficiency reserve is recorded for certain immediate annuities with life
contingencies. A liability of $115.1 million and $40.6 million is included in
the reserve for life-contingent contract benefits with respect to this
deficiency as of December 31, 2010 and 2009, respectively. The offset to this
liability is recorded as a reduction of the unrealized net capital gains
included in accumulated other comprehensive income.
53
As of December 31, contractholder funds consist of the following:
2010 2009
($ IN THOUSANDS) ---------- ----------
Interest-sensitive life insurance..... $ 660,731 $ 627,362
Investment contracts:
Fixed annuities.................... 4,005,939 4,345,165
Other investment contracts......... 22,121 18,352
---------- ----------
Total contractholder funds..... $4,688,791 $4,990,879
========== ==========
The following table highlights the key contract provisions relating to
contractholder funds:
PRODUCT INTEREST RATE WITHDRAWAL/SURRENDER CHARGES
------- ------------------------------------- ---------------------------------
Interest-sensitive life insurance Interest rates credited range from Either a percentage of account
2.7% to 5.0% balance or dollar amount
grading off generally over 20
years
Fixed annuities Interest rates credited range from Either a declining or a level
0.2% to 9.2% for immediate annuities percentage charge generally
and 1.1% to 6.5% for other fixed over nine years or less.
annuities Additionally, approximately
11.5% of fixed annuities are
subject to a market value
adjustment for discretionary
withdrawals
Other investment contracts:
Guaranteed minimum income, Interest rates used in establishing Withdrawal and surrender
accumulation and withdrawal reserves range from 1.8% to 10.3% charges are based on the terms
benefits on variable of the related interest-sensitive
annuities/(1) /and secondary life insurance or variable
guarantees on interest- annuity contract
sensitive life insurance
--------
/(1)/In 2006, the Company disposed its variable annuity business through a
reinsurance agreement with Prudential.
Contractholder funds activity for the years ended December 31 is as follows:
2010 2009
($ IN THOUSANDS) ---------- ----------
Balance, beginning of year......... $4,990,879 $5,086,965
Deposits........................... 159,490 296,990
Interest credited.................. 165,758 182,665
Benefits........................... (160,376) (160,351)
Surrenders and partial withdrawals. (385,801) (308,244)
Contract charges................... (61,370) (57,157)
Net transfers to separate accounts. (67) --
Other adjustments.................. (19,722) (49,989)
---------- ----------
Balance, end of year............... $4,688,791 $4,990,879
========== ==========
The Company offered various guarantees to variable annuity contractholders.
Liabilities for variable contract guarantees related to death benefits are
included in the reserve for life-contingent contract benefits and the
liabilities related to the income, withdrawal and accumulation benefits are
included in contractholder funds in
54
the Statements of Financial Position. All liabilities for variable contract
guarantees are reported on a gross basis on the balance sheet with a
corresponding reinsurance recoverable asset.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death, a specified contract anniversary
date, partial withdrawal or annuitization, variable annuity and variable life
insurance contractholders bear the investment risk that the separate accounts'
funds may not meet their stated investment objectives. The account balances of
variable annuities contracts' separate accounts with guarantees included $494.7
million and $547.3 million of equity, fixed income and balanced mutual funds
and $82.6 million and $41.0 million of money market mutual funds as of
December 31, 2010 and 2009, respectively.
The table below presents information regarding the Company's variable
annuity contracts with guarantees. The Company's variable annuity contracts may
offer more than one type of guarantee in each contract; therefore, the sum of
amounts listed exceeds the total account balances of variable annuity
contracts' separate accounts with guarantees.
DECEMBER 31,
- -------------------
2010 2009
($ IN MILLIONS) --------- ---------
IN THE EVENT OF DEATH
Separate account value................................................ $ 577.3 $ 588.3
Net amount at risk/(1)/............................................... $ 56.4 $ 105.5
Average attained age of contractholders............................... 63 years 62 years
AT ANNUITIZATION (INCLUDES INCOME BENEFIT GUARANTEES)
Separate account value................................................ $ 41.9 $ 41.2
Net amount at risk/(2)/............................................... $ 6.2 $ 11.1
Weighted average waiting period until annuitization options available. 3 years 4 years
FOR CUMULATIVE PERIODIC WITHDRAWALS
Separate account value................................................ $ 38.3 $ 42.9
Net amount at risk/(3)/............................................... $ 0.6 $ 1.7
ACCUMULATION AT SPECIFIED DATES
Separate account value................................................ $ 190.5 $ 186.5
Net amount at risk/(4)/............................................... $ 6.5 $ 12.1
Weighted average waiting period until guarantee date.................. 6 years 7 years
--------
/(1)/Defined as the estimated current guaranteed minimum death benefit in
excess of the current account balance as of the balance sheet date.
/(2)/Defined as the estimated present value of the guaranteed minimum annuity
payments in excess of the current account balance.
/(3)/Defined as the estimated current guaranteed minimum withdrawal balance
(initial deposit) in excess of the current account balance as of the
balance sheet date.
/(4)/Defined as the estimated present value of the guaranteed minimum
accumulation balance in excess of the current account balance.
The liability for death and income benefit guarantees is 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. The establishment of reserves
for these guarantees requires the projection of future separate account fund
performance, mortality, persistency and customer benefit utilization rates.
These assumptions are periodically reviewed and updated. For guarantees related
to death benefits, benefits represent the current guaranteed minimum death
benefit payments in excess of the current account balance. For guarantees
related to income benefits, benefits represent the present value of the minimum
guaranteed annuitization benefits in excess of the current account balance.
Projected benefits and contract charges used in determining the liability
for certain guarantees are developed using models and stochastic scenarios that
are also used in the development of estimated expected gross profits.
55
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 is re-evaluated periodically, and
adjustments are made to the liability balance through a charge or credit to
contract benefits.
Guarantees related to withdrawal and accumulation benefits are considered to
be derivative financial instruments; therefore, the liability for these
benefits is established based on its fair value.
The following table summarizes the liabilities for guarantees:
LIABILITY FOR
LIABILITY FOR GUARANTEES
GUARANTEES LIABILITY FOR RELATED TO
RELATED TO DEATH GUARANTEES ACCUMULATION
BENEFITS AND RELATED TO AND
INTEREST-SENSITIVE INCOME WITHDRAWAL
LIFE PRODUCTS BENEFITS BENEFITS TOTAL
($ IN THOUSANDS) ------------------ ------------- ------------- -------
Balance, December 31, 2009/(1)/..... $2,332 $5,142 $13,211 $20,685
Less reinsurance recoverables...... 2,332 5,142 13,211 20,685
------ ------ ------- -------
Net balance as of December 31, 2009. -- -- -- --
Incurred guaranteed benefits........ 1,392 -- -- 1,392
Paid guarantee benefits............. -- -- -- --
------ ------ ------- -------
Net change......................... 1,392 -- -- 1,392
Net balance as of December 31, 2010. 1,392 -- -- 1,392
Plus reinsurance recoverables...... 1,862 4,578 17,544 23,984
------ ------ ------- -------
Balance, December 31, 2010/(2)/..... $3,254 $4,578 $17,544 $25,376
====== ====== ======= =======
Balance, December 31, 2008/(3)/..... $2,028 $3,469 $30,051 $35,548
Less reinsurance recoverables...... 2,028 3,469 30,051 35,548
------ ------ ------- -------
Net balance as of December 31, 2008. -- -- -- --
Incurred guaranteed benefits........ -- -- -- --
Paid guarantee benefits............. -- -- -- --
------ ------ ------- -------
Net change......................... -- -- -- --
Net balance as of December 31, 2009. -- -- -- --
Plus reinsurance recoverables...... 2,332 5,142 13,211 20,685
------ ------ ------- -------
Balance, December 31, 2009/(1)/..... $2,332 $5,142 $13,211 $20,685
====== ====== ======= =======
--------
/(1)/Included in the total liability balance as of December 31, 2009 are
reserves for variable annuity death benefits of $2.3 million, variable
annuity income benefits of $5.2 million, variable annuity accumulation
benefits of $11.0 million and variable annuity withdrawal benefits of $2.2
million.
/(2)/Included in the total liability balance as of December 31, 2010 are
reserves for variable annuity death benefits of $1.9 million, variable
annuity income benefits of $4.6 million, variable annuity accumulation
benefits of $15.1 million, variable annuity withdrawal benefits of $2.4
million and other guarantees of $1.4 million.
/(3)/Included in the total liability balance as of December 31, 2008 are
reserves for variable annuity death benefits of $2.0 million, variable
annuity income benefits of $3.5 million, variable annuity accumulation
benefits of $24.0 million and variable annuity withdrawal benefits of $6.0
million.
9. REINSURANCE
The Company reinsures certain of its risks to unaffiliated reinsurers and
ALIC under yearly renewable term, coinsurance and modified coinsurance
agreements. These agreements result in a passing of the agreed-upon percentage
of risk to the reinsurer in exchange for negotiated reinsurance premium
payments. Modified coinsurance is similar to coinsurance, except that the cash
and investments that support the liability for contract benefits are not
transferred to the assuming company and settlements are made on a net basis
between the
56
companies. As of December 31, 2010 and 2009, for certain term life insurance
policies, we ceded up to 90% of the mortality risk depending on the year of
policy issuance. Further, we cede the mortality risk associated with coverage
in excess of $250 thousand per life to ALIC.
In addition, the Company has used reinsurance to effect the disposition of
certain blocks of business. The Company had reinsurance recoverables of $265.0
million and $287.5 million as of December 31, 2010 and 2009, respectively, due
from Prudential related to the disposal of its variable annuity business that
was effected through reinsurance agreements. In 2010, premiums and contract
charges of $12.4 million, contract benefits of $5.7 million, interest credited
to contractholder funds of $8.5 million, and operating costs and expenses of
$1.7 million were ceded to Prudential. In 2009, premiums and contract charges
of $11.7 million, contract benefits of $(11.6) million, interest credited to
contractholder funds of $8.8 million, and operating costs and expenses of $1.2
million were ceded to Prudential. In 2008, premiums and contract charges of
$16.3 million, contract benefits of $35.5 million, interest credited to
contractholder funds of $10.5 million, and operating costs and expenses of $2.5
million were ceded to Prudential. In addition, as of December 31, 2010 and
2009, the Company had reinsurance recoverables of $738 thousand and $429
thousand, respectively, due from a subsidiary of Citigroup (Triton Insurance
Company) in connection with the disposition of the direct response distribution
business in 2003.
As of December 31, 2010, the gross life insurance in force was $35.26
billion of which $4.66 billion and $11.14 billion was ceded to affiliated and
unaffiliated reinsurers, respectively.
The effects of reinsurance on premiums and contract charges for the years
ended December 31 are as follows:
2010 2009 2008
($ IN THOUSANDS) -------- -------- --------
PREMIUMS AND CONTRACT CHARGES
Direct............................................... $155,865 $154,440 $156,187
Assumed -- non-affiliate............................. 955 959 1,164
Ceded
Affiliate........................................... (30,797) (26,250) (4,470)
Non-affiliate....................................... (28,873) (29,656) (32,525)
-------- -------- --------
Premiums and contract charges, net of reinsurance. $ 97,150 $ 99,493 $120,356
======== ======== ========
The effects of reinsurance on contract benefits for the years ended
December 31 are as follows:
2010 2009 2008
($ IN THOUSANDS) -------- -------- --------
CONTRACT BENEFITS
Direct................................... $207,433 $174,909 $223,859
Assumed -- non-affiliate................. 877 676 640
Ceded
Affiliate/(1)/.......................... (6,079) (6,225) 7,022
Non-affiliate........................... (19,445) 715 (47,329)
-------- -------- --------
Contract benefits, net of reinsurance. $182,786 $170,075 $184,192
======== ======== ========
--------
/(1)/The Company recorded additional expenses for contract benefits in 2008
relating to a rescission of reinsurance coverage for certain traditional
and interest-sensitive life insurance policies provided in accordance with
an agreement between the Company and ALIC. These contract benefits are
reflected as a component of contract benefits ceded to affiliate for 2008
and totaled $7.1 million. See Note 4 for further details.
57
The effects of reinsurance on interest credited to contractholder funds for
the years ended December 31 are as follows:
2010 2009 2008
($ IN THOUSANDS) -------- -------- --------
INTEREST CREDITED TO CONTRACTHOLDER FUNDS
Direct........................................................... $176,523 $210,289 $201,661
Assumed -- non-affiliate......................................... 19 17 32
Ceded
Non-affiliate................................................... (8,457) (8,757) (10,485)
-------- -------- --------
Interest credited to contractholder funds, net of reinsurance. $168,085 $201,549 $191,208
======== ======== ========
In addition to amounts included in the table above are reinsurance premiums
ceded to ALIC of $3.5 million, $3.4 million and $3.3 million during 2010, 2009
and 2008, respectively, under the terms of the structured settlement annuity
reinsurance agreement (see Note 4).
10. DEFERRED POLICY ACQUISITION AND SALES INDUCEMENT COSTS
Deferred policy acquisitions costs for the years ended December 31 are as
follows:
2010 2009 2008
($ IN THOUSANDS) -------- --------- --------
Balance, beginning of year................................... $213,325 $ 538,248 $278,664
Impact of adoption of new OTTI accounting guidance before
unrealized impact/(1)/..................................... -- (11,825) --
Impact of adoption of new OTTI accounting guidance effect of
unrealized capital gains and losses/(2)/................... -- 11,825 --
Acquisition costs deferred................................... 24,704 32,560 51,390
Amortization charged to income............................... (16,437) (148,450) (17,778)
Effect of unrealized gains and losses........................ (51,655) (209,033) 225,972
-------- --------- --------
Balance, end of year......................................... $169,937 $ 213,325 $538,248
======== ========= ========
-----
/(1)/The adoption of new OTTI accounting guidance on April 1, 2009 resulted in
an adjustment to DAC to reverse previously recorded DAC accretion related
to realized capital losses that were reclassified to other comprehensive
income upon adoption.
/(2)/The adoption of new OTTI accounting guidance resulted in an adjustment to
DAC due to the change in unrealized capital gains and losses that
occurred upon adoption on April 1, 2009 when previously recorded realized
capital losses were reclassified to other comprehensive income. The
adjustment was recorded as an increase of the DAC balance and unrealized
capital gains and losses.
58
DSI activity, which primarily relates to fixed annuities and interest
sensitive life contracts, for the years ended December 31 was as follows:
2010 2009 2008
($ IN THOUSANDS) ------- -------- -------
Balance, beginning of year................................ $11,091 $ 47,319 $27,991
Impact of adopting new OTTI accounting guidance before
unrealized impact/(1)/.................................. -- (1,732) --
Impact of adopting new OTTI accounting guidance effect of
unrealized capital gains and losses/(2)/................ -- 1,732 --
Sales inducements deferred................................ 1,048 3,454 7,579
Amortization charged to income............................ (3,375) (22,337) (7,843)
Effect of unrealized gains and losses..................... (6,740) (17,345) 19,592
------- -------- -------
Balance, end of year...................................... $ 2,024 $ 11,091 $47,319
======= ======== =======
-----
/(1)/The adoption of new OTTI accounting guidance on April 1, 2009 resulted in
an adjustment to DSI to reverse previously recorded DSI accretion related
to realized capital losses that were reclassified to other comprehensive
income upon adoption.
/(2)/The adoption of new OTTI accounting guidance resulted in an adjustment to
DSI due to the change in unrealized capital gains and losses that
occurred upon adoption on April 1, 2009 when previously recorded realized
capital losses were reclassified to other comprehensive income. The
adjustment was recorded as an increase of the DSI balance and unrealized
capital gains and losses.
11. GUARANTEES AND CONTINGENT LIABILITIES
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a state
can be assessed, up to prescribed limits, for certain obligations of insolvent
insurance companies to policyholders and claimants. Amounts assessed to each
company are typically related to its proportion of business written in each
state. The Company's policy is to accrue assessments when the entity for which
the insolvency relates has met its state of domicile's statutory definition of
insolvency and the amount of the loss is reasonably estimable. In most states,
the definition is met with a declaration of financial insolvency by a court of
competent jurisdiction. In certain states there must also be a final order of
liquidation. As of December 31, 2010 and 2009, the liability balance included
in other liabilities and accrued expenses was $787 thousand and $790 thousand,
respectively. The related premium tax offsets included in other assets were
$736 thousand and $739 thousand as of December 31, 2010 and 2009, respectively.
The New York Liquidation Bureau (the "Bureau") has publicly reported that
Executive Life Insurance Company of New York ("Executive Life") is currently
under its jurisdiction as part of a 1992 court-ordered rehabilitation plan. At
this time, Executive Life continues to fully pay claims when due. An Order to
Show Cause dated December 17, 2010 from the New York Supreme Court mandates
that the Bureau, Life Insurance Corporation of New York ("LICNY") and other
interested parties provide a proposed plan of liquidation by July 1, 2011;
otherwise, the Superintendent of the New York State Insurance Department will
be required to do so by August 1, 2011. A public hearing on the proposed plan
of liquidation is now scheduled for January 4, 2010. The current publicly
available estimated shortfall from the Bureau is $1.27 billion.
If Executive Life were to be declared insolvent in the future, it is
reasonably possible that the Company will have exposure to future guaranty fund
assessments. The Company's exposure will ultimately depend on the level of
guaranty fund system participation. New York law currently contains an
aggregate limit on guaranty funds under the LICNY of $500 million, of which
approximately $40 million has been used. Under current law, the Company may be
allowed to recoup a portion of the amount of any additional guaranty fund
assessment in periods subsequent to the recognition of the assessment by
offsetting future premium taxes. The Company's three-year average market share
for New York as of December 31, 2009, based on assessable premiums, was
approximately 2.2%.
59
GUARANTEES
Related to the disposal through reinsurance of our variable annuity business
to Prudential in 2006, the Company, ALIC and the Corporation have agreed to
indemnify Prudential for certain pre-closing contingent liabilities (including
extra-contractual liabilities of the Company and liabilities specifically
excluded from the transaction) that the Company and ALIC have agreed to retain.
In addition, the Company, ALIC and the Corporation will each indemnify
Prudential for certain post-closing liabilities that may arise from the acts of
the Company and ALIC and their agents, including in connection with the
Company's and ALIC's provision of transition services. The reinsurance
agreements contain no limitations or indemnifications with regard to insurance
risk transfer, and transferred all of the future risks and responsibilities for
performance on the underlying variable annuity contracts to Prudential,
including those related to benefit guarantees. Management does not believe this
agreement will have a material adverse effect on results of operations, cash
flows or financial position of the Company.
In the normal course of business, the Company provides standard
indemnifications to contractual counterparties in connection with numerous
transactions, including acquisitions and divestitures. 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 are 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.
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 December 31, 2010.
REGULATION AND COMPLIANCE
The Company is subject to changing social, economic and regulatory
conditions. From time to time, regulatory authorities or legislative bodies
seek to impose additional regulations regarding agent and broker compensation,
regulate the nature of and amount of investments, and otherwise expand overall
regulation of insurance products and the insurance industry. The Company has
established procedures and policies to facilitate compliance with laws and
regulations, to foster prudent business operations, and to support financial
reporting. The Company routinely reviews its practices to validate compliance
with laws and regulations and with internal procedures and policies. As a
result of these reviews, from time to time the Company may decide to modify
some of its procedures and policies. Such modifications, and the reviews that
led to them, may be accompanied by payments being made and costs being
incurred. The ultimate changes and eventual effects of these actions on the
Company's business, if any, are uncertain.
LEGAL AND REGULATORY PROCEEDINGS AND INQUIRIES
BACKGROUND
The Company and certain affiliates are involved in a number of lawsuits,
regulatory inquiries, and other legal proceedings arising out of various
aspects of its business. As background to the "Proceedings" subsection below,
please note the following:
. These matters raise difficult and complicated factual and legal issues
and are subject to many uncertainties and complexities, including the
underlying facts of each matter; novel legal issues; variations between
jurisdictions in which matters are being litigated, heard, or
investigated; differences in applicable laws and judicial
interpretations; the length of time before many of these matters might
be resolved by settlement, through litigation or otherwise; the fact
that some of the lawsuits are putative
60
class actions in which a class has not been certified and in which the
purported class may not be clearly defined; the fact that some of the
lawsuits involve multi-state class actions in which the applicable
law(s) for the claims at issue is in dispute and therefore unclear; and
the current challenging legal environment faced by large corporations
and insurance companies.
. The outcome of these matters may be affected by decisions, verdicts, and
settlements, and the timing of such decisions, verdicts, and
settlements, in other individual and class action lawsuits that involve
the Company, other insurers, or other entities and by other legal,
governmental, and regulatory actions that involve the Company, other
insurers, or other entities. The outcome may also be affected by future
state or federal legislation, the timing or substance of which cannot be
predicted.
. In the lawsuits, plaintiffs seek a variety of remedies which may include
equitable relief in the form of injunctive and other remedies and
monetary relief in the form of contractual and extra-contractual
damages. In some cases, the monetary damages sought include punitive
damages. Often specific information about the relief sought, such as the
amount of damages, is not available because plaintiffs have not
requested specific relief in their pleadings. When specific monetary
demands are made, they are often set just below a state court
jurisdictional limit in order to seek the maximum amount available in
state court, regardless of the specifics of the case, while still
avoiding the risk of removal to federal court. In the Company's
experience, monetary demands in pleadings bear little relation to the
ultimate loss, if any, to the Company.
. In connection with regulatory examinations and proceedings, government
authorities may seek various forms of relief, including penalties,
restitution and changes in business practices. The Company may not be
advised of the nature and extent of relief sought until the final stages
of the examination or proceeding.
. For the reasons specified above, it is not possible to make meaningful
estimates of the amount or range of loss that could result from the
matters described below in the "Proceedings" subsection. The Company
reviews these matters on an ongoing basis and follows appropriate
accounting guidance when making accrual and disclosure decisions. When
assessing reasonably possible and probable outcomes, the Company bases
its decisions on its assessment of the ultimate outcome following all
appeals.
. Due to the complexity and scope of the matters disclosed in the
"Proceedings" subsection below and the many uncertainties that exist,
the ultimate outcome of these matters cannot be reasonably predicted. In
the event of an unfavorable outcome in one or more of these matters, the
ultimate liability may be in excess of amounts currently reserved, if
any, and may be material to the Company's operating results or cash
flows for a particular quarterly or annual period. However, based on
information currently known to it, management believes that the ultimate
outcome of all matters described below, as they are resolved over time,
is not likely to have a material adverse effect on the financial
position of the Company.
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 in the following paragraph.
AIC is defending certain matters relating to its agency program
reorganization announced in 1999. These matters are in various stages of
development.
. These matters include a lawsuit filed in 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") alleging retaliation under
federal civil rights laws (the "EEOC I" suit) and a class action filed
in 2001 by former employee agents alleging retaliation and age
discrimination under the Age
61
Discrimination in Employment Act ("ADEA"), breach of contract and ERISA
violations (the "Romero I" suit). In 2004, in the consolidated EEOC I
and Romero I litigation, the trial court issued a memorandum and order
that, among other things, certified classes of agents, including a
mandatory class of agents who had signed a release, for purposes of
effecting the court's declaratory judgment that the release is voidable
at the option of the release signer. The court also ordered that an
agent who voids the release must return to AIC "any and all benefits
received by the [agent] in exchange for signing the release." The court
also stated that, "on the undisputed facts of record, there is no basis
for claims of age discrimination." The EEOC and plaintiffs asked the
court to clarify and/or reconsider its memorandum and order and in
January 2007, the judge denied their request. In June 2007, the court
granted AIC's motions for summary judgment. Following plaintiffs' filing
of a notice of appeal, the U.S. Court of Appeals for the Third Circuit
("Third Circuit") issued an order in December 2007 stating that the
notice of appeal was not taken from a final order within the meaning of
the federal law and thus not appealable at this time. In March 2008, the
Third Circuit decided that the appeal should not summarily be dismissed
and that the question of whether the matter is appealable at this time
will be addressed by the Third Circuit along with the merits of the
appeal. In July 2009, the Third Circuit vacated the decision which
granted AIC's summary judgment motions, remanded the cases to the trial
court for additional discovery, and directed that the cases be
reassigned to another trial court judge. In January 2010, the cases were
assigned to a new judge for further proceedings in the trail court.
. A putative nationwide class action has also been filed by former
employee agents alleging various violations of 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 by the trial court, was the
subject of further proceedings on appeal, and was reversed and remanded
to the trial court in 2005. In June 2007, the court granted AIC's motion
to dismiss the case. Following plaintiffs' filing of a notice of appeal,
the Third Circuit issued an order in December 2007 stating that the
notice of appeal was not taken from a final order within the meaning of
the federal law and thus not appealable at this time. In March 2008, the
Third Circuit decided that the appeal should not summarily be dismissed
and that the question of whether the matter is appealable at this time
will be addressed by the Third Circuit along with the merits of the
appeal. In July 2009, the Third Circuit vacated the decision which
granted AIC's motion to dismiss the case, remanded the case to the trial
court for additional discovery, and directed that the case be reassigned
to another trial court judge. In January 2010, the case was assigned to
a new judge for further proceedings in the trial court.
In these agency program reorganization 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.
OTHER MATTERS
Various other legal, governmental, and regulatory actions, including state
market conduct exams, and other governmental and regulatory inquiries are
pending from time to time 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 a number of lawsuits and other types of proceedings, some of
which involve claims for substantial or indeterminate amounts. These actions
are based on a variety of issues and target a range of the Company's practices.
The outcome of these disputes is currently unpredictable.
One or more of these matters could have an adverse effect on the Company's
operating results or cash flows for a particular quarterly or annual period.
However, based on information currently known to it, management believes that
the ultimate outcome of all matters described in this "Other Matters"
subsection, in excess of amounts currently reserved, if any, as they are
resolved over time, is not likely to have a material effect on the operating
results, cash flows or financial position of the Company.
62
12. INCOME TAXES
The Company joins with the Corporation and its other domestic subsidiaries
(the "Allstate Group") in the filing of a consolidated federal income tax
return and is party to a federal income tax allocation agreement (the "Allstate
Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the Company
pays to or receives from the Corporation the amount, if any, by which the
Allstate Group's federal income tax liability is affected by virtue of
inclusion of the Company in the consolidated federal income tax return.
Effectively, this results in the Company's annual income tax provision being
computed, with adjustments, as if the Company filed a separate return.
The Internal Revenue Service ("IRS") is currently examining the Allstate
Group's 2007 and 2008 federal income tax returns. The IRS has completed its
examination of the Allstate Group's federal income tax returns through 2006 and
the statute of limitations has expired on years prior to 2005. Any adjustments
that may result from IRS examinations of tax returns are not expected to have a
material effect on the results of operations, cash flows or financial position
of the Company.
The Company had no liability for unrecognized tax benefits as of
December 31, 2010 or 2009, and believes it is reasonably possible that the
liability balance will not significantly increase within the next twelve
months. No amounts have been accrued for interest or penalties.
The components of the deferred income tax assets and liabilities at
December 31 are as follows:
2010 2009
($ IN THOUSANDS) --------- --------
DEFERRED ASSETS
Life and annuity reserves.............. $ 9,264 $ 17,820
Other assets........................... 546 701
--------- --------
Total deferred assets............... 9,810 18,521
--------- --------
DEFERRED LIABILITIES
Unrealized net capital gains........... (71,729) (12,950)
DAC.................................... (28,695) (23,825)
Difference in tax bases of investments. (10,717) (18,594)
Other liabilities...................... (977) (1,039)
--------- --------
Total deferred liabilities.......... (112,118) (56,408)
--------- --------
Net deferred liability.......... $(102,308) $(37,887)
========= ========
Although realization is not assured, management believes it is more likely
than not that the deferred tax assets will be realized based on the Company's
assessment that the deductions ultimately recognized for tax purposes will be
fully utilized.
The components of income tax expense for the years ended December 31 are as
follows:
2010 2009 2008
($ IN THOUSANDS) ------ ------- --------
Current..................... $ 209 $ (946) $ 16,537
Deferred.................... 5,642 20,675 (12,532)
------ ------- --------
Total income tax expense. $5,851 $19,729 $ 4,005
====== ======= ========
The Company received a refund of $3.5 million in 2010, and paid income taxes
of $29.9 million and $3.6 million in 2009 and 2008, respectively.
63
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the years ended December 31 is as
follows:
2010 2009 2008
---- ---- ----
Statutory federal income tax rate......... 35.0% 35.0% 35.0%
State income tax expense.................. 9.6 2.8 13.1
Dividends received deduction.............. (4.4) (1.1) (6.0)
Tax credits............................... (3.2) (1.0) (4.6)
Adjustment for prior year tax liabilities. (1.0) (0.5) (3.4)
Other..................................... 0.2 -- 0.2
---- ---- ----
Effective income tax rate.............. 36.2% 35.2% 34.3%
==== ==== ====
13. STATUTORY FINANCIAL INFORMATION
The Company prepares its statutory-basis financial statements in conformity
with accounting practices prescribed or permitted by the State of New York. The
State of New York requires insurance companies domiciled in its state to
prepare statutory-basis financial statements in conformity with the NAIC
Accounting Practices and Procedures Manual, subject to any deviations
prescribed or permitted by the State of New York Insurance Superintendent.
Prescribed statutory accounting practices include a variety of publications of
the NAIC, as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.
Statutory accounting practices differ from GAAP primarily since they require
charging policy acquisition and certain sales inducement costs to expense as
incurred, establishing life insurance reserves based on different actuarial
assumptions, and valuing certain investments and establishing deferred taxes on
a different basis.
Statutory net loss for 2010, 2009 and 2008 was $(17.3) million, $(8.6)
million and $(18.9) million, respectively. Statutory capital and surplus was
$497.0 million and $506.3 million as of December 31, 2010 and 2009,
respectively.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant
factors. The payment of shareholder dividends by the Company without the prior
approval of the state insurance regulator is limited to formula amounts based
on net income and capital and surplus, determined in conformity with statutory
accounting practices, as well as the timing and amount of dividends paid in the
preceding twelve months. During 2011, the Company will not be able to pay
dividends without prior New York State Insurance Department approval. The
Company paid no dividends in 2010.
14. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT PLANS
Defined benefit pension plans, sponsored by AIC, cover most full-time
employees and certain part-time employees. Benefits under the pension plans are
based upon the employee's length of service and eligible annual compensation.
The allocated cost to the Company for the pension plans was $3.3 million, $1.4
million and $1.8 million in 2010, 2009 and 2008, respectively.
The Corporation provides certain health care subsidies for eligible
employees hired before January 1, 2003 when they retire and their eligible
dependents and certain life insurance benefits for eligible employees hired
before January 1, 2003 when they retire ("postretirement benefits"). Qualified
employees may become eligible
64
for these benefits if they retire in accordance with the Corporation's
established retirement policy and are continuously insured under Corporation's
group plans or other approved plans in accordance with the plan's participation
requirements. The Corporation shares the cost of the retiree medical benefits
with non Medicare-eligible retirees based on years of service, with the
Corporation's share being subject to a 5% limit on annual medical cost
inflation after retirement. During 2009, the Corporation decided to change its
approach for delivering benefits to Medicare-eligible retirees. The Corporation
no longer offers medical benefits for Medicare-eligible retirees but instead
provides a fixed company contribution (based on years of service and other
factors), which is not subject to adjustments for inflation. The allocated cost
to the Company was $47 thousand, $206 thousand and $339 thousand for
postretirement benefits other than pension plans in 2010, 2009 and 2008,
respectively.
AIC and the Corporation have reserved the right to modify or terminate their
benefit plans at any time or for any reason.
ALLSTATE 401(K) SAVINGS PLAN
Employees of AIC are eligible to become members of the Allstate 401(k)
Savings Plan ("Allstate Plan"). The Corporation's contributions are based on
the Corporation's matching obligation and certain performance measures. The
allocated cost to the Company for the Allstate Plan was $492 thousand, $912
thousand and $667 thousand in 2010, 2009 and 2008, respectively.
15. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income (loss) on a pre-tax and
after-tax basis for the years ended December 31 are as follows:
2010
-----------------------------
PRE-TAX TAX AFTER-TAX
($ IN THOUSANDS) -------- --------- ---------
Unrealized net holding gains arising during the period, net of
related offsets............................................... $165,578 $ (57,953) $107,625
Less: reclassification adjustment of realized capital gains and
losses........................................................ (2,361) 826 (1,535)
-------- --------- --------
Unrealized net capital gains and losses......................... 167,939 (58,779) 109,160
-------- --------- --------
Other comprehensive income...................................... $167,939 $ (58,779) $109,160
======== ========= ========
2009
-----------------------------
PRE-TAX TAX AFTER-TAX
-------- --------- ---------
Unrealized net holding gains arising during the period, net of
related offsets............................................... $337,657 $(118,180) $219,477
Less: reclassification adjustment of realized capital gains and
losses........................................................ 101,749 (35,612) 66,137
-------- --------- --------
Unrealized net capital gains and losses......................... 235,908 (82,568) 153,340
-------- --------- --------
Other comprehensive income...................................... $235,908 $ (82,568) $153,340
======== ========= ========
65
2008
-----------------------------
PRE-TAX TAX AFTER-TAX
--------- -------- ---------
Unrealized net holding losses arising during the period, net of
related offsets............................................... $(323,776) $113,321 $(210,455)
Less: reclassification adjustment of realized capital gains and
losses........................................................ (55,927) 19,574 (36,353)
--------- -------- ---------
Unrealized net capital gains and losses......................... (267,849) 93,747 (174,102)
--------- -------- ---------
Other comprehensive loss........................................ $(267,849) $ 93,747 $(174,102)
========= ======== =========
66
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE I--SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2010
AMOUNTS AT
WHICH
COST/ SHOWN IN
AMORTIZED FAIR THE BALANCE
COST VALUE SHEET
($ IN THOUSANDS) ---------- ---------- -----------
Type of investment
Fixed Maturities:
Bonds:
United States government, government agencies and authorities. $ 288,835 $ 358,568 $ 358,568
States, municipalities and political subdivisions............. 874,967 853,734 853,734
Foreign governments........................................... 268,603 329,603 329,603
Public utilities.............................................. 780,536 838,112 838,112
Convertibles and bonds with warrants attached................. 88,560 89,426 89,426
All other corporate bonds..................................... 2,676,469 2,825,554 2,825,554
Asset-backed securities.......................................... 138,832 138,564 138,564
Residential mortgage-backed securities........................... 579,801 590,298 590,298
Commercial mortgage-backed securities............................ 294,494 267,044 267,044
Redeemable preferred stocks...................................... 9,196 9,206 9,206
---------- ---------- ----------
Total fixed maturities...................................... 6,000,293 $6,300,109 6,300,109
---------- ========== ----------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other....................... 99,348 $ 124,559 124,559
==========
Mortgage loans on real estate.................................... 501,476 $ 488,248 501,476
==========
Policy loans..................................................... 41,862 41,862
Derivative instruments........................................... 411 $ 411 411
==========
Limited partnership interests.................................... 4,814 4,814
Other long-term investments...................................... 18,365 18,365
Short-term investments........................................... 198,601 $ 198,601 198,601
---------- ========== ----------
Total investments........................................... $6,865,170 $7,190,197
========== ==========
67
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE IV--REINSURANCE
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES/(1)/ COMPANIES AMOUNT TO NET
($ IN THOUSANDS) ----------- ------------- ---------- ----------- ----------
YEAR ENDED DECEMBER 31, 2010
----------------------------
Life insurance in force......... $34,597,944 $15,803,458 $663,707 $19,458,193 3.4%
=========== =========== ======== ===========
Premiums and contract charges:
Life and annuities........... $ 143,571 $ 57,638 $ 955 $ 86,888 1.1%
Accident and health.......... 12,294 2,032 -- 10,262 --%
----------- ----------- -------- -----------
Total premiums and contract
charges.................... $ 155,865 $ 59,670 $ 955 $ 97,150 1.0%
=========== =========== ======== ===========
YEAR ENDED DECEMBER 31, 2009
----------------------------
Life insurance in force......... $33,925,356 $12,115,820 $695,124 $22,504,660 3.1%
=========== =========== ======== ===========
Premiums and contract charges:
Life and annuities........... $ 142,563 $ 53,595 $ 959 $ 89,927 1.1%
Accident and health.......... 11,877 2,311 -- 9,566 --%
----------- ----------- -------- -----------
Total premiums and contract
charges.................... $ 154,440 $ 55,906 $ 959 $ 99,493 1.0%
=========== =========== ======== ===========
YEAR ENDED DECEMBER 31, 2008
----------------------------
Life insurance in force......... $32,704,176 $11,655,410 $737,572 $21,786,338 3.4%
=========== =========== ======== ===========
Premiums and contract charges:
Life and annuities........... $ 145,521 $ 34,529 $ 1,164 $ 112,156 1.0%
Accident and health.......... 10,666 2,466 -- 8,200 --%
----------- ----------- -------- -----------
Total premiums and contract
charges.................... $ 156,187 $ 36,995 $ 1,164 $ 120,356 1.0%
=========== =========== ======== ===========
--------
/(1)/No reinsurance or coinsurance income was netted against premium ceded in
2010, 2009 or 2008.
68
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V--VALUATION ALLOWANCES AND QUALIFYING ACCOUNTS
ADDITIONS
($ IN THOUSANDS) --------------------
BALANCE AS OF CHARGED TO BALANCE AS OF
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ADDITIONS DEDUCTIONS PERIOD
----------- ------------- ---------- --------- ---------- -------------
YEAR ENDED DECEMBER 31, 2010
----------------------------
Allowance for estimated losses on mortgage
loans.................................... $4,250 $2,922 $ -- $5,502 $1,670
YEAR ENDED DECEMBER 31, 2009
----------------------------
Allowance for estimated losses on mortgage
loans.................................... $ 449 $5,264 $ -- $1,463 $4,250
YEAR ENDED DECEMBER 31, 2008
Allowance for estimated losses on mortgage
loans.................................... $ -- $ 449 $ -- $ -- $ 449
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Allstate Life Insurance Company of New York
Hauppauge, NY
We have audited the accompanying Statements of Financial Position of Allstate
Life Insurance Company of New York (the "Company"), an affiliate of The
Allstate Corporation, as of December 31, 2010 and 2009, and the related
Statements of Operations and Comprehensive Income, Shareholder's Equity, and
Cash Flows for each of the three years in the period ended December 31, 2010.
Our audits also included Schedule I-Summary of Investments-Other Than
Investments in Related Parties, Schedule IV-Reinsurance, and Schedule
V-Valuation Allowances and Qualifying Accounts. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Allstate Life Insurance Company of New York
as of December 31, 2010 and 2009, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2010,
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, Schedule I-Summary of
Investments-Other Than Investments in Related Parties, Schedule IV-Reinsurance,
and Schedule V-Valuation Allowances and Qualifying Accounts, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
In 2009, the Company changed its recognition and presentation for
other-than-temporary impairments of debt securities.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 11, 2011
70
ITEM 11(F).SELECTED FINANCIAL DATA
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2010 2009 2008 2007 2006
($ IN THOUSANDS) ---------- ---------- ---------- ---------- ----------
OPERATING RESULTS
Premiums...................................... $ 45,087 $ 47,659 $ 59,248 $ 69,124 $ 84,313
Contract charges.............................. 52,063 51,834 61,108 59,530 63,426
Net investment income......................... 368,695 372,395 402,931 386,738 373,064
Realized capital gains and losses............. (45,849) 145,468 (77,205) (831) (22,085)
Total revenues................................ 419,996 617,356 446,082 514,561 498,718
Net income.................................... 10,297 36,370 7,672 41,909 34,342
FINANCIAL POSITION
Investments................................... $7,190,197 $7,139,397 $6,648,585 $7,057,629 $6,779,874
Total assets.................................. 8,353,855 8,388,191 8,284,933 8,785,177 8,619,988
Reserve for life-contingent contract benefits
and contractholder funds.................... 6,679,005 6,866,458 7,040,122 6,865,432 6,634,920
Shareholder's equity.......................... 826,341 706,884 516,568 680,872 652,996
ITEM 11(H).MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion highlights significant factors influencing the
financial position and results of operations of Allstate Life Insurance Company
of New York (referred to in this document as "we", "ALNY", "our", "us" or the
"Company"). It should be read in conjunction with the financial statements and
related notes found under Item 11(e) contained herein. We operate as a single
segment entity based on the manner in which we use financial information to
evaluate business performance and to determine the allocation of resources.
The most important factors we monitor to evaluate the financial condition
and performance of our company include:
. For operations: benefit and investment spread, amortization of deferred
policy acquisition costs ("DAC"), expenses, net income, invested assets,
and premiums and contract charges;
. For investments: credit quality/experience, realized capital gains and
losses, investment income, unrealized capital gains and losses,
stability of long-term returns, total returns, cash flows, and asset and
liability duration; and
. For financial condition: liquidity, financial strength ratings,
operating leverage, and return on equity.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the financial statements. The most critical
estimates include those used in determining:
. Fair value of financial assets
. Impairment of fixed income and equity securities
. Deferred policy acquisition costs amortization
. Reserve for life-contingent contract benefits estimation
71
In making these determinations, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain. Many of these policies, estimates and related judgments are common
in the insurance and financial services industries; others are specific to our
businesses and operations. It is reasonably likely that changes in these
estimates could occur from period to period and result in a material impact on
our financial statements.
A brief summary of each of these critical accounting estimates follows. For
a more detailed discussion of the effect of these estimates on our financial
statements, and the judgments and assumptions related to these estimates, see
the referenced sections of this document. For a complete summary of our
significant accounting policies, see Note 2 of the financial statements.
FAIR VALUE OF FINANCIAL ASSETS Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. We categorize
our financial assets measured at fair value into a three-level hierarchy based
on the observability of inputs to the valuation techniques as follows:
LEVEL 1:Financial asset values are based on unadjusted quoted prices for
identical assets in an active market that we can access.
LEVEL 2:Financial assets values are based on the following:
(a)Quoted prices for similar assets in active markets;
(b)Quoted prices for identical or similar assets in markets that are not
active; or
(c)Valuation models whose inputs are observable, directly or indirectly,
for substantially the full term of the asset.
LEVEL 3:Financial assets values are based on prices or valuation techniques
that require inputs that are both unobservable and significant to the
overall fair value measurement. Unobservable inputs reflect our
estimates of the assumptions that market participants would use in
valuing the financial assets.
Observable inputs are inputs that reflect the assumptions market
participants would use in valuing financial assets that are developed based on
market data obtained from independent sources. In the absence of sufficient
observable inputs, unobservable inputs reflect our estimates of the assumptions
market participants would use in valuing financial assets and are developed
based on the best information available in the circumstances. The degree of
management judgment involved in determining fair values is inversely related to
the availability of market observable information.
We are responsible for the determination of fair value of financial assets
and the supporting assumptions and methodologies. We gain assurance on the
overall reasonableness and consistent application of valuation input
assumptions, valuation methodologies and compliance with accounting standards
for fair value determination through the execution of various processes and
controls designed to ensure that our financial assets are appropriately valued.
We monitor fair values received from third parties and those derived internally
on an ongoing basis.
We employ independent third-party valuation service providers, broker quotes
and internal pricing methods to determine fair values. We obtain or calculate
only one single quote or price for each financial instrument.
Valuation service providers typically obtain data about market transactions
and other key valuation model inputs from multiple sources and, through the use
of proprietary models, produce valuation information in the form of a single
fair value for individual securities for which a fair value has been requested
under the terms of our agreements. For certain equity securities, valuation
service providers provide market quotations for completed
72
transactions on the measurement date. For other security types, fair values are
derived from the valuation service providers' proprietary valuation models. The
inputs used by the valuation service providers include, but are not limited to,
market prices from recently completed transactions and transactions of
comparable securities, interest rate yield curves, credit spreads, liquidity
spreads, currency rates, and other information, as applicable. Credit and
liquidity spreads are typically implied from completed transactions and
transactions of comparable securities. Valuation service providers also use
proprietary discounted cash flow models that are widely accepted in the
financial services industry and similar to those used by other market
participants to value the same financial instruments. The valuation models take
into account, among other things, market observable information as of the
measurement date, as described above, as well as the specific attributes of the
security being valued including its term, interest rate, credit rating,
industry sector, and where applicable, collateral quality and other issue or
issuer specific information. Executing valuation models effectively requires
seasoned professional judgment and experience. In cases where market
transactions or other market observable data is limited, the extent to which
judgment is applied varies inversely with the availability of market observable
information.
For certain of our financial assets measured at fair value, where our
valuation service providers cannot provide fair value determinations, we obtain
a single non-binding price quote from a broker familiar with the security who,
similar to our valuation service providers, may consider transactions or
activity in similar securities among other information. The brokers providing
price quotes are generally from the brokerage divisions of leading financial
institutions with market making, underwriting and distribution expertise
regarding the security subject to valuation.
The fair value of certain financial assets, including privately placed
corporate fixed income securities, auction rate securities ("ARS") backed by
student loans, and certain free-standing derivatives, for which our valuation
service providers or brokers do not provide fair value determinations, is
determined using valuation methods and models widely accepted in the financial
services industry. Internally developed valuation models, which include inputs
that may not be market observable and as such involve some degree of judgment,
are considered appropriate for each class of security to which they are applied.
Our internal pricing methods are primarily based on models using discounted
cash flow methodologies that develop a single best estimate of fair value. Our
models generally incorporate inputs that we believe are representative of
inputs other market participants would use to determine fair value of the same
instruments, including yield curves, quoted market prices of comparable
securities, published credit spreads, and other applicable market data.
Additional inputs that are used include internally-derived assumptions such as
liquidity premium and credit ratings, as well as instrument-specific
characteristics that include, but are not limited to, coupon rate, expected
cash flows, sector of the issuer, and call provisions. Our internally assigned
credit ratings are developed at a more detailed level than externally published
ratings and allow for a more precise match of these ratings to other market
observable valuation inputs, such as credit and sector spreads, when performing
these valuations. Due to the existence of non-market observable inputs, such as
liquidity premiums, judgment is required in developing these fair values. As a
result, the fair value of these financial assets may differ from the amount
actually received to sell an asset in an orderly transaction between market
participants at the measurement date. Moreover, the use of different valuation
assumptions may have a material effect on the financial assets' fair values.
For the majority of our financial assets measured at fair value, all
significant inputs are based on market observable data and significant
management judgment does not affect the periodic determination of fair value.
The determination of fair value using discounted cash flow models involves
management judgment when significant model inputs are not based on market
observable data. However, where market observable data is available, it takes
precedence, and as a result, no range of reasonably likely inputs exists from
which the basis of a sensitivity analysis could be constructed.
There is one primary situation where a discounted cash flow model utilizes a
significant input that is not market observable, and it relates to the
determination of fair value for our ARS backed by student loans. The
73
significant input utilized is the anticipated date liquidity will return to
this market (that is, when auction failures will cease). Determination of this
assumption allows for matching to market observable inputs when performing
these valuations.
The following table displays the sensitivity of reasonably likely changes in
the anticipated date liquidity will return to the student loan ARS market as of
December 31, 2010. The selection of these hypothetical scenarios represents an
illustration of the estimated potential proportional effect of alternate
assumptions and should not be construed as either a prediction of future events
or an indication that it would be reasonably likely that all securities would
be similarly affected.
($ IN THOUSANDS)
ARS backed by student loans at fair value........................................ $82,229
Percentage change in fair value resulting from:
Decrease in the anticipated date liquidity will return to this market by six
months...................................................................... 1.1%
Increase in the anticipated date liquidity will return to this market by six
months...................................................................... (1.1)%
We believe our most significant exposure to changes in fair value is due to
market risk. Our exposure to changes in market conditions is discussed fully in
the Market Risk section of the MD&A.
We employ specific control processes to determine the reasonableness of the
fair values of our financial assets. Our processes are designed to ensure that
the values received or internally estimated are accurately recorded and that
the data inputs and the valuation techniques utilized are appropriate,
consistently applied, and that the assumptions are reasonable and consistent
with the objective of determining fair value. For example, on a continuing
basis, we assess the reasonableness of individual security values received from
valuation service providers and those derived from internal models that exceed
certain thresholds as compared to previous values received from those valuation
service providers or derived from internal models. In addition, we may validate
the reasonableness of fair value by comparing information obtained from our
valuation service providers to other third party valuation sources for selected
securities. We perform ongoing price validation procedures such as back-testing
of actual sales, which corroborate the various inputs used in internal pricing
models to market observable data. When fair value determinations are expected
to be more variable, we validate them through reviews by members of management
who have relevant expertise and who are independent of those charged with
executing investment transactions.
We also perform an analysis to determine whether there has been a
significant decrease in the volume and level of activity for the asset when
compared to normal market activity, and if so, whether transactions may not be
orderly. Among the indicators we consider in determining whether a significant
decrease in the volume and level of market activity for a specific asset has
occurred include the level of new issuances in the primary market, trading
volume in the secondary market, level of credit spreads over historical levels,
bid-ask spread, and price consensuses among market participants and sources. If
evidence indicates that prices are based on transactions that are not orderly,
we place little, if any, weight on the transaction price and will estimate fair
value using an internal pricing model. As of December 31, 2010 and 2009, we did
not alter fair values provided by our valuation service providers or brokers or
substitute them with an internal pricing model.
74
The following table identifies fixed income and equity securities and
short-term investments as of December 31, 2010 by source of value determination:
FAIR PERCENT
VALUE TO TOTAL
($ IN THOUSANDS) ---------- --------
Fair value based on internal sources...... $ 978,644 14.8%
Fair value based on external sources/(1)/. 5,644,625 85.2
---------- -----
Total..................................... $6,623,269 100.0%
========== =====
-
/(1)/Includes $325.6 million that are valued using broker quotes.
For more detailed information on our accounting policy for the fair value of
financial assets and the financial assets by level in the fair value hierarchy,
see Notes 2 and 6 of the financial statements.
IMPAIRMENT OF FIXED INCOME AND EQUITY SECURITIES For investments classified
as available for sale, the difference between fair value and amortized cost for
fixed income securities and cost for equity securities, net of certain other
items and deferred income taxes (as disclosed in Note 5), is reported as a
component of accumulated other comprehensive income on the Statements of
Financial Position and is not reflected in the operating results of any period
until reclassified to net income upon the consummation of a transaction with an
unrelated third party or when a write-down is recorded due to an
other-than-temporary decline in fair value. We have a comprehensive portfolio
monitoring process to identify and evaluate each fixed income and equity
security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we assess
whether management with the appropriate authority has made the decision to sell
or whether it is more likely than not we will be required to sell the security
before recovery of the amortized cost basis for reasons such as liquidity,
contractual or regulatory purposes. If a security meets either of these
criteria, the security's decline in fair value is considered other than
temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is
not more likely than not we will be required to sell the fixed income security
before recovery of its amortized cost basis, we evaluate whether we expect to
receive cash flows sufficient to recover the entire amortized cost basis of the
security. We use our best estimate of future cash flows expected to be
collected from the fixed income security discounted at the security's original
or current effective rate, as appropriate, to calculate a recovery value and
determine whether a credit loss exists. The determination of cash flow
estimates is inherently subjective and methodologies may vary depending on
facts and circumstances specific to the security. All reasonably available
information relevant to the collectability of the security, including past
events, current conditions, and reasonable and supportable assumptions and
forecasts, are considered when developing the estimate of cash flows expected
to be collected. That information generally includes, but is not limited to,
the remaining payment terms of the security, prepayment speeds, foreign
exchange rates, the financial condition and future earnings potential of the
issue or issuer, expected defaults, expected recoveries, the value of
underlying collateral, vintage, geographic concentration, available reserves or
escrows, current subordination levels, third party guarantees and other credit
enhancements. Other information, such as industry analyst reports and
forecasts, sector credit ratings, financial condition of the bond insurer for
insured fixed income securities, and other market data relevant to the
realizability of contractual cash flows, may also be considered. The estimated
fair value of collateral will be used to estimate recovery value if we
determine that the security is dependent on the liquidation of collateral for
ultimate settlement. If the estimated recovery value is less than the amortized
cost of the security, a credit loss exists and an other-than-temporary
impairment for the difference between the estimated recovery value and
amortized cost is recorded in earnings. The portion of the unrealized loss
related to factors other than credit remains classified in accumulated other
comprehensive income. If we determine that the fixed income security does not
have sufficient cash flow or other information to estimate a recovery value for
the security, we may conclude that the entire decline in fair value is deemed
to be credit related and the loss is recorded in earnings.
75
There are a number of assumptions and estimates inherent in evaluating
impairments of equity securities and determining if they are other than
temporary, including: 1) our ability and intent to hold the investment for a
period of time sufficient to allow for an anticipated recovery in value; 2) the
length of time and extent to which the fair value has been less than cost; 3)
the financial condition, near-term and long-term prospects of the issue or
issuer, including relevant industry specific market conditions and trends,
geographic location and implications of rating agency actions and offering
prices; and 4) the specific reasons that a security is in an unrealized loss
position, including overall market conditions which could affect liquidity.
Once assumptions and estimates are made, any number of changes in facts and
circumstances could cause us to subsequently determine that a fixed income or
equity security is other-than-temporarily impaired, including: 1) general
economic conditions that are worse than previously forecasted or that have a
greater adverse effect on a particular issuer or industry sector than
originally estimated; 2) changes in the facts and circumstances related to a
particular issue or issuer's ability to meet all of its contractual
obligations; and 3) changes in facts and circumstances that result in changes
to management's intent to sell or result in our assessment that it is more
likely than not we will be required to sell before recovery of the amortized
cost basis of a fixed income security or causes a change in our ability or
intent to hold an equity security until it recovers in value. Changes in
assumptions, facts and circumstances could result in additional charges to
earnings in future periods to the extent that losses are realized. The charge
to earnings, while potentially significant to net income, would not have a
significant effect on shareholder's equity, since our securities are designated
as available for sale and carried at fair value and as a result, any related
unrealized loss, net of deferred income taxes and related DAC, deferred sales
inducement costs ("DSI") and reserves for life-contingent contract benefits,
would already be reflected as a component of accumulated other comprehensive
income in shareholder's equity.
The determination of the amount of other-than-temporary impairment is an
inherently subjective process based on periodic evaluation of the factors
described above. Such evaluations and assessments are revised as conditions
change and new information becomes available. We update our evaluations
regularly and reflect changes in other-than-temporary impairments in results of
operations as such evaluations are revised. The use of different methodologies
and assumptions in the determination of the amount of other-than-temporary
impairments may have a material effect on the amounts presented within the
financial statements.
For additional detail on investment impairments, see Note 5 of the financial
statements.
DEFERRED POLICY ACQUISITION COSTS AMORTIZATION We incur significant costs in
connection with acquiring insurance policies and investment contracts. In
accordance with GAAP, costs that vary with and are primarily related to
acquiring insurance policies and investment contracts are deferred and recorded
as an asset on the Statements of Financial Position.
DAC related to traditional life insurance is amortized over the premium
paying period of the related policies in proportion to the estimated revenues
on such business. Significant assumptions relating to estimated premiums,
investment returns, as well as mortality, persistency and expenses to
administer the business are established at the time the policy is issued and
are generally not revised during the life of the policy. The assumptions for
determining the timing and amount of DAC amortization are consistent with the
assumptions used to calculate the reserve for life-contingent contract
benefits. Any deviations from projected business in force resulting from actual
policy terminations differing from expected levels and any estimated premium
deficiencies may result in a change to the rate of amortization in the period
such events occur. Generally, the amortization periods for these policies
approximates the estimated lives of the policies. The recovery of DAC is
dependent upon the future profitability of the business. We periodically review
the adequacy of reserves and recoverability of DAC for these policies on an
aggregate basis using actual experience. We aggregate all traditional life
insurance products and immediate annuities with life contingencies in the
analysis. In the event actual experience is significantly adverse compared to
the original assumptions and a premium deficiency is determined to exist, any
remaining unamortized DAC balance must be expensed to the extent not
recoverable and a premium
76
deficiency reserve may be required if the remaining DAC balance is insufficient
to absorb the deficiency. In 2010, 2009 and 2008, our reviews concluded that no
premium deficiency adjustments were necessary.
DAC related to interest-sensitive life, fixed annuities and other investment
contracts is amortized in proportion to the incidence of the total present
value of gross profits, which includes both actual historical gross profits
("AGP") and estimated future gross profits ("EGP") expected to be earned over
the estimated lives of the contracts. The amortization is net of interest on
the prior period DAC balance using rates established at the inception of the
contracts. Actual amortization periods generally range from 15-30 years;
however, incorporating estimates of the rate of customer surrenders, partial
withdrawals and deaths generally results in the majority of the DAC being
amortized during the surrender charge period, which is typically 10-20 years
for interest-sensitive life and 5-10 years for fixed annuities. The cumulative
DAC amortization is reestimated and adjusted by a cumulative charge or credit
to results of operations when there is a difference between the incidence of
actual versus expected gross profits in a reporting period or when there is a
change in total EGP.
AGP and EGP consist primarily of the following components: contract charges
for the cost of insurance less mortality costs and other benefits (benefit
margin); investment income and realized capital gains and losses less interest
credited (investment margin); and surrender and other contract charges less
maintenance expenses (expense margin). The principal assumptions for
determining the amount of EGP are investment returns, including capital gains
and losses on assets supporting contract liabilities, interest crediting rates
to contractholders, and the effects of persistency, mortality, expenses, and
hedges if applicable, and these assumptions are reasonably likely to have the
greatest impact on the amount of DAC amortization. Changes in these assumptions
can be offsetting and we are unable to reasonably predict their future
movements or offsetting impacts over time.
Each reporting period, DAC amortization is recognized in proportion to AGP
for that period adjusted for interest on the prior period DAC balance. This
amortization process includes an assessment of AGP compared to EGP, the actual
amount of business remaining in force and realized capital gains and losses on
investments supporting the product liability. The impact of realized capital
gains and losses on amortization of DAC depends upon which product liability is
supported by the assets that give rise to the gain or loss. If the AGP is
greater than EGP in the period, but the total EGP is unchanged, the amount of
DAC amortization will generally increase, resulting in a current period
decrease to earnings. The opposite result generally occurs when the AGP is less
than the EGP in the period, but the total EGP is unchanged. However, when DAC
amortization or a component of gross profits for a quarterly period is
potentially negative (which would result in an increase of the DAC balance) as
a result of negative AGP, the specific facts and circumstances surrounding the
potential negative amortization are considered to determine whether it is
appropriate for recognition in the financial statements. Negative amortization
is only recorded when the increased DAC balance is determined to be recoverable
based on facts and circumstances. Negative amortization was not recorded for
certain fixed annuities during 2010, 2009 and 2008 periods in which significant
capital losses were realized on their related investment portfolio. For
products whose supporting investments are exposed to capital losses in excess
of our expectations which may cause periodic AGP to become temporarily
negative, EGP and AGP utilized in DAC amortization may be modified to exclude
the excess credit losses.
Annually, we review and update all assumptions underlying the projections of
EGP, including investment returns, comprising investment income and realized
capital gains and losses, interest crediting rates, persistency, mortality,
expenses and the effect of any hedges. At each reporting period, we assess
whether any revisions to assumptions used to determine DAC amortization are
required. These reviews and updates may result in amortization acceleration or
deceleration, which are commonly referred to as "DAC unlocking". If the update
of assumptions causes total EGP to increase, the rate of DAC amortization will
generally decrease, resulting in a current period increase to earnings. A
decrease to earnings generally occurs when the assumption update causes the
total EGP to decrease.
77
Over the past three years, our most significant DAC assumption updates that
resulted in a change to EGP and the amortization of DAC have been revisions to
expected future investment returns, primarily realized capital losses,
mortality, expenses and the number of contracts in force or persistency. The
following table provides the effect on DAC amortization of changes in
assumptions relating to the gross profit components of investment margin,
benefit margin and expense margin during the years ended December 31.
2010 2009 2008
($ IN THOUSANDS) ------- -------- -------
Investment margin. $ 408 $(50,219) $(9,358)
Benefit margin.... (4,127) 7,483 4,029
Expense margin.... 1,599 812 (3,762)
------- -------- -------
Net acceleration.. $(2,120) $(41,924) $(9,091)
======= ======== =======
In 2010, DAC amortization deceleration related to changes in the investment
margin component of EGP primarily related to interest-sensitive life insurance
and was due to higher than previously projected investment income and lower
interest credited, partially offset by higher projected realized capital
losses. The acceleration related to benefit margin was primarily due to lower
projected renewal premium (which is also expected to reduce persistency) on
interest-sensitive life insurance, partially offset by higher than previously
projected revenues associated with variable life insurance due to appreciation
in the underlying separate account valuations. The deceleration related to
expense margin resulted from current and expected expense levels lower than
previously projected. DAC amortization acceleration related to changes in the
investment margin component of EGP in the first quarter of 2009 was primarily
due to an increase in the level of expected realized capital losses in 2009 and
2010. The deceleration related to benefit margin was due to more favorable
projected life insurance mortality. DAC amortization acceleration related to
changes in the investment margin component of EGP in 2008 was primarily due to
the level of realized capital losses impacting actual gross profits in 2008 and
the impact of realized capital losses on expected gross profits in 2009. The
deceleration related to benefit margin was due to more favorable projected life
insurance mortality. The acceleration related to expense margin resulted from
current and expected expense levels higher than previously expected.
The following table displays the sensitivity of reasonably likely changes in
assumptions included in the gross profit components of investment margin or
benefit margin to amortization of the DAC balance as of December 31, 2010.
DECEMBER 31, 2010
INCREASE/(REDUCTION) IN DAC
($ IN THOUSANDS) ---------------------------
Increase in future investment margins of 25 basis points. $ 3,021
Decrease in future investment margins of 25 basis points. $(3,237)
Decrease in future life mortality by 1%.................. $ 863
Increase in future life mortality by 1%.................. $ (863)
Any potential changes in assumptions discussed above are measured without
consideration of correlation among assumptions. Therefore, it would be
inappropriate to add them together in an attempt to estimate overall
variability in amortization.
For additional detail related to DAC, see the Operations section of this
document.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS ESTIMATION Due to the long
term nature of traditional life insurance, life-contingent immediate annuities
and voluntary health products, benefits are payable over many years;
accordingly, the reserves are calculated as the present value of future
expected benefits to be paid, reduced by the present value of future expected
net premiums. Long-term actuarial assumptions of future investment yields,
mortality, morbidity, policy terminations and expenses are used when
establishing the reserve for life-contingent contract benefits payable under
these insurance policies. These assumptions, which for traditional life
78
insurance are applied using the net level premium method, include provisions
for adverse deviation and generally vary by characteristics such as type of
coverage, year of issue and policy duration. Future investment yield
assumptions are determined based upon prevailing investment yields as well as
estimated reinvestment yields. Mortality, morbidity and policy termination
assumptions are based on our experience and industry experience. Expense
assumptions include the estimated effects of inflation and expenses to be
incurred beyond the premium-paying period. These assumptions are established at
the time the policy is issued, are consistent with assumptions for determining
DAC amortization for these policies, and are generally not changed during the
policy coverage period. However, if actual experience emerges in a manner that
is significantly adverse relative to the original assumptions, adjustments to
DAC or reserves may be required resulting in a charge to earnings which could
have a material adverse effect on our operating results and financial
condition. We periodically review the adequacy of reserves and recoverability
of DAC for these policies on an aggregate basis using actual experience. In the
event actual experience is significantly adverse compared to the original
assumptions and a premium deficiency is determined to exist, any remaining
unamortized DAC balance must be expensed to the extent not recoverable and the
establishment of a premium deficiency reserve may be required. In 2010, 2009
and 2008, our reviews concluded that no premium deficiency adjustments were
necessary. We anticipate that mortality, investment and reinvestment yields,
and policy terminations are the factors that would be most likely to require
premium deficiency adjustment to these reserves or related DAC.
For further detail on the reserve for life-contingent contract benefits, see
Note 8 of the financial statements.
OPERATIONS
OVERVIEW AND STRATEGY We are 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 Allstate Insurance
Holdings, LLC, which is wholly owned by The Allstate Corporation. We provide
life insurance, retirement and investment products, and voluntary accident and
health insurance. We serve our customers through Allstate exclusive agencies
and non-proprietary distribution channels. Our strategic vision is to reinvent
protection and retirement for the consumer and our purpose is to create
financial value on a standalone basis and to add strategic value to the
Allstate organization.
To fulfill our purpose, our primary objectives are to deepen relationships
with Allstate customers by adding financial services to their suite of products
with Allstate and improve profitability by decreasing earnings volatility,
increasing our returns, and improving our capital position. We bring value to
our ultimate parent, The Allstate Corporation (the "Corporation"), in three
principal ways: through profitable growth, improving the economics of the
Corporation's property-liability insurance business through increased customer
loyalty and renewal rates by cross selling our products to their customers, and
by bringing new customers to Allstate. We continue to shift our mix of products
in force by decreasing spread based products, principally fixed annuities, and
through growth of underwritten products having mortality or morbidity risk,
principally life insurance and voluntary accident and health products. In
addition to focusing on higher return markets, products, and distribution
channels, we continue to emphasize capital efficiency and enterprise risk and
return management strategies and actions.
Our strategy provides a platform to profitably grow our business. Based upon
Allstate's strong financial position and brand, we have a unique opportunity to
cross-sell to our customers. Through Allstate exclusive agencies we will
leverage the trusted customer relationships to serve those who are looking for
assistance in meeting their protection and retirement needs by providing them
with the information, products and services that they need.
Our products include interest-sensitive, traditional and variable life
insurance; fixed annuities such as deferred and immediate annuities; and
voluntary accident and health insurance. Our products are sold through multiple
distribution channels including Allstate exclusive agencies, which include
exclusive financial specialists, independent agents (including workplace
enrolling agents) and specialized structured settlement brokers.
79
SUMMARY ANALYSIS Summarized financial data for the years ended December 31
is presented in the following table.
2010 2009 2008
($ IN THOUSANDS) ---------- ---------- ----------
REVENUES
Premiums.................................. $ 45,087 $ 47,659 $ 59,248
Contract charges.......................... 52,063 51,834 61,108
Net investment income..................... 368,695 372,395 402,931
Realized capital gains and losses......... (45,849) 145,468 (77,205)
---------- ---------- ----------
Total revenues............................ 419,996 617,356 446,082
COSTS AND EXPENSES
Contract benefits......................... (182,786) (170,075) (184,192)
Interest credited to contractholder funds. (168,085) (201,549) (191,208)
Amortization of DAC....................... (16,437) (148,450) (17,778)
Operating costs and expenses.............. (36,540) (41,183) (40,869)
---------- ---------- ----------
Total costs and expenses.................. (403,848) (561,257) (434,047)
Loss on disposition of operations......... -- -- (358)
Income tax expense........................ (5,851) (19,729) (4,005)
---------- ---------- ----------
Net income................................ $ 10,297 $ 36,370 $ 7,672
========== ========== ==========
Investments as of December 31............. $7,190,197 $7,139,397 $6,648,585
========== ========== ==========
NET INCOME was $10.3 million in 2010 compared to $36.4 million in 2009. The
decrease of $26.1 million was primarily the result of net realized capital
losses in 2010 compared to net realized capital gains in 2009, partially offset
by lower amortization of DAC and lower interest credited to contractholder
funds.
Net income was $36.4 million in 2009 compared to $7.7 million in 2008. The
increase of $28.7 million was primarily the result of net realized capital
gains in 2009 compared to net realized capital losses in 2008, partially offset
by higher amortization of DAC and decreased net investment income.
Net income in 2008 included additional expenses for contract benefits
relating to a rescission of reinsurance coverage for certain traditional and
interest-sensitive life insurance policies in accordance with an agreement
between the Company and ALIC (the "rescission"). The rescission reduced net
income by $4.1 million in 2008. For further detail on the rescission, see Note
4 of the financial statements.
ANALYSIS OF REVENUES Total revenues decreased 32.0% or $197.4 million in
2010 compared to 2009 primarily due to net realized capital losses and lower
net investment income. Total revenues increased 38.4% or $171.3 million in 2009
compared to 2008 primarily due to a $222.7 million improvement in realized
capital gains and losses, partially offset by a $30.5 million decline in net
investment income and a $20.9 million decrease in premiums and contract charges.
PREMIUMS represent revenues generated from traditional life insurance,
immediate annuities with life contingencies, and accident and health insurance
products that have significant mortality or morbidity risk.
CONTRACT CHARGES are revenues generated from interest-sensitive and variable
life insurance and fixed annuities for which deposits are classified as
contractholder funds or separate account liabilities. Contract charges are
assessed against the contractholder account values for maintenance,
administration, cost of insurance and surrender prior to contractually
specified dates.
80
The following table summarizes premiums and contract charges by product for
the years ended December 31.
2010 2009 2008
($ IN THOUSANDS) ------- ------- --------
UNDERWRITTEN PRODUCTS
Traditional life insurance premiums.................. $20,215 $20,159 $ 29,597
Accident and health insurance premiums............... 10,262 9,566 8,200
Interest-sensitive life insurance contract charges... 48,453 47,071 54,972
------- ------- --------
Subtotal............................................ 78,930 76,796 92,769
ANNUITIES
Immediate annuities with life contingencies premiums. 14,610 17,934 21,451
Other fixed annuities contract charges............... 3,610 4,763 6,136
------- ------- --------
Subtotal............................................ 18,220 22,697 27,587
------- ------- --------
PREMIUMS AND CONTRACT CHARGES/(1)/................... $97,150 $99,493 $120,356
======= ======= ========
-----
/(1)/Total contract charges include contract charges related to the cost of
insurance totaling $26.8 million, $26.7 million and $36.8 million in
2010, 2009 and 2008, respectively.
Total premiums and contract charges decreased 2.4% in 2010 compared to 2009
primarily due to lower sales of immediate annuities with life contingencies and
decreased surrender charges on fixed annuities, partially offset by higher
contract charges on interest-sensitive life insurance products resulting from a
shift in the mix of policies in force to contracts with higher policy
administration fees.
Total premiums and contract charges decreased 17.3% in 2009 compared to 2008
due to lower premiums on traditional life insurance and lower contract charges
on interest-sensitive life insurance policies. The decline in premiums on
traditional life insurance was primarily the result of higher premiums ceded to
ALIC due to a greater utilization of reinsurance. The decline in contract
charges on interest-sensitive life insurance was the result of higher cost of
insurance contract charges ceded to ALIC due to a greater utilization of
reinsurance, partially offset by increased contract charge rates and growth in
business in force.
81
CONTRACTHOLDER FUNDS represent interest-bearing liabilities arising from the
sale of interest-sensitive life insurance and fixed annuities. The balance of
contractholder funds is equal to the cumulative deposits received and interest
credited to the contractholder less cumulative contract benefits, surrenders,
withdrawals and contract charges for mortality or administrative expenses. The
following table shows the changes in contractholder funds for the years ended
December 31.
2010 2009 2008
($ IN THOUSANDS) ---------- ---------- ----------
CONTRACTHOLDER FUNDS, BEGINNING BALANCE........... $4,990,879 $5,086,965 $4,848,461
DEPOSITS
Fixed annuities................................... 64,115 180,327 509,146
Interest-sensitive life insurance................. 95,375 116,663 102,858
---------- ---------- ----------
Total deposits.................................... 159,490 296,990 612,004
INTEREST CREDITED................................. 165,758 182,665 190,945
BENEFITS, WITHDRAWALS AND OTHER ADJUSTMENTS
Benefits.......................................... (160,376) (160,351) (161,813)
Surrenders and partial withdrawals................ (385,801) (308,244) (335,521)
Contract charges.................................. (61,370) (57,157) (54,138)
Net transfers to separate accounts................ (67) -- (38)
Other adjustments /(1)/........................... (19,722) (49,989) (12,935)
---------- ---------- ----------
Total benefits, withdrawals and other adjustments. (627,336) (575,741) (564,445)
---------- ---------- ----------
CONTRACTHOLDER FUNDS, ENDING BALANCE.............. $4,688,791 $4,990,879 $5,086,965
========== ========== ==========
--------
/(1)/The table above illustrates the changes in contractholder funds, which are
presented gross of reinsurance recoverables on the Statements of Financial
Position. The table above is intended to supplement our discussion and
analysis of revenues, which are presented net of reinsurance on the
Statements of Operations and Comprehensive Income. As a result, the net
change in contractholder funds associated with products reinsured to third
parties is reflected as a component of the other adjustments line.
Contractholder funds decreased 6.1% and 1.9% in 2010 and 2009, respectively,
and increased 4.9% in 2008. Average contractholder funds decreased 4.0% in 2010
compared to 2009 and increased 1.4% in 2009 compared to 2008.
Contractholder deposits decreased 46.3% in 2010 compared to 2009 primarily
due to lower deposits on fixed annuities. Deposits on fixed annuities decreased
64.4% in 2010 compared to 2009 due to our strategic decision to discontinue
distributing fixed annuities through banks and broker-dealers and our goal to
reduce our concentration in spread based products and improve returns on new
business.
Contractholder deposits decreased 51.5% in 2009 compared to 2008 primarily
due to lower deposits on fixed annuities. Deposits on fixed annuities decreased
64.6% in 2009 compared to 2008 due to pricing actions to improve returns on new
business and reduce our concentration in spread based products.
Surrenders and partial withdrawals increased 25.2% in 2010 compared to 2009,
and decreased 8.1% in 2009 compared to 2008. In 2010, the increase was due to
higher surrenders and partial withdrawals on fixed annuities. In 2009, the
decrease was due to lower surrenders and partial withdrawals on traditional
fixed annuities, partially offset by higher surrenders and partial withdrawals
on market value adjusted annuities and interest-sensitive life insurance. The
surrender and partial withdrawal rate, based on the beginning of period
contractholder funds, was 9.4% in 2010 compared to 7.4% in 2009 and 8.6% in
2008.
ANALYSIS OF COSTS AND EXPENSES Total costs and expenses decreased 28.0% or
$157.4 million in 2010 compared to 2009 primarily due to lower amortization of
DAC and interest credited to contractholder funds, partially offset by higher
contract benefits. Total costs and expenses increased 29.3% or $127.2 million
in 2009
82
compared to 2008 primarily due to higher amortization of DAC and, to a much
lesser extent, higher interest credited to contractholder funds, partially
offset by lower contract benefits.
CONTRACT BENEFITS increased 7.5% or $12.7 million in 2010 compared to 2009
primarily due to higher mortality experience on interest-sensitive and
traditional life insurance products resulting from an increase in average claim
size and higher incidence of claims.
Contract benefits decreased 7.7% or $14.1 million in 2009 compared to 2008
due primarily to the rescission. Excluding the impact of the rescission, which
increased contract benefits by $7.1 million in 2008, total contract benefits
decreased 3.9% or $7.0 million in 2009 compared to 2008 due to lower contract
benefits on annuities and traditional life insurance. The decline in contract
benefits on annuities reflects improved mortality experience and the impact of
lower sales of immediate annuities with life contingencies. The decline in
contract benefits on traditional life insurance was due to improved mortality
experience resulting primarily from a reduction in large claim counts and
higher contract benefits ceded to ALIC due to a greater utilization of
reinsurance.
We analyze our mortality and morbidity results using the difference between
premiums and contract charges earned for the cost of insurance and contract
benefits excluding the portion related to the implied interest on immediate
annuities with life contingencies ("benefit spread"). This implied interest
totaled $111.3 million in both 2010 and 2009 and $108.1 million in 2008.
The benefit spread by product group is disclosed in the following table for
the years ended December 31.
2010 2009 2008
($ IN THOUSANDS) ------- ------- -------
Life insurance................ $ 1,395 $12,627 $18,858
Accident and health insurance. 5,255 4,355 3,875
Annuities..................... (6,205) (1,334) (2,826)
------- ------- -------
Total benefit spread.......... $ 445 $15,648 $19,907
======= ======= =======
Benefit spread decreased 97.2% or $15.2 million in 2010 compared to 2009.
The decrease was primarily due to higher mortality experience on
interest-sensitive and traditional life insurance products. Benefit spread
decreased 21.4% or $4.3 million in 2009 compared to 2008.
INTEREST CREDITED TO CONTRACTHOLDER FUNDS decreased 16.6% or $33.5 million
in 2010 compared to 2009 primarily due to lower amortization of DSI, management
actions to reduce interest crediting rates on deferred fixed annuities and
interest-sensitive life insurance, and lower average contractholder funds.
Amortization of DSI in 2010 was $3.4 million compared to $22.3 million in 2009.
The decline in amortization of DSI in 2010 was primarily due to a $8.8 million
decrease in amortization relating to realized capital gains and losses and a
$6.9 million reduction in amortization acceleration for changes in assumptions.
Interest credited to contractholder funds increased 5.4% or $10.3 million in
2009 compared to 2008 due primarily to higher amortization of DSI, partially
offset by lower weighted average interest crediting rates on deferred fixed
annuities. Amortization of DSI in 2009 and 2008 was $22.3 million and $7.8
million, respectively. The increase primarily related to an unfavorable change
in amortization relating to realized capital gains and losses of $14.6 million.
In order to analyze the impact of net investment income and interest
credited to contractholders on net income, we monitor the difference between
net investment income and the sum of interest credited to contractholder funds
and the implied interest on immediate annuities with life contingencies, which
is included as a component of contract benefits on the Statements of Operations
and Comprehensive Income ("investment spread").
83
The investment spread by product group is shown in the following table for
the years ended December 31.
2010 2009 2008
($ IN THOUSANDS) ------- ------- --------
Annuities............................................... $53,406 $28,775 $ 56,314
Life insurance.......................................... 2,565 1,090 2,767
Accident and health insurance........................... 1 (17) (11)
Net investment income on investments supporting capital. 33,301 29,670 44,555
------- ------- --------
Total investment spread................................. $89,273 $59,518 $103,625
======= ======= ========
Investment spread increased 50.0% or $29.8 million in 2010 compared to 2009
as lower net investment income was more than offset by decreased interest
credited to contractholder funds, which includes lower amortization of DSI.
Excluding amortization of DSI, investment spread increased 13.2% or $10.8
million in 2010 compared to 2009.
Investment spread declined 42.6% or $44.1 million in 2009 compared to 2008.
This decline reflects lower net investment income and, to a lesser extent,
higher amortization of DSI.
To further analyze investment spreads, the following table summarizes the
weighted average investment yield on assets supporting product liabilities and
capital, interest crediting rates and investment spreads for 2010, 2009 and
2008.
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
INVESTMENT YIELD INTEREST CREDITING RATE INVESTMENT SPREADS
------------- ---------------------- -----------------
2010 2009 2008 2010 2009 2008 2010 2009 2008
---- ---- ---- ---- ---- ---- ---- ---- ----
Interest-sensitive life insurance.................... 5.2% 5.1% 5.7% 4.4% 4.6% 4.6% 0.8% 0.5% 1.1%
Deferred fixed annuities............................. 5.0 5.1 5.6 3.0 3.3 3.5 2.0 1.8 2.1
Immediate fixed annuities with and without life
contingencies...................................... 6.6 6.6 7.1 6.4 6.5 6.5 0.2 0.1 0.6
Investments supporting capital, traditional life and
other products..................................... 3.3 4.2 6.5 n/a n/a n/a n/a n/a n/a
The following table summarizes our product liabilities as of December 31 and
indicates the account value of those contracts and policies for which an
investment spread is generated.
2010 2009 2008
($ IN THOUSANDS) ---------- ---------- ----------
Immediate fixed annuities with life contingencies.... $1,703,738 $1,675,884 $1,649,426
Other life contingent contracts and other............ 286,476 199,695 303,731
---------- ---------- ----------
Reserve for life-contingent contract benefits..... $1,990,214 $1,875,579 $1,953,157
========== ========== ==========
Interest-sensitive life insurance.................... $ 660,731 $ 627,362 $ 576,167
Deferred fixed annuities............................. 3,443,034 3,771,584 3,918,609
Immediate fixed annuities without life contingencies. 585,026 591,933 592,189
---------- ---------- ----------
Contractholder funds.............................. $4,688,791 $4,990,879 $5,086,965
========== ========== ==========
84
AMORTIZATION OF DAC decreased $132.0 million in 2010 compared to 2009 and
increased $130.7 million in 2009 compared to 2008. The components of
amortization of DAC are summarized in the following table for the years ended
December 31.
2010 2009 2008
($ IN THOUSANDS) -------- --------- --------
Amortization of DAC before amortization relating to realized
capital gains and losses and changes in assumptions........... $(14,620) $ (52,307) $(41,471)
Accretion (amortization) relating to realized capital gains and
losses........................................................ 303 (54,219) 32,784
Amortization acceleration for changes in assumptions ("DAC
unlocking")................................................... (2,120) (41,924) (9,091)
-------- --------- --------
Total amortization of DAC.................................... $(16,437) $(148,450) $(17,778)
======== ========= ========
The decrease of $132.0 million in 2010 was primarily due to a favorable
change in amortization relating to realized capital gains and losses, lower
amortization acceleration for changes in assumptions and a decreased
amortization rate on fixed annuities. The increase of $130.7 million in 2009
compared to 2008 was due primarily to an unfavorable change in amortization
relating to realized capital gains and losses, and to a lesser extent, higher
amortization acceleration for changes in assumptions.
The impact of realized capital gains and losses on amortization of DAC is
dependent upon the relationship between the assets that give rise to the gain
or loss and the product liability supported by the assets. Fluctuations result
from changes in the impact of realized capital gains and losses on actual and
expected gross profits. In 2010, DAC accretion relating to realized capital
gains and losses resulted primarily from other-than-temporary impairment losses
on investments supporting interest-sensitive life products. In 2009, DAC
amortization relating to realized capital gains and losses resulted primarily
from realized capital gains on derivatives. Additionally, DAC amortization in
2010 and 2009 reflects our decision in the second half of 2009 not to
recapitalize DAC for credit or derivative losses on investments supporting
certain fixed annuities following concerns that an increase in the level of
expected realized capital losses may reduce EGP and adversely impact the
product DAC recoverability. In 2008, DAC accretion resulted primarily from
realized capital losses on derivatives and other-than-temporary impairment
losses.
Our annual comprehensive review of the profitability of our products to
determine DAC balances for our interest-sensitive life, fixed annuities and
other investment contracts covers assumptions for investment returns, including
capital gains and losses, interest crediting rates to policyholders, the effect
of any hedges, persistency, mortality and expenses in all product lines. In the
first quarter of 2010, the review resulted in an acceleration of DAC
amortization (charge to income) of $2.1 million, including amortization
acceleration of $2.2 million related to interest-sensitive life insurance,
partially offset by amortization deceleration (credit to income) of $78
thousand for fixed annuities. Amortization acceleration related to
interest-sensitive life insurance was primarily due to an increase in projected
realized capital losses and lower projected renewal premium (which is also
expected to reduce persistency), partially offset by lower expenses.
In 2009, our annual comprehensive review resulted in the acceleration of DAC
amortization of $41.9 million, including amortization acceleration of $45.2
million related to fixed annuities, partially offset by amortization
deceleration of $3.3 million for interest-sensitive life insurance. The
principal assumption impacting EGP and the related DAC amortization for fixed
annuities was an increase in the level of expected realized capital losses in
2009 and 2010 and, to a lesser extent, reduced investment spread. Reduced EGP
for fixed annuities resulted in accelerated DAC amortization. For our
interest-sensitive life insurance products, the amortization deceleration was
due to higher EGP due to a favorable change in our mortality assumptions,
partially offset by increased expected capital losses and, to a lesser extent,
reduced investment spread.
85
In 2008, DAC amortization acceleration for changes in assumptions, recorded
in connection with comprehensive reviews of the DAC balances resulted in an
increase to amortization of DAC of $9.1 million. The principle assumption
impacting the amortization acceleration in 2008 was the level of realized
capital losses impacting actual gross profits in 2008 and the impact of
realized capital losses on EGP in 2009. During the fourth quarter of 2008, our
assumptions for EGP were impacted by a view of higher impairments in our
investment portfolio.
The changes in the DAC asset are detailed in the following table.
TRADITIONAL LIFE
AND ACCIDENT INTEREST-SENSITIVE FIXED
AND HEALTH LIFE INSURANCE ANNUITIES TOTAL
---------------- ------------------ ------------------- -------------------
2010 2009 2010 2009 2010 2009 2010 2009
($ IN THOUSANDS) ------- ------- -------- -------- -------- --------- -------- ---------
Beginning balance........................ $47,868 $45,332 $119,974 $153,106 $ 45,483 $ 339,810 $213,325 $ 538,248
Acquisition costs deferred............... 7,575 7,844 15,781 15,483 1,348 9,233 24,704 32,560
Impact of adoption of new OTTI
accounting before unrealized
impact/(1)/............................. -- -- -- (832) -- (10,993) -- (11,825)
Impact of adoption of new OTTI
accounting effect of unrealized capital
gains and losses/(2)/................... -- -- -- 832 -- 10,993 -- 11,825
Amortization of DAC before amortization
relating to realized capital gains and
losses and changes in assumptions/(3)/.. (5,587) (5,308) (1,277) (3,902) (7,756) (43,097) (14,620) (52,307)
Accretion (amortization) relating to
realized capital gains and losses/(3)/.. -- -- 401 (935) (98) (53,284) 303 (54,219)
Amortization (acceleration) deceleration
for changes in assumptions ("DAC
unlocking")/(3)/........................ -- -- (2,198) 3,281 78 (45,205) (2,120) (41,924)
Effect of unrealized capital gains and
losses/(4)/............................. -- -- (14,404) (47,059) (37,251) (161,974) (51,655) (209,033)
------- ------- -------- -------- -------- --------- -------- ---------
Ending balance........................... $49,856 $47,868 $118,277 $119,974 $ 1,804 $ 45,483 $169,937 $ 213,325
======= ======= ======== ======== ======== ========= ======== =========
--------
/(1)/The adoption of new OTTI accounting guidance resulted in an adjustment to
DAC to reverse previously recorded DAC accretion related to realized
capital losses that were reclassified to other comprehensive income upon
adoption on April 1, 2009. The adjustment was recorded as a reduction of
the DAC balance and retained income.
/(2)/The adoption of new OTTI accounting guidance resulted in an adjustment to
DAC due to the change in unrealized capital gains and losses that occurred
upon adoption on April 1, 2009 when previously recorded realized capital
losses were reclassified to other comprehensive income. The adjustment was
recorded as an increase of the DAC balance and unrealized capital gains
and losses.
/(3)/Included as a component of amortization of DAC on the Statements of
Operations and Comprehensive Income.
/(4)/Represents the change in the DAC adjustment for unrealized capital gains
and losses. The DAC adjustment balance was $(4.9) million and $46.8
million as of December 31, 2010 and 2009, respectively, and represents the
amount by which the amortization of DAC would increase or decrease if the
unrealized gains and losses in the respective product portfolios were
realized. Recapitalization of DAC is limited to the originally deferred
policy acquisition costs plus interest.
OPERATING COSTS AND EXPENSES decreased 11.3% or $4.6 million in 2010
compared to 2009 primarily due to lower insurance department assessments and
restructuring and related charges.
Operating costs and expenses increased 0.8% in 2009 compared to 2008 due
primarily to higher insurance department assessments and restructuring and
related charges, partially offset by lower non-deferrable commissions and
decreased employee and professional services expenses. During 2009,
restructuring and related charges of $2.2 million were recorded in connection
with our previously announced plan to improve efficiency and narrow our focus
of product offerings.
INCOME TAX EXPENSE decreased by $13.9 million in 2010 compared to 2009 and
increased by $15.7 million in 2009 compared to 2008. These changes were
proportionate with the changes in pre-tax income.
86
Our effective tax rate is impacted by tax favored investment income such as
dividends qualifying for the dividends received deduction ("DRD"). In 2007, the
Internal Revenue Service announced its intention to issue regulations dealing
with certain computational aspects of the DRD related to separate account
assets ("separate accounts DRD"). The ultimate timing and substance of any such
regulations are unknown at this time, but may result in the elimination of some
or all of the separate accounts DRD tax benefit reflected as a component of
income tax expense. We recognized a tax benefit from the separate accounts DRD
of $856 thousand, $846 thousand and $1.0 million in 2010, 2009 and 2008,
respectively.
REINSURANCE CEDED We enter into reinsurance agreements with ALIC and
unaffiliated reinsurers to limit our risk of mortality and morbidity losses and
reinvestment risk. In addition, we have used reinsurance to effect the
disposition of certain blocks of business. We retain primary liability as a
direct insurer for all risks ceded to reinsurers. As of December 31, 2010 and
2009, 44.8% and 35.0%, respectively, of our face amount of life insurance in
force was reinsured. Additionally, we ceded all of the risk associated with our
variable annuity business.
Our reinsurance recoverables, summarized by reinsurer as of December 31, are
shown in the following table.
STANDARD & POOR'S REINSURANCE
FINANCIAL STRENGTH RECOVERABLE ON PAID
RATING/(1)/ AND UNPAID BENEFITS
------------------ -------------------
2010 2009
($ IN THOUSANDS) -------- --------
Prudential Insurance Company of America. AA- $265,021 $287,545
Transamerica Life Group................. AA- 26,174 22,146
RGA Reinsurance Company................. AA- 6,586 5,975
Swiss Re Life and Health America, Inc... A+ 3,851 3,032
Allstate Life Insurance Company......... A+ 2,221 3,449
Canada Life............................. AA 1,380 1,149
Security Life of Denver................. A 995 977
Generali USA............................ A+ 946 902
American United Life.................... AA- 804 767
Triton Insurance Company................ N/A 738 429
Scottish Re Life Corporation............ N/A 471 423
Cologne Re.............................. AA+ 95 121
Minnesota Mutual........................ AA- 90 87
Metropolitan Life....................... AA- 83 99
Mutual of Omaha......................... AA- 43 72
-------- --------
Total................................ $309,498 $327,173
======== ========
--------
/(1)/N/A reflects no rating available.
Three of our reinsurers, Allstate Life Insurance Company, Security Life of
Denver and Cologne Re, experienced rating downgrades in 2010 by Standard &
Poor's ("S&P"). We continuously monitor the creditworthiness of reinsurers in
order to determine our risk of recoverability on an individual and aggregate
basis, and a provision for uncollectible reinsurance is recorded if needed. No
amounts have been deemed unrecoverable in the three-years ended December 31,
2010.
INVESTMENTS
OVERVIEW AND STRATEGY The return on our investment portfolio is an important
component of our financial results. Our investment strategy focuses on the
total return of assets needed to support the underlying liabilities,
asset-liability management and achieving an appropriate return on capital.
87
We employ a strategic asset allocation approach which uses models that
consider the nature of the liabilities and risk tolerances, as well as the risk
and return parameters of the various asset classes in which we invest. This
asset allocation is informed by our global economic and market outlook, as well
as other inputs and constraints, including diversification effects, duration,
liquidity and capital considerations. Within the ranges set by the strategic
asset allocation model, tactical investment decisions are made in consideration
of prevailing market conditions.
We continue to focus our strategic risk mitigation efforts towards managing
interest rate, credit and credit spreads and real estate investment risks,
while our return optimization efforts focus on investing in new opportunities
to generate income and capital appreciation. As a result, during 2010 we
reduced our commercial real estate exposure by 20.6% or $214.4 million of
amortized cost primarily through targeted dispositions and principal repayments
from borrowers.
PORTFOLIO COMPOSITION The composition of the investment portfolio as of
December 31, 2010 is presented in the table below. Also see Notes 2 and 5 of
the financial statements for investment accounting policies and additional
information.
PERCENT TO
TOTAL
($ IN THOUSANDS) ----------
Fixed income securities/(1)/....... $6,300,109 87.6%
Mortgage loans..................... 501,476 7.0
Equity securities/(2)/............. 124,559 1.7
Limited partnership interests/(3)/. 4,814 0.1
Short-term/(4)/.................... 198,601 2.8
Policy loans....................... 41,862 0.6
Other.............................. 18,776 0.2
---------- -----
Total........................... $7,190,197 100.0%
========== =====
-
/(1)/Fixed income securities are carried at fair value. Amortized cost
basis for these securities was $6.00 billion.
/(2)/Equity securities are carried at fair value. Cost basis for these
securities was $99.3 million.
/(3)/We have commitments to invest in additional limited partnership
interests totaling $98.1 million.
/(4)/Short-term investments are carried at fair value. Amortized cost
basis for these investments was $198.6 million.
Total investments increased to $7.19 billion as of December 31, 2010, from
$7.14 billion as of December 31, 2009, primarily due to higher valuations for
fixed income securities partially offset by reductions in short-term
investments and mortgage loans. Valuations of fixed income securities are
typically driven by a combination of changes in relevant risk-free interest
rates and credit spreads over the period. Risk-free interest rates are
typically defined as the yield on U.S. Treasury securities, whereas credit
spread is the additional yield on fixed income securities above the risk-free
rate that market participants require to compensate them for assuming credit,
liquidity and/or prepayment risks. The increase in valuation of fixed income
securities during 2010 was mainly due to declining risk-free interest rates and
tightening of credit spreads in certain sectors.
88
FIXED INCOME SECURITIES by type are listed in the table below.
FAIR VALUE AS OF PERCENT TO FAIR VALUE AS OF PERCENT TO
DECEMBER 31, TOTAL DECEMBER 31, TOTAL
2010 INVESTMENTS 2009 INVESTMENTS
($ IN THOUSANDS) ---------------- ----------- ---------------- -----------
U.S. government and agencies.................... $ 358,568 5.0% $ 586,202 8.2%
Municipal....................................... 853,734 11.9 878,410 12.3
Corporate....................................... 3,753,092 52.2 3,271,202 45.8
Foreign government.............................. 329,603 4.6 290,856 4.1
Residential mortgage-backed securities ("RMBS"). 590,298 8.2 651,672 9.1
Commercial mortgage-backed securities ("CMBS").. 267,044 3.7 346,741 4.9
Asset-backed securities ("ABS")................. 138,564 1.9 40,044 0.6
Redeemable preferred stock...................... 9,206 0.1 8,638 0.1
---------- ---- ---------- ----
Total fixed income securities................... $6,300,109 87.6% $6,073,765 85.1%
========== ==== ========== ====
As of December 31, 2010, 93.8% of the fixed income securities portfolio was
rated investment grade, which is defined as a security having a rating of Aaa,
Aa, A or Baa from Moody's, a rating of AAA, AA, A or BBB from S&P, Fitch,
Dominion, or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a
comparable internal rating if an externally provided rating is not available.
The following table summarizes the fair value and unrealized net capital
gains and losses for fixed income securities by credit rating as of
December 31, 2010.
AAA AA A
--------------------- --------------------- ---------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE GAIN/(LOSS) FAIR VALUE GAIN/(LOSS) FAIR VALUE GAIN/(LOSS)
($ IN THOUSANDS) ---------- ----------- ---------- ----------- ---------- -----------
U.S. government and agencies........ $ 358,568 $ 69,733 $ -- $ -- $ -- $ --
Municipal
Tax exempt......................... -- -- 3,057 72 -- --
Taxable............................ 19,224 (151) 459,623 3,055 212,420 (2,185)
ARS................................ 74,448 (4,962) -- -- 7,781 (944)
Corporate
Public............................. 39,942 295 250,662 15,981 849,812 60,313
Privately placed................... 79,133 2,012 197,698 3,337 452,355 28,274
Foreign government.................. 304,425 58,268 10,180 184 14,998 2,548
RMBS
U.S. government sponsored entities
("U.S. Agency").................. 448,532 17,997 -- -- -- --
Prime residential mortgage-backed
securities ("Prime")............. 66,261 1,731 3,548 90 22,499 720
Alt-A residential mortgage-backed
securities ("Alt-A")............. -- -- 7,767 (1,154) 12,401 (370)
Subprime residential mortgage-
backed securities ("Subprime")... 3,398 (111) 729 (1) 1,872 (95)
CMBS................................ 125,175 4,758 31,042 (130) 28,700 (5,216)
ABS
Collateralized debt obligations
("CDO").......................... -- -- 4,390 (199) 7,024 (448)
Consumer and other asset-backed
securities ("Consumer and other
ABS")............................ 47,399 1,914 22,398 484 38,659 390
Redeemable preferred stock.......... -- -- -- -- -- --
---------- -------- -------- ------- ---------- -------
Total fixed income securities....... $1,566,505 $151,484 $991,094 $21,719 $1,648,521 $82,987
========== ======== ======== ======= ========== =======
89
BAA BA OR LOWER TOTAL
--------------------- --------------------- ---------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE GAIN/(LOSS) FAIR VALUE GAIN/(LOSS) FAIR VALUE GAIN/(LOSS)
---------- ----------- ---------- ----------- ---------- -----------
U.S. government and agencies.. $ -- $ -- $ -- $ -- $ 358,568 $ 69,733
Municipal
Tax exempt................... 5,005 512 -- -- 8,062 584
Taxable...................... 70,286 (16,466) 1,890 (164) 763,443 (15,911)
ARS.......................... -- -- -- -- 82,229 (5,906)
Corporate
Public....................... 911,062 48,842 159,639 9,296 2,211,117 134,727
Privately placed............. 632,081 33,187 180,708 5,990 1,541,975 72,800
Foreign government............ -- -- -- -- 329,603 61,000
RMBS
U.S. Agency.................. -- -- -- -- 448,532 17,997
Prime........................ -- -- -- -- 92,308 2,541
Alt-A........................ 8,095 (1,534) -- -- 28,263 (3,058)
Subprime..................... 1,130 (58) 14,066 (6,718) 21,195 (6,983)
CMBS.......................... 57,595 (11,934) 24,532 (14,928) 267,044 (27,450)
ABS
CDO........................ -- -- 7,500 (2,500) 18,914 (3,147)
Consumer and other ABS..... 11,194 91 -- -- 119,650 2,879
Redeemable preferred stock.... 9,206 10 -- -- 9,206 10
---------- -------- -------- -------- ---------- --------
Total fixed income securities. $1,705,654 $ 52,650 $388,335 $ (9,024) $6,300,109 $299,816
========== ======== ======== ======== ========== ========
MUNICIPAL BONDS, including tax exempt, taxable and ARS securities, totaled
$853.7 million as of December 31, 2010 with an unrealized net capital loss of
$21.2 million.
As of December 31, 2010, 26.2% or $223.8 million of our municipal bond
portfolio is insured by five bond insurers and 37.9% of these securities have a
credit rating of Aa. 58.0% of our insured municipal bond portfolio was insured
by National Public Finance Guarantee Corporation, Inc., 17.6% by Ambac
Assurance Corporation, 15.9% by Assured Guarantee Municipal Corporation and
4.4% by Syncora Holdings. Given the effects of the economic crisis on bond
insurers, the value inherent in this insurance has declined. We believe the
fair value of our insured municipal bond portfolio substantially reflects the
decline in the value of the insurance, and further related valuation declines,
if any, are not expected to be material. Our practice for acquiring and
monitoring municipal bonds is predominantly based on the underlying credit
quality of the primary obligor. We currently expect to receive all contractual
cash flows from the primary obligor and are not relying on bond insurers for
payments.
ARS totaled $82.2 million with an unrealized net capital loss of $5.9
million as of December 31, 2010. Our holdings primarily have a credit rating of
Aaa. All of our holdings are collateralized by pools of student loans for which
at least 85% of the collateral was insured by the U.S. Department of Education
at the time we purchased the security. As of December 31, 2010, $60.5 million
of our ARS backed by student loans was 100% insured by the U.S. Department of
Education and $21.7 million was 90% to 99% insured. All of our student loan ARS
holdings are experiencing failed auctions and we receive the failed auction
rate or, for those which contain maximum reset rate formulas, we receive the
contractual maximum rate. We anticipate that failed auctions may persist and
most of our holdings will continue to pay the failed auction rate or, for those
that contain maximum rate reset formulas, the maximum rate. Auctions continue
to be conducted as scheduled for each of the securities.
CORPORATE BONDS, including publicly traded and privately placed, totaled
$3.75 billion as of December 31, 2010 with an unrealized net capital gain of
$207.5 million. Privately placed securities primarily consist of corporate
issued senior debt securities that are in unregistered form or are directly
negotiated with the borrower.
90
41.7% of the privately placed corporate securities in our portfolio are rated
by an independent rating agency and substantially all are rated by the National
Association of Insurance Commissioners ("NAIC").
Our portfolio of privately placed securities is broadly diversified by
issuer, industry sector and country. The portfolio is made up of 236 issuers.
Privately placed corporate obligations contain structural security features
such as financial covenants and call protections that provide investors greater
protection against credit deterioration, reinvestment risk or fluctuations in
interest rates than those typically found in publicly registered debt
securities. Additionally, investments in these securities are made after
extensive due diligence of the issuer, typically including direct discussions
with senior management and on-site visits to company facilities. Ongoing
monitoring includes direct periodic dialog with senior management of the issuer
and continuous monitoring of operating performance and financial position.
Every issue not rated by an independent rating agency is internally rated with
a formal rating affirmation at least once a year.
FOREIGN GOVERNMENT securities totaled $329.6 million, with 100% rated
investment grade, as of December 31, 2010. Of these securities, 92.4% are
backed by the U.S. government and the remaining 7.6% are in Canadian government
securities.
RMBS, CMBS AND ABS are structured securities that are primarily
collateralized by residential and commercial real estate loans and other
consumer or corporate borrowings. The cash flows from the underlying collateral
paid to the securitization trust are generally applied in a pre-determined
order and are designed so that each security issued by the trust, typically
referred to as a "class", qualifies for a specific original rating. For
example, the "senior" portion or "top" of the capital structure, or rating
class, which would originally qualify for a rating of Aaa typically has
priority in receiving principal repayments on the underlying collateral and
retains this priority until the class is paid in full. In a sequential
structure, underlying collateral principal repayments are directed to the most
senior rated Aaa class in the structure until paid in full, after which
principal repayments are directed to the next most senior Aaa class in the
structure until it is paid in full. Senior Aaa classes generally share any
losses from the underlying collateral on a pro-rata basis after losses are
absorbed by classes with lower original ratings. The payment priority and class
subordination included in these securities serves as credit enhancement for
holders of the senior or top portions of the structures. These securities
continue to retain the payment priority features that existed at the
origination of the securitization trust. Other forms of credit enhancement may
include structural features embedded in the securitization trust, such as
overcollateralization, excess spread and bond insurance. The underlying
collateral can have fixed interest rates, variable interest rates (such as
adjustable rate mortgages ("ARM")) or may contain features of both fixed and
variable rate mortgages.
RMBS, including U.S. Agency, Prime, Alt-A and Subprime, totaled $590.3
million, with 97.6% rated investment grade, as of December 31, 2010. The RMBS
portfolio is subject to interest rate risk, but unlike other fixed income
securities, is additionally subject to significant prepayment risk from the
underlying residential mortgage loans. The credit risk associated with our RMBS
portfolio is mitigated due to the fact that 76.0% of the portfolio consists of
securities that were issued by or have underlying collateral guaranteed by U.S.
government agencies. The unrealized net capital loss of $10.0 million as of
December 31, 2010 on our Alt-A and Subprime RMBS was the result of wider credit
spreads than at initial purchase, largely due to higher risk premiums caused by
macroeconomic conditions and credit market deterioration, including the impact
of lower real estate valuations, which began to show signs of stabilization in
certain geographic areas in 2010. The following table shows our RMBS portfolio
as of December 31, 2010 based upon vintage year of the issuance of the
securities.
91
U.S. AGENCY PRIME ALT-A SUBPRIME TOTAL RMBS
-------------------- ------------------- ------------------ ------------------ -------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
($ IN VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS)
THOUSANDS) -------- ----------- ------- ----------- ------- ----------- ------- ----------- -------- -----------
2010....... $ -- $ -- $35,415 $1,127 $ 3,394 $ 120 $ -- $ -- $ 38,809 $ 1,247
2009....... 34,013 993 20,240 163 -- -- -- -- 54,253 1,156
2008....... 61,077 894 -- -- -- -- -- -- 61,077 894
2007....... 17,680 275 -- -- -- -- 8,482 (3,768) 26,162 (3,493)
2006....... 28,353 1,088 -- -- -- -- 8,721 (2,879) 37,074 (1,791)
2005....... 66,909 2,608 -- -- -- -- 79 (26) 66,988 2,582
Pre-2005... 240,500 12,139 36,653 1,251 24,869 (3,178) 3,913 (310) 305,935 9,902
-------- ------- ------- ------ ------- ------- ------- ------- -------- -------
Total.... $448,532 $17,997 $92,308 $2,541 $28,263 $(3,058) $21,195 $(6,983) $590,298 $10,497
======== ======= ======= ====== ======= ======= ======= ======= ======== =======
Prime are collateralized by residential mortgage loans issued to prime
borrowers. As of December 31, 2010, all of the Prime had fixed rate underlying
collateral.
Alt-A includes securities collateralized by residential mortgage loans
issued to borrowers who do not qualify for prime financing terms due to high
loan-to-value ratios or limited supporting documentation, but have stronger
credit profiles than subprime borrowers. As of December 31, 2010, all of the
Alt-A had fixed rate underlying collateral.
Subprime includes securities collateralized by residential mortgage loans
issued to borrowers that cannot qualify for Prime or Alt-A financing terms due
in part to weak or limited credit history. It also includes securities that are
collateralized by certain second lien mortgages regardless of the borrower's
credit history. The Subprime portfolio consisted of $12.2 million and $9.0
million of first lien and second lien securities, respectively. As of
December 31, 2010, $11.7 million of the Subprime had fixed rate underlying
collateral and $9.5 million had variable rate underlying collateral.
CMBS totaled $267.0 million, with 90.8% rated investment grade, as of
December 31, 2010. The CMBS portfolio is subject to credit risk, but unlike
certain other structured securities, is generally not subject to prepayment
risk due to protections within the underlying commercial mortgage loans. All of
the CMBS investments are traditional conduit transactions collateralized by
commercial mortgage loans, broadly diversified across property types and
geographical area. The remainder consists of non-traditional CMBS such as small
balance transactions, large loan pools and single borrower transactions.
The following table shows our CMBS portfolio as of December 31, 2010 based
upon vintage year of the underlying collateral.
FAIR UNREALIZED
VALUE GAIN/(LOSS)
($ IN THOUSANDS) -------- -----------
2006............ $152,838 $(23,852)
2005............ 44,579 (5,558)
Pre-2005........ 69,627 1,960
-------- --------
Total CMBS.... $267,044 $(27,450)
======== ========
The unrealized net capital loss of $27.5 million as of December 31, 2010 on
our CMBS portfolio was the result of wider credit spreads than at initial
purchase, largely due to the macroeconomic conditions and credit market
deterioration, including the impact of lower real estate valuations, which
began to show signs of stabilization in certain geographic areas in 2010. While
CMBS spreads tightened during 2009 and 2010, credit spreads in most rating
classes remain wider than at initial purchase, which is particularly evident in
our 2005-2006 vintage year CMBS.
92
ABS, including CDO and Consumer and other ABS, totaled $138.6 million, with
94.6% rated investment grade, as of December 31, 2010. Credit risk is managed
by monitoring the performance of the underlying collateral. Many of the
securities in the ABS portfolio have credit enhancement with features such as
overcollateralization, subordinated structures, reserve funds, guarantees
and/or insurance. The unrealized net capital loss of $268 thousand as of
December 31, 2010 on our ABS portfolio was the result of wider credit spreads
than at initial purchase.
CDO totaled $18.9 million, with 60.3% rated investment grade, as of
December 31, 2010. CDO consist primarily of obligations collateralized by high
yield and investment grade corporate credits including $7.5 million of project
finance CDO with unrealized losses of $2.5 million. The remaining $11.4 million
of securities consisted of trust preferred CDO and cash flow collateralized
loan obligations with unrealized losses of $647 thousand.
Consumer and other ABS totaled $119.6 million, with 100% rated investment
grade, as of December 31, 2010. Consumer and other ABS consists of $82.8
million of auto and $36.8 million of other ABS with unrealized gains of $1.1
million and $1.8 million, respectively.
MORTGAGE LOANS Our mortgage loan portfolio totaled $501.5 million as of
December 31, 2010, compared to $543.0 million as of December 31, 2009, and
primarily comprises loans secured by first mortgages on developed commercial
real estate. Key considerations used to manage our exposure include property
type and geographic diversification by state and metropolitan area.
We recognized $2.9 million of realized capital losses related to net
increases in the valuation allowance on impaired mortgage loans in 2010,
primarily due to deteriorating debt service coverage resulting from a decrease
in occupancy and the risk associated with refinancing near-term maturities due
to declining underlying collateral valuations. We recognized $5.3 million of
realized capital losses related to net increases in the valuation allowance on
impaired loans in 2009.
For further detail on our mortgage loan portfolio, see Note 5 of the
financial statements.
EQUITY SECURITIES Equity securities include exchange traded funds. The
equity securities portfolio was $124.6 million as of December 31, 2010 compared
to $123.3 million as of December 31, 2009. Net unrealized gains totaled $25.2
million as of December 31, 2010 compared to $23.1 million as of December 31,
2009.
LIMITED PARTNERSHIP INTERESTS consist of investments in private equity/debt
funds. The limited partnership interests portfolio is well diversified across a
number of characteristics including fund sponsors, strategies, geography
(including international), and company types. The following table presents
information about our limited partnership interests as of December 31, 2010.
($ IN THOUSANDS)
Cost method of accounting ("Cost").. $2,355
Equity method of accounting ("EMA"). 2,459
------
Total............................ $4,814
======
Number of sponsors.................. 14
Number of individual funds.......... 14
Largest exposure to single fund..... $1,068
Our aggregate limited partnership exposure represented 0.1% of total
invested assets as of December 31, 2010. We did not hold any limited
partnership interests as of December 31, 2009.
93
Limited partnership interests, excluding impairment write-downs, produced
losses of $146 thousand in 2010, all of which related to EMA limited
partnerships. Income on EMA limited partnerships is recognized on a delay due
to the availability of the related financial statements. The recognition of
income on private equity/debt funds are generally on a three-month delay.
Income on Cost limited partnerships is recognized only upon receipt of amounts
distributed by the partnerships. There were no impairment write-downs related
to limited partnerships for the year ended December 31, 2010.
SHORT-TERM INVESTMENTS Our short-term investment portfolio was $198.6
million and $348.5 million as of December 31, 2010 and 2009, respectively.
POLICY LOANS Our policy loan balance was $41.9 million and $40.6 million as
of December 31, 2010 and 2009, respectively. Policy loans are carried at the
unpaid principal balances.
OTHER INVESTMENTS Our other investments as of December 31, 2010 are
comprised of $18.4 million of notes due from a related party and $411 thousand
of certain derivatives. For further detail on the notes due from related party,
see Note 4 of the financial statements. For further detail on our use of
derivatives, see Note 7 of the financial statements
UNREALIZED NET CAPITAL GAINS totaled $325.0 million as of December 31, 2010,
compared to $24.0 million as of December 31, 2009. The improvement since
December 31, 2009 was primarily a result of declining risk-free interest rates
and tightening of credit spreads in certain sectors. The following table
presents unrealized net capital gains and losses, pre-tax and after-tax as of
December 31.
2010 2009
($ IN THOUSANDS) --------- ---------
U.S. government and agencies....................... $ 69,733 $ 51,612
Municipal.......................................... (21,233) (51,278)
Corporate.......................................... 207,527 98,172
Foreign government................................. 61,000 49,715
RMBS............................................... 10,497 (14,446)
CMBS............................................... (27,450) (126,094)
ABS................................................ (268) (6,544)
Redeemable preferred stock......................... 10 (607)
--------- ---------
Fixed income securities/(1)/....................... 299,816 530
Equity securities.................................. 25,211 23,143
Short-term investments............................. -- (3)
Derivatives........................................ -- 309
--------- ---------
Unrealized net capital gains and losses, pre-tax... 325,027 23,979
Amounts recognized for:
Insurance reserves/(2)/......................... (115,141) (40,551)
DAC and DSI/(3)/................................ (4,947) 53,572
--------- ---------
Amounts recognized.......................... (120,088) 13,021
Deferred income taxes.............................. (71,729) (12,950)
--------- ---------
Unrealized net capital gains and losses, after-tax. $ 133,210 $ 24,050
========= =========
--------
/(1)/Unrealized net capital gains and losses for fixed income
securities as of December 31, 2010 and 2009 comprise $2.3 million
and $(3.8) million, respectively, related to unrealized net
capital gains and losses on fixed income securities with
other-than-temporary impairment and $297.5 million and $4.3
million, respectively, related to other unrealized net capital
gains and losses.
/(2)/The insurance reserves adjustment represents the amount by which
the reserve balance would increase if the net unrealized gains in
the applicable product portfolios were realized and reinvested at
current lower interest rates, resulting in a premium deficiency.
Although we evaluate premium
94
deficiencies on the combined performance of our life insurance and
immediate annuities with life contingencies, the adjustment
primarily relates to structured settlement annuities with life
contingencies, in addition to certain payout annuities with life
contingencies.
/(3)/The DAC and DSI adjustment balance represents the amount by which
the amortization of DAC and DSI would increase or decrease if the
unrealized gains or losses in the respective product portfolios
were realized. Only the unrealized net capital gains and losses on
the fixed annuity and interest-sensitive life product portfolios
are used in this calculation. The DAC and DSI adjustment balance,
subject to limitations, is determined by applying the DAC and DSI
amortization rate to unrealized net capital gains or losses.
Recapitalization of the DAC and DSI balances is limited to the
originally deferred costs plus interest.
The unrealized net capital gains for the fixed income portfolio totaled
$299.8 million and comprised $413.1 million of gross unrealized gains and
$113.3 million of gross unrealized losses as of December 31, 2010. This is
compared to unrealized net capital gains for the fixed income portfolio
totaling $530 thousand, comprised of $287.2 million of gross unrealized gains
and $286.7 million of gross unrealized losses as of December 31, 2009. The
unrealized net capital gain for the equity portfolio totaled $25.2 million,
comprised entirely of unrealized gains as of December 31, 2010. This is
compared to an unrealized net capital gain for the equity portfolio totaling
$23.1 million, comprised entirely of unrealized gains as of December 31, 2009.
Gross unrealized gains and losses as of December 31, 2010 on fixed income
securities by type and sector are provided in the table below.
AMORTIZED FAIR VALUE
GROSS UNREALIZED COST AS A AS A PERCENT
PAR AMORTIZED ------------------ FAIR PERCENT OF OF
VALUE/(1)/ COST GAINS LOSSES VALUE PAR VALUE/(2)/ PAR VALUE/(2)/
($ IN THOUSANDS) ---------- ---------- -------- --------- ---------- ------------- -------------
Corporate:
Banking............................. $ 336,333 $ 325,035 $ 15,293 $ (7,888) $ 332,440 96.6% 98.8%
Utilities........................... 794,002 786,363 65,192 (7,776) 843,779 99.0 106.3
Consumer goods (cyclical and
non-cyclical)...................... 597,201 603,548 39,922 (2,783) 640,687 101.1 107.3
Capital goods....................... 407,657 407,695 31,420 (2,677) 436,438 100.0 107.1
Transportation...................... 207,795 210,303 11,960 (2,160) 220,103 101.2 105.9
Financial services.................. 279,831 281,457 12,621 (1,384) 292,694 100.6 104.6
Technology.......................... 160,067 162,075 8,859 (1,115) 169,819 101.3 106.1
Communications...................... 213,947 215,907 13,720 (1,010) 228,617 100.9 106.9
Basic industry...................... 112,895 113,444 7,842 (580) 120,706 100.5 106.9
Energy.............................. 265,017 266,974 18,007 (334) 284,647 100.7 107.4
Other............................... 244,393 172,764 10,547 (149) 183,162 70.7 74.9
---------- ---------- -------- --------- ----------
Total corporate fixed income portfolio. 3,619,138 3,545,565 235,383 (27,856) 3,753,092 98.0 103.7
---------- ---------- -------- --------- ----------
U.S. government and agencies........... 419,028 288,835 69,934 (201) 358,568 68.9 85.6
Municipal.............................. 1,079,711 874,967 16,539 (37,772) 853,734 81.0 79.1
Foreign government..................... 409,878 268,603 61,683 (683) 329,603 65.5 80.4
RMBS................................... 579,137 579,801 20,859 (10,362) 590,298 100.1 101.9
CMBS................................... 306,484 294,494 5,832 (33,282) 267,044 96.1 87.1
ABS.................................... 137,328 138,832 2,917 (3,185) 138,564 101.1 100.9
Redeemable preferred stock............. 8,500 9,196 10 -- 9,206 108.2 108.3
---------- ---------- -------- --------- ----------
Total fixed income securities.......... $6,559,204 $6,000,293 $413,157 $(113,341) $6,300,109 91.5 96.0
========== ========== ======== ========= ==========
--------
/(1)/Included in par value are zero-coupon securities that are generally
purchased at a deep discount to the par value that is received at
maturity. These primarily included corporate, U.S. government and
agencies, municipal and foreign government zero-coupon securities with par
value of $170.7 million, $331.3 million, $323.7 million and $362.9
million, respectively.
/(2)/Excluding the impact of zero-coupon securities, the percentage of
amortized cost to par value would be 100.0% for corporates, 101.4% for
U.S. government and agencies, 99.6% for municipals and 106.3% for foreign
governments. Similarly, excluding the impact of zero-coupon securities,
the percentage of fair value to par value would be 105.8% for corporates,
110.2% for U.S. government and agencies, 99.0% for municipals and 114.3%
for foreign governments.
95
The banking, utilities, consumer goods, capital goods and transportation
sectors had the highest concentration of gross unrealized losses in our
corporate fixed income securities portfolio as of December 31, 2010. In
general, credit spreads remain wider than at initial purchase for most of the
securities with gross unrealized losses in these categories.
We have a comprehensive portfolio monitoring process to identify and
evaluate each fixed income and equity security that may be
other-than-temporarily impaired. The process includes a quarterly review of all
securities to identify instances where the fair value of a security compared to
its amortized cost (for fixed income securities) or cost (for equity
securities) is below established thresholds. The process also includes the
monitoring of other impairment indicators such as ratings, ratings downgrades
and payment defaults. The securities identified, in addition to other
securities for which we may have a concern, are evaluated based on facts and
circumstances for inclusion on our watch-list. All investments in an unrealized
loss position as of December 31, 2010 were included in our portfolio monitoring
process for determining whether declines in value were other than temporary.
The extent and duration of a decline in fair value for fixed income
securities have become less indicative of actual credit deterioration with
respect to an issue or issuer. While we continue to use declines in fair value
and the length of time a security is in an unrealized loss position as
indicators of potential credit deterioration, our determination of whether a
security's decline in fair value is other than temporary has placed greater
emphasis on our analysis of the underlying credit and collateral and related
estimates of future cash flows.
The following table summarizes the fair value and gross unrealized losses of
fixed income securities by type and investment grade classification as of
December 31, 2010.
INVESTMENT GRADE BELOW INVESTMENT GRADE TOTAL
-------------------- --------------------- --------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
($ IN THOUSANDS) ---------- ---------- -------- ---------- ---------- ----------
U.S. government and agencies. $ 4,182 $ (201) $ -- $ -- $ 4,182 $ (201)
Municipal.................... 396,938 (37,608) 1,890 (164) 398,828 (37,772)
Corporate.................... 391,226 (21,085) 89,266 (6,771) 480,492 (27,856)
Foreign government........... 43,918 (683) -- -- 43,918 (683)
RMBS......................... 41,097 (3,617) 13,699 (6,745) 54,796 (10,362)
CMBS......................... 103,414 (18,354) 24,532 (14,928) 127,946 (33,282)
ABS.......................... 21,351 (685) 7,500 (2,500) 28,851 (3,185)
---------- -------- -------- -------- ---------- ---------
Total........................ $1,002,126 $(82,233) $136,887 $(31,108) $1,139,013 $(113,341)
========== ======== ======== ======== ========== =========
We have experienced declines in the fair values of fixed income securities
primarily due to wider credit spreads resulting from higher risk premiums since
the time of initial purchase, largely due to macroeconomic conditions and
credit market deterioration, including the impact of lower real estate
valuations, which began to show signs of stabilization in certain geographic
areas in 2010. Consistent with their ratings, our portfolio monitoring process
indicates that investment grade securities have a low risk of default.
Securities rated below investment grade, comprising securities with a rating of
Ba, B and Caa or lower, have a higher risk of default.
As of December 31, 2010, 70% of our below investment grade gross unrealized
losses were concentrated in CMBS and RMBS. As of December 31, 2010, the fair
value of our below investment grade CMBS with gross unrealized losses totaled
$24.5 million compared to $2.3 million as of December 31, 2009. As of
December 31, 2010, gross unrealized losses for our below investment grade CMBS
portfolio totaled $14.9 million, an increase of 21.9% compared to $12.2 million
as of December 31, 2009. The increase over prior year was primarily due to
downgrades of certain CMBS to below investment grade during 2010, partially
offset by improved valuations, impairment write-downs and sales during 2010 in
anticipation of negative capital treatment by certain regulatory and rating
agencies. As of December 31, 2010, the fair value of our below investment grade
RMBS with gross unrealized losses totaled $13.7 million compared to $12.8
million as of December 31, 2009. As of December 31,
96
2010, gross unrealized losses for our below investment grade RMBS portfolio
totaled $6.7 million, a decrease of 49.2% compared to $13.3 million as of
December 31, 2009. The improvement over prior year was primarily due to
improved valuations resulting from lower risk premiums, sales and principal
collections, and impairment write-downs, partially offset by downgrades of
certain RMBS securities to below investment grade during 2010.
Fair values for our structured securities are obtained from third-party
valuation service providers and are subject to review as disclosed in our
Application of Critical Accounting Estimates. In accordance with GAAP, when
fair value is less than the amortized cost of a security and we have not made
the decision to sell the security and it is not more likely than not we will be
required to sell the security before recovery of its amortized cost basis, we
evaluate if we expect to receive cash flows sufficient to recover the entire
amortized cost basis of the security. We calculate the estimated recovery value
by discounting our best estimate of future cash flows at the security's
original or current effective rate, as appropriate, and compare this to the
amortized cost of the security. If we do not expect to receive cash flows
sufficient to recover the entire amortized cost basis of the security, the
credit loss component of the impairment is recorded in earnings, with the
remaining amount of the unrealized loss related to other factors
("non-credit-related") recognized in OCI.
The non-credit-related unrealized losses for our structured securities,
including our below investment grade RMBS and CMBS, are heavily influenced by
risk factors other than those related to our best estimate of future cash
flows. The difference between these securities' original or current effective
rates and the yields implied by their fair value indicates that a higher risk
premium is included in the valuation of these securities than existed at
initial issue or purchase. This risk premium represents the return that a
market participant requires as compensation to assume the risk associated with
the uncertainties regarding the future performance of the underlying
collateral. The risk premium is comprised of: default risk, which reflects the
probability of default and the uncertainty related to collection of contractual
principal and interest; liquidity risk, which reflects the risk associated with
exiting the investment in an illiquid market, both in terms of timeliness and
cost; and volatility risk, which reflects the potential valuation volatility
during an investor's holding period. Other factors reflected in the risk
premium include the costs associated with underwriting, monitoring and holding
these types of complex securities. Certain aspects of the default risk are
included in the development of our best estimate of future cash flows, as
appropriate. Other aspects of the risk premium are considered to be temporary
in nature and are expected to reverse over the remaining lives of the
securities as future cash flows are received.
We believe the unrealized losses on our RMBS and CMBS securities result from
the current risk premium on these securities, which should continue to reverse
over the securities' remaining lives, as demonstrated by improved valuations in
2010. We expect to receive our estimated share of contractual principal and
interest collections used to determine the securities' recovery value. As of
December 31, 2010, we do not have the intent to sell and it is not more likely
than not we will be required to sell these securities before the recovery of
their amortized cost basis. We believe that our valuation and impairment
processes are comprehensive, employ the most current views about collateral and
securitization trust financial positions, and demonstrate our recorded
impairments and that the remaining unrealized losses on these positions are
temporary.
PROBLEM, RESTRUCTURED, OR POTENTIAL PROBLEM SECURITIES
We also monitor the quality of our fixed income portfolio by categorizing
certain investments as "problem," "restructured," or "potential problem."
Problem fixed income securities are in default with respect to principal or
interest and/or are investments issued by companies that have gone into
bankruptcy subsequent to our acquisition. Fixed income securities are
categorized as restructured when the debtor is experiencing financial
difficulty and we grant a concession. Potential problem fixed income securities
are current with respect to contractual principal and/or interest, but because
of other facts and circumstances, we have concerns regarding the borrower's
ability to pay future principal and interest according to the original terms,
which causes us to believe these investments may be classified as problem or
restructured in the future.
97
The following table summarizes problem, restructured and potential problem
fixed income securities as of December 31.
2010
--------------------------------------------------------------
AMORTIZED FAIR VALUE PERCENT OF
COST AS A AS A PERCENT TOTAL FIXED
PAR AMORTIZED PERCENT OF FAIR OF PAR INCOME
VALUE/(1)/ COST/(1)/ PAR VALUE VALUE VALUE PORTFOLIO
($ IN THOUSANDS) --------- --------- ---------- ------- ------------ -----------
Problem................................. $ 285 $ 276 96.8% $ 268 94.0% --%
Potential problem....................... 42,836 25,312 59.1 22,826 53.3 0.4
------- ------- ------- ---
Total net carrying value................ $43,121 $25,588 59.3 $23,094 53.6 0.4%
======= ======= ======= ===
Cumulative write-downs recognized/(2)/.. $13,571
=======
2009
--------------------------------------------------------------
AMORTIZED FAIR VALUE PERCENT OF
COST AS A AS A PERCENT TOTAL FIXED
PAR AMORTIZED PERCENT OF FAIR OF PAR INCOME
VALUE/(1)/ COST/(1)/ PAR VALUE VALUE VALUE PORTFOLIO
--------- --------- ---------- ------- ------------ -----------
Problem................................. $15,052 $10,118 67.2% $10,176 67.6% 0.2%
Potential problem....................... 80,594 47,484 58.9 38,348 47.6 0.6
------- ------- ------- ---
Total net carrying value................ $95,646 $57,602 60.2 $48,524 50.7 0.8%
======= ======= ======= ===
Cumulative write-downs recognized /(2)/. $25,493
=======
--------
/(1)/The difference between par value and amortized cost of $17.5 million as of
December 31, 2010 and $38.0 million as of December 31, 2009 is primarily
attributable to write-downs. Par value has been reduced by principal
payments.
/(2)/Cumulative write-downs recognized only reflects impairment write-downs
related to investments within the problem, potential problem and
restructured categories.
As of December 31, 2010, amortized cost for the problem category was $276
thousand of Subprime. As of December 31, 2010, amortized cost for the potential
problem category was $25.3 million and comprised $14.6 million of CMBS, $6.9
million of Subprime and $3.8 million of corporates (primarily privately placed).
NET INVESTMENT INCOME The following table presents net investment income for
the years ended December 31.
2010 2009 2008
($ IN THOUSANDS) -------- -------- --------
Fixed income securities........... $341,612 $338,563 $362,671
Mortgage loans.................... 30,374 36,658 41,949
Equity securities................. 2,626 1,751 --
Short-term and other.............. 4,452 5,038 12,949
-------- -------- --------
Investment income, before expense. 379,064 382,010 417,569
Investment expense................ (10,369) (9,615) (14,638)
-------- -------- --------
Net investment income............. $368,695 $372,395 $402,931
======== ======== ========
Net investment income decreased 1.0% or $3.7 million in 2010 compared to
2009, after decreasing 7.6% or $30.5 million in 2009 compared to 2008. The 2010
and 2009 decreases were primarily due to lower yields and reduced average
investment balances.
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REALIZED CAPITAL GAINS AND LOSSES The following table presents the
components of realized capital gains and losses and the related tax effect for
the years ended December 31.
($ IN THOUSANDS) 2010 2009 2008
---------------- -------- -------- ---------
Impairment write-downs....................................... $(31,370) $(30,255) $ (38,528)
Change in intent write-downs................................. (11,226) (20,821) (79,262)
-------- -------- ---------
Net other-than-temporary impairment losses recognized in
earnings................................................ (42,596) (51,076) (117,790)
Sales........................................................ 39,937 160,294 59,966
Valuation of derivative instruments.......................... (37,932) 29,831 (29,525)
Settlements of derivative instruments........................ (5,112) 6,419 10,144
EMA limited partnership income............................... (146) -- --
-------- -------- ---------
Realized capital gains and losses, pre-tax................... (45,849) 145,468 (77,205)
Income tax benefit (expense)................................. 14,495 (52,474) 25,708
-------- -------- ---------
Realized capital gains and losses, after-tax.............. $(31,354) $ 92,994 $ (51,497)
======== ======== =========
IMPAIRMENT WRITE-DOWNS totaled $31.4 million in 2010 and included
write-downs on fixed income securities and mortgage loans of $28.5 million and
$2.9 million, respectively. In 2009, impairment write-downs totaled $30.3
million and included write-downs on fixed income securities and mortgage loans
of $25.0 million and $5.3 million, respectively. In 2008, impairment
write-downs totaled $38.5 million and included write-downs on fixed income
securities and mortgage loans of $38.1 million and $449 thousand, respectively.
Impairment write-downs in 2010 were primarily driven by investments with
commercial real estate exposure, including CMBS and mortgage loans, which were
impacted by lower real estate valuations or experienced deterioration in
expected cash flows; privately placed corporate bonds impacted by issuer
specific circumstances; and RMBS, which experienced deterioration in expected
cash flows.
CHANGE IN INTENT WRITE-DOWNS totaling $11.2 million in 2010 were all related
to fixed income securities. In 2009, change in intent write-downs totaled $20.8
million and included $20.1 million for fixed income securities, $686 thousand
for mortgage loans and $14 thousand for equity securities. The change in intent
write-downs in 2010 and 2009 were a result of ongoing comprehensive reviews of
our portfolio resulting in write-downs of individually identified investments,
primarily municipal bonds and RMBS.
SALES generated $39.9 million of net realized gains in 2010 primarily due to
$19.6 million of gains on sales of corporate fixed income securities and $19.0
million of gains on sales of equity securities, partially offset by $3.6
million of net losses on municipal bonds. Net realized gains from sales in 2009
of $160.3 million were primarily due to $150.3 million of gains on sales of
U.S. and foreign government fixed income securities
VALUATION AND SETTLEMENT OF DERIVATIVE INSTRUMENTS net realized capital
losses totaling $43.0 million in 2010 included $37.9 million of losses on the
valuation of derivative instruments and $5.1 million of losses on the
settlement of derivative instruments. In 2009, net realized capital gains on
the valuation and settlement of derivative instruments totaled $36.2 million.
Net realized capital gains and losses from our risk management derivative
programs are primarily driven by changes in risk-free interest rates and
volatility during a given period.
MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in
interest rates, credit spreads or equity prices. Adverse changes to these rates
and prices may occur due to changes in the liquidity of a market or market
segment, insolvency or financial distress of key market makers or participants
or changes in market perceptions of credit worthiness and/or risk tolerance.
99
The active management of market risk is integral to our results of
operations. We may use the following approaches to manage exposure to market
risk within defined tolerance ranges: 1) rebalancing existing asset or
liability portfolios, 2) changing the character of investments purchased in the
future and 3) using derivative instruments to modify the market risk
characteristics of existing assets and liabilities or assets expected to be
purchased. For a more detailed discussion of our use of derivative financial
instruments, see Note 7 of the financial statements.
OVERVIEW In formulating and implementing guidelines for investing funds, we
seek to earn returns that enhance our ability to offer competitive rates and
prices to customers while contributing to attractive and stable profits and
long-term capital growth. Accordingly, our investment decisions and objectives
are a function of the underlying risks and product profiles.
Investment policies define the overall framework for managing market and
other investment risks, including accountability and controls over risk
management activities. These investment policies, which have been approved by
our board of directors, specify the investment limits and strategies that are
appropriate given our liquidity, surplus, product profile and regulatory
requirements. Executive oversight of investment activities is conducted
primarily through our board of directors and investment committee.
Asset-liability management ("ALM") policies further define the overall
framework for managing market and investment risks. ALM focuses on strategies
to enhance yields, mitigate market risks and optimize capital to improve
profitability and returns. ALM activities follow asset-liability policies that
have been approved by our board of directors. These ALM policies specify
limits, ranges and/or targets for investments that best meet our business
objectives in light of our product liabilities.
We manage our exposure to market risk through the use of asset allocation,
duration, simulation, and as appropriate, through the use of stress tests. We
have asset allocation limits that place restrictions on the total funds that
may be invested within an asset class. We have duration limits on our
investment portfolio and, as appropriate, on individual components of the
portfolio. These duration limits place restrictions on the amount of interest
rate risk that may be taken. Comprehensive day-to-day management of market risk
within defined tolerance ranges occurs as portfolio managers buy and sell
within their respective markets based upon the acceptable boundaries
established by investment policies. This day-to-day management is integrated
with and informed by the activities of the ALM organization. This integration
is intended to result in a prudent, methodical and effective adjudication of
market risk and return, conditioned by the unique demands and dynamics of our
product liabilities and supported by the continuous application of advanced
risk technology and analytics.
INTEREST RATE RISK is the risk that we will incur loss due to adverse
changes in interest rates relative to the interest rate characteristics of our
interest bearing assets and liabilities. This risk arises from many of our
primary activities, as we invest substantial funds in interest-sensitive assets
and issue interest-sensitive liabilities. Interest rate risk includes risks
related to changes in U.S. Treasury yields and other key risk-free reference
yields.
We manage the interest rate risk in our assets relative to the interest rate
risk in our liabilities. One of the measures used to quantify this exposure is
duration. Duration measures the price sensitivity of the assets and liabilities
to changes in interest rates. For example, if interest rates increase 100 basis
points, the fair value of an asset with a duration of 5 is expected to decrease
in value by 5%. As of December 31, 2010, the difference between our asset and
liability duration was a (1.17) gap, compared to a (0.36) gap as of
December 31, 2009. A negative duration gap indicates that the fair value of our
liabilities is more sensitive to interest rate movements than the fair value of
our assets.
We seek to invest premiums, contract charges and deposits to generate future
cash flows that will fund future claims, benefits and expenses, and that will
earn stable spreads across a wide variety of interest rate and economic
scenarios. To achieve this objective and limit interest rate risk, we adhere to
a philosophy of managing the duration of assets and related liabilities within
predetermined tolerance levels. This philosophy is executed
100
using duration targets for fixed income investments in addition to interest
rate swaps and caps to reduce the interest rate risk resulting from mismatches
between existing assets and liabilities.
To calculate the duration gap between assets and liabilities, we project
asset and liability cash flows and calculate their net present value using a
risk-free market interest rate adjusted for credit quality, sector attributes,
liquidity and other specific risks. Duration is calculated by revaluing these
cash flows at alternative interest rates and determining the percentage change
in aggregate fair value. The cash flows used in this calculation include the
expected maturity and repricing characteristics of our derivative financial
instruments, all other financial instruments, and certain other items including
annuity liabilities and other interest-sensitive liabilities. The projections
include assumptions (based upon historical market experience and our
experience) that reflect the effect of changing interest rates on the
prepayment, lapse, leverage and/or option features of instruments, where
applicable. The preceding assumptions relate primarily to mortgage-backed
securities, municipal housing bonds, callable municipal and corporate
obligations, and fixed rate single and flexible premium deferred annuities.
Based upon the information and assumptions used in the duration calculation,
and interest rates in effect as of December 31, 2010, we estimate that a 100
basis point immediate, parallel increase in interest rates ("rate shock") would
increase the net fair value of the assets and liabilities by $36.8 million,
compared to $172 thousand as of December 31, 2009, reflecting year to year
changes in duration. In calculating the impact of a 100 basis point increase on
the value of the derivatives, we have assumed interest rate volatility remains
constant. The selection of a 100 basis point immediate parallel change in
interest rates should not be construed as our prediction of future market
events, but only as an illustration of the potential effect of such an event.
There are $596.2 million of assets supporting life insurance products such as
traditional and interest-sensitive life that are not financial instruments.
These assets and the associated liabilities have not been included in the above
estimate. The $596.2 million of assets excluded from the calculation has
increased from $471.9 million as of December 31, 2009, due to an increase in
interest-sensitive life contractholder funds and improved fixed income
valuations as a result of declining risk-free interest rates and tightening of
credit spreads in certain sectors. Based on assumptions described above, in the
event of a 100 basis point immediate increase in interest rates, the assets
supporting life insurance products would decrease in value by $37.4 million,
compared to a decrease of $28.6 million as of December 31, 2009.
To the extent that conditions differ from the assumptions we used in these
calculations, duration and rate shock measures could be significantly impacted.
Additionally, our calculations assume that the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the effect of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.
CREDIT SPREAD RISK is the risk that we will incur a loss due to adverse
changes in credit spreads ("spreads"). This risk arises from many of our
primary activities, as we invest substantial funds in spread-sensitive fixed
income assets.
We manage the spread risk in our assets. One of the measures used to
quantify this exposure is spread duration. Spread duration measures the price
sensitivity of the assets to changes in spreads. For example, if spreads
increase 100 basis points, the fair value of an asset exhibiting a spread
duration of 5 is expected to decrease in value by 5%.
Spread duration is calculated similarly to interest rate duration. As of
December 31, 2010, the spread duration of assets was 5.65, compared to 5.24 as
of December 31, 2009. Based upon the information and assumptions we use in this
spread duration calculation, and spreads in effect as of December 31, 2010, we
estimate that a 100 basis point immediate, parallel increase in spreads across
all asset classes, industry sectors and credit ratings ("spread shock") would
decrease the net fair value of the assets by $352.3 million, compared to $343.5
million as of December 31, 2009. The selection of a 100 basis point immediate
parallel change in spreads should not be construed as our prediction of future
market events, but only as an illustration of the potential effect of such an
event.
101
EQUITY PRICE RISK is the risk that we will incur losses due to adverse
changes in general levels of the equity markets. As of December 31, 2010, we
held $129.4 million in securities with equity risk (including equity securities
and limited partnership interests), compared to $123.3 million as of
December 31, 2009.
As of December 31, 2010, our portfolio of securities with equity risk had a
cash market portfolio beta of 0.99, compared to a beta of 1.00 as of
December 31, 2009. Beta represents a widely used methodology to describe,
quantitatively, an investment's market risk characteristics relative to an
index such as the Standard & Poor's 500 Composite Price Index ("S&P 500").
Based on the beta analysis, we estimate that if the S&P 500 increases or
decreases by 10%, the fair value of our securities with equity risk will
increase or decrease by 10%, respectively. Based upon the information and
assumptions we used to calculate beta as of December 31, 2010, we estimate that
an immediate decrease in the S&P 500 of 10% would decrease the net fair value
of our securities with equity risk by $12.9 million, compared to $12.3 million
as of December 31, 2009, and an immediate increase in the S&P 500 of 10% would
increase the net fair value by $12.9 million compared to $12.3 million as of
December 31, 2009. The selection of a 10% immediate decrease or increase in the
S&P 500 should not be construed as our prediction of future market events, but
only as an illustration of the potential effect of such an event.
The beta of our securities with equity risk was determined by calculating
the change in the fair value of the portfolio resulting from stressing the
equity market up and down 10%. The illustrations noted above may not reflect
our actual experience if the future composition of the portfolio (hence its
beta) and correlation relationships differ from the historical relationships.
As of December 31, 2010 and 2009, we had separate accounts assets related to
variable annuity and variable life contracts with account values totaling
$577.8 million and $587.0 million, respectively. Equity risk exists for
contract charges based on separate account balances and guarantees for death
and/or income benefits provided by our variable products. In 2006, we disposed
of all of the variable annuity business through a reinsurance agreement with
The Prudential Insurance Company of America, a subsidiary of Prudential
Financial Inc. and therefore mitigated this aspect of our risk. Equity risk of
our variable life business relates to contract charges and policyholder
benefits. Total variable life contract charges for 2010 and 2009 were $1.0
million and $860 thousand, respectively. Separate account liabilities related
to variable life contracts were $7.4 million and $5.8 million in December 31,
2010 and 2009, respectively.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES consist of shareholder's equity. The following table
summarizes our capital resources as of December 31.
2010 2009 2008
($ IN THOUSANDS) -------- -------- ---------
Common stock, retained income and additional capital
paid-in............................................ $693,131 $682,834 $ 625,482
Accumulated other comprehensive income (loss)........ 133,210 24,050 (108,914)
-------- -------- ---------
Total shareholder's equity........................ $826,341 $706,884 $ 516,568
======== ======== =========
SHAREHOLDER'S EQUITY increased in 2010, primarily due to increased
unrealized net capital gains on investments and net income. Shareholder's
equity increased in 2009, primarily due to unrealized net capital gains as of
December 31, 2009 compared to unrealized net capital losses as of December 31,
2008 and net income.
102
FINANCIAL RATINGS AND STRENGTH The following table summarizes our financial
strength ratings as of December 31, 2010.
RATING AGENCY RATING
------------- ----------------
A.M. Best Company, Inc............. A+ ("Superior")
Standard & Poor's Ratings Services. A+ ("Strong")
Moody's Investors Service, Inc..... A1 ("Good")
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, the
current level of operating leverage, ALIC's ratings and AIC's ratings.
On January 24, 2011, Moody's affirmed our financial strength rating of A1.
The outlook for the Moody's rating remained stable. On December 15, 2010, A.M.
Best affirmed our A+ financial strength rating. The outlook remained negative.
On November 17, 2010, S&P downgraded our financial strength rating to A+ from
AA-. The outlook for the S&P rating was revised to stable from negative.
State laws specify regulatory actions if an insurer's risk-based capital
("RBC"), a measure of an insurer's solvency, falls below certain levels. The
NAIC has a standard formula for annually assessing RBC. The formula for
calculating RBC for life insurance companies takes into account factors
relating to insurance, business, asset and interest rate risks. As of
December 31, 2010, our RBC was within the range that we target.
The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or actions by insurance regulatory
authorities. The NAIC analyzes financial data provided by insurance companies
using prescribed ratios, each with defined "usual ranges." Generally,
regulators will begin to monitor an insurance company if its ratios fall
outside the usual ranges for four or more of the ratios. If an insurance
company has insufficient capital, regulators may act to reduce the amount of
insurance it can issue. Our ratios are within these ranges.
LIQUIDITY SOURCES AND USES Our potential sources of funds principally
include the activities as follows.
. Receipt of insurance premiums
. Contractholder fund deposits
. Reinsurance recoveries
. Receipts of principal, interest and dividends on investments
. Sales of investments
. Funds from securities lending
. Intercompany loans
. Capital contributions from parent
Our potential uses of funds principally include the activities as follows.
. Payment of contract benefits, surrenders and withdrawals
. Reinsurance cessions and payments
. Operating costs and expenses
. Purchase of investments
. Repayment of securities lending
. Payment or repayment of intercompany loans
. Dividends to parent
. Tax payments/settlements
103
We have an intercompany loan agreement with the Corporation. The amount of
intercompany 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.
The Corporation may use commercial paper borrowings and bank lines of credit to
fund intercompany borrowings. We had no amounts outstanding under the
intercompany loan agreement as of December 31, 2010 or 2009.
Certain remote events and circumstances could constrain our or the
Corporation's liquidity. Those events and circumstances include, for example, a
catastrophe resulting in extraordinary losses, a downgrade in the Corporation's
long-term debt rating of A3, A- and a- (from Moody's, S&P and A.M. Best,
respectively) to non-investment grade status of below Baa3/BBB-/bb, a downgrade
in AIC's financial strength rating from Aa3, AA- and A+ (from Moody's, S&P and
A.M. Best, respectively) to below Baa2/BBB/A-, or a downgrade in our financial
strength ratings from A1, A+ and A+ (from Moody's, S&P and A.M. Best,
respectively) to below A3/A-/A-. The rating agencies also consider the
interdependence of the Corporation's individually rated entities; therefore, a
rating change in one entity could potentially affect the ratings of other
related entities.
CASH FLOWS As reflected in our Statements of Cash Flows, increased operating
cash flows in 2010 compared to 2009 were primarily due to income tax refunds
compared to payments in 2009 and lower expenses, partially offset by higher
contract benefits. Lower operating cash flows in 2009 compared to 2008 were due
primarily to higher income tax payments, lower premiums and decreased net
investment income, partially offset by lower expenses.
Cash flows provided by investing activities increased in 2010 compared 2009
primarily due to lower purchases of fixed income securities. Cash flows
provided by investing activities in 2009 compared to cash flows used in
investing activities in 2008 were primarily due to net reductions in
investments to fund reductions in contractholder fund liabilities.
Increased cash flows used in financing activities in 2010 compared 2009 were
due to lower contractholder fund deposits and increased contractholder fund
withdrawals. Cash flows used in financing activities in 2009 compared to cash
flows provided by financing activities in 2008 were due to lower contractholder
fund deposits, partially offset by lower contractholder fund withdrawals. For
quantification of the changes in contractholder funds, see the Operations
section of MD&A.
A portion of our product portfolio, including fixed annuities and
interest-sensitive life insurance, is subject to surrender and withdrawal at
the discretion of contractholders. As of December 31, 2010, contractholder
funds totaling $594.2 million were not subject to discretionary withdrawal,
$2.70 billion were subject to discretionary withdrawal with adjustments, and
$1.40 billion were subject to discretionary withdrawal without adjustment. Of
the contractholder funds subject to discretionary withdrawal with adjustments,
$1.36 billion had a contractual surrender charge of less than 5% of the account
balance.
104
CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of
December 31, 2010 and the payments due by period are shown in the following
table.
LESS THAN OVER 5
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
($ IN THOUSANDS) ----------- ---------- ---------- ---------- ----------
Securities lending/(1)/.............. $ 127,983 $ 127,983 $ -- $ -- $ --
Contractholder funds/(2) /........... 5,398,102 785,914 1,421,910 1,028,584 2,161,694
Reserve for life-contingent contract
benefits/(2) /..................... 7,559,063 139,884 288,917 293,391 6,836,871
Reinsurance payable to parent........ 3,667 3,667 -- -- --
Payable to affiliates, net........... 6,709 6,709 -- -- --
Other liabilities and accrued
expenses/(3)(4)/................... 30,260 25,672 2,705 1,027 856
----------- ---------- ---------- ---------- ----------
Total contractual cash obligations... $13,125,784 $1,089,829 $1,713,532 $1,323,002 $8,999,421
=========== ========== ========== ========== ==========
--------
/(1)/Liabilities for securities lending are typically fully secured with cash
or short-term investments. We manage our short-term liquidity position to
ensure the availability of a sufficient amount of liquid assets to
extinguish short-term liabilities as they come due in the normal course of
business, including utilizing potential sources of liquidity as disclosed
previously.
/(2)/Contractholder funds represent interest-bearing liabilities arising from
the sale of products such as interest-sensitive life and fixed annuities,
including immediate annuities without life contingencies. The reserve for
life-contingent contract benefits relates primarily to traditional life
insurance immediate annuities with life contingencies and voluntary
accident and health insurance. These amounts reflect the present value of
estimated cash payments to be made to contractholders and policyholders.
Certain of these contracts, such as immediate annuities without life
contingencies, involve payment obligations where the amount and timing of
the payment is essentially fixed and determinable. These amounts relate to
(i) policies or contracts where we are currently making payments and will
continue to do so and (ii) contracts where the timing of a portion or all
of the payments has been determined by the contract. Other contracts, such
as interest-sensitive life, fixed deferred annuities, traditional life
insurance, immediate annuities with life contingencies and voluntary
accident and health insurance, involve payment obligations where a portion
or all of the amount and timing of future payments is uncertain. For these
contracts, we are not currently making payments and will not make payments
until (i) the occurrence of an insurable event such as death or illness or
(ii) the occurrence of a payment triggering event such as the surrender or
partial withdrawal on a policy or deposit contract, which is outside of
our control. We have estimated the timing of payments related to these
contracts based on historical experience and our expectation of future
payment patterns. Uncertainties relating to these liabilities include
mortality, morbidity, expenses, customer lapse and withdrawal activity,
estimated additional deposits for interest-sensitive life contracts, and
renewal premium for life policies, which may significantly impact both the
timing and amount of future payments. Such cash outflows reflect
adjustments for the estimated timing of mortality, retirement, and other
appropriate factors, but are undiscounted with respect to interest. As a
result, the sum of the cash outflows shown for all years in the table
exceeds the corresponding liabilities of $4.69 billion for contractholder
funds and $1.99 billion for reserve for life-contingent contract benefits
as included in the Statements of Financial Position as of December 31,
2010. The liability amount in the Statements of Financial Position
reflects the discounting for interest as well as adjustments for the
timing of other factors as described above.
/(3)/Other liabilities primarily include accrued expenses, claim payments and
other checks outstanding.
/(4)/Balance sheet liabilities not included in the table above include unearned
and advanced premiums of $946 thousand and gross deferred tax liabilities
of $112.1 million. These items were excluded as they do not meet the
definition of a contractual liability as we are not contractually
obligated to pay these amounts to third parties. Rather, they represent an
accounting mechanism that allows us to present our financial statements on
an accrual basis. In addition, other liabilities of $1.1 million were not
included in the table above because they did not represent a contractual
obligation or the amount and timing of their eventual payment was
sufficiently uncertain.
Our contractual commitments as of December 31, 2010 and the periods in which
the commitments expire are shown in the following table.
LESS THAN OVER 5
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
($ IN THOUSANDS) ------- --------- --------- --------- ------
Other commitments -- unconditional. $98,114 $ -- $1,972 $92,841 $3,301
Contractual commitments represent investment commitments such as limited
partnership interests.
For a more detailed discussion of our off-balance sheet arrangements, see
Note 7 of the financial statements.
105
REGULATION AND LEGAL PROCEEDINGS
We are subject to extensive regulation and we are involved in various legal
and regulatory actions, all of which have an effect on specific aspects of our
business. For a detailed discussion of the legal and regulatory actions in
which we are involved, see Note 11 of the financial statements.
PENDING ACCOUNTING STANDARDS
There are several pending accounting standards that we have not implemented
either because the standard has not been finalized or the implementation date
has not yet occurred. For a discussion of these pending standards, see Note 2
of the financial statements.
The effect of implementing certain accounting standards on our financial
results and financial condition is often based in part on market conditions at
the time of implementation of the standard and other factors we are unable to
determine prior to implementation. For this reason, we are sometimes unable to
estimate the effect of certain pending accounting standards until the relevant
authoritative body finalizes these standards or until we implement them.
ITEM 11(I).CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 11(J).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required for Item 11(j) is incorporated by reference to the
material under the caption "Market Risk" in Item 11(h) of this report.
ITEM 11(K).DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
Directors are elected at each annual meeting of shareholders, for a term of one
year. The biographies of each of the directors below contains information
regarding the person's service as a director, business experience, director
positions held currently or at any time during the last five years, and the
experiences, qualifications, attributes or skills that caused the company
management to determine that a director should serve as such for Allstate New
York.
MARCIA D. ALAZRAKI, 69, has been a director since December 1993. She is a
partner at the law firm Manatt, Phelps & Phillips, LLP and co-chair of the
firm's insurance practice group. Prior to joining this firm in 2003,
Ms. Alazraki headed the insurance regulatory practices at Shea & Gould and then
at Simpson Thacher & Bartlett. For each of the last four years, Ms. Alazraki
has been selected for inclusion in THE BEST LAWYERS IN AMERICA. She also
currently holds director positions with Protective Life Insurance Company of
New York and First Great-West Life & Annuity Insurance Company. Ms. Alazraki
possesses a thorough understanding of insurance laws and regulations, including
those governing the financing, acquisition and licensing of insurance
companies, insurance product design, reinsurance transactions and market
conduct and financial examination.
ROBERT K. BECKER, 55, became director and Senior Vice President on March 16,
2010. Mr. Becker is also the Chairman of the Board, Chief Executive Officer and
Manager of Allstate Financial Services, LLC ("AFS, LLC") and Vice President of
Allstate Life Insurance Company. Mr. Becker is responsible for Allstate's
broker dealer operations as well as recruiting, training and product strategy
for registered representatives of AFS, LLC and third party relationships. At
Allstate since 2000, Mr. Becker has progressed through various roles, including
Regional Financial Services Manager, Regional Distribution Leader and Assistant
Field Vice President. Prior to
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joining Allstate, Mr. Becker spent over 20 years with MetLife Insurance
Company, where he held various leadership positions. Mr. Becker's professional
designations include LUTCF, CLU, ChFC, CFP, and CLTC. Currently, Mr. Becker
also serves as a director with Allstate Life Insurance Company, which is
affiliated with Allstate New York. Mr. Becker has proven leadership experience
with using excellent customer service to grow business in a competitive
environment.
MICHAEL B. BOYLE, 52, has been a director since March 2007 and a Senior Vice
President since April 2004. Mr. Boyle also is a Senior Vice President with
Allstate Life Insurance Company. Mr. Boyle is responsible for Customer Service
and Technology within the Allstate Financial group of companies. Prior to
joining Allstate, Mr. Boyle was employed at Robertson Stephens, Inc., an
investment bank, where he served as Chief Information Officer and head of back
office operations, technology and electronic trading platforms on a global
basis. Prior to Robertson Stephens, he spent 15 years with Merrill Lynch in New
York and London, including several years as Director of Technology for
Europe/Africa/Middle East. Currently, Mr. Boyle serves as a director for MIB,
Inc, a fraud protection services corporation. In addition, he holds a director
position with Allstate Life Insurance Company, which is affiliated with
Allstate New York. Mr. Boyle has in-depth knowledge of operations personnel
management and many aspects of technology, including infrastructure,
applications, and e-commerce.
ANURAG CHANDRA, 33, has been a director and Executive Vice President since
March 2011. Mr. Chandra is also a Senior Vice President of Allstate Life
Insurance Company. Mr. Chandra has broad responsibilities for driving long-term
strategy and for improving the operational base for the Allstate Financial
group of companies. More specifically, Mr. Chandra has direct accountability
for product development, underwriting, wholesaling and asset liability
management. Prior to joining Allstate in January 2011, Mr. Chandra was an
executive vice president and chief operating officer for HealthMarkets, Inc.
Under his leadership, the company transformed from a niche individual health
insurance manufacturer to one of the largest independent distributors in the
United States. Prior to that role, Mr. Chandra was a principal at Aquiline
Capital Partners, a global private equity firm that took advantage of market
conditions to launch successful new insurance and financial services companies.
Mr. Chandra has also held senior operating and strategic development roles at
Nationwide Financial Services and Conseco/Bankers Life and Casualty. Currently,
Mr. Chandra also serves as a director for Allstate Life Insurance Company,
which is affiliated with Allstate New York. Mr. Chandra has extensive
experience with the day-to-day management of company operations.
MATTHEW S. EASLEY, 55, has been a director since March 2009 and Senior Vice
President since December 2005. Mr. Easley is also a Vice President for Allstate
Life Insurance Company. Mr. Easley is responsible for Product Management,
Underwriting, and Asset Liability Management within the Allstate Financial
group of companies. Prior to joining Allstate, Mr. Easley spent 23 years at
Nationwide Financial including 11 years as the head of Annuity and Pension
Actuarial, where he started a 401(k) business with a new-to-the-world business
model, created a synthetic asset segmentation method, co-invented a patented
retirement planning software and led a team to create a new strategic plan as
part of the initial public offering of Nationwide Financial Services stock.
Currently, Mr. Easley also serves as a director for Allstate Life Insurance
Company, which is affiliated with Allstate New York. Mr. Easley possesses
extensive insurance business, product and liability management experience.
MARK A. GREEN, 43, became director and Senior Vice President on March 16, 2010.
Mr. Green is also the Vice President of National Sales for Allstate Life
Insurance Company. Prior to his current role, Mr. Green was the Assistant Field
Vice President for Allstate Insurance Company in the Capital Region, where he
had geographic responsibility for West Virginia, Delaware and Washington D.C.
Before joining Allstate, Mr. Green was a founding equity partner and chief risk
officer for AIX Group in Connecticut, where he was responsible for corporate
development and overall risk and investment management. He has worked for Wells
Fargo, Chubb Group and Swiss Reinsurance. Currently, Mr. Green also serves as a
director for Allstate Life Insurance Company, which is affiliated with Allstate
New York. Mr. Green has experience in optimizing insurance company operations
to drive profitable growth.
107
JUDITH P. GREFFIN, 50, has been an Executive Vice President of Allstate New
York since April 2004. Ms. Greffin is also a Senior Vice President and the
Chief Investment Officer of Allstate Insurance Company, where she oversees
Allstate's $100 billion-plus investment portfolio. Since joining Allstate in
1990, Ms. Greffin has served in a series of key investment positions, including
responsibility for Allstate's fixed-income portfolio and the Portfolio
Management Group. She began her financial career as an analyst with the
Huntington National Bank, and served as a senior portfolio manager with
Flagship Financial before joining Allstate. Ms. Greffin has also served on the
Allstate Foundation Grant Committee.
CLEVELAND JOHNSON, JR., 76, has been a director since December 1983.
Mr. Johnson has worked in public service for thirty-five years, including
positions of responsibility in city, town, county, state and federal
government. He has also owned and operated a number of successful businesses.
Mr. Johnson is currently the President of Johnson Consulting Associates, a
business development firm. In addition, he serves as Executive Vice President
of ValuCare, Inc, a home health care company, and Executive Vice President of
Strategic Fundraising, Inc., a consulting firm. Mr. Johnson has strong business
administration skills and experience in crafting multi-disciplinary approaches
to the development of social policy.
SUSAN L. LEES, 53, has been director and Senior Vice President, General Counsel
and Secretary since August 2008. Ms. Lees is also Senior Vice President,
General Counsel and Secretary of Allstate Life Insurance Company. At Allstate
for over 20 years, Ms. Lees progressed through various counsel positions
throughout Allstate before become an assistant vice president in 1999. As the
leader of the Corporate Law division of Allstate Law and Regulation, Ms. Lees
gained extensive experience working with a number of the business areas
throughout the enterprise, including Allstate Life Insurance Company.
Currently, Ms. Lees serves as a director for Life Insurance Council of New
York. She also serves as a director for Allstate Life Insurance Company, which
is affiliated with Allstate New York. Ms. Lees has a deep understanding of
insurance business generally, as well as applicable laws and regulations,
including corporate and securities laws and corporate governance matters. In
addition, Ms. Lees has extensive knowledge regarding Allstate New York's
business, including its employees, products, agencies and customers.
KENNETH R. O'BRIEN, 73, has served as director since July 1998. Mr. O'Brien was
the President and Chief Executive Officer of O'Brien Asset Management, an
investment advisory firm, from 1996 until his retirement in 2006. Prior to that
role, Mr. O'Brien was Chief Executive Officer for Aurora National Life
Insurance Company and Executive Vice President for New York Life Insurance
Company. Mr. O'Brien has significant knowledge of insurance company operations
and executive experience in the life insurance and financial services
industries.
SAMUEL H. PILCH, 64, became a director in December 2010. Mr. Pilch is also a
Senior Group Vice President and Controller of Allstate New York. In addition,
Mr. Pilch is a Senior Group Vice President and Controller of Allstate Life
Insurance Company, Allstate Insurance Company, and The Allstate Corporation,
each a parent company of Allstate New York. In his roles, Mr. Pilch is
responsible for all statutory and GAAP reporting, Property-Liability reserving
and accounting standards and research. He is also responsible for the Specialty
Operations division for Allstate, which includes discontinued Property
Liability operations and Property Liability catastrophe reinsurance, guaranty
funds and residual markets administration. Before joining Allstate in 1995, Mr.
Pilch was Chief Operating Officer, Managed Care at the Travelers Insurance
Company in Hartford, Connecticut, where he also held the positions of Financial
Officer of Insurance Operations and Corporate Treasurer. Prior to Travelers,
Mr. Pilch was an officer in Aetna Life & Casualty's life insurance business,
also in Hartford. Currently, Mr. Pilch serves as a director for Allstate Life
Insurance Company. He is also a member of the Connecticut Society of CPAs. Mr.
Pilch has a deep knowledge of the insurance industry as well as extensive
experience with insurance company accounting.
JOHN C. PINTOZZI, 45, has been director since September 2004 and Senior Vice
President and Chief Financial Officer since March 2005. Mr. Pintozzi also is
Senior Vice President and Chief Financial Officer for Allstate Life Insurance
Company. In these positions, Mr. Pintozzi is responsible for the planning and
analysis, capital allocation, valuation and compliance functions as well as
Allstate Federal Savings Bank. Prior to Allstate,
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Mr. Pintozzi was an audit partner with Deloitte & Touche, specializing in the
insurance and financial services industries. He is a Certified Public
Accountant and holds memberships with the American Institute of Certified
Public Accountants and the Illinois CPA Society. In addition, Mr. Pintozzi
currently serves as a director for Allstate Life Insurance Company, which is
affiliated with Allstate New York. Mr. Pintozzi has extensive experience in
corporate and insurance company finance and accounting.
JOHN R. RABEN, JR., 65, has served as director since 1988. Mr. Raben was a
Managing Director of JP Morgan Chase from 2004 until his retirement in 2008,
where he worked with the commercial and investment banking groups. Prior to
that, he was also a Manager Director of Banc One Securities. Mr. Raben is
active in his local organizations as Chairman of the Greenwich Republican Town
Committee, Vice Chairman of the Greenwich Emergency Medical Service (GEMS)
Board of Directors, and a member of the Coastal Resources Advisory Committee.
In addition, Mr. Raben is a Treasurer and Board Member of both the Yellowstone
Park Foundation and the Cornelia Rossi Foundation, each of which are charitable
organizations. Mr. Raben has extensive experience in the financial services
industry.
LARRY SEDILLO, 53, has been a director, Vice President and Chief Operating
Officer since December 2010. Mr. Sedillo is also a Field Vice President for
Allstate Insurance Company. In this role, he assists in the operation and
management of the New York Market Operating Committee. Mr. Sedillo has been
with Allstate for over 24 years and has served in numerous roles for the
organization. He first began his career with Allstate in 1987 as a neighborhood
office agent in the Texas Region. He then progressed through several sales
management roles to become a Territorial Sales Leader, where he was responsible
for distribution in the western section of Texas. After staying in this role
for over 7 years, Mr. Sedillo then became a director in Allstate's home office
and worked to manage incentive compensation for sales leaders across the
Allstate enterprise. Finally, prior to his current role in the New York Region,
Mr. Sedillo was a Regional Sales Leader, where his responsibilities included
management of the Sales Department for the California Region. Over the course
of his career with Allstate, Mr. Sedillo has established himself as a strong
and effective leader and has gained deep knowledge of the insurance industry,
as well as extensive experience with sales management.
PHYLLIS HILL SLATER, 66, has been a director since 2002. Ms. Slater is the
founder and president of Hill Slater, Inc, a successful engineering and
architectural support firm. Hill Slater Inc. specializes in construction
management, inspection services, design drafting, and CAD services. Ms. Slater
served as national president of the National Association of Women Business
Owners from 1997 to 1998, and presently serves on many corporate and non-profit
boards. Ms. Slater has deep knowledge of general business operations and
corporate governance.
MATTHEW E. WINTER, 54, has been a director since December 2009, and President,
Chief Executive Officer and Chairman of the Board since March 2010. Mr. Winter
is also the President and Chief Executive Officer of Allstate Life Insurance
Company and Senior Vice President of Allstate Insurance Company, each a parent
organization of Allstate New York. Prior to Allstate, Mr. Winter was the Vice
Chairman of American International Group, President and Chief Executive Officer
of American General Life Companies, and Executive Vice President for MassMutual
Financial Group. For a brief period in 2009, Mr. Winter served as a director of
EP Global Communications, a magazine publication and distribution company.
Currently, Mr. Winter also serves as a director for Allstate Insurance Company
and Allstate Life Insurance Company, each of which is affiliated with Allstate
New York. Mr. Winter was also a former Chairman of the Houston Food Bank Board
of Directors. Mr. Winter has extensive experience leading major life insurance
and financial services providers, working with financial and estate planning
products and overseeing the operations of insurance companies.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
No directors or executive officers have been involved in any legal
proceedings that are material to an evaluation of the ability or integrity of
any director or executive officer of Allstate New York.
109
ITEM 11(L).EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS ("CD&A")
OVERVIEW
Executive officers of Allstate New York also serve as officers of other
subsidiaries of The Allstate Corporation ("Allstate") and receive no
compensation directly from Allstate New York. They are employees of an Allstate
subsidiary. Allocations have been made for each named executive based on the
amount of the named executive's compensation allocated to Allstate New York
under the Amended and Restated Service and Expense Agreement among Allstate
Insurance Company, Allstate and certain affiliates, as amended effective
January 1, 2009, to which Allstate New York is a party (the "Service and
Expense Agreement"). Those allocations are reflected in the Summary
Compensation Table set forth below and in this disclosure, except where noted.
The named executives may have received additional compensation for services
rendered to other Allstate subsidiaries, and those amounts are not reported.
Each year the Compensation and Succession Committee (the "Committee") of the
Allstate Board of Directors and members of Allstate management review the
overall design of Allstate's executive compensation program to ensure
compensation is aligned with both annual and long-term performance. At target
levels of performance, annual and long-term incentive awards are designed to
constitute a significant percentage of an executive's total core compensation
and provide a strong link to Allstate's performance. Additionally, the delivery
of the largest portion of incentive compensation through stock options provides
even greater alignment with stockholder interests because the stock price must
appreciate from the date of grant for any value to be delivered to executives.
Allstate has made changes to its executive compensation program for 2011.
Allstate has eliminated any excise tax gross-ups in new change-in-control
agreements. Allstate has also made changes to the annual incentive program for
2011 to continue to better align executive compensation with enterprise
performance. The key program change, which will apply to all bonus eligible
employees across the enterprise, will be to reduce the number of measures and
provide for greater use of enterprise-wide corporate goals. Allstate believes
this action will focus employees on those goals which will more effectively
drive sustainable long-term growth for stockholders.
COMPENSATION PHILOSOPHY
Allstate's compensation philosophy is based on these central beliefs:
. Executive compensation should be aligned with performance and
stockholder value. Accordingly, a significant amount of executive
compensation should be in the form of equity.
. The compensation of our executives should vary both with appreciation in
the price of Allstate stock and with Allstate's performance in achieving
strategic short and long-term business goals designed to drive stock
price appreciation.
. Allstate's compensation program should inspire our executives to
strive for performance that is better than the industry average.
. A greater percentage of compensation should be at risk for executives
who bear higher levels of responsibility for Allstate's performance.
. Allstate should provide competitive levels of compensation for
competitive levels of performance and superior levels of compensation
for superior levels of performance.
Allstate's executive compensation program has been designed around these
beliefs and includes programs and practices that ensure alignment between the
interests of its stockholders and executives and delivery of
110
compensation consistent with the corresponding level of performance. These
objectives are balanced with the goal of attracting, motivating, and retaining
highly talented executives to compete in our complex and highly regulated
industry.
Some of Allstate's key practices we believe support this approach include:
. Providing a significant portion of executive pay through stock options,
creating direct alignment with stockholder interests.
. Establishment of stock ownership guidelines for senior executives that
drive further alignment with stockholder interests. Each named executive
officer is required to hold four times salary.
. Stock option repricing is not permitted.
. A robust governance process for the design, approval, administration,
and review of our overall compensation program.
. Utilization of annual incentive plan caps to limit maximum award
opportunities and support enterprise risk management strategies.
. Inclusion of a clawback feature in the Annual Executive Incentive Plan
and the 2009 Equity Incentive Plan that provides the ability to recover
compensation from Allstate executive officers in the event of certain
financial restatements.
. Incorporation of discretion in the annual executive incentive plan to
allow for the adjustment of awards to reflect individual performance.
Allstate's philosophy and practices have provided us with the tools to create
an effective executive compensation program as detailed below.
NAMED EXECUTIVES
This CD&A describes the executive compensation program at Allstate and
specifically describes total 2010 compensation for the following named
executives of Allstate New York*:
. Matthew E. Winter--Chairman of the Board, Chief Executive Officer, and
President,
. John C. Pintozzi--Vice President and Chief Financial Officer
--------
*Reflects titles in effect as of December 31, 2010.
COMPENSATION PRACTICES
Allstate reviews the design of its executive compensation program and
executive pay levels on an annual basis and performance and goal attainment
within this design throughout the year. As part of that review, Allstate
considers available data regarding compensation paid to similarly-situated
executives at companies against which it competes for executive talent. With
respect to the compensation program for 2010, the Committee considered
compensation data for the peer companies listed below for Mr. Winter, as well
as proxy information from select S&P 100 companies with fiscal 2009 revenue of
between $15 and $60 billion with which Allstate competes for executive talent.
Towers Watson, an independent compensation consultant, recommended
modifications to the peer insurance companies that Allstate uses in
benchmarking compensation for certain executives for 2010. The Committee
approved removing from the peer insurance companies Cincinnati Financial
Corporation due to its relative size and CNA Financial Corporation because it
is closely held. ACE Ltd, AFLAC Inc., and Manulife Financial Corporation were
added to augment the peer insurance companies with similarly sized insurers.
With respect to Mr. Pintozzi, Allstate management considered compensation
surveys that provided information on companies of broadly similar size and
business mix as Allstate, as well as companies with a
111
broader market context. The compensation surveys considered include the Mercer
Property & Casualty Insurance Company Survey, the 2009 Towers Perrin
Diversified Insurance Survey, and the Towers Perrin Compensation Data Bank. The
Diversified Insurance Survey includes 18 insurance organizations with assets
ranging from $848 million to $108 billion. The Towers Perrin Compensation Data
Bank provides compensation data on 90 of the Fortune 100 companies. The Mercer
Property & Casualty Insurance Company Survey includes compensation data for 27
property and casualty insurance companies with at least $2 billion in annual
premiums. In addition, in its executive pay and performance discussions,
Allstate management considered information regarding other companies in the
financial services industries.
PEER INSURANCE COMPANIES
ACE Ltd.* Manulife Financial Corporation*
AFLAC Inc.* MetLife Inc.
The Chubb Corporation The Progressive Corporation
The Hartford Financial Services
Group, Inc. Prudential Financial, Inc.
Lincoln National Corporation The Travelers Companies, Inc.
--------
*Added in 2010
CORE ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM
Allstate's executive compensation program design balances fixed and variable
compensation elements and provides alignment with both short and long term
business goals through annual and long-term incentives. Allstate's incentives
are designed to balance overall corporate, business unit, and individual
performance with respect to measures Allstate believes correlate to the
creation of stockholder value and align with Allstate's strategic vision and
operating priorities. The following table lists the core elements of Allstate's
executive compensation program.
POTENTIAL FOR VARIABILITY
CORE ELEMENT PURPOSE WITH PERFORMANCE
------------ ------------------------------------------------------------- -------------------------
Annual salary Provides a base level of competitive cash compensation for Low
executive talent
Annual cash incentive Reward performance on key strategic, operational, and High
awards financial measures over the year
Long-term equity Align the interests of executives with long-term shareholder Moderate to High
incentive awards value and retain executive talent
SALARY
Mr. Winter's salary was set by the Allstate Board of Directors based on the
Committee's recommendation. Mr. Pintozzi's salary was set by Allstate
management. In recommending executive base salary levels, Allstate uses the
50/th/ percentile of its peer insurance companies for Mr. Winter and the 50/th/
percentile of insurance and general industry data for Mr. Pintozzi as a
guideline to align with Allstate's pay philosophy for competitive positioning
in the market for executive talent.
. The average enterprise-wide merit and promotional increases are based
on a combination of U.S. general and insurance industry market data
and are set at levels intended to be competitive.
. Annual merit increases for the named executives are based on
evaluations of their performance using the average enterprise-wide
merit increase as a guideline.
. The base salaries for each named executive were reviewed in
February of 2010. Allstate established a new base salary for Mr.
Pintozzi, based on his performance and in line with the
enterprise-wide merit increase.
. Allstate did not adjust the base salary for Mr. Winter, which had
just been established in the last quarter of 2009 when he joined
the corporation.
112
INCENTIVE COMPENSATION
The Committee approves performance measures and goals for cash incentive
awards during the first quarter of the year. The performance measures and goals
are aligned with Allstate's objectives and tied to its strategic vision and its
operating priorities. They are designed to reward Allstate executives for
actual performance, to reflect objectives that will require significant effort
and skill to achieve, and to drive Allstate stockholder value.
After the end of the year for annual cash incentive awards and after the end
of the three-year cycle for long-term cash incentive awards, the Committee
reviews the extent to which Allstate has achieved the various performance
measures and approves the actual amount of all cash incentive awards for
Allstate executive officers. The Committee may adjust the amount of an annual
cash incentive award but has no authority to increase the amount of an award
payable to Mr. Winter above the described plan limits. Allstate management
approves the actual amount of cash incentive awards to Mr. Pintozzi. Allstate
pays the cash incentive awards in March, after the end of the year for the
annual cash incentive awards and after the end of the three-year cycle for the
long-term cash incentive awards. Long-term cash incentives have been
discontinued, and the last three year cycle ended in 2010.
Typically the Committee also approves grants of equity awards on an annual
basis during a meeting in the first quarter. By making these awards and
approving performance measures and goals for the annual cash incentive awards
during the first quarter, Allstate is able to balance these elements of core
compensation to align with its business goals.
ANNUAL CASH INCENTIVE AWARDS
In 2010 Allstate executives had the opportunity to earn an annual cash
incentive award based on the achievement of performance measures over a
one-year period. The annual incentive plans are designed to provide all of the
named executives with cash awards based on a combination of corporate and
business unit performance measures for each of Allstate's main business units:
Allstate Protection, Allstate Financial, and Allstate Investments. Allstate New
York is part of Allstate Financial.
The maximum amount of Mr. Winter's award was the lesser of a stockholder
approved maximum under the Annual Executive Incentive Plan of $8.5 million or
25% of the 1.0% of Operating Income pool. Operating Income is defined under the
"Performance Measures" caption on page 129. Although these limits established
the maximum annual cash incentive awards that could be paid to Mr. Winter, the
Committee retained complete discretion to pay any lesser amount. Mr. Winter's
actual award was based on the achievement of certain performance measures as
detailed below, including assessments of his individual performance and overall
corporate and Allstate Financial business unit performance. Mr. Pintozzi does
not participate in the Operating Income pool.
For 2010, the Committee adopted corporate and Allstate Financial business
unit level annual performance measures and weighted them as applied to
Mr. Winter in accordance with his responsibility for Allstate's overall
corporate performance and the performance of the Allstate Financial business
unit. Allstate management utilized the same performance measures and weighting
with respect to Mr. Pintozzi. Each measure is assigned a weight expressed as a
percentage of the total annual cash incentive award opportunity, with all
weights adding to 100%.
The following table lists the performance measures and related target goals
for 2010 as well as the weighting factors and the actual results applicable to
the named executives. The performance measures were designed to focus executive
attention on key strategic, operational, and financial measures including top
line growth and profitability. For each performance measure, the Committee
approved a threshold, target, and maximum goal. The target goals for the
performance measures were based on evaluations of our historical performance
and plans to drive projected performance. A description of each performance
measure is provided under the "Performance Measures" caption on page 129.
113
ANNUAL CASH INCENTIVE AWARD PERFORMANCE MEASURES, TARGET, AND WEIGHTING/(1)/
ACHIEVEMENT
RELATIVE TO
THRESHOLD, TARGET,
PERFORMANCE MEASURE WEIGHTING TARGET ACTUAL/(2)/ MAXIMUM GOALS
------------------- --------- ------------- ------------- -------------------
CORPORATE-LEVEL PERFORMANCE MEASURE 20%
Adjusted Operating Income Per Diluted $4.30 $3.00 Between threshold
Share and target
ALLSTATE FINANCIAL PERFORMANCE MEASURES 80%
Adjusted Operating Income $425 million $474 million Exceeded
maximum
Adjusted Operating Return on Equity 6.6% 7.7% Exceeded
maximum
Allstate Exclusive Agency Proprietary and $256 million $262 million Between target and
AWD Weighted Sales maximum
Allstate Financial Portfolio Excess Total 55 63 Between target and
Return (in basis points) maximum
--------
/(1)/Information regarding Allstate's performance measures is disclosed in the
limited context of its annual cash incentive awards and should not be
understood to be statements of Allstate management's expectations or
estimates of results or other guidance. Allstate specifically cautions
investors not to apply these statements to other contexts.
/(2)/Stated as a percentage of target goals with a range from 0% to 250%, the
actual performance comprises 54% for Adjusted Operating Income Per Diluted
Share performance, and 189% for Allstate Financial performance. The
weighted results stated as a percentage of the target goals for the named
executives was 162%.
Target award opportunities approved by Allstate are stated as a percentage
of annual base salary. Annual cash incentive awards are calculated using base
salary, as adjusted by any merit and promotional increases granted during the
year on a prorated basis. In setting target incentive levels for named
executives, Allstate gives the most consideration to market data primarily
focusing on pay levels at peer group companies with which it directly competes
for executive talent and stockholder investment. As a result of leveraging
external market data, Mr. Winter had a target award opportunity of 125% and
Mr. Pintozzi had a target award opportunity of 60%.
In calculating the annual cash incentive awards, Allstate achievement with
respect to each performance measure is expressed as a percentage of the target
goal, with interpolation applied between the threshold and target goals and
between the target and maximum goals. Unless otherwise adjusted by Allstate,
the amount of each named executive's annual cash incentive award is the sum of
the amounts calculated using the calculation below for all of the performance
measures.
Actual performance interpolated X Weighting X Target award opportunity as a X Salary**
relative to threshold and target on a percentage of salary**
range of 50% to 100% and relative
to target and maximum on a range
of 100% to 250%*
--------
* Actual performance below threshold results in 0%
** Base salary, as adjusted by any merit and promotional increases granted
during the year on a prorated basis.
Following the end of the performance year, the performance of each named
executive was evaluated. Based on a subjective evaluation of each executive's
contributions and performance individual adjustments were made to the formula
driven annual incentive amounts. The recommendations were considered and
approved by the Committee for Mr. Winter and by Allstate management for
Mr. Pintozzi.
114
LONG-TERM INCENTIVE AWARDS--CASH AND EQUITY
As part of total core compensation, Allstate historically has provided three
forms of long-term incentive awards: stock options, restricted stock units, and
long-term cash incentive awards. In 2009, Allstate discontinued future cycles
of the long-term cash incentive plan. The relative mix of various forms of
these awards is driven by Allstate's objectives in providing the specific form
of award, as described below.
LONG-TERM INCENTIVE AWARDS--EQUITY
Allstate grants larger equity awards to executives with the broadest scope
of responsibility, consistent with Allstate's philosophy that a significant
amount of executive compensation should be in the form of equity and that a
greater percentage of compensation should be at risk for executives who bear
higher levels of responsibility for Allstate's performance. However, from time
to time, larger equity awards are granted to attract new executives. Allstate
annually reviews the mix of equity incentives provided to the named executives.
The mix consisted of 65% stock options and 35% restricted stock units for
Mr. Winter. Other employees eligible for equity incentive awards, including Mr.
Pintozzi, had the choice of receiving the value of their equity incentive
awards in the following proportions between stock options and restricted stock
units:
. 25% stock options and 75% restricted stock units;
. 65% stock options and 35% restricted stock units;
. 50% stock options and 50% restricted stock units; or
. 75% stock options and 25% restricted stock units
Mr. Pintozzi's elections are reflected in the Grants of Plan-Based Awards at
Fiscal Year-End 2010 table. Stock options, which are performance-based, require
growth in the Allstate stock price to deliver any value to an executive. The
restricted stock units provide alignment with Allstate stockholder interests
along with providing an effective retention tool.
STOCK OPTIONS
Stock options represent the opportunity to buy shares of Allstate's stock at
a fixed exercise price at a future date. Allstate uses them to align the
interests of Allstate's executives with long-term stockholder value, as the
stock price must appreciate from the date of grant for any value to be
delivered to executives.
Key elements:
. Under Allstate's stockholder-approved equity incentive plan, the
exercise price cannot be less than the fair market value of a share on
the date of grant.
. Stock option repricing is not permitted. In other words, absent an event
such as a stock split, if the Committee cancels an award and substitutes
a new award, the exercise price of the new award cannot be less than the
exercise price of the cancelled award.
. All stock option awards have been made in the form of nonqualified stock
options.
. The options granted to the named executives in 2010 become exercisable
in three installments, 50% on the second anniversary of the grant date
and 25% on each of the third and fourth anniversary dates, and expire in
ten years, except in certain change-in-control situations or under other
special circumstances approved by the Committee.
RESTRICTED STOCK UNITS
Each restricted stock unit represents Allstate's promise to transfer one
fully vested share of stock in the future if and when the restrictions expire
(when the unit "vests"). Because restricted stock units are based on and
115
payable in stock, they serve to reinforce the alignment of interests of
Allstate's executives and Allstate's stockholders. In addition, because
restricted stock units have a real, current value that is forfeited, except in
some circumstances, if an executive terminates employment before the restricted
stock units vest, they provide a retention incentive. Under the terms of the
restricted stock unit awards, the executives have only the rights of general
unsecured creditors of Allstate and no rights as stockholders until delivery of
the underlying shares.
Key elements:
. The restricted stock units granted to the named executives in 2010 vest
in three installments, 50% on the second anniversary of the grant date
and 25% on each of the third and fourth anniversary dates, except in
certain change-in-control situations or under other special
circumstances approved by Allstate.
. The restricted stock units granted to the named executives in 2010
include the right to receive previously accrued dividend equivalents
when the underlying restricted stock unit vests.
TIMING OF EQUITY AWARDS AND GRANT PRACTICES
The Committee grants equity incentive awards to current employees on an
annual basis normally during a meeting in the first fiscal quarter, after the
issuance of Allstate's prior fiscal year-end earnings release. Throughout the
year, the Committee grants equity incentive awards in connection with new hires
and promotions and in recognition of achievements. Equity incentive awards to
employees other than Allstate executive officers also may be granted by an
equity award committee which currently consists of Allstate's chief executive
officer. The equity award committee may grant restricted stock units and stock
options in connection with new hires and promotions and in recognition of
achievements. The grant date for awards other than annual awards is fixed as
the first business day of a month following the committee action.
STOCK OWNERSHIP GUIDELINES
Because Allstate believes management's interests must be linked with those
of Allstate's stockholders, Allstate instituted stock ownership guidelines in
1996 that require each of the named executives to own common stock, including
restricted stock units, worth a multiple of base salary, as of March 1
following the fifth year after assuming a senior management position.
Unexercised stock options do not count towards meeting the stock ownership
guidelines. For the named executives, the goal is four times salary. Mr. Winter
has until March 2015 to meet his goal. Mr. Pintozzi has met his goal. After a
named executive meets the guideline for the position, if the value of his or
her shares does not equal the specified multiple of base salary solely due to
the fact that the value of the shares has declined, the executive is still
deemed to be in compliance with the guideline. However, an executive in that
situation may not sell shares acquired upon the exercise of an option or
conversion of an equity award except to satisfy tax withholding obligations,
until the value of his or her shares again equals the specified multiple of
base salary. In accordance with Allstate's policy on insider trading, all
officers, directors, and employees are prohibited from engaging in transactions
with respect to any securities issued by Allstate or any of its subsidiaries
that might be considered speculative or regarded as hedging, such as selling
short or buying or selling options.
LONG-TERM INCENTIVE AWARDS--CASH
There were no pay-outs on any long-term cash incentive awards for the
2008-2010 cycle, the final cycle under the Long-Term Executive Incentive
Compensation Plan. Long-term cash incentive awards were originally designed to
reward executives for collective results attained over a three-year performance
cycle. Only Mr. Pintozzi was eligible for these awards. There were three
performance measures for the 2008-2010 cycle: average adjusted return on equity
relative to peers, which was weighted at 50% of the potential award, Allstate
Protection growth in policies in force, and Allstate Financial return on total
capital, both weighted at 25% of the potential award. The Allstate Protection
growth in policies in force measure had target set at 5.0%, with actual
116
performance of -5.9%. The Allstate Financial return on total capital measure
had target set at 9.5%, with actual performance of -12.6%. The selection and
weighting of these measures was intended to focus executive attention on the
collective achievement of Allstate's long-term financial goals across its
various product lines. A description of each performance measure is provided
under the "Performance Measures" caption on page 129.
The average adjusted return on equity relative to peers measure compared
Allstate's performance to a group of other insurance companies. If the average
adjusted return on equity had exceeded the average risk free rate of return on
three-year Treasury notes over the three-year cycle, plus 200 basis points,
Allstate's ranked position relative to the peer group would have determined the
percentage of the total target award for this performance measure to be paid.
However, the average adjusted return on equity did not exceed the average risk
free rate of return, plus 200 basis points, resulting in no payout.
OTHER ELEMENTS OF COMPENSATION
To remain competitive with other employers and to attract, retain, and
motivate highly talented executives and other employees, we provide the
benefits listed in the following table.
ALL FULL-TIME
OTHER OFFICERS AND REGULAR
BENEFIT OR NAMED AND CERTAIN PART-TIME
PERQUISITE EXECUTIVES MANAGERS EMPLOYEES
---------- ------------ --------------- -------------
401(k)/(1)/ and defined benefit pension................................ (check mark) (check mark) (check mark)
Supplemental retirement benefit........................................ (check mark) (check mark)
Health and welfare benefits/(2)/....................................... (check mark) (check mark) (check mark)
Supplemental long-term disability and executive physical program....... (check mark) (check mark)/(3)/
Deferred compensation.................................................. (check mark) (check mark)
Tax preparation and financial planning services........................ (check mark) (check mark)/(4)/
Mobile phones, ground transportation and personal use of aircraft/(5)/. (check mark) (check mark)
--------
/(1)/Allstate contributed $.50 for every dollar of basic pre-tax deposits made
in 2010 on the first 3 percent of eligible pay and $.25 for every dollar
of basic pre-tax deposits made in 2010 on the next 2 percent of eligible
pay for eligible participants, including the named executives.
/(2)/Including medical, dental, vision, life, accidental death and
dismemberment, long-term disability, and group legal insurance.
/(3)/An executive physical program is available to all officers.
/(4)/All officers are eligible for tax preparation services. Financial planning
services were provided to Mr. Winter.
/(5)/Ground transportation is available to Mr. Winter. In limited circumstances
approved by Allstate's CEO, Mr. Winter is permitted to use Allstate's
corporate aircraft for personal purposes. Mr. Winter did not use the
corporate aircraft for personal purposes in 2010. Mobile phones are
available to members of Allstate's senior management team, other officers,
and certain managers, and certain employees depending on their job
responsibilities.
RETIREMENT BENEFITS
Each named executive participates in two different defined benefit pension
plans. The Allstate Retirement Plan (ARP) is a tax qualified defined benefit
pension plan available to all of Allstate's regular full-time and regular
part-time employees who meet certain age and service requirements. The ARP
provides an assured retirement income related to an employee's level of
compensation and length of service at no cost to the employee. As the ARP is a
tax qualified plan, federal tax law places limits on (1) the amount of an
individual's compensation that can be used to calculate plan benefits and
(2) the total amount of benefits payable to a participant under the plan on an
annual basis. These limits may result in a lower benefit under the ARP than
would have been payable if the limits did not exist for certain of our
employees. Therefore, the Allstate Insurance Company Supplemental Retirement
Income Plan (SRIP) was created for the purpose of providing ARP-eligible
employees whose compensation or benefit amount exceeds the federal limits with
an additional defined benefit in an amount equal to what would have been
payable under the ARP if the federal limits described above did not exist.
117
CHANGE-IN-CONTROL AND POST-TERMINATION BENEFITS
Since a change-in-control or other triggering event may never occur,
Allstate does not view change-in-control benefits or post-termination benefits
as compensation. Consistent with Allstate compensation objectives, Allstate
offers these benefits to attract, motivate, and retain certain highly talented
executives. A change-in-control of Allstate could have a disruptive impact on
both Allstate and its executives. Allstate's change-in-control benefits and
post-termination benefits are designed to mitigate that impact and to maintain
the connection between the interests of Allstate's executives and Allstate
stockholders. Allstate's change-in-control agreements entered into prior to
January 1, 2011, provide an excise tax gross-up to mitigate the possible
disparate tax treatment for similarly situated employees. However, starting in
2011, new change-in-control agreements will not include an excise tax gross-up
provision. Each of the named executives is subject to change-in-control
agreements.
As part of the change-in-control benefits, the named executives receive
previously deferred compensation and equity awards that might otherwise be
eliminated by new directors elected in connection with a change-in- control,
and receive certain protections for cash incentive awards and benefits if an
executive's employment is terminated within a two-year period after a
change-in-control. The change-in-control and post-termination arrangements
which are described in the "Potential Payments as a Result of Termination or
Change-in-Control" section are not provided exclusively to the named
executives. A larger group of management employees is eligible to receive many
of the post-termination benefits described in that section.
EXECUTIVE COMPENSATION TABLES
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
the named executives for all services rendered to Allstate New York in 2009 and
2010, allocated to Allstate New York in a manner consistent with the allocation
of compensation expenses under the Service and Expense Agreement.
CHANGE IN
PENSION VALUE
NON-EQUITY AND
INCENTIVE NONQUALIFIED
STOCK OPTION PLAN DEFERRED ALL OTHER
SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
NAME/(1)/ YEAR ($)/(2)/ ($) ($)/(3)/ ($)/(4)/ ($)/(5)/ EARNINGS ($)/(6)/ ($)/(7)/ ($)
-------- ---- ------- ----- ------- ------- ------------ ---------------- ------------ -------
Matthew E. Winter............ 2010 33,600 0 41,160 76,440 67,889 215/(8)/ 1,967 221,271
(CHAIRMAN OF THE BOARD,
PRESIDENT, AND
CHIEF EXECUTIVE OFFICER)
John C. Pintozzi............. 2010 25,514 0 18,509 18,509 30,738 1,704/(9)/ 1,469 96,443
(VICE PRESIDENT 2009 25,193 1,558 11,650 22,304 15,812 2,237 1,897 80,651
AND CHIEF FINANCIAL OFFICER)
--------
/(1)/Mr. Winter was not a named executive for fiscal year 2009.
/(2)/Reflects amounts for 2009 that were paid in 2009 which, due to the timing
of Allstate's payroll cycle, included amounts earned in 2008.
/(3)/The aggregate grant date fair value of restricted stock unit awards
computed in accordance with Financial Accounting Standards Board ("FASB")
Accounting Standards Codification Topic 718 ("ASC 718"). The number of
restricted stock units granted in 2010 to each named executive is provided
in the Grants of Plan-Based Awards table on page 120. The fair value of
restricted stock unit awards is based on the final closing price of
Allstate's stock as of the date of grant. The final closing price in part
reflects the payment of future dividends expected.
118
/(4)/The aggregate grant date fair value of option awards computed in
accordance with FASB ASC 718. The fair value of each option award is
estimated on the date of grant using a binomial lattice model. The fair
value of each option award is estimated on the date of grant using the
assumptions as set forth in the following table:
2010 2009
------------ ------------
Weighted average expected term...... 7.8 years 8.1 years
Expected volatility................. 23.7 - 52.3% 26.3 - 79.2%
Weighted average volatility......... 35.1% 38.3%
Expected dividends.................. 2.4 - 2.8% 2.6%
Weighted average expected dividends. 2.6% 2.6%
Risk-free rate...................... 0.1 - 3.9% 0.0 - 3.7%
The number of options granted in 2010 to each named executive is provided in
the Grants of Plan-Based Awards table on page 120.
/(5)/Amounts earned under the annual incentive plan are paid in the year
following performance. Amounts earned under the Long-Term Executive
Incentive Compensation Plan are paid in the year following the performance
cycle. The amounts shown in the table above include amounts earned in 2010
and 2009, and payable under these plans in 2011 and 2010, respectively.
The break-down for each component is as follows:
ANNUAL CASH LONG-TERM
INCENTIVE CASH INCENTIVE
NAME YEAR AWARD AMOUNT CYCLE AWARD AMOUNT
---- ---- ------------ --------- --------------
Mr. Winter... 2010 $67,889 2008-2010 $ 0
Mr. Pintozzi. 2010 $30,738 2008-2010 $ 0
2009 $11,519 2007-2009 $4,293
/(6)/Amounts reflect the aggregate increase in actuarial value of the pension
benefits as set forth in the Pension Benefits table, accrued during 2010
and 2009. These are benefits under the Allstate Retirement Plan (ARP) and
the Allstate Insurance Company Supplemental Retirement Income Plan (SRIP).
Non-qualified deferred compensation earnings are not reflected since our
Deferred Compensation Plan does not provide above-market earnings. The
pension plan measurement date is December 31. (See note 16 to Allstate's
audited financial statements for 2010.)
/(7)/The "All Other Compensation for 2010--Supplemental Table" provides details
regarding the amounts for 2010 for this column.
/(8)/Reflects increases in the actuarial value of the benefits provided to
Mr. Winter pursuant to the SRIP of $215.
/(9)/Reflects increases in the actuarial value of the benefits provided to
Mr. Pintozzi pursuant to the ARP and SRIP of $858 and $846, respectively.
ALL OTHER COMPENSATION FOR 2010--SUPPLEMENTAL TABLE
(In dollars)
The following table describes the incremental cost of other benefits
provided in 2010 that are included in the "All Other Compensation" column.
TOTAL
401(K) ALL OTHER
NAME MATCH/(1)/ OTHER/(2)/ COMPENSATION
---- --------- --------- ------------
Mr. Winter... 2010 273 1,694 1,967
Mr. Pintozzi. 2010 392 1,077 1,469
--------
/(1)/Each of the named executives participated in our 401(k) plan
during 2010. The amount shown is the amount allocated to their
accounts as employer matching contributions. Mr. Winter will not
be vested in the employer matching contribution until he has
completed three years of vesting service.
/(2)/"Other" consists of premiums for group life insurance and personal
benefits and perquisites consisting of cell phones, tax
preparation services, financial planning, executive physicals,
ground transportation, and supplemental long-term disability
coverage. There was no incremental cost for the use of mobile
phones. Allstate provides supplemental long-term disability
coverage to regular full-time and regular part-time employees
whose annual earnings exceed the level which produces the maximum
monthly benefit provided by the Group Long Term Disability
Insurance Plan. This coverage is self-insured (funded and paid for
by Allstate when obligations are incurred). No obligations for the
named executives were incurred in 2010 and so no incremental cost
is reflected in the table. None of the personal benefits and
perquisites individually exceeded the greater of $25,000 or 10% of
the total amount of these benefits for the named executives.
119
GRANTS OF PLAN-BASED AWARDS AT FISCAL YEAR-END 2010/(1)/
The following table provides information about non-equity incentive plan
awards and equity awards granted to our named executives during the fiscal year
2010 to the extent the expense for such awards was allocated to Allstate New
York under the Service and Expense Agreement.
ALL OTHER
STOCK ALL OTHER
AWARDS: OPTION
ESTIMATED FUTURE PAYOUTS NUMBER AWARDS: EXERCISE
UNDER NON-EQUITY INCENTIVE OF NUMBER OF OR BASE
PLAN AWARDS/(2)/ SHARES SECURITIES PRICE OF
------------------------ OF STOCK UNDERLYING OPTION
THRESHOLD TARGET MAXIMUM OR UNITS OPTIONS AWARDS
NAME GRANT DATE PLAN NAME ($) ($) ($) (#) (#) ($/SHR)/(3)/
---- -------------- ----------------------- --------- ------ ------- --------- ---------- -----------
Mr. Winter... -- Annual cash incentive 21,000 42,000 215,460
Feb. 22, 2010 Restricted stock units 1,310
Feb. 22, 2010 Stock options 7,721 $31.41
Mr. Pintozzi. -- Annual cash incentive 7,653 15,305 38,263
Feb. 22, 2010 Restricted stock units 589
Feb. 22, 2010 Stock options 1,870 $31.41
GRANT DATE
FAIR VALUE ($)/(4)/
-------------------
STOCK OPTION
NAME AWARDS AWARDS
---- ------- -------
Mr. Winter...
$41,160
$76,440
Mr. Pintozzi.
$18,590
$18,509
--------
/(1)/Awards under the annual executive incentive plans and the 2009 Equity
Incentive Plan.
/(2)/The amounts in these columns consist of the threshold, target, and maximum
annual cash incentive awards for the named executives. The threshold
amount for each named executive is fifty percent of target, as the minimum
amount payable if threshold performance is achieved. If threshold is not
achieved the payment to named executives would be zero. The target amount
is based upon achievement of certain performance measures set forth in the
"Annual Cash Incentive Awards" section. The maximum amount payable to
Mr. Winter is the lesser of a stockholder approved maximum under the
Annual Executive Incentive Plan of $8.5 million or 25% of the award pool.
The award pool is equal to 1.0% of Operating Income. Mr. Pintozzi does not
participate in the operating income pool. A description of the Operating
Income performance measure is provided under the "Performance Measures"
caption on page 129.
/(3)/The exercise price of each option is equal to the fair market value of
Allstate's common stock on the date of grant. Fair market value is equal
to the closing sale price on the date of grant or, if there was no such
sale on the date of grant, then on the last previous day on which there
was a sale.
/(4)/The aggregate grant date fair value of restricted stock units was $31.41
and for stock option awards was $9.90 for 2010, computed in accordance
with FASB ASC 718. The assumptions used in the valuation are discussed in
footnotes 3 and 4 to the Summary Compensation Table on pages 118 and 119.
120
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2010
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2010
The following table summarizes the outstanding equity awards of the named
executives as of December 31, 2010, allocated in a manner consistent with the
allocation of compensation expenses to Allstate New York under the Service and
Expense Agreement for 2010. The percentage of each equity award actually
allocated to Allstate New York has varied over the years during which these
awards were granted depending on the extent of services rendered by such
executive to Allstate New York and the arrangements in place at the time of
such equity awards between Allstate New York and the executive's
Allstate-affiliated employer. Because the aggregate amount of such equity
awards attributable to services rendered to Allstate New York by each named
executive cannot be calculated without unreasonable effort, the allocated
amount of each equity award provided for each named executive in the following
table is the amount determined by multiplying each named executive's equity
award for services rendered to Allstate and all of its affiliates by the
percentage used for allocating such named executive's compensation to Allstate
New York in 2010 under the Service and Expense Agreement.
OPTION AWARDS/(1)/ STOCK AWARDS
------------------------------------------------------------------------ -----------------------------
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SHARES OR
UNDERLYING UNDERLYING UNITS OF
UNEXERCISED UNEXERCISED OPTION OPTION STOCK THAT
OPTION GRANT OPTIONS (#) OPTIONS(#) EXERCISE EXPIRATION STOCK AWARD HAVE NOT
NAME DATE EXERCISABLE/(2)/ UNEXERCISABLE/(3)/ PRICE DATE GRANT DATE VESTED(#)/(4)/
---- -------------- --------------- ----------------- -------- -------------- -------------- -------------
Mr. Winter... Nov. 2, 2009 470 1,409 $29.64 Nov. 2, 2019 Nov. 2, 2009 331
Feb. 22, 2010 0 7,721 $31.41 Feb. 22, 2020 Feb. 22, 2010 1,310
Mr. Pintozzi. Sep. 30, 2002 100 0 $35.17 Sep. 30, 2012
Feb. 7, 2003 280 0 $31.78 Feb. 7, 2013
Feb. 6, 2004 398 0 $45.96 Feb. 6, 2014
Feb. 22, 2005 1,096 0 $52.57 Feb. 22, 2015
Feb. 21, 2006 1,085 0 $53.84 Feb. 21, 2016
Feb. 21, 2006 720 0 $53.84 Feb. 21, 2016
Feb. 20, 2007 799 266 $62.24 Feb. 20, 2017 Feb. 20, 2007 147
Feb. 26, 2008 951 951 $48.82 Feb. 26, 2018 Feb. 26, 2008 206
Feb. 27, 2009 496 2,988 $16.83 Feb. 27, 2019 Feb. 27, 2009 701
Feb. 22, 2010 0 1,870 $31.41 Feb. 22, 2020 Feb. 22, 2010 589
------------
MARKET VALUE
OF SHARES OR
UNITS OF
STOCK
THAT HAVE
NOT
NAME VESTED/(5)/
---- ------------
Mr. Winter... $10,540
$41,776
AGGREGATE
MARKET VALUE
------------
$52,316
-------
Mr. Pintozzi.
$ 4,683
$ 6,577
$22,347
$18,786
AGGREGATE
MARKET VALUE
------------
$52,393
-------
--------
/(1)/The options granted in 2010 vest in three installments of 50% on the
second anniversary date and 25% on each of the third and fourth
anniversaries dates. The other options vest in four installments on the
first four anniversaries of the grant date. The exercise price of each
option is equal to the fair market value of Allstate's common stock on the
date of grant. For options granted prior to 2007, fair market value is
equal to the average of high and low sale prices on the date of grant, and
for options granted in 2007 and thereafter, fair market value is equal to
the closing sale price on the date of grant or in each case, if there was
no sale on the date of grant, then on the last previous day on which there
was a sale.
/(2)/The aggregate value and aggregate number of exercisable in-the-money
options as of December 31, 2010, for each of the named executives is as
follows: Mr. Winter $1,052 (470 aggregate number exercisable) and
Mr. Pintozzi $7,493 (776 aggregate number exercisable).
/(3)/The aggregate value and aggregate number of unexercisable in-the-money
options as of December 31, 2010, for each of the named executives is as
follows: Mr. Winter $6,784 (9,130 aggregate number unexercisable) and
Mr. Pintozzi $45,843 (4,857 aggregate number unexercisable).
/(4)/The restricted stock unit awards granted in 2010 vest in three
installments of 50% on the second anniversary of the grant date and 25% on
each of the third and fourth anniversary dates. The other restricted stock
unit awards vest in one installment on the fourth anniversary of the grant
date, unless otherwise noted.
/(5)/Amount is based on the closing price of Allstate common stock of $31.88 on
December 31, 2010.
121
OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2010
The following table summarizes the options exercised by the named executives
during 2010 and the restricted stock and restricted stock unit awards that
vested during 2010, allocated in a manner consistent with the allocation of
compensation expenses to Allstate New York under the Service and Expense
Agreement for 2010.
OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2010
OPTION AWARDS
(AS OF 12/31/10) STOCK AWARDS
-------------------------------- -------------------------------
NUMBER OF SHARES NUMBER OF SHARES
ACQUIRED ON VALUE REALIZED ACQUIRED ON VALUE REALIZED
NAME EXERCISE (#) ON EXERCISE ($) VESTING (#) ON VESTING ($)
---- ---------------- --------------- ---------------- --------------
Mr. Winter... 0 $ 0 0 $ 0
Mr. Pintozzi. 500 $7,027 212 $6,619
RETIREMENT BENEFITS
Each named executive participates in two different defined benefit pension
plans. Pension expense for each named executive under these plans has been
accrued annually over the course of the executive's career with Allstate. The
aggregate amount of the annual accrual specifically allocated to Allstate New
York over that period of time has varied depending on the extent of services
rendered by such executive to Allstate New York and the arrangements in place
at the time of accrual between Allstate New York and the executive's
Allstate-affiliated employer. Because the aggregate amount of such annual
accruals earned prior to 2010 attributable to services rendered to Allstate New
York by each named executive cannot be calculated without unreasonable effort,
the present value of accumulated benefit provided for each named executive in
the following table is the amount determined by multiplying the present value
of such named executive's accumulated pension benefit for services rendered to
Allstate and all of its affiliates over the course of such named executive's
career with Allstate by the percentage used for allocating such named
executive's compensation to Allstate New York under the Service and Expense
Agreement in 2010.
PENSION BENEFITS
NUMBER OF PRESENT
YEARS VALUE OF PAYMENTS
CREDITED ACCUMULATED DURING LAST
NAME PLAN NAME SERVICE (#) BENEFIT/(1)(2)/ ($) FISCAL YEAR ($)
---- ------------------------------------ ----------- ----------------- ---------------
Mr. Winter/(3)/. Allstate Retirement Plan 1.2 0 0
Supplemental Retirement Income Plan 1.2 215 0
Mr. Pintozzi.... Allstate Retirement Plan 8.3 3,891 0
Supplemental Retirement Income Plan 8.3 4,010 0
--------
/(1)/These amounts are estimates and do not necessarily reflect the actual
amounts that will be paid to the named executives, which will only be
known at the time they become eligible for payment. Accrued benefits were
calculated as of December 31, 2010, and used to calculate the Present
Value of Accumulated Benefits at December 31, 2010. December 31 is our
pension plan measurement date used for financial statement reporting
purposes.
The amounts listed in this column are based on the following assumptions:
. Discount rate of 6%, payment form assuming 80% paid as a lump sum and 20%
paid as an annuity, lump-sum/annuity conversion segmented interest rates
of 5.0% for the first five years, 6.5% for the next 15 years, and 7% for
all years after 20 and the 2011 combined static Pension Protection Act
funding mortality table with a blend of 50% males and 50% females (as
required under the Internal Revenue Code), and post-retirement mortality
for annuitants using the 2011 Internal Revenue Service mandated annuitant
table; these are the same as those used for financial reporting year-end
disclosure as described in the notes to Allstate's consolidated financial
statements. (See note 16 to Allstate's audited financial statements for
2010.)
. Based on guidance provided by the Securities and Exchange Commission, we
have assumed normal retirement age which is age 65 under both the ARP and
SRIP, regardless of any announced or anticipated retirements.
. No assumption for early termination, disability, or pre-retirement
mortality.
122
/(2)/The figures shown in the table above reflect the present value of the
current accrued pension benefits calculated using the assumptions
described in the preceding footnote. If the named executives' employment
terminated on December 31, 2010, the present value of the non-qualified
pension benefits for each named executive earned through December 31,
2010, is shown in the following table:
LUMP SUM
NAME PLAN NAME AMOUNT ($)
---- ------------------------------------ ----------
Mr. Winter... Supplemental Retirement Income Plan 226
Mr. Pintozzi. Supplemental Retirement Income Plan 4,396
The amount shown is based on the lump sum methodology (i.e., interest rate
and mortality table) used by the Allstate pension plans in 2011, as required
under the Pension Protection Act. Specifically, the interest rate for 2011
is based on 20% of the average August 30-year Treasury Bond rate from the
prior year and 80% of the average corporate bond segmented yield curve from
August of the prior year. The mortality table for 2011 is the 2011 combined
static Pension Protection Act funding mortality table with a blend of 50%
males and 50% females, as required under the Internal Revenue Code.
/(3)/Mr. Winter is not currently vested in the Allstate Retirement Plan or the
Supplemental Retirement Income Plan.
The benefits and value of benefits shown in the Pension Benefits table are
based on the following material factors:
ALLSTATE RETIREMENT PLAN ("ARP")
The ARP has two different types of benefit formulas (final average pay and
cash balance) which apply to participants based on their date of hire or
individual choice made prior to the January 1, 2003 introduction of a cash
balance design. Messrs. Winter and Pintozzi are only eligible to earn cash
balance benefits. Neither of the named executives is eligible to earn benefits
under the final average pay formula, under which benefits are earned and stated
in the form of a straight life annuity payable at the normal retirement date
(age 65).
For participants eligible to earn cash balance benefits, pay credits are
added to the cash balance account on a quarterly basis as a percent of
compensation and based on the participant's years of vesting service as follows:
CASH BALANCE PLAN PAY CREDITS
VESTING SERVICE PAY CREDIT %
--------------- ------------
Less than 1 year................. 0%
1 year, but less than 5 years.... 2.5%
5 years, but less than 10 years.. 3%
10 years, but less than 15 years. 4%
15 years, but less than 20 years. 5%
20 years, but less than 25 years. 6%
25 years or more................. 7%
SUPPLEMENTAL RETIREMENT INCOME PLAN ("SRIP")
SRIP benefits are generally determined using a two-step process:
(1) determine the amount that would be payable under the ARP formula specified
above if the federal limits described above did not apply, then (2) reduce the
amount described in (1) by the amount actually payable under the ARP formula.
The normal retirement date under the SRIP is age 65. If eligible for early
retirement under the ARP, an eligible employee is also eligible for early
retirement under the SRIP.
OTHER ASPECTS OF THE PENSION PLANS
For the ARP and SRIP, eligible compensation consists of salary, annual cash
incentive awards, pre-tax employee deposits made to Allstate's 401(k) plan and
Allstate's cafeteria plan, holiday pay, and vacation pay. Eligible compensation
also includes overtime pay, payment for temporary military service, and
payments for short term disability, but does not include long-term cash
incentive awards or income related to the exercise of stock options and the
vesting of restricted stock and restricted stock units. Compensation used to
determine benefits under the ARP is limited in accordance with the Internal
Revenue Code. For final average pay benefits,
123
average annual compensation is the average compensation of the five highest
consecutive calendar years within the last ten consecutive calendar years
preceding the actual retirement or termination date.
Payment options under the ARP include a lump sum, straight life annuity, and
various survivor annuity options. The lump sum under the final average pay
benefit is calculated in accordance with the applicable interest rate and
mortality as required under the Internal Revenue Code. The lump sum payment
under the cash balance benefit is generally equal to a participant's cash
balance account balance. Payments from the SRIP are paid in the form of a lump
sum using the same interest rate and mortality assumptions used under the ARP.
TIMING OF PAYMENTS
The earliest retirement age that a named executive may retire with unreduced
retirement benefits under the ARP and SRIP is age 65. A participant earning
cash balance benefits who terminates employment with at least three years of
vesting service is entitled to a lump sum benefit equal to his or her cash
balance account balance.
SRIP benefits earned through December 31, 2004 (Pre 409A SRIP Benefits) are
generally payable at age 65, the normal retirement date under the ARP. Pre 409A
SRIP Benefits may be payable earlier upon reaching age 50 if disabled,
following early retirement at age 55 or older with 20 years of service, or
following death in accordance with the terms of the SRIP. SRIP benefits earned
after December 31, 2004 (Post 409A SRIP Benefits) are paid on the January 1
following termination of employment after reaching age 55 (a minimum six month
deferral period applies), or following death in accordance with the terms of
the SRIP.
Eligible employees are vested in the normal retirement benefit under the ARP
and the SRIP on the earlier of the completion of five years of service or upon
reaching age 65 for participants with final average pay benefits or the
completion of three years of service or upon reaching age 65 for participants
whose benefits are calculated under the cash balance formula.
. Mr. Winter's SRIP benefit is not currently vested but would become
payable following death. Mr. Winter will turn 65 on January 22, 2022.
. Mr. Pintozzi's Pre 409A SRIP benefit would become payable as early as
January 1, 2011, but is immediately payable upon death. Mr. Pintozzi's
Post 409A Benefit would be paid on January 1, 2021, or immediately upon
death. Mr. Pintozzi will turn 65 on May 18, 2030.
EXTRA SERVICE AND PENSION BENEFIT ENHANCEMENT
No additional service is granted under the ARP or the SRIP. Generally,
Allstate has not granted additional service credit outside of the actual
service used to calculate ARP and SRIP benefits.
NON-QUALIFIED DEFERRED COMPENSATION
The aggregate amount of the annual accrual specifically allocated to
Allstate New York over each named executive's career with Allstate has varied
depending on the extent of services rendered by such executive to Allstate New
York and the arrangements in place at the time of accrual between Allstate New
York and the executive's Allstate-affiliated employer. Because the aggregate
earnings and balance attributable to services rendered to Allstate New York by
each named executive cannot be calculated without unreasonable effort, the
aggregate earnings and aggregate balance provided for each named executive in
the following table is the amount determined by multiplying the value of such
named executive's non-qualified deferred compensation benefit for services
rendered to Allstate and all of its affiliates over the course of such named
executive's career with Allstate by the percentage used for allocating such
named executive's compensation to Allstate New York under the Service and
Expense Agreement in 2010.
124
NON-QUALIFIED DEFERRED COMPENSATION AT FISCAL YEAR-END 2010
EXECUTIVE REGISTRANT AGGREGATE AGGREGATE AGGREGATE
CONTRIBUTIONS CONTRIBUTIONS EARNINGS WITHDRAWALS/ BALANCE
IN LAST FY IN LAST FY IN LAST FY DISTRIBUTIONS AT LAST FYE
NAME ($) ($) ($)/(1)/ ($) ($)/(2)/
---- ------------- ------------- ---------- ------------- -----------
Mr. Winter... 0 0 0 0 0
Mr. Pintozzi. 0 0 0 0 0
--------
/(1)/Aggregate earnings were not included in the named executive's prior year
compensation.
/(2)/There are no amounts reported in the Aggregate Balance at Last FYE column
that were reported in the 2010 or 2009 Summary Compensation Tables.
In order to remain competitive with other employers, Allstate allows
employees, including the named executives, whose annual compensation exceeds
the amount specified in the Internal Revenue Code (e.g., $245,000 in 2010), to
defer up to 80% of their salary and/or up to 100% of their annual cash
incentive award that exceeds that amount under the Deferred Compensation Plan.
Allstate does not match participant deferrals and does not guarantee a stated
rate of return.
Deferrals under the Deferred Compensation Plan are credited with earnings,
or are subject to losses, based on the results of the investment option or
options selected by the participants. The investment options available in 2010
under the Deferred Compensation Plan are Stable Value, S&P 500, International
Equity, Russell 2000, and Bond Funds--options available in 2010 under our
401(k) plan. Under the Deferred Compensation Plan, deferrals are not actually
invested in these funds, but instead are credited with earnings or losses based
on the funds' investment experience, which are net of administration and
investment expenses. Because the rate of return is based on actual investment
measures in our 401(k) plan, no above-market earnings are paid. Similar to
participants in our 401(k) plan, participants can change their investment
elections daily. Investment changes are effective the next business day. The
Deferred Compensation Plan is unfunded; participants have only the rights of
general unsecured creditors.
Deferrals under the Deferred Compensation Plan are segregated into Pre 409A
balances and Post 409A balances. A named executive may elect to begin receiving
a distribution of a Pre 409A balance upon separation from service or in one of
the first through fifth years after separation from service. In either event,
the named executive may elect to receive payment of a Pre 409A balance in a
lump sum or in annual cash installment payments over a period of two to ten
years. An irrevocable distribution election is required before making any Post
409A deferrals into the plan. The distribution options available to the Post
409A balances are similar to those available to the Pre 409A balances, except
the earliest distribution date is six months following separation from service.
Upon a showing of unforeseeable emergency, a plan participant may be allowed to
access certain funds in a deferred compensation account earlier than the dates
specified above.
125
POTENTIAL PAYMENTS AS A RESULT OF TERMINATION OR CHANGE-IN-CONTROL
The following table lists the compensation and benefits that Allstate would
pay or provide to the named executives in various scenarios involving a
termination of employment, other than compensation and benefits generally
available to all salaried employees.
COMPENSATION ELEMENTS
----------------------------------------------------------------------------------------------
NON-QUALIFIED
TERMINATION ANNUAL RESTRICTED PENSION
SCENARIOS BASE SALARY SEVERANCE PAY INCENTIVE STOCK OPTIONS STOCK UNITS BENEFITS/(1)/
----------- ------------ ----------------- -------------- ------------------- ------------- --------------
Voluntary Termination Ceases None Forfeited Unvested are Forfeited Distributions
immediately unless forfeited, vested commence
terminated expire at the per plan
on last day earlier of three
of fiscal months or normal
year expiration
Involuntary Ceases None Forfeited Unvested are Forfeited Distributions
Termination/(3)/ immediately unless forfeited, vested commence
terminated expire at the per plan
on last day earlier of three
of fiscal months or normal
year expiration
Retirement/(4)/ Ceases None Pro rated for Continue to vest RSUs Distributions
Immediately the year upon normal or continue to commence
based on health retirement; vest upon per plan
actual unvested normal
performance forfeited upon retirement.
for the year early retirement. Forfeited in
All expire at early
earlier of five retirement.
years or normal
expiration
Termination due to Ceases Lump sum Pro rated at Vest immediately Vest Immediately
Change in Control/(5)/ Immediately equal to a target upon a change in immediately payable upon
multiple of (reduced by control upon a a change in
salary, a any actually change in control
multiple of paid) control
annual
incentive at
target and
pension
enhancement/(6)/
Death One month None Pro rated for Vest immediately Vest Distributions
salary paid year based and expire at immediately commence
upon death on actual earlier of two per plan
performance years or normal
for the year expiration
Disability Ceases None Pro rated for Vest immediately Forfeited Participant
Immediately year based and expire at may request
on actual earlier of two payment if
performance years or normal age 50 or
for the year expiration older
----------------------------------
HEALTH,
WELFARE AND
TERMINATION DEFERRED OTHER
SCENARIOS COMPENSATION/(2)/ BENEFITS
----------- ---------------- ----------------
Voluntary Termination Distributions None
commence per
participant
election
Involuntary Distributions None
Termination/(3)/ commence per
participant
election
Retirement/(4)/ Distributions None
commence per
participant
election
Termination due to Immediately Outplacement
Change in Control/(5)/ payable upon a services
change in provided;
control continuation
coverage
subsidized/(7)/
Death Payable within None
90 days
Disability Distributions Supplemental
commence per Long Term
participant Disability
election benefits
--------
/(1)/See the section titled Pension Benefits for further detail on
non-qualified pension benefits and timing of payments.
/(2)/See the Non-Qualified Deferred Compensation section for additional
information on the Deferred Compensation Plan and distribution options
available.
/(3)/Examples of "Involuntary Termination" independent of a change-in-control
include performance-related terminations; terminations for employee
dishonesty and violation of Allstate rules, regulations, or policies; and
terminations resulting from lack of work, rearrangement of work, and
reduction in force.
126
/(4)/Retirement for purposes of the annual cash incentive plans is defined as
voluntary termination on or after the date the named executive attains age
55 with at least 20 years of service. The "normal retirement date" under
the equity awards is the date on or after the date the named executive
attains age 60 with at least one year of service. The "health retirement
date" is the date on which the named executive terminates for health
reasons after attaining age 50, but before attaining age 60, with at least
ten years of continuous service. The "early retirement date" is the date
the named executive attains age 55 with 20 years of service.
/(5)/In general, a change-in-control is one or more of the following events:
(1) any person acquires 30% or more of the combined voting power of
Allstate common stock within a 12-month period; (2) any person acquires
more than 50% of the combined voting power of Allstate common stock;
(3) certain changes are made to the composition of the Board; or (4) the
consummation of a merger, reorganization, or similar transaction. These
triggers were selected because, in a widely held company the size of
Allstate, they could each result in a substantial change in management.
Effective upon a change-in-control, the named executives become subject to
covenants prohibiting competition and solicitation of employees,
customers, and suppliers at any time until one year after termination of
employment. During the two-year period following a change-in-control, the
change-in-control agreements provide for a minimum salary, annual cash
incentive awards, and other benefits. In addition, they provide that the
named executives' positions, authority, duties, and responsibilities will
be at least commensurate in all material respects with those held prior to
the change-in-control. If a named executive incurs legal fees or other
expenses in an effort to enforce the change-in-control agreement, Allstate
will reimburse the named executive for these expenses unless it is
established by a court that the named executive had no reasonable basis
for the claim or acted in bad faith.
/(6)/For those named executives subject to change-in-control agreements,
severance benefits would be payable if the named executive's employment is
terminated either by Allstate without "cause" or by the executive for
"good reason" as defined in the agreements during the two-year period
following the change-in-control. Cause means the named executive has been
convicted of a felony or other crime involving fraud or dishonesty, has
willfully or intentionally breached the change-in-control agreement, has
habitually neglected his or her duties, or has engaged in willful or
reckless material misconduct in the performance of his or her duties. Good
reason includes a material diminution in a named executive's base
compensation, authority, duties, or responsibilities, a material change in
the geographic location where the named executive performs services, or a
material breach of the change-in-control agreement by Allstate.
Mr. Winter's cash severance payment would be three times his salary and
three times his annual incentive at target. Mr. Pintozzi's cash severance
payment would be two times his salary and two times his annual incentive
at target.
Under the change-in-control agreements, the pension enhancement is a lump
sum payment equal to the positive difference, if any, between: (a) the sum
of the lump-sum values of each maximum annuity that would be payable to the
named executive under any defined benefit plan (whether or not qualified
under Section 401(a) of the Internal Revenue Code) if the named executive
had: (i) become fully vested in all such benefits, (ii) attained as of the
named executive's termination date an age that is three years (two years for
Mr. Pintozzi) greater than the named executive's actual age, (iii) accrued a
number of years of service that is three years (two years for Mr. Pintozzi)
greater than the number of years of service actually accrued by the named
executive as of the named executive's termination date, and (iv) received a
lump-sum severance benefit consisting of three times base salary (two for
Mr.Pintozzi), three times annual incentive cash compensation calculated at
target (two for Mr. Pintozzi), plus the 2010 annual incentive cash award as
covered compensation in equal monthly installments during the three-year
period following the named executive's termination date (a two-year period
applies to Mr. Pintozzi); and (b) the lump-sum values of the maximum annuity
benefits vested and payable to named executive under each defined benefit
plan that is qualified under Section 401(a) of the Internal Revenue Code
plus the aggregate amounts simultaneously or previously paid to the named
executive under the defined benefit plans (whether or not qualified under
Section 401(a)). The calculation of the lump sum amounts payable under this
formula does not impact the benefits payable under the ARP, or the SRIP.
/(7)/If a named executive's employment is terminated by reason of death during
the two-year period commencing on the date of a change-in-control, the
named executive's estate or beneficiary will be entitled to survivor and
other benefits, including retiree medical coverage, if eligible, that are
not less favorable than the most favorable benefits available to the
estates or surviving families of peer executives at Allstate. In the event
of termination by reason of disability, Allstate will pay disability and
other benefits, including supplemental long-term disability benefits and
retiree medical coverage, if eligible, that are not less favorable than
the most favorable benefits available to disabled peer executives. In
addition, such survivor or disability benefits shall not be materially
less favorable, in the aggregate, than the most favorable benefits in
effect during the 90-day period preceding the change-in-control.
127
ESTIMATE OF POTENTIAL PAYMENTS UPON TERMINATION/(1)/
The table below describes the amount of compensation payable to each named
executive or the value of benefits provided to the named executives, calculated
in a manner consistent with the allocation of compensation expenses to Allstate
New York under the Service and Expense Agreement for 2010, that exceed the
compensation or benefits generally available to all salaried employees in each
termination scenario. The "Total" column in the following table does not
reflect compensation or benefits previously accrued or earned by the named
executives such as deferred compensation and non-qualified pension benefits.
The payment of the 2010 annual cash incentive award and any 2010 salary earned
but not paid in 2010 due to Allstate's payroll cycle are not included in these
tables because these amounts are payable to the named executives regardless of
termination, death, or disability. Benefits and payments are calculated
assuming a December 31, 2010, employment termination date.
RESTRICTED
STOCK STOCK
OPTIONS-- UNITS-- WELFARE EXCISE TAX
UNVESTED UNVESTED BENEFITS AND REIMBURSEMENT
AND AND OUTPLACEMENT AND TAX
SEVERANCE ACCELERATED ACCELERATED SERVICES GROSS-UP/(2)/ TOTAL
NAME ($) ($) ($) ($) ($) ($)
---- --------- ----------- ----------- ------------ ------------- -------
MR. WINTER
Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0
Involuntary Termination................... 0 0 0 0 0
Termination due to Change-in-Control/(4)/. 234,586 6,784 52,316 2,003/(5)/ 87,454 383,143
Death..................................... 0 6,784 52,316 0 0 59,100
Disability................................ 0 6,784 0 124,346/(6)/ 0 131,131
MR. PINTOZZI
Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0
Involuntary Termination................... 0 0 0 0 0
Termination due to Change-in-Control/(4)/. 86,300 45,843 52,393 2,652/(5)/ 0 187,188
Death..................................... 0 45,843 52,393 0 0 98,236
Disability................................ 0 45,843 0 138,041/(6)/ 0 183,884
--------
/(1)/A "0" indicates that either there is no amount payable to the named
executive or no amount payable to the named executive that is not also
made available to all salaried employees.
/(2)/Certain payments made as a result of a change in control are subject to a
20% excise tax imposed on the named executive by Section 4999 of the Code.
The Excise Tax Reimbursement and Tax Gross-up is the amount Allstate would
pay to the named executive as reimbursement for the 20% excise tax plus a
tax gross-up for any taxes incurred by the named executive resulting from
the reimbursement of such excise tax. The estimated amounts of
reimbursement of any resulting excise taxes were determined without regard
to the effect that restrictive covenants and any other facts and
circumstances may have on the amount of excise taxes, if any, that
ultimately might be payable in the event these payments were made to a
named executive which is not subject to reliable advance prediction or a
reasonable estimate. Allstate believes providing an excise tax gross-up
mitigates the possible disparate tax treatment for similarly situated
employees and is appropriate in this limited circumstance to prevent the
intended value of a benefit from being significantly and arbitrarily
reduced. However, starting in 2011, new change-in-control agreements will
not include an excise tax gross-up provision.
/(3)/As of December 31, 2010, neither of the named executives was eligible to
retire in accordance with Allstate's policy or the terms of any of the
Allstate compensation and benefit plans including the equity incentive
plans.
/(4)/The values in this change-in-control row represent amounts paid if both
the change-in-control and termination occur on December 31, 2010. If there
was a change-in-control that did not result in a termination, the amounts
payable to each named executive would be as follows:
STOCK OPTIONS-- TOTAL--
UNVESTED AND RESTRICTED STOCK UNITS-- UNVESTED AND
ACCELERATED UNVESTED AND ACCELERATED ACCELERATED
NAME ($) ($) ($)
---- --------------- ------------------------ ------------
Mr. Winter... 6,784 52,316 59,100
Mr. Pintozzi. 45,843 52,393 98,236
A change-in-control also would accelerate the distribution of each named
executive's non-qualified deferred compensation and SRIP benefits. Within
five business days after the effective date of a change-in-control, each
named executive would receive any deferred compensation account balances and
a lump sum payment equal to the present value of the named executive's SRIP
benefit. Please see the Non-Qualified Deferred Compensation at Fiscal Year
End 2010 table and footnote 2 to the Pension Benefits table in the
Retirement Benefits section for details regarding the applicable amounts for
each named executive.
128
/(5)/The Welfare Benefits and Outplacement Services amount includes the cost to
provide certain welfare benefits to the named executive and family during
the period which the named executive is eligible for continuation coverage
under applicable law. The amount shown reflects Allstate's costs for these
benefits or programs assuming an 18-month continuation period. The value
of outplacement services for Mr. Winter is $20,000 and $15,000 for
Mr. Pintozzi.
/(6)/The named executives are eligible to participate in Allstate's
supplemental long-term disability plan for employees whose annual earnings
exceed the level which produces the maximum monthly benefit provided by
the Allstate Long Term Disability Plan (Basic Plan). The benefit is equal
to 50% of the named executive's qualified annual earnings divided by
twelve and rounded to the nearest one hundred dollars, reduced by $7,500,
which is the maximum monthly benefit payment that can be received under
the Basic Plan. The amount reflected assumes the named executive remains
totally disabled until age 65 and represents the full present value of the
monthly benefit payable until age 65.
RISK MANAGEMENT AND COMPENSATION
Allstate management has reviewed its compensation policies and practices and
believes that they are appropriately structured, that they are consistent with
its key operating priority of keeping Allstate financially strong, and that
they avoid providing incentives for employees to engage in unnecessary and
excessive risk taking. Allstate believes that executive compensation has to be
examined in the larger context of an effective risk management framework and
strong internal controls. The Allstate Board and its Audit Committee both play
an important role in risk management oversight, including reviewing how
management measures, evaluates, and manages the corporation's exposure to risks
posed by a wide variety of events and conditions. In addition, the Compensation
and Succession Committee of Allstate employs an independent executive
compensation consultant each year to assess Allstate's executive pay levels,
practices, and overall program design.
A review and assessment of potential compensation-related risks was
conducted by Allstate management and reviewed by the Chief Risk Officer.
Performance related incentive plans were analyzed using a process developed in
conjunction with our independent executive compensation consultant.
The 2010 risk assessment specifically noted that our compensation programs:
. provide a balanced mix of cash and equity through annual and long-term
incentives to align with short-term and long-term business goals.
. utilize a full range of performance measures that Allstate believes
correlate to long-term Allstate shareholder value creation.
. incorporate strong governance practices, including paying cash incentive
awards only after a review of executive and corporate performance.
. enable the use of negative discretion to adjust annual incentive
compensation payments when formulaic payouts are not warranted due to
other circumstances.
Furthermore, to ensure Allstate's compensation programs do not motivate
imprudent risk taking, awards to Allstate executive officers, including
Mr. Winter, made after May 19, 2009, under the 2009 Equity Incentive Plan and
awards made under the Annual Executive Incentive Plan are subject to clawback
in the event of certain financial restatements.
PERFORMANCE MEASURES
Information regarding our performance measures is disclosed in the limited
context of Allstate's annual and long-term cash incentive awards and should not
be understood to be statements of management's expectations or estimates of
results or other guidance. We specifically caution investors not to apply these
statements to other contexts.
The following are descriptions of the performance measures used for
Allstate's annual cash incentive awards for 2010 and its long-term cash
incentive awards for the 2008-2010 cycle which may be applied to
129
compensation of Allstate New York's named executives. These measures are not
GAAP measures. They were developed uniquely for incentive compensation purposes
and are not reported items in our financial statements. Some of these measures
use non-GAAP measures and operating measures. The Committee has approved the
use of non-GAAP and operating measures when appropriate to drive executive
focus on particular strategic, operational, or financial factors or to exclude
factors over which our executives have little influence or control, such as
capital market conditions.
ANNUAL CASH INCENTIVE AWARDS FOR 2010
OPERATING INCOME: This measure is used to assess financial performance. This
measure is equal to net income adjusted to exclude the after tax effects of the
items listed below:
. Realized capital gains and losses (which includes the related effect on
the amortization of deferred acquisition and deferred sales inducement
costs) except for periodic settlements and accruals on certain non-hedge
derivative instruments.
. Gains and losses on disposed operations.
. Adjustments for other significant non-recurring, infrequent, or unusual
items, when (a) the nature of the charge or gain is such that it is
reasonably unlikely to recur within two years or (b) there has been no
similar charge or gain within the prior two years.
CORPORATE MEASURE
ADJUSTED OPERATING INCOME PER DILUTED SHARE: This measure is used to assess
financial performance. The measure is equal to net income adjusted to exclude
the after-tax effects of the items listed below, divided by the weighted
average shares outstanding on a diluted basis:
. Realized capital gains and losses (which includes the related effect on
the amortization of deferred acquisition and deferred sales inducement
costs) except for periodic settlements and accruals on certain non-hedge
derivative instruments.
. Gains and losses on disposed operations.
. Adjustments for other significant non-recurring, infrequent, or unusual
items, when (a) the nature of the charge or gain is such that it is
reasonably unlikely to recur within two years or (b) there has been no
similar charge or gain within the prior two years.
. Restructuring and related charges.
. Effects of acquiring businesses.
. Negative operating results of sold businesses.
. Underwriting results of the Discontinued Lines and Coverages segment.
. Any settlement, awards, or claims paid as a result of lawsuits and other
proceedings brought against Allstate subsidiaries regarding the scope
and nature of coverage provided under insurance policies issued by such
companies.
ALLSTATE FINANCIAL MEASURES
ADJUSTED OPERATING INCOME: This is a measure Allstate management uses to
assess the profitability of the business. The Allstate Financial segment
measure, operating income, is adjusted to exclude the after tax effects of
restructuring and related charges and the potential amount by which 2010
guaranty fund assessments related to insured solvencies exceed $6 million. For
disclosure of the Allstate Financial segment measure see footnote 18 to
Allstate's audited financial statements.
130
ADJUSTED OPERATING RETURN ON EQUITY: This is a measure Allstate management
uses to assess profitability and capital efficiency. This measure is calculated
using adjusted operating income, as defined above, as the numerator, and
Allstate Financial's adjusted average subsidiary shareholder's equity as the
denominator. Adjusted subsidiary shareholder's equity is the sum of
subsidiaries' shareholder's equity for Allstate Life Insurance Company,
Allstate Bank, a proportionate share of American Heritage Life Investment
Corporation and certain other minor entities and excludes the effect of
unrealized net capital gains and losses, net of tax and deferred acquisition
costs. The average adjusted shareholder's equity is calculated by dividing the
sum of Allstate Financial's adjusted shareholder's equity at year-end 2009 and
at the end of each quarter of 2010 by five.
ALLSTATE EXCLUSIVE AGENCY PROPRIETARY AND AWD WEIGHTED SALES: This operating
measure is used to quantify the current year sales of financial products
through Allstate's Exclusive Agency proprietary distribution channel, including
agencies and direct, and the Allstate Workplace Division. The measure is
calculated by applying a percentage or factor against the premium or deposits
of life insurance, annuities and Allstate Workplace Division products that vary
based on the relative expected profitability of the specific product. For
non-Allstate Workplace Division proprietary products sold through Allstate
Financial Services channel, the percentage or factors are consistent with those
used for production credits by Allstate Protection.
ALLSTATE FINANCIAL PORTFOLIO RELATIVE TOTAL RETURN:
PORTFOLIO RELATIVE TOTAL RETURN: Management uses the three following
measures to assess the value of active portfolio management relative to the
total return of a market based benchmark. The measure is calculated as the
difference, in basis points, of the specific portfolio total return over a
designated benchmark. Total return is principally determined using industry
standards and the same sources used in preparing the financial statements to
determine fair value. (See footnotes to our audited financial statements for
our methodologies for estimating the fair value of our investments.) In
general, total return represents the annualized increase or decrease, expressed
as a percentage, in the value of the portfolio. Time weighted returns are
utilized. The designated benchmark is a composite of pre-determined, customized
indices which reflect the investment risk parameters established in investment
policies by the boards of the relevant subsidiaries, weighted in proportion to
our investment plan, in accordance with our investment policy. The specific
measures and investments included are listed below:
. PROPERTY LIABILITY PORTFOLIO RELATIVE TOTAL RETURN: Total return for
Property-liability investments and Kennett investments.
. ALLSTATE FINANCIAL PORTFOLIO RELATIVE TOTAL RETURN: Total return for
Allstate Financial investments.
. ALLSTATE PENSION PLANS PORTFOLIO RELATIVE TOTAL RETURN: Total return for
the Allstate Retirement Plan and Agents Pension Plan investments.
LONG-TERM CASH INCENTIVE AWARDS
AVERAGE ADJUSTED RETURN ON EQUITY RELATIVE TO PEERS: This measure is used to
assess Allstate's financial performance against its peers. It is calculated as
Allstate's ranked position relative to the insurance company peer group based
upon three-year average adjusted return on equity, calculated on the same basis
for Allstate and each of the peer insurance companies. Three-year average
adjusted return on equity is the sum of the annual adjusted return on equity
for each of the three years in the cycle divided by three. The annual adjusted
return on equity is calculated as the ratio of net income divided by the
average of shareholders' equity at the beginning and at the end of the year
after excluding the component of accumulated other comprehensive income for
unrealized net capital gains and losses.
ALLSTATE FINANCIAL RETURN ON TOTAL CAPITAL: This is a measure management
uses to measure the efficiency of capital utilized in the business. Three-year
Allstate Financial return on total capital is the sum of the annual adjusted
return on subsidiaries' shareholder's equity for each of the three years
divided by three. The annual
131
adjusted return on subsidiaries' shareholder's equity is the Allstate Financial
measure, net income, divided by the average subsidiaries' shareholder's equity
at the beginning and at the end of the year. The subsidiaries' shareholder's
equity is the sum of the subsidiaries' shareholder's equity for Allstate Life
Insurance Company, Allstate Bank, American Heritage Life Investment
Corporation, and certain other minor entities, adjusted to exclude the loan
protection business and excluding the component of accumulated other
comprehensive income for unrealized net capital gains. (See note 18 to
Allstate's audited financial statements for Allstate Financial net income.)
ALLSTATE PROTECTION GROWTH IN POLICIES IN FORCE OVER THREE-YEAR CYCLE: This
is a measure used by management to assess growth in the number of policies in
force, which is a driver of premiums written. The measure is calculated as the
sum of the percent increase in each of the three years in the total number of
policies in force at the end of the year over the beginning of the year. The
measure excludes property insurance, Allstate Motor Club, and the loan
protection business and includes Allstate Canada.
DIRECTOR COMPENSATION
The following table summarizes the compensation of each of Allstate New
York's non-employee directors during 2010 for his or her services as a member
of the Allstate New York Board and its committees. Our non-employee directors
each received an annual retainer of $13,500 and the chair of the Operations
Review Committee received an additional annual retainer of $1,500.
Additionally, they each received a fee of $1,500 for each Board meeting
attended throughout the year and a fee of $750 for each meeting they attended
as members of the Board's Operations Review Committee, Investment Committee, or
Audit Committee.
All other Allstate New York directors are employees of Allstate or its
subsidiaries. These directors receive no compensation for their service as
directors in addition to their compensation as employees of Allstate New York,
Allstate, or their subsidiaries.
FEES EARNED
OR PAID IN CASH
NAME OF NON-EMPLOYEE DIRECTOR/(1)/ ($) TOTAL ($)
--------------------------------- --------------- ---------
Ms. Alazraki................ 22,500 22,500
Mr. Johnson/(2)/............ 24,000 24,000
Mr. O'Brien/(3) /........... 25,500 25,500
Mr. Raben/(4)/.............. 25,500 25,500
Ms. Slater.................. 22,500 22,500
-
/(1)/Each of these directors is a member of the Operations Review
Committee.
/(2)/Chair of the Operations Review Committee
/(3)/Audit Committee member
/(4)/Investment Committee member
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of Allstate New York does not have a compensation
committee. All compensation decisions are made by The Allstate Corporation, as
the ultimate parent company of Allstate New York. No executive officer of
Allstate New York served as a member of the compensation committee of another
entity for which any executive officer served as a director for Allstate New
York.
132
ITEM 11(M).SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table shows the number of Allstate New York shares owned by
any beneficial owner who owns more than five percent of any class of Allstate
New York's voting securities.
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
(A) (B) (C) (D)
---------------------------------------------------------------------------------------------------
Capital Stock Allstate Life Insurance Company
3100 Sanders Road, Northbrook, IL 60062 100,000 100%
---------------------------------------------------------------------------------------------------
N/A Allstate Insurance Company Indirect voting and investment N/A
2775 Sanders Road, Northbrook, IL 60062 power of shares owned by
Allstate Life Insurance
Company
---------------------------------------------------------------------------------------------------
N/A The Allstate Corporation Indirect voting and investment N/A
2775 Sanders Road, Northbrook, IL 60062 power of shares owned by
Allstate Life Insurance
Company
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS.
The following table shows the number of shares of Allstate common stock
beneficially owned by each director and named executive officer of Allstate New
York individually, and by all executive officers and directors of Allstate New
York as a group. Shares reported as beneficially owned include shares held
indirectly through the Allstate 401(k) Savings Plan and other shares held
indirectly, as well as shares subject to stock options exercisable on or prior
to May 9, 2011 and restricted stock units for which restrictions expire on or
prior to May 9, 2011. The percentage of Allstate shares of common stock
beneficially owned by any Allstate New York director, named executive officer
or by all directors and executive officers of Allstate New York as a group does
not exceed 1%. The following share amounts are as of March 10, 2011. As of
March 10, 2011, none of these shares were pledged as security.
COMMON STOCK SUBJECT
TO OPTIONS EXERCISABLE
AND RESTRICTED STOCK
UNITS FOR WHICH
AMOUNT AND NATURE OF RESTRICTIONS EXPIRE ON OR
BENEFICIAL OWNERSHIP OF PRIOR TO APRIL 16, 2010 --
ALLSTATE COMMON STOCK INCLUDED IN COLUMN (A)
NAME OF BENEFICIAL OWNER (A) (B)
---------------------------------------------------------------------------------------------------
Marcia D. Alazraki 200 0
---------------------------------------------------------------------------------------------------
Robert K. Becker 17,535 12,162
---------------------------------------------------------------------------------------------------
Michael B. Boyle 117,802 102,095
---------------------------------------------------------------------------------------------------
Anurag Chandra 0 0
---------------------------------------------------------------------------------------------------
Cleveland Johnson, Jr. 2,048 0
---------------------------------------------------------------------------------------------------
Susan L. Lees 39,344 27,732
---------------------------------------------------------------------------------------------------
Kenneth R. O'Brien 900 0
---------------------------------------------------------------------------------------------------
Samuel H. Pilch 170,306 144,020
---------------------------------------------------------------------------------------------------
John C. Pintozzi 102,679 97,514
---------------------------------------------------------------------------------------------------
John R. Raben, Jr. 1,850 0
---------------------------------------------------------------------------------------------------
Larry M. Sedillo 8,676 4,977
---------------------------------------------------------------------------------------------------
Phyllis Hill Slater 0 0
---------------------------------------------------------------------------------------------------
Matthew E. Winter 8,539 8,385
---------------------------------------------------------------------------------------------------
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP 858,076 770,338
133
ITEM 11(N).TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL
PERSONS.
TRANSACTIONS WITH RELATED PERSONS.
This table describes certain intercompany agreements involving Allstate Life
of New York and the following companies:
. Allstate Life Insurance Company ("ALIC"), the direct parent of Allstate
Life of New York;
. Allstate Insurance Company ("AIC"), an indirect parent of Allstate Life
of New York; and
. The Allstate Corporation ("AllCorp"), the ultimate indirect parent of
Allstate Life of New York.
APPROXIMATE DOLLAR
VALUE OF THE AMOUNT
INVOLVED IN THE
TRANSACTION,
TRANSACTION DESCRIPTION PER FISCAL YEAR
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
Tax Sharing Agreement among The Allstate Corporation 2008 465,439,826/(2)/
and certain affiliates dated as of November 12, 1996. 2009 (1,173,212,154)/(2)/
2010 (113,770,599)/(2)/
-----------------------------------------------------------------------------------------
Cash Management Services Master Agreement between 2008 1,338,376/(3)/
Allstate Insurance Company, Allstate Bank (aka Allstate 2009 1,527,072/(3)/
Federal Savings Bank), and certain affiliates dated 2010 967,620/(3)/
March 16, 1999, as amended by Amendment No. 1
effective January 5, 2001, and Amendment No. 2 entered
into November 8, 2002, between Allstate Insurance
Company, Allstate Bank and Allstate Motor Club, Inc., and
as supplemented by the Premium Depository Service
Supplement dated as of September 30, 2005, the Variable
Annuity Service Supplement dated November 10, 2005,
and the Sweep Agreement Service Supplement dated as of
October 11, 2006.
-----------------------------------------------------------------------------------------
Amended and Restated Service and Expense Agreement 2008 3,295,180,640
between Allstate Insurance Company, The Allstate 2009 3,451,765,246
Corporation and certain affiliates effective January 1, 2004, 2010 3,619,106,706
as amended by Amendment No. 1 effective January 1,
2009, and as supplemented by 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 Intramerica Life Insurance Company,
effective March 5, 2005.
-----------------------------------------------------------------------------------------
Intercompany Loan Agreement among The Allstate 2008 400,040,660
Corporation, Allstate Life Insurance Company, Lincoln 2009 86,111,674
Benefit Life Company and other certain subsidiaries of The 2010 149,971,764
Allstate Corporation dated February 1, 1996.
-----------------------------------------------------------------------------------------
Agreement for the Settlement of State and Local Tax 2008 2,089,067
Credits among Allstate Insurance Company and certain 2009 941,379
affiliates effective January 1, 2007. 2010 835,435
-----------------------------------------------------------------------------------------
RELATED PERSON(S) INVOLVED IN THE
TRANSACTION/(1)/ AND THE APPROXIMATE
DOLLAR VALUE OF THE AMOUNT OF THE
TRANSACTION DESCRIPTION RELATED PERSON'S INTEREST IN THE TRANSACTION
-----------------------------------------------------------------------------------------------------------------
ALIC AIC ALLCORP
-----------------------------------------------------------------------------------------------------------------
Tax Sharing Agreement among The Allstate Corporation (109,322,083) 633,316,282 (121,960,368)
and certain affiliates dated as of November 12, 1996. (534,572,879) (467,570,173) (121,813,486)
(621,234,096) 647,559,256 (146,676,325)
-----------------------------------------------------------------------------------------------------------------
Cash Management Services Master Agreement between 198,098/(4)/ 816,143/(4)/ N/A
Allstate Insurance Company, Allstate Bank (aka Allstate 158,312/(4)/ 1,052,781/(4)/
Federal Savings Bank), and certain affiliates dated 76,166/(4)/ 694,117/(4)/
March 16, 1999, as amended by Amendment No. 1
effective January 5, 2001, and Amendment No. 2 entered
into November 8, 2002, between Allstate Insurance
Company, Allstate Bank and Allstate Motor Club, Inc., and
as supplemented by the Premium Depository Service
Supplement dated as of September 30, 2005, the Variable
Annuity Service Supplement dated November 10, 2005,
and the Sweep Agreement Service Supplement dated as of
October 11, 2006.
-----------------------------------------------------------------------------------------------------------------
Amended and Restated Service and Expense Agreement 215,640,945/(5)/ 2,186,281,461/(5)/ 5,351,262/(5)/
between Allstate Insurance Company, The Allstate 180,154,068/(5)/ 1,937,571,496/(5)/ 2,510,800/(5)/
Corporation and certain affiliates effective January 1, 2004, 175,950,701/(5)/ 1,823,391,816/(5)/ 4,191,150/(5)/
as amended by Amendment No. 1 effective January 1,
2009, and as supplemented by 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 Intramerica Life Insurance Company,
effective March 5, 2005.
-----------------------------------------------------------------------------------------------------------------
Intercompany Loan Agreement among The Allstate 50,014,792/(6)/ 1,732,736/(6)/ 400,040,660
Corporation, Allstate Life Insurance Company, Lincoln 0/(7)/ 86,111,674/(6)/ 86,111,674
Benefit Life Company and other certain subsidiaries of The 149,971,764/(6)/ 149,971,764/(6)/ 149,971,764
Allstate Corporation dated February 1, 1996.
-----------------------------------------------------------------------------------------------------------------
Agreement for the Settlement of State and Local Tax 356,331/(8)/ 1,732,736/(8)/ N/A
Credits among Allstate Insurance Company and certain 193,504/(8)/ 441,024/(8)/
affiliates effective January 1, 2007. 236,540/(8)/ 474,132/(8)/
-----------------------------------------------------------------------------------------------------------------
--------
/(1)/Each identified Related Person is a Party to the transaction.
/(2)/Total amounts paid to Internal Revenue Service.
/(3)/Total fees collected for all bank accounts covered under the transaction.
/(4)/Fees paid under the transaction.
/(5)/Gross amount of expense received under the transaction.
/(6)/Amounts loaned and repaid.
/(7)/No loans outstanding at year end.
/(8)/Value of transfer transactions.
134
APPROXIMATE DOLLAR
VALUE OF THE AMOUNT RELATED PERSON(S) INVOLVED IN THE
INVOLVED IN THE TRANSACTION/(1)/ AND THE APPROXIMATE
TRANSACTION, DOLLAR VALUE OF THE AMOUNT OF THE
TRANSACTION DESCRIPTION PER FISCAL YEAR RELATED PERSON'S INTEREST IN THE TRANSACTION
------------------------------------------------------------------------------------------------------------------------------
ALIC AIC ALLCORP
------------------------------------------------------------------------------------------------------------------------------
Reinsurance Agreements between Allstate Life Insurance 2008 (14,905,073)/(9)/ (14,905,073)/(9)/ N/A N/A
Company and Allstate Life Insurance Company of New 2009 (26,652,961)/(9)/ (26,652,961)/(9)/
York: Reinsurance Agreement effective January 1, 1984, as 2010 (27,988,981)/(9)/ (27,988,981)/(9)/
amended by Amendment No. 1 effective September 1,
1984, Amendment No. 2 effective January 1, 1987,
Amendment No. 3 effective October 1, 1988, Amendment
No. 4 effective January 1, 1994, Amendment No. 5
effective December 31, 1995, Amendment No. 6 effective
December 1, 2007, and Amendment No. 7; Assumption
Reinsurance Agreement between Allstate Life Insurance
Company and Allstate Life Insurance Company of New
York effective July 1, 1984; Reinsurance Agreement
effective January 1, 1986, as amended by Amendment
No. 1 effective December 31, 1995 and Amendment No. 2
effective December 1, 1995; Reinsurance Agreement
effective January 1, 1991, as amended by Amendment
No. 1 effective December 31, 1995; Stop Loss Reinsurance
Agreement effective December 31.
--------
/(9)/Net reinsurance expense.
POLICIES AND PROCEDURES FOR REVIEW AND APPROVAL OF RELATED PERSON TRANSACTIONS:
All intercompany agreements to which Allstate New York is a party are
approved by Allstate New York's Board of Directors as well as by the board of
any other affiliate of The Allstate Corporation which is a party to the
agreement. Intercompany agreements are also submitted for approval to the New
York State Insurance Department, Allstate New York's domestic regulator
pursuant to the applicable state's insurance holding company systems act. This
process is documented in an internal procedure that captures the review and
approval process of all intercompany agreements. All approvals are maintained
in Allstate New York's corporate records.
While there is no formal process for the review and approval of related
person transactions between unaffiliated entities specific to Allstate New
York, all directors and executive officers of Allstate New York are subject to
the Allstate Code of Ethics ("Code"). The Code includes a written conflict of
interest policy that was adopted by the Board of Directors of the Allstate
Corporation, the ultimate parent company of Allstate New York. Any potential
relationship or activity that could impair independent thinking and judgment,
including holding a financial interest in a business venture that is similar to
Allstate, or in a business that has a relationship with Allstate, must be
disclosed to Human Resources. Human Resources will work with representatives
from the Law Department, including Enterprise Business Conduct, to determine
whether an actual conflict of interest exists. Each director and executive
officer must sign a Code of Ethics certification annually.
INDEPENDENCE STANDARDS FOR DIRECTORS
Outside directors of Allstate New York are subject to independence standards
based on New York insurance law. Generally, these independence standards
require that an independent director cannot be an employee or a beneficial
owner of a controlling interest in Allstate New York or any other affiliate of
The Allstate Corporation. Applying these independence standards, Ms. Alazraki,
Mr. Johnson, Mr. O'Brien, Mr. Raben, and Ms. Slater are independent.
Although not subject to the independence standards of the New York Stock
Exchange, for purposes of this S-1 registration statement, Allstate New York
has applied the independence standards required for listed companies of the New
York Stock Exchange to the Board of Directors. Applying these standards,
Allstate New York has been determined that Ms. Alazraki, Mr. Johnson,
Mr. O'Brien, Mr. Raben, and Ms. Slater are considered to be independent.
135
OTHER INFORMATION
A section entitled "Experts" is added to your prospectus as follows:
EXPERTS
The financial statements and the related financial statement schedules
included herein have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report appearing herein.
Such financial statements and financial statement schedules are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
PRINCIPAL UNDERWRITER
Contingent on regulatory approval, ALFS, Inc ("ALFS") is expected to merge
into Allstate Distributors, LLC ("ADLLC"), effective April 29, 2011. At that
time, ALFS will assign its rights and delegate its duties as principal
underwriter to ADLLC. This change will have no effect on Allstate Life
Insurance Company of New York's obligations to you under your Contract. The
section of your prospectus concerning the principal underwriter is amended
accordingly.
Contingent on regulatory approval, ADLLC serves as distributor of the
securities registered herein. The securities offered herein are sold on a
continuous basis, and there is no specific end date for the offering. ADLLC, an
affiliate of Allstate Life Insurance Company of New York, is a wholly owned
subsidiary of Allstate Life Insurance Company. ADLLC is a registered broker
dealer under the Securities and Exchange Act of 1934, as amended, and is a
member of the Financial Industry Regulatory Authority. ADLLC is not required to
sell any specific number or dollar amount of securities, but will use its best
efforts to sell the securities offered.
ADMINISTRATION
We have primary responsibility for all administration of the Contracts and
the Variable Account. We entered into an administrative services agreement with
The Prudential Insurance Company of America ("PICA") whereby, PICA or an
affiliate provides administrative services to the Variable Account and the
Contracts on our behalf. In addition, PICA entered into a master services
agreement with se/2/, inc., of 5801 SW 6th Avenue, Topeka, Kansas 66636,
whereby se/2/, inc. provides certain business process outsourcing services with
respect to the Contracts. se/2/, inc. may engage other service providers to
provide certain administrative functions. These service providers may change
over time, and as of December 31, 2010, consisted of the following: Keane BPO,
LLC (administrative services) located at 625 North Michigan Avenue, Suite 1100,
Chicago, IL 60611; RR Donnelly Global Investment Markets (compliance printing
and mailing) located at 111 South Wacker Drive, Chicago, IL 60606; Jayhawk File
Express, LLC (file storage and document destruction) located at 601 E. 5th
Street, Topeka, KS 66601-2596; Co-Sentry.net, LLC (back-up printing and
disaster recovery) located at 9394 West Dodge Rd, Suite 100, Omaha, NE 68114;
Convey Compliance Systems, Inc. (withholding calculations and tax statement
mailing) located at 3650 Annapolis Lane, Suite 190, Plymouth, MN 55447;
Spangler Graphics, LLC (compliance mailings) located at 29305 44th Street,
Kansas City, KS 66106; Veritas Document Solutions, LLC (compliance mailings)
located at 913 Commerce Ct, Buffalo Grove, IL 60089; Records Center of Topeka,
a division of Underground Vaults & Storage, Inc. (back-up tapes storage)
located at 1540 NW Gage Blvd. #6, Topeka, KS 66618; EquiSearch Services, Inc.
(lost shareholder search) located at 11 Martime Avenue, Suite 665, White
Plains, NY 10606; ZixCorp Systems, Inc. (email encryption) located at 2711 N.
Haskell Ave., Suite 2300, Dallas, TX 75204; DST Systems, Inc. (FAN mail,
positions, prices) located at 333 West 11 Street, 5th Floor, Kansas City, MO
64105.
In administering the Contracts, the following services are provided, among
others:
. maintenance of Contract Owner records;
. Contract Owner services;
. calculation of unit values;
. maintenance of the Variable Account; and
. preparation of Contract Owner reports.
136