UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-61846
Allstate Life Insurance Company of New York
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 36-2608394
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Allstate Drive 11738
Farmingville, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 516/451-5300
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2002, Registrant had 100,000 shares of common stock
outstanding, par value $25 per share, all of which shares are held by Allstate
Life Insurance Company.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the Three Month and Six Month Periods
Ended June 30, 2002 and 2001 (unaudited) 3
Condensed Statements of Financial Position as of June 30, 2002 (unaudited)
and December 31, 2001 4
Condensed Statements of Cash Flows for the Six Month Periods Ended
June 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ----------------------------
-------------------------- ----------------------------
(in thousands) 2002 2001 2002 2001
----------- ------------- ------------- -------------
(Unaudited) (Unaudited)
REVENUES
Premiums $ 30,230 $ 26,779 $ 52,774 $ 46,993
Contract charges 12,250 10,117 24,607 20,471
Net investment income 56,953 50,209 111,381 98,695
Realized capital gains and losses 1,142 (3,229) (1,465) (2,452)
---------- ------------ ------------ ------------
100,575 83,876 187,297 163,707
---------- ------------ ------------ ------------
COSTS AND EXPENSES
Contract benefits 44,673 45,584 90,500 85,056
Interest credited to contractholder funds 25,399 18,281 41,430 34,592
Amortization of deferred policy acquisition costs 4,942 2,089 6,784 3,785
Operating costs and expenses 8,372 8,050 18,514 15,794
---------- ------------ ------------ ------------
83,386 74,004 157,228 139,227
---------- ------------ ------------ ------------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 17,189 9,872 30,069 24,480
Income tax expense 5,945 3,402 10,352 8,457
---------- ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 11,244 6,470 19,717 16,023
Cumulative effect of change in accounting for
derivative financial instruments, after-tax - - - (147)
---------- ------------ ------------ ------------
NET INCOME $ 11,244 $ 6,470 $ 19,717 $ 15,876
========== ============ ============ ============
3
See notes to condensed financial statements.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
(in thousands, except par value data) 2002 2001
--------------- -----------------
--------------- -----------------
(Unaudited)
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $2,895,301 and $2,678,265) $ 3,138,531 $ 2,894,461
Mortgage loans 271,259 242,727
Short-term 120,074 57,507
Policy loans 33,082 33,160
-------------- ----------------
Total investments 3,562,946 3,227,855
Cash 6,153 7,375
Deferred policy acquisition costs 176,408 156,615
Accrued investment income 38,919 33,601
Reinsurance recoverables 1,134 1,453
Other assets 13,680 13,800
Separate Accounts 589,029 602,657
-------------- ----------------
TOTAL ASSETS $ 4,388,269 $ 4,043,356
============== ================
LIABILITIES
Reserve for life-contingent contract benefits 1,378,722 1,317,816
Contractholder funds 1,656,171 1,428,113
Current income taxes payable 3,305 6,049
Deferred income taxes 72,576 64,612
Other liabilities and accrued expenses 195,352 164,399
Payable to affiliates, net 3,904 427
Reinsurance payable to affiliate, net 859 307
Separate Accounts 589,029 602,657
-------------- ----------------
TOTAL LIABILITIES $ 3,899,918 $ 3,584,380
-------------- ----------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 3)
SHAREHOLDER'S EQUITY
Common stock, $25 par value, 100,000 shares authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 45,787 45,787
Retained income 311,411 291,694
Accumulated other comprehensive income:
Unrealized net capital gains and losses 128,653 118,995
-------------- ----------------
Total accumulated other comprehensive income 128,653 118,995
-------------- ----------------
TOTAL SHAREHOLDER'S EQUITY 488,351 458,976
-------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 4,388,269 $ 4,043,356
============== ================
See notes to condensed financial statements.
4
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
--------------------------
--------------------------
(in thousands) 2002 2001
------------ ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 19,717 $ 15,876
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items (24,000) (24,681)
Realized capital gains and losses 1,465 2,452
Interest credited to contractholder funds 41,430 34,592
Changes in:
Life-contingent contract benefits and insurance reserves 28,083 30,332
Deferred policy acquisition costs (17,768) (25,264)
Income taxes payable 20 7,849
Other operating assets and liabilities (2,712) 3,569
----------- ----------
Net cash provided by operating activities 46,235 44,725
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities 129,851 122,378
Investment collections
Fixed income securities 87,663 38,459
Mortgage loans 13,113 11,376
Investments purchases
Fixed income securities (399,221) (332,654)
Mortgage loans (41,276) (15,500)
Change in short-term investments, net (43,709) (29,260)
Change in other investments, net 788 (392)
Change in policy loans, net 78 (598)
----------- ----------
Net cash used in investing activities (252,713) (206,191)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 286,469 261,791
Contractholder fund withdrawals (81,213) (101,172)
----------- ----------
Net cash provided by financing activities 205,256 160,619
----------- ----------
NET DECREASE IN CASH (1,222) (847)
CASH AT BEGINNING OF PERIOD 7,375 2,162
----------- ----------
CASH AT END OF PERIOD $ 6,153 $ 1,315
=========== ==========
See notes to condensed financial statements.
5
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Allstate Life Insurance Company of New York (the "Company"), a wholly owned
subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by
Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate
Corporation (the "Corporation").
The condensed financial statements and notes as of June 30, 2002, and for
the three-month and six-month periods ended June 30, 2002 and 2001, are
unaudited. The condensed financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for the fair presentation of the financial position,
results of operations and cash flows for the interim periods. These condensed
financial statements and notes should be read in conjunction with the financial
statements and notes thereto included in the Allstate Life Insurance Company of
New York Annual Report on Form 10-K for the year ended December 31, 2001. The
results of operations for the interim periods should not be considered
indicative of results to be expected for the full year.
To conform with the 2002 and year-end 2001 presentations, certain prior
year amounts have been reclassified.
NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and other
Intangible Assets", which eliminates the requirement to amortize goodwill, and
requires that goodwill and separately identified intangible assets with
indefinite lives be evaluated for impairment on an annual basis (or more
frequently if impairment indicators arise) on a fair value basis. The Company
adopted SFAS No. 142 effective January 1, 2002. The Company's 2001 results do
not reflect the impact of the non-amortization provisions of SFAS No. 142. Had
the Company adopted the non-amortization provisions on January 1, 2001, the
impact would have been immaterial to Net income (goodwill totaled $160 thousand
balance at June 30, 2002). During the second quarter of 2002, the Company
completed the initial goodwill impairment test required by SFAS No. 142 and
concluded that goodwill was not impaired.
PENDING ACCOUNTING STANDARD
On July 31, 2002, the AICPA issued an exposure draft Statement of Position
("SOP") entitled "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts". The
accounting guidance contained in the proposed SOP applies to several of the
Company's products and product features. The proposed effective date of the SOP
is fiscal years beginning after December 15, 2003, with earlier adoption
encouraged. Initial application should be as of the beginning of the fiscal
year; therefore, if adopted during an interim period of 2003, prior interim
periods should be restated. Most provisions of the proposed SOP will have a
minimal impact to the Company, however, a provision that requires the
establishment of a liability in addition to the account balance for contracts
that contain death benefits may have a material impact on the condensed
statement of operations depending on the market conditions at the time of
adoption. Contracts affected are those that contain provisions wherein the
amounts assessed against the contractholder each period for the insurance
benefit feature are not proportionate to the insurance coverage provided for the
period. These contract provisions are commonly referred to as guaranteed minimum
death benefits.
6
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
2. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis are as follows:
Three Months Ended June 30,
-----------------------------------------------------------------------------
-------------------------------------- -----------------------------------
(in thousands) 2002 2001
-------------------------------------- -----------------------------------
----------- ---------- ---------- ---------- --------- ---------
After- After-
Pretax Tax tax Pretax Tax tax
----------- ---------- ---------- ---------- --------- ---------
----------- ---------- ---------- ---------- --------- ---------
UNREALIZED CAPITAL GAINS AND LOSSES
AND NET GAINS AND LOSSES ON DERIVATIVE
FINANCIAL INSTRUMENTS:
Unrealized holding gains (losses)
arising during the period $ 23,800 $ (8,330) $ 15,470 $ (18,421) $ 6,448 $ (11,973)
Less: reclassification adjustments (51) 18 (33) (2,324) 814 (1,510)
----------- --------- -------- ---------- ---------- ----------
Unrealized net capital gains (losses) 23,851 (8,348) 15,503 (16,097) 5,634 (10,463)
Net gains (losses) on derivative
financial instruments arising during
the period 1,193 (418) 775 (1,138) 398 (740)
Less: reclassification adjustments 1,193 (418) 775 (904) 316 (588)
----------- --------- --------- ---------- ---------- ---------
Net (losses) gains on derivative
financial instruments - - - (234) 82 (152)
----------- --------- --------- ---------- ---------- ---------
Other comprehensive income (loss) $ 23,851 $ (8,348) 15,503 $ (16,331) $ 5,716 (10,615)
=========== ========= ========== ==========
Net income 11,244 6,470
--------- ---------
Comprehensive income (loss) $ 26,747 $ (4,145)
========= =========
Six Months Ended June 30,
-----------------------------------------------------------------------------
-------------------------------------- -----------------------------------
2002 2001
-------------------------------------- -----------------------------------
----------- ---------- ---------- ---------- --------- ---------
(in thousands) After- After-
Pretax Tax tax Pretax Tax tax
----------- ---------- ---------- ---------- --------- ---------
----------- ---------- ---------- ---------- --------- ---------
UNREALIZED CAPITAL GAINS AND LOSSES AND
NET GAINS AND LOSSES ON DERIVATIVE
FINANCIAL INSTRUMENTS:
Unrealized holding gains (losses)
arising during the period $ 14,127 $ (4,945) $ 9,182 $ (7,341) $ 2,570 $ (4,771)
Less: reclassification adjustments (732) 256 (476) (2,059) 721 (1,338)
----------- ---------- ---------- ---------- ---------- ----------
Unrealized net capital gains (losses) 14,859 (5,201) 9,658 (5,282) 1,849 (3,433)
Net gains (losses) on derivative
financial instruments arising during
the period 793 (278) 515 (392) 137 (255)
Less: reclassification adjustments 793 (278) 515 (392) 137 (255)
----------- ---------- --------- --------- ---------- ----------
Net gains (losses) on derivative
financial instruments - - - - - -
----------- ---------- --------- --------- ---------- ----------
Other comprehensive income (loss) $ 14,859 $ (5,201) 9,658 $ (5,282) $ 1,849 (3,433)
=========== ========== ========= ==========
Net income 19,717 15,876
--------- ----------
Comprehensive income $ 29,375 $ 12,443
========= ==========
7
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
3. REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social,
economic and regulatory environment. State and federal regulatory initiatives
have varied and have included employee benefit regulations, removal of barriers
preventing banks from engaging in the securities and insurance businesses, tax
law changes affecting the taxation of insurance companies, the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles, and the overall expansion of regulation. The
ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
The Company sells its products through a variety of distribution channels
including Allstate agencies. Consequently, the outcome of some legal proceedings
that involve AIC regarding the Allstate agencies may have an impact on the
Company.
AIC is defending various lawsuits involving worker classification issues.
Examples of these lawsuits include a number of putative class actions
challenging the overtime exemption claimed by AIC under the Fair Labor Standards
Act or state wage and hour laws. These class actions mirror similar lawsuits
filed recently against other carriers in the industry and other employers.
Another example involves the worker classification of staff working in agencies.
In this putative class action, plaintiffs seek damages under the Employee
Retirement Income Security Act ("ERISA") and the Racketeer Influenced and
Corrupt Organizations Act alleging that agency secretaries were terminated as
employees by AIC and rehired by agencies through outside staffing vendors for
the purpose of avoiding the payment of employee benefits. A putative nationwide
class action filed by former employee agents also includes a worker
classification issue; these agents are challenging certain amendments to the
Agents Pension Plan and are seeking to have exclusive agent independent
contractors treated as employees for benefit purposes. AIC has been vigorously
defending these and various other worker classification lawsuits. The outcome of
these disputes is currently uncertain.
In addition, on August 6, 2002 a petition was filed with the National Labor
Relations Board ("NLRB") by the United Exclusive Allstate Agents, Office and
Professional Employees International Union, seeking certification as the
collective bargaining representative of all Allstate agents in the United
States. AIC is opposing the petition on a number of grounds, including that the
agents are independent contractors and, therefore, the NLRB lacks jurisdiction
over the issue. The outcome is currently uncertain.
AIC is also defending certain matters relating to its agency program
reorganization announced in 1999. These matters include an investigation by the
U.S. Department of Labor and a lawsuit filed in December 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") with respect to allegations of
retaliation under the Age Discrimination in Employment Act, the Americans with
Disabilities Act and Title VII of the Civil Rights Act of 1964. A putative
nationwide class action has also been filed by former employee agents alleging
various violations of ERISA, breach of contract and age discrimination. AIC has
been vigorously defending these lawsuits and other matters related to its agency
program reorganization. The outcome of these disputes is currently uncertain.
Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the target of an increasing
number of class action lawsuits and other types of litigation based on a variety
of issues, some of which involve claims for substantial and/or indeterminate
amounts (including punitive and treble damages) and the outcomes of which are
unpredictable. However, at this time, based on their present status, it is the
opinion of management that the ultimate liability, if any, in one or more of
these other actions in excess of amounts currently reserved is not expected to
have a material effect on the results of operations, liquidity or financial
position of the Company.
8
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
4. REINSURANCE
The Company purchases reinsurance to limit aggregate and single losses on
large risks. The Company also cedes a portion of the mortality risk on certain
term life policies with a pool of reinsurers. The Company continues to have
primary liability as the direct insurer for risks reinsured. The Company follows
a comprehensive evaluation process involving credit scoring and capacity to
select reinsurers. Estimating amounts of reinsurance recoverable is impacted by
the uncertainties involved in the establishment of loss reserves. Failure of
reinsurers to honor their obligations could result in losses to the Company.
Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. No single reinsurer had a material obligation to
the Company nor is the Company's business substantially dependent upon any
reinsurance contract. The effects of reinsurance on Premiums and contract
charges and Contract benefits were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
----------- ---------- ---------- ------------
(in thousands) 2002 2001 2002 2001
----------- ---------- ---------- ------------
PREMIUMS AND CONTRACT CHARGES
Direct $ 44,361 $ 38,137 $ 81,105 $ 69,748
Assumed - non-affiliate 106 176 246 372
Ceded
Affiliate (1,764) (1,216) (3,525) (2,235)
Non-affiliate (223) (201) (445) (421)
---------- --------- ---------- ----------
Premiums and contract charges, net
of reinsurance $ 42,480 $ 36,896 $ 77,381 $ 67,464
========== ========= ========== ==========
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
------------ ---------- ---------- ------------
(in thousands) 2002 2001 2002 2001
------------ ---------- ---------- ------------
CONTRACT BENEFITS
Direct $ 45,013 $ 46,284 $ 91,617 $ 85,997
Assumed - non-affiliate 4 24 45 26
Ceded
Affiliate (37) (436) (566) (490)
Non-affiliate (307) (288) (596) (477)
----------- ---------- ---------- -----------
Contract benefits, net of reinsurance $ 44,673 $ 45,584 $ 90,500 $ 85,056
=========== ========== ========== ===========
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING RESULTS
OF OPERATIONS AND CHANGES IN FINANCIAL POSITION OF ALLSTATE LIFE INSURANCE
COMPANY OF NEW YORK (THE "COMPANY"). IT SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED FINANCIAL STATEMENTS AND RELATED NOTES THERETO FOUND UNDER PART I.
ITEM 1. CONTAINED HEREIN AND WITH THE DISCUSSION, ANALYSIS, FINANCIAL STATEMENTS
AND NOTES THERETO IN PART I. ITEM 1. AND PART II. ITEM 7. AND ITEM 8. OF THE
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 2001, WHICH INCLUDES A DISCUSSION OF THE COMPANY'S
CRITICAL ACCOUNTING POLICIES. TO CONFORM WITH THE 2002 AND YEAR-END 2001
PRESENTATION, CERTAIN PRIOR YEAR AMOUNTS HAVE BEEN RECLASSIFIED.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets a diversified group of products to meet consumers'
lifetime needs in the areas of protection and retirement solutions in the state
of New York through a combination of Allstate agencies, financial services
firms, direct marketing and specialized brokers. The Company's products include
term life; whole life; universal life; annuities such as fixed annuities, market
value adjusted annuities; variable annuities; immediate annuities; and other
protection products such as accidental death and hospital indemnity.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable annuity contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried at
the fair value of the assets. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and
therefore are not included in the Company's condensed statements of operations.
Revenues to the Company from the Separate Accounts consist of contract
maintenance and administration fees and mortality, surrender and expense
charges.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death, variable annuity contractholders
bear the investment risk that the Separate Accounts' funds may not meet their
stated objectives.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
FINANCIAL HIGHLIGHTS
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
------------ ----------- ----------- ------------
(in thousands) 2002 2001 2002 2001
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Statutory premiums and deposits $ 216,081 $ 194,428 $ 406,473 $ 362,200
============ =========== =========== ============
Investments $ 3,562,946 $ 3,060,061 $ 3,562,946 $ 3,060,061
Separate Accounts Assets 589,029 582,462 589,029 582,462
------------ ----------- ----------- ------------
Investments, including Separate Accounts Assets $ 4,151,975 $ 3,642,523 $ 4,151,975 $ 3,642,523
============ =========== =========== ============
GAAP Premiums $ 30,230 $ 26,779 $ 52,774 $ 46,993
Contract charges 12,250 10,117 24,607 20,471
Net investment income 56,953 50,209 111,381 98,695
Contract benefits 44,673 45,584 90,500 85,056
Interest credited to contractholder funds 25,399 18,281 41,430 34,592
Amortization of deferred policy acquisition costs ("DAC") 5,243 1,073 7,073 2,603
Operating costs and expenses 8,372 8,050 18,514 15,794
------------ ----------- ----------- ------------
Operating income before tax 15,746 14,117 31,245 28,114
Income tax expense 5,428 4,930 10,773 9,766
------------ ----------- ----------- ------------
Operating income (1) 10,318 9,187 20,472 18,348
Realized capital gains and losses, after-tax(2) 926 (2,717) (755) (2,325)
Cumulative effect of change in
accounting principle, after-tax - - - (147)
------------ ----------- ----------- ------------
Net income $ 11,244 $ 6,470 $ 19,717 $ 15,876
============ =========== =========== ============
(1) For a complete definition of operating income, see the operating income
discussion beginning on page 13.
(2) RECONCILIATION OF REALIZED CAPITAL GAINS AND LOSSES
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- -----------------------------
------------ ---------- ------------ ------------
(in thousands)
2002 2001 2002 2001
------------ ---------- ------------ ------------
------------ ---------- ------------ ------------
Realized capital gains and losses $ 1,142 $ (3,229) $ (1,465) $ (2,452)
Reclassification of Amortization of DAC 301 (1,016) 289 (1,182)
Reclassification of Income tax benefit (expense) (517) 1,528 421 1,309
---------- ---------- ----------- -----------
Realized capital gains and losses, after-tax $ 926 $ (2,717) $ (755) $ (2,325)
========== ========== =========== ===========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
STATUTORY PREMIUMS AND DEPOSITS
Statutory premiums and deposits is a measure used by management to analyze
sales trends. Statutory premiums and deposits includes premiums on insurance
policies and premiums and deposits on annuities determined in conformity with
statutory accounting practices prescribed or permitted by the insurance
regulatory authorities of the state of New York, and all other funds received
from customers on deposit-type products which are accounted for by the Company
as liabilities. The statutory accounting practices, and the Company's definition
of statutory premiums and deposits, differ in material aspects from GAAP. The
Company's method of calculating statutory premiums and deposits may also be
different from the method used by other companies and therefore comparability
may be limited.
The following table summarizes statutory premiums and deposits by product
line:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
----------- ------------ ----------- ------------
(in thousands) 2002 2001 2002 2001
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
LIFE AND OTHER PRODUCTS
Interest-sensitive life $ 13,716 $ 11,768 $ 27,412 $ 24,009
Traditional life 5,624 6,497 10,581 12,099
Other 2,315 2,084 4,498 4,203
----------- ------------ ----------- ------------
Total life and other products 21,655 20,349 42,491 40,311
----------- ------------ ----------- ------------
INVESTMENT PRODUCTS
Fixed annuities 83,590 70,178 142,401 123,205
Immediate annuities 34,519 32,029 62,543 60,854
Variable annuities 76,317 71,872 159,038 137,830
----------- ------------ ----------- ------------
Total investment products 194,426 174,079 363,982 321,889
----------- ------------ ----------- ------------
TOTAL STATUTORY PREMIUMS AND DEPOSITS $ 216,081 $ 194,428 $ 406,473 $ 362,200
=========== ============ =========== ============
For the second quarter of 2002, total statutory premiums and deposits
increased 11.1% when compared to the same period last year. In the first six
months of 2002, total statutory premiums and deposits increased 12.2% compared
to the same period last year. For both periods the increase was primarily due to
an increase in sales of fixed annuities, variable annuities and
interest-sensitive life products. Fixed annuities increased due to marketing and
sales in the financial services channel. Variable annuities increased due to new
wholesaling initiatives through the banking channel and the financial services
channel. Interest-sensitive life products increased due to increased marketing.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
GAAP PREMIUMS AND CONTRACT CHARGES
Under GAAP, premiums represent premium generated from traditional life and
other insurance products which have significant mortality or morbidity risk, and
contract charges generated from interest-sensitive life products, variable
annuities, fixed annuities and other investment products for which deposits are
classified as contractholder funds. Contract charges are assessed against the
contractholder account balance for maintenance, administration, cost of
insurance and early surrender. The following table summarizes GAAP premiums and
contract charges:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
(in thousands) 2002 2001 2002 2001
---------- --------- --------- ----------
---------- --------- --------- ----------
PREMIUMS
Traditional life $ 5,459 $ 6,084 $ 10,560 $ 11,740
Immediate annuities with life contingencies(1) 22,476 18,571 37,722 31,011
Other 2,295 2,124 4,492 4,242
------------ ---------- ---------- -----------
Total premiums $ 30,230 $ 26,779 $ 52,774 $ 46,993
============ ========== ========== ===========
CONTRACT CHARGES
Interest-sensitive life $ 9,069 $ 6,827 $ 17,959 $ 13,707
Variable annuities 2,549 2,324 5,286 4,596
Investment contracts 632 966 1,362 2,168
----------- ---------- ---------- -----------
Total contract charges $ 12,250 $ 10,117 $ 24,607 $ 20,471
=========== ========== ========== ===========
(1) Under GAAP accounting requirements, only those immediate annuities with
life contingencies are recognized in premiums. Those without life contingencies,
or period certain, are directly recorded as liabilities and generate contract
charges. Market conditions and consumer preferences drive the mix of immediate
annuities sold with or without life contingencies.
For the second quarter and the first six months of 2002, total premiums
increased 12.9% and 12.3%, respectively, compared to the same periods last year.
These increases were due to increased sales of immediate annuities with life
contingencies partially offset by decreased premiums from traditional life
products.
Total contract charges increased 21.1% for the second quarter of 2002 and
20.2% for the first six months of 2002, compared to the same periods last year.
In both periods, the increases were due to increased contract charges on
interest-sensitive life products from new business sales. Contract charges on
variable annuities, which are generally calculated as a percentage of account
value, increased compared to prior year periods due to growth from new sales
partially offset by declines in account value as a result of market declines.
OPERATING INCOME
Operating income is a measure used by management to evaluate profitability.
Operating income is defined as Income before the cumulative effect of changes in
accounting principles, after-tax, and excluding the after-tax effects of
realized capital gains and losses. In this management measure, the effects of
realized capital gains and losses and certain other items have been excluded due
to the volatility between periods and because such data is often excluded when
evaluating the overall financial performance and profitability of other
insurers. These operating results should not be considered as a substitute for
any GAAP measure of performance. A reconciliation of operating income to net
income is provided in the table on page 11. The Company's method of calculating
operating income may be different from the method used by other companies and
therefore comparability may be limited.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
----------- ------------ ----------- -----------
(in thousands) 2002 2001 2002 2001
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Investment margin $ 12,907 $ 11,077 $ 25,090 $ 22,190
Mortality margin 9,722 6,283 19,361 13,134
Maintenance charges 5,580 4,992 10,177 9,326
Surrender charges 1,152 888 2,204 1,861
DAC amortization (5,243) (1,073) (7,073) (2,603)
Operating costs and expenses (8,372) (8,050) (18,514) (15,794)
Income tax expense on operations (5,428) (4,930) (10,773) (9,766)
----------- ------------ ----------- -----------
OPERATING INCOME $ 10,318 $ 9,187 $ 20,472 $ 18,348
=========== ============ =========== ===========
Operating income for the second quarter and six month period ended June 30,
2002 increased 12.3% and 11.6%, respectively, compared to the same periods last
year. For both periods the increase in operating income was primarily due to
increases in both the mortality and investment margins partially offset by
increase in DAC amortization and operating expenses.
Investment margin, which represents the excess of investment income earned
over interest credited to policyholders and contractholders, increased 16.5% in
the second quarter of 2002 and 13.1% for the first six months of 2002 compared
to the same periods last year. For both periods, the increase in investment
margin was due to an increase in invested assets from the 2001 level. The growth
in invested assets was driven by sales of fixed and immediate annuities, less
contract benefits and surrenders and withdrawals. The impact of this growth was
partly offset by a decline in invested assets yields. Management actions taken
in 2001 and the first half of 2002 to reduce crediting rates where contractually
allowed have partially offset the decline in invested asset yields.
Mortality margin, which represents premiums and cost of insurance charges
in excess of related policy benefits, increased 54.7% in the second quarter of
2002 and 47.4% for the first six months of 2002 compared to the same periods
last year. For both periods the increase in mortality margin was due to revenue
growth on new business and lower death benefits on interest-sensitive products.
Mortality and morbidity loss experience can cause benefit payments to fluctuate
from period to period while underwriting and pricing guidelines utilize a
long-term view of the trends in mortality and morbidity thereby causing period
to period fluctuations in the mortality margin.
DAC amortization for the Company is dependent on the nature of the
insurance contract and requires judgment on both the period and rate of
amortization. DAC amortization periods for products with significant mortality
or morbidity risk are determined when the products are sold, and are related to
the periods in which premiums are received on these products. Amortization is
recognized in proportion to the pattern of expected gross profits for
interest-sensitive life and investment products, which is dependent on expected
investment returns and product profitability experience and the estimated lives
of the contract periods. The estimated average lives of the contracts are
considerably shorter than the stated amortization period due to withdrawals,
surrenders and other policy terminations. The average long-term rate of assumed
future investment yield of the Separate Accounts used in estimating expected
gross margins is 8.0% plus 1.15% to 1.45% for fees at June 30, 2002. If actual
results differ from estimated gross margins, DAC amortization is adjusted. Bonus
interest and other sales incentives are deferred and reflected as an offset
contractholder funds.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
The following table summarizes the DAC asset balance by product.
(in thousands) Amortization June 30, December 31,
Period 2002 2001
---------------- -------------- ---------------
---------------- -------------- ---------------
Traditional Life 7-30 years $ 29,831 $ 27,757
Other various 3,531 3,946
------------- --------------
33,362 31,703
Interest-sensitive life 30 years 61,608 59,574
Fixed annuity 15 years 21,124 14,701
Variable annuity 15 years 60,314 50,637
------------- --------------
143,046 124,912
------------- --------------
TOTAL DAC $ 176,408 $ 156,615
============= ==============
DAC amortization increased $4.2 million during the second quarter of 2002
and $4.5 million during the first six months of 2002 compared to the same
periods of 2001 due to overall growth in business and improved margins on
investment and interest-sensitive life contracts.
Operating costs and expenses increased 4.0% during the second quarter of
2002 and 17.2% for the first six months of 2002 compared to the same periods
last year due to distribution expenses incurred on new growth initiatives and
administrative expenses.
NET INVESTMENT INCOME
Pretax net investment income increased 13.4% in the second quarter of 2002
compared to the same period in 2001. For the first six months of 2002, pretax
net investment income increased 12.9% compared to the same period last year. The
increase was due to higher investment balances partially offset by slightly
lower yields. At June 30, 2002 investment balances, excluding Separate Accounts
and unrealized gains and losses on fixed income securities, increased 16.6%
compared to June 30, 2001.
AFTER-TAX REALIZED CAPITAL GAINS AND LOSSES
After-tax realized capital gains were $926 thousand for the second quarter
of 2002 compared to after-tax realized capital losses of $2.7 million in the
same period last year. After-tax realized capital losses were $755 thousand for
the first six months of 2002 compared to $2.3 million in the same period last
year. After-tax realized capital gains and losses are presented net of the
effects of DAC amortization, to the extent that such effects resulted from the
recognition of realized capital gains and losses. The following table describes
the factors impacting the realized capital gains and losses results:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
---------- ----------- ---------- ------------
(in thousands) 2002 2001 2002 2001
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
Portfolio trading $ 567 $ (593) $ (322) $ (422)
Investment write-downs (599) (896) (1,127) (896)
Valuation of derivative securities 766 (579) 509 (251)
---------- ----------- ---------- -----------
Subtotal 734 (2,068) (940) (1,569)
Reclassification of amortization of DAC 192 (649) 185 (756)
---------- ----------- ---------- -----------
Total realized capital gains and losses, after-tax $ 926 $ (2,717) $ (755) $ (2,325)
========== =========== ========== ===========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
Period to period fluctuations in realized capital gains and losses are the
result of timing of sales decisions reflecting management's decision on
positioning the portfolio, as well as assessments of individual securities and
overall market conditions.
INVESTMENTS
The composition of the Company's investment portfolio at June 30, 2002 is
presented in the following table:
Percent
(in thousands) to total
Fixed income securities (1) $3,138,531 88.1%
Mortgage loans 271,259 7.6
Short-term 120,074 3.4
Policy loans 33,082 0.9
---------- ----------
Total $3,562,946 100.0%
========== ==========
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $2.90 billion at June 30, 2002 and $2.68 billion at December
31, 2001.
Total investments were $3.56 billion at June 30, 2002 compared to $3.23
billion at December 31, 2001. The increase was due to amounts invested from
positive cash flows generated from operations and increased unrealized capital
gains. At June 30, 2002, unrealized capital gains on the fixed income securities
portfolio were $243.2 million compared to $216.2 million at December 31, 2001.
At June 30, 2002, 97.5% of the Company's fixed income securities portfolio
was rated investment grade, which is defined by the Company as a security having
a rating from the National Association of Insurance Commissioners ("NAIC") of 1
or 2, a Moody's rating of Aaa, Aa, A, Baa, or a comparable Company internal
rating.
Total investment balances related to the collateral from securities lending
increased to $167.3 million at June 30, 2002 from $140.3 million at December 31,
2001.
Commencing in late July 2002, deterioration of U.S. credit markets
significantly escalated. For example, in July the Lehman Bothers U.S.
Investment-Grade Credit Index under-performed U.S. Treasuries by 259 basis
points, its second-worst month ever. In particular, the telecommunications,
airlines, and energy sectors in which the Company has holdings have been
adversely affected. This deterioration, along with reduced market liquidity,
could also extend to other segments of the economy and is expected to lead to
increased recognition of realized capital losses from investment write-downs and
portfolio trading in subsequent periods.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
SEPARATE ACCOUNTS
Separate Accounts assets and liabilities decreased 2.3% to $589.0 million
at June 30, 2002 from December 31, 2001. The increase from additional deposits
and transfers from the fixed account fund to variable Separate Accounts funds
more than was offset by surrenders and withdrawals and unfavorable investment
performance of the Separate Accounts investments portfolios due to equity market
conditions.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
The Company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources:
June 30, December 31,
(in thousands) 2002 2001
------------ --------------
------------ --------------
Common stock and retained income $ 359,698 $ 339,981
Accumulated other comprehensive income 128,653 118,995
----------- -------------
Total shareholder's equity $ 488,351 $ 458,976
=========== =============
SHAREHOLDER'S EQUITY
Shareholder's equity increased in the first six months of 2002 compared to
December 31, 2001, due to net income and an increase in unrealized net capital
gains.
DEBT
The Company had no outstanding debt at June 30, 2002 and December 31, 2001.
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and, generally, may
be expected to have an effect on an insurance company's sales. On an ongoing
basis, rating agencies review the financial performance and condition of
insurers. A multiple level downgrade, while not expected, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's financial strength was rated Aa2, AA+, and A+ by
Moody's, Standard & Poor's, and A.M. Best, respectively, at June 30, 2002.
In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings.
Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and
affiliates, including the Company, to "negative" from "stable". This revision is
part of an ongoing life insurance industry review being conducted by Standard &
Poor's. Moody's and A.M. Best reaffirmed their ratings and outlook for the
Company.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
LIQUIDITY
The principal sources of funds for the Company include the following
activities:
SOURCES OF FUNDS
Statutory premiums and deposits
Reinsurance recoveries
Receipts of principal, interest and dividends on investments
Sales of investments
Capital contributions from ALIC
Inter-company loans
The principal uses of funds for the Company include the following activities:
USES OF FUNDS
Payment of contract benefits, maturities, surrenders and withdrawals
Reinsurance cessions and payments
Operating expenses
Purchase of investments
Repayment of inter-company loans
Dividends to ALIC
Management believes that cash flows from operating and investing activities
of the Company are adequate to satisfy liquidity requirements of these
operations based on the current liability structure and considering a variety of
reasonably foreseeable stress scenarios.
The maturity structure of the Company's fixed income securities, which
represent 88.1% of the Company's total investments, is managed to meet the
anticipated cash flow requirements of the underlying liabilities. A portion of
the Company's diversified product portfolio, primarily fixed annuities and
interest-sensitive life insurance products, is subject to discretionary
surrenders and withdrawals by contractholders. Total surrenders and withdrawals
for the three month period and six month period ended June 30, 2002 were $33.8
million and $82.3 million compared with $23.2 million and $48.6 million for the
same periods last year. As the Company's interest-sensitive life policies and
annuity contracts in-force grow and age, the dollar amount of surrenders and
withdrawals could increase. While the overall amount of surrenders may increase
in the future, a significant increase in the level of surrenders relative to
total contractholder account balances is not anticipated.
The Company has entered into an inter-company loan agreement with the
Corporation. The amount of inter-company loans available to the Company is at
the discretion of the Corporation. The maximum amount of loans the Corporation
will have outstanding to all its eligible subsidiaries at any given point in
time is limited to $1.00 billion. No amounts were outstanding for the Company
under the inter-company loan agreement at June 30, 2002 and December 31, 2001,
respectively.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate results
based on management's 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.
Forward-looking statements do not relate strictly to historical or current
facts and may be identified by their use of words like "plans," "expects,"
"will," "anticipates," "estimates," "intends," "believes," "likely," and other
words with similar meanings. These statements may address, among other things,
the Company's strategy for growth, product development, regulatory approvals,
market position, expenses, financial results and reserves. Forward-looking
statements are based on management's current expectations of future events. The
Company cannot guarantee that any forward-looking statement will be accurate.
However, we believe that our forward-looking statements are based on reasonable,
current expectations and assumptions. We assume no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual results
could differ materially from those communicated in these forward-looking
statements. In addition to the normal risks of business, the Company is subject
to significant risk factors, including those listed below which apply to it as
an insurance business and provider of other financial services.
o There is uncertainty involved in estimating the availability of reinsurance
and the collectibility of reinsurance recoverables. This uncertainty arises
from a number of factors, including whether losses meet the qualifying
conditions of the reinsurance contracts and if the reinsurers have the
financial capacity and willingness to pay.
o Currently, the Corporation is examining the potential exposure, if any, of
its insurance operations from acts of terrorism. The Corporation is also
examining how best to address this exposure, if any, considering the
interests of policyholders, shareholders, the lending community, regulators
and others. The Company does not have exclusions for terrorist events
included in its life insurance policies. In the event that a terrorist act
occurs, the Company may be adversely impacted, depending on the nature of
the event. With respect to the Company's investment portfolio, in the event
that commercial insurance coverage for terrorism becomes unavailable or
very expensive, there could be significant adverse impacts on some portion
of the Company's portfolio, particularly in sectors such as airlines and
real estate. For example, commercial mortgages or certain debt obligations
might be adversely affected due to the inability to obtain coverage to
restore the related real estate or other property, thereby creating the
potential for increased default risk.
o Changes in market interest rates can have adverse effects on the Company's
investment portfolio, investment income, product sales, results of
operations and retention of existing business. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
Declining market interest rates could have an adverse impact on the
Company's investment income as the Company reinvests proceeds from positive
cash flows from operations and from maturing and called investments into
new investments that could be yielding less than the portfolio's average
rate. Changes in interest rates could also reduce the profitability of the
Company's spread-based products, particularly interest-sensitive life,
investment and structured financial products, as the difference between the
amount that the Company is required to pay on such products and the rate of
return earned on the general account investments could be reduced. Changes
in market interest rates as compared to rates offered on some of the
Company's products could make those products less attractive if competitive
investment margins are not maintained, leading to lower sales and/or
changes in the level of surrenders and withdrawals on these products.
Additionally, unanticipated surrenders could cause acceleration of
amortization of DAC and thereby increase expenses and reduce current period
profitability. The Company seeks to limit its exposure to this risk on its
products by offering a diverse group of products, periodically reviewing
and revising crediting rates and providing for surrender charges in the
event of early withdrawal.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
o The Company amortizes DAC related to interest-sensitive life and investment
contracts in proportion to gross profits over the estimated lives of the
contract periods. Periodically, the Company updates the assumptions
underlying the estimated future gross profits, which include estimated
future contract charges, investment margins and expenses, in order to
reflect actual and expected experience and its potential impact to the
valuation of DAC. Updates to these assumptions could potentially result in
adjustment to the cumulative amortization of DAC. For example, reduced
estimated future gross profits resulting from declines in contract charges
assessed against the Separate Accounts' balances invested in equity
securities which have declined in value, could potentially result in
increased amortization of DAC. An adjustment, if any, may have a material
effect on results of operations.
o The impact of decreasing Separate Accounts balances resulting from volatile
market conditions, underlying fund performance and sales management
performance could cause contract charges realized by the Company to
decrease and lead to an increase of exposure to pay guaranteed minimum
death benefits and could result in increased statutory reserves for these
benefits, reducing the Company's statutory capital and surplus. In
addition, it is possible that the assumptions and projections used by the
Company in establishing prices for the guaranteed minimum death benefits on
variable annuities, particularly assumptions and projections about
investment performance, do not accurately anticipate the level of costs
that the Company will ultimately incur in providing those benefits,
resulting in adverse mortality trends that may have a material effect on
results of operations.
o Conditions in the U.S. and international stock markets can have an impact
on the Company's variable annuities sales. In general, sales of variable
annuities increase when the stock markets are generally rising over an
extended period of time and decrease when stock markets are falling over an
extended period of time.
o In order to meet the anticipated cash flow requirements of its obligations
to policyholders, from time to time the Company adjusts the effective
duration of investments, liabilities for contractholder funds and reserves
for life-contingent contract benefits. Those adjustments may have an impact
on the value of the investment portfolio, investment income, interest
credited on contractholder funds and the investment margin.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not be made until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations.
o Under current U.S. tax law and regulations, deferred and immediate
annuities and life insurance, including interest-sensitive products,
receive favorable policyholder tax treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance used
in estate planning.
o The Company is affiliated with various entities registered under the
federal securities laws as broker-dealers, investment advisers and/or
investment companies. These entities are subject to the regulatory
jurisdiction of the Securities and Exchange Commission, the National
Association of Securities Dealers and /or, in some cases, state securities
administrators. The laws regulating the securities products and activities
of these entities are complex, numerous and subject to change. As with any
highly regulated industry, there is some degree of risk of regulatory
non-compliance; however the Company has in place various legal and
compliance personnel, procedures and systems designed to reasonably assure
compliance with these requirements.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
o The Company distributes some of its products under agreements with other
members of the financial services industry that are not affiliated with the
Company. Termination of one or more these agreements due to, for example,
changes in control of any of these entities, could have a detrimental
effect on the Company's sales. This risk may be exacerbated due to the
enactment of the Gramm-Leach-Bliley Act of 1999, which eliminated many
federal and state law barriers to affiliations among banks, securities
firms, insurers and other financial service providers.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophe which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade in AIC's financial strength rating
from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best,
respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard &
Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a
downgrade of the Corporations' rating, ALIC and its subsidiaries could also
experience a similar downgrade.
o The events of September 11, 2001, and the resulting disruption in the
financial markets revealed weaknesses in the physical and operational
infrastructure that underlies the U.S. and worldwide financial systems.
Those weaknesses did not impair the Company's liquidity in the wake of the
September 11, 2001. However, if an event of similar or greater magnitude
occurred in the future and if the weaknesses in the physical and
operational infrastructure of the U.S. and worldwide financial systems are
not remedied, the Company could encounter significant difficulties in
transferring funds, buying and selling securities and engaging in other
financial transactions that support its liquidity.
o Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers and could downgrade or change a
company's ratings due to, for example, a decline in the value of a
company's investment portfolio or increased reserves due to additional
death benefit exposure resulting from market declines. A multiple level
downgrade of either the Corporation, the Company or ALIC, while not
expected, could have a material adverse effect on the Company's sales,
including the competitiveness of the Company's product offerings, its
ability to market products, and its financial condition and results of
operations. Also, the rating agencies have a variety of policies and
practices regarding the relationships among ratings of affiliated entities.
As such, the ratings of the Company or ALIC could be affected by changes in
ratings of AIC and/or the Corporation.
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends to ALIC and use its capital in other ways.
o The Company currently has Separate Account liabilities which contain death
benefit features covered by the exposure draft Statement of Position
("SOP") entitled "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts".
The Company does not currently hold liabilities for death benefit features
covered by the SOP. If adopted, the Company's establishment of liabilities
with respect to the contracts could have a material impact on the statement
of operations, however the market values at the time of adoption will
affect the amount of the liability required.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2002 AND 2001
o A portion of the unrealized capital gains and losses included as a
component of shareholder's equity relating to non-exchange traded
marketable investment securities accounted for at fair value are internally
developed using widely accepted valuation models and independent third
party data as model inputs. A decrease in these values would negatively
impact the Corporation's, ALIC's and the Company's debt-to-capital ratio.
o Following enactment of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the U.S. insurance business in an effort to determine the proper
role of state insurance regulation in the U.S. financial services industry.
In addition, members of Congress have introduced or discussed measures to
permit optional federal chartering, and thus regulation, of some types of
insurance business, such as life insurance and annuities. We cannot predict
whether any state or federal measures will be adopted to change the nature
or scope of the regulation of the insurance business or what affect any
such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition, grandfathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
o The impact of The Sarbanes-Oxley Act of 2002 on the business of the Company
is being evaluated but cannot be determined at this time.
22
PART II - Other Information
Item 1. Legal Proceedings
The discussion "Regulation and Legal Proceedings" in Part I, Item 1,
Note 4 of this Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
(b) Reports on Form 8-K
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated August 13, 2002 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
---------------------------------------------
(Registrant)
BY /s/SAMUEL H. PILCH
------------------
Samuel H. Pilch
Group Vice President and Controller
(chief accounting officer and duly
authorized officer of registrant)
24
Exhibit Index
EXHIBIT NO. DESCRIPTION
10.1 Underwriting Agreement between Allstate Life Insurance Company of New York
and ALFS, Inc., effective October 1, 1996.
10.2 Principal Underwriting Agreement between Allstate Life Insurance Company of
New York and Allstate Distributors, L.L.C., effective May 1, 2000
10.3 Service Agreement between Allstate Life Insurance Company and Allstate Life
Insurance Company of New York, effective July 1, 1989.
10.4 Business Operations and Service Agreement between Allstate Life Insurance
Company of New York and Allstate Life Insurance Company effective October
1, 1997.
10.5 Administrative Services Agreement between Allstate Life Insurance Company
of New York and Allstate Distributors, L.L.C. effective May 1, 2000.
10.6 Reinsurance Agreement between Allstate Life Insurance Company and Allstate
Life Insurance Company of New York effective January 1, 1984 as 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 and Amendment No.5 effective December 31, 1995.
10.7 Agreement and Assumption Reinsurance Agreement between Allstate Life
Insurance Company and Allstate Life Insurance Company of New York effective
July 1, 1984.
10.8 Reinsurance Agreement between Allstate Life Insurance Company and Allstate
Life Insurance Company of New York, effective January 1, 1986, as amended
by Amendment No.1 effective December 31, 1995 and Amendment No. 2 effective
December 1, 1995.
10.9 Reinsurance Agreement between Allstate Life Insurance Company and Allstate
Life Insurance Company of New York, effective January 1,1991, as amended by
Amendment No.1 effective December 31, 1995.
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