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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
For fiscal year ended December 31, 1998 Commission file number 33-47245
33-65355
033-65381
033-35445
033-24228
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
P.O. Box 9095
Farmingville, New York 11738
(Address of Principal executive offices)(Zip Code)
516/451-5300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
------------ -----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 31, 1998 there were 80,000 shares of common capital stock
outstanding, par value $25 per share all of which shares are held by ALIC.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
(A wholly owned subsidiary of Allstate Life Insurance Company)
Annual Report for 1998 On Form 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business**........................................... 3
ITEM 2. Properties**......................................... 4
ITEM 3. Legal Proceedings.................................... 4
ITEM 4. Submission of Matters to a Vote of Security Holders*.N/A
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................... 5
ITEM 6. Selected Financial Data*.............................N/A
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 6
ITEM 7A. Quantitiative and Qualitative Disclosures About
Market Risk..........................................16
ITEM 8. Financial Statements and Supplementary Data..........16
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................16
PART III
ITEM 10. Directors and Executive Officers of the Registrant*..N/A
ITEM 11. Executive Compensation*..............................N/A
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management*..........................................N/A
ITEM 13. Certain Relationships and Related Transactions*......N/A
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................................17
Index to Financial Statement Schedules..........................18
Signatures......................................................19
Exhibit Index...................................................E-1
* Omitted pursuant to General Instruction I(2) of Form 10-K.
**Item prepared in accordance with General Instruction I(2) of Form 10-K.
PART I
ITEM 1. BUSINESS
Allstate Life Insurance Company of New York (hereinafter "Allstate Life of
New York" or the "Company") was incorporated in 1967 as a stock life insurance
company under the laws of the State of New York and was known as "Financial Life
Insurance Company" from 1967 to 1978. From 1978 to 1984, the Company was known
as "PM Life Insurance Company." Since 1984, the Company has done business as
"Allstate Life Insurance Company of New York." Allstate Life of New York's
products, individual annuities and life insurance, have been approved by the
State of New York.
Allstate Life of New York is a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), a stock life insurance company incorporated under
the laws of Illinois. ALIC is a wholly owned subsidiary of Allstate Insurance
Company ("AIC"), a stock property-liability insurance company incorporated under
the laws of Illinois. All of the outstanding capital stock of AIC is owned by
The Allstate Corporation ("Corporation").
Allstate Life of New York's operations consist of one business segment
which is the sale of life insurance and savings products.
Allstate Life of New York's and ALIC's general account assets must be
invested in accordance with applicable state laws. These laws govern the nature
and quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment.
Allstate Life of New York is engaged in a business that is highly
competitive because of the large number of stock and mutual life insurance
companies and other entities competing in the sale of insurance and annuities.
There are approximately 1,700 stock, mutual and other types of insurers in
business in the United States. A.M. Best Company assigns Allstate Life of New
York the rating of A+(g). Under Best's rating policy and procedure, the Company
is assigned the Best's rating of its parent company, and is based on the
consolidated performance of the parent and its subsidiary. Standard & Poor's
Insurance Rating Services assigns an AA+ (Excellent) to the Company's claim
paying ability. Moody's Investors Service assigns an Aa2 (Excellent) financial
strength rating to the Company. The Company shares the same ratings of its
parent, ALIC.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed measures which may significantly
affect the Company's insurance business relate to the taxation of insurance
companies and the tax treatment of insurance products and the removal of
barriers preventing banks from engaging in the securities and insurance
business.
3
Allstate Life of New York is registered with the Securities and Exchange
Commission ("SEC") as an issuer of registered products. The SEC also regulates
certain Allstate Life of New York Separate Accounts which, together with the
Company, issue variable annuity contracts.
ITEM 2. PROPERTIES
Allstate Life of New York occupies office space in Farmingville, New York
and Northbrook, Illinois.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal
proceedings pending to which the Company is a party or which would materially
affect the Company. The Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not anticipate
the ultimate liability arising from such pending or threatened litigation to
have a material effect on the position or results of operations of the Company.
4
PART II
ITEM 5. MARKET FOR REGISTRANTS'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by its parent, ALIC. All
of ALIC's outstanding shares are owned by AIC. All of the outstanding shares of
AIC are owned by the Corporation.
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 financial statements and related notes.
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 ("Corporation"),
markets a broad line of life insurance and savings products in the State of New
York. Life insurance includes traditional products such as whole life and term
life insurance, as well as universal life and other interest-sensitive life
products. Savings products include deferred annuities, such as variable
annuities and fixed rate single and flexible premium annuities, and immediate
annuities such as structured settlement annuities. The Company distributes its
products using a combination of Allstate agents (which include life
specialists), banks, independent insurance agents, brokers and direct marketing.
The Company has identified itself as a single segment entity.
FINANCIAL HIGHLIGHTS
($ in thousands)
1998 1997 1996
----------- ----------- -----------
Statutory premiums and deposits $ 266,950 $ 208,090 $ 235,634
=========== =========== ===========
Investments $ 2,216,909 $ 1,907,997 $ 1,636,654
Separate Account assets 366,247 308,595 260,668
----------- ----------- -----------
Investments, including Separate Account assets $ 2,583,156 $ 2,216,592 $ 1,897,322
=========== =========== ===========
Premiums and contract charges $ 119,052 $ 118,963 $ 117,106
Net investment income 134,413 124,887 112,862
Life and annuity contract benefits 183,839 179,872 172,772
Operating costs and expenses 31,100 28,667 23,386
----------- ----------- -----------
Income from operations 38,526 35,311 33,810
Income tax expense on operations 13,511 13,051 12,221
----------- ----------- -----------
Operating income 25,015 22,260 21,589
Realized capital gains and losses, after-tax (1) 2,642 456 (1,028)
----------- ----------- -----------
Net income $ 27,657 $ 22,716 $ 20,561
=========== =========== ===========
(1) Net of the effect of related amortization of deferred acquisition costs in
1998.
6
PREMIUMS, DEPOSITS, CONTRACT CHARGES AND CONTRACT BENEFITS
Statutory premiums and deposits include premiums and deposits for all
products. In 1998, total statutory premiums and deposits increased $58.9 million
or 28.3%. The increase was due primarily to increased sales of fixed annuities
in the banking distribution channel. Total statutory premiums and deposits
decreased $27.5 million, or 11.7%, in 1997 from 1996 as increased sales of
variable annuities and life insurance policies were more than offset by a
reduction in deposits relating to funding agreements, a type of fixed annuity
product. Funding agreements, first sold by the Company in 1996, are entered into
based on the Company's assessment of market opportunities.
Under generally accepted accounting principles ("GAAP"), revenues exclude
deposits on most annuity contracts and premiums on universal life insurance
policies, and will vary with the mix of business sold during the period.
Premiums and contract charges were $119.1 million in 1998 compared to $119.0
million in 1997. In both years higher universal life and variable annuity
contract charges were partially offset by lower sales of structured settlement
annuities with life contingencies. In 1998, higher traditional life, health and
credit premiums also contributed to the increase. The increase in universal life
contract charges was due primarily to growth in universal life policies in
force. Variable annuity contract charges increased due to growth in variable
annuity deposits as well as strong performance in the underlying funds of the
Separate Accounts.
OPERATING INCOME
Pretax net investment income increased 7.6% and 10.7% in 1998 and 1997,
respectively. Higher investment balances in each period more than offset lower
portfolio yields. Investments, excluding Separate Account assets and unrealized
gains on fixed income securities, grew 14.3% and 9.8% in 1998 and 1997,
respectively. In the declining interest rate environments of 1998, 1997 and
1996, funds from maturing investments were generally reinvested at lower yields
resulting in reduced investment income.
Operating costs and expenses increased $2.4 million, or 8.5% and $5.3
million, or 22.6%, for the years ended December 31, 1998 and 1997, respectively.
For the year ended December 31, 1998, the increase in expenses is primarily due
to growth in business. For the year ended December 31, 1997 the increase is
related to growth in business and the recognition of costs related to the
relocation of the policy administration function, offset by a reduction in
amortization of deferred acquisition costs due to revised estimates of future
gross profits on interest-sensitive life products.
Operating income increased 12.4% in 1998 and 3.1% in 1997. The increase
in 1998 resulted from favorable mortality margins and increased contract
charges, primarily from variable annuities, partially offset by higher expenses.
The increase in 1997 is primarily due to favorable mortality experience and
higher investment margins on the structured settlement annuity business.
REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses increased in 1998 due primarily to
higher levels of sales and pre-payments of fixed income securities. In 1997,
increased realized capital gains on fixed income securities and reduced losses
on other investments were partially offset by increased writedowns on mortgage
loans. Year to year fluctuations in realized capital gains are largely the
result of the timing of sales decisions reflecting management's view of
individual securities and overall market conditions.
7
INVESTMENTS
The composition of the investment portfolio at December 31, 1998 is
presented in the table below (see Notes 2 and 4 to the financial statements for
investment accounting policies and additional information).
PERCENT
($ in thousands) TO TOTAL
--------
Fixed income securities (1) $1,966,067 88.7%
Mortgage loans 145,095 6.6
Short-term 76,127 3.4
Policy loans 29,620 1.3
---------- -------
Total $2,216,909 100.0%
========== =======
(1)Fixed income securities are carried at fair value. Amortized cost for these
securities was $1,648,972 at December 31, 1998.
Total investments increased to $2.22 billion at December 31, 1998, from
$1.91 billion at December 31, 1997. The increase was primarily due to amounts
invested from positive cash flows generated from operations and increases in the
market values of fixed income securities.
Short-term investments increased, in part, at December 31, 1998 by $10.0
million due to a change in accounting treatment for collateral received by the
securities lending program and by approximately $34 million in anticipation of
an inter-company settlement.
FIXED INCOME SECURITIES
The Company's fixed income securities portfolio consists of U.S.
government bonds, privately-placed securities, publicly traded corporate bonds,
mortgage-backed securities, asset-backed securities and tax-exempt municipal
bonds. The Company generally holds its fixed income securities for the long
term, but has classified all of these securities as available for sale to allow
maximum flexibility in portfolio management. At December 31, 1998, unrealized
net capital gains on the fixed income securities portfolio were $317.1 million
compared to $246.1 million as of December 31, 1997. The increase in the
unrealized gain position is primarily attributable to lower interest rates.
8
At December 31, 1998, substantially all of the Company's fixed income
securities portfolio was rated investment grade, which is defined by the Company
as a security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating. The quality mix of the Company's fixed income securities
portfolio at December 31, 1998 is presented below:
NAIC
RATINGS MOODY'S EQUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL
------- ------------------------------ ---------- ----------------
1 Aaa/Aa/A $1,565,538 79.6%
2 Baa 387,948 19.7
3 Ba 10,617 .6
4 B 1,964 .1
---------- --------
$1,966,067 100.0%
========== ========
As of December 31, 1998, the fixed income securities portfolio contained
$555.9 million of privately-placed corporate obligations, compared with $540.9
million at December 31, 1997. The benefits of privately-placed securities as
compared to public securities are generally higher yields, improved cash flow
predictability through pro-rata sinking funds on many bonds, and a combination
of covenant and call protection features designed to better protect the holder
against losses resulting from credit deterioration, reinvestment risk and
fluctuations in interest rates. A relative disadvantage of privately-placed
securities as compared to public securities is reduced liquidity. At December
31, 1998, substantially all of the privately-placed securities were rated as
investment grade by either the NAIC or the Company's internal ratings. The
Company determines the fair value of privately-placed fixed income securities
based on discounted cash flows using current interest rates for similar
securities.
At December 31, 1998 and 1997, $305.1 million and $228.7 million,
respectively, of the fixed income securities portfolio were invested in
mortgage-backed securities ("MBS"). At December 31, 1998, all of the MBS were
investment grade and substantially all have underlying collateral that is
guaranteed by U.S. government entities, thus credit risk is minimal.
MBS, however, are subject to interest rate risk as the duration and
ultimate realized yield are affected by the rate of repayment of the underlying
mortgages. The Company attempts to limit interest rate risk by purchasing MBS
where cost does not significantly exceed par value, and with repayment
protection to provide a more certain cash flow to the Company. At December 31,
1998, the amortized cost of the MBS portfolio was below par value by $6.9
million and over 42% of the MBS portfolio was invested in planned amortization
class bonds. This type of MBS is purchased to provide additional protection
against declining interest rates.
The fixed income securities portfolio contained $34.5 million and $39.7
million of asset-backed securities ("ABS") at December 31, 1998 and 1997,
respectively. ABS are subject to credit and interest rate risk. Credit risk is
mitigated by monitoring the performance of the collateral. Approximately 50% of
all securities are rated in the highest rating category by one or more credit
rating agencies. Interest rate risk is similar to the risk posed by MBS, however
to a lesser degree because of the nature of the underlying assets. At December
31, 1998, the amortized cost of the ABS portfolio was below par value by $230
million. Over 65% of the Company's ABS are invested in securitized credit card
receivables. The remainder of the portfolio is backed primarily by securitized
home equity, manufactured housing, and auto loans.
The Company closely monitors its fixed income securities portfolio for
declines in value that are other than temporary. Securities are placed on
non-accrual status when they are in default or when the receipt of interest
payments is in doubt.
9
MORTGAGE LOANS
The Company's $145.1 million investment in mortgage loans at December 31,
1998 is comprised primarily of loans secured by first mortgages on developed
commercial real estate. Geographical and property type diversification are key
considerations used to manage the Company's mortgage loan risk.
The Company closely monitors its commercial mortgage loan portfolio on a
loan-by-loan basis. Loans with an estimated collateral value less than the loan
balance, as well as loans with other characteristics indicative of higher than
normal credit risk, are reviewed by financial and investment management at least
quarterly for purposes of establishing valuation allowances and placing loans on
non-accrual status. The underlying collateral values are based upon discounted
property cash flow projections, which are updated as conditions change or at
least annually.
SHORT-TERM INVESTMENTS
The Company's short-term investment portfolio was $76.1 million and $9.5
million at December 31, 1998 and 1997, respectively. The Company invests
available cash balances primarily in taxable short-term securities having a
final maturity date or redemption date of one year or less. The short-term
investment portfolio increased, in part, at December 31, 1998 by $10.0 million
due to a change in the accounting treatment for collateral received by the
securities lending program and by approximately $34 million in anticipation of
an inter-company settlement.
SEPARATE ACCOUNTS
Separate Account assets and liabilities increased 18.7% to $366.2 million
at December 31, 1998. The increases were primarily attributable to sales of
flexible premium deferred variable annuity contracts and favorable investment
performance of the Separate Accounts investment portfolios, partially offset by
variable annuity surrenders and withdrawals.
MARKET RISK
Market risk is the risk that the Company will incur losses due to
adverse changes in equity prices or interest rates. The Company's primary market
risk exposure is to changes in interest rates, although the Company also has
certain exposures to changes in equity prices.
The active management of market risk is integral to the Company's
operations. The Company may use the following approaches to manage its exposure
to market risk within defined tolerance ranges: 1) rebalance its existing asset
or liability portfolios, 2) change the character of future investments purchased
or 3) use derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be purchased. Note 5 to
the financial statements provides a more detailed discussion of these
instruments.
10
CORPORATE OVERSIGHT
The Company administers and oversees its investment risk management
processes primarily through two oversight bodies: the Board of Directors and the
Credit and Risk Management Committee ("CRMC") of the Corporation. The Board of
Directors provide executive oversight of investment activities. The
Corporation's CRMC is a senior management committee consisting of the Chief
Investment Officer, the Investment Risk Manager, and other investment officers
who are responsible for the day-to-day management of market risk. The CRMC meets
at least monthly to provide detailed oversight of investment risk, including
market risk.
The Company has investment guidelines that define the overall framework
for managing market and other investment risks, including the accountabilities
and controls over these activities. In addition, the Company has specific
investment policies that delineate the investment limits and strategies that are
appropriate given the Company`s liquidity, surplus, product and regulatory
requirements.
The Company manages its exposure to market risk through asset allocation
limits, duration limits and, as appropriate, stress tests. Asset allocation
limits place restrictions on the aggregate fair value which may be invested
within an asset class. The Company has duration limits on investment portfolios,
and, as appropriate, on individual components of these portfolios. These
duration limits place restrictions on the amount of interest rate risk which may
be taken. Stress tests measure downside risk to fair value and earnings over
longer time intervals and/or for adverse market scenarios.
The 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 asset allocation, duration and
other limits, including but not limited to credit and liquidity.
INTEREST RATE RISK
Interest rate risk is the risk that the Company will incur economic
losses due to adverse changes in interest rates. This risk arises from the
Company's primary activities, as the Company invests substantial funds in
interest-sensitive assets and also has certain interest-sensitive liabilities.
The Company manages the interest rate risk inherent in its assets
relative to the interest rate risk inherent in its liabilities. One of the
measures the Company uses to quantify this exposure is duration. Duration
measures the sensitivity of the fair value of assets and liabilities to changes
in interest rates. For example, if interest rates increase 1%, the fair value of
an asset with a duration of 5 years is expected to decrease in value by
approximately 5%. At December 31, 1998, the difference between the Company's
liability and asset duration was approximately 3.4 years, which is larger than
the 2.8 gap reported for December 31, 1997. This duration gap indicates that the
fair value of the Company's liabilities is more sensitive to interest rate
movements than the fair value of its assets.
The Company seeks to invest premiums and deposits to create future cash
flows that will fund future claims, benefits and expenses, and earn stable
margins across a wide variety of interest rate and economic scenarios. In order
to achieve this objective and limit its exposure to interest rate risk, the
Company adheres to a philosophy of managing the duration of assets and related
liabilities. The Company uses financial futures to hedge the interest rate risk
related to anticipatory purchases and sales of investments and product sales to
customers.
11
To calculate duration, the Company projects asset and liability cash
flows, and discounts them to a net present value basis using a risk-free market
rate adjusted for credit quality, sector attributes, liquidity and other
specific risks. Duration is calculated by revaluing these cash flows at an
alternative level of interest rates, and determining the percentage change in
fair value from the base case. The cash flows used in the model reflect the
expected maturity and repricing characteristics of the Company's derivative
financial instruments, all other financial instruments (as depicted in Note 5 to
the financial statements), and certain non-financial instruments including
interest-sensitive annuity liabilities. The projections include assumptions
(based upon historical market and Company specific experience) reflecting the
impact of changing interest rates on the prepayment, lapse, leverage and/or
option features of instruments, where applicable. Such assumptions relate
primarily to mortgage-backed securities, collateralized mortgage obligations,
municipal housing bonds, callable municipal and corporate obligations, and fixed
rate single and flexible premium deferred annuities.
Based upon the information and assumptions the Company uses in its
duration calculation and interest rates in effect at December 31, 1998,
management estimates that a 100 basis point immediate, parallel increase in
interest rates ("rate shock") would decrease the net fair value of its assets
and liabilities identified above by approximately $3.8 million. The selection of
a 100 basis point immediate rate shock should not be construed as a prediction
by the Company's management of future market events; but rather, to illustrate
the potential impact of such an event.
To the extent that actual results differ from the assumptions utilized,
the Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes 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 impact of non-parallel changes in the term structure of
interest rates and/or large changes in interest rates.
EQUITY PRICE RISK
Equity price risk is the risk that the Company will incur economic losses
due to adverse changes in equity prices. At December 31, 1998, the Company had
variable annuity funds with balances totaling $366.2 million. The Company earns
mortality and expense fees as a percentage of fund balance. In the event of an
immediate decline of 10% in the fund balances due to equity market declines, the
Company would earn approximately $500 thousand less in annualized fee income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are collections of principal,
interest and dividends from the investment portfolio and the receipt of premiums
and deposits. The primary uses of these funds are to purchase investments and
pay policyholder claims, benefits, contract maturities, contract surrenders and
withdrawals, and operating costs.
The maturity structure of the Company's fixed income securities, which
represent 88.7% of the Company's total investments, is managed to meet the
anticipated cash flow requirements of the underlying liabilities. A portion of
the Company's diversified product portfolio, primarily fixed deferred annuity
and universal life insurance products, is subject to discretionary surrender and
withdrawal by contractholders. Management believes its assets are sufficiently
liquid to meet future obligations to its life and annuity contractholders under
various interest rate scenarios.
12
At December 31, 1998, the Moody's and Standard and Poor's financial
strength ratings for the Company were Aa2 and AA+, respectively.
The NAIC has a standard for assessing the solvency of insurance
companies, which is referred to as risk-based capital ("RBC"). The requirement
consists of a formula for determining each insurer's RBC and a model law
specifying regulatory actions if an insurer's RBC falls below specified levels.
The RBC formula for life insurance companies establishes capital requirements
relating to insurance, business, asset and interest rate risks. At December 31,
1998, RBC for the Company was significantly above a level that would require
regulatory action.
YEAR 2000
The Company is dependent upon certain services provided for it by the
Corporation including computer-related systems, and systems and equipment not
typically thought of as computer-related (referred to as "non-IT"). For this
reason, the Company is reliant upon the Corporation for the establishment and
maintenance of its computer-related systems and non-IT.
The Corporation is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, insurance processing,
underwriting, loss reserving, investments and other enterprise systems. Since
many of the Corporation's older computer software programs recognize only the
last two digits of the year in any date, some software may fail to operate
properly in or after the year 1999, if the software is not reprogrammed,
remediated, or replaced, ("Year 2000"). Also, non-IT often contains embedded
hardware or software that may have a Year 2000 sensitive component. The
Corporation believes that many of its counterparties and suppliers also have
Year 2000 issues and non-IT issues which could affect the Corporation.
In 1995, the Corporation commenced a plan consisting of four phases which
are intended to mitigate and/or prevent the adverse effects of Year 2000 issues
on its systems: 1) inventory and assessment of affected systems and equipment,
2) remediation and compliance of systems and equipment through strategies that
include the replacement or enhancement of existing systems, upgrades to
operating systems already covered by maintenance agreements and modifications to
existing systems to make them Year 2000 compliant, 3) testing of systems using
clock-forward testing for both current and future dates and for dates which
trigger specific processing, and 4) contingency planning which will address
possible adverse scenarios and the potential financial impact to the
Corporation's results of operations, liquidity or financial position.
The Corporation believes that the first three steps of this plan,
assessment, remediation and testing, including clock-forward testing which is
being performed on the Corporation's systems and non-IT, are mostly complete for
the Corporation's critical systems. In April 1998, the Corporation announced its
main premium application system, ALERT, which manages more than 20 million auto
and homeowners policies, is Year 2000 compliant. The Corporation is relying on
other remediation techniques for its midrange and personal computer
environments, and certain mainframe applications.
Certain investment processing systems, midrange computers and personal
computer environments are planned to be remediated by the middle of 1999, and
some systems and non-IT related to discontinued or non-critical functions of the
Corporation are planned to be abandoned by the end of 1999.
13
The Corporation is currently in the process of identifying key processes
and developing contingency plans in the event that the systems supporting these
processes are not Year 2000 compliant at the end of 1999. Management believes
these contingency plans should be completed by mid-1999. Until these plans are
complete, management is unable to determine an estimate of the most reasonably
possible worst case scenario due to issues relating to the Year 2000.
In addition, the Corporation is actively working with its major external
counterparties and suppliers to assess their compliance efforts and the
Corporation's exposure to both their Year 2000 issues and non-IT issues. This
assessment has included the solicitation of external counterparties and
suppliers, evaluating responses received and testing third party interfaces and
interactions to determine compliance. Currently, the Corporation has solicited
approximately 1,500, and has received responses from approximately 75% of its
counterparties and suppliers. The Corporation will continue its efforts to
solicit responses on Year 2000 compliance from these parties. The majority of
these responses have stated that the counterparties and suppliers believe that
they will be Year 2000 compliant and that no transactions will be affected.
However, some key vendors have not provided affirmative responses to date. The
Corporation has also decided to test certain interfaces and interactions to gain
additional assurance on third party compliance. If key vendors are determined to
be unable to meet the Year 2000 requirement, the Corporation is preparing
contingency plans that will allow the Corporation to continue to sell its
products and to service its customers. Management believes these contingency
plans should be completed by mid-1999. The Corporation currently does not have
sufficient information to determine whether or not its external counterparties
and suppliers will be Year 2000 ready.
The Corporation is currently assessing the level of Year 2000 risk
associated with certain personal lines policies that have been issued. To date,
no changes have been made in the coverages provided by the Corporation's
personal auto and homeowners lines policies to specifically exclude coverage for
Year 2000 related claims. This does not mean that all losses, or any particular
type of loss, that might be related to Year 2000 will be covered. Rather, all
claims will continue to be evaluated on a case-by-case basis to determine
whether coverage is available for a particular loss in accordance with the
applicable terms and conditions of the policy in force.
The Corporation also has investments which have been publicly or privately
placed. The Corporation may be exposed to the risk that the issuers of these
investments will be adversely impacted by Year 2000 issues. The Company assesses
the impact which Year 2000 issues have on the Corporation's investments as part
of due diligence for proposed new investments, and in its ongoing review of all
current portfolio holdings. Any recommended actions with respect to individual
investments are determined by taking into account the potential impact of Year
2000 on the issuer. Contingency plans are being created for any securities held
whose issuer is determined to not be Year 2000 compliant.
The Corporation presently believes that it will resolve the Year 2000
issue in a timely manner. Year 2000 costs are expensed as incurred, therefore
the majority of expenses related to this project have been incurred as of
December 31, 1998. The Corporation estimates that a total of approximately $125
million in expenses will be incurred between the years of 1995 and 2000. These
amounts include costs directly related to fixing Year 2000 issues, such as
modifying software and hiring Year 2000 solution providers. These amounts also
include costs to replace certain non-compliant systems which would not have been
otherwise replaced. A portion of these costs will be incurred by the Company on
a pro rata basis of usage of the computer-related systems and non-IT, as
compared to the usage of all entities which share these services with the
Corporation. These amounts are not expected to be material to the results of
operations of the Company.
14
PENDING ACCOUNTING STANDARDS
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP is required to be adopted in 1999. The
SOP provides guidance concerning when to recognize a liability for
insurance-related assessments and how those liabilities should be measured.
Specifically, insurance-related assessments should be recognized as liabilities
when all of the following criteria have been met: 1) an assessment has been
imposed or it is probable that an assessment will be imposed, 2) the event
obligating an entity to pay an assessment has occurred and 3) the amount of the
assessment can be reasonably estimated. The Company is currently evaluating the
effects of this SOP on its accounting for insurance-related assessments. Certain
information required for compliance is not currently available and therefore the
Company is studying alternatives for estimating the accrual. In addition,
industry groups are working to improve the information available. Adoption of
this standard is not expected to be material to the results of operations or
financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
replaces existing pronouncements and practices with a single, integrated
accounting framework for derivatives and hedging activities. The requirements
are effective for fiscal years beginning after June 15, 1999. Earlier
application is encouraged but is only permitted as of the beginning of any
fiscal quarter after issuance. This statement requires that all derivatives be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
Additionally, the change in fair value of a derivative which is not effective as
a hedge will be immediately recognized in earnings. The Company expects to adopt
SFAS No. 133 as of January 1, 2000. Based on existing interpretations of the
requirements of SFAS No. 133, the impact of adoption is not expected to be
material to the results of operations or financial position of the Company.
FORWARD-LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis that
are not historical information are forward-looking statements that are based on
management's estimates, assumptions and projections. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of
1933 and The Securities Exchange Act of 1934 for forward-looking statements.
15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The pertinent provisions of Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 10 to 12 are herein incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements filed with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required by this Item.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS. The Registrants financial statements, for the year
ended December 31, 1998, together with the Report of Independent Accountants are
set forth on pages F-1 - F-21 of this report.
2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part IV of
this report:
Schedule IV - Reinsurance page F-22
Schedule V - Valuation and Qualifying Accounts page F-23
All other schedules have been omitted because they are not applicable or
not required or because the required information is included in the financial
statements or notes thereto.
3. EXHIBITS. The exhibits required to be filed by Item 601 of Regulation
S-K are listed under the caption "Exhibits" in Item 14(c).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended December 31, 1998.
(c) EXHIBITS
Exhibit No. Description
3(i) Restated Certificate of Incorporation, as amended, of
Allstate Life Insurance Company of New York (filed herewith)
3(ii) Amended By-laws of Allstate Life Insurance Company of New
York (filed herewith)
27 Financial Data Schedule (filed herewith)
17
Financial Statements
Index
-----
Page
----
Independent Auditors' Report...............................................F-1
Financial Statements:
Statements of Financial Position,
December 31, 1998 and 1997...............................F-2
Statements of Operations and Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996.........................F-3
Statements of Shareholder's Equity for the Years Ended
December 31, 1998, 1997 and 1996.........................F-4
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.........................F-5
Notes to Financial Statements.....................................F-6
Schedule IV - Reinsurance for the Years Ended
December 31, 1998, 1997 and 1996.........................F-22
Schedule V - Valuation and Qualifying Accounts
December 31, 1998, 1997 and 1996.........................F-23
18
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF ALLSTATE LIFE INSURANCE COMPANY OF
NEW YORK:
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, 1998 and 1997, 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, 1998. Our audits also
included Schedule IV - Reinsurance and Schedule V Valuation 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
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 the Company as of December 31, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
and Schedule V - Valuation 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.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 19, 1999
F-1
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION
December 31,
------------
($ in thousands) 1998 1997
---- ----
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $1,648,972 and $1,510,110) $1,966,067 $1,756,257
Mortgage loans 145,095 114,627
Short-term 76,127 9,513
Policy loans 29,620 27,600
---------- ----------
Total investments 2,216,909 1,907,997
Deferred acquisition costs 87,830 71,946
Accrued investment income 22,685 21,725
Reinsurance recoverables 2,210 1,726
Cash 3,117 393
Other assets 9,887 6,167
Separate Accounts 366,247 308,595
---------- ----------
TOTAL ASSETS $2,708,885 $2,318,549
========== ==========
LIABILITIES
Reserve for life-contingent contract benefits $1,208,104 $1,084,409
Contractholder funds 703,264 607,474
Current income taxes payable 14,029 1,419
Deferred income taxes 25,449 16,990
Other liabilities and accrued expenses 23,463 10,985
Payable to affiliates, net 38,835 5,267
Separate Accounts 366,247 308,595
---------- ----------
TOTAL LIABILITIES 2,379,391 2,035,139
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)
SHAREHOLDER'S EQUITY
Common stock, $25 par value, 80,000 shares
authorized, issued and outstanding 2,000 2,000
Additional capital paid-in 45,787 45,787
Retained income 198,801 171,144
Accumulated other comprehensive income:
Unrealized net capital gains 82,906 64,479
---------- ----------
Total accumulated other comprehensive income 82,906 64,479
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 329,494 283,410
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $2,708,885 $2,318,549
========== ==========
See notes to financial statements.
F-2
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
REVENUES
Premiums and contract charges (net of reinsurance
ceded of $3,204, $3,087 and $2,273) $ 119,052 $ 118,963 $ 117,106
Net investment income 134,413 124,887 112,862
Realized capital gains and losses 4,697 701 (1,581)
--------- --------- ---------
258,162 244,551 228,387
--------- --------- ---------
COSTS AND EXPENSES
Contract benefits (net of reinsurance recoveries
of $997, $1,985 and $2,827) 183,839 179,872 172,772
Amortization of deferred acquisition costs 7,029 5,023 6,512
Operating costs and expenses 24,703 23,644 16,874
--------- --------- ---------
215,571 208,539 196,158
--------- --------- ---------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 42,591 36,012 32,229
Income tax expense 14,934 13,296 11,668
--------- --------- ---------
NET INCOME 27,657 22,716 20,561
--------- --------- ---------
OTHER COMPREHENSIVE INCOME
Change in unrealized net capital gains and losses 18,427 27,627 (37,561)
--------- --------- ---------
COMPREHENSIVE INCOME $ 46,084 $ 50,343 $ (17,000)
========= ========= =========
See notes to financial statements.
F-3
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SHAREHOLDER'S EQUITY
December 31,
------------
($ in thousands) 1998 1997 1996
---- ---- ----
COMMON STOCK $ 2,000 $ 2,000 $ 2,000
--------- --------- ---------
ADDITIONAL CAPITAL PAID-IN 45,787 45,787 45,787
--------- --------- ---------
RETAINED INCOME
Balance, beginning of year 171,144 148,428 127,867
Net income 27,657 22,716 20,561
--------- --------- ---------
Balance, end of year 198,801 171,144 148,428
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year 64,479 36,852 74,413
Change in unrealized net capital gains and losses 18,427 27,627 (37,561)
--------- --------- ---------
Balance, end of year 82,906 64,479 36,852
--------- --------- ---------
Total shareholder's equity $ 329,494 $ 283,410 $ 233,067
========= ========= =========
See notes to financial statements.
F-4
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 27,657 $ 22,716 $ 20,561
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and other non-cash items (34,890) (31,112) (26,172)
Realized capital gains and losses (4,697) (701) 1,581
Interest credited to contractholder funds 41,200 31,667 25,817
Changes in:
Life-contingent contract benefits
and contractholder funds 53,343 68,114 75,217
Deferred acquisition costs (16,693) (10,781) (6,859)
Accrued investment income (960) (1,404) (1,493)
Income taxes payable 13,865 (158) 1,986
Other operating assets and liabilities (15,014) 9,949 (5,963)
--------- --------- ---------
Net cash provided by operating activities 63,811 88,290 84,675
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities 65,281 15,723 28,454
Investment collections
Fixed income securities 159,648 120,061 72,751
Mortgage loans 5,855 5,365 12,508
Investment purchases
Fixed income securities (292,444) (236,984) (236,252)
Mortgage loans (24,252) (35,200) (10,325)
Change in short-term investments, net (55,846) 16,342 (18,598)
Change in policy loans, net (2,020) (2,241) (2,574)
--------- --------- ---------
Net cash used in investing activities (143,778) (116,934) (154,036)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 137,473 79,384 115,420
Contractholder fund withdrawals (54,782) (51,374) (46,504)
--------- --------- ---------
Net cash provided by financing activities 82,691 28,010 68,916
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 2,724 (634) (445)
CASH AT BEGINNING OF YEAR 393 1,027 1,472
--------- --------- ---------
CASH AT END OF YEAR $ 3,117 $ 393 $ 1,027
========= ========= =========
See notes to financial statements.
F-5
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
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"), a wholly owned subsidiary of The Allstate Corporation
(the "Corporation"). These financial statements have been prepared in conformity
with generally accepted accounting principles.
To conform with the 1998 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets a broad line of life insurance and savings products in the
State of New York. Life insurance includes traditional products such as whole
life and term life insurance, as well as universal life and other
interest-sensitive life products. Savings products include deferred annuities,
such as variable annuities and fixed rate single and flexible premium annuities,
and immediate annuities such as structured settlement annuities. The Company
distributes its products using a combination of Allstate agents, which include
life specialists as well as banks, independent insurance agents, brokers and
direct marketing.
Structured settlement annuity contracts issued by the Company are long-term in
nature and involve fixed guarantees relating to the amount and timing of benefit
payments. Annuity contracts and life insurance policies issued by the Company
are subject to discretionary withdrawal or surrender by customers, subject to
applicable surrender charges. In low interest rate environments, funds from
maturing investments, particularly those supporting long-term structured
settlement annuity obligations, may be reinvested at substantially lower
interest rates than those which prevailed when the funds were previously
invested.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be proposed federal and
state regulation and legislation that, if passed, would allow banks greater
participation in the securities and insurance businesses. Such events would
present an increased level of competition for sales of the Company's products.
Furthermore, the market for deferred annuities and interest-sensitive life
insurance is enhanced by the tax incentives available under current law. Any
legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Additionally, traditional demutualizations of mutual insurance companies and
enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; and (2) increasing competition in capital
markets.
Although the Company currently benefits from agreements with financial services
entities who market and distribute its products, change in control of these
non-affliliated entities with which the Company has alliances could have a
detrimental effect on the Company's sales.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds and mortgage-backed and asset-backed
securities. All fixed income securities are carried at fair value and may be
sold prior to their contractual maturity ("available for sale"). The difference
between amortized cost and fair value, net of deferred income taxes, certain
deferred acquisition costs, and reserves for life and annuity policy benefits,
is reflected as a component of shareholder's equity. Provisions are recognized
for declines in the value of fixed income securities that are other than
temporary. Such writedowns are included in realized capital gains and losses.
Mortgage loans are carried at outstanding principal balance, 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 or the present
value of the loan's expected future repayment cash flows discounted at the
loan's original effective interest rate. Valuation allowances on loans not
considered to be impaired are established based on consideration of the
underlying collateral, borrower financial strength, current and expected market
conditions, and other factors.
Short-term investments are carried at cost or amortized cost which approximates
fair value, and includes collateral received in connection with securities
lending activities. Policy loans are carried at the unpaid principal balances.
Investment income consists primarily of interest and dividends on short-term
investments. Interest is recognized on an accrual basis and dividends are
recorded at the ex-dividend date. Interest income on mortgage-backed and
asset-backed securities is determined on the effective yield method, based on
estimated principal repayments. Accrual of income is suspended for fixed income
securities and mortgage loans that are in default or when the receipt of
interest payments is in doubt. Realized capital gains and losses are determined
on a specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes futures contracts which are derivative financial
instruments. When futures contracts meet specific criteria they may be
designated as accounting hedges and accounted for on either a fair value or
deferral basis, depending upon the nature of the hedge strategy and the method
used to account for the hedged item. Derivatives that are not designated as
accounting hedges are accounted for on a fair value basis.
If, subsequent to entering into a hedge transaction, the futures contract
becomes ineffective (including if the the occurrence of a hedged anticipatory
transaction is no longer probable), the Company terminates the derivative
position. Gains and losses on these terminations are reported in realized
capital gains and losses in the period they occur. The Company may also
terminate derivatives as a result of other events or circumstances. Gains and
losses on these terminations are either deferred and amortized over the
remaining life of either the hedge or the hedged item, whichever is shorter, or
are reported in shareholder's equity, consistent with the accounting for the
hedged item. Futures contracts must reduce the primary market risk exposure on
an enterprise or transaction basis in conjunction with the hedge strategy; be
designated as a hedge at the inception of the transaction; and be highly
correlated with the fair value of, or interest income or expense associated
with, the hedged item at inception and throughout the hedge period.
DEFERRAL ACCOUNTING Under deferral accounting, gains and losses on futures
contracts are deferred on the statement of financial position and recognized in
earnings in conjunction with earnings on the hedged item. The Company accounts
for interest rate futures contracts as hedges using deferral accounting for
anticipatory investment purchases and sales when the criteria for futures
(discussed above) are met. In addition, anticipated transactions must be
probable of occurrence and their significant terms and characteristics
identified.
F-7
Changes in fair values of these types of derivatives are initially deferred as
other liabilities and accrued expenses. Once the anticipated transaction occurs,
the deferred gains or losses are considered part of the cost basis of the asset
and reported net of tax in shareholder's equity or recognized as a gain or loss
from disposition of the asset, as appropriate. The Company reports initial
margin deposits on futures in short-term investments. Fees and commissions paid
on these derivatives are also deferred as an adjustment to the carrying value of
the hedged item.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES
Premiums for traditional life insurance and certain life-contingent annuities
are recognized as revenue when due. Accident and disability premiums are earned
on a pro rata basis over the policy period. Revenues on universal life-type
insurance policies are comprised of contract charges and fees, and are
recognized when assessed against the policyholder account balance. Revenues on
investment contracts include contract charges and fees for contract
administration and surrenders. These revenues are recognized when levied against
the contract balance. Gross premium in excess of the net premium on limited
payment contracts are deferred and recognized over the contract period.
REINSURANCE
The Company has reinsurance agreements whereby certain premiums and contract
benefits are ceded and reflected net of such reinsurance in the statements of
operations and comprehensive income. Reinsurance recoverable and the related
reserves for life-contingent contract benefits and contractholder funds are
reported separately in the statements of financial position. The Company
continues to have primary liability as the direct insurer for risks reinsured.
DEFERRED ACQUISITION COSTS
Certain costs of acquiring life and annuity business, principally agents'
remuneration, premium taxes, certain underwriting costs and direct mail
solicitation expenses are deferred and amortized to income. For traditional life
insurance, limited payment contracts and accident and disability insurance,
these costs are amortized in proportion to the estimated revenues on such
business. For universal life-type policies and investment contracts, the costs
are amortized in relation to the present value of estimated gross profits on
such business. Changes in the amount or timing of estimated gross profits will
result in adjustments in the cumulative amortization of these costs. To the
extent that unrealized gains or losses on fixed income securities carried at
fair value would result in an adjustment of deferred acquisition costs had those
gains or losses actually been realized, the related unamortized deferred
acquisition costs are recorded as a reduction of the unrealized gains or losses
included in shareholder's equity.
INCOME TAXES
The income tax provision is calculated under the liability method and presented
net of reinsurance. 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 insurance reserves and deferred acquisition
costs. Deferred income taxes also arise from unrealized capital gains and losses
on fixed income securities carried at fair value.
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuities, the assets and
liabilities of which are legally segregated and reflected in the accompanying
statements of financial position as assets and liabilities of the Separate
Accounts. The Company's Separate Accounts consist of: Allstate Life of New York
Variable Annuity Account, Allstate Life of New York Variable Annuity Account II
and Allstate Life of New York Separate Account A. Each of the Separate Accounts
are unit investment trusts registered with the Securities and Exchange
Commission.
F-8
Assets of the Separate Accounts are carried at fair value. 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. Revenues to the Company from the
Separate Accounts consist of contract maintenance fees, administration fees and
mortality and expense risk charges.
RESERVES FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to traditional
life insurance, group retirement annuities and structured settlement annuities
with life contingencies, disability insurance and accident insurance, is
computed on the basis of assumptions as to future investment yields, mortality,
morbidity, terminations and expenses. These assumptions, which for traditional
life insurance are applied using the net level premium method, include
provisions for adverse deviation and generally vary by such characteristics as
type of coverage, year of issue and policy duration. Reserve interest rates
ranged from 4.0% to 11.0% during 1998. To the extent that unrealized gains on
fixed income securities would result in a premium deficiency had those gains
actually been realized, the related increase in reserves is recorded as a
reduction of the unrealized gains included in shareholder's equity.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most fixed annuities
and universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. During 1998, credited interest rates on
contractholder funds ranged from 3.46% to 11.00% for those contracts with fixed
interest rates and from 3.50% to 7.75% for those with flexible rates.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend mortgage loans have only off-balance-sheet risk because
their contractual amounts are not recorded in the Company's statements of
financial position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
NEW ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" under the guidance of SFAS No. 127 "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125". As a
result, the Company has recorded an asset and corresponding liability
representing the collateral received in connection with the Company's securities
lending program.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income is a measurement of certain changes in shareholder's equity
that result from transactions and other economic events other than transactions
with shareholders. For the Company, these consist of changes in unrealized gains
and losses on the investment portfolio (See Note 9).
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 redefines how segments are
determined and requires additional segment disclosures for both annual and
interim financial reporting. The Company has identified itself as a single
operating segment.
F-9
PENDING ACCOUNTING STANDARDS
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
97-3, "Accounting by Insurance and Other Enterprises for Insurance-related
Assessments." The SOP is required to be adopted in 1999. The SOP provides
guidance concerning when to recognize a liability for insurance-related
assessments and how those liabilities should be measured. Specifically,
insurance-related assessments should be recognized as liabilities when all of
the following criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an entity
to pay an assessment has occurred and 3) the amount of the assessment can be
reasonably estimated. The Company is currently evaluating the effects of this
SOP on its accounting for insurance-related assessments. Certain information
required for compliance is not currently available and therefore the Company is
studying alternatives for estimating the accrual. In addition, industry groups
are working to improve the information available. Adoption of this standard is
not expected to be material to the results of operations or financial position
of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
replaces existing pronouncements and practices with a single, integrated
accounting framework for derivatives and hedging activities. The requirements
are effective for fiscal years beginning after June 15, 1999. Earlier
application is encouraged but is only permitted as of the beginning of any
fiscal quarter after issuance. This statement requires that all derivatives be
recognized on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
Additionally, the change in fair value of a derivative which is not effective as
a hedge will be immediately recognized in earnings. The Company expects to adopt
SFAS No. 133 as of January 1, 2000. Based on existing interpretations of the
requirements of SFAS No. 133, the impact of adoption is not expected to be
material to the results of operations or financial position of the Company.
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements with ALIC in order to limit aggregate and
single exposure on large risks. A portion of the Company's premiums and policy
benefits are ceded to ALIC and reflected net of such reinsurance in the
statements of operations and comprehensive income. Reinsurance recoverable and
the related reserve for life-contingent contract benefits and contractholder
funds are reported separately in the statements of financial position. The
Company continues to have primary liability as the direct insurer for risks
reinsured.
F-10
The following amounts were ceded to the ALIC under reinsurance agreements.
YEAR ENDED DECEMBER 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
Premiums $ 2,519 2,171 $ 1,383
Policy benefits 315 327 1,662
Included in the reinsurance recoverable at December 31, 1998 and 1997 are
amounts due from the ALIC of $532 and $342, respectively.
STRUCTURED SETTLEMENT ANNUITIES
AIC, through an affiliate, purchased $12,747, $12,766 and $15,610 of structured
settlement annuities from the Company in 1998, 1997 and 1996, respectively. Of
these amounts, $5,152, $3,468 and $8,517 relate to structured settlement
annuities with life contingencies and are included in premium income in 1998,
1997 and 1996, respectively. Additionally, the reserve for life-contingent
contract benefits was increased by approximately 94% of such premium received in
each of these years.
BUSINESS OPERATIONS
The Company utilizes services performed by AIC and ALIC and business facilities
owned or leased, and operated by AIC in conducting its business activities. The
Company reimburses AIC and ALIC for the operating expenses incurred on behalf of
the Company. The cost to the Company is determined by various allocation methods
and is primarily related to the level of services provided. Operating expenses,
including compensation and retirement and other benefit programs, allocated to
the Company were $32,326, $27,632 and $23,134 in 1998, 1997 and 1996,
respectively. A portion of these expenses relate to the acquisition of life and
annuity business which are deferred and amortized over the contract period.
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
AT DECEMBER 31, 1998
U.S. government and agencies $ 443,930 $ 179,455 $ (1) $ 623,384
Municipal 31,617 2,922 (19) 34,520
Corporate 848,289 121,202 (899) 968,592
Mortgage-backed securities 291,520 14,294 (700) 305,114
Asset-backed securities 33,616 869 (28) 34,457
---------- ---------- ---------- ----------
Total fixed income securities $1,648,972 $ 318,742 $ (1,647) $1,966,067
========== ========== ========== ==========
AT DECEMBER 31, 1997
U.S. government and agencies $ 416,203 $ 126,824 $ (212) $ 542,815
Municipal 35,382 2,449 (22) 37,809
Corporate 803,935 103,700 (479) 907,156
Mortgage-backed securities 215,465 13,442 (166) 228,741
Asset-backed securities 39,125 642 (31) 39,736
---------- ---------- ---------- ----------
Total fixed income securities $1,510,110 $ 247,057 $ (910) $1,756,257
========== ========== ========== ==========
F-11
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1998:
AMORTIZED FAIR
COST VALUE
---- -----
Due in one year or less $ 14,903 $ 15,087
Due after one year through five years 79,333 84,372
Due after five years through ten years 227,770 250,208
Due after ten years 1,001,830 1,276,829
---------- ----------
1,323,836 1,626,496
Mortgage- and asset-backed securities 325,136 339,571
---------- ----------
Total $1,648,972 $1,966,067
========== ==========
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
NET INVESTMENT INCOME
YEAR ENDED DECEMBER, 31 1998 1997 1996
---- ---- ----
Fixed income securities $124,100 $116,763 $104,583
Mortgage loans 10,309 7,896 7,113
Other 2,940 2,200 2,942
-------- -------- --------
Investment income, before expense 137,349 126,859 114,638
Investment expense 2,936 1,972 1,776
-------- -------- --------
Net investment income $134,413 $124,887 $112,862
======== ======== ========
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
Fixed income securities $ 4,755 $ 955 $(1,522)
Mortgage loans (65) (221) (59)
Other 7 (33) --
------- ------- -------
Realized capital gains and losses 4,697 701 (1,581)
Income tax 1,644 245 (553)
------- ------- -------
Realized capital gains and losses, after tax $ 3,053 $ 456 $(1,028)
======= ======= =======
Excluding calls and prepayments, gross gains of $2,905, $471 and $480 and gross
losses of $164, $105 and $2,308 were realized on sales of fixed income
securities during 1998, 1997 and 1996, respectively.
F-12
UNREALIZED NET CAPITAL GAINS
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1998 are as follows:
COST/ GROSS UNREALIZED UNREALIZED
AMORTIZED COST FAIR VALUE GAINS LOSSES NET GAINS
-------------- ---------- ----- ------ ---------
Fixed income securities $ 1,648,972 $ 1,966,067 $ 318,742 $ (1,647) $ 317,095
=========== =========== =========== ===========
Reserve for life-contingent
contract benefits (187,706)
Deferred income taxes (44,642)
Deferred acquisition costs
and other (1,841)
-----------
Unrealized net capital gains $ 82,906
===========
CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
Fixed income securities $ 70,948 $ 123,519 $ (82,847)
Reserves for life contingent-contract benefits (42,251) (80,155) 24,300
Deferred income taxes (9,922) (14,876) 20,224
Deferred acquisition costs and other (348) (861) 762
--------- --------- ---------
Increase (decrease) in unrealized net
capital gains $ 18,427 $ 27,627 $ (37,561)
========= ========= =========
INVESTMENT LOSS PROVISIONS AND VALUATION ALLOWANCES
Pretax provisions for investment losses, principally relating to other than
temporary declines in value of fixed income securities and valuation allowances
on mortgage loans were $114, $261 and $208 in 1998, 1997 and 1996, respectively.
MORTGAGE LOAN IMPAIRMENT
A mortgage loan is impaired when it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement.
The Company had no impaired loans at December 31, 1998, 1997 and 1996.
Interest income is recognized on a cash basis for impaired loans carried at the
fair value of the collateral, beginning at the time of impairment. For other
impaired loans, interest is accrued based on the net carrying value. There were
no impaired loans during 1998 and 1997. In 1996, the Company recognized interest
income of $281 on impaired loans, which was received in cash during the year.
The average recorded investment in impaired loans was $5,154 during 1996.
Valuation allowances for mortgage loans at December 31, 1998, 1997 and 1996 were
$600, $486 and $225, respectively. There were no direct write-downs of mortgage
loan valuation allowances for the years ended December 31, 1998 and 1997. For
the year ended December 31, 1996, direct write-downs of mortgage loan valuation
allowances were $1,431. Net (reductions) additions to the mortgage loan
valuation allowances were $114, $261 and $(296) for the years ended December 31,
1998, 1997 and 1996, respectively.
F-13
INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE PORTFOLIOS
AND OTHER INVESTMENT INFORMATION
The Company maintains a diversified portfolio of municipal bonds. The largest
concentrations in the portfolio are presented below. Except for the following,
holdings in no other state exceeded 5% of the portfolio at December 31, 1998 and
1997:
(% of municipal bond portfolio carrying value) 1998 1997
---- ----
Ohio 30.2% 28.4%
Illinois 21.1 19.8
California 17.4 22.7
Maryland 8.2 8.0
Minnesota 5.9 5.5
New York 5.7 5.4
Maine 5.3 5.6
The Company's mortgage loans are collateralized by a variety of commercial real
estate property types located throughout the United States. Substantially all of
the commercial mortgage loans are non-recourse to the borrower. The states with
the largest portion of the commercial mortgage loan portfolio are listed below.
Except for the following, holdings in no other state exceeded 5% of the
portfolio at December 31, 1998 and 1997:
(% of commercial mortgage portfolio carrying value) 1998 1997
---- ----
California 41.9% 47.7%
New York 26.3 30.5
Illinois 15.8 15.3
New Jersey 6.9 -
Pennsylvania 6.2 3.3
The types of properties collateralizing the commercial mortgage loans at
December 31, are as follows:
(% of commercial mortgage portfolio carrying value) 1998 1997
---- ----
Retail 39.5% 38.8%
Warehouse 19.2 25.4
Apartment complex 18.5 14.9
Office buildings 11.7 15.3
Industrial 5.5 4.9
Other 5.6 .7
------ ------
100.0% 100.0%
===== =====
F-14
The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 1998, for loans that were not in foreclosure are as follows:
NUMBER OF LOANS CARRYING VALUE PERCENT
--------------- -------------- -------
1999 1 $ 2,832 2.0%
2000 4 7,762 5.3
2001 5 7,066 4.9
2002 2 6,154 4.2
Thereafter 31 121,281 83.6
-------- -------- --------
Total 43 $145,095 100.0%
======== ======== ========
In 1998, there were no commercial mortgage loans which were contractually due.
SECURITIES ON DEPOSIT
At December 31, 1998, fixed income securities with a carrying value of $2,109
were on deposit with regulatory authorities as required by law.
5. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving derivative financial instruments and other off-balance-sheet financial
instruments. The fair value estimates of financial instruments presented below
are not necessarily indicative of the amounts the Company might pay or receive
in actual market transactions. Potential taxes and other transaction costs have
not been considered in estimating fair value. The disclosures that follow do not
reflect the fair value of the Company as a whole since a number of the Company's
significant assets (including deferred acquisition costs and reinsurance
recoverables) and liabilities (including traditional life and universal
life-type insurance reserves and deferred income taxes) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments such as accrued investment income
and cash are generally of a short-term nature. Their carrying values are assumed
to approximate fair value.
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Fixed income securities $1,966,067 $1,966,067 $1,756,257 $1,756,257
Mortgage loans 145,095 154,872 114,627 120,849
Short-term investments 76,127 76,127 9,513 9,513
Policy loans 29,620 29,620 27,600 27,600
Separate Accounts 366,247 366,247 308,595 308,595
Carrying value and fair value include the effects of derivative financial
instruments where applicable.
F-15
Fair values for fixed income securities are based on quoted market prices where
available. Non-quoted securities are valued based on discounted cash flows using
current interest rates for similar securities. Mortgage loans are valued based
on discounted contractual cash flows. Discount rates are selected using current
rates at which similar loans would be made to borrowers with similar
characteristics, using similar properties as collateral. Loans that exceed 100%
loan-to-value are valued at the estimated fair value of the underlying
collateral. Short-term investments are highly liquid investments with maturities
of less than one year whose carrying value approximates fair value.
The carrying value of policy loans approximates its fair value. Separate
Accounts assets are carried in the statements of financial position at fair
value based on quoted market prices.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31, are
as follows:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Contractholder funds on
investment contracts $512,239 $518,448 $437,449 $466,136
Separate Accounts 366,247 366,247 308,595 308,595
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
DERIVATIVE FINANCIAL INSTRUMENTS
The only derivative financial instruments used by the Company are interest rate
futures contracts. The Company primarily uses this derivative financial
instrument to reduce its exposure to market risk, specifically interest rate
risk, in conjunction with asset/liability management. The Company does not hold
or issue these instruments for trading purposes.
The following table summarizes the contract amount, credit exposure, fair value
and carrying value of the Company's derivative financial instruments:
CARRYING
VALUE
CONTRACT CREDIT FAIR ASSETS/
AMOUNT EXPOSURE VALUE (LIABILITIES)
------ -------- ----- -------------
AT DECEMBER 31, 1998
- --------------------
Financial futures contracts $15,000 $ -- $ (15) $ (223)
AT DECEMBER 31, 1997
- --------------------
Financial futures contracts $29,800 $ -- $ (153) $ (810)
Carrying value is representative of deferred gains and losses.
F-16
The contract amounts are used to calculate the exchange of contractual payments
under the agreements and are not representative of the potential for gain or
loss on these agreements.
Credit exposure represents the Company's potential loss if all of the
counterparties failed to perform under the contractual terms of the contracts
and all collateral, if any, became worthless. This exposure is measured by the
fair value of contracts with a positive fair value at the reporting date. The
Company manages its exposure to credit risk primarily by establishing risk
control limits. To date, the Company has not incurred any losses on derivative
financial instruments due to counterparty nonperformance.
Fair value is the estimated amount that the Company would receive (pay) to
terminate or assign the contracts at the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer and
exchange quotes are used to value the Company's derivatives.
Financial futures are commitments to either purchase or sell designated
financial instruments at a future date for a specified price or yield. They may
be settled in cash or through delivery. As part of its asset/liability
management, the Company generally utilizes futures contracts to manage its
market risk related to anticipatory investment purchases and sales, as well as
other risk management purposes. Futures used as hedges of anticipatory
transactions pertain to identified transactions which are probable to occur and
are generally completed within 90 days. Futures contracts have limited
off-balance-sheet credit risk as they are executed on organized exchanges and
require security deposits, as well as the daily cash settlement of margins.
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 that the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions. The Company
mitigates this risk through established risk control limits set by senior
management. In addition, the change in the value of the Company's derivative
financial instruments designated as hedges are generally offset by the change in
the value of the related assets and liabilities.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend mortgage loans are agreements to lend to a borrower
provided there is no violation of any condition established in the contract. The
Company enters these agreements to commit to future loan fundings at a
predetermined interest rate. Commitments generally have fixed expiration dates
or other termination clauses. Commitments to extend mortgage loans, which are
secured by the underlying properties, are valued based on estimates of fees
charged by other institutions to make similar commitments to similar borrowers.
The Company had no mortgage loan commitments at December 31, 1998. At December
31, 1997 the Company had $18,000 in mortgage loan commitments which had a fair
value of $180.
F-17
6. INCOME TAXES
The Company joins the Corporation and its other eligible 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.
Prior to Sears, Roebuck and Co.'s ("Sears") distribution ("Sears distribution")
on June 30, 1995 of its 80.3% ownership in the Corporation to Sears
shareholders, the Allstate Group joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Tax Sharing Agreement"). Under the Tax Sharing
Agreement, the Company, through the Corporation, paid to or received from the
Sears Group the amount, if any, by which the Sears Tax Group's federal income
tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return.
As a result of the Sears distribution, the Allstate Group was no longer included
in the Sears Tax Group, and the Tax Sharing Agreement was terminated.
Accordingly, the Allstate Group and Sears Group entered into a new tax sharing
agreement, which adopts many of the principles of the Tax Sharing Agreement and
governs their respective rights and obligations with respect to federal income
taxes for all periods prior to the Sears distribution, including the treatment
of audits of tax returns for such periods.
The Internal Revenue Service ("IRS") has completed its review of the Allstate
Group's federal income tax returns through the 1993 tax year. Any adjustments
that may result from IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or results of operations of
the Company.
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
1998 1997
---- ----
DEFERRED ASSETS
Life and annuity reserves $ 41,073 $ 34,084
Difference in tax bases of investments -- 742
Discontinued operations 364 364
Other postretirement benefits 328 352
Other assets 2,023 255
-------- --------
Total deferred assets 43,788 35,797
-------- --------
DEFERRED LIABILITIES
Unrealized net capital gains (44,642) (34,720)
Deferred acquisition costs (20,573) (15,821)
Difference in tax bases of investments (1,784) --
Prepaid commission expense (790) (792)
Other liabilities (1,448) (1,454)
-------- --------
Total deferred liabilities (69,237) (52,787)
-------- --------
Net deferred liability $(25,449) $(16,990)
======== ========
F-18
Although realization is not assured, management believes it is more likely than
not that the deferred tax assets will be realized based on the assumptions that
certain levels of income will be achieved.
The components of income tax expense for the year ended December 31, are as
follows:
1998 1997 1996
-------- -------- --------
Current $ 13,679 $ 14,874 $ 11,411
Deferred 1,255 (1,578) 257
-------- -------- --------
Total income tax expense $ 14,934 $ 13,296 $ 11,668
======== ======== ========
The Company paid income taxes of $3,788, $13,350 and $11,968 in 1998, 1997 and
1996, respectively. The Company had a current income tax liability of $14,029
and $1,419 at December 31, 1998 and 1997, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
1998 1997 1996
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax expense 1.6 2.2 2.4
Other (1.5) (.3) (1.2)
------ ------ ------
Effective income tax rate 35.1% 36.9% 36.2%
====== ====== ======
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1998, approximately $389,
will result in federal income taxes payable of $136 if distributed by the
Company. No provision for taxes has been made as the Company has no plan to
distribute amounts from this account. No further additions to the account have
been permitted since the Tax Reform Act of 1984.
7. STATUTORY FINANCIAL INFORMATION
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the New York
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company does not follow any permitted statutory accounting
practices that have a significant impact on statutory surplus or statutory net
income.
The NAIC's codification initiative has produced a comprehensive guide of revised
statutory accounting principles. While the NAIC has approved a January 1, 2001
implementation date for the newly developed guidance, companies must adhere to
the implementation date adopted by their state of domicile. The Company's state
of domicile, New York, is continuing its comparison of codification and current
statutory accounting requirements to determine necessary revisions to existing
state laws and regulations. The requirements are not expected to have a material
impact on the statutory surplus of the Company.
F-19
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. Under New
York Insurance Law, a notice of intention to distribute any dividend must be
filed with the New York Superintendent of Insurance not less than 30 days prior
to the distribution. Such proposed declaration is subject to the
Superintendent's disapproval.
8. BENEFIT PLANS
PENSION PLANS
Defined benefit pension plans, sponsored by the Corporation, cover domestic
full-time employees and certain part-time employees. Benefits under the pension
plans are based upon the employee's length of service, average annual
compensation and estimated social security retirement benefits. The
Corporation's funding policy for the pension plans is to make annual
contributions in accordance with accepted actuarial cost methods. The costs to
the Company included in net income were $382, $597 and $490 for the pension
plans in 1998, 1997 and 1996, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation also provides certain health care and life insurance benefits
for retired employees. Qualified employees may become eligible for these
benefits if they retire in accordance with the Corporation's established
retirement policy and are continuously insured under the Corporation's group
plans or other approved plans for ten or more years prior to retirement. The
Corporation shares the cost of the retiree medical benefits with retirees based
on years of service, with the Corporation's share being subject to a 5% limit on
annual medical cost inflation after retirement. The Corporation's postretirement
benefit plans currently are not funded. The Corporation has the right to modify
or terminate these plans.
PROFIT SHARING FUND
Employees of the Corporation and its domestic subsidiaries are also eligible to
become members of The Savings and Profit Sharing Fund of Allstate Employees
("Allstate Plan"). The Corporation's contributions are based on the
Corporation's matching obligation and performance.
The Company's contribution to the Allstate Plan was $567, $164 and $111 in 1998,
1997 and 1996, respectively.
F-20
9. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax basis for
the year ended December 31, are as follows:
1998 1997 1996
------------------------------- ------------------------------------------------------------------
After- After- After-
Pretax Tax tax Pretax Tax tax Pretax Tax tax
------ --- --- ------ --- --- ------ --- ---
Unrealized capital gains
and losses:
- --------------------------------
Unrealized holding gains
(losses) arising during
the period $75,817 $(26,536) $49,281 $ 124,702 $(43,645) $ 81,057 $(86,096) $ 30,133 $(55,963)
Adjustments to unrealized
capital gains and losses
arising during the period:
Deferred acquisition costs (348) 122 (226) (861) 301 (560) 762 (267) 495
Reserve for life insurance
policy benefits (42,251) 14,788 (27,463) (80,155) 28,054 (52,101) 24,300 (8,505) 15,795
------- -------- ------- --------- -------- -------- -------- -------- --------
Net unrealized holding
gains arising during the
period 33,218 (11,626) 21,592 43,686 (15,290) 28,396 (61,034) 21,361 (39,673)
------- -------- ------- --------- -------- -------- -------- -------- --------
Less: reclassification
adjustment for realized
net capital gains included
in net income 4,869 (1,704) 3,165 1,183 (414) 769 (3,249) 1,137 (2,112)
------- -------- ------- --------- -------- -------- -------- -------- --------
Unrealized net capital
gains (losses) 28,349 (9,922) 18,427 42,503 (14,876) 27,627 (57,785) 20,224 (37,561)
------- -------- ------- --------- -------- -------- -------- -------- --------
OTHER COMPREHENSIVE
INCOME $28,349 $ (9,922) $18,427 $ 42,503 $(14,876) $ 27,627 $(57,785) $ 20,224 $(37,561)
======= ======== ======= ========= ======== ======== ======== ======== ========
10. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATIONS AND LEGAL PROCEEDINGS
The Company's business is subject to the effect of a changing social, economic
and regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulation, controls on medical care costs,
removal of barriers preventing banks from engaging in the securities and
insurance business, tax law changes affecting the taxation of insurance
companies, the tax treatment of insurance products and its impact on the
relative desirability of various personal investment vehicles, and proposed
legislation to prohibit the use of gender in determining insurance rates and
benefits. The ultimate changes and eventual effects, if any, of these
initiatives are uncertain.
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. In the opinion of management, the ultimate liability, if any, arising
from such pending or threatened litigation is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
F-21
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE IV--REINSURANCE
($ in thousands)
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $12,656,826 $ 857,500 $11,799,326
=========== =========== ===========
Premiums and contract charges:
Life and annuities $ 116,678 $ 2,541 $ 114,137
Accident and health 5,578 663 4,915
----------- ----------- -----------
$ 122,256 $ 3,204 $ 119,052
=========== =========== ===========
GROSS NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $11,339,990 $ 721,040 $10,618,950
=========== =========== ===========
Premiums and contract charges:
Life and annuities $ 116,167 $ 2,185 $ 113,982
Accident and health 5,883 902 4,981
----------- ----------- -----------
$ 122,050 $ 3,087 $ 118,963
=========== =========== ===========
GROSS NET
YEAR ENDED DECEMBER 31, 1996 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 9,962,300 $ 553,628 $ 9,408,672
=========== =========== ===========
Premiums and contract charges:
Life and annuities $ 114,296 $ 1,398 $ 112,898
Accident and health 5,083 875 4,208
----------- ----------- -----------
$ 119,379 $ 2,273 $ 117,106
=========== =========== ===========
F-22
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- -------- ---------- ------
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
Allowance for estimated losses
on mortgage loans $ 486 $ 114 $ - $ 600
============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
Allowance for estimated losses
on mortgage loans $ 225 $ 261 $ - $ 486
============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1996
- ----------------------------
Allowance for estimated losses
on mortgage loans $ 1,952 $ (296) $ 1,431 $ 225
============ ============ ============ ============
F-23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
By /s/ LOUIS G. LOWER, II
----------------------
Louis G. Lower, II
Chairman of the Board of Directors and Director
(Principal Executive Officer)
Date March 2, 1999
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ LOUIS G. LOWER, II
----------------------
Louis G. Lower, II
Chairman of the Board of Directors and Director
(Principal Executive Officer)
Date March 2, 1999
--------------
By /s/ MICHAEL J. VELOTTA
----------------------
Michael J. Velotta
Vice President, Secretary, General Counsel and Director
Date March 19, 1999
--------------
By /s/ MARLA G. FRIEDMAN
----------------------
Marla G. Friedman
Vice President and Director
Date March 2, 1999
--------------
By /s/VINCENT A. FUSCO
---------------------
Vincent A. Fusco
Chief Operations Officer and Director
Date March 8, 1999
---------------
By /s/ GERARD F. McDERMOTT
-------------------------
Gerard F. McDermott
Director
Date March 8, 1999
----------------
By /s/ TIMOTHY H. PLOHG
----------------------
Timothy H. Plohg
Vice President and Director
Date March 15, 1999
-----------------
19
By
----------------------
Kevin R. Slawin
Vice President and Director
Date March , 1999
-----------------
By
-----------------------
Patricia A. Wilson
Assistant Vice President and Director
Date March , 1999
-----------------
By /s/ KEITH A. HAUSCHILDT
------------------------
Keith A. Hauschildt
Assistant Vice President and Controller
(Chief Accounting Officer)
Date March 18, 1999
------------------
By /s/MARCIA D. ALAZRAKI
---------------------
Marcia D. Alazraki
Director
Date March 10, 1999
-----------------
By /s/CLEVELAND JOHNSON, JR.
-------------------------
Cleveland Johnson, Jr.
Director
Date March 1, 1999
-----------------
By /s/KENNETH R. O'BRIEN
---------------------
Kenneth R. O'Brien
Director
Date March 2, 1999
-----------------
By /s/JOHN R. RABEN, JR.
---------------------
John R. Raben, Jr.
Director
Date March 1, 1999
-----------------
By /s/ SALLY A. SLACKE
-------------------
Sally A. Slacke
Director
Date March 1, 1999
-----------------
By /s/ THOMAS J. WILSON, II
------------------------
Thomas J. Wilson, II
President and Director
Date March 15, 1999
-----------------
20
EXHIBIT INDEX
The Allstate Life Insurance Company of New York
Form 10-K for the year ended December 31, 1998
Exhibit No. Description
3(i) Restated Certificate of Incorporation, as amended, of Allstate Life
Insurance Company of New York
(filed herewith)
3(ii) Amended By-laws of Allstate Life Insurance Company of New York
(filed herewith)
27 Financial Data Schedule (filed herewith)
E-1