ALLSTATE LIFE INSURANCE CO OF NEW YORK - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

- --------------------------------------------------------------------------------
FORM 10-K

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.

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 333-100029

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
(Exact name of registrant as specified in its charter)

NEW YORK 36-2608394
(State of Incorporation) (I.R.S. Employer Identification No.)

ONE ALLSTATE DRIVE
FARMINGVILLE, NEW YORK 11738
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: 516-451-5300

Securities registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934: 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, 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 the Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes / / No /X/

As of March 15, 2003, the Registrant had 100,000 common shares, $25 par value,
outstanding, all of which are held by Allstate Life Insurance Company.

TABLE OF CONTENTS

* Item prepared in accordance with General Instruction I(2) of
Form 10-K
** Omitted pursuant to General Instruction I(2) of Form 10-K

ii

PART I

ITEM 1. BUSINESS

Allstate Life Insurance Company of New York ("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 when purchased by Allstate
Life Insurance Company ("ALIC"), the Company has done business as "Allstate
Life Insurance Company of New York."

Allstate Life of New York is a wholly owned subsidiary of ALIC, a stock
life insurance company incorporated under the laws of the State of Illinois.
ALIC is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a
stock property-liability insurance company incorporated under the laws of the
State of Illinois. All of the outstanding capital stock of AIC is owned by
The Allstate Corporation (the "Corporation"), a Delaware corporation which
has several different classes of securities, including common stock,
registered with the Securities and Exchange Commission ("SEC").

Allstate Life of New York, a single segment entity, markets a
diversified group of products to meet customers' lifetime needs in the areas
of financial protection and retirement solutions in the State of New York
through exclusive Allstate agencies, financial services firms, direct
marketing and specialized brokers. The Company's products include term life
insurance; whole life and universal life insurance; annuities such as fixed
annuities, market value adjusted annuities and treasury-linked annuities;
variable annuities; immediate annuities; and other protection products such
as accidental death and hospital indemnity. ALFS, Inc. ("ALFS") is the
principal underwriter for certain Allstate Life of New York investment
products, such as variable annuities and fixed annuities with a market value
adjustment feature. ALFS is a wholly owned subsidiary of ALIC and a
registered broker-dealer under the Securities Exchange Act of 1934. Also,
beginning May 1, 2000, Allstate Distributors, L.L.C. ("ADLLC"), a registered
broker-dealer under the Securities Act of 1934, provides underwriting and
distribution services for variable annuities sold pursuant to a joint venture
agreement between Allstate Life of New York and Putnam Investments, Inc.
("Putnam"). The joint venture was dissolved in late 2002; however, ADLLC
continues to provide services to Allstate Life of New York for these
products. ADLLC, upon dissolution of the joint venture with Putnam, became a
wholly owned subsidiary of ALIC.

The assets and liabilities of the variable contracts are held in legally
segregated, unitized Separate Accounts. Allstate Life of New York'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.
As of December 2001, the last year for which current information is available,
there were approximately 1,225 stock, mutual and other types of insurers in
business in the United States.

The Company is subject to changing social, economic and regulatory
conditions. State and federal regulatory initiatives and proceedings have varied
and have included efforts to remove barriers preventing banks from engaging in
the securities and insurance businesses, to change tax laws affecting the
taxation of insurance companies and the tax treatment of insurance products
which may impact the relative desirability of various personal investment
products, and to expand overall regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.

Allstate Life of New York is the issuer of certain market value adjusted
annuities registered with the SEC. Allstate Life of New York is also the
depositor of certain Separate Accounts that are registered with the SEC as unit
investment trusts and through which the Company offers variable annuity
contracts that are registered with the SEC.

ITEM 2. PROPERTIES

Allstate Life of New York occupies office space in Farmingville, New York
and Northbrook, Illinois.

1

ITEM 3. LEGAL PROCEEDINGS

Incorporated in this Item 3 by reference to the discussion under the
heading "Regulation and legal proceedings" in Note 9 to the Company's financial
statements of this Form 10-K.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no public trading market for the Company's common stock. All of
its outstanding common stock is owned by its parent, ALIC. ALIC's outstanding
common stock is owned by AIC. All of the outstanding common stock of AIC is
owned by the Corporation.

From January 1, 2001 through March 15, 2003, the Company paid no dividends
on its common stock to ALIC.

Within the past three years, no equity securities were sold by the Company
that were not registered under the Securities Act of 1933.

For additional information on dividends, including restrictions on the
payment of dividends by the Company, see the "Liquidity" subsection of the
"Capital Resources and Liquidity" section of our "Management's Discussion and
Analysis of Financial Condition and Results of Operations", which items are
incorporated herein by reference.

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 financial position of the Company. It should be
read in conjunction with the financial statements and related notes. To
conform to the 2002 presentation, certain prior year amounts have been
reclassified.

DEFINITIONS OF NON-GAAP AND OPERATING MEASURES

In addition to information presented in the financial statements, the
Company uses information other than that determined using accounting
principles generally accepted in the United States of America ("GAAP") to
analyze and report its financial position and results of operations.
Management believes that these non-GAAP and operating measures, when used in
conjunction with the financial statements, can improve the understandability
of the financial statements and allow readers to evaluate the information
used by management to analyze company performance.

OPERATING INCOME is a non-GAAP measure used by the Company's management
to supplement its evaluation of Net income. Operating income is "Income
before cumulative effect of change in accounting principle, after-tax"
excluding the effects of Realized capital gains and losses, after-tax. In
this computation, Realized capital gains and losses, after-tax is presented
net of the effects of deferred policy acquisition costs amortization and
additional future policy benefits, to the extent that such effects resulted
from the recognition of realized capital gains and losses.

Management believes that the supplemental Operating income information
presented below allows for a more complete analysis of results of operations.
The net effect of Realized capital gains and losses have been excluded due to
their volatility between periods and because such data is often excluded when
evaluating the overall financial performance of insurers. Operating income
should not be considered as a substitute for any GAAP measure of performance.
This method of calculating Operating income may be different from the method
used by other companies and therefore comparability may be limited. A
reconciliation of Operating income to Net income for the years ended December
31, is presented in the following table:

2

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

PREMIUMS AND DEPOSITS is an operating measure used by the Company's
management to analyze production trends for sales. Premiums and deposits
includes premiums on insurance policies and annuities, and all deposits and
other funds received from customers on deposit-type products which are accounted
for by the Company as liabilities, rather than as revenue. The Company's method
of calculating Premiums and deposits may be different from methods used by other
companies to measure sales and therefore comparability may be limited.

The following table illustrates where Premiums and deposits are reflected
in the financial statements.

(1) Derived directly from the Statements of Cash Flows.

OVERVIEW

The Company, a wholly owned subsidiary of ALIC, which is a wholly owned
subsidiary of AIC, a wholly owned subsidiary of the Corporation, markets a
diversified group of products to meet customers' lifetime needs in the areas of
financial protection and retirement solutions in the State of New York through
exclusive Allstate agencies, financial services firms, direct marketing and
specialized brokers. The Company's products include term life insurance; whole
life and universal life insurance; annuities such as fixed annuities, market
value adjusted annuities and treasury-linked annuities; variable annuities;
immediate annuities; and other protection products such as accidental death and
hospital indemnity.

The Company's strategies include developing and delivering
market-informed products and services, leveraging and building the Allstate
brand in financial services, building profitable long-term relationships, and
driving operational scale, efficiency and effectiveness. Consumer and
distribution partner research will be used to develop and deliver products
and services. The Company will continue to extend the Allstate brand by using
it in conjunction with more products and distribution channels, focusing on a
consistent experience for both producers and customers. The Company will
utilize consumer and producer segmentation and target building profitable,
long-term relationships with producers and consumers. To drive operational
scale, efficiency and effectiveness, the Company will focus on enhancing
operating processes and infrastructure spanning all functional areas
including product development, customer service and technology.

Management has identified the Company as a single segment entity.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company has identified four of its accounting policies that, due to
their nature, have required management to make assumptions and estimates that
are significant to the financial statements at December 31, 2002. It is
reasonably likely that changes in these assumptions and estimates could occur
from period to period, and have a material impact on the Company's financial
statements.

3

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

A brief summary of each of these critical accounting policies follows. For
a more complete discussion of the judgments and other factors affecting the
measurement of these policies, see the referenced sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A"). There is also a complete summary of the Company's significant
accounting policies in Note 2 of the financial statements.

INVESTMENTS- Fixed income securities include bonds and mortgage-backed and
asset-backed securities. All fixed income securities are carried at fair value
and are classified as available for sale. The fair value of publicly traded
fixed income securities is based on independent market quotations. The fair
value of non-publicly traded securities, primarily privately placed corporate
obligations, is based on either widely accepted pricing valuation models which
utilize internally developed ratings and independent third party data (e.g.,
term structures and current publicly traded bond prices) as inputs or
independent third party pricing sources. The valuation models use indicative
information such as ratings, industry, coupon, and maturity along with related
third party data and publicly traded bond prices to determine security specific
spreads. These spreads are then adjusted for illiquidity based on historical
analysis and broker surveys. Periodic changes in fair values are reported as a
component of Accumulated other comprehensive income on the Statements of
Financial Position and are reclassified to Net income only when supported by the
consummation of a transaction with an unrelated third party, or when declines in
fair values are deemed other than temporary.

The Company writes down to fair value a fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired. The assessment of other than
temporary impairment is performed on a case-by-case basis considering a wide
range of factors. Inherent in the Company's evaluation of a particular security
are assumptions and estimates about the operations of the issuer and its future
earnings potential. Some of the factors considered in evaluating whether a
decline in fair value is other than temporary are:
- The Company's ability and intent to retain the investment for a
period of time sufficient to allow for an anticipated recovery in
value;
- The recoverability of principal and interest;
- The duration and extent to which the fair value has been less
than amortized cost for fixed income securities;
- The financial condition, near-term and long-term prospects of the
issuer, including relevant industry conditions and trends, and
implications of rating agency actions and offering prices; and
- The specific reasons that a security is in a significant
unrealized loss position, including market conditions which could
affect liquidity.

There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if impairment is other than temporary.
These risks and uncertainties include the risks that:
- The economic outlook is worse than anticipated and has a greater
adverse impact on a particular issuer than anticipated;
- The Company's assessment of a particular issuer's ability to meet
all of its contractual obligations changes based on changes in
the facts and circumstances related to that issuer; and
- New information is obtained or facts and circumstances change
that cause a change in the Company's ability or intent to hold a
security to maturity or until it recovers in value.

These risks and uncertainties could result in a charge to earnings in
future periods to the extent that losses are realized. The charge to earnings,
while potentially significant to Net income, would not have a significant impact
on Shareholder's equity since the majority of the portfolio is held at fair
value and as a result, the related unrealized gain (loss), net of tax, would
already be reflected as Accumulated other comprehensive income in Shareholder's
equity. For a further discussion of these policies, and quantification of the
impact of these estimates and assumptions, see the Investments, Market risk and
Forward-looking statements and risk factors sections of the MD&A.

DERIVATIVE INSTRUMENTS - Derivative financial instruments include
financial futures and a re-investment related risk transfer reinsurance
agreement. Derivatives are accounted for on a fair value basis, and reported
as Other assets or Other liabilities and accrued expenses. Beginning in
January 2001, hedge accounting is not applied to those

4

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

strategies that utilize financial futures contracts for interest rate risk
management purposes. Therefore, the gains and losses pertaining to the change in
the fair value of the financial futures contracts and the reinsurance agreement
are recognized in Realized capital gains and losses during the period on a
current basis.

The fair value of the Company's exchange traded derivative contracts is
based on independent market quotations. The fair value of non-exchange traded
derivative contracts is based on valuation models which utilize independent
third party data as inputs. Periodic changes in the fair values are reported
as a component of Net income or liabilities depending on the nature of the
derivative and the program to which it relates. For further discussion of
these policies, and quantification of the impact of these estimates and
assumptions, see the Investments, Market risk and Forward-looking statements
and risk factors sections of the MD&A.

DEFERRED POLICY ACQUISITION COSTS ("DAC") - The Company establishes a
deferred asset for certain costs that vary with and are primarily related to
acquiring business. These costs, principally agents' and brokers' remuneration,
certain underwriting costs and direct mail solicitation expenses, are deferred
and amortized to income. Amortization of DAC is reflected on the Statements of
Operations and Comprehensive Income. All other acquisition expenses are charged
to operations as incurred, impacting Operating costs and expenses on the
Statements of Operations and Comprehensive Income.

For traditional life insurance and other premium paying contracts, such as
immediate annuities with life contingencies and limited payment contracts, these
costs are amortized over the premium paying period of the related policies in
proportion to the estimated revenues on such business. Assumptions relating to
estimated revenue, as well as to all other aspects of DAC and reserve
calculations, are determined based upon conditions as of the date of policy
issue and are generally not revised during the life of the policy. Any
deviations from projected business inforce, resulting from actual policy
terminations differing from expected levels, and any estimated premium
deficiencies change the rate of amortization in the period such events occur.
Generally, the amortization period for these contracts approximates the
estimated lives of the contracts.

For internal exchanges of traditional life insurance and immediate
annuities with life contingencies, the unamortized balance of costs previously
deferred under the original contracts are charged to income. The new costs
associated with the exchange are deferred and amortized to income.

For interest-sensitive life insurance, variable annuities and investment
contracts, DAC is amortized in relation to the present value of estimated
gross profits ("EGP") on such business over the estimated lives of the
contracts. Generally, the amortization period ranges from 15-30 years,
however an assumed surrender rate is also used which results in the majority
of deferred costs being amortized over the surrender charge period. The rate
of amortization during this term is matched to the pattern of EGP. EGP
consists of the following components: margins from mortality, including
guaranteed minimum death and income benefits, investment margin, including
realized capital gains and losses, contract administration, surrender and
other contract charges, less maintenance expenses. The estimation of EGP
requires judgment, including the forecasting of highly uncertain events such
as the level of surrenders at the end of a surrender charge period and, in
some cases, future equity market performance. In estimating the impact of
highly uncertain events, the Company considers historical experience as well
as current trends.

In particular, a significant degree of judgment is involved with estimating
future levels of EGP for the Company's variable annuity contracts as future fee
income and guaranteed minimum death benefits ("GMDBs") are highly sensitive to
equity market performance. The Company's variable annuity DAC amortization
methodology includes a long-term market return assumption for account values of
approximately 9.25%, or 8.0% after average morality and expense fees of 1.25%.
When market returns vary from the 8.0% long-term expectation or mean, the
Company assumes a reversion to the mean over a seven-year period, which includes
two prior years and five future years. The assumed returns over this period are
limited to a range between 0% to 13.25% after mortality and expense fees. The
costs associated with GMDBs are included in EGP. Generally, less DAC is
amortized during periods in which the GMDBs are higher than projected. However,
if projected GMDBs cause DAC to be not fully recoverable, DAC will be written
down to an amount deemed recoverable.

The Company currently performs quarterly reviews of DAC recoverability for
interest-sensitive life insurance, variable annuities and investment contracts
in the aggregate using current assumptions. Future volatility

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

in the equity markets of similar or greater magnitude may result in
disproportionate changes in the amortization of DAC.

If a change in the amount of EGP is significant, it could result in the
unamortized DAC not being recoverable, resulting in a charge which is reflected
as a component of Amortization of DAC. For quantification of the impact of these
estimates and assumptions on the Company, see the Operating income and
Forward-looking statements and risk factors sections of the MD&A.

LIFE INSURANCE RESERVES - Reserves for life-contingent contract
benefits, which relate to traditional life insurance and immediate annuities
with life contingencies, are computed on the basis of long-term actuarial
assumptions of future investment yields, mortality, morbidity, policy
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. Mortality, morbidity and policy
termination assumptions are based on Company and industry experience
prevailing at the time of issue. Expense assumptions include the estimated
effects of inflation and expenses to be incurred beyond the premium paying
period. Future investment yield assumptions are determined at the time of
issue based upon prevailing investment yields as well as forecasted
reinvestment yields. 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 reserve is recorded as a reduction in
Unrealized net capital gains and losses included in Accumulated other
comprehensive income. For further discussion of these policies, see the
Forward-looking statements and Risk factors section of the MD&A.

6

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

FINANCIAL HIGHLIGHTS
Summarized financial data and key operating measures for the years ended
and as of December 31, are presented in the following table.

(1) Further information and a reconciliation of Operating income to Net income
appear in the Definitions of Non-GAAP and Operating Measures Section of
the MD&A

(2) Further information and an illustration of where Premiums and deposits
are reflected in the financial statements appear in the Definitions of
Non-GAAP and Operating Measures Section of the MD&A.

PREMIUMS AND CONTRACT CHARGES, included in financial results, represent
GAAP premiums generated from traditional life and other insurance products and
immediate annuities with life contingencies which have significant mortality or
morbidity risk. Contract charges are generated from interest-sensitive life
insurance products, variable annuities, fixed annuities and other investment
products for which deposits are classified as contractholder funds or Separate
Accounts liabilities. Contract charges are assessed against the contractholder
account balance for maintenance, administration, cost of insurance and surrender
prior to the contractually specified dates.

The following table summarizes GAAP premiums and contract charges:

(1)Under GAAP accounting requirements, only those immediate annuities with life
contingencies are recognized in premiums. Those without life contingencies,
called period certain, are recorded directly as liabilities and generate
contract charges and investment margin.

7

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

In 2002, total GAAP premiums decreased 12.7% compared to 2001. Premiums
from immediate annuities with life contingencies decreased 14.4%. The sales mix
of immediate annuities with life contingencies and those without life
contingencies can cause fluctuations in premiums and contract charges from year
to year. Overall, immediate annuities were down 16.4% compared to prior year as
the competitive environment for structured settlement annuities and the
Company's focus on new sales meeting targeted returns reduced sales. Traditional
life GAAP premiums decreased 13.2% when compared to 2001 as a result of the
consumer shift to interest-sensitive life insurance from traditional whole life
products.

In 2001, total GAAP premiums were comparable to 2000. Increased premiums
from traditional life and other products were more than offset by a decrease in
premiums from immediate annuities with life contingencies. The increase in sales
of traditional products resulted, in part, due to an increase in retention
limits associated with third party reinsurance instituted during the year.

Contract charges increased 21.4% in 2002 compared to 2001 due primarily
to increased contract charges on interest-sensitive life insurance resulting
from increased customer account values. Variable annuity contract charges
increased 11.6% due to fees received on new deposits more than offsetting the
impact of declines in account values resulting from poor equity market
performance. Contract charges on variable annuities are generally calculated
as a percentage of account value. Variable annuities are typically invested
in equity mutual funds and therefore contract charges assessed as a
percentage of account value are impacted by equity market volatility.
Contract charges on other investment contracts decreased 14.7% compared to
prior year.

In 2001, contract charges remained fairly constant with 2000 as lower
contract charges from interest-sensitive life insurance were partially offset by
increased contract charges from variable annuities and other investment
contracts. Contract charges on immediate annuities without life contingencies,
included in other investment contract charges, increased due to an increase in
new deposits.

PREMIUMS AND DEPOSITS by product line is summarized in the following table:

Premiums and deposits increased $259.4 million or 37.7% in 2002 as compared
to 2001. In 2002, fixed annuities increased 70.3% from increased sales in the
financial services firms channel and increased focus on investment products sold
within the Allstate agencies channel. Variable annuity sales increased 49.6% in
2002 compared to 2001. Attractive crediting rates on the variable annuity
products' fixed funds drove additional sales in most distribution channels,
while an increase in the number of Allstate agents licensed to sell variable
annuity products increased their variable annuity sales to new record levels.
Interest-sensitive life insurance and other life products increased 15.3% and
3.0%, respectively, compared to 2001, as consumer preference for
interest-sensitive life insurance continues to replace traditional whole life
insurance contributing to the 17.1% decrease in traditional life products
premiums.

Premiums and deposits increased $19.0 million or 2.8% in 2001 as compared
to 2000. In 2001, fixed annuities increased 10.9% from increased sales in the
financial services firms channel and increased focus on investment products sold
within the Allstate agencies channel. Traditional life and other life products
increased

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

37.3% and 14.8%, respectively, due to strong sales stemming from a pricing
change implemented late in 2000. In 2001, interest-sensitive life insurance
products and variable annuities decreased 6.0% and 1.1%, respectively, due to
market conditions.

OPERATING INCOME is presented in the following table.

Operating income decreased 15.3% in 2002 from 2001 due primarily to an
increase in DAC amortization and higher Operating costs and expenses, partly
offset by increases in the investment and mortality margins. Operating income
increased 3.3% in 2001 compared to 2000 due to decreases in the mortality margin
being more than offset by increases in the investment margin and surrender
charges.

INVESTMENT MARGIN, which represents the excess of investment income earned
over interest credited to policyholders and contractholders, increased 14.0%
during 2002 compared to 2001. The increased investment margin is a result of
growth in portfolio balances of 24.3% as of December 31, 2002 compared to
December 31, 2001. This portfolio growth is a result of new sales of fixed and
immediate annuities. The impact of greater portfolio balances was partly offset
by a decline in portfolio yields from lower market interest rates affecting the
yield on the investment of cash flows from operations and investments. Another
development affecting investment margin was a shift to sales of investment
products with lower investment margins such as market value adjusted annuities.
Management actions taken in 2002 and 2001 to reduce crediting rates, where
contractually allowed, have partially offset the impact on investment margin
from the decline in portfolio yields.

The investment margin increased 19.2% during 2001 compared to 2000 as a
result of growth in portfolio balances of 17.7% as of December 31, 2001 compared
to December 31, 2000. This increase was primarily driven by sales of new fixed
annuities, less contract benefits, surrenders and withdrawals.

The following table summarizes the weighted average investment yields and
the weighted average interest crediting rates during 2002, 2001 and 2000.
These averages are affected by the concentration of structured settlement
annuities included in the fixed rate contracts category below.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The following table summarizes Contractholder funds and Reserve for
life-contingent contract benefits associated with the weighted average
investment yield and weighted average interest crediting rates at December 31.

MORTALITY MARGIN, which represents premiums and cost of insurance charges
less related policy benefits, increased 48.5% in 2002 compared to last year. The
mortality margins in 2001 reflect the impact of the September 11, 2001 attack on
the World Trade Center in New York City. Premiums and cost of insurance contract
charges on new business have improved the mortality margin compared to prior
year. Mortality and morbidity loss experience can cause benefit payments to
fluctuate from period to period while underwriting and pricing guidelines are
based on a long-term view of the trends in mortality and morbidity.

Mortality margin includes results from both immediate annuities with life
contingencies and traditional life insurance. For immediate
annuities with life contingencies, an increase in the death rate reduces the
number and cost of future contract benefit payments. Conversely, life insurance
contracts are favorably affected by decreases in death rates because
beneficiaries receive full death benefits but premiums are collected over a
longer period of time than expected when the product was priced. The immediate
annuities sold with life contingencies act as a hedge or offset to the risk of
increased death rates. In determining premium rates, the Company uses
underwriting and pricing guidelines with a long-term view of mortality rates.
However, the effects of mortality can cause benefit expense to fluctuate from
period to period.

Contract benefits paid include cash payments for variable annuity GMDBs
totaling $2.7 million, $955 thousand and $63 thousand for the years ended
December 31, 2002, 2001 and 2000, respectively. The increases over this
three-year period reflect poor equity market performance. Variable annuity
contractholder activity, including surrender, withdrawal, asset allocation, and
annuitization, could have a significant impact on the ultimate cost of providing
guaranteed minimum death benefits.

AMORTIZATION OF DAC, included in the Operating income table on page 9,
increased 373.0% during 2002 compared to 2001 due to the acceleration of
amortization in 2002, as discussed below, and the ongoing growth of the
business inforce. DAC amortization decreased 61.8% during 2001 compared to
2000 as amortization on interest-sensitive life insurance was decelerated in
part due to the death benefits related to the events of September 11, 2001.

The steep and sustained decline in the equity markets in 2002 changed the
amount and timing of variable annuity EGP and resulted in the acceleration of
DAC amortization, often called "DAC unlocking" on variable annuities. Declines
in equity market performance reduce future or expected fee income and may
increase the exposure to GMDB policy benefits. Such events generally reduce EGP,
which may in turn require further DAC unlocking of the variable annuity DAC
asset. Future volatility in the equity markets of similar or greater magnitude
may result in disproportionate changes in the amortization of DAC.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The following table summarizes the DAC asset balance by product.

The factors causing a change in DAC asset balances for the year ended
December 31 are summarized in the following table.

OPERATING COSTS AND EXPENSES increased 19.4% during 2002 compared to 2001
due to distribution expenses incurred on new growth initiatives and increased
administrative expenses supporting the growth of the Company. Costs and expenses
increased 30.4% during 2001 compared to 2000 due to higher marketing, technology
and distribution expenses incurred on new growth initiatives.

COMPANY OUTLOOK

- - The Company's ability to manage its investment margin is dependent upon
maintaining adequately profitable spreads between investment yields and
interest crediting rates on inforce business. As interest rates change or
remain at historically low levels, assets may be reinvested at lower yields
that compress investment margin. The Company has the ability to impact
the investment margin by changing the interest crediting rates on flexible
rate contracts. However, these changes could be limited by market
conditions, and regulatory minimum rates or contractual minimum rate
guarantees on many contracts and may not match

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

the timing or magnitude of changes in asset yields. The level of defaults
may also affect investment income. The Company will continually monitor its
risk limits related to credit quality and duration as well as monitor and
adjust its crediting rates.

- - A portion of the Company's contract charge revenue is dependent upon the
value of the accounts supporting its variable annuity products. Most
account values for these products are invested, at the discretion of the
contractholder, in Separate Accounts invested primarily in equity
securities. Therefore, future equity market performance has a
significant impact on contract charge revenue and benefit guarantees
which are key drivers of the returns on these products.

- - Variable annuity DAC is amortized in relation to the present value of
EGP over the estimated lives of the contracts. Future levels of EGP are
highly sensitive to future equity market performance. Changes in the
amount or timing of EGP may result in adjustments in the cumulative
amortization of DAC.

- - In order to maintain an acceptable target return, the Company needs to
design and sell products having interest crediting rates with adequate
spreads to investment returns. If investments with appropriate maturity
and risk adjusted returns to support pricing targets are not available,
product sales will be restricted. For this reason, fixed annuity sales
volume will vary in the future as dictated by market conditions.

- - The Company is undertaking various expense-saving initiatives to
increase profitability. These initiatives will include creating greater
efficiencies, simplifying operations and focusing on distribution among
the current channels. The efficacy of these expense-saving initiatives
is difficult to predict due to external factors and technology costs.

- - In order to compete with major insurance company competitors, as well as
non-traditional competitors such as banks, financial service firms and
securities firms, the Company will have to provide products that are
considered competitive by its distribution channels and customers.
Additionally, to meet its return targets, the Company must distribute
its products within its pricing parameters. The Company plans to focus
its efforts by deepening relationships with its more productive and more
profitable distribution partners.

INVESTMENT RESULTS

PRE-TAX NET INVESTMENT INCOME increased 13.9% in 2002 compared to 2001.
The increase was due to higher portfolio balances partially offset by
slightly lower portfolio yields. In 2002, lower portfolio yields were due to
investments made in the low interest rate environment. At December 31, 2002,
portfolio balances, excluding Separate Accounts and net unrealized gains and
losses on fixed income securities, increased 24.3% compared to December 31,
2001 due to net cash provided from operating and financing activities.

After-tax realized capital losses were $5.8 million in 2002 compared to
after-tax realized capital gains of $105 thousand in 2001. After-tax realized
capital gains and losses are presented net of the effects of DAC
amortization, to the extent that such effects resulted from the recognition
of realized capital gains and losses.

The following table describes the factors driving the after-tax realized
capital gains and losses results.

For a further discussion of realized capital gains and losses, see the
Investments discussion following.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

INVESTMENT OUTLOOK

- - As the Company continues to receive Premiums and deposits, investment of
these increased cash flows in available high quality securities with
acceptable yields will be a focus.

- - The Company expects to experience lower investment yields as positive cash
flows from operations and investment activities are invested at
market yields that are less than the average portfolio rate, and as the
lower rate environment impacts securities with variable yields.

- - The Company expects to incur realized capital losses while the corporate
credit environment remains under pressure.

INVESTMENTS

An important component of the Company's financial results is the return
on portfolio balances. The investment portfolios are managed based upon the
nature of the business and its corresponding liability structure.

The investment strategy for the Company is based upon a strategic asset
allocation framework that takes into account the need to manage on a risk
adjusted spread basis for the product portfolio and to maximize return on
capital. Generally, a combination of recognized market modeling, analytical
models and proprietary models is used to achieve a desired asset mix in the
management of the portfolio. The strategic asset allocation model portfolio
is the primary basis for setting annual asset allocation targets with respect
to interest sensitive, illiquid and credit asset allocations as well as
limitations with respect to overall below investment grade exposure and
diversification requirements. On a tactical basis, decisions are made on an
option adjusted relative value basis staying within the constraints of the
strategic asset allocation framework. The Company believes it maximizes asset
spread by selecting assets that perform on a long-term basis and by using
periodic sales of securities to minimize the effect of downgrades and
defaults. Total return measurement is used on a selective basis where the
asset risks are significant (e.g., high yield fixed income securities,
convertible bonds). The Company expects that employing this strategy will
minimize interest rate market impacts on investment income. This strategy is
also expected to provide sustainable investment-related income over time.

The composition of the investment portfolio is presented in the table
below. See Notes 2 and 4 to the financial statements for investment
accounting policies and additional information.

(1) Fixed income securities are carried at fair value. Amortized cost basis for
these securities was $3.28 billion and $2.68 billion at December 31, 2002
and 2001, respectively.

Total investments were $4.20 billion at December 31, 2002 compared to
$3.23 billion at December 31, 2001. The increase was due to positive cash
flows generated from operations and financing activities and unrealized
gains on fixed income securities.

The fair value of the Company's publicly traded marketable investment
securities is based on independent market quotations. The fair value of
non-publicly traded securities, primarily privately placed corporate
obligations, is based on either widely accepted pricing valuation models which
utilize internally developed ratings and independent third party data (e.g.,
term structures and current publicly traded bond prices) as inputs or
independent third party pricing sources. The valuation models use indicative
information such as ratings, industry, coupon, and maturity along with related
third party data and publicly traded bond prices to determine

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

security specific spreads. These spreads are then adjusted for illiquidity based
on historical analysis and broker surveys. Some factors, such as the illiquidity
premium that differentiates the private market from the public market, are
difficult to observe and to characterize. As such, the valuation process
involves key assumptions for such factors. Although these assumptions are
reviewed on a periodic basis and the Company believes that the valuation model
produces estimates that reasonably reflect the fair value of the overall
portfolio, there can be specific factors that would cause the fair value of a
particular holding to deviate from the calculated valuation.

As of December 31, 2002, the key assumptions used to estimate the fair
value of privately placed corporate obligations included the following:
- Risk free interest rates are based on the current yield curve for U.S.
Treasuries with 10 term points ranging from 1 year to 30 years.
- Current public corporate spreads for 22 sectors in 16 quality
categories are based on the Bloomberg fair market industrial yield
curve and the median Lehman sector spreads over the Bloomberg
industrial curve.
- The 22 sectors include airlines, banking, basic industry,
brokerage, capital goods, chemicals, communications, consumer
cyclical - auto, consumer cyclical - services, consumer cyclical
- others, consumer non-cyclical, electric, energy, finance
companies, insurance, natural gas, other industrial, REITS,
technology, telecommunications, transportation, and water. Since
the water sector has no public market counterpart, sector spread
for this sector is based on selected broker quotes and analyst
estimates.
- The 16 quality categories range from AAA to B3.
- An additional 25 basis points are added to public corporate spreads to
compensate for illiquidity.
- Watch-list securities are conservatively priced at the lower of
analyst price or an adjusted model price for a rating that is one
category lower and are capped at 100.

The following table shows the Company's investment portfolio, and the
sources of its fair value, at December 31, 2002.

The fair value of the Company's exchange traded derivative contracts is
based on independent market quotations. The fair value of non-exchange traded
derivative contracts is based on valuation models which
utilize independent third party data as inputs. Periodic changes in the fair
values are reported as a component of either Net income, Other comprehensive
income, assets or liabilities depending on the nature of the derivative and the
program to which it relates.

The following table shows the Company's derivative contracts, and the
sources of their fair value, at December 31, 2002.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The following table presents the amortized cost, gross unrealized gains and
losses and fair value for fixed income securities.

The Unrealized net capital gains on fixed income securities at December 31,
2002 were $453.1 million, an increase of $236.9 million or 109.6% since December
31, 2001. Unrealized losses were primarily concentrated in the corporate fixed
income portfolio.

FIXED INCOME SECURITIES

The Company's fixed income securities include bonds, such as municipal
bonds, privately placed bonds and publicly traded corporate bonds, U.S.
government bonds, mortgage-backed and asset-backed securities. All fixed income
securities are carried at fair value and are classified as available for sale.
Periodic changes in fair values are reported as a component of Other
comprehensive income net of deferred taxes, certain life and annuity DAC and
certain reserves for life-contingent benefits and are reclassified to Net income
only when supported by the consummation of a transaction with an unrelated third
party, or when declines in fair values are deemed other than temporary.

Fixed income securities issued by U.S. government and agencies of the U.S.
government totaled $608.1 million at December 31, 2002 compared to $515.2
million at December 31, 2001. All of these securities are rated investment grade
at December 31, 2002.

Municipal bonds, including tax-exempt and taxable securities, comprise
$126.2 million or 3.4% of the Company's fixed income securities portfolio at
December 31, 2002. Investment grade municipal bonds represent 99.0% of the total
$126.2 million. Approximately 4% of the municipal bond portfolio is insured by
four bond insurers and the bonds accordingly have a rating of Aaa. The municipal
bond portfolio at December 31, 2002 consisted of 13 issues from 11 issuers.

Public corporate obligations totaled $1.07 billion at December 31, 2002,
and 93.1% of these obligations were rated investment grade. As of December 31,
2002, the fixed income securities portfolio contained $1.01 billion of privately
placed corporate obligations compared to $879.7 million at December 31, 2001.
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, 2002, 90.2% of the privately
placed securities were rated as

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

investment grade by either the National Association of Insurance Commissioners
("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.

Foreign government securities totaled $242.2 million and $181.8 million at
December 31, 2002 and 2001, respectively. All of the securities were rated
investment grade at December 31, 2002.

At December 31, 2002 and 2001, $623.3 million and $442.1 million,
respectively, of the fixed income securities portfolio was invested in
mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of
securities that were issued by, or have underlying collateral that is guaranteed
by, U.S. government agencies or sponsored entities. Therefore, the MBS portfolio
has relatively low credit risk.

The MBS portfolio is subject to interest rate risk since the price
volatility and ultimate realized yield are affected by the rate of repayment of
the underlying mortgages. The Company attempts to limit interest rate risk on
these securities by investing a portion of the portfolio in securities that
provide prepayment protection. At December 31, 2002, approximately 50.6% of the
MBS portfolio was invested in planned amortization class bonds or the
equivalent.

The fixed income securities portfolio contained $58.8 million and $55.0
million of asset-backed securities ("ABS") at December 31, 2002 and 2001,
respectively. The ABS portfolio is subject to credit and interest rate risk.
Credit risk is mitigated by monitoring the performance of the collateral.
Approximately 88.1% of the ABS portfolio is rated in the highest rating category
by one or more credit rating agencies. The ABS portfolio is subject to interest
rate risk since the price volatility and ultimate realized yield are affected by
the rate of repayment of the underlying assets. Approximately 23.6% of the
Company's ABS portfolio is invested in securitized credit card receivables. The
remainder of the portfolio is backed primarily by securitized home equity,
manufactured housing, and auto loans.

At December 31, 2002, 95.4% of the Company's fixed income securities
portfolio was rated investment grade, which is defined by the Company as a
security having a rating from the NAIC of 1 or 2, a Moody's equivalent rating of
Aaa, Aa, A or Baa, or a comparable Company internal rating.

The following table summarizes the credit quality of the fixed income
securities portfolio.

(IN THOUSANDS)

All of the securities with a NAIC rating of 5 or 6 and 38% of securities
with an NAIC rating of 4 are reflected in securities defined as problem or
potential problem as described on page 18. These securities represent 0.7% of
the fixed income securities portfolio at December 31, 2002.

FIXED INCOME PORTFOLIO MONITORING

The Company writes down to fair value any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired. Inherent in the Company's
evaluation of a particular security are assumptions and estimates about the
operations of the issuer and its future

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

earnings potential. Some of the factors considered in evaluating whether a
decline in fair value is other than temporary are:
- The Company's ability and intent to retain the investment for a
period of time sufficient to allow for an anticipated recovery
in value;
- The recoverability of principal and interest;
- The duration and extent to which the fair value has been less
than amortized cost for fixed income securities;
- The financial condition, near-term and long-term prospects of
the issuer, including relevant industry conditions and trends,
and implications of rating agency actions and offering prices;
and
- The specific reasons that a security is in a significant
unrealized loss position, including market conditions which
could affect liquidity.

There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if an impairment is other than temporary.
These risks and uncertainties include the risks that:
- The economic outlook is worse than anticipated and has a
greater adverse impact on a particular issuer than anticipated;
- The Company's assessment of a particular issuer's ability to
meet all of its contractual obligations changes based on
changes in the facts and circumstances related to that issuer;
and
- New information is obtained or facts and circumstances change
that cause a change in the Company's ability or intent to hold
a security to maturity or until it recovers in value.

These risks and uncertainties could result in a charge to earnings in
future periods to the extent that losses are realized. The charge to
earnings, while potentially significant to Net income, would not have a
significant impact on Shareholder's equity since the majority of the
portfolio is held at fair value and as a result, the related unrealized gain
(loss), net of tax, would already be reflected as Accumulated other
comprehensive income in Shareholder's equity.

The Company has an extensive monitoring process to identify fixed income
securities whose carrying value may be other than temporarily impaired. This
process includes a quarterly review of all securities using a screening process
to identify those securities whose fair value compared to amortized cost for
fixed income securities is below established thresholds and time periods, or
which are identified through other monitoring criteria such as ratings
downgrades or payment defaults. Securities with an unrealized loss of greater
than 20% of their amortized cost for fixed income securities for a period of six
months or more, are identified through this process. The securities identified,
in addition to other securities for which the Company may have concern, are
evaluated based on facts and circumstances for inclusion on a watch list.
Securities on the watch list are reviewed in detail to determine whether any
other than temporary impairment exists.

The following table contains the individual securities as of December 31,
2002, with the ten largest unrealized losses:

(IN THOUSANDS)

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The Company monitors the quality of its fixed income portfolio, in part, by
categorizing certain investments as problem, restructured or potential problem.
Problem fixed income securities are securities in default with respect to
principal and/or interest and/or securities issued by companies that have gone
into bankruptcy subsequent to the Company's acquisition of the security.
Restructured fixed income securities have modified terms and conditions that
were not at current market rates or terms at the time of the restructuring.
Potential problem fixed income securities are current with respect to
contractual principal and/or interest, but because of other facts and
circumstances, management has serious concerns regarding the borrower's ability
to pay future principal and interest, which causes management to believe these
securities may be classified as problem or restructured in the future.

The following table summarizes problem and potential problem fixed income
securities at December 31.

The Company has experienced an increase in its balance of fixed income
securities categorized as problem or potential problem as of December 31, 2002
compared to December 31, 2001. The Company had no fixed income securities
categorized as restructured at December 31, 2002 or 2001. The increases in
problem and potential problem assets primarily resulted from poor operating
fundamentals as well as liquidity constraints in the utilities, transportation
and energy sectors of the market in 2002. The Company expects eventual recovery
in these sectors but evaluated each fixed income security in these sectors
through its watch list process at December 31, 2002 and recorded write-downs
when appropriate. Approximately $2.3 million of gross unrealized losses at
December 31, 2002 are related to securities that the Company has included in the
problem or potential problem categories. These securities represent 0.7% of the
fixed income portfolio. The Company concluded, through its watch list monitoring
process that these unrealized losses were temporary in nature. While it is
possible for these balances to increase in the future if economic conditions
continue to be unfavorable, the total amount of securities in these categories
is expected to remain a relatively low percentage of the total fixed income
securities portfolio.

The following table describes the components of pre-tax realized capital
gains and losses.

Fixed income write-downs of $15.8 million during 2002 represent 0.4% of the
average total investments during the year.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The Company recorded, for the year ended December 31, 2002, $3.9 million in
net gains from sales of fixed income securities, which is comprised of gross
gains of $11.7 million and gross losses of $7.8 million. Gross losses from sales
of fixed income securities of $7.8 million combined with investment write-downs
of $15.8 million and gross losses on derivatives of $4.1 million, represent the
total gross realized losses of $27.7 million on fixed income securities for
2002.

The $7.8 million in losses from sales of fixed income securities primarily
related to a decision to reduce exposure to certain holdings due to severely
constrained liquidity conditions in the market and routine reductions of
exposure to deteriorating credits.

The following list details the five largest realized losses from
write-downs by issuer, the related circumstances giving rise to the loss and
a discussion of how those circumstances may have impacted other material
investments held.

- A $7.0 million write-down on a global energy and utility company,
which missed coupon payments due to severely constrained liquidity.
Some sectors in the utility industry continue to be under fundamental
pressure. The Company is monitoring developments closely and each
security in the industry is evaluated for impairment in the
watch list process.
- A $2.6 million write-down on securities issued by a major U.S. airline
that filed for bankruptcy. The Company has no other securities of this
issuer and currently expects to hold its existing positions until they
recover in value or mature. The U.S. airline industry is under stress.
The Company monitors its investments in airline issuers closely,
particularly with regard to collateral values.
- A $1.9 million write-down on senior unsecured securities issued by a
seismic data and related geophysical services company that has been
experiencing negative financial results and liquidity pressures. The
circumstances of this impairment are not expected to have a material
impact on the other investments.
- A $1.4 million write-down on collateralized debt obligation notes. The
loss resulted from the decline in value of the portfolio of high-yield
bonds securing the notes. The circumstances of this impairment are not
expected to have a material impact on the other investments.
- A $1.3 million write-down on a major U.S. airline that filed for
bankruptcy. The loss primarily relates to an unsecured issue whose
collateral value is insufficient. The U.S. airline industry is under
stress. The Company monitors its investments in airline issuers
closely, particularly with regard to collateral values.

MORTGAGE LOANS

The Company's $323.1 million investment in mortgage loans at December 31,
2002 and $242.7 million at December 31, 2001 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. The Company had no realized capital gains
related to prepayments and write-downs on mortgage loans at December 31, 2002.
At December 31, 2001 and 2000, the Company had realized capital gains related to
prepayments and write-downs on mortgage loans of $119 thousand and $697
thousand, respectively.

SHORT-TERM INVESTMENTS

The Company's short-term investment portfolio was $104.2 million and $57.5
million at December 31, 2002 and 2001, 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.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The Company participates in securities lending programs, primarily as an
investment yield enhancement with third parties, such as large brokerage firms.
The Company obtains collateral in an amount that approximates 102% of the fair
value of loaned securities and monitors the market value of the securities
loaned on a daily basis with additional collateral obtained as necessary. At
December 31, 2002, fixed income securities with a carrying value of $160.0
million have been loaned under these agreements. This compares to $140.3 million
at December 31, 2001. In return for these securities, the Company receives cash
that is subsequently invested in either Fixed income securities or Short-term
investments with an offsetting liability recorded in other liabilities.

SEPARATE ACCOUNTS

Separate Accounts assets and liabilities decreased 10.9% to $537.2 million
at December 31, 2002 from $602.7 million at December 31, 2001. The decrease was
primarily attributable to declines in account values due to poor equity market
performance partially offset by additional deposits from new sales and transfers
from the fixed account fund to variable Separate Accounts funds.

The assets and liabilities related to variable annuity contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried at
the fair value of the assets. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and
therefore, are not included in the Company's Statements of Operations and
Comprehensive Income. Revenues to the Company from the Separate Accounts consist
of contract maintenance and administration fees and mortality, early surrender
and expense charges.

Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
contractholders bear the investment risk that the underlying mutual funds of the
Separate Accounts may not meet their stated investment objectives.

REINSURANCE RECOVERABLES

Reinsurance recoverable decreased $181 thousand, or 7.8%, to $2.1 million
at December 31, 2002 from $2.3 million at December 31, 2001. Reinsurance
recoverable decreased due to benefits paid partially offset by an increase in
traditional life insurance product reserves. The Company purchases reinsurance
to limit aggregate and single losses on large risks. The Company continues to
have primary liability as a direct insurer for risks reinsured. Estimating
amounts of reinsurance recoverable is impacted by the uncertainties involved in
the establishment of loss reserves. Failure of reinsurers to honor their
obligations could result in losses to the Company.

The Company purchases reinsurance after evaluating the financial condition
of the reinsurer, as well as the terms and price of coverage. The Company
reinsures certain of its risks to reinsurers under yearly renewable term and
coinsurance agreements. Yearly renewable term and coinsurance agreements result
in the passing of a portion of the risk to the reinsurers. Generally, the
reinsurer receives a proportionate amount of the premiums less commissions and
is liable for a corresponding proportionate amount of all benefit payments.

Beginning in 2002, the Company cedes 80% of the mortality risk on certain
term life policies to a pool of eight reinsurers. Mortality risk on policies in
excess of $250 thousand per life are ceded to ALIC.

The Company has a reinsurance treaty through which it cedes
re-investment related risk on its structured settlement annuities to ALIC.
The terms of this treaty meet the accounting definition of a derivative under
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Accordingly, the treaty is
recorded in the Statement of Financial Position at fair value, and changes in
the fair value of the treaty are recognized in Realized capital gains and
losses. Premiums paid to ALIC are included in Operating costs and expenses.

As of December 31, 2002, $3.40 billion or 17.9% of life insurance in force
was ceded to other companies.

The Company continuously monitors the credit worthiness of reinsurers. As
of December 31, 2002, all non-affiliated ceded premiums were reinsured under
uncollateralized reinsurance agreements with companies that had

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

a financial strength rating above investment grade level, as measured by at
least one of the major rating agencies. In certain cases, these ratings refer to
the financial strength of the affiliated group or parent company of the
reinsurer.

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
exposures are 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 results
of 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 investments
purchased in the future or 3) use derivative instruments to modify the market
risk characteristics of existing assets and liabilities or assets expected to be
purchased. For a more detailed discussion of these derivative financial
instruments, see Note 5 to the financial statements.

CORPORATE OVERSIGHT

The Company generates substantial investable funds from its business
operations. In formulating and implementing policies for investing funds, the
Company seeks to earn returns that enhance its ability to offer competitive
rates and prices to customers while contributing to attractive and stable
profits and long-term capital growth for the Company. Accordingly, the Company's
investment decisions and objectives are a function of its underlying risks and
product profiles.

The Company administers and oversees its investment risk management
processes primarily through its Board of Directors, Investment Committee and the
Credit and Risk Management Committee ("CRMC"). The Board of Directors and
Investment Committee provide executive oversight of investment activities and
set investment strategies, guidelines and policy that delineates the investment
limits and strategies that are appropriate given the Company's liquidity,
capital, product portfolios and regulatory requirements. The CRMC is a senior
investment 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 investment risk. The CRMC meets at least monthly to
provide detailed oversight of investment risk, including market risk.

The Company manages its exposure to market risk through the use of asset
allocation limits and duration limits. It also uses stress tests when
appropriate. Asset allocation limits place restrictions on the aggregate fair
value that may be invested within an asset class. The Company sets duration
limits on its investment portfolios, and, in certain circumstances, on
individual components of these portfolios. These duration limits place a
restriction on the level of interest rate risk which is acceptable in the
investment portfolios. 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 the investment policy. The Company
has implemented a comprehensive daily measurement process, administered by the
Investment Risk Manager, for monitoring compliance to limits established by the
investment policy.

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 carries certain interest-sensitive
liabilities.

The Company seeks to invest Premiums and deposits to generate future
cash flows that will fund future claims, benefits and expenses, and that will
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 and a reinsurance treaty with ALIC (see Note 3) to hedge the interest
rate risk related to anticipatory purchases and sales of investments and
product sales to customers.

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 by 1%, the fair value of an asset
with a duration of 5 is expected to decrease in value by approximately 5%. At
December 31, 2002 and 2001, the difference between the Company's liability and
asset duration was

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

approximately 1.0 and 1.1, respectively. This positive 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's liabilities are
more sensitive than the assets due to structured settlement annuities, which
make up a significant portion of the liabilities. Structured settlement
liabilities have benefits that are paid over an extended period of time and may
be significantly longer than the duration of fixed income securities that are
available to support the liabilities. The risk introduced by structured
settlements is mitigated through the use of reinsurance and by managing the
duration of the investment portfolios supporting other liability products so
that those liabilities have durations shorter than their assets.

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 liabilities and annuity liabilities. The projections include
assumptions (based upon historical market experience and Company specific
experience) reflecting the impact of changing interest rates on the prepayment,
lapse, leverage and/or option features of instruments, where applicable. The
assumptions utilized relate primarily to assets such as mortgage-backed
securities, collateralized mortgage obligations, callable corporate and
municipal obligations, and liabilities including fixed rate single and flexible
premium annuities.

Based upon the information and assumptions the Company uses in its duration
calculation and interest rates in effect at December 31, 2002, 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 $6.4 million versus an increase of $5.9
million at December 31, 2001. However, there are $217.6 million of assets
supporting life insurance products which are not financial instruments and have
not been included in the above analysis. This amount has increased from the
$199.3 million in assets reported for December 31, 2001. According to the
duration calculation, in the event of a 100 basis point immediate increase in
interest rates, these assets would decrease in value by $4.1 million versus a
decrease of $5.4 million for December 31, 2001. The selection of a 100 basis
point immediate parallel increase in interest rates should not be construed as a
prediction by the Company's management of future market events, but only as an
illustration of the potential impact of such an event.

To the extent that conditions 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 (referred to as 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 a mutual fund or stock index.

At December 31, 2002 and 2001, the Company had Separate Accounts assets
with account values totaling $537.2 million and $602.7 million, respectively.
The Company earns contract charges as a percentage of these account values. In
the event of an immediate decline of 10% in the account values at December 31,
2002 and 2001 due to equity market declines, the Company would earn
approximately $892 thousand and $916 thousand less in annualized fee income,
respectively.

22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

Generally at the time of purchase, the contractholders of variable annuity
contracts receive a GMDB and, for certain contracts, may elect to purchase an
enhanced GMDB or guaranteed minimum income benefit ("GMIB"). The Company charges
a fee for this guarantee that is generally calculated as a percentage of the
account value. Both types of guarantees subject the Company to additional equity
risk as the beneficiary or contractholder may receive a benefit for an amount
greater than the account value under contractually defined circumstances and
terms. GMDBs may be payable upon death, while GMIBs may be payable on or after
the ten-year anniversary of the contract if the contractholder elects to receive
a defined stream of payments ("annuitize").

Substantially all of the Company's variable annuity contracts inforce
contain some type of GMDBs. In general, the types of guarantees offered include
a return of deposits or the highest anniversary value. At December 31, 2002 and
2001, the guaranteed value in excess of contractholders' account values, payable
if all contractholders were to die, was estimated to be $200.6 million and
$118.8 million, respectively. The increase in this measure is attributable to
the decline in equity markets during 2002. In both periods, approximately
two-thirds of this exposure is related to the return of deposits guarantee,
while the remaining one-third is attributable to a death benefit guarantee
greater than the original deposits.

The estimated present value of expected future payments for GMDBs, net of
estimated fee revenue, is approximately $3.2 million at December 31, 2002
compared to $950 thousand at December 31, 2001. This estimate considers the
current guarantees outstanding for all contracts that contain GMDBs and expected
fund performance to calculate expected future GMDB payments for the next 40
fiscal quarters. The assumptions and methodology used to determine the present
value of the future GMDB payments are consistent with those used for DAC
amortization. The increase in this estimate in 2002 is primarily attributable to
the decline in account value due to the continued decline in the equity markets
during the year. Management also estimates the impact to its expected future
GMDB payments in the event of extreme adverse market conditions. For example, in
the event of an immediate decline of 10% in contractholders' account values as
of December 31, 2002 due to equity market declines, expected payments for
guaranteed death benefits would increase by $1.5 million during the next year.
The selection of a 10% immediate decrease should not be construed as a
prediction by management of future market events, but only as an example to
illustrate the potential impact to earnings and cash flow of equity market
declines as a result of this guarantee. Also, the Company's actual payment
experience in the future may not be consistent with the assumptions used in its
model.

The GMIBs offered by the Company include the right to annuitize based on
the highest account value at any contract anniversary date. The Company began
offering these guarantees in certain of its variable annuity contracts in 2002,
therefore based on contract specifications, these benefits will not be available
for election by the contractholders until at least 2012. The guaranteed value in
excess of contractholders' account values at December 31, 2002 payable over the
annuity period if all contractholders were to elect to annuitize, was estimated
to be $15 thousand. To calculate this measure, the current interest rate
environment is utilized in the assumptions.

Growth in variable contracts in the future stemming from new sales will
increase the Company's amount of overall exposure to equity price risk embedded
in these contracts. An increase in the equity markets above December 31, 2002
levels will increase the contractholder returns on these products, thereby
decreasing the risk of utilizing these guarantees on the inforce business. A
decrease in the equity markets that causes a decrease in the variable contracts'
account balances will increase the equity risk profile of the inforce business
as is demonstrated in the December 31, 2002 measurements compared to the
December 31, 2001 measurements disclosed and discussed above.

The Company also is exposed to equity risk in its DAC, as equity portfolio
valuation fluctuations impact DAC amortization because projected fee income and
guaranteed benefits payable are components of the EGP for variable annuity
contracts. Poor equity market performance could result in DAC not being
recoverable or in accelerated DAC amortization. For a more detailed discussion
of DAC, see Note 2 to the financial statements.

23

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

The Company's capital resources consist of shareholder's equity. The
following table summarizes the Company's capital resources at December 31:

SHAREHOLDER'S EQUITY

Shareholder's equity increased in 2002 when compared to December 31, 2001,
due to an increase of $50.7 million in Accumulated other comprehensive income,
Net income of $24.2 million and a capital contribution of $10.0 million from
ALIC. In 2001, shareholder's equity increased as a result of Net income of $35.4
million and an increase of $753 thousand in Accumulated other comprehensive
income.

FINANCIAL RATINGS AND STRENGTH

The Company's insurance financial strength was rated Aa2, AA+, and A+ by
Moody's, Standard & Poor's and A.M. Best, respectively, at December 31, 2002.

None of these ratings were changed during 2002. The Company's and ALIC's
insurance financial strength ratings have remained at the same consistently
high levels for the last five years (Aa2 "excellent" by Moody's, AA and AA+
"very strong" by Standard & Poor's and A+ "superior" by A.M. Best). On a
relative basis, these rating positions have improved in light of the
significant volume of rating downgrades of other companies in the industry
during 2002. Since February 2002, Standard & Poor's rating outlook for ALIC
and its rated subsidiaries, including the Company, has been "negative". In
November 2002, Standard & Poor's reaffirmed the AA+ rating of ALIC and the
Company, but left the outlook unchanged. In January 2003, A.M. Best Company
newly assigned a "positive" rating outlook for AIC, ALIC, the Company and
selected affiliates.

The Company's ratings are influenced by many factors including operating
and financial performance, asset quality, asset/liability management, overall
portfolio mix, the amount of financial leverage (i.e., debt), exposure to risks,
as well as the current level of operating leverage.

The NAIC has a standard for assessing the solvency of insurance companies,
which is referred to as risk-based capital ("RBC"). The standard is based on 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
establishes capital requirements relating to insurance, business, asset and
interest rate risks. At December 31, 2002, RBC for the Company was significantly
above levels that would require regulatory actions.

The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or action from insurance regulatory
authorities. The NAIC analyzes data provided by insurance companies using
prescribed financial data ratios each with defined "usual ranges." Generally,
regulators will begin to monitor an insurance company if its ratios fall outside
the usual ranges for four or more of the ratios. If an insurance company has
insufficient capital, regulators may act to reduce the amount of insurance it
can issue. The Company is currently not under regulatory scrutiny based on these
ratios.

24

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

LIQUIDITY

The principal, potential sources of funds for the Company include the following
activities:

Premiums and deposits
Reinsurance recoveries
Receipts of principal, interest and dividends on investments
Sales of investments
Funds from securities lending
Inter-company loans
Capital contributions from ALIC

The principal, potential uses of funds for the Company include the following
activities:

Payment of contract benefits, maturities, surrenders and withdrawals
Reinsurance cessions and payments
Operating costs and expenses
Purchase of investments
Repayment of securities lending
Repayment of inter-company loans
Dividends to ALIC

The Company's operations typically generate substantial positive cash flows
from operations as most premiums are received in advance of the time when claim
and benefit payments are required. These positive operating cash flows are
expected to continue to meet the liquidity requirements of the Company.

A portion of the Company's diversified product portfolio, primarily fixed
annuities and interest-sensitive life insurance products, is subject to
discretionary surrenders and withdrawals by contractholders. Total surrenders
and withdrawals for 2002 were $162.1 million compared with $106.5 million for
last year. The increase was driven primarily from increased surrenders of
variable annuities resulting from poor equity market conditions in 2002. As the
Company's interest-sensitive life insurance policies and annuity contracts
inforce grow and age, the dollar amount of surrenders and withdrawals could
increase. While the overall amount of surrenders may increase in the future, a
significant increase in the level of surrenders relative to total contractholder
account balances is not anticipated.

The Company has entered into an inter-company loan agreement with the
Corporation. The amount of inter-company loans available to the Company is at
the discretion of the Corporation. The maximum amount of loans the Corporation
will have outstanding to all its eligible subsidiaries at any given point in
time is limited to $1.00 billion. No amounts were outstanding for the Company
under the inter-company loan agreement at December 31, 2002 or 2001. The
Corporation uses commercial paper borrowings and bank lines of credit to fund
intercompany borrowings.

Although the Corporation considers the occurrence of such events to be
remote, certain events and circumstances could constrain the Corporation's
liquidity. Those events and circumstances include, for example, a catastrophe
resulting in extraordinary losses, a downgrade in the Corporation's long-term
debt rating of A1 and A+ (from Moody's and Standard & Poor's, respectively) to
non-investment grade status of below Baa3/BBB-, a downgrade in AIC's financial
strength rating from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M.
Best, respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the
Company's financial strength ratings from Aa2, AA+ and A+ (from Moody's,
Standard & Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. The rating
agencies also consider the interdependence of the Corporation's individually
rated entities, and therefore a rating change in one entity could potentially
affect the ratings of other related entities. In addition, management knows of
no trends, demands, commitments, events or uncertainties that are reasonable
likely to significantly constrain the Corporation's or the Company's liquidity.

25

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The following table summarizes the contractual obligations of the Company
as of December 31, 2002 and the payments due by period.

(1) Securities lending, dollar rolls and repurchase transactions are typically
fully collateralized with marketable securities. The Company manages its
short-term liquidity position to ensure the availability of a sufficient
amount of liquid assets to extinguish liabilities as they come due in the
normal course of business.
(2) The putable/callable Funding agreement program is very closely
asset/liability duration matched by the Company. Accordingly, upon
surrender or maturity of the related contracts, the Company maintains
assets with a sufficient market value to extinguish the liabilities in the
normal course of business.

At December 31, 2002, the Company had $14.0 million in contractual
conditional commitments to invest in private placements or mortgage loans.

REGULATIONS AND LEGAL PROCEEDINGS

The Company is subject to changing social, economic and regulatory
conditions. State and federal regulatory initiatives and proceedings have varied
and have included efforts to remove barriers preventing banks from engaging in
the securities and insurance businesses, to change tax laws affecting the
taxation of insurance companies and the tax treatment of insurance products
which may impact the relative desirability of various personal investment
products, and to expand overall regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.

The Company sells its products through a variety of distribution channels
including Allstate agencies. Consequently, the outcome of some legal proceedings
that involve AIC regarding the Allstate agencies may have an impact on the
Company.

AIC is defending various lawsuits involving worker classification issues.
Examples of these lawsuits include a number of putative class actions
challenging the overtime exemption claimed by AIC under the Fair Labor Standards
Act or state wage and hour laws. These class actions mirror similar lawsuits
filed recently against other insurance carriers in the industry and other
employers. Another example involves the worker classification of staff working
in agencies. In this putative class action, plaintiffs seek damages under the
Employee Retirement Income Security Act ("ERISA") and the Racketeer Influenced
and Corrupt Organizations Act alleging that agency secretaries were terminated
as employees by AIC and rehired by agencies through outside staffing vendors for
the purpose of avoiding the payment of employee benefits. A putative nationwide
class action filed by former employee agents also includes a worker
classification issue; these agents are challenging certain amendments to the
Agents Pension Plan and are seeking to have exclusive agent independent
contractors treated as employees for benefit purposes. AIC has been vigorously
defending these and various other worker classification lawsuits. The outcome of
these disputes is currently uncertain.

In addition, on August 6, 2002, a petition was filed with the National
Labor Relations Board ("NLRB") by the United Exclusive Allstate Agents, Office
and Professional Employees International Union (the "OPEIU"), seeking
certification as the collective bargaining representative of all Allstate agents
in the United States. On December 2, 2002, the Chicago Regional Director of the
NLRB dismissed the petition, agreeing with AIC's position that the agents are
independent contractors, not employees, and that, consequently, the NLRB lacks
jurisdiction over the issue. The OPEIU has requested that the NLRB in
Washington, D.C. review the dismissal by the Chicago Regional Director. The
request for appeal has not been accepted yet. If it is, AIC will vigorously
oppose the appeal. The outcome is currently uncertain.

AIC is also defending certain matters relating to its agency program
reorganization announced in 1999. These matters include an investigation by the
U.S. Department of Labor and a lawsuit filed in December 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") with respect to allegations of
retaliation under the

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

Age Discrimination in Employment Act, the Americans with Disabilities Act and
Title VII of the Civil Rights Act of 1964. A putative nationwide class action
has also been filed by former employee agents alleging various violations of
ERISA, breach of contract and age discrimination. AIC has been vigorously
defending these lawsuits and other matters related to its agency program
reorganization. In addition, AIC is defending certain matters relating to its
life agency program reorganization announced in 2000. These matters include an
investigation by the EEOC with respect to allegations of age discrimination and
retaliation. AIC is cooperating fully with the agency investigation and will
continue to vigorously defend these and other claims related to the life agency
program reorganization. The outcome of these disputes is currently uncertain.

Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the potential target of an
increasing number of class action lawsuits and other types of litigation, some
of which involve claims for substantial and/or indeterminate amounts (including
punitive and treble damages) and the outcomes of which are unpredictable. This
litigation is based on a variety of issues including insurance and claim
settlement practices. However, at this time, based on their present status, it
is the opinion of management that the ultimate liability, if any, in one or more
of these other actions in excess of amounts currently reserved is not expected
to have a material effect on the results of operations, liquidity or financial
position of the Company.

STATE INSURANCE REGULATION

State insurance authorities have broad administrative powers with respect
to all aspects of the life insurance business including:
- Licensing to transact business
- Licensing agents
- Admittance of assets to support statutory surplus
- Approving policy forms
- Regulating unfair trade and claims practices
- Establishing reserve requirements and solvency standards
- Regulating the type, amounts and valuations of investments
permitted and other matters

State insurance laws require the Company to file statutory-basis financial
statements with the insurance department in the State of New York. The
operations of the Company and the accounts are subject to examination by the
department at any time. The Company prepares statutory-basis financial
statements in accordance with accounting practices and procedures prescribed or
permitted by the state of New York.

State insurance departments conduct periodic examinations of the books and
records, financial reporting, policy filings and market conduct of insurance
companies domiciled in their states, generally once every three to five years.
Examinations are generally carried out in cooperation with the insurance
departments of other states under guidelines promulgated by the NAIC.

MARKET CONDUCT REGULATION

State insurance laws and regulations include numerous provisions governing
the marketplace activities of insurers, including provisions governing the form
and content of disclosure to customers, illustrations, advertising, sales
practices and complaint handling. State regulatory authorities generally enforce
these provisions through periodic market conduct examinations.

FEDERAL REGULATION AND SECURITIES OPERATIONS

The Company's variable annuity products generally are considered securities
within the meaning of federal and state securities laws and are registered under
the Securities Act of 1933 and are subject to regulation by the SEC, the
National Association of Securities Dealers ("NASD") and state securities
regulations. The Company's Separate Accounts are registered as unit investment
trusts under the Investment Company Act of 1940.

27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

GUARANTY FUNDS

Under state insurance guaranty fund laws, insurers doing business in a
state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to policyholders and claimants. Amounts assessed
to each company are typically related to its proportion of business written in a
particular state. The Company's expenses related to these funds have been
immaterial.

OTHER DEVELOPMENTS

Effective January 1, 2001, the State of New York required insurance
companies domiciled in its state to prepare statutory-basis financial statements
in accordance with the NAIC Accounting Practices and Procedures Manual
("Codification") subject to any deviations prescribed or permitted by the State
of New York insurance superintendent.

The Company prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the State of New York.
Prescribed statutory accounting practices include a variety of publications of
the NAIC, as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.

Accounting changes adopted to conform to the provisions of Codification are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods. The State of New York has recently adopted
Statement of Statutory Accounting Principles ("SSAP") No. 10, Income Taxes,
which is effective for statutory-basis financial statements filed as of December
31, 2002 and thereafter. The Company reported an increase to surplus of $11.4
million effective December 31, 2002 to reflect the adoption of SSAP No. 10 by
the State of New York as a result of recognizing a net deferred tax asset.

PENDING ACCOUNTING STANDARDS

On July 31, 2002, the American Institute of Certified Public Accountants
issued an exposure draft Statement of Position ("SOP") entitled "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts". The accounting guidance contained in the
proposed SOP applies to several of the Company's products and product features.
The proposed effective date of the SOP is fiscal years beginning after December
15, 2003, with earlier adoption encouraged. If adopted early, the provisions of
the SOP must be applied as of the beginning of the fiscal year. Accordingly, if
the SOP were adopted during an interim period of 2003, prior interim periods
would be restated. A provision of the proposed SOP requires the establishment of
a liability in addition to the account balance for contracts and contract
features that provide guaranteed death or other insurance benefits. The
finalized SOP may also require a liability for guaranteed income benefits. These
liabilities are not currently recognized by the Company, and their establishment
may have a material impact on the Statements of Operations and Comprehensive
Income depending on the market conditions at the time of adoption, but is not
expected to have a material impact on the Company's Statements of Financial
Position.

The Financial Accounting Standards Board ("FASB") has exposed guidance
that addresses the accounting for certain modified coinsurance agreements.
The guidance has been exposed as FASB Interpretation of Statement 133
Implementation Issue No. B36, "Embedded Derivatives: Bifurcation of a Debt
Instrument That Incorporates Both Interest Rate Risk and Credit Risk
Exposures That Are Unrelated or Only Partially Related to the
Creditworthiness of the Issuer of That Instrument." The proposed guidance
requires recognizing an embedded derivative in certain reinsurance agreements
when certain conditions are met. The initial impact of adopting the proposed
guidance would be recorded as a cumulative adjustment to Net income in the
first fiscal quarter beginning after June 15, 2003. The Company has no
reinsurance arrangements that would be subject to the proposed guidance.
Accordingly, the potential impact of recognizing embedded derivatives
pursuant to the requirements of the proposed guidance is expected to be
immaterial to both the Company's Statements of Financial Position and
Statements of Operations and Comprehensive Income.

28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This document contains "forward-looking statements" that anticipate results
based on management's estimates, assumptions and plans that are subject to
uncertainty. These statements are made subject to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company assumes no
obligation to update any forward-looking statements as a result of new
information or future events or developments.

These forward-looking statements do not relate strictly to historical or
current facts and may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "estimates," "intends," "believes," "likely,"
and other words with similar meanings. These statements may address, among other
things, the Company's strategy for growth, product development, regulatory
approvals, market position, expenses, financial results and reserves. Management
believes that these statements are based on reasonable estimates, assumptions
and plans. However, if the estimates, assumptions or plans underlying the
forward-looking statements prove inaccurate or if other risks or uncertainties
arise, actual results could differ materially from those communicated in these
forward-looking statements. In addition to the normal risks of business, the
Company is subject to significant risk and uncertainties, including those listed
below which apply to it as an insurance business and a provider of other
financial services.

- - New York requires insurers to participate in guaranty funds for impaired or
insolvent insurance companies. Such funds periodically assess losses to all
insurance companies doing business in the state. These assessments may be
material to the Company's financial results.

- - There is uncertainty involved in the availability of non-affiliate
reinsurance and estimating the collectibility of reinsurance
recoverables. This uncertainty arises from a number of factors,
including whether losses meet the qualifying conditions of the
reinsurance contracts and whether the reinsurers, or their affiliates,
have the financial capacity and willingness to pay.

- - The Corporation is continuing to examine the potential exposure of its
operations to acts of terrorism and to evaluate methods of addressing
this exposure in the best interests of shareholders, policyholders, the
lending community and regulators. In the event that a terrorist act
occurs, the Company may be adversely impacted, depending on the nature
of the event. The Corporation is also evaluating the impact of the
federal "Terrorism Risk Insurance Act of 2002" (the "Act") on the
nature, availability and affordability of commercial insurance coverage
for terrorism and the consequent impact on the Company's investments
portfolio, particularly in sectors such as airlines and real estate. The
Act established a temporary federal program providing for a system of
shared public and private compensation for certain insured commercial
property and casualty losses resulting from acts of terrorism, as
defined by the Act.

- - Changes in market interest rates can have adverse effects on the Company's
investment portfolio, investment income, product sales, results of
operations and retention of existing business. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing the fair values of fixed income securities.
Declining market interest rates could have an adverse impact on the
Company's investment income as the Company reinvests proceeds from positive
cash flows from operations and from maturities, calls and
prepayments of investments into new investments that could yield less than
the portfolio's average rate.

- - A declining market could negatively impact the credit quality of the
Company's investment portfolio as adverse equity markets also affect
issuers of securities held by the Company. Declines in the quality of the
portfolio could cause additional realized losses on securities.

- - Changes in interest rates could also reduce the profitability of the
Company's spread-based products, particularly interest-sensitive life
insurance and investment products, as the difference between the amount
that the Company is required to pay on such products and the rate of return
earned on the related investments could be reduced. Changes in market
interest rates as compared to rates offered on some of the Company's
products could make those products less attractive if competitive
investment margins are not maintained, leading to lower sales and/or
changes in the level of surrenders and withdrawals for these products. The

29

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

Company's products generally have the flexibility to adjust crediting rates
to reflect higher or lower investment returns. However, this flexibility is
limited by contractual minimum crediting rates. Additionally, unanticipated
surrenders could cause acceleration of amortization of DAC or impact the
recoverability of DAC and thereby increase expenses and reduce current
period profitability. The Company seeks to limit its exposure to this risk
by regularly monitoring DAC recoverability as well as offering a diverse
group of products, periodically reviewing and revising crediting rates and
providing for surrender charges in the event of early withdrawal.

- - The Company amortizes DAC related to interest-sensitive life insurance and
investment contracts in proportion to EGP over the estimated lives of the
contracts. Periodically, the Company updates the assumptions underlying the
EGP, which include margins from mortality, including guaranteed minimum
death and income benefits, investment margin, including realized capital
gains and losses, contract administration, surrender and other contract
charges, less maintenance expenses, in order to reflect actual and expected
experience and its potential impact to the valuation of DAC. Updates to
these assumptions could result in adjustment to the cumulative amortization
of DAC. For example, reduced EGP resulting from declines in contract
charges assessed against declining Separate Accounts' balances resulting
from poor equity market performance could result in accelerated
amortization of DAC. An adjustment, if any, may have a material effect on
the results of operations.

- - The impact of decreasing Separate Accounts balances resulting from
volatile equity market conditions, underlying fund performance and the
performance of distributors could cause contract charges earned by the
Company to decrease and lead to an increase in exposure to pay GMDBs and
GMIBs. Poor fund performance could also result in higher partial
withdrawals of account value which, for some contracts, do not reduce
the GMDB in a proportional amount. In addition, it is possible that the
assumptions and projections used by the Company in establishing prices
for the GMDBs and GMIBs, particularly assumptions and projections about
investment performance, do not accurately anticipate the level of costs
the Company will ultimately incur in providing those benefits,
resulting in adverse mortality margin trends that may have a material
effect on results of operations. These factors may result in accelerated
DAC amortization and require increases in statutory reserves which
reduce the Company's statutory capital and surplus.

- - Conditions in the U.S. and international stock markets can have an impact
on the Company's variable annuity sales. In general, sales of variable
annuities increase when the stock markets are rising over an extended
period of time and decrease when stock markets are falling over an extended
period of time.

- - In order to meet the anticipated cash flow requirements of its obligations
to policyholders, from time to time the Company manages the effective
duration gap between investments and liabilities for contractholder funds
and reserves for life-contingent contract benefits. Adjustments made to
modify durations may have an impact on the value of the investment
portfolio, investment income, interest credited to contractholder funds
and the investment margin.

- - Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not be made until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums to be received over
the assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premiums received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations.

- - State and federal laws and regulations affect the taxation of insurance
companies and life insurance and annuity products. From time to time,
Congress has considered proposals that, if enacted, could impose a greater
tax burden on the Company or could have an adverse impact on the federal
income tax treatment of some insurance products offered by the Company,
including the favorable policyholder tax treatment currently applicable to
deferred and immediate annuities, and life insurance, including
interest-sensitive life

30

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

insurance. Such proposals have included legislation relating to the
deferral of taxation on the accretion of value within certain annuities and
life insurance products. Recent proposals to eliminate the double taxation
of dividends and to permit the establishment of tax-free lifetime savings
and retirement savings accounts could substantially reduce the
tax-advantaged nature of many insurance products. If such proposals were to
be adopted, they could have a material adverse effect on the Company's
financial position or the Company's ability to sell such products and could
result in the surrender of some existing contracts and policies. In
addition, recent changes in the federal estate tax laws have negatively
affected the demand for the types of life insurance used in estate
planning.

- - The Company distributes some of its products under agreements with other
members of the financial services industry that are not affiliated with the
Company. Termination of one or more of these agreements due to, for
example, changes in control of any of these entities, could have a
detrimental effect on the Company's sales. This risk may be exacerbated due
to the enactment of the Gramm-Leach-Bliley Act of 1999, which eliminated
many federal and state law barriers to affiliations among banks, securities
firms, insurers and other financial service providers.

- - The Company is taking various expense-saving steps to increase
profitability. These steps include restructuring management and
organizations, simplifying operations and processes and focusing on key
distributors in its distribution channels. The efficacy of these
expense saving initiatives is difficult to predict due to external
factors such as the stock market impact on pension and other benefit
expenses, the extent of future guaranty fund assessments, and
technology costs. Also, sales could be impacted negatively by
distribution being concentrated in fewer partners.

- - The Company is affiliated with various entities registered under the
federal securities laws as broker-dealers, investment advisers and/or
investment companies. These entities are subject to the regulatory
jurisdiction of the SEC, NASD and/or, in some cases, state securities
administrators. The laws regulating the securities products and activities
of the entities are complex, numerous and subject to change. As with any
highly regulated industry, there is some degree of risk of regulatory
non-compliance; however ALIC has in place various legal and compliance
personnel, procedures and systems designed to reasonably assure compliance
with these requirements.

- - While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could
be constrained by a catastrophe, or multiple catastrophes, which result
in extraordinary losses, a downgrade of the Corporation's long-term
debt rating of A1 and A+ (from Moody's and Standard & Poor's,
respectively) to non-investment grade status of below Baa3/BBB-, a
downgrade of AIC's insurance financial strength rating from Aa2, AA and
A+ (from Moody's, Standard & Poor's and A.M. Best, respectively) to
below Baa/BBB/B+, or a downgrade in ALIC's or the Company's insurance
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard
& Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event
of a downgrade of the Corporation's or AIC's rating, ALIC and its
subsidiaries including the Company, could also experience a similar
downgrade.

- - The events of September 11, 2001, and the resulting disruption in the
financial markets revealed weaknesses in the physical and operational
infrastructure that underlies the U.S. and worldwide financial systems.
Those weaknesses did not impair the Company's liquidity in the wake of
September 11, 2001. However, if an event of similar or greater magnitude
occurred in the future and if the weaknesses in the physical and
operational infrastructure of the U.S. and worldwide financial systems are
not remedied, the Company could encounter significant difficulties in
transferring funds, buying and selling securities and engaging in other
financial transactions that support its liquidity.

- - Insurance financial strength ratings are an important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers and could downgrade or change a
company's ratings due to, for example, a decline in the value of a
company's investment portfolio or increased liabilities for variable
contracts due to additional GMDB and GMIB exposure resulting from market
declines. A multiple level downgrade of the Corporation, AIC, ALIC or the
Company, while not expected, could have a material adverse affect on the
Company's sales, including the

31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

competitiveness of the Company's product offerings, its ability to market
products, and its financial condition and results of operations. Also, the
rating agencies have a variety of policies and practices regarding the
relationships among ratings of affiliated entities. As such, the ratings of
the Company or ALIC could be affected by changes in ratings of AIC and/or
the Corporation.

- - State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures generally require the Company to maintain insurance
financial strength ratings. These restrictions affect the Company's ability
to pay shareholder dividends to ALIC and to use its capital in other ways.

- - An exposure draft SOP entitled "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" applies to several of the Company's products and
product features. A provision requires the establishment of a liability
in addition to the account balance for contracts and contract features
that provide guaranteed death or other insurance benefits. The Company
does not currently hold liabilities for GMDB features covered by the SOP
or GMIBs. However, these benefits are included in the EGP calculation used
when evaluating DAC. If the SOP is adopted, the Company's establishment of
these liabilities could have a material impact on the Statements of
Operations and Comprehensive Income depending on the market conditions
at the time of adoption, but it is not expected to have a material
impact on the Company's Statements of Financial Position.

- - Portions of the non-publicly traded marketable investment securities are
accounted for at fair value using internally developed, widely accepted
valuation models and independent third party data as model inputs. Changes
in the fair value of any security could negatively impact the
Corporation's, AIC's, ALIC's and the Company's net income, shareholder's
equity, assets, liabilities and debt-to-capital ratio.

- - In recent years, the state insurance regulatory framework has come under
increased federal scrutiny and legislation that would provide for optional
federal chartering of insurance companies has been introduced in Congress.
In addition state legislators and insurance regulators continue to examine
the appropriate nature and scope of state insurance regulation. The Company
cannot predict whether any state or federal measures will be adopted to
change the nature or scope of the regulation of the insurance business or
what effect any such measures would have on the Company.

- - The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act of 1999, the Glass Steagall Act of
1933 had limited the ability of banks to engage in securities-related
businesses and the Bank Holding Company Act of 1956 had restricted banks
from being affiliated with insurers. With the passage of the
Gramm-Leach-Bliley Act of 1999, bank holding companies may acquire insurers
and insurance holding companies may acquire banks. In addition,
grandfathered unitary thrift holding companies, including the Corporation,
may engage in activities that are not financial in nature. The ability of
banks to affiliate with insurers may materially adversely affect all of the
Company's product lines by substantially increasing the number, size and
financial strength of potential competitors.

- - Like other members of the insurance industry, the Company is the potential
target of an increasing number of class action lawsuits and other types of
litigation, some of which involve claims for substantial and/or
indeterminate amounts (including punitive and treble damages) and the
outcomes of which are unpredictable. GAAP prescribes when the Company has a
contingent liability and may reserve for particular risks, including
litigation exposures. Therefore, results for a given period could be
significantly adversely affected when a reserve is established for
litigation.

- - The design of any system of controls and procedures, including internal
controls and disclosure controls and procedures, is based in part upon
assumptions about the likelihood of future events. As a result, there can
be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

- - The impact of The Sarbanes-Oxley Act of 2002 on the business of the Company
is being evaluated but cannot be completely determined at this time.

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 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.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this report and under
the supervision and with the participation of the Company's management,
including the principal executive officer and principal financial officer, the
Company evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures with respect to its annual reports on Form
10-K and its current reports on Form 8-K to be filed with the SEC. Based upon
that evaluation, the principal executive officer and the principal financial
officer concluded that these disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in the Company's annual reports on Form 10-K and its current reports
on Form 8-K. "Disclosure controls and procedures" are those controls and
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. They include controls and
procedures designed to ensure that information required to be disclosed by the
Company in reports that it files or submits under that Exchange Act is
accumulated and communicated to the Company's management, including the
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.

In addition, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of This Report

1. Financial Statements. The Registrant's financial statements, as of
December 31, 2002 and 2001 and for the years ended December 31, 2002,
2001 and 2000, together with the Independent Auditors' Report are set
forth on pages F-1 to F-26 of this report.

2. Financial Statement Schedules. The following are included in Part IV
of this report:

Schedule IV - Reinsurance page F-27

Schedule V - Valuation and Qualifying Accounts page F-28

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.

33

3. Exhibits. The exhibits required to be filed by Item 601 of
Regulation S-K are listed under the caption "Exhibits" in Item 15(c).

(b) A Current Report on Form 8-K was filed during the fourth quarter of 2002 on
the following date for the item indicated

December 3, 2002 Item 5 Other Events - reporting developments on
a petition before the
National Labor Relations
Board.

(c) Exhibits

34

Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended March
31, 2002.

10.7 Tax Sharing Agreement dated as of November 12, 1996
among The Allstate Corporation and certain
affiliates. Incorporated herein by reference to
Exhibit 10.4 to Northbrook Life Insurance Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002.

10.8 Underwriting Agreement between Allstate Life
Insurance Company of New York and ALFS, Inc.,
effective October 1, 1996. Incorporated herein by
reference to Exhibit 10.1 to Allstate Life Insurance
Company of New York's Quarterly Report on Form 10-Q
for quarter ended June 30, 2002.

10.9 Principal Underwriting Agreement between Allstate Life
Insurance Company of New York and Allstate
Distributors, L.L.C., effective May 1, 2000.
Incorporated herein by reference to Exhibit 10.2 to
Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended June
30, 2002.

10.10 Business Operations and Service Agreement between
Allstate Life Insurance Company of New York and
Allstate Life Insurance Company effective October
1,1997. Incorporated herein by reference to Exhibit
10.4 to Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended June
30, 2002.

10.11 Reinsurance Agreement between Allstate Life Insurance
Company and Allstate Life Insurance Company of New
York effective January 1, 1984 as amended by Amendment
No. 1 effective September 1, 1984, Amendment No.2
effective January 1, 1987, Amendment No.3 effective
October 1, 1988, Amendment No.4 effective January 1,
1994 and Amendment No.5 effective December 31, 1995.
Incorporated herein by reference to Exhibit 10.6 to
Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended June
30, 2002.

10.12 Agreement and Assumption Reinsurance Agreement between
Allstate Life Insurance Company and Allstate Life
Insurance Company of New York effective July 1, 1984.
Incorporated herein by reference to Exhibit 10.7 to
Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended June
30, 2002.

10.13 Reinsurance Agreement between Allstate Life Insurance
Company and Allstate Life Insurance Company of New
York, effective January 1, 1986, as amended by
Amendment No.1 effective December 31, 1995 and
Amendment No.2 effective December 1, 1995.
Incorporated herein by reference to Exhibit 10.8 to
Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended June
30, 2002.

10.14 Reinsurance Agreement between Allstate Life Insurance
Company and Allstate Life Insurance Company of New
York, effective January 1, 1991, as amended by
Amendment No.1 effective December 31, 1995.
Incorporated herein by reference to Exhibit 10.9 to
Allstate Life Insurance Company of New York's
Quarterly Report on Form 10-Q for quarter ended June
30, 2002.

23 Independent Auditors' Consent

35

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Allstate Life Insurance Company of New York
(Registrant)

March 24, 2003 /s/ Samuel H. Pilch
-------------------
By: Samuel H. Pilch
(chief accounting officer and duly authorized
officer of the registrant)

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.

36

/s/ Phyllis Hill Slater Director March 19, 2003
- -----------------------
Phyllis Hill Slater

/s/ Michael J. Velotta Director March 19, 2003
- ----------------------
Michael J. Velotta

/s/ Patricia W. Wilson Director March 19, 2003
- ----------------------
Patricia W. Wilson

37

CERTIFICATIONS

I, Casey J. Sylla, certify that:

1. I have reviewed this annual report on Form 10-K of Allstate Life Insurance
Company of New York;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

/s/ Casey J. Sylla
-------------------

Chairman of the Board and
President

38

I, Steven E. Shebik, certify that:

1. I have reviewed this annual report on Form 10-K of Allstate Life Insurance
Company of New York;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

/s/ Steven E. Shebik
--------------------

Vice President and
Chief Financial Officer

39

CERTIFICATIONS
PURSUANT TO 18 UNITED STATES CODE SECTION 1350

Each of the undersigned hereby certifies that to his knowledge the annual
report on Form 10-K for the fiscal year ended December 31, 2002 of Allstate Life
Insurance Company of New York (the "Company") filed with the Securities and
Exchange Commission fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that the information contained
in such report fairly presents, in all material respects, the financial
condition and results of operations of the Company. This certification
accompanies this annual report on Form 10-K pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such
Act, be deemed filed by Allstate Life Insurance Company of New York for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.

Date: March 24, 2003

/s/ Casey J. Sylla
-------------------
Casey J. Sylla
Chairman of the Board and President

/s/ Steven E. Shebik
---------------------
Steven E. Shebik
Vice President and Chief Financial Officer

40

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12
OF THE SECURITIES EXCHANGE ACT OF 1934

All of the outstanding common stock of the Company is owned by ALIC. The
Company has not provided any of the following items to security holders:

(1) annual reports to security holders covering the registrant's last
fiscal year; or
(2) proxy statements, forms of proxy or other proxy soliciting
materials.

41

FINANCIAL STATEMENTS

INDEX

42

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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and
2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. 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 5, 2003

F-1

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See notes to financial statements.

F-2

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION

See notes to financial statements.

F-3

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SHAREHOLDER'S EQUITY

See notes to financial statements.

F-4

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS

See notes to financial statements.

F-5

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

1. GENERAL

BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Allstate Life
Insurance Company of New York (the "Company"), a wholly owned subsidiary of
Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate
Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation
(the "Corporation"). These financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
("GAAP").

To conform to the 2002 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.

Non-cash investment exchanges and modifications, which primarily reflect
refinancings of fixed income securities, totaled $5.4 million for 2002. Non-cash
transactions of $256 thousand have been excluded from investment purchases and
sales for 2001 on the Statements of Cash Flows to conform to current period
presentation. There were no exchanges or modifications in 2001 or 2000 and no
non-cash transactions in 2000.

NATURE OF OPERATIONS
The Company markets a diversified group of products to meet customers'
lifetime needs in the areas of financial protection and retirement solutions in
the state of New York through exclusive Allstate agencies, financial services
firms, direct marketing and specialized brokers. The Company's products include
term life insurance; whole life and universal life insurance; annuities such as
fixed annuities, market value adjusted annuities and treasury-linked annuities;
variable annuities; immediate annuities; and other protection products such as
accidental death and hospital indemnity. Although the Company currently benefits
from agreements with financial service entities that market and distribute its
products, change in control of these non-affiliated entities with which the
Company has distribution agreements could negatively impact the Company's sales.

The Company monitors economic and regulatory developments that have the
potential to impact its business. Federal legislation has allowed banks and
other financial organizations to have greater participation in the securities
and insurance businesses. This legislation may present an increased level of
competition for sales of the Company's products. Furthermore, state and
federal laws and regulations affect the taxation of insurance companies and
life insurance and annuity products. From time to time, Congress has
considered proposals that, if enacted, could impose a greater tax burden on
the Company or could have an adverse impact on the federal income tax
treatment of some insurance products offered by the Company, including
favorable policyholder tax treatment currently applicable to deferred and
immediate annuities, and life insurance, including interest-sensitive life
insurance. Recent proposals to eliminate the double taxation of dividends
and to permit the establishment of tax-free lifetime savings and retirement
savings accounts could substantially reduce the tax-advantaged nature of many
insurance products. If such proposals were to be adopted, they could have a
material adverse effect on the Company's financial position or ability to
sell such products and could result in the surrender of some existing
contracts and policies. In addition, recent changes in the federal estate
tax laws have negatively affected the demand for the types of life insurance
used in estate planning.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS
Fixed income securities include bonds and asset-backed and mortgage-backed
securities. All fixed income securities are carried at fair value and are
classified as available for sale. The fair value of publicly traded fixed income
securities is based upon independent market quotations. The fair value of
non-publicly traded securities, primarily privately placed corporate
obligations, is based on either widely accepted pricing valuation models which
utilize internally developed ratings and independent third party data (e.g.,
term structures and current publicly traded bond prices) as inputs or
independent third party pricing sources. The valuation models use indicative
information such as ratings, industry, coupon, and maturity along with related
third party data and publicly traded bond prices to determine security specific
spreads. These spreads are then adjusted for illiquidity based on historical
analysis and broker surveys. Periodic changes in fair values are reported as a
component of Other comprehensive income net of deferred taxes, certain life and
annuity deferred policy acquisition costs and certain reserves for
life-contingent benefits and are reclassified to Net income only when supported
by the consummation of a transaction with an unrelated third party, or when
declines in fair values are deemed other than temporary. Cash received from
calls, principal payments and make-whole payments is reflected as a component of
Proceeds from sales, and cash received from maturities and pay-downs is
reflected as a component of Investment collections on the Statements of Cash
Flows.

F-6

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 that
approximates fair value, and generally include the reinvestment of collateral
received in connection with certain securities lending activities. For
securities lending transactions, the Company records an offsetting liability in
Other liabilities and accrued expenses for the Company's obligation to repay the
collateral. Other investments, which consist primarily of policy loans, are
carried at the unpaid principal balances.

Investment income consists of interest that is recognized on an accrual
basis. 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. They include gains and losses on security dispositions,
write-downs in value due to other than temporary declines in fair value, and
changes in the value of certain derivative instruments.

The Company writes down to fair value any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired. Inherent in the Company's
evaluation of a particular security are assumptions and estimates about the
operations of the issuer and its future earnings potential. Some of the factors
considered in evaluating whether a decline in fair value is other than temporary
are: 1) the Company's ability and intent to retain the investment for a period
of time sufficient to allow for an anticipated recovery in value; 2) the
recoverability of principal and interest; 3) the duration and extent to which
the fair value has been less than amortized cost for fixed income securities; 4)
the financial condition, near-term and long-term prospects of the issuer,
including relevant industry conditions and trends, and implications of rating
agency actions and offering prices; and 5) the specific reasons that a security
is in a significant unrealized loss position, including market conditions which
could affect access to liquidity.

DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as of January 1, 2001. The impact of SFAS No. 133 and SFAS No. 138
(the "statements") to the Company was a loss of $147 thousand, after-tax, and is
reflected as a cumulative effect of change in accounting principle on the
Statements of Operations and Comprehensive Income.

The statements require that all derivatives be recognized on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through Net income. If the derivative is designated as 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 Net income or recognized in Accumulated other
comprehensive income until the hedged item is recognized in Net income.

The Company manages interest rate risk by holding financial futures
contracts that are derivative financial instruments and by a re-investment
related risk transfer reinsurance agreement with ALIC that meets the
accounting definition of a derivative (See Note 3). Derivatives are accounted
for on a fair value basis, and reported as Other assets or Other liabilities
and accrued expenses, as appropriate. Beginning in January 2001, hedge
accounting is not applied to the strategies which utilize the financial
futures contracts for interest rate risk management purposes. Therefore, the
gains and losses pertaining to the change in the fair value of the financial
futures contracts and the re-investment risk related transfer reinsurance
agreement are recognized in Realized capital gains and losses during the
period on a current basis.

F-7

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

SECURITIES LOANED
Securities loaned are treated as financing arrangements and are recorded in
Short-term investments, Fixed income securities and Other liabilities and
accrued expenses at the amount of cash received. The Company obtains collateral
in an amount equal to 102% of the fair value of securities. The Company monitors
the market value of securities loaned on a daily basis with additional
collateral obtained as necessary. Substantially all of the Company's securities
loaned are with large brokerage firms.

RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED
Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Premiums from these products are recognized as revenue when
due. Benefits are recognized in relation to such revenue so as to result in the
recognition of profits over the life of the policy and are reflected in contract
benefits.

Immediate annuities with life contingencies, including certain structured
settlement annuities, provide insurance protection over a period that extends
beyond the period during which premiums are collected. Gross premiums in excess
of the net premium on immediate annuities with life contingencies are deferred
and recognized over the contract period. Contract benefits are recognized in
relation to such revenue so as to result in the recognition of profits over the
life of the policy.

Interest-sensitive life insurance contracts, such as universal life, are
insurance contracts whose terms are not fixed and guaranteed. The terms that may
be changed include premiums paid by the contractholder, interest credited to the
contractholder account balance and any amounts assessed against the
contractholder account balance. Premiums from these contracts are reported as
Contractholder funds deposits. Contract charges consist of fees assessed against
the contractholder account balance for the cost of insurance (mortality risk),
contract administration and surrender charges. These revenues are recognized
when levied against the contractholder account balance. Contract benefits
include life-contingent benefit payments in excess of the contractholder account
balance.

Contracts that do not subject the Company to significant risk arising
from mortality or morbidity are referred to as investment contracts. Fixed
annuities, market value adjusted annuities and immediate annuities without
life contingencies are considered investment contracts. Deposits received for
such contracts are reported as Contractholder funds. Contract charges for
investment contracts consist of charges assessed against the contractholder
account balance for contract administration and surrender charges. These
revenues are recognized when levied against the contractholder account
balance.

Interest credited to contractholder funds represents interest accrued or
paid for interest-sensitive life contracts and investment contracts.
Crediting rates for fixed rate annuities and interest-sensitive life
contracts are adjusted periodically by the Company to reflect current market
conditions subject to contractually guaranteed rates.

Variable annuity contracts are sold as Separate Accounts products. The
assets supporting these products are legally segregated and available only to
settle Separate Accounts contract obligations. Deposits received are reported
as Separate Accounts liabilities. Contract charges for these contracts
consist of fees assessed against the Separate Accounts account values for
contract maintenance, administration, mortality, expense and surrenders.
Contract benefits incurred include guaranteed minimum death benefits paid on
variable annuity contracts.

DEFERRED POLICY ACQUISITION COSTS
The Company establishes a deferred asset for certain costs that vary
with and are primarily related to acquiring business. These costs,
principally agents' and brokers' remuneration, certain underwriting costs and
direct mail solicitation expenses, are deferred and recorded as Deferred
policy acquisition costs ("DAC"). All other acquisition expenses are charged
to operations as incurred and included in Operating costs and expenses on the
Statements of Operations and Comprehensive Income. DAC is periodically
reviewed as to recoverability and written down when necessary.

For traditional life insurance and other premium paying contracts, such as
immediate annuities with life contingencies and limited payment contracts, these
costs are amortized over the premium paying period of the related policies in
proportion to the estimated revenue on such business. Assumptions relating to
estimated

F-8

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

revenue, as well as to all other aspects of the DAC and reserve calculations,
are determined based upon conditions as of the date of policy issue and are
generally not revised during the life of the policy. Any deviations from
projected business inforce, resulting from actual policy terminations differing
from expected levels, and any estimated premium deficiencies change the rate of
amortization in the period such events occur. Generally, the amortization period
for these contracts approximates the estimated lives of the contracts.

For internal exchanges of traditional life insurance and immediate
annuities with life contingencies, the unamortized balance of costs previously
deferred under the original contracts are charged to income. The new costs
associated with the exchange are deferred and amortized to income.

For interest-sensitive life insurance, variable annuities and investment
contracts, DAC is amortized in relation to the present value of estimated gross
profits ("EGP") on such business over the estimated lives of the contracts.
Generally, the amortization period ranges from 15-30 years, however an assumed
surrender rate is also used which results in the majority of deferred costs
being amortized over the surrender charge period. The rate of amortization
during this term is matched to the pattern of EGP. EGP consists of the following
components: margins from mortality, including guaranteed minimum death and
income benefits, investment margin, including realized capital gains and losses,
and contract administration, surrender and other contract charges less
maintenance expenses. The estimation of EGP requires judgment, including the
forecasting of highly uncertain events such as the level of surrenders at the
end of a surrender charge period and, in some cases, future equity market
performance. In estimating the impact of highly uncertain events, the Company
considers historical experience as well as current trends.

In particular, a significant degree of judgment is involved with estimating
future levels of EGP for the Company's variable annuity contracts as future fee
income and guaranteed minimum death benefits ("GMDBs") are highly sensitive to
equity market performance. The Company's variable annuity DAC amortization
methodology includes a long-term market return assumption for account values of
approximately 9.25%, or 8.0% after average mortality and expense fees of 1.25%.
When market returns vary from the 8.0% long-term expectation or mean, the
Company assumes a reversion to the mean over a seven-year period, which includes
two prior years and five future years. The assumed returns over this period are
limited to a range between 0% to 13.25% after mortality and expense fees. The
costs associated with GMDBs are included in EGP. Generally, less DAC is
amortized during periods in which the GMDBs are higher than projected. However,
if projected GMDBs cause DAC to be not fully recoverable, DAC will be written
down to an amount deemed recoverable.

Changes in the amount or timing of EGP result in adjustments to the
cumulative amortization of DAC. All such adjustments are reflected in the
current results of operations.

The Company currently performs quarterly reviews of DAC recoverability for
interest-sensitive life insurance, variable annuities and investment contracts
in the aggregate using current assumptions. Future volatility in the equity
markets of similar or greater magnitude may result in disproportionate changes
in the amortization of DAC. If a change in the amount of EGP is significant, it
could result in the unamortized DAC not being recoverable, resulting in a charge
which is reflected as a component of Amortization of deferred policy
acquisitions costs on the Statements of Operations and Comprehensive Income.

REINSURANCE RECOVERABLES
In the normal course of business, the Company seeks to limit aggregate and
single exposure to losses on large risks by purchasing reinsurance from other
insurers (See Note 8). The amounts reported in the Statements of Financial
Position include amounts billed to reinsurers on losses paid as well as
estimates of amounts expected to be recovered from reinsurers on incurred losses
that have not yet been paid. Reinsurance recoverables on unpaid losses are
estimated based upon assumptions consistent with those used in establishing the
liabilities related to the underlying reinsured contract. Insurance liabilities
are reported gross of reinsurance recoverables. Prepaid reinsurance premiums are
deferred and reflected in income in a manner consistent with the recognition of
premiums on the reinsured contracts. Reinsurance does not extinguish the
Company's primary liability under the policies written and therefore reinsurers
and amounts recoverable are regularly evaluated by the Company and allowances
for uncollectible reinsurance are established as appropriate.

The Company has a reinsurance treaty through which it cedes primarily
re-investment related risk on its structured settlement annuities to ALIC. The
terms of this treaty meet the accounting definition of a derivative under SFAS
No. 133. Accordingly, the treaty is recorded in the Statement of Financial
Position at fair value, and

F-9

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

changes in the fair value of the treaty are recognized in Realized capital gains
and losses. Premiums paid to ALIC are included in Operating costs and expenses
(See Note 3).

INCOME TAXES
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
unrealized capital gains and losses on certain investments, insurance reserves
and deferred policy acquisition costs. A deferred tax asset valuation allowance
is established when there is uncertainty that such assets would be realized.

SEPARATE ACCOUNTS
The assets and liabilities related to variable annuity contracts are
legally segregated and recorded as assets and liabilities of the Separate
Accounts. The assets of the Separate Accounts are carried at fair value.
Separate Accounts liabilities represent the contractholders' claims to the
related assets and are carried at the fair value of the assets. Investment
income and realized capital gains and losses of the Separate Accounts accrue
directly to the contractholders and therefore, are not included in the Company's
Statements of Operations and Comprehensive Income. Revenues to the Company from
the Separate Accounts consist of contract maintenance and administration fees
and mortality, surrender and expense risk charges reflected as Contract charges.
Deposits to the Separate Accounts are not included in the Statements of Cash
Flows.

Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
contractholders bear the investment risk that the underlying mutual funds of the
Separate Accounts may not meet their stated investment objectives.

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The Reserve for life-contingent contract benefits, which relates to
traditional life insurance and immediate annuities with life contingencies, are
computed on the basis of long-term actuarial assumptions of 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.
Mortality, morbidity and termination assumptions are based on Company and
industry experience prevailing at the time of issue, and expense assumptions
include the estimated effects of inflation and expenses to be incurred beyond
the premium paying period. Future investment yield assumptions are determined at
the time of issue based upon prevailing investment yields as well as forecasted
reinvestment yields. 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 reserve is recorded as a reduction in
Unrealized net capital gains and losses included in Accumulated other
comprehensive income.

CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of interest-sensitive life
insurance policies and investment contracts. Deposits received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received and interest credited to the benefit of the contractholder less
surrenders and withdrawals, mortality charges and administrative expenses.
Detailed information on crediting rates and surrender and withdrawal provisions
on contractholder funds are outlined in Note 6.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend mortgage loans have off-balance-sheet risk because
their contractual amounts are not recorded in the Company's Statements of
Financial Position. The contractual amounts and fair values of these instruments
are outlined in Note 5.

USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

F-10

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

PENDING ACCOUNTING STANDARDS

On July 31, 2002, the American Institute of Certified Public Accountants
issued an exposure draft Statement of Position ("SOP") entitled "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts". The accounting guidance contained in the
proposed SOP applies to several of the Company's products and product features.
The proposed effective date of the SOP is fiscal years beginning after December
15, 2003, with earlier adoption encouraged. If adopted early, the provisions of
the SOP must be applied as of the beginning of the fiscal year. Accordingly, if
the SOP were adopted during an interim period of 2003, prior interim periods
would be restated. A provision of the proposed SOP requires the establishment of
a liability in addition to the account balance for contracts and contract
features that provide guaranteed death or other insurance benefits. The
finalized SOP may also require a liability for guaranteed income benefits. These
liabilities are not currently recognized by the Company, and their establishment
may have a material impact on the Statements of Operations and Comprehensive
Income depending on the market conditions at the time of adoption, but is not
expected to have a material impact on the Company's Statements of Financial
Position.

The FASB has exposed guidance that addresses the accounting for certain
modified coinsurance agreements. The guidance has been exposed as FASB
Interpretation of Statement 133 Implementation Issue No. B36, "Embedded
Derivatives: Bifurcation of a Debt Instrument That Incorporates Both Interest
Rate Risk and Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Issuer of That Instrument." The
proposed guidance requires recognizing an embedded derivative in certain
reinsurance agreements when certain conditions are met. The initial impact of
adopting the proposed guidance would be recorded as a cumulative adjustment
to Net income in the first fiscal quarter beginning after June 15, 2003. The
Company has no reinsurance arrangements that would be subject to the proposed
guidance. Accordingly, the potential impact of recognizing embedded
derivatives pursuant to the requirements of the proposed guidance is expected
to be immaterial to both the Company's Statements of Financial Position and
Statements of Operations and Comprehensive Income.

3. RELATED PARTY TRANSACTIONS

REINSURANCE
The Company has reinsurance agreements with ALIC in order to limit
aggregate and single exposure on large risks and to reduce re-investment related
risk on its structured settlement annuity business. 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 recoverables 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 (See Note 8). Additionally, the Company
entered into a reinsurance treaty through which it primarily cedes re-investment
related risk on its structured settlement annuities to ALIC. Under the terms of
the treaty, the Company pays a premium to ALIC that varies with the aggregate
structured settlement annuity reserve balance, which was $1.75 billion at
December 31, 2002. In return, ALIC guarantees that the yield on the portion of
the Company's investment portfolio that supports structured settlement annuity
liabilities will not fall below contractually determined rates. During 2002, the
Company ceded premium to ALIC of $2.4 million related to structured settlement
annuities that is included in Operating costs and expenses.

STRUCTURED SETTLEMENT ANNUITIES
The Company issued $23.8 million, $23.7 million and $16.2 million of
structured settlement annuities, a type of immediate annuity, in 2002, 2001 and
2000, respectively, at prices based upon interest rates in effect at the time of
issuance, to fund structured settlement annuities in matters involving AIC. Of
these amounts, $7.5 million, $4.9 million and $4.5 million relate to structured
settlement annuities with life contingencies and are included in premium income
in 2002, 2001 and 2000, respectively. Additionally, the reserve for
life-contingent contract benefits was increased by approximately 94% of such
premium received in each of these years. In most cases, these annuities were
issued to Allstate Settlement Corporation ("ASC") for cases issued prior to July
1, 2001 and to Allstate Assignment Company ("AAC") for cases issued after July
1, 2001. Both are subsidiaries of ALIC, which, under a "qualified assignment",
assumed AIC's obligation to make the future payments to annuitants.

F-11

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

AIC has issued surety bonds to guarantee the payment of structured
settlement benefits assumed by ASC (from both AIC and non-related parties) and
funded by certain annuity contracts issued by the Company. ASC has entered into
General Indemnity Agreements pursuant to which it indemnified AIC for any
liabilities associated with the surety bonds and gives AIC certain collateral
security rights with respect to the annuities and certain other rights in the
event of any defaults covered by the surety bonds. For contracts written on or
after July 1, 2001, AIC no longer issues surety bonds to guarantee the payment
of structured settlement benefits. Alternatively, ALIC guarantees the payment of
structured settlement benefits on all contracts issued on or after July 1, 2001.

Reserves recorded by the Company for annuities covered by the surety bonds
were $1.43 billion and $1.40 billion at December 31, 2002 and 2001,
respectively.

BUSINESS OPERATIONS
The Company utilizes services performed by its affiliates, AIC, ALIC and
Allstate Investments LLC as well as business facilities owned or leased, and
operated by AIC in conducting its business activities. In addition, the Company
shares the services of employees with AIC. The Company reimburses its affiliates
for the operating expenses incurred on behalf of the Company. The Company is
charged for the cost of these operating expenses based on the level of services
provided. Operating expenses, including compensation, retirement and other
benefit programs, allocated to the Company were $34.9 million, $26.6 million and
$15.6 million in 2002, 2001 and 2000, respectively. A portion of these expenses
relate to the acquisition of business and are deferred and amortized over the
contract period.

DEBT
The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds available to the Company at a given point in
time is dependent upon the debt position of the Corporation. No amounts were
outstanding for the Company under the intercompany loan agreement at December
31, 2002 and 2001, respectively.

BROKER/DEALER AGREEMENT
Beginning May 1, 2000, the Company receives underwriting and distribution
services from Allstate Distributors, L.L.C. ("ADLLC"), a broker-dealer company
owned by ALIC, for certain variable annuity contracts sold pursuant to a joint
venture agreement between the Company and a third party which was dissolved in
2002. The Company incurred $4.2 million, $10.5 million and $10.9 million of
commission expenses and other distribution expenses payable to ADLLC during
2002, 2001 and 2000, respectively. Other distribution expenses include
administrative, legal, financial management and sales support that the Company
provides to ADLLC, for which the Company earned administration fees of $83
thousand and $127 thousand for the years ended December 31, 2002 and 2001,
respectively. The Company did not earn administration fees in 2000. Other
distribution expenses also include marketing expenses for subsidized interest
rates associated with the Company's dollar cost averaging program offered on
variable annuities, for which ADLLC reimbursed the Company $60 thousand, $855
thousand and $549 thousand for the years ended December 31, 2002, 2001 and 2000,
respectively.

INCOME TAXES
The Company is a party to a federal income tax allocation agreement with
the Corporation (See note 10).

F-12

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

4. INVESTMENTS

FAIR VALUES

The amortized cost, gross unrealized gains and losses, and fair value for
fixed income securities are as follows:

SCHEDULED MATURITIES

The scheduled maturities for fixed income securities are as follows at
December 31, 2002:

Actual maturities may differ from those scheduled as a result of
prepayments by the issuers. Because of the potential for prepayment, mortgage-
and asset-backed securities have not been reflected based on their contractual
maturities.

F-13

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

NET INVESTMENT INCOME

REALIZED CAPITAL GAINS AND LOSSES, AFTER-TAX

Realized capital gains and losses by security type, for the year ended
December 31, are as follows:

Realized capital gains and losses by transaction type, for the year ended
December 31, are as follows:

Excluding calls and prepayments, gross gains of $11.7 million, $7.4 million
and $3.0 million and gross losses of $7.8 million, $4.5 million and $5.0 million
were realized on sales of fixed income securities during 2002, 2001 and 2000,
respectively.

F-14

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

UNREALIZED NET CAPITAL GAINS AND LOSSES

Unrealized net capital gains and losses on fixed income securities included
in shareholder's equity at December 31, 2002 are as follows:

CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES

INVESTMENT LOSS PROVISIONS AND VALUATION ALLOWANCES
Pretax provisions for investment losses, principally relating to
write-downs on fixed income securities, were $15.8 million, $1.3 million and
$3.1 million in 2002, 2001 and 2000, 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, 2002 or 2001.

There were no valuation allowance balances at December 31, 2002 or 2001.
The valuation allowance for mortgage loans at December 31, 2000 was $119
thousand. Net reductions to the mortgage loan valuation allowances were $119
thousand and $481 thousand for the years ended December 31, 2001 and 2000,
respectively.

INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE PORTFOLIOS
AND OTHER INVESTMENT INFORMATION
The Company maintains a diversified portfolio of municipal bonds that
represents 3.4% of the Company's fixed income security portfolio. Except for the
following states, holdings in no other state exceeded 5.0% of the portfolio at
December 31:

F-15

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 5.0%
of the portfolio at December 31:

The types of properties collateralizing the commercial mortgage loans at
December 31 are as follows:

The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 2002, are as follows:

In 2002, $763 thousand of commercial mortgage loans were contractually due
and paid.

SECURITIES LENDING
The Company participates in securities lending programs, primarily as an
investment yield enhancement, with third parties, such as large brokerage firms.
At December 31, 2002 and 2001, fixed income securities with a carrying value of
$160.0 million and $140.3 million, respectively, have been loaned under these
lending agreements. In return, the Company receives cash that is subsequently
invested and included in Short-term investments and Fixed income securities with
an offsetting liability recorded in Other liabilities and accrued expenses to
account for the Company's obligation to return the collateral. Interest income
on collateral, net of fees, was $370 thousand, $572 thousand and $109 thousand,
for the years ending December 31, 2002, 2001 and 2000, respectively.

SECURITIES ON DEPOSIT
At December 31, 2002, fixed income securities with a carrying value of $2.3
million were on deposit with regulatory authorities as required by law.

F-16

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 policy acquisition costs and Reinsurance
recoverables) and liabilities (including Reserve for life-contingent contract
benefits 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 deemed to approximate fair value.

FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are
as follows:

The fair value of publicly traded fixed income securities is based on
independent market quotations or dealer quotes. The fair value of non-publicly
traded securities, primarily privately placed corporate obligations, is based on
either widely accepted pricing valuation models which utilized internally
developed ratings and independent third party data (e.g., term structures and
current publicly traded bond prices) as inputs or independent third party
pricing sources. 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
values are deemed to approximate fair value. The carrying value of policy loans
is deemed to approximate fair value. Separate Accounts assets are carried in the
Statements of Financial Position at fair value based on independent market
quotations.

FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31,
are as follows:

Contractholder funds include interest-sensitive life insurance contracts
and investment contracts. Interest-sensitive life insurance contracts and
certain other contractholder liabilities are not considered to be financial
instruments subject to fair value disclosure. The fair value of investment
contracts is based on the terms of the underlying contracts. Fixed annuities
are valued at the account balance less surrender charges and immediate
annuities without life contingencies are valued at the present value of
future benefits using current interest rates. Market value adjusted
annuities' fair value is estimated to be the market adjusted surrender value.
Separate Accounts liabilities are carried in the Statements of Financial
Position at the fair value of the underlying assets.

DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes financial futures contracts 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

F-17

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

for trading purposes. 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 to manage its
market risk related to forecasted investment purchases and sales.

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. The Company pledged securities with a fair
value of $176 thousand as collateral at December 31, 2002.

The fair value of the re-investment related risk transfer reinsurance
agreement is based on valuation models which utilize independent third party
data as inputs.

The following table summarizes the notional amount, credit exposure, fair
value and carrying value of the Company's derivative financial instruments:

At December 31, 2001, the Company did not hold any derivative financial
instruments.

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 reduced
by the effect, if any, of master netting agreements.

The Company manages its exposure to credit risk primarily by establishing
risk control limits. To date, the Company has not incurred any losses as
financial futures contracts have limited off-balance-sheet credit risk as they
are executed on organized exchanges and require daily cash settlement of
margins.

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.

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 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.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

A summary of the contractual amounts and fair values of off-balance-sheet
financial instruments at December 31, 2002 is presented below. There were no
off-balance-sheet financial instruments at December 31, 2001.

F-18

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

The contractual amounts represent the amount at risk if the contract is
fully drawn upon, the counterparty defaults and the value of any underlying
security becomes worthless. Unless noted otherwise, the Company does not require
collateral or other security to support off-balance-sheet financial instruments
with credit risk.

Private placement commitments represent conditional commitments to purchase
private placement debt at a specified future date. The Company regularly enters
into these agreements in the normal course of business. The fair value of these
commitments generally cannot be estimated on the date the commitment is made, as
the terms and conditions of the underlying private placement securities are not
yet final.

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
predetermined interest rates. 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.

6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS

At December 31, the Reserve for life-contingent contract benefits consists
of the following:

The following table highlights the key assumptions generally utilized in
calculating the Reserve for life-contingent contract benefits:

To the extent the unrealized gains on fixed income securities would result
in a premium deficiency had those gains actually been realized, premium
deficiency reserves are established and have been recorded for certain immediate
annuities with life contingencies. A liability of $149.5 million and $13.5
million is included in the Reserve for life-contingent contract benefits with
respect to this deficiency as of December 31, 2002 and 2001, respectively. The
offset to this liability is recorded as a reduction of the unrealized net
capital gains included in Accumulated other comprehensive income.

F-19

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

At December 31, Contractholder funds consist of the following:

Contractholder funds activity for the year ended December 31, was as
follows:

The following table highlights the key contract provisions relating to
Contractholder funds:

7. DEFERRED POLICY ACQUISITION COSTS

Certain costs of acquiring business which were deferred and amortized for
the years ended December 31, 2002 and 2001 are as follows:

F-20

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

8. REINSURANCE

The Company purchases reinsurance to limit aggregate and single losses on
large risks. The Company continues to have primary liability as the direct
insurer for risks reinsured. Estimating amounts of reinsurance recoverable is
impacted by the uncertainties involved in the establishment of loss reserves.
Failure of reinsurers to honor their obligations could result in losses to the
Company.

The Company assumes a closed block of variable annuity business from an
unaffiliated insurance company.

Beginning in 2002, the Company cedes 80% of the mortality risk on
certain term life policies to a pool of eight unaffiliated reinsurers.
Mortality risk on policies in excess of $250 thousand per life are ceded to
ALIC.

Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. No single reinsurer had a material obligation to
the Company nor is the Company's business substantially dependent upon any
reinsurance contract. (See Note 3 for discussion of reinsurance agreements with
ALIC.) The effects of reinsurance on premiums and contract charges for the year
ended December 31, were as follows:

The effects of reinsurance on contract benefits and interest credited to
contractholder funds for the year ended December 31, were as follows:

Included in reinsurance recoverables at December 31, 2002 and 2001 are the
net amounts owed to ALIC of $588 thousand and $890 thousand, respectively. The
table above excludes $2.4 million of premiums ceded to ALIC during 2002 under
the terms of the structured settlement annuity reinsurance treaty (See Note 3).

9. COMMITMENTS AND CONTINGENT LIABILITIES

REGULATIONS AND LEGAL PROCEEDINGS

The Company is subject to changing social, economic and regulatory
conditions. State and federal regulatory initiatives and proceedings have varied
and have included efforts to remove barriers preventing banks from engaging in
the securities and insurance businesses, to change tax laws affecting the
taxation of insurance companies and the tax treatment of insurance products
which may impact the relative desirability of various personal investment
products, and to expand overall regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.

F-21

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

The Company sells its products through a variety of distribution channels
including Allstate agencies. Consequently, the outcome of some legal proceedings
that involve AIC regarding the Allstate agencies may have an impact on the
Company.

AIC is defending various lawsuits involving worker classification issues.
Examples of these lawsuits include a number of putative class actions
challenging the overtime exemption claimed by AIC under the Fair Labor Standards
Act or state wage and hour laws. These class actions mirror similar lawsuits
filed recently against other carriers in the industry and other employers.
Another example involves the worker classification of staff working in agencies.
In this putative class action, plaintiffs seek damages under the Employee
Retirement Income Security Act ("ERISA") and the Racketeer Influenced and
Corrupt Organizations Act alleging that agency secretaries were terminated as
employees by AIC and rehired by agencies through outside staffing vendors for
the purpose of avoiding the payment of employee benefits. A putative nationwide
class action filed by former employee agents also includes a worker
classification issue; these agents are challenging certain amendments to the
Agents Pension Plan and are seeking to have exclusive agent independent
contractors treated as employees for benefit purposes. AIC has been vigorously
defending these and various other worker classification lawsuits. The outcome of
these disputes is currently uncertain.

In addition, on August 6, 2002, a petition was filed with the National
Labor Relations Board ("NLRB") by the United Exclusive Allstate Agents, Office
and Professional Employees International Union (the "OPEIU"), seeking
certification as the collective bargaining representative of all Allstate agents
in the United States. On December 2, 2002, the Chicago Regional Director of the
NLRB dismissed the petition, agreeing with AIC's position that the agents are
independent contractors, not employees, and that, consequently, the NLRB lacks
jurisdiction over the issue. The OPEIU has requested that the NLRB in
Washington, D.C. review the dismissal by the Chicago Regional Director. The
request for appeal has not been accepted yet. If it is, AIC will vigorously
oppose the appeal. The outcome is currently uncertain.

AIC is also defending certain matters relating to its agency program
reorganization announced in 1999. These matters include an investigation by the
U.S. Department of Labor and a lawsuit filed in December 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") with respect to allegations of
retaliation under the Age Discrimination in Employment Act, the Americans with
Disabilities Act and Title VII of the Civil Rights Act of 1964. A putative
nationwide class action has also been filed by former employee agents alleging
various violations of ERISA, breach of contract and age discrimination. AIC has
been vigorously defending these lawsuits and other matters related to its agency
program reorganization. In addition, AIC is defending certain matters relating
to its life agency program reorganization announced in 2000. These matters
include an investigation by the EEOC with respect to allegations of age
discrimination and retaliation. AIC is cooperating fully with the agency
investigation and will continue to vigorously defend these and other claims
related to the life agency program reorganization. The outcome of these disputes
is currently uncertain.

Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the potential target of an
increasing number of class action lawsuits and other types of litigation, some
of which involve claims for substantial and/or indeterminate amounts (including
punitive and treble damages) and the outcomes of which are unpredictable. This
litigation is based on a variety of issues including insurance and claim
settlement practices. However, at this time, based on their present status, it
is the opinion of management that the ultimate liability, if any, in one or more
of these other actions in excess of amounts currently reserved is not expected
to have a material effect on the results of operations, liquidity or financial
position of the Company.

GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a
state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to policyholders and claimants. Amounts assessed
to each company are typically related to its proportion of business written in a
particular state. The Company's expenses related to these funds have been
immaterial.

F-22

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

10. 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 July 1, 1995, the Corporation was a subsidiary of Sears, Roebuck &
Co. ("Sears") and, with its eligible domestic subsidiaries, was included in the
Sears consolidated federal income tax return and federal income tax allocation
agreement. On January 27, 1995, to reflect the separation of the Corporation
from Sears, the Corporation and Sears entered into a new tax sharing agreement,
which governs their respective rights and obligations with respect to federal
income taxes for all periods during which the Corporation was a subsidiary of
Sears, 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 1996 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:

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:

F-23

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

The Company paid income taxes of $17.1 million, $13.1 million and $11.3
million in 2002, 2001 and 2000, respectively. The Company had a current income
tax receivable of $914 thousand at December 31, 2002 and a current income tax
liability of $6.0 million at December 31, 2001.

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:

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, 2002,
approximately $389 thousand, will result in federal income taxes payable of $136
thousand 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 1983.

11. STATUTORY FINANCIAL INFORMATION

The following table reconciles Net income for the year ended December 31,
and Shareholder's equity at December 31, as reported herein in conformity with
GAAP with total statutory net income and capital and surplus of the Company,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities:

Effective January 1, 2001, the State of New York required insurance
companies domiciled in its state to prepare statutory-basis financial statements
in accordance with the National Association of Insurance Commissioners ("NAIC")
Accounting Practices and Procedures Manual ("Codification") subject to any
deviations prescribed or permitted by the State of New York insurance
superintendent.

The Company prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the State of New York.
Prescribed statutory accounting practices include a variety of publications of
the NAIC, as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed.

Accounting changes adopted to conform to the provisions of Codification are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods. The State of New York has recently adopted
Statement of Statutory Accounting Principles ("SSAP") No. 10, Income Taxes,
which is effective for statutory-basis financial statements filed as of December

F-24

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

31, 2002 and thereafter. The Company reported an increase to surplus of $11.4
million effective December 31, 2002 to reflect the adoption of SSAP No. 10 by
the State of New York as a result of recognizing a net deferred tax asset.

DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The payment of shareholder dividends by the Company without prior approval of
the state insurance regulator in any calendar year is limited to formula amounts
based on statutory surplus and statutory net gain from operations, determined in
accordance with statutory accounting practices, for the immediately preceding
calendar year. The maximum amount of dividends that the Company can distribute
during 2003 without prior approval of the New York State Insurance Department is
$16.3 million. In the twelve-month period beginning January 1, 2002, the Company
did not pay any dividends.

RISK-BASED CAPITAL
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. At December
31, 2002, RBC for the Company was significantly above a level that would require
regulatory action.

12. BENEFIT PLANS

PENSION AND OTHER POSTRETIREMENT PLANS
The Company utilizes the services of AIC employees. AIC provides various
benefits, described in the following paragraphs to its employees. The Company is
allocated an appropriate share of the costs associated with these benefits in
accordance with a service and expenses agreement.

Defined pension plans, sponsored by AIC, cover most domestic full-time
and certain part-time employees. Benefits under the pension plans are
based upon the employee's length of service and eligible annual compensation.
The Company uses the accrual method for its defined benefit plans in accordance
with accepted actuarial methods. AIC's funding policy for the pension plans is
to make annual contributions in accordance with accepted actuarial cost methods.
The allocated cost to the Company included in net income was $518 thousand for
the pension plans in 2002. The allocated benefit to the Company included in net
income was $87 thousand and $62 thousand for the pension plans in 2001 and 2000,
respectively.

AIC also provides certain health care and life insurance subsidies for
employees hired before January 1, 2003 when they retire. Qualified employees may
become eligible for these benefits if they retire in accordance with AIC's
established retirement policy and are continuously insured under AIC's group
plans or other approved plans in accordance with the plan's participation
requirements. AIC shares the cost of the retiree medical benefits with retirees
based on years of service, with AIC's share being subject to a 5% limit on
annual medical cost inflation after retirement. AIC's postretirement benefit
plans currently are not funded. AIC has the right to modify or terminate these
plans. The allocated cost to the Company included in net income was $439
thousand, $304 thousand and $80 thousand for postretirement benefits other than
pension plans in 2002, 2001 and 2000, respectively.

PROFIT SHARING PLAN
Employees of AIC are 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 allocation of profit sharing expense from the Corporation was
$1.3 million, $374 thousand and $198 thousand in 2002, 2001 and 2000,
respectively.

F-25

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

13. 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:

(IN THOUSANDS)

(IN THOUSANDS)

(IN THOUSANDS)

F-26

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE IV--REINSURANCE

(IN THOUSANDS)

F-27

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

F-28