ALLSTATE LIFE INSURANCE CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

- --------------------------------------------------------------------------------

FORM 10-K

THE REGISTRANT MEETS THE CONDITIONS FOR SET FORTH IN GENERAL INSTRUCTIONS
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: 0-31248

ALLSTATE LIFE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

ILLINOIS 36-2554642
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

3100 SANDERS ROAD 60062
NORTHBROOK, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847/402-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE SECURITIES EXCHANGE ACT
OF 1934: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT
OF 1934: COMMON STOCK, PAR VALUE $227.00 PER SHARE

THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR
SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO / /

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/

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 23,800 COMMON SHARES, $227 PAR VALUE,
OUTSTANDING, ALL OF WHICH ARE HELD BY ALLSTATE INSURANCE COMPANY.

ALLSTATE LIFE INSURANCE COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2002

* Omitted pursuant to General Instruction I(2) of Form 10-K

PART I

ITEM 1. BUSINESS.

Allstate Life Insurance Company was organized in 1957 as a stock life
insurance company under the laws of the State of Illinois. It conducts
substantially all of its operations directly or through wholly owned U.S.
subsidiaries. Allstate Life Insurance Company, together with its subsidiaries,
provides personal life insurance, retirement, investment and structured
financial products to approximately 2.7 million individual and institutional
customers. In this document, we refer to Allstate Life Insurance Company as
"Allstate Life" or "ALIC" and to Allstate Life and its wholly owned subsidiaries
as the "Allstate Life Group" or the "Company."

Allstate Life is a wholly owned subsidiary of Allstate Insurance Company, a
stock property-liability insurance company organized under the laws of the State
of Illinois. All of the outstanding stock of Allstate Insurance Company is owned
by The Allstate Corporation, a publicly owned holding company incorporated under
the laws of the State of Delaware. The Allstate Corporation, together with its
subsidiaries, is the second-largest personal property and casualty insurer in
the United States on the basis of 2001 statutory premiums earned. Widely known
through the "You're In Good Hands With Allstate(R)" slogan, The Allstate
Corporation, through its subsidiaries, provides insurance products to more than
16 million households and has approximately 12,300 exclusive agents in the U.S.
and Canada. In this document, we refer to Allstate Insurance Company as "AIC"
and to The Allstate Corporation and its consolidated subsidiaries as the "Parent
Group" or the "Corporation."

The Parent Group has four business segments, one of which is Allstate
Financial. Allstate Financial, which is not a separate legal entity, is composed
of the Allstate Life Group together with other Parent Group subsidiaries that
are not part of the Allstate Life Group. In addition to being one of the Parent
Group's business segments, the name Allstate Financial has been used from time
to time to refer collectively to the Allstate Life Group, the Allstate Bank and
other Parent Group subsidiaries. This document describes the Allstate Life
Group. It does not describe the entire group of companies that form the Allstate
Financial segment of the Parent Group.

The Allstate Life Group has two business segments: Retail and Structured
Financial Products. Our Retail segment markets primarily personal life
insurance, retirement and investment products through a variety of distribution
channels including Allstate agencies, independent agents (including master
brokerage agencies), broker-dealers, financial institutions and direct
marketing. Our Structured Financial Products segment distributes a range of
higher dollar value products directly or through financial intermediaries,
consultants and brokers in several specialty markets.

In this annual report on Form 10-K, we occasionally refer to statutory
financial information that has been prepared in accordance with the National
Association of Insurance Commissioners ("NAIC") Accounting Practices and
Procedure Manual. All domestic U.S. insurance companies are required to prepare
statutory-basis financial statements in accordance with the Manual. As a result,
industry data is available on a widespread basis that enables comparisons
between insurance companies, including competitors that are not subject to the
requirement to publish financial statements on the basis of accounting
principles generally accepted in the United States of America ("GAAP.") We
frequently use industry publications containing statutory financial information
to assess our competitive position.

COMPANY OBJECTIVES

The Company has the following objectives:

- Develop and deliver market-informed, personal life insurance,
retirement and investment products and services

- Leverage and build the Allstate brand in financial services

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- Build profitable, long-term relationships

- Drive operational scale, efficiency and effectiveness

The Company will continue to extend the Allstate brand by using it in
conjunction with more products and distribution channels. The Company will
create greater awareness of the Company's services through advertising,
public relations, and by focusing on a consistent experience for customers
and distribution partners. The Company intends to grow its business through a
combination of organic growth, selective acquisitions, alliances and
partnerships.

A discussion of our two business segments, Retail and Structured Financial
Products, including a discussion of the components of our strategy applicable to
each segment, follows.

SEGMENT FINANCIAL INFORMATION. For financial information about our
segments, including information by product line for the last three fiscal years,
see the "Retail Segment 2002 Highlights" and "Structured Financial Products
Segment 2002 Highlights" sections of our "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 16 to the 2002
Consolidated Financial Statements, which items are incorporated herein by
reference.

RETAIL SEGMENT

PRODUCTS

Our Retail segment markets a broad range of insurance products that we call
"financial protection" products and a broad range of retirement products. Our
Retail segment continues to develop new versions of its products to satisfy
evolving consumer needs. For example, in 2002 our Retail segment introduced the
Allstate(R) Treasury-Linked Annuity, a flexible premium deferred fixed annuity
that provides a guaranteed five-year rate plus the unique ability to earn
additional interest based upon the performance of the five-year U.S. Treasury
rate. By developing and offering a variety of products, we believe we can
position our Retail segment to compete in various stock market and interest rate
environments and to address the changing needs of our targeted customer groups.
We believe that demographic trends, including the aging of the American
population, will continue to support increased consumer demand for financial
protection and retirement products.

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The Retail segment's personal life insurance, retirement, and investment
products are listed below.

INSURANCE

Whole life Long-term care
Term life Accidental death
Universal life Hospital indemnity
Single premium life
Variable life*
Variable universal life*

ANNUITIES

Fixed annuities Variable annuities*
(including market Immediate annuities
value adjusted and
equity-indexed annuities)

* -- Separate Accounts products

SEPARATE ACCOUNTS AND GENERAL ACCOUNT

The assets and liabilities relating to variable annuities and variable life
products are legally segregated and reflected as assets and liabilities of the
Separate Accounts in the financial statements of Allstate Life and the
subsidiary insurance companies of Allstate Life Group that provide such
products. Assets in the Separate Accounts are only available for the benefit of
the holders of these products and are not available to other creditors or
policyholders with a claim solely against the general account assets of an
insurance company. Absent a contract provision specifying either a guaranteed
minimum return or account value upon death or annuitization, variable annuity
and variable life contractholders bear the investment risk that the underlying
mutual funds of the Separate Account may not meet their stated investment
objectives. The assets and liabilities relating to variable products issued with
fixed fund options are divided between the applicable Separate Account for the
variable portion of the product and the general account for the fixed portion of
the product.

The assets and liabilities relating to the other (non-variable) life
insurance and annuity products, including any minimum guarantees of Separate
Accounts products, are reflected in the general account of Allstate Life or the
applicable subsidiary insurance company.

DISTRIBUTION

Our Retail segment distributes its personal life insurance, retirement and
investment products through five distribution channels: Allstate exclusive
agencies, independent agents (including master brokerage agencies),
broker-dealers, financial institutions and direct marketing. This multi-channel
distribution strategy results in a broad distribution network and increases
operating flexibility while still allowing us to focus our marketing efforts.
Our Retail segment has been expanding the distribution of its products by
increasing cross sales to existing customers of the Parent Group's personal
property and casualty business and by driving increased sales activity through
stronger wholesaling efforts to independent agents, broker-dealers and financial
institutions.

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ALLSTATE EXCLUSIVE AGENCIES CHANNEL

Through the Allstate agencies, our Retail segment uses exclusive agents and
exclusive financial specialists to distribute its personal life insurance,
retirement and investment products. In some rural areas, the Allstate agency
channel also utilizes independent agents to distribute products.

Historically, the Allstate exclusive agencies focused primarily on the sale
of the Parent Group's personal property and casualty products such as auto and
homeowners insurance, and exclusive financial specialists, previously called
life specialists, on the sale of our traditional life insurance products. In
recent years, we have begun to integrate these sales forces and are seeking to
substantially increase cross sales of our personal life insurance, retirement
and investment products to customers who have already purchased one or more
personal property and casualty products, such as auto or homeowners insurance.

As part of this initiative, we now require exclusive financial specialists
to have the "Personal Financial Representative" or PFR designation and any new
Allstate exclusive agent that we appoint to become a PFR within 15 months after
his or her appointment. We also encourage our existing Allstate exclusive agents
to earn this designation. Each PFR earns the designation by completing an
education curriculum and obtaining the licenses required to sell products such
as variable annuities and variable life insurance. Approximately 48% of the
Allstate exclusive agents were PFRs at the end of 2002.

PFRs help their customers with personal life insurance, retirement and
investment products. They offer our portfolio of insurance and investment
products, long-term care products and nonproprietary mutual funds to their
customers. Frequently, exclusive financial specialists with the PFR designation
partner with exclusive agents who are more focused on the sale of auto and
homeowners insurance. Together, they are qualified to sell a wide range of
products to our customers.

The products distributed through this channel include term life insurance,
whole life insurance, universal life and variable universal life insurance,
fixed annuities, variable annuities, immediate annuities, long-term care
insurance and nonproprietary mutual funds.

INDEPENDENT AGENTS CHANNEL

Our Retail segment also distributes personal life insurance and retirement
products through independent agents (including master brokerage agencies).
Products distributed through independent agents include term life insurance,
whole life insurance, universal life insurance, variable universal life
insurance, single premium life insurance, fixed annuities, variable annuities,
immediate annuities and long-term care insurance.

BROKER-DEALERS CHANNEL

Through broker-dealers across the country, our Retail segment targets
consumers who want assistance in investing for retirement. Products
distributed through broker-dealers include fixed annuities, variable annuities,
immediate annuities and variable life insurance. Our Retail segment has
established distribution arrangements with most national broker-dealers and
regional firms.

FINANCIAL INSTITUTIONS CHANNEL

Our Retail segment also uses financial institutions to target consumers who
want assistance in investing for retirement. The products that we distribute
through financial institutions include fixed annuities, variable annuities,
single premium life insurance and variable life insurance. We have established
distribution arrangements with a growing number of leading financial
institutions.

4

DIRECT MARKETING CHANNEL

Our Retail segment also uses direct marketing techniques such as
telemarketing and direct mail. Through direct marketing, our Retail segment
primarily distributes term life insurance, accidental death insurance and
hospital indemnity products.

The following table lists our Retail segment's primary personal life
insurance, retirement and investment products, the major distribution channels
for these products and the targeted customer segment.

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RISK MANAGEMENT, UNDERWRITING AND PRICING

For individual life insurance policies, our Retail segment underwrites
based on detailed and uniform policies and procedures to assess and quantify the
risk of each applicant. Our Retail segment may require medical examinations and,
in some cases, it may order attending physicians' statements and consumer
investigative reports.

Most of our life insurance policies generally allow us to adjust charges
and credits to reflect changes from expected mortality and expense experience or
higher or lower investment returns. However, our Retail segment is subject to
contractual maximum charges and minimum crediting rates and state regulatory
limits on increasing charges after a policy is issued.

Our Retail segment prices personal life insurance, retirement and
investment products at issuance to achieve a target return on required capital
based on assumptions regarding mortality, expenses, investment return,
persistency, required reserves and capital. We have developed these assumptions
based on reviews of our experience in this business. Periodically, we revise
inforce products through non-guaranteed charges or credits to reflect changes in
experience and to preserve the margins originally priced into the product.

REINSURANCE

We use reinsurance as a means of sharing mortality risk with external
reinsurers as well as to transfer risk among the Allstate Life Group companies
and other affiliates. As of December 31, 2002 the Allstate Life Group retained a
maximum risk of two million dollars on each insured life. In 2002, the primary
uses of reinsurance included ceding amounts greater than the two million dollar
retention limit, proportional sharing of certain life insurance policies with
external reinsurance pools, and catastrophe reinsurance which limited overall
life insurance losses as a result of catastrophic events.

For more information on reinsurance, see Note 10 to the 2002 Consolidated
Financial Statements and the "Reinsurance Recoverable" section of our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which items are incorporated herein by reference.

RESERVES

We establish actuarially determined Reserve for life-contingent contract
benefits and Contractholder funds to meet future obligations on our products.
These reserves are carried as liabilities.

We compute reserves for life contingent contract benefits, mostly for term
life and whole life insurance policies, on the basis of assumptions as to future
investment yields, mortality, morbidity, terminations and expenses. These
assumptions generally vary by characteristics such as type of coverage, issue
age, year of issue, and policy duration.

With regard to policies and contracts that include an investment component,
such as most fixed annuities and interest-sensitive life insurance policies, we
establish reserves for Contractholder funds. Contractholder funds are equal to
deposits received, which we record as interest-bearing liabilities, and interest
credited to the benefit of the contractholder less surrenders and withdrawals,
death benefits, mortality and expense charges, and net Separate Accounts
transfers.

Separate Accounts liabilities, including those for variable annuities and
variable life insurance, represent the contractholders' claims to the related
assets and are carried at the fair value of the assets.

The establishment of Reserve for life-contingent contract benefits and
Contractholder fund liabilities in recognition of our future benefit obligations
under life and annuity policies and other products is discussed in Notes 2 and 9
to the 2002 Consolidated Financial Statements and in the "Reserves for Life
Contingent Contract Benefits" and "Reserves for

6

Contractholder Funds" sections of our "Management's Discussion and Analysis of
Financial Condition and Results of Operations", which items are incorporated
herein by reference.

COMPETITION

Our Retail segment competes principally on the basis of: the scope of its
distribution systems, the breadth of its product offerings, the recognition of
our brands, the Company's financial strength and ratings, its product features
and prices, and the level of customer service that it provides. In addition,
with respect to variable life and variable annuity products, our Retail segment
competes on the basis of the variety of providers and choices of funds for our
Separate Accounts and the management and performance of those funds within the
Separate Accounts.

The life insurance and annuity market continues to be highly fragmented and
competitive. As of December 31, 2001, there were approximately 750 groups of
life insurance companies in the United States, most of which offered one or more
products similar to our Retail segment's personal life insurance, retirement and
investment products and many of which used similar marketing techniques. Based
on information contained in statements filed with state insurance departments,
in 2001 approximately 60% of the life insurance and annuity statutory premiums
and deposits were written by 20 insurance company groups, including the Allstate
Life Group. According to the same sources, as of December 31, 2001, the Allstate
Life Group ranked tenth based on ordinary life insurance inforce and 19th based
on statutory admitted assets. Banks and savings and loan associations in some
jurisdictions compete with us in the sale of life insurance products. In
addition, because many of our personal life insurance, retirement and investment
products include a savings or investment component, our competition also
includes securities firms, investment advisors, mutual funds, banks and other
financial institutions. Competitive pressure is growing due, in part, to
demutualization and consolidation activity in the financial services industry,
which, among other things, provides our larger competitors with improved access
to capital markets and increased economies of scale.

STRUCTURED FINANCIAL PRODUCTS SEGMENT

PRODUCTS

Our Structured Financial Products segment offers a variety of spread-based
products and fee-based products designed for both individuals and institutional
investors. Spread-based products are designed to generate income based on a
spread between investment returns on the supporting assets and the guaranteed
returns provided to customers on the funds deposited with us. Spread-based
products provide a guaranteed rate of return to the customer. Fee-based products
are designed to generate income based on various customer fees or charges. Some
fee-based products provide customers with a limited guarantee.

The principal SPREAD-BASED PRODUCTS offered by our Structured
Financial Products segment include:

- General account guaranteed investment contracts ("GICs")

- Funding agreements (including funding agreements backing
medium-term notes)

- Structured settlement annuities

- Immediate annuities

The principal FEE-BASED PRODUCTS offered by our Structured Financial
Products segment are synthetic GICs.

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SPREAD-BASED PRODUCTS

Among its spread-based products, our Structured Financial Products segment
offers fund accumulation-type products consisting of general account GICs and
funding agreements.

General account GICs are group annuity contracts, with a stated maturity,
that pay a guaranteed rate of return. GICs are marketed primarily to pension
plan sponsors and managers of tax-qualified retirement plans as an investment
within their tax-qualified defined contribution retirement plans, such as 401(k)
plans. Purchasers of general account GICs and synthetic GICs (described below
under FEE-BASED PRODUCTS) seek a guaranteed rate of return, limited payment
guarantees related to plan participant withdrawals, or book value treatment. The
guaranteed rate of return on GICs can be a fixed rate or a floating rate based
on an external market index.

Funding agreements are insurance contracts that pay a guaranteed rate of
return. Funding agreements are not tax-qualified insurance contracts and are
issued to special purpose entities and a wide range of corporations, mutual
funds and other institutional investors. Funding agreements usually have stated
maturities. Some funding agreements with stated maturities may be renewed by
mutual agreement. The guaranteed rate of return can be a fixed rate or a
floating rate based on an external market index. A portion of our Structured
Financial Products segment's funding agreements also has put and call features.

Funding agreements are used primarily to support medium-term notes offered
by special purpose entities to institutional investors seeking high quality,
fixed income investments.

Structured settlement annuities, another type of spread-based product, are
chosen by both individuals and institutions seeking specialized long-term
immediate annuities, typically to fund or annuitize large claim or litigation
settlements. They are generally used in place of lump sum awards in court cases,
or in settlement of property and liability claims that, in most cases, arise
from personal injury lawsuits. These annuities are customized long-term
immediate annuities used to provide ongoing periodic payments to a claimant
instead of a lump sum settlement. The two most common types of structured
settlement annuities are life contingent, which makes payments for the life of
the annuitant and, in many cases, makes a guaranteed number of payments even if
the annuitant dies; or period-certain, which makes payments for a specific
period. Our Structured Financial Products segment primarily markets structured
settlement annuities to buyers responsible for funding these settlements.

Immediate annuities are also a principal type of spread-based product
marketed by our Structured Financial Products segment. Immediate annuities
generally provide a series of payments over time in exchange for a single
initial payment. The series of payments generally begins no later than one
annuity period after the date on which the annuity was purchased. Our Structured
Financial Products segment typically sells individual immediate annuities for
the life of an individual or with a maturity greater than ten years.

FEE-BASED PRODUCTS

Our Structured Financial Products segment's fee-based products consist
primarily of synthetic GIC contracts, which are off-balance-sheet obligations of
the Company that provide limited guarantees related to specific investment
portfolios owned by tax-qualified retirement plans. These contracts are
purchased as a substitute for general account GICs and provide guarantees under
limited circumstances of payments related to plan participant withdrawals. We
derive earnings on these products from expense, risk and profit charges, which
are assessed on the basis of assets under management. Fee-based products provide
relatively stable revenues and have lower capital requirements than do
spread-based products.

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DISTRIBUTION

Our Structured Financial Products segment distributes its products either
directly to institutional buyers or indirectly through financial intermediaries,
consultants and brokers. General account and synthetic GICs are marketed
directly to retirement plan sponsors or to investment managers who represent
plan sponsors. Funding agreements are marketed either directly or through
specialized brokers to short-term institutional money managers or directly to
special purpose entities that issue medium-term notes through investment banks
to United States and offshore investors. Approximately 81% of our funding
agreement sales are derived from transactions in which a special purpose entity
purchases a funding agreement with terms similar to those of notes that are
issued by the special purpose entity to institutional investors. The strength of
the sales of funding agreements to special purpose entities is dependent on
conditions in the capital markets. As a result, the sales of funding agreements
can vary widely from one fiscal quarter to another. Structured settlement
annuities are marketed through a small group of specialty brokers. In 2002,
approximately 28.1% of our Structured Financial Products segment's structured
settlement annuities originated with cases referred from the Parent Group's
personal property and casualty business. Immediate annuities are marketed to
affluent customers through independent agents.

Our Structured Financial Products segment has an experienced sales staff
that develops and maintains relationships with targeted customers for our
structured financial products, financial intermediaries, consultants and
brokers. Our consistent market presence has created strong and valuable
relationships with a large segment of our customer base.

The following table summarizes our Structured Financial Products segment's
primary distribution methods, primary products and the target customers for
these products.

RISK MANAGEMENT, UNDERWRITING AND PRICING

Our Structured Financial Products segment's risk management strategy
is based on:

- Using sophisticated systems and processes to project expected
cash flows for assets and liabilities and to measure the
sensitivity of asset and liability cash flows to interest rate
changes.

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- Managing interest rate exposure to control the "duration match"
of assets and liabilities. In other words, closely matching the
relative sensitivity of asset and liability values to interest
rate changes when feasible, often by using derivative financial
instruments.

- Primarily writing contracts with predictable maturity structures
and without credit event triggers, cross-default acceleration
clauses or premature surrender or redemption provisions.

- Monitoring withdrawal activity to detect deviations from expected
cash flows.

- Establishing multi-disciplinary working groups of professionals
with expertise in investment, sales, financial and pricing
management to manage risk.

General account GICs and synthetic GICs are underwritten as part of
developing pricing proposals for new contracts. Our Structured Financial
Products segment's underwriters evaluate the likely variance from expected cash
flows due to events that trigger the Company's payment obligations under the
contracts, such as asset reallocations on the part of plan participants, benefit
payments and withdrawals, and actions taken by plan sponsors such as layoffs,
mergers and plan terminations. Proposals are made only in those situations in
which the risk of cash flow variance is projected within strict guidelines, so
that withdrawal risk is minimized. In addition, underwriters ensure that the
contracts and plans provide appropriate protection against financial
disintermediation.

Structured settlement annuities and immediate annuities are underwritten
using recent mortality experience and an assumption of continued improvement in
annuitant longevity.

RESERVES

Our Structured Financial Products segment establishes and reports reserves
for Contractholder funds and Reserve for life-contingent contract benefits to
meet the obligations on its policies and contracts. Its reserves for general
account GICs, period-certain structured settlement and immediate annuities and
funding agreements are equal to the cumulative account balances for these
products. Cumulative account balances include deposits plus credited interest
less expense charges, surrenders and withdrawals. Reserve for life-contingent
contract benefits for structured settlement annuities and immediate annuities
are calculated based on a set of actuarial assumptions that we establish and
maintain throughout the lives of the contracts. These assumptions include
investment yields and mortality.

The establishment of reserve and Contractholder fund liabilities in
recognition of Reserve for life-contingent contract benefits under life and
annuity policies and other products is discussed in Notes 2 and 9 to the 2002
Consolidated Financial Statements and in the "Reserves for Life Contingent
Contract Benefits" and "Reserves for Contractholder Funds" sections of our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which items are incorporated herein by reference.

COMPETITION

In the sale of its structured financial products, our Structured Financial
Products segment operates in a variety of highly competitive institutional
markets. Although many companies offer some of the same products, a relatively
small number of companies dominate the market. In 2001, the top 15 providers of
structured financial products, including the Company, issued approximately 88%
of total general account GICs and funding agreements issued by U.S. life
insurance companies; and ten insurers, including the Company, issued
approximately 85% of the total structured settlement annuities. In addition,
many companies sell immediate annuities, but sales are not significantly
concentrated. Our competitors include a variety of well-recognized insurance
companies, many of which are larger than the Allstate Life Group.

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Our Structured Financial Products segment has built a significant
market share in several important markets and we believe it is able to compete
successfully in its markets as a result of a number of factors. These factors
include:

- strong financial ratings;

- investment management expertise;

- a strong distribution network;

- competitive product design; and

- the highly recognized Allstate brand name.

Competition in this market is restricted almost exclusively to insurance
companies with strong financial ratings. For more information regarding our
ratings, see the "Capital Resources and Liquidity--Financial ratings and
strength" section of our "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

OTHER INFORMATION ABOUT THE COMPANY

GEOGRAPHIC MARKETS

Our Retail segment distributes its personal life insurance, retirement and
investment products throughout the United States. Through the Allstate Life
Group, it is authorized to market its products in all 50 states, the District of
Columbia, Puerto Rico, Guam and the U.S. Virgin Islands.

Our Structured Financial Products segment distributes its products in the
United States and internationally. However, our international distribution is
generally limited to selling funding agreements to special purpose entities that
issue medium-term notes distributed through investment bankers to institutional
investors. In the United States, we provide funding agreements to back
medium-term note programs that are distributed to qualified institutional
buyers.

The following table reflects, in percentages, the principal geographic
distribution of Premiums and deposits for the Allstate Life Group for the year
ended December 31, 2002. Approximately 87.9% of the Premiums and deposits
generated in Delaware represent deposits received in connection with funding
agreements sold to a special purpose entity domiciled in Delaware by our
Structured Financial Products segment. Premiums and deposits arising from the
activities of our Retail segment account for most of the remaining Premiums and
deposits generated in these four states.

California 10.8%
Delaware 9.0%
New York 7.7%
Florida 6.1%

No other jurisdiction accounted for more than six percent of the
Premiums and deposits.

"Premiums and deposits" is an operating measure that we use to analyze
production trends for the Company's 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 we account for as
liabilities, rather than as revenue. Our method of calculating Premiums and
deposits may be different from the method used by other companies to measure
sales and therefore comparability may be limited.

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

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

INVESTMENTS

In managing our general account assets, our investment strategy for the
Allstate Life Group is based upon a strategic asset allocation framework that
takes into account the need to manage on a risk adjusted spread basis for the
underwriting liability product portfolio and to maximize return on retained
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. We believe we maximize asset spread by selecting assets
that perform on a long-term basis and by using trading to minimize the effect of
downgrades and defaults. We use total return measurement on a selective basis
where the asset risks are significant (e.g., high yield fixed income securities,
convertible bonds). We expect that the application of this strategy for the
Allstate Life Group will minimize interest rate market impacts on investment
income. This strategy is also expected to provide sustainable investment-related
income over time.

REGULATION

The Allstate Life Group is subject to extensive regulation in the
jurisdictions in which it does business. In the U.S. the method of such
regulation varies from state to state but generally has its source in statutes
that delegate regulatory authority to a state insurance official. In general,
such regulation is intended for the protection of insurance policyholders rather
than security holders. Regulation relates to a wide variety of matters including
insurance company licensing and examination, agent licensing, pricing, trade
practices, policy forms, accounting methods, the nature and amount of our
investments, claims practices, participation in guaranty funds, reserve
adequacy, insurer solvency, transactions with affiliates, the amount of
dividends that we may pay, and underwriting standards. These regulations have a
substantial effect on our business. Some of these matters are discussed in more
detail below. For discussion of statutory financial information, see Note 14 to
the 2002 Consolidated Financial Statements, and for discussion of regulatory
contingencies, see Note 11 to the 2002 Consolidated Financial Statements, which
items are incorporated herein by reference.

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. We cannot predict
whether any state or federal measures will be adopted to change the nature or
scope of the regulation of the insurance business or what effect any such
measures would have on the Company.

LIMITATIONS ON DIVIDENDS BY INSURANCE SUBSIDIARIES. Allstate Life may
receive dividends from time to time from its subsidiaries. When received, these
dividends represent a source of cash from which Allstate Life may meet some of
its obligations. If a subsidiary is an insurance company, its ability to pay
dividends may be restricted by state laws regulating insurance companies. These
laws typically require the subsidiary insurance company to notify, and in some
cases receive approval from, the department of insurance for the state in which
the subsidiary is

12

domiciled prior to paying a dividend. In addition, some state laws limit the
amount of the dividend based upon a percentage of the subsidiary's statutory
surplus or net income.

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.

INVESTMENT REGULATION. Allstate Life and its insurance subsidiaries are
subject to state laws and regulations that require investment portfolio
diversification and that limit the amount of investment in certain categories.
Failure to comply with these laws and regulations would cause non-conforming
investments to be treated as non-admitted assets for purposes of measuring
statutory surplus and, in some instances, would require divestiture. As of
December 31, 2002 the investment portfolios of our insurance subsidiaries did
not contain any investments that were non-admitted for failure to comply with
such laws and regulations.

VARIABLE LIFE INSURANCE, VARIABLE ANNUITIES AND REGISTERED FIXED ANNUITIES.
The sale of variable life insurance, and variable annuities and registered fixed
annuities with market value adjustment features is subject to extensive
regulatory oversight at the federal and state level, including regulation and
supervision by the Securities and Exchange Commission and the National
Association of Securities Dealers.

BROKER-DEALERS, INVESTMENT ADVISORS AND INVESTMENT COMPANIES. The Allstate
Life Group entities that operate as broker-dealers, registered investment
advisors and investment companies are subject to regulation and supervision by
the Securities and Exchange Commission, the National Association of Securities
Dealers and/or, in some cases, state securities administrators.

REGULATION AND LEGISLATION AFFECTING CONSOLIDATION IN THE FINANCIAL
SERVICES INDUSTRY. The Gramm-Leach-Bliley Act of 1999 permits mergers that
combine commercial banks, insurers and securities firms within one holding
company group. Until passage of the Gramm-Leach-Bliley Act, the Glass Steagall
Act of 1933 had limited the ability of banks to engage in securities-related
businesses and the Bank Holding Company Act of 1956 had restricted banks from
being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers, and insurance holding companies may
acquire banks. In addition, grandfathered unitary thrift holding companies,
including The Allstate Corporation, may engage in activities that are not
financial in nature. The ability of banks to affiliate with insurers may
materially adversely affect our business by substantially increasing the number,
size and financial strength of potential competitors.

In some states a mutual insurance company can convert to a hybrid structure
known as a mutual holding company. This process converts an insurance company,
owned by its policyholders, to a stock insurance company, owned (through one or
more intermediate holding companies) by its policyholders and, in some
instances, in part by third-party stockholders. Also some states permit the
conversion of a mutual insurance company into a stock insurance company
(demutualization). The ability of mutual insurance companies to convert to
mutual holding companies or to demutualize may materially adversely affect our
business by substantially increasing competition for capital in the financial
services industry.

PRIVACY REGULATION. Federal law and regulation requires financial
institutions to protect the security and confidentiality of customer information
and to notify customers about their policies and practices relating to their
collection and disclosure of customer information and their policies relating to
protecting the security and confidentiality of that information. Federal and
state laws also regulate disclosures of customer information. Congress and state
legislatures are expected to consider additional regulation relating to privacy
and other aspects of customer information.

TAX. 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
insurance. Such proposals have included legislation relating to the deferral of
taxation on the accretion of value within certain annuities and life

13

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 our financial position or our 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.

EMPLOYEES AND OTHER SHARED SERVICES

The Allstate Life Group has no employees. Instead, we primarily use
employees of Allstate Insurance Company, our direct parent. We also make use of
other services and facilities provided by Allstate Insurance Company and other
members of the Parent Group. These services and facilities include space rental,
utilities, building maintenance, human resources, investment management,
finance, information technology and legal services. We reimburse our affiliates
for these services and facilities under a variety of agreements.

SERVICE MARKS

The Allstate Life Group, together with the Parent Group, uses the following
names, logos and slogans extensively in our business:

Allstate Insure Today. Secure Tomorrow.
Allstate Financial design logo Lincoln Benefit
Allstate Life Northbrook design logo
Allstate Treasury-Linked Annuity The Good Hands Network
Glenbrook The Good Hands People
Good Hands Slant "A" Allstate logo

You're In Good Hands With Allstate
The Right Hands Make All The Difference

In addition, we use the graphic "Good Hands" design logos featuring cupped
hands. Our rights in the United States to these names, logos and slogans
continue so long as we continue to use them in commerce. Most of these service
marks are the subject of renewable U.S. and/or foreign service mark
registrations. We believe that these service marks are important to our
business and we intend to maintain our rights to them by continued use.

ITEM 2. PROPERTIES.

Our home office is part of the Parent Group's home office complex in
Northbrook, Illinois. The complex consists of several buildings with an
aggregate of approximately 2.35 million square feet of office space on a
250-acre site. In addition, we operate from various administrative, data
processing, claims handling and support facilities.

All of the facilities from which we operate are owned or leased by our
direct parent, Allstate Insurance Company. Expenses associated with these
facilities are allocated to us on both a direct and an indirect basis, depending
on the nature and use of each particular facility. We believe that these
facilities are suitable and adequate for our current operations.

The locations from which the Parent Group exclusive agencies operate in the
U.S. are normally leased by the agencies.

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ITEM 3. LEGAL PROCEEDINGS.

Incorporated in this Item 3 by reference to the discussion under the
heading "Regulation" and under the heading "Regulations and Legal proceedings"
in Note 11 of the Company's consolidated financial statements in Item 8 of this
Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER.

Omitted.

PART II

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

There is no public trading market for Allstate Life's common stock. All of
its outstanding common stock is owned by its parent, Allstate Insurance Company
("AIC"). All of the outstanding common stock of AIC is owned by The Allstate
Corporation.

From January 1, 2001 through March 15, 2003, Allstate Life paid the
following amounts to AIC in the aggregate on the dates specified as dividends on
its common stock:

Within the past three years, the only equity securities sold by Allstate
Life that were not registered under the Securities Act of 1933 have been shares
of common stock or preferred stock issued to companies that are wholly-owned by
The Allstate Corporation. These securities were issued in transactions that were
exempt from registration under the Securities Act of 1933 because they did not
involve a public offering.

For additional information on dividends, including restrictions on the
payment of dividends by Allstate Life and its subsidiaries, 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
item is incorporated herein by reference.

15

ITEM 6. SELECTED FINANCIAL DATA.

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA

16

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

THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF ALLSTATE LIFE
INSURANCE COMPANY ("ALIC") AND ITS WHOLLY OWNED SUBSIDIARIES (TOGETHER WITH
ALIC, THE "COMPANY"). ALIC IS WHOLLY OWNED BY ALLSTATE INSURANCE COMPANY
("AIC"), A WHOLLY OWNED SUBSIDIARY OF THE ALLSTATE CORPORATION (THE
"CORPORATION"). IT SHOULD BE READ IN CONJUNCTION WITH THE SELECTED FINANCIAL
DATA, CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES FOUND UNDER PART II,
ITEM 6 AND ITEM 8 CONTAINED HEREIN. FURTHER ANALYSIS OF THE COMPANY'S INSURANCE
SEGMENTS IS PROVIDED IN THE RETAIL PRODUCTS SEGMENT AND THE STRUCTURED FINANCIAL
PRODUCTS SEGMENT SECTIONS OF MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A"). THE
SEGMENTS ARE DEFINED BASED UPON THE COMPONENTS OF THE COMPANY FOR WHICH
FINANCIAL INFORMATION IS USED INTERNALLY TO EVALUATE SEGMENT PERFORMANCE AND
DETERMINE THE ALLOCATION OF RESOURCES.

DEFINITIONS OF NON-GAAP AND OPERATING MEASURES

In addition to information presented in the consolidated financial
statements, the Company uses information other than that determined using
accounting principles generally accepted in the United States ("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 consolidated financial statements, can improve the understandability of
the financial statements and allow investors to evaluate the information used by
management to analyze company performance.

OPERATING INCOME is a non-GAAP measure used by 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," and Gain (loss) on disposition
of operations, after-tax. In this computation, Realized capital gains and
losses, after-tax is presented net of the effects of the Company's deferred
policy acquisition cost ("DAC") 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 (loss)
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 (loss) should not be considered as a substitute for any GAAP
measure of performance. This method of calculating Operating income (loss) 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.

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A reconciliation of Retail Operating income to Net income for the years
ended December 31, is presented in the following table.

A reconciliation of Structured Financial Products Operating income to
Net income for the years ended December 31, is presented in the following table.

PREMIUMS AND DEPOSITS is an operating measure used by management to analyze
production trends for the Company's 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 the method 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 consolidated financial statements.

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

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

The following table illustrates where Structured Financial Products
Premiums and deposits are reflected in the consolidated financial statements.

2002 HIGHLIGHTS

- - Total consolidated revenues decreased 1.4% in 2002 compared to 2001.
Excluding realized capital losses, revenues increased 3.3% in 2002 to
$4.86 billion primarily due to increased investment income.
- - Premiums and deposits increased 7.3% to $10.97 billion in 2002 due to
increased sales of fixed annuities, including sales of the Allstate(R)
Treasury - Linked Annuity of $762 million. Sales of variable annuities
declined 17.5% in 2002 compared to 2001. (Further information and a
reconciliation of Premiums and deposits to the Consolidated financial
statements appears in the Definitions of Non-GAAP and Operating Measures
section of the MD&A).
- - Net income decreased $123 million as a result of increased realized capital
losses.
- - Operating income was comparable in 2002 to 2001 due to an increase in the
investment margin and an adjustment for prior year tax liabilities offset
by accelerated amortization of DAC and higher operating costs and expenses.
(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.)
- - Separate Accounts assets decreased 18.1% due to declines in account
balances related to poor equity market performance during the year.

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CONSOLIDATED NET INCOME

Consolidated net income decreased 33.4% for 2002 compared to 2001 and
21.7% for 2001 compared to 2000. In both years, realized capital losses
increased in both segments. Realized capital gains and losses totaled $(427)
million in 2002, $(213) million in 2001 and $(26) million in 2000.

CONSOLIDATED REVENUES

Consolidated revenues decreased 1.4% in 2002 compared to 2001 resulting
from increased realized net capital loses and decreases in Premiums and Contract
charges in the Retail segment. These declines were partly offset by an increase
in Net investment income and Structured Financial Products Premiums and Contract
charges.

Consolidated revenues increased 1.4% during 2001 compared to 2000
resulting from increased Net investment income and Premiums and Contract charges
in the Retail segment. These increases were partially offset by an increase in
realized capital losses and lower Premiums and Contract charges in the
Structured Financial Products segment. Net investment income increased 9.7%
primarily due to higher investment balances.

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 consolidated 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
consolidated financial statements.

A brief summary of each of these critical accounting policies follows. For
a complete discussion of the judgments and other factors affecting the
measurement of these policies, see the referenced sections of the MD&A. There is
also a complete summary of the Company's significant accounting policies in Note
2 of the consolidated financial statements.

INVESTMENTS - Fixed income securities include bonds, mortgage-backed and
asset-backed securities, and redeemable preferred stocks. All fixed income and
equity securities are carried at fair value and are classified as available for
sale. The fair value of publicly traded fixed income and equity 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 Consolidated

19

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 or equity 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
cost for equity securities or 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 affecting the Company sections of
the MD&A.

DERIVATIVE INSTRUMENTS Derivative financial instruments include swaps,
futures, options, interest rate caps and floors, warrants, synthetic guaranteed
investment contracts, certain forward contracts for purchases of to-be-announced
mortgage securities, certain investment risk transfer reinsurance agreements and
certain fixed income security forward purchase commitments. Derivatives that are
required to be separated from the host instrument and accounted for as
derivative financial instruments ("subject to bifurcation") are embedded in
convertible and other fixed income securities, equity indexed life and annuity
contracts, and certain variable life and annuity contracts.

When derivatives meet specific criteria, they may be designated as
accounting hedges and accounted for as fair value, cash flow, foreign currency
fair value, or foreign currency cash flow hedges. The hedged item may be either
all or a specific portion of a recognized asset, liability or an unrecognized
firm commitment attributable to a particular risk. At the inception of the
hedge, the Company formally documents the hedging relationship and risk
management objective and strategy. The documentation identifies the hedging
instrument, the hedged item, the nature of the risk being hedged and the
methodology used to assess how effective the hedging instrument is in offsetting
the exposure to changes in the hedged item's fair value attributable to the
hedged risk, or in the case of a cash flow hedge, the exposure to changes in the
hedged transaction's variability in cash flows attributable to the hedged risk.
The Company does not currently exclude any component of the change in fair value
of the hedging instrument from the effectiveness assessment. At each reporting
date, the Company confirms that the hedging instrument continues to be highly
effective in offsetting the hedged risk. Ineffectiveness in fair value hedges
and cash flow hedges is reported in Realized capital gains and losses on the
Consolidated Statements of Operations and Comprehensive Income. For

20

the years ended December 31, 2002 and 2001, the hedge ineffectiveness reported
as Realized capital gains and losses amounted to losses of $15 million and gains
of $6 million, respectively.

Derivatives are accounted for on a fair value basis, and reported as Other
investments, Other assets, Other liabilities and accrued expenses or
Contractholder funds. Embedded derivative instruments subject to bifurcation are
also accounted for on a fair value basis and are reported together with the host
contract. The 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 either independent third party pricing sources
or widely accepted pricing valuation models which utilize independent third
party data as inputs. The change in the fair value of derivatives embedded in
assets and subject to bifurcation is reported as Realized capital gains and
losses. The change in the fair value of derivatives embedded in liabilities and
subject to bifurcation is reported as Realized capital gains and losses or Life
and annuity contract benefits. 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
affecting the Company 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. For life insurance and investment-oriented 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 Consolidated Statements of
Operations and Comprehensive Income. All other acquisition expenses are
charged to operations as incurred, impacting operating costs and expenses on
the Consolidated 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, 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.

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The Company currently performs quarterly reviews of recoverability for
interest-sensitive life, 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 DAC. For quantification of the
impact of these estimates and assumptions on the Company, see the Retail
Segment, Structured Financial Product Segment, Forward-looking Statements and
Risk Factors affecting the Company sections of the MD&A.

LIFE INSURANCE RESERVES - Reserves for life-contingent contract benefits,
which relate to traditional life insurance, group retirement annuities 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 affecting the Company section of the
MD&A.

RETAIL SEGMENT

2002 HIGHLIGHTS

- - Premiums and deposits for the Retail segment increased 20.3% to $8.31
billion in 2002 primarily due to sales of fixed annuities, including the
Allstate(R)Treasury - Linked Annuity.
- - Separate Accounts assets for the Retail segment decreased 18.2% due to
declines in account balances resulting from poor equity market performance
during the year.
- - Net income decreased 19.9% due to accelerated amortization of DAC,
higher operating expenses and an increase in realized capital losses
partly offset by a higher investment margin and an adjustment for prior
year tax liabilities.

OVERVIEW The Company markets a diversified portfolio of retail products to
meet customers' needs in the areas of financial protection, investment and
retirement solutions.

Products sold to Retail customers include retirement solutions such as
variable annuities and fixed annuities, and financial protection products such
as interest-sensitive life and traditional life insurance. Retail products are
sold through a variety of distribution channels including Allstate exclusive
agencies, independent agents (including master brokerage agencies), financial
services firms (financial institutions and broker/dealers) and direct marketing.

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. The Company will continue to extend the
Allstate brand by using it in conjunction with more products and distribution
channels. The Company will create greater awareness of the Company's services
through advertising, public relations and by focusing on a consistent
experience for customers and distribution partners. The Company intends to
grow its business through a combination of organic growth, selective
acquisitions, alliances and partnerships.

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

(1) Reconciliation of Realized capital gains and losses

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
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 contractually specified dates.

23

The following table summarizes GAAP premiums and contract charges for the
Retail segment.

Total Retail GAAP premiums decreased 14.7% in 2002 compared to 2001, due to
declines in both traditional life insurance and other insurance products
premiums. Traditional life premiums declined due to the Company entering a
reinsurance agreement implemented January 1, 2002 which ceded certain of its
direct-marketed credit life insurance products. Additionally, term life
insurance sales decreased. Declines in other premiums are related to the
Company not renewing certain direct marketing non-life credit insurance
products.

In 2001, Retail GAAP premiums increased 6.7% compared to 2000 due to
increases in both traditional life and other insurance products. The increase in
traditional life was from new term insurance sales and renewal premiums being
partially offset by declines in whole life business. The increase in other
premiums is a result of modest increases in the accident and health premiums
earned through the direct marketing channel.

Total Retail contract charges increased 3.9% during 2002 compared to
2001 due to growth in interest-sensitive life insurance account values
inforce and contract charge rate increases. Average contract charges have
trended upwards as customers have selected products with more riders and
higher fees. Contract charges on variable annuities, which are generally
calculated as a percentage of each account value ranging from .70% to 2.30%,
decreased 2.3% compared to 2001 due to declines in account values as a
result of poor equity market performance. Contract charges on Retail products
increased 2.0% during 2001 from 2000 due to new sales, partly offset by
declines in variable annuity account balances due to poor equity market
performance.

The following table summarizes premiums and contract charges for the Retail
segment by distribution channel.

24

PREMIUMS AND DEPOSITS for the Retail segment are summarized by product line
in the following table.

Total Retail Premiums and deposits increased 20.3% to $8.31 billion in 2002
from $6.91 billion in 2001. The increase in 2002 was due to growth in sales of
fixed annuities, including $762 million of the Allstate(R) Treasury -Linked
Annuity sales, partly offset by declines in variable annuity sales. The
Allstate(R) Treasury-Linked Annuity is the first flexible premium deferred fixed
annuity that provides a competitive underlying guaranteed rate for five years
plus annual renewal rates linked to movement in five-year U.S. Treasury rates.
The decline in variable annuity sales was caused by poor equity market
performance during the period.

Total Retail Premiums and deposits decreased 22.7% to $6.91 billion in 2001
from $8.93 billion in 2000. The decrease was due to declines in variable and
fixed annuity sales. The decline in variable annuity sales was a reflection of
the overall decline in the variable annuity market caused by poor equity market
performance. The fixed annuity decline was a reflection of management decisions
to curtail sales in selected distribution channels in order to meet targeted
returns.

The following table summarizes Premiums and deposits for the Retail segment
by distribution channel.

As a result of initiatives undertaken to expand the sales of financial
services products through Allstate agencies, Premiums and deposits increased
39.8% in 2002 compared to 2001 and 22.4% in 2001 compared to 2000.

25

OPERATING INCOME for the Retail segment is presented in the following
table.

Operating income for the Retail segment decreased 4.7% during 2002 as
compared to 2001 due to increases in DAC amortization, higher operating costs
and expenses and a decrease in maintenance charges partly offset by an
adjustment for prior year tax liabilities, as well as increased investment and
mortality margins. In 2001, Operating income decreased 0.7% compared to 2000 due
to increases in the investment margin and decreased amortization of DAC being
more than offset by higher operating costs and expenses and decreases in the
mortality margin.

INVESTMENT MARGIN, which represents the excess of investment income
earned over interest credited to policyholders and contractholders, increased
7.1% during 2002 compared to 2001. The increase is a result of 17.8% higher
portfolio balances at December 31, 2002 compared to December 31, 2001.
The increase in 2002 was driven by sales of fixed annuities, less contract
benefits, surrenders and withdrawals. The impact of this growth was partly
offset by a decline in portfolio yields from lower market interest rates
affecting the yield on the investment of funds from operations and investments
and a shift to sales of investment products with lower investment margins, such
as market value adjusted annuities ("MVAAs"). Investment margin increased
15.2% in 2001 compared to 2000 as a result of 11.5% higher portfolio balances
at December 31, 2001 compared to December 31, 2000.

Management actions taken in 2002 and 2001 to reduce crediting rates on
inforce contracts where contractually allowed and in 2002 to reduce guaranteed
minimum crediting rates in new product offerings, have partially offset the
impact on investment margin from the decline in portfolio yields. As of January
1, 2003, 19 states permit a 1.5% minimum interest guarantee for retail annuity
products, and 25 states permit a 2.0% minimum interest guarantee for 10 years
and 3.0% minimum thereafter. The remaining 6 states have a 3.0% minimum interest
rate guarantee, which was formerly the minimum among all states as of January 1,
2002. The weighted average interest crediting rate during 2002 on retail fixed
annuity and interest-sensitive life products inforce, excluding MVAAs, which
have longer interest rate guarantee periods, is approximately 140 basis points
more than the underlying long term guaranteed rates on these products. The
differences between average investment yields and interest crediting rates were
comparable throughout 2002, 2001 and 2000, except for a tightening of the margin
on Retail interest-sensitive life products in 2002.

26

The following table summarizes the weighted average investment yield and
the weighted average interest crediting rates during 2002, 2001 and 2000.

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 1.9% during 2002 compared to 2001.
During 2002, growth in interest-sensitive life products and increased contract
charges were partially offset by the Company exiting most of its direct marketed
credit life insurance products through a reinsurance agreement, non-renewal of
certain other non-life credit insurance contracts and an increase in policy
benefits compared to 2001. 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 decreased 9.3% during 2001 compared to 2000 due to a
higher incidence of mortality and morbidity, including $12 million related to
the September 11 tragedies. The 2001 mortality margin also includes an increase
in death benefits on variable annuity contracts over 2000.

Policy benefits paid include cash payments for variable annuity GMDBs
totaling $58 million, $31 million, and $3 million in 2002, 2001, and 2000
respectively, net of reinsurance and other contractual arrangements. The
increases over this three-year period reflect poor equity market performance.

AMORTIZATION OF DAC increased 20.1% during 2002 compared to 2001 due to the
acceleration of amortization in 2002 and the ongoing growth of the business
inforce. DAC amortization decreased 9.0% during 2001 compared to 2000.

The steep and sustained decline in the equity markets during 2002 changed
the amount and timing of variable annuity EGP and resulted in the acceleration
of variable annuity DAC amortization, often called "DAC unlocking," totaling
$120 million. There was also a $32 million favorable DAC unlocking adjustment
(deceleration of amortization) on fixed annuities, which resulted from primarily
favorable investment margin, and a $6 million acceleration of amortization of
DAC on interest-sensitive life products, which reflects the impact of the
decline in equity markets on variable life contracts, for a net pre-tax
acceleration of DAC amortization for retail products totaling $94 million in
2002. In addition, DAC amortization was reduced by $29 million as a result of
improved persistency on fixed annuities and interest-sensitive life products and
other recoveries. Declines in the 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.

27

The following table summarizes the DAC asset balance for the Retail
segment by product.

(1) Other investment contracts include fixed annuities and all Retail other
annuities.

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

(1) Included as a component of amortization of deferred policy acquisition
costs on the Consolidated Statements of Operations and Comprehensive
Income.

OPERATING COSTS AND EXPENSES increased 12.4% during 2002 compared to
2001. The increase is due to investments in technology and advertising. The
additional investments in technology relate to systems that will increase
efficiencies and improve services through the Internet, and infrastructure
investments to support the Allstate exclusive agents in selling registered
investment products. Additionally, advertising expenditures were increased
in 2002 to create greater awareness of Allstate as a financial services
company. Operating costs and expenses increased 24.1% during 2001 compared
to 2000 due to higher marketing, technology and distribution expenses
incurred on similar growth initiatives.
INCOME TAX EXPENSE ON OPERATIONS declined 27.7% in 2002 compared to
2001 due primarily to a $34 million adjustment for prior year tax
liabilities that resulted primarily from Internal Revenue Service
developments and examination of tax returns. In 2001, total income tax
expense on operations declined 6.8% compared to 2000.

RETAIL SEGMENT 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, regulatory
minimum rates or contractual minimum rate guarantees on many contracts
and may not match the timing or magnitude of changes in asset yields.
The level of investment 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 and variable
life products. Most account values for these products are invested, at
the discretion of the contractholder, in Separate Accounts invested
primarily in equities. 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.

29

- - The Company is undertaking various expense-saving initiatives to increase
profitability. These initiatives will include creating greater
efficiencies, a simplification of 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.

RETAIL INVESTMENT RESULTS

PRE-TAX NET INVESTMENT INCOME increased 8.2% for the Retail segment in 2002
compared to 2001 after increasing 9.6% in 2001 compared to 2000. The increase in
both 2002 and 2001 was due to higher portfolio balances, partially offset by
lower portfolio yields. Lower portfolio yields were due to funds from operations
and reinvestments being made at current market rates. Retail investment
balances, excluding assets invested in Separate Accounts and net unrealized
capital gains on fixed income securities, increased 17.8% as of December 31,
2002 from December 31, 2001, compared to an 11.5% increase from December 31,
2000 to December 31, 2001. The increase in both years was principally due to the
receipt of Premiums and deposits less contract benefits and withdrawals during
the periods. The average pre-tax investment yield in 2002 was 6.9% compared to
7.7% in 2001.

AFTER-TAX REALIZED CAPITAL LOSSES were $140 million in 2002 compared to
$103 million in 2001 and $36 million in 2000. After-tax realized capital gains
and losses are presented net of the effects of DAC amortization and additional
future policy benefits, 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 further discussion of realized capital gains and losses, see the
Investments discussion of the MD&A.

RETAIL 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.

30

STRUCTURED FINANCIAL PRODUCTS SEGMENT

2002 HIGHLIGHTS

- - Net income decreased $58 million to a net loss in 2002 as a result of
increased realized capital losses, higher operating costs and expenses
and lower mortality margin, partly offset by an increase in the investment
margin.
- - Premiums and deposits decreased 19.8% in the Structured Financial Products
segment due to unfavorable market conditions for sales of funding
agreements ("FAs").

OVERVIEW The Company markets a diversified portfolio of structured financial
products to meet primarily institutional customers' financial needs.
Structured Financial Products offers a variety of primarily spread-based
products to institutional investors, special purpose entities ("SPEs") and
others. Spread-based products are designed to generate income based on the
difference ("spread") between investment returns on the supporting assets and
the returns credited to customers. These products include guaranteed investment
contracts ("GICs") sold to tax-qualified retirement plan sponsors or investment
managers who represent plan sponsors, and FAs sold to SPEs that issue
medium-term notes to institutional investors.

Summarized financial data and key operating measures for the Structured
Financial Products segment as of and for the years ended December 31, are
presented in the following table.

(1) Reconciliation of Realized capital gains and losses

PREMIUMS AND CONTRACT CHARGES, included in financial results, represent
GAAP premiums generated from structured settlement and immediate annuities with
life contingencies which have significant mortality or morbidity risk. Contract
charges are generated from interest-sensitive life products, structured
settlement and immediate

31

annuities, and synthetic GICs 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 contractually specified
dates.

In 2002, premiums from structured settlement and immediate annuities with
life contingencies totaled $415 million, an increase of 24.6% from $333 million
in 2001. Premiums from structured settlement and immediate annuities with life
contingencies decreased 17.0% for 2001 compared to $401 million in 2000. Under
GAAP accounting requirements, only structured settlement and immediate annuities
with life contingencies are recognized in premiums. Those annuities without life
contingencies, called period certain, are recorded directly as contractholder
funds and generate investment margins and contract charges. Market conditions
and consumer preferences drive the mix of structured settlement and immediate
annuities sold with or without life contingencies, which cause fluctuations
in the overall level of premiums, resulting in volatility in reported
revenues. Contract charges increased 4.2% to $25 million in 2002 from $24
million in 2001. Contract charges in 2001 increased 41.2% compared to $17
million in 2000 resulting primarily from increased contract charges related
to structured settlement annuities without life contingencies.

PREMIUMS AND DEPOSITS for the Structured Financial Products segment are
summarized by product line in the following table.

Total Premiums and deposits in 2002 decreased 19.8% compared to 2001 due
to declining sales of funding agreements and GICs partly offset by an
increase in sales of structured settlement and immediate annuities. Period to
period fluctuations in sales of FAs and GICs will occur as the sales of these
products are primarily made based on management's assessment of market
opportunities. The 28.4% decline in FAs compared to 2001 is primarily a
result of lower sales in the latter part of 2002. Management determined that
economic conditions during that period were adverse to earning targeted
spreads on this product.

Total Premiums and deposits increased 8.0% to $3.32 billion in 2001 from
$3.08 billion in 2000. In 2001, Structured Financial Products Premiums and
deposits increased due to the sale of FAs, including $2.00 billion sold to
SPEs issuing medium-term notes. This increase and the increased sales of
structured settlement and immediate annuities more than offset the decrease
in sales of GICs, interest-sensitive life contracts and other products.

32

OPERATING INCOME for the Structured Financial Products segment is presented
in the following table.

Operating income for the Structured Financial Products segment increased
17.5% in 2002 compared to 2001 due to growth in the investment margin partially
offset by a decline in the mortality margin and increased operating costs and
expenses. In 2001, Operating income increased 24.1% over 2000 as a result of
increased investment margin partly offset by higher income tax expense on
operations and a decline in the mortality margin.

INVESTMENT MARGIN, which represents the excess of investment income
over interest credited to policyholders and contractholders, increased 27.7% for
this segment during 2002 compared to 2001. The increase was due to growth in
portfolio balances of 12.9% related to sales in the prior twelve-month period
and improved spreads from short-term asset/liability management actions.

Investment margin increased 28.7% during 2001 compared to 2000. The
increased investment margin is a result of growth in invested assets of 19.2%
when compared to 2000. The growth in portfolio balances reflects the net growth
of inforce business during the year from new sales less contract maturities and
withdrawals.

The Company's asset/liability strategy includes swap transactions for
certain products that can have the effect of reducing portions of Net investment
income as well as interest credited to Contractholder funds while preserving the
spread on those products. The following table summarizes the weighted average
investment yield and the weighted average interest crediting rates during 2002,
2001 and 2000.

MORTALITY MARGIN, which represents premiums and cost of insurance charges
less related policy benefits, declined $12 million to a negative margin of $14
million in 2002 compared to 2001, and decreased $7 million

33

during 2001 as compared to 2000. The declines were due to a lower death rate
than anticipated in the policyholder benefit liability assumptions for
structured settlement and immediate annuities with life contingencies. For
structured settlement and immediate annuities with life contingencies, a
decrease in the death rate increases 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 a life contingency 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. The effects of the mortality rate can
cause benefit expense to fluctuate from period to period.

DAC AMORTIZATION was comparable in 2002, 2001 and 2000. The DAC balance for
the Structured Financial Products segment was $17 million and $21 million at
December 31, 2002 and December 31, 2001, respectively.

OPERATING COSTS AND EXPENSES increased 28.9% to $58 million in 2002
compared to 2001. These increased expenses in 2002 were driven by additional
spending on product development and higher allocations of expenses billed
pursuant to the inter-company expense sharing agreement with AIC. Operating
costs and expenses in 2001 were comparable to 2000 results.

STRUCTURED FINANCIAL PRODUCTS 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,
regulatory minimum rates or contractual minimum rate guarantees on certain
contracts and may not match the timing or magnitude of changes in asset
yields. The level of investment defaults may also affect investment
income. The Company will continually monitor its risk limits related to
credit quality.
- - 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. This includes sales of funding agreements that
are pursued when market conditions are conducive to meeting target returns.
For this reason, funding agreement sales volume will vary in the future as
dictated by market conditions.
- - The financial strength ratings of the Company are an integral factor in the
Company's ability to compete in the marketplace for sales of FAs.
Accordingly, the Company manages the Structured Financial Product
business mindful of rating agency considerations, which principally
include factors such as asset quality, asset/liability management and
overall investment and business portfolio mix.

STRUCTURED FINANCIAL PRODUCTS INVESTMENT RESULTS

PRE-TAX NET INVESTMENT INCOME for the Structured Financial Products segment
for 2002 was comparable to 2001, after increasing 9.8% in 2001 compared to 2000.
Increased Structured Financial Products portfolio balances were partly offset by
lower portfolio yields in both periods. In 2002, lower portfolio yields were due
to investments made in a low interest rate environment and increased payments on
interest rate swaps as part of the Company's asset/liability management
strategy. Structured Financial Products portfolio balances, excluding assets
invested in Separate Accounts and net unrealized capital gains on fixed income
securities, increased 12.9% from December 31, 2002 compared to December 31,
2001, compared to an increase of 19.2% from December 31, 2000 to December 31,
2001. The increase in both periods was due to Premiums and deposits from inforce
business less maturities and withdrawals. The average pre-tax investment yield
in 2002 was 6.6% compared to 7.1% in 2001.
AFTER-TAX REALIZED CAPITAL LOSSES increased to $138 million in 2002
compared to $47 million in 2001 and $4 million in 2000.

34

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

INVESTMENT OUTLOOK

- - As the Company continues to receive Premiums and deposits, investment of
these increased cash flows in available securities with acceptable
risk-adjusted 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
invested assets. The Company's investment portfolios are segmented between the
Retail and Structured Financial Products segments. The investment portfolios are
managed based upon the nature of each respective 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 underwriting liability product portfolio and to
maximize return on retained 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 trading 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.

35

The composition of the investment portfolio at December 31, 2002 is
presented in the table below. Also see Notes 2 and 6 of the consolidated
financial statements for investment accounting policies and additional
information.

(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $25.24 billion and $16.48 billion for Retail and Structured
Financial Products, respectively.

Total investments increased to $52.67 billion at December 31, 2002 from
$44.30 billion at December 31, 2001. This increase was due in part to amounts
invested from positive cash flows from new sales and a 104.4% increase in net
unrealized gains on fixed income securities from December 31, 2001 to $3.08
billion at December 31, 2002.

Retail investments were $31.75 billion at December 31, 2002 compared to
$26.40 billion at December 31, 2001. The increase in investments were primarily
attributable to amounts invested from positive cash flows generated from
operations and increased unrealized gains on fixed income securities.

Structured Financial Products' investments were $20.92 billion at December
31, 2002 compared to $17.90 billion at December 31, 2001. The increase in
investments was primarily attributable to amounts invested from positive cash
flows generated from operations and increased unrealized gains on fixed income
securities. Structured Financial Products' other investments reflect the
decrease in the market price of certain fair value hedges due to the decline
in short-term interest rates. As a component of the Company's overall
interest rate risk management, this decline is most appropriately considered
in conjunction with the $1.69 billion net unrealized gain in Structured
Financial Products' fixed income securities portfolio.

Total investment balances related to collateral primarily due to securities
lending decreased to $1.24 billion at December 31, 2002 from $1.47 billion at
December 31, 2001.

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 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.

36

- 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 either independent third party pricing
sources or widely accepted pricing 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.

37

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

The Unrealized net capital gains on fixed income and equity secu rities at
December 31, 2002 were $3.07 billion, an increase of $1.56 billion or 103.2%
since December 31, 2001. Included in net unrealized gains are unrealized losses
of $405 million. Unrealized losses were primarily concentrated in the corporate
fixed income portfolio. Corporate fixed income net unrealized gains totaled
$1.52 billion, comprised of $1.86 billion of unrealized gains and $342 million
of unrealized losses. The unrealized losses for the corporate fixed income
portfolio were concentrated in the transportation, public utility, energy and
communications sectors, all of which have been under considerable pressure in
2002. These sectors comprised $229 million or 67.0% of the unrealized losses and
$715 million or 38.5% of unrealized gains in the corporate fixed income
portfolio. The remaining unrealized gains and losses were spread across multiple
sectors. The transportation, utility, energy and communication sectors have been
vulnerable to overcapacity, difficulty in accessing capital markets and general
economic weakness. The Company expects eventual recovery in these sectors and
included every security in these sectors in its watch list process at December
31, 2002.

FIXED INCOME SECURITIES The Company's fixed income securities include
bonds, such as municipal bonds, corporate publicly and privately placed bonds,
mortgage-backed and asset-backed securities, and redeemable preferred stocks.
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 $3.06 billion at December 31, 2002 compared to $2.23 billion
at December 31, 2001. Approximately 99.3% of these securities are rated
investment grade at December 31, 2002.

38

Municipal bonds comprise 2.9% of the Company's fixed income securities
portfolio at December 31, 2002. Investment grade municipal bonds represent
99.1% of the total $1.29 billion. The municipal bond portfolio at December
31, 2002 consisted of approximately 60 issues from nearly 50 issuers.

Corporate obligations that are publicly issued totaled $13.78 at December
31, 2002 compared to $10.71 at December 31, 2001. At December 31, 2002, 89.7% of
these obligations were rated as investment grade. As of December 31, 2002, the
fixed income securities portfolio contained $12.36 billion of privately placed
corporate obligations or 47.3% of the total corporate obligations in the
portfolio, compared with $11.36 billion 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 when compared to public securities
is reduced liquidity. At December 31, 2002, 84.1% of the privately placed
securities were rated as investment grade.

Foreign government securities totaled $1.36 billion and $1.05 billion at
December 31, 2002 and 2001, respectively. Approximately 94.2% of these
securities are rated investment grade at December 31, 2002.

At December 31, 2002 and 2001, $10.38 billion and $8.16 billion,
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 53.2% of the
MBS portfolio was invested in planned amortization class bonds or the
equivalent.

The fixed income securities portfolio contained $2.47 billion and $2.41
billion 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 83.5% 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 30.8% of the
Company's ABS portfolio is invested in securitized credit card receivables. The
remainder of the portfolio is backed by securitized home equity, manufactured
housing and auto loans.

At December 31, 2002, 91.8% of the Company's consolidated fixed income
securities portfolio was rated investment grade, which is defined by the Company
as a security having a rating from The National Association of Insurance
Commissioners ("NAIC") of 1 or 2, a Moody's 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.

39

The following table shows the composition by credit quality of the fixed
income securities with gross unrealized losses at December 31, 2002.

The table above includes redeemable preferred securities with a fair value
of $40 million and an unrealized loss of $1 million. It also includes 56
securities that have not yet received an NAIC rating, for which the Company has
assigned a rating based on an analysis similar to that used by the NAIC. As of
December 31, 2002, the fair value of unrated securities was $490 million
including an unrealized loss of $14 million. Due to lags between the funding of
an investment, processing of final legal documents, filing with the Securities
Valuation Office of the NAIC ("SVO"), and rating by the SVO, the Company will
always have a small number of non-rated securities.

At December 31, 2002, $164 million, or 41.7%, of the gross unrealized
losses are related to fixed income securities that are rated investment grade.
Unrealized losses on investment grade securities principally relate to changes
in interest rates or changes in sector related credit spreads since the
securities were acquired.

As of December 31, 2002, $229 million of the gross unrealized losses are
related to below investment grade fixed income securities. Of this amount,
18% have been in a significant unrealized loss position (greater than or
equal to 20% of amortized cost) for six or more consecutive months prior to
December 31, 2002. Through a monitoring process, the Company assessed those
securities that met certain screening criteria and other securities for which
it has concerns to determine if any were other than temporarily impaired.
After reviewing each of those securities with the information available as of
December 31, 2002, the Company concluded that the securities are not other
than temporarily impaired. Included among the securities that are rated below
investment grade are both public and privately placed high-yield bonds and
securities that were purchased at investment grade but have since been
downgraded. The Company mitigates the credit risk of investing in below
investment grade fixed income securities by limiting the percentage of its
portfolio invested in such securities and through diversification of the
portfolio.

The scheduled maturity dates for fixed income securities in an unrealized
loss position at December 31, 2002 is shown below. Actual maturities may differ
from those scheduled as a result of repayments by the issuers.

(1) Because of the potential for prepayment, mortgage- and asset-backed
securities have not been reflected based on their contractual maturities.

40

EQUITY SECURITIES The Company's equity securities portfolio was $183
million at December 31, 2002 compared to $201 million in 2001. The decrease is
attributable to general market declines and disposition of selected securities
during the year. Losses are recognized for declines in the value of equity
securities that are deemed other than temporary, and included in realized
capital gains and losses.

The equity securities portfolio includes partnership investments where the
Company has virtually no influence over the operating and financial policies of
the partnership. These investments are accounted for using the cost method.
Partnership investments where the Company has more than a minor amount of
influence over the operating and financial policies of the partnership and an
ownership interest less than or equal to 50% are accounted for using the equity
method of accounting. The Company has not provided any guarantees to any
partners or any other parties related to these investments. The majority of the
Company's partnerships invest in either real estate or private equities.

Common and non-redeemable preferred stocks and real estate investment
trust equity investments are classified as available for sale and are carried
at fair value if independent market quotations are available. If independent
market quotations are not available, these securities are carried at cost.
The difference between cost and fair value, net of deferred income taxes, is
reflected as a component of Accumulated other comprehensive income.

FIXED INCOME AND EQUITY PORTFOLIO MONITORING The Company writes down to
fair value any security, fixed income or equity, 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:

- 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
cost for equity securities or 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
and equity 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 cost
for equity securities or 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 cost for equity securities
or 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.

41

The unrealized loss balance for fixed income and equity securities can be
further segmented into the following four categories of securities:

(i) Securities with an unrealized loss less than 20% of cost for equity
securities or amortized cost for fixed income securities ($209
million of unrealized loss);
(ii) Securities with an unrealized loss greater than or equal to 20% of
cost for equity securities or amortized cost for fixed income
securities for a period of less than six consecutive months prior
to December 31, 2002 ($145 million of unrealized loss);
(iii) Securities with an unrealized loss greater than or equal to 20% of
cost for equity securities or amortized cost for fixed income
securities for a period of six or more consecutive months, but less
than 12 consecutive months prior to December 31, 2002 ($46 million
of unrealized loss); and
(iv) Securities with an unrealized loss greater than or equal to 20% of
cost for equity securities or amortized cost for fixed income
securities for twelve or more consecutive months prior to December
31, 2002 ($5 million of unrealized loss).

The first two categories have generally been adversely impacted by the
downturn in the financial markets, overall economic conditions, and the market's
evaluation of certain sectors. While all of the securities in the first two
categories are monitored for impairment, the degree to which and length of time
that the securities have been in an unrealized loss position suggest that these
securities do not pose a high risk of other than temporary impairment. In
general, the Company expects that the fair values of these securities will
recover over time.

For the third category above, securities with an unrealized loss greater
than or equal to 20% of their cost for equity securities or amortized cost for
fixed income securities for a period of six or more consecutive months, but less
than 12 consecutive months prior to December 31, 2002 ($46 million of unrealized
loss), there are 7 equity securities with a fair value of $17 million ($9
million unrealized loss, with the largest being $3 million) and 12 fixed income
securities with a fair value of $80 million ($37 million of unrealized loss,
with the largest being $6 million).

For the fourth category above, securities with an unrealized loss
greater than or equal to 20% of their cost for equity securities or amortized
cost for fixed income securities for a period of twelve or more consecutive
months prior to December 31, 2002 ($5 million of unrealized loss). The
balance was attributable to 5 fixed income securities with a fair value of
$12 million. The largest unrealized loss on a single security totaled $4
million. Unrealized losses related to securities in categories three and four
represent 2% of the total net unrealized gain position. Additionally, any
fixed income security with an unrealized loss of 20% or more for at least 36
months or any equity security with an unrealized loss of 20% or more for at
least 24 months is evaluated and requires additional approval to support not
recording a write-down.

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

As of December 31, 2002, the Energy Company and Electricity Generator
with an NAIC rating of 6 had unrealized losses totaling $11 million, and had
been in a significant unrealized loss position, greater than or equal to 20%
of cost for equity securities or amortized cost for fixed income securities,
for six or more consecutive months, but less than 12 consecutive

42

months prior to December 31, 2002. The Major U.S. Airline security, with an
unrealized loss of $6 million, was rated investment grade at December 31, 2002.
The remaining securities, with unrealized losses totaling $50 million, were
rated below investment grade and either had an unrealized loss less than or
equal to 20% of cost for equity securities or amortized cost for fixed income
securities or had an unrealized loss greater than or equal to 20% of cost for
equity securities or amortized cost for fixed income securities for a period
of less than six consecutive months prior to December 31, 2002.

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, restructured 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, restructured or potential problem as of
December 31, 2002 compared to December 31, 2001. The increases in problem and
potential problem assets primarily resulted from poor operating fundamentals as
well as liquidity constraints in the utilities, energy and airlines 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 $77 million of Unrealized losses at December 31, 2002 are related
to securities that the Company has included in the problem, restructured or
potential problem categories. These securities represent 1.4% 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.

43

The following table describes the components of pre-tax realized capital
gains and losses for fixed income and equity securities.

Fixed income and equity write-downs of $309 million during 2002 represent
0.6% of the average total investments during the year.

The Company recorded for the year ended December 31, 2002, $108 million in
net losses from sales of fixed income and equity securities, which is comprised
of gross gains of $229 million and gross losses of $337 million. Gross losses
from sales of fixed income and equity securities of $337 million which, combined
with investment write-downs of $309 million, represents a total gross realized
loss of $646 million on fixed income and equity securities for the year ended
December 31, 2002. Of the $337 million in gross losses from sales of fixed
income and equity securities, $328 million resulted from sales of fixed income
securities and $9 million resulted from sales of equity securities.

The $328 million in losses from sales of fixed income securities are
primarily related to a decision in 2002 to reduce exposure to certain holdings
due to severely constrained liquidity conditions in the market and routine
reductions of exposure to deteriorating credits.

The ten largest losses from sales of individual securities for the
twelve-month period ended December 31, 2002 totaled $69 million with the largest
being $18 million and the smallest being $4 million. A total of $2.5 million of
those losses related to a security in a significant unrealized loss position
(greater than or equal to 20% of cost for equity securities or amortized cost
for fixed income securities) for a period of six or more consecutive months but
less than twelve consecutive months prior to sale. The Company changed its
intention to continue holding the security upon further evaluation.

44

The following list details the 10 largest realized losses from sales and
other than temporary declines or write-downs, consolidated by issuer and all of
its affiliates (therefore, multiple issuers and securities may be consolidated
based upon affiliate and subsidiary relationships), the related circumstances
giving rise to the loss and a discussion of how those circumstances may have
impacted other material investments held.

(1) Some sectors of the utility industry continue to be under severe
fundamental pressure. The Company is monitoring developments closely
and each security in the industry is evaluated for impairment in the
watch list process.
(2) Holdings could include fixed income securities at amortized cost or
equity securities at cost.

46

MORTGAGE LOANS The Company's $5.88 billion investment in mortgage loans at
December 31, 2002 and $5.45 billion 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 or
losses related to prepayments and write-downs on mortgage loans at December
31, 2002. The Company had realized capital losses related to prepayments and
write-downs on mortgage loans of $1 million at December 31, 2001 and realized
capital gains of $4 million at December 31, 2000.

SHORT-TERM INVESTMENTS The Company's short-term investment portfolio was
$839 million and $672 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.

The Company also participates in securities lending, primarily as an
investment yield enhancement, with third parties such as brokerage firms. The
Company obtains collateral in an amount equal to 102% of the fair value of
domestic 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 $1.04 billion had been
loaned under these agreements. This compares to $964 million at December 31,
2001. In return for these securities, the Company receives cash that is
subsequently invested, a portion of which is included in Short-term investments
and an offsetting liability is recorded in Other liabilities.

SEPARATE ACCOUNTS

Separate Accounts assets and liabilities decreased 18.1% to $11.13 billion
at December 31, 2002 from $13.59 billion at December 31, 2001. The decrease was
primarily attributable to declines in the fair value of the Separate Accounts'
investment portfolios due to poor equity market performance, surrenders,
withdrawals and contract charges, partially offset by sales of variable annuity
contracts and transfers from the fixed account contract option to variable
Separate Accounts funds. During 2002, sales of variable annuities continued to
be adversely impacted by market volatility.

The assets and liabilities related to variable annuities, variable life
contracts and certain GICs 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
investments accrue directly to the contractholders and therefore are not
included in the Company's Consolidated Statements of Operations and
Comprehensive Income. Revenues to the Company from the Seperate 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 Separate Accounts' funds
may not meet their stated investment objectives.

REINSURANCE RECOVERABLES

The Company's Reinsurance Recoverables increased 11.7%, to $1.06 billion at
December 31, 2002 from $950 million at December 31, 2001. The increase in 2002
is due to the 2001 acquisition of an inactive licensed insurance company that
continues to cede inforce business externally, normal growth in the business
reinsured and a redesign of a formerly direct business relationship to
reinsurance. The Company purchases reinsurance to limit aggregate and single
losses on large risks while continuing 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 contractual obligations could result in
additional net losses.

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,
coinsurance, and modified coinsurance agreements. Yearly renewable term and
coinsurance agreements result in the passing of a portion of the risk to the
reinsurer. Generally, the reinsurer receives a proportionate amount of the
premiums less commissions, and is liable for a corresponding proportionate
amount of all benefit payments. Modified coinsurance is similar to coinsurance
except that the cash and investments that support the liability for contract
benefits are not transferred to the assuming company, and settlements are made
on a net basis between the companies.

47

The Company cedes 90%, 80% or 60% of the mortality risk on certain life
policies, depending upon the issue year and product, to a pool of eleven
reinsurers. The Company also cedes 100% of the mortality and other risks related
to product features of a portion of variable contracts. Since 1998, the Company
has also ceded mortality risk on new business in excess of $2 million per life
for individual coverage. For business sold prior to 1998, the Company ceded
mortality risk in excess of $1 million or less per life for individual coverage.

As of December 31, 2002 $156.51 billion or 41.7% of life insurance inforce
was ceded to third parties.

The Company continuously monitors the credit worthiness of reinsurers. As
of December 31, 2002, 100% of ceded premiums under uncollateralized
non-affiliate reinsurance treaties were ceded to companies that had 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, interest, commodity, or currency exchange rates and prices.
The Company's primary market risk exposures are to changes in interest rates and
equity prices, although the Company also has a limited exposure to changes in
foreign currency exchange rates.

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 7 to the consolidated financial statements.

OVERSIGHT The Company generates substantial investable funds from its
primary 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 the underlying risks and product profiles.

The Company administers and oversees the investment risk management
processes primarily through the Boards of Directors and Investment Committees
and the Credit and Risk Management Committee ("CRMC"). The Boards of Directors
and Investment Committees provide executive oversight of investment activities.
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 has investment guidelines that define the overall framework
for managing market and other investment risks, including the
accountabilities and controls over these activities. In addition, the Company
follows investment policies that have been approved by the Board of Directors
and that delineate the investment limits and strategies that are appropriate
given the respective liquidity, surplus, product, and regulatory requirements.

The Company manages its exposure to market risk through the use of asset
allocation limits, duration limits and value-at-risk limits, through the use of
simulation and, as appropriate, through the use of stress tests. Asset
allocation limits place restrictions on the aggregate fair value that may be
invested within an asset class. The Company has duration limits on its
investment portfolios and, as appropriate, on individual components of these
portfolios. These duration limits place restrictions on the amount of interest
rate risk that may be taken. Relative value-at-risk limits restrict the
potential loss in fair value that could arise from adverse movements in the
fixed income, equity, and currency markets over a time interval based on
historical volatilities and correlations among market risk factors. Simulation
and 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 policies. The
Company has implemented a comprehensive daily measurement process, administered
by the Investment Risk Manager, for monitoring compliance with limits
established by the investment policies.

48

INTEREST RATE RISK is the risk that the Company will incur economic losses due
to adverse changes in interest rates. This risk arises from many of the
Company's primary activities, as the Company invests substantial funds in
interest-sensitive assets and carries significant interest-sensitive
liabilities.

The Company manages the interest rate risk inherent in its assets
relative to the interest rate risk inherent in its liabilities. One of the
measures the Company uses to quantify this exposure is duration. Duration
measures the sensitivity of the fair value of assets and liabilities to
changes in interest rates. For example, if interest rates increase 1%, the
fair value of an asset with a duration of 5 is expected to decrease in value
by approximately 5%. At December 31, 2002, the difference between the
Company's liability and asset duration was approximately 0.09, versus a gap
of 0.15 at December 31, 2001. This 0.09 duration gap indicates that the fair
value of the Company's liabilities is slightly more sensitive to interest
rate movements than its assets.

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 interest rate swaps, futures, forwards,
caps and floors to reduce the interest rate risk resulting from duration
mismatches between assets and liabilities. In addition, the Company uses
financial futures and other derivative instruments to hedge the interest rate
risk related to anticipatory purchases and sales of investments and product
sales to customers.

The Company currently pledges and receives collateral on certain types of
derivative contracts. For futures and option contracts traded on exchanges, the
Company has pledged securities as margin deposits for 2002, totaling $47
million. For-over-the counter derivative transactions, involving interest rate
swap, foreign currency swap, interest rate cap, and interest rate floor
agreements, master netting agreements are utilized. These agreements permit
either party to net payments due for transactions covered by the agreements. In
addition, when applicable, parties are required to post collateral. As of
December 31, 2002, the Company had posted $12 million of securities, while
counter parties have posted cash to the Company, totaling $194 million.

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 alternative
levels 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 described in Note 7 to the
consolidated 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 financial instruments,
where applicable. Such assumptions relate primarily to mortgage-backed
securities, collateralized mortgage obligations, callable corporate and
municipal obligations, and fixed rate single and flexible premium deferred
annuities.

Based upon the information and assumptions the Company uses in its duration
calculation and interest rates in effect at December 31, 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 $102 million, versus $167 million at December
31, 2001. However, there are $4.85 billion of assets supporting life insurance
products that are not financial instruments and have not been included in the
above analysis. This amount has increased from $4.30 billion in assets reported
at December 31, 2001. According to the duration calculations, in the event of a
100 basis point immediate increase in interest rates, these assets would
decrease in value by $185 million, versus a decrease of $173 million reported
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 used, 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 (also known 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 is the risk that the Company will incur economic losses due to
adverse changes in a particular stock, mutual fund or stock index. At December
31, 2002, the Company had approximately $40 million in common stocks and $551
million in other securities with equity risk (including primarily convertible
securities that are reflected as a

49

component of Fixed income securities on the Consolidated Statements of
Financial Position). These amounts were $54 million and $704 million,
respectively, at December 31, 2001.

At December 31, 2002, the Company's portfolio of equity instruments had a
beta of approximately 0.60. Beta represents a widely accepted methodology to
describe, in mathematical terms, an investment's market risk characteristics
relative to the Standard and Poor's 500 Composite Price Index ("S&P 500"). For
example, if the S&P 500 decreases by 10%, management estimates that the fair
value of its equity portfolio will decrease by approximately 6.0%. Likewise, if
the S&P 500 increases by 10%, management estimates that the fair value of its
equity portfolio will increase by approximately 6.0%. At December 31, 2001, the
Company's equity portfolio had a beta of 0.68.

Based upon the information and assumptions the Company uses in its beta
calculation and in effect at December 31, 2002, management estimates that an
immediate decrease in the S&P 500 of 10% would decrease the net fair value of
the Company's equity portfolio identified above by approximately $36 million,
versus $51 million at December 31, 2001. The selection of a 10% immediate
decrease in the S&P 500 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.

Beta was determined by regressing the monthly stock price movements of the
equity portfolio against movements in the S&P 500 over a three-year historical
period. Portfolio beta was also determined for the domestic equity portfolio by
weighting individual stock betas by the market value of the holding in the
portfolio. The two approaches to calculating portfolio beta yielded virtually
identical results. Since beta is historically based, projecting future price
volatility using this method involves an inherent assumption that historical
volatility and correlation relationships will remain stable. Therefore, the
results noted above may not reflect the Company's actual experience if future
volatility and correlation relationships differ from such historical
relationships.

At December 31, 2002 and 2001, the Company had Separate Accounts assets
with account values totaling $11.13 billion and $13.59 billion, 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 due to equity
market declines, the Company would earn approximately $18 million and $21
million less in annualized fee income at December 31, 2002 and December 31,
2001, respectively.

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 benefits ("GMIB"). The Company
charges a fee for these guarantees 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 fund balance 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 GMDB. In general, the types of guarantees offered include a
return of deposits, the highest anniversary value or a guaranteed compound
earnings rate on the initial deposit over the contract period. To reduce its
GMDB exposure resulting from further declines in the equity market, the Company
entered into various derivative instruments during 2002 which economically
hedged a portion of this existing risk. These instruments will hedge expected
benefit payments through December 31, 2003. Separate from the current hedging
program, the Company plans to enter into a new program during the first quarter
of 2003. This program is intended to hedge substantially all future death claims
on new business as it is written. At December 31, 2002 and 2001, the guaranteed
value in excess of the contractholders' account value, payable if all
contractholders were to die, is estimated to be $4.07 billion and $2.36 billion,
respectively, net of reinsurance. 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 is
approximately $131 million at December 31, 2002 compared to $15 million 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 values 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

50

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, payments for guaranteed death benefits would increase by
an estimated $14 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.

GMIBs offered by the Company include the right to annuitize based on the
highest account value at any contract anniversary date or a guaranteed compound
earnings rate based on the initial account value over the specified contract
period. The Company began offering these guarantees in certain of its variable
contracts in 1998, therefore based on the contract specifications, these
benefits will not be available for election by the contractholders until at
least 2008. The guaranteed value in excess of contractholders' account values at
December 31, 2002 and 2001, payable over the annuity period if all
contractholders were to elect to annuitize, was estimated to be $607 million and
$299 million, net of reinsurance, respectively. To calculate this measure, the
current interest rate environment is utilized in the assumptions. The increase
in this measure is attributable to the decline in the equity markets during 2002
as well as a decline in interest rates.

The estimated present value of expected future payments for GMIBs is
approximately $16 million at December 31, 2002, assuming payments over the next
40 years. To calculate the expected future GMIB payments, this estimate
considers the current mix of guarantees outstanding for all contracts that
contain GMIBs and expected fund performance. The assumptions and methodology
used to determine the present value of the future GMIB payments are consistent
with those used for DAC amortization. Management estimated the present value of
expected future payments at December 31, 2001, using these assumptions, to be
less than the expected future fees earned for this contract feature. The
increase in 2002 is attributable to the decline in account value due to the
decline in equity markets during the year, a decline in interest rates and the
fact that contractholders are one year closer to being eligible to annuitize
their contracts at guaranteed amounts. Management also estimates the impact to
its expected future GMIB payments in the event of extreme adverse market
conditions. However, in the event of an immediate decline of 10% in
contractholders' account values as of December 31, 2002 due to equity market
declines, there would be no near term impact to the Company's earnings or cash
flow, since these benefits are not currently reserved for and are not payable
until at least 2008. 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.

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.

In addition to the above, at December 31, 2002 and 2001, the Company had
approximately $1.36 billion and $1.40 billion, respectively, in equity-indexed
annuity liabilities that provide customers with contractually guaranteed
crediting rates related to a portion of the price appreciation of the S&P 500.
The Company hedges the risk associated with the price appreciation component of
equity-indexed annuity liabilities through the purchase and sale of
equity-indexed options, futures, swap futures, and Eurodollar futures,
maintaining risk within specified value-at-risk limits.

The Company also is exposed to equity risk in DAC, as equity portfolio
valuation fluctuations impact DAC amortization, because projected fee income and
guaranteed benefits payable are components of the EGP for variable life and
annuity contracts. For a more detailed discussion of DAC, see Note 2 to the
consolidated financial statements.

FOREIGN CURRENCY EXCHANGE RATE RISK is the risk that the Company will incur
economic losses due to adverse changes in foreign currency exchange rates. This
risk arises from the Company's foreign equity investments. The Company also has
certain fixed income securities and liabilities that are denominated in foreign
currencies and uses derivatives to hedge the foreign currency risk of these
securities and liabilities (both principal and interest payments). To manage the
Company's counterparty exposure risk with respect to foreign currency
derivatives, such

51

derivatives used in conjunction with medium-term note programs are covered by
Collateral Support Annexes with the derivative counterparties. Such annexes
require the posting of collateral above certain exposure thresholds, which
limits the amount of overall counterparty exposure either party has to the
other.

At December 31, 2002, the Company had approximately $2 million in foreign
currency denominated equity securities compared to approximately $5 million at
December 31, 2001. At December 31, 2002, the Company had $1.43 billion of
medium-term note liabilities denominated in foreign currencies versus $1.31
billion at December 31, 2001. All foreign currency denominated funding
agreements have been swapped to U.S. Dollars and have insignificant residual
currency risk.

Based upon the information and assumptions in effect at December 31, 2002,
management estimates that, holding everything else constant, a 10% immediate
unfavorable change in each of the foreign currency exchange rates to which the
Company is exposed would decrease the net fair value of its foreign currency
denominated instruments by approximately $0.2 million, versus $0.5 million at
December 31, 2001. The selection of a 10% immediate decrease in all currency
exchange 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. The Company's currency exposure is diversified across
approximately 11 countries at both December 31, 2002 and 2001. The largest
individual exposures at December 31, 2002 are to France (53%) and the UK (26%).
The largest individual exposures were France (49%) and the UK (22%) at December
31, 2001. The Company's primary regional exposure is to Western Europe with
approximately 98% at December 31, 2002 versus 99% at December 31, 2001.

The modeling technique the Company uses to report its currency exposure
does not take into account correlation among foreign currency exchange rates or
correlation among various markets (i.e., the foreign exchange, equity and fixed
income markets). Even though the Company believes it to be unlikely that all of
the foreign currency exchange rates to which it is exposed would simultaneously
decrease by 10%, the Company finds it meaningful to "stress test" its portfolio
under this and other hypothetical extreme adverse market scenarios. The
Company's actual experience may differ from the results noted above if future
experience does not correspond with the correlation assumptions that the Company
has used or if events occur that were not included in the methodology, such as
significant liquidity or market events.

CAPITAL RESOURCES AND LIQUIDITY

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

SHAREHOLDER'S EQUITY increased at December 31, 2002 due to an increase
in net unrealized capital gains, additional capital paid-in and retained income.

In 2002, AIC contributed $350 million of capital to the Company to
maintain the ALIC's statutory surplus and risk-based capital measures at
management's target levels. The need for additional capital was driven
primarily by the impact of realized capital losses, new business growth and
statutory reserves required for variable annuity GMDBs and GMIBs.

Shareholder's equity increased at December 31, 2001 compared to December
31, 2000 due to net income, a capital contribution from AIC and increased
unrealized capital gains. AIC made a capital contribution to ALIC of all of the
issued and outstanding Allstate Life Preferred Stock, Series B, resulting in an
increase in additional paid-in capital of $117 million.

DEBT The Company had no outstanding debt at December 31, 2002 and 2001,
respectively. The Company has an inter-company loan agreement with the
Corporation whereby the amount of inter-company loans available is at the
discretion of the Corporation. The maximum amount of loans the Corporation will
have outstanding to all its

52

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.

FINANCIAL RATINGS AND STRENGTH The Company's insurance financial strength
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, current
level of operating leverage as well as the relationship of ALIC's rating to
that of its parent, AIC. Insurance financial strength ratings have become an
increasingly important factor in establishing the competitive position of
insurance companies and, generally, may be expected to have an effect on an
insurance company's sales. On an ongoing basis, rating agencies review the
financial performance and condition of insurers. A downgrade, while not
expected, could have a material adverse effect on the Company's business,
financial condition and results of operations. ALIC's current insurance
financial strength ratings are listed below:

None of these ratings were changed during 2002. AIC's and ALIC's insurance
financial strength ratings have remained at the same consistently high levels
for the last five years. 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 and affiliates has been
"negative". In November 2002, Standard & Poor's reaffirmed the AA+ rating of
ALIC, but left the outlook unchanged. In January 2003, A.M. Best Company newly
assigned a "positive" rating outlook for AIC, ALIC, and selected affiliates.

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, which
regulators use to assess the sufficiency of an insurer's capital, measures the
risk characteristics of a company's assets, liabilities and certain off-balance
sheet items. RBC is calculated by applying factors to various asset, premium and
liability items. Within a given risk category, these factors are higher for
those items with greater underlying risk and lower for items with less
underlying risk. At December 31, 2002, RBC for each of the Company's insurance
companies 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 by 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. ALIC and its insurance subsidiaries are currently not under
regulatory scrutiny based on these ratios.

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 investment repurchase agreements, securities lending, dollar
roll and lines of credit agreements
Inter-company loans
Capital contributions from AIC

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

Payment of contract benefits, maturities, surrenders and withdrawals

53

Reinsurance cessions and payments
Operating costs and expenses
Purchase of investments
Repayment of investment repurchase agreements, securities lending, dollar
roll and borrowings under lines of credit agreements
Repayment of inter-company loans
Dividends to AIC

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

Dividends to ALIC from its domestic insurance subsidiaries and dividends
ALIC can pay to AIC are subject to restriction under the insurance company
holding act of the insurance company's state of domicile. The payment of
dividends by ALIC is limited by Illinois insurance law to formula amounts based
on statutory net income and statutory surplus, as well as the timing and amount
of dividends paid in the preceding twelve months. Based on the greater of 2002
statutory net income or 10% of statutory surplus, the maximum amount of
dividends ALIC will be able to pay without prior Illinois Department of
Insurance approval at a given point in time during 2003 is $315 million, less
dividends paid during the preceding twelve months measured at that point in
time. In the twelve-month period ending December 31, 2002, ALIC has paid total
dividends of $48 million. Notification and approval of inter-company lending
activities is also required by the Illinois Department of Insurance for those
transactions that exceed formula amounts based on statutory admitted assets and
statutory surplus.

ALIC's insurance subsidiaries are domiciled in Illinois, New York, Arizona
and Nebraska. Except for those domiciled in New York and one in Nebraska, ALIC
has 100% inter-company reinsurance agreements in place with its domestic
insurance subsidiaries. Only invested assets supporting capital and relating to
Separate Accounts remain in these subsidiaries.

A portion of the Company's diversified product portfolio, primarily fixed
annuity and interest-sensitive life insurance products, is subject to
discretionary surrender and withdrawal by contractholders. Total surrender and
withdrawal amounts were $3.11 billion, $2.95 billion and $3.65 billion in 2002,
2001 and 2000, respectively. As the Company's interest-sensitive life 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 from the aging of the policies and interest rate changes, a
significant increase in the level of surrenders relative to total contractholder
account balances is not anticipated.

Management performs actuarial tests on the impact to cash flows of
surrenders and other actions under various interest rate scenarios. Based on
these tests, management believes that future cash flows are expected to be
sufficient to meet future benefit obligations to the Company's contractholders
under various interest rate scenarios.

The following table summarizes the Company's liabilities for
interest-sensitive products by their contractual withdrawal provisions at
December 31, 2002. Approximately 11.5% of these liabilities is subject to
discretionary withdrawal without adjustment.

(1) Includes $8.70 billion of liabilities with a contractual surrender charge
of less than 5% of the account balance.

The Company is also exposed to interest rate risk on certain insurance
liabilities. Decreases in interest rates can lead contractholders to surrender
their contracts.

54

As of December 31, 2002, the Company had $1.40 billion of putable Funding
Agreements of varying lengths of putable periods ranging from seven to three
hundred sixty five days. At December 31, 2002, the average put period was 259
days.

Established external sources of short-term liquidity include lines of
credit, dollar rolls and repurchase agreements, which in the aggregate, could
provide over $2.48 billion of additional liquidity at December 31, 2002. These
transactions are subject to borrowing limits and collateral requirements in
certain situations, which are monitored by the Company and reviewed regularly.
ALIC and its subsidiaries also have access to approximately $56.0 billion of
potential liquidity from their portfolios of marketable investment securities
and the ability to issue new insurance contracts. A significant portion of the
investment portfolio has favorable liquidity characteristics but with variation
by asset class, including for example $12.36 billion of privately placed
corporate obligations and $5.88 billion of mortgage loans.

Although the Company considers the occurrence of such events to be remote,
certain events and circumstances that could constrain the Corporation's
liquidity, and could therefore constrain the Company's liquidity. Those events
and circumstances include a catastrophe resulting in extraordinary losses, a
downgrade in the Corporation's current long-term debt rating of A1 and A+ (from
Moody's and Standard & Poor's, respectively) to non-investment grade status of
below Baa3/BBB-, a downgrade in AIC's financial strength ratings 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 financial strength ratings from Aa2/AA+/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 known trends, demands, commitments, events or
uncertainties that are reasonably likely to significantly constrain the
Company's liquidity.

The Corporation has access to additional borrowing to support liquidity as
follows:

- - The Corporation has a commercial paper program with a borrowing limit of
$1.00 billion to cover short-term cash needs. As of December 31, 2002, the
remaining borrowing capacity under the commercial paper program was $721
million, however the outstanding balance fluctuates daily.
- - The Corporation has a primary credit facility and currently maintains three
credit facilities totaling $1.20 billion as a potential source of funds to
meet short-term liquidity requirements: a $575 million five-year revolving
line of credit expiring in 2006, a $575 million 364-day revolving line of
credit expiring in the second quarter of 2003 and a $50 million one-year
revolving line of credit expiring in the third quarter of 2003. The rights
to borrow on the five-year and 364-day lines of credit are subject to
requirements that are customary for facilities of this size, type and
purpose. For example, the Corporation's ratio of total debt to total
capital (as defined in the agreements) cannot exceed a designated level.
This requirement is currently being met and management expects to continue
to meet it in the future. There were no borrowings under any of these lines
of credit during 2002. The total amount outstanding at any point in time
under the combination of the commercial paper program and the three credit
facilities is limited to $1.20 billion.
- - The Corporation has the right to issue up to an additional $1.20 billion of
debt securities, preferred stock, trust preferred securities or debt
warrants utilizing the shelf registration statement filed with the
Securities Exchange Commission ("SEC") in June 2000.

55

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 cash. The Company's principal operating
subsidiaries manage their 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 FA program as well as the non-putable FA and GIC
programs, are 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.
(3) The liquidity requirements of operating leases are managed within the
structure of the Company's intermediate to long-term liquidity management
program.

The following is a distribution in U.S. Dollars of funding agreements
(non-putable) by currency at December 31:

All foreign currency denominated funding agreements have been swapped to
U.S. Dollars.

56

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

(1) Approximately $5.67 billion (or 94.5%) of this balance relates to Synthetic
GICs. Synthetic GICs are fee-based insurance products purchased by pension
trusts to obtain book value treatment for their defined contribution plans.
The coverage provides for a benefit payment in the event the plan
experiences heavy withdrawal activity due to allowable participant
initiated events. The product has been offered since 1996 without
experiencing a call on the guarantee. Coverage is provided to approximately
110 companies with contracts ranging in size from $1 million to $707
million. The Company's underwriting activities closely monitor each
arrangement. At December 31, 2002, the market value of the plan assets was
valued on average at 103% of the book value of the guarantee. This ratio
typically ranges from 99% to 101%.
(2) Represents investment commitments such as private placements and mortgage
loans.

The Company has inter-company agreements in place that relate to insurance,
reinsurance, loans, capitalization and the performance of various services,
generally at cost. All material inter-company transactions have appropriately
been eliminated in consolidation. Inter-company transactions among insurance
subsidiaries and affiliates have been approved by the applicable domiciliary
state department of insurance as required under applicable laws.

OFF-BALANCE SHEET ARRANGEMENTS

The Company's use of off-balance sheet arrangements is limited to an SPE
used to issue global medium-term notes ("GMTNs") to institutional investors.
Management of the Company has not invested in this SPE.

The Company has not yet determined if this SPE meets the criteria to be
considered a variable interest entity ("VIE") pursuant to the pending accounting
guidance of Financial Accounting Standards Board ("FASB") Interpretation ("FIN")
No. 46, "Consolidation of Variable Interest Entities." A final assessment will
be made as of July 1, 2003 in accordance with FIN No. 46.

At December 31, 2002, the SPE used to issue GMTNs had assets of $2.42
billion, liabilities of $2.33 billion and unrelated third party equity of $90
million. The funding agreements issued by the Company to the SPE are reported on
the Company's Consolidated Statements of Financial Position as a component of
contractholder funds.

REGULATION 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 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

57

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.

The Company is defending various lawsuits and regulatory proceedings that
allege that it engaged in business or sales practices inconsistent with state or
federal law. The Company has been vigorously defending these matters, but their
outcome is currently uncertain.

Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the target of an increasing
number of class action lawsuits and other types of litigation, 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.

PENDING ACCOUNTING STANDARDS

In June 2001, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 143, "Accounting for Asset Retirement Obligations", which changes
the measurement of an asset retirement obligation from a cost-accumulation
measurement to a fair value measurement, where the fair value of an asset
retirement obligation is recognized as a liability when incurred rather than
over the useful life of the related asset. Accretion expense is recognized using
the credit-adjusted risk-free interest rate in effect when the liability is
initially recognized and asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset and subsequently amortized into expense.
The adoption of SFAS No. 143 on January 1, 2003 is not expected to have a
material impact on either the consolidated financial position or results of
operations of the Company.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which amends SFAS No.
123, "Accounting for Stock-Based Compensation". This amendment enables
companies that choose to adopt the fair value based method to report the full
effect of employee stock options in their financial statements immediately
upon adoption. The statement sets forth clearer and more prominent
disclosures about the cost of employee stock options and increases the
frequency of those disclosures to include publication in quarterly financial
statements. The Corporation previously announced its intention to begin
expensing the fair value of all stock options granted on or after January 1,
2003 beginning January 1, 2003. Based

58

on stock option grants for the year ending December 31, 2003, the estimated
impact to the Company's Consolidated Statements of Operations and
Comprehensive Income is approximately $2 million, after-tax. The Company
will be billed its proportionate share of this expense pursuant to the
inter-company expense sharing agreement with AIC.

In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires that upon issuance of a guarantee,
the guarantor must recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of FIN No. 45 are
effective for financial statements ending after December 15, 2002. The adoption
of the disclosure provisions of FIN No. 45 did not have a material impact on the
Company's consolidated financial statements for the year ended December 31, 2002
(see Note 11). The provisions for initial recognition and measurement are
effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002. The adoption of the remaining provisions of FIN No. 45
is not expected to have a material impact on either the Consolidated Statements
of Financial Position or results of operations of the Company.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". FIN No. 46 addresses issues related to the consolidation of
VIE. The effective date of this interpretation is the first fiscal year or
interim period beginning after June 15, 2003. The Company has one SPE used to
issue GMTNs to unrelated third parties. The Company is in the process of
assessing whether this SPE meets the criteria to be considered a VIE, thereby
requiring consolidation under FIN No. 46. The assets and liabilities of this SPE
are currently included on the Consolidated Statements of Financial Position of
the Company.

EXPOSURE DRAFTS

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 Consolidated 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
Consolidated 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's reinsurance balances
that would be subject to the proposed guidance, as currently drafted, are
immaterial in the aggregate. 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 Consolidated Statements of
Financial Position and Consolidated Statements of Operations and
Comprehensive Income.

RECENT DEVELOPMENTS

On January 1, 2003, Northbrook Life Insurance Company ("NLIC"), one of
ALIC's wholly owned subsidiaries, was merged into ALIC. Substantially all
premiums, contract charges, interest credited, policyholder benefits and
expenses of NLIC were already being ceded to ALIC under existing reinsurance
agreements between ALIC and NLIC. ALIC is the surviving legal entity and NLIC no
longer exists as an independent entity. In conjunction with the merger, two of
NLIC's Separate Accounts, Northbrook Variable Annuity Account I and Northbrook
Variable Annuity Account II, were merged with the Allstate Financial Advisors
Separate Account I, a Separate Account of

59

ALIC. A third Separate Account, Northbrook Variable Life Separate Account A was
renamed Allstate Life Separate Account A.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS AFFECTING THE COMPANY

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 our
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.

- - Certain states require insurers to participate in guaranty funds for
impaired or insolvent insurance companies. These funds periodically assess
such 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 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 Company 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 its shareholder, 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 Company 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 reinvents proceeds from positive
cash flows from operations and proceeds 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, including
realized losses relating to derivative strategies not adequately addressing
portfolio risks, thus causing volatility in the Consolidated Statements of
Operations and Comprehensive Income. Due to the accounting treatment of
certain derivative strategies, their volatility could also impact
Accumulated other comprehensive income in the Consolidated Statements of
Financial Position.
- - Changes in interest rates could also reduce the profitability of the
Company's spread-based products, particularly interest-sensitive life,
investment and structured financial products, as the difference between the
amount that the Company is required to pay on such products and the rate of
return earned on the 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

60

maintained, leading to lower sales and/or changes in the level of
surrenders and withdrawals for these products. The 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
on its products 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, variable
annuity 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 an 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 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 the exposure of the Company 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 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

61

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, the simplification of 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 comprised of 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, the National Association of Securities Dealers and/or, in some cases,
state securities administrators. The laws regulating the securities
products and activities of the Company are complex, numerous and subject to
change. As with any highly regulated industry, there is some degree of risk
of regulatory non-compliance; however the Company has in place various
legal and compliance personnel, procedures and systems designed to
reasonably assure compliance with these requirements.
- - 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 current long-term
debt rating of A1 and A+ (from Moody's and Standard & Poor's, respectively)
to non-investment grade status of below Baa3/BBB-, a downgrade 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 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-.
- - The events of September 11, 2001, and the resulting disruption in the
financial markets revealed weakness 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 GMIB or GMDB exposure resulting from market
declines. A multiple level downgrade, while not expected, of either the
Company, AIC or the Corporation, could have a material adverse affect on
the Company's sales, including the competitiveness of the Company's product
offerings, its ability to market products, and its financial condition and
results of operations. Also, the rating agencies have a variety of policies
and practices regarding the relationships among ratings of affiliated
entities. As such, the ratings of the Company could be affected by changes
in ratings of AIC 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
insurance subsidiaries' ability to pay shareholder dividends to the Company
and to use their 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

62

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 Consolidated Statement 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 Consolidated Statements of Financial Position.
- - Portions of the non-publicly traded marketable investment securities and
non-exchange traded derivative contracts 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
or derivative contract could negatively impact the Company's net income,
assets, liabilities and shareholder's equity.
- - 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 target of
an increasing number of class action lawsuits and other types of
litigation, some of which involve claims for substantial and/or indetermine
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. GAAP prescribes when
a 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. Therefore, there can be
no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
- - 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.

63

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The discussion under the heading "Market Risk" in Management's Discussion
and Analysis of Financial Condition and Results of Operations is 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.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Omitted.

ITEM 11. EXECUTIVE COMPENSATION

Omitted.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Omitted.

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 Allstate Life Insurance Company's
management, including the principal executive officer and principal financial
officer, Allstate Life Insurance Company evaluated the effectiveness of the
design and operation of its disclosure controls and procedures with respect to
its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current
reports on Form 8-K to be filed with the Securities and Exchange Commission
("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 Allstate Life Insurance Company (including its consolidated
subsidiaries) required to be included in its annual reports on Form 10-K,
quarterly reports on Form 10-Q, and 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 Allstate Life Insurance
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
Allstate Life Insurance Company in reports that it files or submits under that
Act is accumulated and communicated to 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 Allstate Life Insurance
Company's internal controls or in other factors that could significantly affect
these internal controls subsequent to the date of their evaluation.

64

PART IV

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

(a) 1 and 2 The following financial statements of Allstate Life Insurance
Company are included as part of this registration statement:

Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Shareholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Schedule I--Summary of Investments Other than Investments in Related
Parties
Schedule III--Supplementary Insurance Information
Schedule IV--Reinsurance
Schedule V--Valuation and Qualifying Accounts
Independent Auditors' Report

(a) 3 The following is a list of the exhibits filed as part of this Form
10-K. The SEC File Number for the exhibits incorporated by reference
is 0-31248.

65

10.4 Administrative Services Agreement between Allstate
Insurance Company and Intramerica Life Insurance Company
effective July 1, 1999. Incorporated herein by reference
to Exhibit 10.25 to Allstate Life Insurance Company's
Form 10 filed on April 24, 2002.

10.5 Service Agreement between Allstate Insurance Company and
Allstate Financial Services, LLC effective August 1,
1999. Incorporated herein by reference to Exhibit 10.26
to Allstate Life Insurance Company's Form 10 filed on
April 24, 2002.

10.6 Cost Sharing Agreement between Allstate Life Insurance
Company and Allstate Reinsurance Ltd. effective October
12, 2000. Incorporated herein by reference to Exhibit
10.27 to Allstate Life Insurance Company's Form 10 filed
on April 24, 2002.

10.7 Investment Management Agreement and Amendment to Certain
Service and Expense Agreements among Allstate
Investments, LLC and Allstate Insurance Company and The
Allstate Corporation and certain affiliates effective as
of January 1, 2002. Incorporated herein by reference to
Exhibit 10.28 to Allstate Life Insurance Company's Form
10 filed on April 24, 2002.

10.8 Investment Advisory Agreement by and between Allstate
Insurance Company and Intramerica Life Insurance Company
effective July 1, 1999. Incorporated herein by reference
to Exhibit 10.29 to Allstate Life Insurance Company's
Form 10 filed on April 24, 2002.

10.9 Assignment and Assumption Agreement dated as of January
1, 2002 among Allstate Insurance Company, Allstate
Investments, LLC and Intramerica Life Insurance Company.
Incorporated herein by reference to Exhibit 10.30 to
Allstate Life Insurance Company's Form 10 filed on April
24, 2002.

10.10 Investment Advisory Agreement and Amendment to Service
Agreement as of January 1, 2002 between Allstate
Insurance Company, Allstate Investments, LLC and
Allstate Life Insurance Company of New York.
Incorporated herein by reference to Exhibit 10.31 to
Allstate Life Insurance Company's Form 10 filed on April
24, 2002.

10.11 Cash Management Services Master Agreement between
Allstate Insurance Company and Allstate Bank (fka
Allstate Federal Savings Bank) dated March 16, 1999.
Incorporated herein by reference to Exhibit 10.32 to
Allstate Life Insurance Company's Form 10 filed on April
24, 2002.

10.12 Amendment No. 1 to Cash Management Services Master
Agreement effective January 5, 2001. Incorporated herein
by reference to Exhibit 10.33 to Allstate Life Insurance
Company's Form 10 filed on April 24, 2002.

10.13 Form of Allstate Insurance Company Agreement of General
Indemnity executed by Allstate Life Insurance Company
and Northbrook Life Insurance Company dated November 27,
1987 and executed by Allstate Settlement Corporation
dated May 14, 1991. Incorporated herein by reference to
Exhibit 10.34 to Allstate Life Insurance Company's Form
10 filed on April 24, 2002.

66

10.14 Stipulation to Allstate Insurance Company Agreement of
General Indemnity executed by Allstate Settlement
Corporation. Incorporated herein by reference to Exhibit
10.35 to Allstate Life Insurance Company's Form 10 filed
on April 24, 2002.

10.15 Tax Sharing Agreement dated as of November 12, 1996
among The Allstate Corporation and certain affiliates.
Incorporated herein by reference to Exhibit 10.36 to
Allstate Life Insurance Company's Form 10 filed on April
24, 2002.

10.16 Reinsurance Agreement between Allstate Insurance Company
and Allstate Life Insurance Company effective as of June
1, 1992. Incorporated herein by reference to Exhibit
10.37 to Allstate Life Insurance Company's Form 10 filed
on April 24, 2002.

10.17 Amendment to Reinsurance Agreement between Allstate
Insurance Company and Allstate Life Insurance Company,
effective January 1, 1993. Incorporated herein by
reference to Exhibit 10.38 to Allstate Life Insurance
Company's Form 10 filed on April 24, 2002.

10.18 Reinsurance Agreement between Columbia Universal Life
Insurance Company and Allstate Life Insurance Company,
approved August 2000. Incorporated herein by reference
to Exhibit 10.39 to Allstate Life Insurance Company's
Form 10 filed on April 24, 2002.

10.19 Reinsurance Agreement between Columbia Universal Life
Insurance Company and Allstate Life Insurance Company,
approved July 2000. Incorporated herein by reference to
Exhibit 10.40 to Allstate Life Insurance Company's Form
10 filed on April 24, 2002.

10.20 Retrocession Agreement between Allstate Life Insurance
Company and Allstate Reinsurance, Ltd. Incorporated
herein by reference to Exhibit 10.41 to Allstate Life
Insurance Company's Form 10 filed on April 24, 2002.

10.21 Amendment No. 1 to Retrocession Agreement between
Allstate Life Insurance Company and Allstate
Reinsurance, Ltd. effective January 1, 1998.
Incorporated herein by reference to Exhibit 10.42 to
Allstate Life Insurance Company's Form 10 filed on April
24, 2002.

10.22 Amendment No. 2 to Retrocession Agreement between
Allstate Life Insurance Company and Allstate
Reinsurance, Ltd. Incorporated herein by reference to
Exhibit 10.43 to Allstate Life Insurance Company's Form
10 filed on April 24, 2002.

10.23 Amendment No. 3 to Retrocession Agreement between
Allstate Life Insurance Company and Allstate
Reinsurance, Ltd. Incorporated herein by reference to
Exhibit 10.44 to Allstate Life Insurance Company's Form
10 filed on April 24, 2002.

23 Independent Auditors' Consent

67

(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, Item 5 -- reporting developments on a petition
before the National Labor Relations Board.

68

SIGNATURES

Pursuant to the requirements of 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
(Registrant)

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

69

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.

70

CERTIFICATIONS

I, Casey J. Sylla, certify that:

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

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
-------------------
Name: Casey J. Sylla
Title: Chairman of the Board and President

71

I, Steven E. Shebik, certify that:

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

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
---------------------
Name: Steven E. Shebik
Title: Senior Vice President and
Chief Financial Officer

72

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 (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 the
Company 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
Senior Vice President and
Chief Financial Officer

73

FINANCIAL STATEMENTS
Index

FINANCIAL STATEMENTS PAGES

Independent Auditors' Report F-1

Consolidated Statements of Operations and Comprehensive Income for
the Years Ended December 31, 2002, 2001 and 2000 F-2

Consolidated Statements of Financial Position as of December 31,
2002 and 2001 F-3

Consolidated Statements of Shareholder's Equity for the Years
Ended December 31, 2002 and 2001 and 2000 F-4

Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001, and 2000 F-5

Note to Consolidated Financial Statements F-6

Schedule I - Summary of Investments other than Investments in Related
Parties as of December 31, 2002 F-46

Schedule III - Supplementary Insurance Information as of December 31,
2002, 2001 and 2000 F-47

Schedule IV - Reinsurance for the Years Ended December 31,
2002, 2001 and 2000 F-48

Schedule V - Valuation and Qualifying Accounts as of December 31,
2002, 2001 and 2000 F-49

74

Independent Auditors' Report

TO THE BOARD OF DIRECTORS AND SHAREHOLDER
OF ALLSTATE LIFE INSURANCE COMPANY:

We have audited the accompanying Consolidated Statements of Financial Position
of Allstate Life Insurance Company and subsidiaries (the "Company", an affiliate
of The Allstate Corporation) as of December 31, 2002 and 2001, and the related
Consolidated 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 I--Summary of Investments other than
Investments in Related Parties, Schedule III--Supplementary Insurance
Information, 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements present fairly,
in all material respects, the financial position of Allstate Life Insurance
Company and subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their 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
I--Summary of Investments other than Investments in Related Parties, Schedule
III--Supplementary Insurance Information, 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 AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See notes to consolidated financial statements

F-2

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

See notes to consolidated financial statements

F-3

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

See notes to consolidated financial statements

F-4

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARRIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements

F-5

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
Allstate Life Insurance Company ("ALIC") and its wholly owned subsidiaries
(collectively referred to as the "Company"). ALIC is wholly owned by Allstate
Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation
(the "Corporation"). These consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America ("GAAP"). All significant intercompany accounts and transactions have
been eliminated.

On May 31, 2000, the Company paid a dividend of all the common shares of
Allstate Insurance Company of Canada ("AICC") stock to AIC. Prior to the
dividend, AICC had been consolidated in the Company's financial statements and
related disclosures. In conjunction with the dividend, the Company has restated
its prior year financial results to exclude AICC.

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

NATURE OF OPERATIONS

The Company markets its products through two business segments, Retail and
Structured Financial Products.

The Retail segment offers a diversified group of products to meet
consumers' lifetime needs in the areas of financial protection, investment, and
retirement solutions through a variety of distribution channels. Principal
products offered by the segment include:

*--Separate Accounts products

Retail products are sold through a variety of distribution channels
including Allstate exclusive agencies, independent agents (including master
brokerage agencies), financial services firms (financial institutions and
broker/dealers) and direct marketing. Although the Company currently benefits
from agreements with financial services entities that market and distribute its
retail products, change in control of these non-affiliated entities with which
the Company has alliances could negatively impact sales.

The Structured Financial Products segment offers a variety of primarily
spread-based products to institutional investors, special purpose entities
("SPEs") and others. Spread-based products are designed to generate income based
on the difference ("spread") between investment returns on the supporting assets
and the guaranteed returns credited to customers. These products include
guaranteed investment contracts ("GICs") sold to tax-qualified retirement plan
sponsors or investment managers who represent plan sponsors, and funding
agreements ("FAs") sold to SPEs that issue medium-term notes to institutional
investors. The segment also offers single premium annuity products such as
structured settlement annuities through brokers who specialize in settlement of
injury and other liability cases and single premium immediate annuities
("SPIAs") through independent agents.

F-6

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2002, annuity premiums and deposits represented approximately 85.8% of
the Company's total premiums and deposits.

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
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.

The Company is authorized to sell its products in all 50 states, the
District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. The Company
is also authorized to sell certain insurance products in various foreign
countries. The top geographic locations in the United States for premiums and
deposits earned by the Company were California, Delaware, New York, Florida,
Texas, New Jersey, and Illinois for the year ended December 31, 2002. No other
jurisdiction accounted for more than 5% of premiums and deposits for the
Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed income securities include bonds, mortgage-backed and asset-backed
securities, and redeemable preferred stocks. All fixed income securities are
carried at fair value and may be sold prior to their contractual maturity
("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 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, net
of deferred income taxes, certain life and annuity deferred policy acquisition
costs, and certain reserves for life-contingent contract benefits, are reflected
as a component of Other comprehensive income. Cash received from calls,
principal payments and make-whole payments is reflected as a component of
Proceeds from sales, and cash received from maturities and pay-downs is
reflected as a component of Investment collections.

Mortgage loans are carried at the 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.

At December 31, 2002, Equity securities include common and non-redeemable
preferred stocks, limited partnership interests, and real estate investment
trust equity investments. Common and non-redeemable preferred stocks had a
carrying value of $96 million and $96 million, and cost of $104 million and $91
million at December 31, 2002 and 2001, respectively. Common and non-redeemable
preferred stocks and real estate investment trust equity investments are
classified as available for sale and are carried at fair value if independent
market quotations are available from vendors. If independent market quotations
are not available, these securities are carried at cost. The difference between
cost and fair value, net of deferred income taxes, is reflected as a component
of Accumulated other comprehensive income. Investments in limited partnership
interests has a carrying value and cost of $87 million and $105 million at
December 31, 2002 and 2001, respectively, and are accounted for in accordance
with the equity method of accounting except for instances in which the Company's
interest is so minor that it exercises virtually no influence over operating and
financial policies, whereby the Company applies the cost method of accounting.

Policy loans are carried at unpaid principal balances. Other investments
consist primarily of real estate investments, which are accounted for by the
equity method if held for investment, or depreciated cost, net of valuation
allowances, if the

F-7

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company has an active plan to sell.

Short-term investments are carried at cost or amortized cost that
approximates fair value, and includes 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.

Investment income consists primarily of interest and dividends, net
investment income from partnership interests and income from certain derivative
transactions. Interest is recognized on an accrual basis and dividends are
recorded at the ex-dividend date. Interest income on mortgage-backed and
asset-backed securities is determined on the effective yield method, based on
estimated principal repayments. Accrual of income is suspended for fixed income
securities and mortgage loans that are in default or when the receipt of
interest payments is in doubt.

Realized capital gains and losses are determined on a specific
identification basis. 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 or equity 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 cost for equity securities or 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 AND EMBEDDED 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 $6 million, after-tax, and is
reflected as a cumulative effect of change in accounting principle on the
Consolidated Statements of Operations and Comprehensive Income. The Company also
recorded a cumulative after-tax decrease of $1 million in Accumulated other
comprehensive income.

Derivative financial instruments include swaps, futures, options, interest
rate caps and floors, warrants, synthetic GICs, certain forward contracts for
purchases of to-be-announced ("TBA") mortgage securities, and certain investment
risk transfer reinsurance agreements. Derivatives that are required to be
separated from the host instrument and accounted for as derivative financial
instruments ("subject to bifurcation") are embedded in convertible and other
fixed income securities, equity indexed life and annuity contracts, and certain
variable contracts sold (see Note 7).

The statements require that all derivatives be recognized on the
Consolidated Statements of Financial Position at fair value. Derivatives are
accounted for on a fair value basis, and reported as Other investments, Other
assets, Other liabilities and accrued expenses or Contractholder funds. Embedded
derivative instruments subject to bifurcation are also accounted for on a fair
value basis and are reported together with the host contract. The change in the
fair value of derivatives embedded in assets and subject to bifurcation is
reported in Realized capital gains and losses. The change in the fair value of
derivatives embedded in liabilities and subject to bifurcation is reported in
Realized capital gains and losses or Life and annuity contract benefits.

Derivatives that are not hedges for accounting purposes 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.

When derivatives meet specific criteria, they may be designated as
accounting hedges and accounted for as fair value, cash flow, foreign currency
fair value or foreign currency cash flow hedges. The hedged item may be either
all or a specific portion of a recognized asset, liability or an unrecognized
firm commitment attributable to a particular risk. At the inception of the
hedge, the Company formally documents the hedging relationship and risk
management objective and strategy. The documentation identifies the hedging
instrument, the hedged item, the nature of the risk being hedged and the
methodology

F-8

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

used to assess how effective the hedging instrument is in offsetting the
exposure to changes in the hedged item's fair value attributable to the hedged
risk, or in the case of a cash flow hedge, the exposure to changes in the hedged
transaction's variability in cash flows attributable to the hedged risk. The
Company does not currently exclude any component of the change in fair value of
the hedging instrument from the effectiveness assessment. At each reporting
date, the Company confirms that the hedging instrument continues to be highly
effective in offsetting the hedged risk. Ineffectiveness in fair value hedges
and cash flow hedges is reported in Realized capital gains and losses. For the
years ended December 31, 2002 and 2001, the hedge ineffectiveness reported as
Realized capital gains and losses amounted to losses of $15 million and gains of
$6 million, respectively.

FAIR VALUE HEDGES The Company designates certain of its interest rate and
foreign currency swap contracts and certain investment risk transfer reinsurance
agreements as fair value hedges when the hedging instrument is highly effective
in offsetting the risk of changes in the fair value of the hedged item.

For hedging instruments utilized in fair value hedges, when the hedged
items are investment assets or a portion thereof, the change in the fair value
of the derivatives is reported in Net investment income together with the change
in the fair value of the hedged items. The change in the fair value of hedging
instruments utilized in fair value hedges, when the hedged items are
Contractholder funds liabilities or a portion thereof, are reported in Life and
annuity contract benefits together with the change in the fair value of the
hedged item. Accrued periodic settlements on swaps are reported in Net
investment income or Life and annuity contract benefits. The book value of the
hedged asset or liability is adjusted for the change in the fair value of the
hedged risk.

CASH FLOW HEDGES The Company designates certain of its foreign currency
swap contracts as cash flow hedges when the hedging instrument is highly
effective in offsetting the exposure of variations in cash flows for the hedged
risk that could affect net income. The Company's cash flow exposure may be
associated with an existing asset, liability, or a forecasted transaction.
Anticipated transactions must be probable of occurrence and their significant
terms and specific characteristics must be identified.

For hedging instruments utilized in cash flow hedges, the changes in fair
value of the derivatives are reported in Accumulated other comprehensive income.
Amounts are reclassified to Net investment income or Realized capital gains and
losses as the hedged transaction affects Net income or when the forecasted
transaction affects Net income. Accrued periodic settlements on derivatives
utilized in cash flow hedges are reported in Net investment income. The amount
in Accumulated other comprehensive income for a hedged transaction is limited to
the lesser of the cumulative gain or loss on the derivative less the amount
reclassified to Net income; or the cumulative gain or loss on the derivative
needed to offset the cumulative change in the expected future cash flows on the
hedged transaction from inception of the hedge less the derivative gain or loss
previously reclassified from Accumulated other comprehensive income to Net
income. If the Company expects at any time that the loss reported in Accumulated
other comprehensive income would lead to a net loss on the combination of the
hedging instrument and the hedged transaction which may not be recoverable, a
loss is recognized immediately in Realized capital gains and losses. If an
impairment loss is recognized on an asset or an additional obligation is
incurred on a liability involved in a hedge transaction, any offsetting gain in
Accumulated other comprehensive income is reclassified and reported together
with the impairment loss or recognition of the obligation.

TERMINATION OF HEDGE ACCOUNTING If, subsequent to entering into a hedge
transaction, the derivative becomes ineffective (including if the hedged item is
sold or otherwise extinguished, the occurrence of a hedged forecasted
transaction is no longer probable, or the hedged asset has become impaired), the
Company may terminate the derivative position. The Company may also terminate
derivative instruments as a result of other events or circumstances. If the
derivative financial instrument is not terminated when a fair value hedge is no
longer effective, the gains and losses recognized on the derivative are reported
in Realized capital gains and losses. For a fair value hedge which is no longer
effective or for which the derivative has been terminated, the gain or loss
recognized on the item being hedged and used to adjust the book value of the
asset, liability or portion thereof is amortized over the remaining life of the
hedged item to Net investment income or Life and annuity contract benefits,
respectively, beginning in the period that hedge accounting is no longer
applied. If the hedged item of a fair value hedge is an asset which has become
impaired, the adjustment made to the book value of the asset is subject to the
accounting policies applied to impaired assets. When a derivative financial
instrument utilized in a cash flow hedge of an existing asset or liability is no
longer effective or is terminated, the gain or loss recognized on the derivative
is reclassified from Accumulated other comprehensive income to Net income as the
hedged risk impacts net income, beginning in the period hedge accounting is no
longer applied or the derivative instrument is terminated. If the derivative
financial instrument is not terminated when a cash flow hedge is no longer
effective, the future gains and losses recognized on the derivative are reported
in Realized capital gains and losses. When a derivative financial instrument
utilized in a cash flow hedge of a forecasted transaction is terminated because
the forecasted transaction is no longer

F-9

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

probable, or if the cash flow hedge is no longer effective, the gain or loss
recognized on the derivative is reclassified from Accumulated other
comprehensive income to Realized capital gains and losses in the period that
hedge accounting is no longer applied.

NON-HEDGE DERIVATIVE FINANCIAL INSTRUMENTS The Company also has certain
derivatives that are used in interest rate, equity price and credit risk
management strategies for which hedge accounting is not applied. These
derivatives primarily consist of indexed instruments, certain interest rate swap
agreements and financial futures contracts, interest rate cap and floor
agreements, and certain forward contracts for TBA mortgage securities. Based
upon the income statement reporting category of the risk being offset, gains and
losses attributable to the change in fair value and the accrued periodic
settlements for these derivatives are reported together with results of the
associated risk. Therefore, the derivatives' gains and losses and accrued
periodic settlements may be recognized in Net investment income, Realized
capital gains and losses or Life and annuity contract benefits during the
reporting period.

SECURITY REPURCHASE AND RESALE AND SECURITIES LOANED

Securities purchased under agreements to resell and securities sold under
agreements to repurchase, including a mortgage dollar roll program, are treated
as financing arrangements and are carried at the amounts at which the securities
will be subsequently resold or reacquired, including accrued interest, as
specified in the respective agreements. The Company's policy is to take
possession or control of securities purchased under agreements to resell. Assets
to be repurchased are the same, or substantially the same, as the assets
transferred and the transferor, through the right of substitution, maintains the
right and ability to redeem the collateral on short notice. The market value of
securities to be repurchased or resold is monitored, and additional collateral
is obtained, where appropriate, to protect against credit exposure.

Securities loaned are treated as financing arrangements and are recorded in
Short-term investments, Fixed income securities and Other liabilities and
accrued expenses for the amount of cash received. The Company obtains collateral
in an amount equal to 102% of the fair value of domestic 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.

Securities repurchase and resale agreements provide liquidity, and
securities loaned transactions are used to generate net investment income. These
instruments are short-term in nature (usually 30 days or less) and are
collateralized principally by U.S. Government and mortgage-backed securities.
The carrying amounts of these instruments approximate fair value because of
their relatively short-term nature.

RECOGNITION OF PREMIUM AND CONTRACT CHARGE 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 Life and
annuity 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 contracts, such as universal life and single
premium life, are insurance contracts whose terms are not fixed and guaranteed.
The terms that may be changed include premiums paid by the contractholder,
interest credited to the contractholder account balance and any amounts assessed
against the contractholder account balance. Premiums from these contracts are
reported as deposits to Contractholder funds. Contract charges consist of fees
assessed against the contractholder account balance for cost of insurance
(mortality risk), contract administration and surrender charges. These revenues
are recognized when levied against the 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, equity-indexed annuities, immediate annuities
without life contingencies, including certain structured settlement annuities,
certain GICs and FAs are considered investment contracts. Deposits received for
such contracts are reported as Contractholder fund deposits. Contract charges
for investment contracts consist of fees or charges assessed against the
contractholder account balance for contract administration and surrenders. These
revenues are recognized when levied against the contractholder account balance.

F-10

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest credited to contractholder funds represents contractual interest
accrued or paid for interest-sensitive life contracts and investment contracts.
Crediting rates for fixed annuities and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions
subject to contractually guaranteed rates. Crediting rates for indexed annuities
and indexed life products are based on an interest rate index, such as LIBOR or
an equity index, such as the S&P 500.

Separate Accounts products include variable annuities, variable life
contracts, and certain GICs. 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

Costs that vary with and are primarily related to acquiring life insurance
and investment business, 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 Consolidated 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 revenue, as well as to all other aspects of the deferred policy
acquisition costs 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 policies.

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, 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); contract administration, surrender and
other contract charges, less maintenance expenses; and investment margin,
including realized capital gains and losses. 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. Additionally, 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 and income benefits. The Company's variable annuity DAC
amortization methodology includes a long-term market return assumption of
approximately 9.25%, or 8.0% after average mortality and expense fees of 1.25%,
for the mutual funds in which customer accounts are invested. 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, variable annuities

F-11

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 included as a component of
Amortization of deferred policy acquisition costs on the Consolidated Statements
of Operations and Comprehensive Income.

The cost assigned to the right to receive future cash flows from certain
business purchased from other insurers is also classified as Deferred policy
acquisition costs in the Consolidated Statements of Financial Position. The
costs capitalized represent the present value of future profits expected to be
earned over the life of the contracts acquired. These costs are amortized as
profits emerge over the life of the acquired business, and are periodically
evaluated for recoverability. Present value of future profits was $63 million
and $78 million at December 31, 2002 and 2001, respectively. Amortization
expense on present value of future profits was $15 million, $16 million and $11
million for the years ended December 31, 2002, 2001 and 2000, respectively.

REINSURANCE RECOVERABLE

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 10). The amounts reported in the Consolidated 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 contracts. Insurance
liabilities, including Reserve for life-contingent contract benefits, 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.

The Company also has reinsurance agreements that transfer the investment
risk for a portion of the GMDBs and guaranteed minimum income benefits
("GMIBs") offered in certain variable contracts.

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 Company issues variable annuities, variable life contracts and certain
GICs, the assets and liabilities of which 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 Consolidated 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 in Contract charges. Deposits to the Separate
Accounts are not included in the Consolidated 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
and variable life contractholders bear the investment risk that the underlying
mutual funds of the Separate Accounts may not meet their stated investment
objectives.

CONTRACTHOLDER FUNDS

Contractholder funds arise from the issuance of interest-sensitive life
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 9.

F-12

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, is
computed on the basis of long-term actuarial assumptions as to future investment
yields, mortality, morbidity, terminations and expenses. These assumptions,
which for traditional life insurance are applied using the net level premium
method, include provisions for adverse deviation and generally vary by such
characteristics as type of coverage, year of issue and policy duration. Detailed
reserve assumptions and reserve interest rates are outlined in Note 9. To the
extent that unrealized gains on fixed income securities would result in a
premium deficiency had those gains actually been realized, the related increase
in reserves is recorded net of tax as a reduction of the unrealized net capital
gains included in Accumulated other comprehensive income.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

Commitments to invest, purchase private placement securities, and extend
mortgage loans; financial guarantees and credit guarantees have
off-balance-sheet risk because their contractual amounts are not recorded in the
Company's Consolidated Statements of Financial Position. The contractual amounts
and fair values of these instruments are outlined in Note 7.

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 consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

PENDING ACCOUNTING STANDARDS

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
that upon issuance of a guarantee, the guarantor must recognize a liability
for the fair value of the obligation it assumes under that guarantee. The
disclosure provisions of FIN 45 are effective for financial statements ending
after December 15, 2002. The adoption of the disclosure provisions of FIN 45
did not have a material impact on the Company's consolidated financial
statements for the year ended December 31, 2002 (see Note 11). The provisions
for initial recognition and measurement are effective on a prospective basis
for guarantees that are issued or modified after December 31, 2002. The
adoption of the remaining provisions of FIN 45 is not expected to have a
material impact on either the consolidated financial position or results of
operations of the Company.

In January 2003, the FASB issued FIN No. 46 ("FIN 46"), "Consolidation
of Variable Interest Entities". FIN 46 addresses issues related to the
consolidation of variable interest entities ("VIEs"). The effective date of
this interpretation is the first fiscal year or interim period beginning
after June 15, 2003 (which for the Company would be July 1, 2003). The
Company has one unconsolidated special purpose entity ("SPE") that is used to
issue Global Medium Term Notes ("GMTNs") to unrelated third parties. The
Company is in the process of assessing whether this SPE meets the criteria to
be considered a VIE, thereby requiring consolidation under FIN 46. The
funding agreements issued by the Company to the SPE are reported on the
Consolidated Statements of Financial Position of the Company as a component
of Contractholder funds.

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 for 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 Consolidated 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
Consolidated Statements of Financial Position.

The FASB has exposed proposed guidance that addresses the accounting for
certain modified coinsurance agreements. The guidance has been exposed as a 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

F-13

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

requires recognizing an embedded derivative in certain reinsurance agreements
when specific conditions are met. The initial impact of adopting the proposed
guidance would be recorded as a cumulative adjustment to earnings in the first
fiscal quarter beginning after June 15, 2003 (which for the Company would be
July 1, 2003). The Company's reinsurance balances that would be subject to the
proposed guidance, as currently drafted, are immaterial in the aggregate.
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 consolidated financial position and results of operations.

3. ACQUISITIONS AND DISPOSITIONS

CURRENT YEAR:

ALLSTATE DISTRIBUTORS, LLC
The Company terminated its joint venture agreement with Putnam Investments,
LLC ("Putnam") and received a net settlement of $1.5 million from Putnam. The
$1.5 million net settlement was comprised of the $2.3 million Putnam owed the
Company for Allstate Distributors, LLC ("ADLLC") promotional expenses, partially
offset by the $826 thousand purchase price for Putnam's 50% share of ADLLC (See
Note 5 for further discussion).

DIRECT RESPONSE LONG-TERM CARE BUSINESS
The Company approved the disposal of its direct response long-term care
business through a reinsurance transaction to be completed during 2003. As a
result, the Company recognized a $3 million loss ($2 million after-tax) to
reduce the carrying value of the long-term care business to its fair value.

PRIOR YEAR:

AMERICAN MATURITY LIFE INSURANCE COMPANY
In 2001, the Company acquired blocks of business from American Maturity
Life Insurance Company ("American Maturity") via coinsurance contracts. Pursuant
to the terms of the coinsurance contracts, the Company assumed: variable
annuities, market value adjusted annuities, equity-indexed annuities, fixed
annuities, and immediate annuities. The Company received assets consisting
primarily of cash, investments and accrued investment income with a fair value
in an amount equal to the corresponding assumed reserves for life-contingent
contract benefits and contractholder funds resulting in no goodwill.

PROVIDENT NATIONAL ASSURANCE COMPANY
In 2001, the Company acquired Provident National Assurance Company
("PNAC"), a broadly licensed inactive company that maintains authority to
sell life insurance and variable annuity products in most states, from
UnumProvident Corporation. The transaction was accounted for as a purchase and
the excess of the acquisition cost over the fair value of PNAC's net assets
acquired of $5 million was recorded as goodwill. The Company paid consideration
of $14 million as part of the acquisition. PNAC's name was subsequently changed
to Allstate Assurance Company, which was redomiciled in the State of Illinois.

PT ASURANSI JIWA ALLSTATE, INDONESIA
In 2001, the Company disposed of its operations in Indonesia through a sale
and purchase agreement with The Prudential Assurance Company Limited
("Prudential"), where Prudential acquired the Company's holdings in Pt Asuransi
Jiwa Allstate, Indonesia. The Company recognized a loss on the dispositions of
$4 million ($3 million after-tax) and a $4 million tax benefit attributable to
the inception-to-date losses of the subsidiaries, not previously recognized. The
tax benefit was reported as a reduction to the Company's income tax expense on
the Consolidated Statements of Operations and Comprehensive Income.

F-14

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. SUPPLEMENTAL CASH FLOW INFORMATION

The Company acquired the assets of businesses in 2001 (see Note 3) using
cash and by assuming liabilities. The following is a summary of the effects of
these transactions on the Company's consolidated financial position for the year
ended December 31, 2001.

(IN MILLIONS)

ACQUISITIONS:
Fair value of assets acquired $ (275)
Fair value of liabilities assumed 342
---------
Net cash received $ 67
=========

Non-cash transactions of $299 million and $239 million, which include
investment exchanges, modifications, conversions and other non-cash
transactions, have been excluded from investment purchases and sales for 2001
and 2000, respectively, on the Consolidated Statements of Cash Flows to conform
to the current period presentation.

Non-cash investment exchanges and modifications, which primarily reflect
refinancings of fixed income securities and mergers completed with equity
securities, totaled $98 million, $210 million and $160 million for the years
ended December 31, 2002, 2001 and 2000, respectively.

Securities lending transactions excluded from Cash flows from investing
activities in the Consolidated Statements of Cash Flows for the years ended
December 31, are as follows:

5. RELATED PARTY TRANSACTIONS

BUSINESS OPERATIONS

The Company utilizes services performed by its affiliates, AIC, and
Allstate Investments LLC and business facilities owned or leased and operated by
AIC in conducting its business activities. In addition, the Company shares the
services of employees with AIC. The Company reimburses its affiliates for the
operating expenses incurred on behalf of the Company. The Company is charged for
the cost of these operating expenses based on the level of services provided.
Operating expenses, including compensation, retirement and other benefit
programs allocated to the Company (see Note 15) were $238 million, $208 million,
and $195 million in 2002, 2001 and 2000, respectively. A portion of these
expenses relate to the acquisition of business, which is deferred and amortized
into income.

STRUCTURED SETTLEMENT ANNUITIES

The Company issued $133 million, $117 million and $96 million of structured
settlement annuities, a type of immediate annuity, in 2002, 2001 and 2000,
respectively, at prices determined based upon interest rates in effect at the
time of purchase, to fund structured settlements in matters involving AIC. Of
these amounts, $27 million, $38 million and $29 million relate to structured
settlement annuities with life contingencies and are included in premium income
for 2002, 2001, and 2000, respectively. In most cases, these annuities were
issued under a "qualified assignment," which means the Company assumed AIC's
obligation to make the future payments.

AIC issued surety bonds, in return for premiums of $531 thousand and
$817 thousand in 2001 and 2000, respectively, to guarantee the payment of
structured settlement benefits assumed (from both AIC and non-related
parties) and funded by certain annuity contracts issued by the Company. In
previous periods, the Company had entered into a General Indemnity Agreement

F-15

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

pursuant to which it has 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 that are guaranteed by the
surety bonds of AIC were $5.29 billion and $5.23 billion at December 31, 2002
and 2001, respectively.

BROKER/DEALER AGREEMENT

ALIC receives underwriting and distribution services from ADLLC, a
broker/dealer company, for certain variable annuity contracts. Effective
September 30, 2002, ALIC and Putnam terminated a joint venture agreement and
ADLLC became a wholly owned subsidiary of ALIC as a result of ALIC's purchase
of Putnam's 50% ownership therein. ALIC incurred $32 million, $80 million and
$100 million of commission and other distribution expenses from ADLLC for the
years ending December 31, 2002, 2001 and 2000, respectively. Other
distribution expenses included administrative, legal, financial management
and sales support which ALIC provides to ADLLC, for which ALIC earned
administration fees of $1 million, $1 million and $2 million for the years
ended December 31, 2002, 2001 and 2000, respectively. Other distribution
expenses also include marketing expenses for subsidizing bonus interest
crediting rates associated with ALIC's variable annuity dollar cost averaging
program for which ADLLC reimbursed ALIC $1 million, $7 million and $6 million
for the years ended December 31, 2002, 2001 and 2000, respectively.

REINSURANCE TRANSACTIONS

The Company has a coinsurance contract with Columbia Universal Life
Insurance Company ("Columbia"), an affiliate of the Company, to assume 100% of
fixed annuity business inforce as of June 30, 2000 and new business as written.
In addition, the Company has a modified coinsurance contract with Columbia to
assume 100% of traditional life and accident and health business inforce on the
effective date of July 1, 2000 and new business as written. Both agreements are
continuous but may be terminated by either party with 30 days notice, material
breach by either party, or by Columbia in the event of the Company's non-payment
of reinsurance amounts due. As of May 31, 2001, Columbia ceased issuing new
contracts. During 2002, 2001 and 2000, the Company assumed $19 million, $21
million and $10 million, respectively, in premiums and contract charges from
Columbia.

The Company has a modified coinsurance contract with Allstate Reinsurance,
Ltd. ("Allstate Re"), an affiliate of the Company, to cede 50% of certain fixed
annuity business issued under a distribution agreement with PNC Bank NA. Under
the terms of the contract, a trust has been established to provide protection to
the Company for ceded liabilities. This agreement is continuous but may be
terminated by either party with 60 days notice. During 2002, 2001 and 2000, the
Company ceded $329 thousand, $236 thousand and $228 thousand, respectively, in
contract charges to Allstate Re.

The Company has a contract to assume 100% of all credit insurance written
by AIC. This agreement is continuous but may be terminated by either party with
60 days notice. The Company assumed premiums from AIC in the amount of $18
million in 2002 and $29 million during both 2001 and 2000, respectively.

ALIC enters into certain intercompany reinsurance transactions with its
wholly owned subsidiaries. ALIC enters into these transactions in order to
maintain underwriting control and spread risk among various legal entities.
These reinsurance agreements have been approved by the appropriate regulatory
authorities. All significant intercompany transactions have been eliminated in
consolidation.

Effective January 1, 2003, Northbrook Life Insurance Company ("NLIC"), a
wholly owned subsidiary of ALIC, will be merged into ALIC to achieve future cost
savings and operational efficiency. The merger will have no impact on the
Company's results of operations or financial position.

PREFERRED STOCK

Redeemable preferred stock--series A subscriptions receivable balance at
December 31, 2001 related to the Company's issuance of redeemable preferred
shares to The Northbrook Corporation, a wholly owned subsidiary of the
Corporation, in return for $14 million cash, which was received on January 14,
2002.

AIC guarantees the repayment of notes payable and the interest thereon
issued to Morgan Stanley DW, Inc. under the terms of a distribution agreement
with The Northbrook Corporation. The balance of the notes payable was $93
million at December 31, 2002.

F-16

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INCOME TAXES

The Company is a party to a federal income tax allocation agreement with
the Corporation (Note 12).

DEBT

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

6. 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:

F-17

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

NET INVESTMENT INCOME

Net investment income from equity securities includes income from
partnership interests of $19 million, $15 million and $13 million for the years
ended December 31, 2002, 2001 and 2000, respectively.

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 the effects of calls and prepayments, gross gains of $222
million, $223 million and $151 million and gross losses of $328 million, $238
million and $228 million were realized on sales of fixed income securities
during 2002, 2001 and 2000, respectively.

F-18

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNREALIZED NET CAPITAL GAINS AND LOSSES

Unrealized net capital gains and losses on fixed income securities, equity
securities and derivative instruments included in Accumulated other
comprehensive income at December 31, 2002 are as follows:

At December 31, 2001, equity securities had gross unrealized gains of $10
million and gross unrealized losses of $5 million.

CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES

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 components of impaired loans at December 31 are as follows:

The net carrying value of impaired loans at December 31, 2002 and 2001 was
comprised of loans in the process of foreclosure and delinquent loans of $11
million and $12 million, respectively, measured at the fair value of the
collateral, and restructured loans of $0 million and $9 million, respectively,
measured at the present value of the loan's expected future cash flows
discounted at the loan's effective interest rate. Impaired loans without
valuation allowances include collateral dependent loans where the fair value of
the collateral is greater than the recorded investment in the loans.

F-19

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest income is recognized on a cash basis for impaired loans, beginning
at the time of impairment. For impaired loans that have been restructured,
interest is accrued based on the principal amount at the adjusted interest rate.
The Company recognized interest income of $1 million on impaired loans during
each of 2002, 2001 and 2000, all of which was received in cash. The average
balance of impaired loans was $16 million, $27 million and $33 million during
2002, 2001 and 2000, respectively.

Valuation allowances for mortgage loans at December 31, 2002, 2001 and
2000, were $0 million, $5 million and $5 million, respectively. Direct
writedowns of the gross carrying amounts of mortgage loans were $5 million,
$0 million and $0 million for the years ended December 31, 2002, 2001 and
2000, respectively. For the years ended December 31, 2002, 2001 and 2000, net
reductions to mortgage loan valuation allowances were $5 million, $300
thousand and $2 million, respectively.

INVESTMENT CONCENTRATION FOR MUNICIPAL BOND PORTFOLIOS

The Company maintains a diversified portfolio of municipal bonds. Except
for the following states, holdings in no other state exceeded 5% of the
portfolio at December 31,:

INVESTMENT CONCENTRATION FOR COMMERCIAL MORTGAGE PORTFOLIOS AND OTHER INVESTMENT
INFORMATION

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. Except
for the following, holdings in no other state exceeded 5% of the portfolio at
December 31,:

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

F-20

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 2002, for loans that were not in foreclosure are as follows:

In 2002, $286 million of commercial mortgage loans were contractually due.
Of these, 58.9% were paid as due, 36.8% were refinanced at prevailing market
terms, 4.3% were foreclosed or are in the process of foreclosure and none are in
the process of refinancing or restructuring discussions.

Included in fixed income securities are below investment grade assets
totaling $3.66 billion and $2.76 billion at December 31, 2002 and 2001,
respectively. The Company defines its below investment grade assets as those
securities with a National Association of Insurance Commissioners ("NAIC")
rating between 3 and 6, or a Moody's equivalent rating of "Ba" or lower, or a
comparable company internal rating.

At December 31, 2002, the carrying value of investments, excluding equity
securities, that were non-income producing during 2002 was $5 million.

At December 31, 2002, fixed income securities with a carrying value of $80
million were on deposit with regulatory authorities as required by law.

SECURITIES LENDING

The Company participates in securities lending programs, primarily for
investment yield enhancement purposes, with third parties, which mostly
include large brokerage firms. At December 31, 2002 and 2001, fixed income
securities with a carrying value of $1.04 billion and $964 million,
respectively, have been loaned under these 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 $5 million, $6 million and $2 million, for the years ended December
31, 2002, 2001 and 2000, respectively.

7. 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 DAC and Reinsurance recoverables, net) and
liabilities (including Reserve for life-contingent contract benefits,
Contractholder Funds pertaining to interest-sensitive life contracts 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.

F-21

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL ASSETS

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

Fair values of publicly traded fixed income securities are based upon
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. Equity securities are valued based
principally on independent market quotations. 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
Consolidated Statements of Financial Position at fair value based on quoted
market prices.

FINANCIAL LIABILITIES

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

Contractholder funds include interest-sensitive life insurance contracts
and investment contracts. Interest-sensitive life insurance contracts are not
considered to be financial instruments subject to fair value disclosure
requirements. 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. GICs, FAs, 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. Equity-indexed annuity contracts' fair value
approximates carrying value since the embedded equity options are carried at
market value in the consolidated financial statements.

Security repurchase agreements are valued at carrying value due to their
short-term nature. Separate Accounts liabilities are carried at the fair value
of the underlying assets.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company primarily uses derivative financial instruments to reduce its
exposure to market risk (principally interest rate, equity price and foreign
currency risk) and in conjunction with asset/liability management. The Company
does not hold or issue these instruments for trading purposes.

F-22

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the notional amount, credit exposure, fair
value and carrying value of the Company's derivative financial instruments at
December 31, 2002 as follows:

- -----------
(1) CREDIT EXPOSURE AND CARRYING VALUE INCLUDE THE EFFECTS OF LEGALLY
ENFORCEABLE MASTER NETTING AGREEMENTS. FAIR VALUE AND CARRYING VALUE OF
THE ASSETS AND LIABILITIES EXCLUDE ACCRUED PERIODIC SETTLEMENTS WHICH ARE
REPORTED IN ACCRUED INVESTMENT INCOME.

F-23

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 as follows:

- ----------
(1) CREDIT EXPOSURE AND CARRYING VALUE INCLUDE THE EFFECTS OF LEGALLY
ENFORCEABLE MASTER NETTING AGREEMENTS. FAIR VALUE AND CARRYING VALUE OF
THE ASSETS AND LIABILITIES EXCLUDE ACCRUED PERIODIC SETTLEMENTS WHICH ARE
REPORTED IN ACCRUED INVESTMENT INCOME.

The notional amounts specified in the contracts are used to calculate the
exchange of contractual payments under the agreements, and are not
representative of the potential for gain or loss on these agreements.

Credit exposure represents the Company's potential loss if all of the
counterparties failed to perform under the contractual terms of the contracts
and all collateral, if any, became worthless. This exposure is measured by the
fair value of contracts with a positive fair value at the reporting date reduced
by the effect, if any, of master netting or collateral agreements.

The Company manages its exposure to credit risk by utilizing highly
rated counterparties, establishing risk control limits, executing legally
enforceable master netting agreements and obtaining collateral where
appropriate. The Company utilizes master netting agreements for all
over-the-counter derivative transactions including interest rate swap,
interest rate cap, and interest rate floor agreements. These agreements
permit either party to net payments due for transactions covered by the
agreements. Under the provisions of the agreements, collateral is either
pledged or obtained when certain predetermined exposure limits are exceeded.
To date, the Company has not incurred any losses on derivative financial
instruments due to counterparty nonperformance. Other derivatives including
futures and certain option contracts are traded on organized exchanges which
require margin deposits and guarantee the execution of trades, thereby
mitigating any potential credit risk associated with these transactions.

F-24

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value, which is equal to the carrying value, is the estimated
amount that the Company would receive (pay) to terminate the derivative
contracts at the reporting date. For exchange traded derivative contracts,
the fair value is based on dealer or exchange quotes. The fair value of
non-exchange traded derivative contracts, including embedded derivative
financial instruments subject to bifurcation, is based on either independent
third party pricing sources or widely accepted pricing and valuation models
which utilize independent third party data as inputs.

The following table summarizes the counterparty credit exposure by
counterparty credit rating at December 31, as it relates to interest rate swap,
currency swap, interest rate cap and interest rate floor agreements.

($ IN MILLIONS)

(1) RATING IS THE LOWER OF STANDARD & POOR'S OR MOODY'S RATINGS.

(2) FOR EACH COUNTERPARTY, ONLY OVER-THE-COUNTER DERIVATIVES WITH A NET
POSITIVE MARKET VALUE ARE INCLUDED.

Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions. The Company
mitigates this risk through established risk control limits set by senior
management. In addition, changes in fair value of the Company's derivative
financial instruments used for risk management purposes are generally offset by
the change in the fair value or cash flows of the hedged risk component of the
related assets, liabilities or forecasted transactions.

The Company reclassified pretax net losses of $259 thousand and pretax net
gains of $4 million from Accumulated other comprehensive income to Net income
during 2002 and 2001, respectively. These amounts related to cash flow hedges.
During 2003, the Company expects to release an estimated $756 thousand of pretax
net losses from Accumulated other comprehensive income to Net income. For the
periods ending December 31, 2002 and 2001, the Company did not terminate any
hedge of a forecasted transaction because it was no longer probable that the
forecasted transaction would occur. Therefore, no gains or losses were
reclassified from Accumulated other comprehensive income to Realized capital
gains and losses related thereto.

F-25

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the derivative instruments used by the
Company. Included in the table is a description of the individual derivative
instruments, the risk management strategies to which they relate, and the
financial statement reporting for the derivative instruments including the
classification of fair value changes and periodic accruals and settlements, if
any, in the Company's consolidated financial statements as of and for the
periods ending December 31, 2002 and 2001. Amounts reported are on a pre-tax
basis.

F-26

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-27

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-28

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-29

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-30

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-31

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

The contractual amounts and fair values of off-balance-sheet financial
instruments at December 31, are as follows:

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

Commitments to invest generally represent commitments to acquire financial
interests or instruments. The Company enters into these agreements to allow for
additional participation in certain limited partnership investments. Because the
equity investments in the limited partnerships are not actively traded, it is
not practicable to estimate the fair value of these commitments.

Private placement commitments represent conditional commitments to purchase
private placement debt and equity securities 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. The fair value of these commitments are estimated
based upon discounted contractual cash flows, adjusted for changes in current
rates at which loans would be made to borrowers with similar credit risk using
similar properties as collateral.

Credit guarantees represent conditional commitments included in certain
fixed income securities owned by the Company. These commitments provide for
obligations to exchange credit risk or to forfeit principal due, depending on
the nature or occurrence of credit events for the referenced entities. The
Company enters into these transactions in order to achieve higher yields than
direct investment in referenced entities. The fees for assuming the conditional
commitments are reflected in the interest receipts reported in Net investment
income over the lives of the contracts. The fair value of the credit guarantees
are estimates of the conditional commitments only and are calculated using
quoted market prices or valuation models, which incorporate external market
data.

In the event of bankruptcy or other default of the referenced entities, the
Company's maximum amount at risk, assuming the value of the referenced credits
becomes worthless, is the fair value of the subject fixed income securities,
which totaled $28 million at December 31, 2002. The Company includes the impact
of credit guarantees in its analysis of credit risk, and the referenced credits
were current to their contractual terms at December 31, 2002.

F-32

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs for the years ended December 31, are as
follows:

9. 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:

F-33

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

To the extent the unrealized gains on fixed income securities would result
in a premium deficiency had those gains actually been realized, a premium
deficiency reserve has been recorded for structured settlement annuities and for
certain immediate annuities with life contingencies. A liability of $797 million
and $212 million is included in the Reserve for life-contingent contract
benefits with respect to this deficiency for the years ended December 31, 2002
and 2001, respectively. The offset to this liability is recorded as a reduction,
net of taxes, of the unrealized net capital gains included in Accumulated other
comprehensive income.

At December 31, Contractholder funds consists of the following:

The following table highlights the key contract provisions that determine
Contractholder funds:

Contractholder funds include FAs sold to SPEs issuing medium-term notes.
The SPEs, Allstate Life Funding, LLC and Allstate Financial Global Funding, LLC
are used exclusively for the Company's FAs supporting medium-term note programs.
The assets and liabilities of Allstate Life Funding, LLC are included on the
Consolidated Statements of Financial Position. The Company classifies the
medium-term notes issued by Allstate Life Funding, LLC as Contractholder funds,
using accounting treatment similar to that of its other investment contracts.
The assets and liabilities of Allstate Financial Global Funding, LLC are not
included on the Consolidated Statements of Financial Position due to the
existence of a sufficient equity ownership interest by an unrelated third party
in this entity. The Company classifies the FAs issued to Allstate Financial
Global Funding, LLC as Contractholder funds. The Corporation's management does
not have an ownership interest in the SPEs.

F-34

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

10. REINSURANCE

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 reinsures certain of its risks to other reinsurers under yearly
renewable term, coinsurance, and modified coinsurance agreements. Yearly
renewable term and coinsurance agreements result in the passing of a portion of
the risk to the reinsurer. Generally, the reinsurer receives a proportionate
amount of the premiums less commissions and is liable for a corresponding
proportionate amount of all benefit payments. Modified coinsurance is similar to
coinsurance except that the cash and investments that support the liability for
contract benefits are not transferred to the assuming company, and settlements
are made on a net basis between the companies.

The Company has a coinsurance contract with Columbia, an affiliate of the
Company, to assume 100% of fixed annuity business inforce as of June 30, 2000
and new business as written. In addition, the Company has a modified coinsurance
contract with Columbia to assume 100% of traditional life and accident and
health business inforce on the effective date of July 1, 2000 and new business
as written. Both agreements are continuous but may be terminated by either party
with 30 days notice, material breach by either party, or by Columbia in the
event of the Company's non-payment of reinsurance amounts due. As of May 31,
2001, Columbia ceased issuing new contracts. During 2002, 2001 and 2000, the
Company assumed $19 million, $21 million and $10 million, respectively, in
premiums and contract charges from Columbia.

The Company has a coinsurance contract to assume 100% of all credit
insurance written by AIC. This agreement is continuous but may be terminated by
either party with 60 days notice. The Company assumed $18 million, $29 million
and $29 million in premiums from AIC for the years ended December 31, 2002, 2001
and 2000, respectively.

The Company has a contract to assume 100% of all insurance written by Sears
Life Insurance Company ("SLIC"). This agreement is continuous but may be
terminated by either party with 60 days notice. The Company assumed $76 million,
$64 million and $38 million in premiums from SLIC for the years ended December
31, 2002, 2001 and 2000, respectively.

On January 2, 2001, the Company acquired blocks of business from American
Maturity via coinsurance contracts. Pursuant to the terms of the coinsurance
contracts, the Company assumed: variable annuities, market value adjusted
annuities, equity-indexed annuities, fixed annuities, and immediate annuities.
The Company received assets consisting primarily of cash, investments and
accrued investment income with a fair value in an amount equal to the
corresponding assumed reserves for life contingent contract benefits and
contractholder funds.

The Company has an administrative services agreement with respect to a
block of variable annuity contracts. Pursuant to the terms of the agreement, the
Company provides insurance contract administration and financial services. As
part of the agreement, the Company assumed via coinsurance 100% of the general
account portion of these contracts (85% for business written in New York) with
an aggregate account value of $37 million and $32 million as of December 31,
2002 and 2001, respectively. The Company paid $65 million, which was capitalized
as present value of future profits and will be subsequently amortized into
income over 20 years, for the right to receive future contract charges and fees
on the block of variable annuity

F-35

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contracts, which has an aggregate account value of $478 million and $795 million
as of December 31, 2002 and 2001, respectively. During 2002, 2001 and 2000, the
Company earned contract charges and fees assessed to contractholder fund
balances of $5 million, $8 million, and $17 million, respectively.

The Company cedes 90%, 80% or 60% of the mortality risk on certain life
policies, depending upon the issue year and product, to a pool of eleven
reinsurers that are not affiliated with the Company or the Corporation.
Beginning in November 1998, the Company cedes mortality risk on new business
in excess of $2 million per life for individual coverage. For business sold
prior to 1998, the Company ceded mortality risk in excess of $1 million per
life for individual coverage. As of December 31, 2002, $156.51 billion of
life insurance in force was ceded to other companies.

The Company has a modified coinsurance contract with Allstate Re, an
affiliate of the Company, to cede 50% of certain fixed annuity business issued
under a distribution agreement with PNC Bank NA ("PNC"). Under the terms of the
contract, a trust has been established to provide protection to the Company for
ceded liabilities. This agreement is continuous but may be terminated by either
party with 60 days notice. Furthermore, Allstate Re then cedes this business to
Alpine Indemnity Limited ("Alpine"), a subsidiary of PNC, via a modified
coinsurance contract. During 2002, 2001 and 2000, the Company ceded $329
thousand, $236 thousand and $228 thousand, respectively, in contract charges to
Allstate Re.

In addition, the Company has a modified coinsurance contract with Alpine to
cede 50% of certain variable annuity business issued on or after May 1, 1999
under a distribution agreement with PNC. This agreement is continuous but may be
terminated by either party with 120 days notice.

The Company has entered into reinsurance agreements in conjunction with the
disposition of certain blocks of business.

Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. Management believes the recoverables are
appropriately established. No single reinsurer has a material obligation to the
Company nor is the Company's business substantially dependent upon any
reinsurance contract.

The effects of reinsurance on premiums and contract charges for the years
ended December 31, are as follows:

The effects of reinsurance on Life and annuity contract benefits for the
years ended December 31, are as follows:

Reinsurance recoverables in the Company's Consolidated Statements of
Financial Position were $1.06 billion and $950 million, at December 31, 2002 and
2001, respectively. The reinsurance recoverable and reinsurance payable balances
pertaining to related party reinsurance agreements were not material at December
31, 2002 and 2001, respectively.

F-36

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES

The Company leases certain office facilities and computer equipment. Total
rent expense for all leases was $2 million, $3 million and $1 million in 2002,
2001 and 2000, respectively.

Minimum rental commitments under noncancelable operating leases with an
initial or remaining term of more than one year as of December 31, 2002 are as
follows:

GUARANTEES

The Company owns certain fixed income securities which contain credit
default swaps or credit guarantees which provide for obligations to exchange
credit risk or to forfeit principal due, depending on the nature or occurrence
of specified credit events for the referenced entities. In the event of a
specified credit event, the Company's maximum potential amount of future
payments, assuming the value of the referenced credits become worthless, is $54
million at December 31, 2002. The credit default swaps and credit guarantees
contained in these fixed income securities expire on various dates during the
next four years.

Lincoln Benefit Life ("LBL"), a wholly owned subsidiary of ALIC, has issued
universal life insurance contracts to third parties who finance the premium
payments on the universal life insurance contracts through a commercial paper
program. LBL has issued a repayment guarantee on the outstanding commercial
paper balance which is fully collateralized by the cash surrender value of the
universal life insurance contracts. At December 31, 2002, the amount due under
the commercial paper program is $300 million and the cash surrender value of the
policies is $306 million. The repayment guarantee expires March 31, 2003 but may
be extended at LBL's option.

In the normal course of business, the Company provides standard
indemnifications to counterparties in contracts in connection with numerous
transactions including indemnifications for breaches of representations and
warranties, taxes and certain other liabilities such as third party lawsuits.
The indemnification clauses are often standard contractual terms and were
entered into in the normal course of business based on an assessment that the
risk of loss would be remote. The terms of the indemnifications vary in duration
and nature. In many cases, the maximum obligation is not explicitly stated and
the contingencies triggering the obligation to indemnify have not occurred and
are not expected to occur. Because the obligated amounts of the indemnifications
are not explicitly stated in many cases, the maximum amount of the obligation
under such indemnifications is not determinable. Historically, the Company has
not made any material payments pursuant to these obligations, and consistent
with the expectation that the risk of loss is remote, the liability balance
related to these obligations as of December 31, 2002 was not material.

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 certain legal
proceedings that involve AIC regarding the Allstate agencies may have an impact
on the Company.

F-37

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

The Company is defending various lawsuits and regulatory proceedings that
allege that it engaged in business or sales practices inconsistent with state or
federal law. The Company has been vigorously defending these matters but their
outcome is currently uncertain.

Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the target of an increasing
number of class action lawsuits and other types of litigation, 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-38

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. INCOME TAXES

ALIC and its eligible domestic subsidiaries (the "Allstate Life Group")
join with the Corporation (the "Allstate Group") in the filing of a consolidated
federal income tax return and are party to a federal income tax allocation
agreement (the "Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing
Agreement, the Allstate Life Group 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 Allstate Life Group in the consolidated
federal income tax return. Effectively, this results in the Allstate Life
Group's annual income tax provision being computed, with adjustments, as if the
Allstate Life Group filed a separate return. Certain domestic subsidiaries are
not eligible to join in the consolidated federal income tax return and file a
separate tax 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 and
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
Corporation'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 assumption
that certain levels of income will be achieved.

The components of income tax expense for the year ended December 31, are as
follows:

F-39

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company paid income taxes of $116 million, $116 million and $168
million in 2002, 2001 and 2000, respectively. The Company had a current income
tax liability of $50 million and $21 million at December 31, 2002 and 2001,
respectively.

A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:

An adjustment for prior year tax liabilities in the amount of $38 million
primarily resulted from Internal Revenue Service developments and examination of
tax returns.

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 $94 million, will result in federal income taxes payable of $33
million 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.

13. PREFERRED STOCK

The Company has issued two series of non-voting, redeemable preferred
stock. Redeemable preferred stock--Series A was issued to The Northbrook
Corporation, a subsidiary of AIC, while Redeemable preferred stock--Series B was
issued directly to AIC. Both series of preferred stock are redeemable at the
option of the Company at any time five years after the issuance date at a price
of $100 per share plus cumulative accrued and unpaid dividends. If the Company
is liquidated or dissolved, holders of the preferred stock will be entitled to
payments of $100 per share plus cumulative accrued and unpaid dividends.

For Redeemable preferred stock--Series A, the Company's Board of Directors
declares and pays a cash dividend from time to time, but not more frequently
than quarterly. The dividend is based on the three month LIBOR rate. Dividends
of $3 million, $5 million and $5 million were paid during 2002, 2001, and 2000,
respectively. There were no accrued and unpaid dividends for Series A preferred
stock at December 31, 2002.

Redeemable preferred stock--Series A subscriptions receivable resulted from
the Company's issuance of additional shares to The Northbrook Corporation in
return for $14 million in cash, which was received on January 14, 2002.

On December 28, 2001 AIC made a capital contribution to ALIC of all of the
issued and outstanding ALIC Redeemable preferred stock--Series B, resulting in
an increase in Additional capital paid-in of $117 million.

For Redeemable preferred stock--Series B, cash dividends of 6.9% per annum
were payable annually in arrears on the last business day of each year to the
shareholder of record on the immediately preceding business day. Dividends of $8
million were paid annually during 2001 and 2000, respectively.

F-40

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. STATUTORY FINANCIAL INFORMATION

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

ALIC and each of its subsidiaries prepares their statutory financial
statements in conformity with accounting practices prescribed or permitted by
the insurance department of the applicable state of domicile. 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.

Beginning in 2001, all states required domiciled insurance companies to
prepare statutory-basis financial statements in accordance with NAIC Accounting
Practices and Procedures Manual--Version effective January 1, 2001
("Codification") subject to any deviations prescribed or permitted by the
applicable state of domicile's insurance commissioner.

The adoption of Codification increased the surplus of ALIC by $81 million
effective January 1, 2001. The increase is primarily a result of the requirement
to recognize net statutory deferred tax assets for temporary differences
reversing within the succeeding twelve-month period. Two of the Company's
subsidiaries are domiciled in the State of New York. The State of New York
adopted Statement of Statutory Accounting Principle No. 10, "Income Taxes",
effective December 31, 2002, resulting in an increase to statutory surplus of
$11 million.

DIVIDENDS

The ability of ALIC to pay dividends is dependent on business conditions,
income, cash requirements of ALIC, receipt of dividends from its subsidiaries
and other relevant factors. The payment of shareholder dividends by ALIC to AIC
without the prior approval of the state insurance regulator is limited to
formula amounts based on net income and capital and surplus, determined in
accordance with statutory accounting practices, as well as the timing and amount
of dividends paid in the preceding twelve months.

In the twelve-month period beginning January 1, 2002, ALIC paid dividends
of $48 million. This was less than the maximum amount allowed under Illinois
insurance law without the approval of the Illinois Department of Insurance ("IL
Department") based on 2001 formula amounts. Based on 2002 ALIC statutory net
income, the maximum amount of dividends ALIC will be able to pay without prior
IL Department approval at a given point in time during 2003 is $288 million,
less dividends paid during the preceding twelve months measured at that point in
time.

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. The RBC
formula for life insurance companies establishes capital requirements relating
to insurance, business, asset and interest rate risks. At December, 31 2002, RBC
for each of the Company's domestic insurance subsidiaries was significantly
above levels that would require regulatory action.

F-41

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. BENEFIT PLANS

PENSION AND OTHER POSTRETIREMENT PLANS

Defined benefit pension plans, sponsored by AIC, cover most domestic
full-time and certain part-time employees and employee-agents. AIC uses the
accrual method for its defined benefit plans in accordance with accepted
actuarial methods. Benefits under the pension plans are based upon the
employee's length of service and eligible annual compensation. 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 for the pension plans in 2002 was $11 million, while the allocated
benefit to the Company included in Net income in 2001 and 2000 was $1 million
for both periods.

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 plans 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 $6 million,
$5 million and $3 million for postretirement benefits other than pension plans
in 2002, 2001 and 2000, respectively.

PROFIT SHARING PLANS

Employees of AIC are also eligible to become members of The Savings and
Profit Sharing Fund of Allstate Employees ("Allstate Plan"). The Corporation's
contributions are based on the Corporation's matching obligation and
performance.

The Company's allocation of profit sharing expense from the Corporation was
$15 million, $5 million, and $4 million in 2002, 2001 and 2000, respectively.

16. BUSINESS SEGMENTS

ALIC's management is organized around products and services, and this
structure is considered in the identification of its two reportable segments.
These segments and their respective operations are as follows:

RETAIL

The Retail segment offers a diversified group of products to meet
consumers' lifetime needs in the areas of financial protection and retirement
solutions through a variety of distribution channels. See Note 1 for discussion
of the Retail segment's products and distribution channels. The Company
evaluates the results of this segment based upon invested asset growth, face
amounts of policies inforce and Net Income.

STRUCTURED FINANCIAL PRODUCTS

The Structured Financial Products segment offers a variety of spread-based
products to institutional investors. See Note 1 for discussion of the Structured
Financial Products segment's products and distribution channels. The Company
evaluates the results of this segment based upon premiums and deposits and Net
Income.

F-42

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summarized revenue data for each of the Company's business segments for the
years ended December 31, are as follows:

Summarized financial performance data for each of the Company's business
segments for the years ended December 31, are as follows:

F-43

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additional significant financial performance data for each of the Company's
reportable segments for the years ended December 31, are as follows:

Summarized data for total assets and investments for each of the Company's
reportable segments as of December 31, are as follows:

F-44

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. 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:

18. QUARTERLY RESULTS (UNAUDITED)

F-45

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002

F-46

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION

F-47

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE

F-48

ALLSTATE LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS

F-49