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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Registrant meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

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

COMMISSION FILE NUMBER: 333-100029

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

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

100 MOTOR PARKWAY, SUITE 132
HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: 631-357-8920

Securities registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

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

None of the common equity of the registrant is held by non-affiliates.
Therefore, the aggregate market value of common equity held by non-affiliates of
the registrant is zero.

As of March 15, 2004, the registrant had 100,000 common shares, $25 par value,
outstanding, all of which are held by Allstate Life Insurance Company.

Part III of this Form 10-K incorporates by reference certain information from
The Allstate Corporation's Notice of Annual Meeting and Proxy Statement dated
March 26, 2004, SEC File Number 1-11840.

TABLE OF CONTENTS

ii

PART I

ITEM 1. BUSINESS

Allstate Life Insurance Company of New York ("Allstate Life of New York",
"we", "us" or "our") was incorporated in 1967 as a stock life insurance company
under the laws of the State of New York. In 1984, Allstate Life Insurance
Company of New York was purchased by Allstate Life Insurance Company ("ALIC").
Allstate Life of New York is a wholly owned subsidiary of ALIC, a stock life
insurance company incorporated under the laws of the State of Illinois. ALIC is
a wholly owned subsidiary of Allstate Insurance Company, a stock
property-liability insurance company organized under the laws of the State of
Illinois. All of the outstanding capital stock of Allstate Insurance Company
("AIC") is owned by The Allstate Corporation (the "Corporation"), a publicly
owned holding company incorporated under the laws of the State of Delaware. The
Corporation is the largest publicly held personal property lines insurer in the
United States. Widely known through the "You're In Good Hands With Allstate(R)"
slogan, the Corporation provides insurance products to more than 16 million
households and has approximately 12,900 exclusive agencies and exclusive
financial specialists in the U.S. and Canada. The Corporation is the
second-largest personal property and casualty insurer in the United States on
the basis of 2002 statutory premiums earned and the nation's 13th largest life
insurance business on the basis of 2002 ordinary life insurance in force and
19th on the basis of 2002 statutory admitted assets.

Our mission is to assist financial services professionals in meeting their
customers' financial protection, savings and retirement needs by providing
top-tier products delivered with reliable and efficient service.

We will pursue the following to grow our business organically: develop
focused, top-tier products; deepen distribution partner relationships; improve
our cost structure and implement a more systematic risk management program. We
also leverage the strength of the Allstate brand name across products and
distribution channels. Products sold to customers in New York include
interest-sensitive and traditional life insurance, variable life insurance,
variable and fixed annuities and accident and health insurance. Products are
sold through a variety of distribution channels including Allstate exclusive
agencies, independent agents (including master brokerage agencies), financial
institutions and broker/dealers.

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. Assets of 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 our
general account assets. Absent any 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 accounts 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
accounts 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 are reflected in our general account.

With regard to our personal life insurance, savings and retirement
products, we compete principally on the basis of the scope of our distribution
systems, the breadth of our product offerings, the recognition of our brand, our
financial strength and ratings, our product features and prices, and the level
of customer service that we provide. In addition, with respect to variable life
and variable annuity products, we compete 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 our separate accounts.

The market for these products continues to be highly fragmented and
competitive. As of December 31, 2002, there were approximately 780 groups of
life insurance companies in the United States, most of which offered one or more
products similar to our personal life insurance, savings and retirement
products. In some states, we compete with banks and savings and loan
associations 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 includes securities firms,
investment advisors, mutual funds, banks and other financial institutions.
Competitive pressure is growing due to several factors, including cross
marketing alliances between unaffiliated businesses and demutualization and
consolidation activity in the financial services industry.

Allstate Life of New York is subject to extensive regulation. In the U.S.
the method, extent and substance of such regulation varies by state but
generally has its source in statutes that delegate regulatory authority to a
state regulatory agency and define standards of conduct. In general, such
regulation is intended for the protection of insurance policyholders rather than
security holders. These rules have a substantial effect on our business and
relate to a wide variety of matters including insurance company licensing and
examination, agent licensing, price

1

setting, trade practices, policy forms, accounting methods, the nature and
amount of investments, claims practices, participation in guaranty funds,
reserve adequacy, insurer solvency, transactions with affiliates, the payment of
dividends, and underwriting standards. For discussion of statutory financial
information, see Note 13 to the financial statements. For discussion of
regulatory contingencies, see Note 11 to the financial statements. Notes 11 and
13 are incorporated in this Part I, Item 1 by reference.

In recent years the state insurance regulatory framework has come under
increased federal scrutiny and legislation that would provide for federal
chartering of insurance companies has been proposed. 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
Allstate Life of New York.

ITEM 2. PROPERTIES

Allstate Life of New York occupies office space in Hauppauge, New York and
Northbrook, Illinois that is owned or leased by AIC. Expenses associated with
these facilities are allocated to us on both a direct and indirect basis,
depending on the nature and use.

ITEM 3. LEGAL PROCEEDINGS

Incorporated in this Item 3 by reference to the discussion under the
headings "Regulations" and "Legal proceedings" in Note 11 of our financial
statements.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

There is no public trading market for our common stock. All of our
outstanding common stock is owned by our parent, ALIC. ALIC's outstanding common
stock is owned by AIC. All of the outstanding common stock of AIC is owned by
the Corporation. Within the past three years, no equity securities have been
sold or repurchased by us.

From January 1, 2002 through March 15, 2004, we paid no dividends on our
common stock to ALIC.

For additional information on dividends, including restrictions on the
payment of dividends, 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". These items are incorporated herein by
reference.

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

THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING THE
FINANCIAL POSITION AND RESULTS OF OPERATIONS OF ALLSTATE LIFE INSURANCE COMPANY
OF NEW YORK (REFERRED TO IN THIS DOCUMENT AS "WE", "OUR" OR THE "COMPANY"). IT
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES
BEGINNING ON PAGE 27. WE ARE MANAGED AS A SINGLE SEGMENT ENTITY.

To conform to the 2003 presentation, certain prior year amounts have been
reclassified.

The most important matters that we monitor to evaluate the financial
condition and performance of our company include:

- For operations: investment and mortality margins; the amortization of
deferred policy acquisition costs; premiums and deposits; expenses;
operating income; invested assets and face amount of life insurance in
force;
- For Investments: credit quality/experience, stability of long-term
returns, cash flows and asset and liability duration;
- For financial condition: our financial strength ratings, and statutory
capital levels and ratios; and
- For product distribution: profitably growing distribution partner
relationships and Allstate agent sales of all products and services in
order to meet the protection and financial needs of our customers.

2

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

We have identified four accounting policies that require us to make
assumptions and estimates that are significant to the financial statements. It
is reasonably likely that changes in these assumptions and estimates could occur
from period to period and have a material impact on our financial statements. A
brief summary of each of these critical accounting policies follows. For a more
complete discussion of the effect of these policies on our financial statements,
and the judgments and estimates relating to these policies, see the referenced
sections of the Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"). For a complete summary of our significant
accounting policies see Note 2 of the financial statements.

INVESTMENT VALUATION The fair value of publicly traded fixed income securities
is based on independent market quotations, whereas the fair value of
non-publicly traded securities is based on either widely accepted pricing
valuation models which use internally developed ratings and independent third
party data as inputs or independent third party pricing sources. Factors used in
our internally developed models, such as liquidity risk associated with
privately-placed securities are difficult to observe and to characterize.
Because of this, judgment is required in developing certain of these estimates
and, as a result, the estimated fair value of non-publicly traded securities may
differ from amounts that would be realized upon an immediate sale of the
securities.

Periodic changes in fair values of investments classified as available for
sale are reported as a component of accumulated other comprehensive income on
the Statements of Financial Position and are not reflected in the operating
results of any period until reclassified to net income upon the consummation of
a transaction, or when declines in fair values are deemed other than temporary.
The assessment of other than temporary impairment of a security's fair value is
performed on a case-by-case basis considering a wide range of factors. There are
a number of assumptions and estimates inherent when assessing impairments and
determining if they are other than temporary, including 1) our ability and
intent to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; 2) the expected recoverability of principal and
interest; 3) the duration and extent to which the fair value has been less than
amortized cost; 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 liquidity. Additionally, once assumptions and
estimates are made, any number of changes in facts and circumstances could cause
us to later determine that an impairment is other than temporary, including 1)
general economic conditions that are worse than assumed or that have a greater
adverse effect on a particular issuer than originally estimated; 2) changes in
the facts and circumstances related to a particular issuer's ability to meet all
of its contractual obligations; and 3) changes in facts and circumstances or new
information that we obtain which causes a change in our ability or intent to
hold a security to maturity or until it recovers in value. Changes in
assumptions, facts and circumstances could result in additional charges to
earnings in future periods to the extent that losses are realized. The charge to
earnings, while potentially significant to net income, would not have a
significant effect on shareholder's equity since our portfolio is held at fair
value and as a result, the related unrealized loss, net of tax, would already be
reflected as accumulated other comprehensive income in shareholder's equity.

For a more detailed discussion of the risks relating to changes in
investment values and levels of investment impairment, and the potential causes
of such changes, see Note 6 to the financial statements and the Investments,
Market Risk and Forward-looking Statements and Risk Factors sections of the
MD&A.

DERIVATIVE INSTRUMENT VALUATION In the normal course of business, we use
derivative financial instruments to reduce our exposure to market risk and in
conjunction with asset/liability management. The fair value of exchange traded
derivative contracts is based on independent market quotations, whereas the fair
value of non-exchange traded derivative contracts is based on a valuation model
that uses independent third party data as inputs. For further discussion of
these policies and quantification of the impact of these estimates and
assumptions, see Note 7 to the financial statements and the Investments, Market
Risk and Forward-looking Statements and Risk Factors sections of the MD&A.

DEFERRED POLICY ACQUISITION COSTS ("DAC") AMORTIZATION - We incur significant
costs in connection with acquiring business. In accordance with generally
accepted accounting principles ("GAAP"), costs that vary with and are primarily
related to acquiring business are deferred and recorded as an asset on the
Statements of Financial Position.

The amortization methodology for DAC includes significant assumptions and
estimates.

3

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

DAC related to traditional life insurance and other premium paying
contracts is amortized over the premium paying period of the related policies in
proportion to the estimated revenues on such business. Assumptions relating to
estimated premiums, investment income and realized capital gains and losses, as
well as to all other aspects of DAC 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 in force 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.

DAC related to interest-sensitive life, variable annuities and investment
contracts is amortized in relation to the present value of estimated gross
profits ("EGP") over the estimated lives of the contracts. Generally, the
amortization period ranges from 15-30 years. However, an assumption for the rate
of contract surrenders is also used, which results in the majority of the DAC
being amortized over the surrender charge period. The rate of amortization
during the surrender charge period is matched to the assumed pattern of EGP. EGP
consists of estimates of the following components: margins from mortality
including guaranteed minimum death and income benefits; investment margin
including realized capital gains and losses; and contract administration,
surrender and other contract charges, less maintenance expenses.

The most significant assumptions involved in determining EGP are the
expected separate accounts fund performance after fees, surrender rates, lapse
rates, and investment and mortality margins. Our long-term assumption of
separate accounts fund performance after fees is approximately 8%, which is
consistent with our pricing assumptions. Whenever actual separate accounts fund
performance, based on the two most recent years, varies from 8%, we create an
estimate of performance levels over the next five years such that the mean
return over that seven-year period equals the long-term 8% assumption. This
process is referred to as a "reversion to the mean" and is commonly used by the
life insurance industry. Although the use of a reversion to the mean assumption
is common within the industry, the parameters used in the methodology are
subject to judgment and vary between companies. For example, when applying this
assumption we do not allow the future rates of return after fees projected over
the five-year period to exceed 12.75% or fall below 0%. Revisions to EGPs result
in changes in the amounts expensed as a component of amortization of DAC in the
period in which the revision is made. This is commonly known as "DAC unlocking".

For quantification of the impact of these estimates and assumptions, see
the Amortization of DAC and Forward-looking Statements and Risk Factors sections
of the MD&A.

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS ESTIMATION Long-term actuarial
assumptions of future investment yields, mortality, morbidity, policy
terminations and expenses are used when estimating the reserve for
life-contingent contract benefits. 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. Future investment yield assumptions
are determined at the time the policy is issued based upon prevailing investment
yields as well as estimated reinvestment yields. Mortality, morbidity and policy
termination assumptions are based on our experience and industry experience
prevailing at the time the policies are issued. Expense assumptions include the
estimated effects of inflation and expenses to be incurred beyond the
premium-paying period.

For further discussion of these policies see Note 8 of the financial
statements and the Forward-looking Statements and Risk Factors sections of the
MD&A.

2003 HIGHLIGHTS

- - Revenues increased 3.7% in 2003 compared to 2002. This increase was
primarily due to increased net investment income partially offset by lower
premiums in 2003.
- - Investments, including separate accounts assets, increased 16.7% to $5.52
billion due primarily to strong contractholder funds deposits and increases
in separate accounts balances resulting from improved equity market
performance and net new deposits during the year.
- - Fixed annuity deposits increased to $512.7 million for 2003 compared to
$388.7 million in 2002. The increase of $124.0 million was primarily due to
competitive pricing.

OVERVIEW AND STRATEGY We are a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is a wholly owned subsidiary of Allstate
Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation
(the "Corporation"). ALIC, along with its wholly owned subsidiaries, is a
leading provider of life insurance, annuities and other financial services to a
broad spectrum of individual and institutional customers.

4

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

Our mission is to assist financial services professionals in meeting their
customers' financial protection, savings and retirement needs by providing
top-tier products delivered with reliable and efficient service.

We will pursue the following to grow our business organically: develop
focused, top-tier products; deepen distribution partner relationships; improve
our cost structure and implement a more systematic risk management program. We
also leverage the strength of the Allstate brand name across products and
distribution channels.

Our product line includes a wide variety of financial protection, savings
and retirement products aimed at serving the financial needs of our customers.
Products include traditional life, interest-sensitive life and variable life
insurance, variable and fixed annuities and accident and health insurance.
Products are sold through a variety of distribution channels including Allstate
exclusive agencies, independent agents (including master brokerage agencies),
financial institutions and broker/dealers.

FINANCIAL HIGHLIGHTS

Summarized financial data for the years ended and as of December 31 is
presented in the following table.

PREMIUMS AND CONTRACT CHARGES Premiums represent revenues generated from
traditional life, immediate annuities with life contingencies and other
insurance products that have significant mortality or morbidity risk. Contract
charges are revenues 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 values for maintenance,
administration, cost of insurance and surrender prior to contractually specified
dates. As a result, changes in contractholder funds and separate accounts
liabilities are considered in the evaluation of growth and as indicators of
future levels of revenues.

5

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

The following table summarizes premiums and contract charges by product.

The following table summarizes premiums and contract charges by
distribution channel.

Total premiums decreased 27.1% in 2003 compared to 2002. The decrease was
primarily the result of a decline in sales of immediate annuities with life
contingencies and the discontinuance of our direct response business. The
decline in premiums from our direct response business reflects management
actions over the past two years to discontinue this business. Sales of immediate
annuities with life contingencies fluctuate due to consumer preference as well
as market and competitive conditions, which drive the level and mix of immediate
annuities sold with or without life contingencies. Excluding the volatility of
the immediate annuities with life contingencies, premiums increased a modest
1.6% as an 8.7% increase in traditional life premiums sold through our Allstate
exclusive and independent agencies were mostly offset by lower premiums from
products sold through direct marketing.

Total premiums were $93.3 million in 2002 compared to $104.1 million in
2001. Premiums from immediate annuities with life contingencies decreased 11.0%.
Overall, immediate annuities, including those without life contingencies, were
down 14.4% compared to prior year as the competitive environment for structured
settlement annuities and our focus on new sales meeting targeted returns reduced
sales. Traditional life premiums decreased 13.2% when compared to 2001 as a
result of the consumer shift to interest- sensitive life insurance from
traditional whole life products.

Contract charges increased 5.9% to $53.0 million in 2003 compared to $50.1
million in 2002. Higher interest-sensitive life and fixed annuity contract
charges were partially offset by lower variable annuity contract

6

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

charges, which resulted from lower average variable annuity account values
during the year. The increase in the interest sensitive-life and fixed annuities
is representative of the growth in the amount of business in-force.

Contract charges increased 21.4% in 2002 compared to 2001 due primarily to
increased contract charges on interest-sensitive life insurance resulting from
increased customer account values. Variable annuity contract charges increased
11.6% due to fees received on new deposits more than offsetting the impact of
declines in account values resulting from poor equity market performance.
Contract charges on fixed annuities decreased 14.7% compared to prior year due
to favorable persistency.

Contractholder funds represent interest-bearing liabilities arising from
the sale of products, such as interest-sensitive life and fixed annuities. The
balance of contractholder funds is equal to the cumulative deposits received and
interest credited to the contractholder less cumulative contract maturities,
benefits, surrenders, withdrawals and contract charges for mortality or
administrative expenses.

The following table shows the changes in contractholder funds.

Contractholder funds deposits decreased 4.0% in 2003 compared to 2002 due
to decreased deposits to the fixed account of variable annuities from lower
variable annuity contract sales that more than offset a significant increase in
fixed annuity deposits. Average contractholder funds increased 35.0% in 2003
compared to 2002 as a result of fixed annuity deposits that increased 31.9% over
2002 due to competitive pricing and our decision to maintain a market presence
in our financial institutions distribution channel despite a challenging
interest rate environment. Fixed annuities have been attractive to consumers in
this distribution channel due to volatile equity markets and the uncertainty of
future interest rates.

Contractholder funds deposits increased in 2002 compared to 2001 due to
significant increases in fixed annuity deposits. Fixed annuity deposits
increased 46.2% over 2001 due to competitive pricing and our ability to achieve
acceptable margins while deposits to the fixed account from variable annuities
increased 95.7%. Average contractholder funds increased 37.0% in 2002 compared
to 2001.

7

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

Separate accounts liabilities represent contractholders' claims to the
related legally segregated separate accounts assets. Separate accounts
liabilities primarily arise from the sale of variable annuity contracts and
variable life insurance policies. The following table shows the changes in
separate accounts liabilities.

Separate accounts liabilities increased $128.7 million during 2003 compared
to 2002 reflecting a significant improvement in investment results, lower
surrenders and benefits, offset in part by lower net deposits. Net new variable
annuity deposits decreased in 2003 compared to 2002 as significant deposits in
2002 were made and transferred to the fixed accounts because of the attractive
crediting rates. These rates were lowered in late 2002 resulting in lower
variable annuity contract sales. In volatile and uncertain equity markets,
variable annuity contractholders often allocate a significant portion of their
initial variable annuity contract deposit into a fixed rate investment option.
This allows contractholders to transfer funds to separate accounts equity
investment funds over time and to purchase their equity investment fund shares
at multiple price levels. This is commonly referred to as dollar cost averaging.
The level of this activity is reflected above in the deposits allocated to the
fixed accounts, while all other transfer activity between the fixed and separate
accounts investment options is reflected in net transfers from fixed accounts.
The liability for the fixed portion of variable annuity contracts is reflected
in contractholder funds.

Separate accounts liabilities decreased $65.5 million during 2002 compared
to 2001, reflecting the significant decline in the equity market and higher
levels of surrenders and benefits during the year.

NET INVESTMENT INCOME increased 13.7% in 2003 compared to 2002 and 13.9% in 2002
compared to 2001. The increases were due to higher portfolio balances during the
year as investment income on positive cash flows from product sales and deposits
was mostly offset by lower portfolio yields. Investments balances at December
31, 2003, excluding unrealized net capital gains, increased 16.9% from December
31, 2002 and increased 24.3% as of December 31, 2002 compared to December 31,
2001. The lower portfolio yields were primarily due to purchases of fixed income
securities with yields lower than the current portfolio average.

During 2003 we reclassified reinsurance premiums paid to ALIC for the stop
loss reinsurance agreement entered into in 2002, which meets the accounting
definition of a derivative under Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", from net investment income for 2003 and from premiums for 2002 to
realized capital gains and losses so that they are reported consistently with
the corresponding fair value adjustments on this agreement. The
reclassifications increased net investment income by $2.6 million for the year
ended December 31, 2003 and increased premiums by $2.4 million for the year
ended December 31, 2002.

8

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

NET INCOME analysis is presented in the following table.

INVESTMENT MARGIN represents the excess of investment income earned over
interest credited to policyholders and contractholders and interest expense.
Investment margin increased 25.3% in 2003 compared to 2002 due to a 29.6%
increase in contractholder funds and actions to reduce crediting rates where
possible, partially offset by the decline in the portfolio yield of fixed income
securities from low market interest rates. The yield decline on the assets that
support our immediate annuities and capital, traditional life and other products
for which we do not have the ability to modify crediting rates also had a
significant negative impact on the investment margin during the year.

The investment margin increased 14.0% in 2002 compared to 2001. The
increase was primarily attributable to a 42.6% increase in contractholder funds.
The impact of this growth was partly offset by a decline in portfolio yields
from lower market interest rates and a shift to sales of investment products
with lower investment margins.

The following table summarizes the annualized weighted average investment
yields, interest crediting rates and investment spreads during 2003, 2002 and
2001.

9

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

The following table summarizes the liabilities as of December 31 for these
contracts and policies.

MORTALITY MARGIN, which represents premiums and cost of insurance contract
charges less related policy benefits, was $21.0 million in 2003, reflecting an
$11.1 million or 34.6% decline compared to 2002. The strengthening of reserves
on certain traditional life insurance policies in 2003 contributed significantly
to the decline as did higher variable annuity death benefits. Contract benefits
paid include cash payments for variable annuity guaranteed minimum death
benefits ("GMDBs") totaling $3.2 million, $2.7 million, and $955 thousand for
the years ended December 31, 2003, 2002 and 2001, respectively. Premiums and
cost of insurance contract charges on new business improved the mortality margin
compared to prior year. Mortality and morbidity loss experience can cause
benefit payments to fluctuate from period to period while underwriting and
pricing guidelines are based on a long-term view of the trends in mortality and
morbidity.

Mortality margin increased 60.5% in 2002 compared 2001. Favorable mortality
margin in 2002 reflects favorable death claims on immediate annuities with life
contingencies and the recognition of reinsurance recoverables arising from the
tragic events of September 11, 2001. The mortality margins in 2001 reflect the
impact of the September 11, 2001 attack on the World Trade Center in New York
City.

AMORTIZATION OF DAC increased 15.1% during 2003 compared to 2002 primarily due
to in-force business growth as reflected in our contractholder funds and
investment margin increases over 2002 partially offset by a lower DAC unlock.
DAC amortization increased 373.0% during 2002 compared to 2001 due to the
acceleration of amortization in 2002.

We performed our annual comprehensive evaluation of DAC assumptions in the
first quarter of 2003 and concluded that, due to sustained poor performance of
the equity markets coupled with an expectation of moderate future performance
due to continuing weakness in the U.S. economy and uncertainty in the
geopolitical environment, it was no longer reasonably possible that variable
annuity fund returns would revert to the expected long-term mean within the time
horizon used in our reversion to the mean model. As a result, we unlocked the
DAC assumptions for all investment products, including variable and fixed
annuities, and interest-sensitive life products, to be consistent across all
product lines.

The 2003 unlocking of DAC assumptions includes a $1.2 million acceleration
of amortization for interest-sensitive life as investment spreads and margins
were projected to be lower than expected, partially offset by a favorable DAC
unlock on variable annuities based on a revised projection of higher investment
spreads and margins from increased utilization of the variable annuity fixed
accounts. A significant assumption change in addition to the fixed account
utilization for variable annuities involved resetting the variable annuity
reversion to the mean calculation, such that future equity market performance
during the five-year reversion period was reduced from 13.25% after fees to the
long-term assumed return of 8% after fees.

10

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

The changes in the DAC asset are summarized in the following tables.

(1) Included as a component of Amortization of DAC on the Statements of
Operations and Comprehensive Income.

We believe that the variable annuity DAC asset is appropriately valued for
the current economic environment. With moderate movements in the equity markets,
the likelihood of future DAC unlocking is substantially reduced since the
projected return in the mean reversion period is no longer at the maximum.

OPERATING COSTS AND EXPENSES decreased 1.0% in 2003 compared to 2002, as higher
employee related benefits and guaranty fund assessments were more than offset by
higher expense reimbursements on reinsured business and aggressive cost
management. Operating costs and expenses increased 19.4% during 2002 compared to
2001 due to distribution expenses incurred on new growth initiatives and
increased administrative expenses supporting our growth.

REINSURANCE CEDED We enter into reinsurance agreements with ALIC and
unaffiliated carriers to limit our risk of mortality losses. For life insurance
policies, beginning in 2002 we cede 80% of the mortality risk on certain term
life policies to a pool of nine unaffiliated reinsurers. Mortality risk on
policies in excess of $250 thousand per life is ceded to ALIC. As of December
31, 2003, 11.1% and 12.1% of our face amount of life insurance is reinsured to
non-affiliates and to ALIC, respectively. We retain primary liability as a
direct insurer for all risks ceded to reinsurers.

The reinsurance recoverables on paid and unpaid claims is $4.6 million and
$2.1 million at December 31, 2003 and 2002, respectively.

Estimating amounts of reinsurance recoverables is impacted by the
uncertainties involved in the establishment of reserves.

Developments in the insurance industry have recently led to a decline in
the financial strength of some of our reinsurance carriers, causing amounts
recoverable from them to be considered a higher risk. There has also been recent
consolidation activity between reinsurers in the industry, which causes
reinsurance risk across the industry to be concentrated among fewer companies.
Additionally, one of our primary reinsurers has announced its intention to no
longer assume life insurance risks. As a result, we plan to reduce our
non-affiliated reinsurance of term life insurance and evaluate alternative
reinsurance structures.

Our reinsurance recoverables, summarized by the reinsurers' Standard &
Poor's financial strength ratings as of December 31, are shown in the following
table. In certain cases, these ratings refer to the financial strength of the
affiliated group or parent company of the reinsurer.

11

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

We continuously monitor the creditworthiness of reinsurers in order to
determine our risk of recoverability on an individual and aggregate basis, and a
provision for uncollectible reinsurance is recorded if needed. At December 31,
2003, there were no reinsurance recoverable amounts that were greater than 60
days past due and we did not have an allowance established for them. No amounts
have been deemed unrecoverable in the three years ended December 31, 2003.

We have a reinsurance treaty through which we cede re-investment related
risk on our structured settlement annuities to ALIC. The terms of this treaty
meet the accounting definition of a derivative under SFAS No. 133. Accordingly,
the treaty is recorded in the Statements of Financial Position at fair value,
and changes in the fair value of the treaty and premiums paid to ALIC are
recognized in realized capital gains and losses.

OUTLOOK

- - Our ability to grow our investment margin is dependent upon maintaining
profitable spreads between investment yields and interest crediting rates,
and growing the amount of business in force. As interest rates decrease or
remain at historically low levels, we expect a reduction in our investment
yields. The amount in which these lower yields will reduce our investment
margin is contingent on our ability to lower interest crediting rates on
certain interest-sensitive products, which could be limited by market
conditions, regulatory minimum rates or contractual minimum rate
guarantees, and may not match the timing or magnitude of changes in asset
yields. Also, a significant amount of our invested assets are used to
support our capital and non-interest-sensitive products, which do not
provide this offsetting opportunity. As a result, we expect growth in our
investment margin from net new business, which also fluctuates in relation
to the interest rate environment, to be partially offset by compression in
our in-force investment spreads.
- - If equity markets perform at historical norms, we expect to see positive
growth in our variable annuity gross margins from increased revenue and
lower net GMDB payments on our in-force business. However, improvements and
deteriorations in our variable annuity gross margins from changes in equity
markets performance creates a proportional increase or decrease in variable
annuity amortization of DAC, which will offset a significant portion of the
changes in gross margins.
- - Market conditions beyond our control determine the availability and cost of
the reinsurance we purchase. To eliminate some of these market concerns, we
are expecting to retain more of our mortality risk in 2004. This change
will have a diminutive effect on our net income in the short-term, but will
provide the foundation to drive increased long-term growth in our life
insurance business. Our mortality margins will also be more volatile in the
future as we retain and manage more of our mortality risk, which will
require increased statutory capital.

INVESTMENTS

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

OVERVIEW AND STRATEGY Our investment strategy is based upon a strategic asset
allocation framework that takes into account the need to manage the portfolio on
a risk-adjusted spread basis for the underlying contract liabilities and to
maximize return on retained capital. Generally, a combination of recognized
market, analytical and proprietary modeling 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 asset spread is maximized 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

12

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

are significant (e.g., high yield fixed income securities, convertible bonds).
We expect that by employing this strategy we will minimize interest rate market
impacts on investment income and provide sustainable investment income over
time.

PORTFOLIO COMPOSITION The composition of the investment portfolio at December
31, 2003 is presented in the table below. Also, see Notes 2 and 6 of the
financial statements for investment accounting policies and additional
information.

(1)Fixed income securities are carried at fair value. Amortized cost basis for
these securities was $3.94 billion and $3.28 billion at December 31, 2003 and
2002, respectively.

Total investments increased to $4.86 billion at December 31, 2003 from
$4.20 billion at December 31, 2002 primarily due to positive cash flows
generated from operating and financing activities and increased unrealized gains
on fixed income securities.

Total investment balances related to collateral, due to securities lending,
decreased to $134.5 million at December 31, 2003 from $160.0 million at December
31, 2002.

We use different methodologies to estimate the fair value of publicly and
non-publicly traded marketable investment securities and exchange traded and
non-exchange traded derivative contracts. For a discussion of these methods, see
the Application of Critical Accounting Policies section of the MD&A.

The following table shows the investment portfolio, and the sources of its
fair value, at December 31, 2003.

FIXED INCOME SECURITIES

See Note 6 of the financial statements for a table showing the amortized
cost, unrealized gains, unrealized losses and fair value for each type of fixed
income securities for the years ended December 31, 2003 and 2002.

U.S. government and agencies of the U.S. government securities were all
rated investment grade at December 31, 2003.

Municipal bonds, including tax-exempt and taxable securities, totaled
$212.4 million and all were rated investment grade at December 31, 2003.
Approximately 26.3% of the municipal bond portfolio was insured by four bond
insurers and accordingly have a rating of Aaa or Aa. The municipal bond
portfolio at December 31, 2003 consisted of 32 issues from 28 issuers. The
largest exposure to a single issuer was 8.9% of the municipal bond portfolio.

Corporate bonds totaled $2.64 billion and 93.1% were rated as investment
grade at December 31, 2003. As of December 31, 2003, the fixed income securities
portfolio contained $1.18 billion of privately placed corporate obligations or
44.7% of the total corporate obligations in the portfolio, compared with $1.00
billion at December

13

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

31, 2002. The benefits of privately placed securities when compared to publicly
issued 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 disadvantage of privately placed securities when compared to
publicly issued securities is relatively reduced liquidity. At December 31,
2003, 92.0% of the privately placed securities were rated as investment grade.

Foreign government securities totaled $254.8 million and all were rated
investment grade at December 31, 2003.

Mortgage-backed securities ("MBS") totaled $609.9 million at December 31,
2003. In our MBS portfolio, the credit risk is mitigated due to the fact that
51.9% of the portfolio consists primarily of securities that were issued by or
have underlying collateral that is guaranteed by U.S. government agencies or
U.S. government sponsored entities. The MBS portfolio is also subject to
interest rate risk since price volatility and ultimate realized yield are
affected by the rate of repayment of the underlying mortgages. We attempt to
limit interest rate risk on these securities by investing a portion of the
portfolio in securities that provide prepayment protection. At December 31,
2003, approximately 50.0% of the MBS portfolio was invested in planned
amortization class bonds or the equivalent. Though these security types offer
greater relative prepayment protection than other MBS securities, the degree of
protection has been limited in this interest rate environment. Based on market
conditions and potential changes in portfolio management objectives, the value
of this protection and the significance of these holdings relative to the entire
portfolio may be reduced in future periods.

Asset-backed securities ("ABS") totaled $46.0 million at December 31, 2003.
Our ABS portfolio is subject to credit and interest rate risk. Credit risk is
mitigated by monitoring the performance of the collateral. Approximately 49.1%
of the ABS portfolio had a Moody's rating of Aaa, or a Standard & Poor's ("S&P")
rating of AAA, the highest rating category. The ABS portfolio is also subject to
interest rate risk since price volatility and ultimate realized yield are
affected by the rate of repayment of the underlying assets. Approximately 6.7%
of our ABS portfolio is invested in securitized credit card receivables. The
remainder of the portfolio is primarily backed by bank trust preferred
securities and high yield corporate bonds and loans.

At December 31, 2003, 95.8% of our fixed income securities portfolio was
rated investment grade, which is defined 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; an S&P equivalent rating of AAA, AA, A
or BBB; or a comparable internal rating.

The following table summarizes the credit quality of the fixed income
securities portfolio as of December 31, 2003.

(IN THOUSANDS)

UNREALIZED GAINS AND LOSSES See Note 6 of the financial statements for
further disclosures regarding unrealized losses on fixed income securities and
factors considered in determining that they are not other than temporarily
impaired. The unrealized net capital gains on fixed income securities at
December 31, 2003 were $479.9 million, an increase of $26.7 million or 5.9%
since December 31, 2002. Gross unrealized losses were primarily concentrated in
the corporate fixed income securities and were comprised of securities in the
following sectors.

14

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

The transportation, banking and capital goods sectors had the highest
concentration of unrealized losses in our corporate fixed income securities
portfolio at December 31, 2003. The gross unrealized losses in these sectors are
primarily company specific or interest rate related. While we expect eventual
recovery of these securities and the related sectors, we included every security
in our portfolio monitoring process at December 31, 2003.

The following table shows the composition by credit quality of the fixed
income securities with gross unrealized losses at December 31, 2003.

The table includes six securities that have not yet received an NAIC
rating, for which we have assigned a rating based on an analysis similar to that
used by the NAIC, with a fair value totaling $22.3 million and an unrealized
loss of $271 thousand. 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, we will always have a small number
of securities that have a pending rating.

At December 31, 2003, $16.2 million, or 85.3%, of the gross unrealized
losses were related to investment grade fixed income securities. 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, 2003, $2.8 million of the gross unrealized losses were
related to below investment grade fixed income securities. 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

15

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

downgraded. We mitigate the credit risk of investing in below-investment-grade
fixed income securities by limiting the percentage of our fixed income 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, 2003 is shown below. Actual maturities may differ
from those scheduled as a result of prepayments by the issuers.

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

PORTFOLIO MONITORING We have a comprehensive portfolio monitoring process to
identify and evaluate fixed income securities whose carrying value may be other
than temporarily impaired. The process includes a quarterly review of all
securities using a screening process to identify those securities whose fair
value compared to amortized cost is below established thresholds for certain
time periods, or which are identified through other monitoring criteria such as
ratings downgrades or payment defaults. The securities identified, in addition
to other securities for which we may have concern, are evaluated based on facts
and circumstances for inclusion on our watch-list. The watch-list is reviewed in
detail to determine whether any other than temporary impairment exists. For
additional information, see Note 6 of the financial statements.

The following table contains the individual securities as of December 31,
2003, with the ten largest unrealized losses.

We also monitor the quality of our fixed income portfolio by categorizing
certain investments as "problem", "restructured" or "potential problem". Problem
fixed income securities are securities in default with respect to principal or
interest and/or securities issued by companies that have gone into bankruptcy
subsequent to our acquisition of the security. Restructured fixed income
securities have rates and terms that are not consistent with market rates or
terms prevailing 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, we have serious concerns
regarding the borrower's ability to pay future principal and interest, which
causes us to believe these securities may be classified as problem or
restructured in the future.

16

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

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

We have experienced a decrease in our balance of fixed income securities
categorized as problem as of December 31, 2003 compared to December 31, 2002.
The decrease was related primarily to the sale of holdings in this category due
to specific developments causing a change in our outlook and intent to hold
those securities and the movement of certain securities to the restructured
category. The increase in the potential problem category assets primarily
resulted from liquidity constraints in the utility sector of the market in 2003.

We also evaluated each of these securities through our portfolio monitoring
process at December 31, 2003 and recorded write-downs when appropriate. We
further concluded that any remaining unrealized losses on these securities were
temporary in nature. While these balances may increase in the future,
particularly if economic conditions are unfavorable, management expects that the
total amount of securities in these categories will remain low relative to the
total fixed income securities portfolio.

NET REALIZED CAPITAL GAINS AND LOSSES The following table presents the
components of realized capital gains and losses and the related tax effect for
the years ended December 31.

Investment write-downs during 2003 represent approximately 0.2% of the
average total investment portfolio value during the year. For the year ended
December 31, 2003, the $1.6 million in net losses from sales was comprised of
gross gains of $5.6 million and gross losses of $7.2 million. Gross losses from
sales of fixed income securities were $6.9 million which, combined with
investment write-downs on fixed income securities of $6.6 million, represents
total gross realized losses of $13.5 million.

In 2003, losses from sales were primarily related to routine reductions of
exposures to deteriorating credits and reallocation of funds to other
investments in a higher interest rate environment. We may sell securities during
the period in which fair value has declined below amortized cost. Recognizing in
certain situations new factors such as negative developments, subsequent credit
deterioration, relative value opportunities, market liquidity concerns and
portfolio reallocation can subsequently change our previous intent to continue
holding a security.

Our largest losses on write-downs resulted from the write-down of $5.2
million of a major U.S. airline that was taken in early 2003 and reflected a
heightened probability of bankruptcy; and the write-down of $1.2 million of
commercial office property resulting from the bankruptcy proceedings of the
borrower. The property was subsequently sold.

17

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

The five largest losses from sales of individual securities for the year
ended December 31, 2003 totaled $3.9 million with the largest being $1.3 million
and the smallest being $489 thousand. Of those losses, one related to a security
that was in an unrealized loss position of greater than 20% of amortized cost
for greater than twelve months. These securities were sold primarily due to
deteriorating credit, to adjust sector exposures or to take advantage of
relative value opportunities.

MORTGAGE LOANS Our $385.6 million mortgage loans portfolio at December 31, 2003
and $323.1 million at December 31, 2002 was comprised primarily of loans secured
by first mortgages on developed commercial real estate. Geographical and
property type diversification are key considerations used to manage our mortgage
loan risk.

We closely monitor our 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 either discounted
property cash flow projections or a commonly used valuation method that utilizes
a one-year projection of expected annual income divided by an expected rate of
return. We had net realized capital losses related to write-downs of $1.1
million and $119 thousand for the years ended December 31, 2003 and 2001,
respectively. At December 31, 2002, we had no realized capital gains or losses
related to write-downs on mortgage loans.

SHORT-TERM INVESTMENTS Our short-term investment portfolio was $22.8 million and
$104.2 million at December 31, 2003 and 2002, respectively. We invest available
cash balances primarily in taxable short-term securities having a final maturity
date or redemption date of one year or less.

We also participate in securities lending, primarily as an investment yield
enhancement, with third parties such as brokerage firms. We obtain collateral in
an amount equal to 102% of the fair value of loaned securities and monitor the
market value of the securities loaned on a daily basis with additional
collateral obtained as necessary. The cash we receive is subsequently invested
and included in short-term and fixed income investments, and an offsetting
liability is recorded in other liabilities. At December 31, 2003, the amount of
securities lending collateral reinvested in short-term investments had a
carrying value of $7.1 million. This compares to $79.2 million at December 31,
2002.

MARKET RISK

Market risk is the risk that we will incur losses due to adverse changes in
equity prices or interest rates. Our primary market risk exposure is to changes
in interest rates, although we also have certain exposures to changes in equity
prices.

The active management of market risk is integral to our results of
operations. We may use the following approaches to manage our exposure to market
risk within defined tolerance ranges: 1) rebalancing existing asset or liability
portfolios, 2) changing the character of investments purchased in the future or
3) using derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be purchased. For a more
detailed discussion of these derivative financial instruments, see Note 7 of the
financial statements.

OVERVIEW We generate substantial investable funds from our business operations.
In formulating and implementing guidelines for investing funds, we seek to earn
returns that enhance our ability to offer competitive rates and prices to
customers while contributing to attractive and stable profits and long-term
capital growth. Accordingly, our investment decisions and objectives are a
function of our underlying risks and product profiles.

Investment guidelines define the overall framework for managing market and
other investment risks, including accountability and control over these risk
management activities. In addition, we follow guidelines that have been approved
by our board of directors and that specify the investment limits and strategies
that are appropriate given our liquidity, surplus, product, and regulatory
requirements. Executive oversight of investment risk management processes is
conducted primarily through the board of directors and investment committees.
Administration and detailed managerial oversight of investment risk, including
market risk, is provided through our credit and risk management committee
("CRMC"). We also have an enterprise-wide committee called the Enterprise Risk
Council ("ERC") that is responsible for assessing risks, including market and
other investment risks, on an integrated basis across subsidiaries and
organizations.

18

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

We manage our 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. We have asset allocation
limits that place restrictions on the total funds that may be invested within an
asset class. We have duration limits on our investment 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. Our
value-at-risk limits are intended to restrict the potential loss in fair value
that could arise from adverse movements in the fixed income markets over a time
interval based on historical volatilities and correlations among market risk
factors. Comprehensive day-to-day management of market risk within defined
tolerance ranges occurs as portfolio managers buy and sell within their
respective markets based upon the acceptable boundaries established by the
investment guidelines.

INTEREST RATE RISK is the risk that we will incur an economic loss due to
adverse changes in interest rates. This risk arises from many of our primary
activities, as we invest substantial funds in interest-sensitive assets and
carry significant interest-sensitive liabilities.

We manage the interest rate risk in our assets relative to the interest
rate risk inherent in our liabilities. One of the measures used to quantify
this exposure is duration. Duration measures the sensitivity of the assets
and liabilities to changes in interest rates. For example, if interest rates
increase by 100 basis points, the fair value of an asset with a duration of 5
is expected to decrease in value by approximately 5%. At December 31, 2003,
the difference between our asset and liability duration was (0.1) compared to
a (1.0) gap at December 31, 2002. A negative duration gap indicates that the
fair value of our liabilities is more sensitive to interest rate movements
than the fair value of our assets.

We seek to invest premiums, contract charges and deposits to generate
future cash flows that will fund future claims, benefits and expenses, and that
will earn stable margins across a wide variety of interest rate and economic
scenarios. In order to achieve this objective and limit exposure to interest
rate risk, we adhere to a philosophy of managing the duration of assets and
related liabilities. This philosophy includes using interest rate swaps and
futures to reduce the interest rate risk resulting from unintended duration
mismatches between assets and liabilities, and financial futures to hedge the
interest rate risk related to anticipated purchases and sales of investments and
product sales to customers.

To calculate duration, we project asset and liability cash flows and
calculate their net present value using a risk-free market interest rate
adjusted for credit quality, sector attributes, liquidity and other specific
risks. Duration is calculated by revaluing these cash flows at alternative
interest rates and determining the percentage change in aggregate fair value.
The cash flows used in this calculation include the expected maturity and
repricing characteristics of our derivative financial instruments, all other
financial instruments (as described in Note 7 of the financial statements) and
certain other items including interest-sensitive liabilities and annuity
liabilities. The projections include assumptions (based upon historical market
experience and our experience) that reflect the effect of changing interest
rates on the prepayment, lapse, leverage and/or option features of instruments,
where applicable. Such assumptions relate primarily to mortgage-backed
securities, collateralized mortgage obligations, municipal housing bonds,
callable municipal and corporate obligations, and fixed rate single and flexible
premium deferred annuities.

Based upon the information and assumptions we use in this duration
calculation, and interest rates in effect at December 31, 2003, we estimate that
a 100 basis point immediate, parallel increase in interest rates ("rate shock")
would decrease the net fair value of the assets and liabilities by approximately
$46.3 million, compared to a decrease of $6.4 million at December 31, 2002.
Additionally, there are $253.2 million of assets supporting life insurance
products such as traditional and interest-sensitive life that are not financial
instruments and as a result have not been included in the above estimate. This
amount has increased from the $217.6 million reported at December 31, 2002 due
to increases in policies in force. Based on assumptions described above, in the
event of a 100 basis point immediate increase in interest rates, these assets
would decrease in value by $10.2 million, compared to a decrease of $4.1 million
at December 31, 2002. The selection of a 100 basis point immediate parallel
change in interest rates should not be construed as our prediction of future
market events, but only as an illustration of the potential effect of such an
event.

To the extent that conditions differ from the assumptions we used in these
calculations, duration and rate shock measures could be significantly impacted.
Additionally, our calculations assume that the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the effect of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.

19

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

EQUITY PRICE RISK is the risk that we will incur economic losses due to
adverse changes in a mutual fund or stock index.

At December 31, 2003 and 2002, we had separate accounts assets with account
values totaling $665.9 million and $537.2 million, respectively. We earn
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, we
would have earned approximately $684 thousand and $892 thousand less in fee
income at December 31, 2003 and 2002, respectively.

Variable annuity contracts we sell usually have a GMDB and customers may
choose to purchase an enhanced GMDB and guaranteed minimum income benefits
("GMIB") prior to 2004 and beginning in 2004 a TrueReturn(SM) Accumulation
Benefit ("GMAB") on certain contracts. These guarantees subject us to
additional equity risk because the beneficiary or contractholder may receive
a benefit that is greater than the current account value. GMDBs are payable
upon death, while GMIBs are payable on or after the ten-year anniversary of
the contract if the contractholder elects to receive a defined stream of
payments ("annuitize"). GMABs are payable on a date that is pre-determined by
the contractholder, between the eighth and twentieth year of the contract.
GMABs guarantee a return of up to 2.5 times (or 250%) of the amount deposited
in the contract, depending on the amount of time the contract is in force and
adherence to certain fund allocations. The GMABs will be 100% ceded to ALIC
under a reinsurance agreement.

At December 31, 2003 and 2002, the guaranteed value of the death benefits
in excess of account values was estimated to be $117.9 million and $200.6
million, respectively. The decrease in this estimate between periods is
attributable to improved equity markets during 2003. 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.

We estimate the present value of expected future payments for GMDBs for the
next 40 quarters to be approximately $5.6 million at December 31, 2003 compared
to $7.3 million at December 31, 2002. In order to calculate this estimate, we
considered the current guarantees outstanding for all contracts that contain
GMDBs, the expected fund performance and the assumptions and methodology we use
for DAC amortization. The decrease in this estimate at December 31, 2003 is
primarily attributable to the equity market improvement during the year. We also
estimate the effect on expected future GMDB payments in the event of extreme
adverse market conditions. In the event of an immediate decline in account
values of 10% due to equity market declines, payments for guaranteed death
benefits at December 31, 2003 would increase by an estimated $473 thousand
during the next year. The selection of a 10% immediate decrease should not be
construed as our prediction of future market events, but only as an example to
illustrate the potential effect on earnings and cash flow of equity market
declines as a result of this guarantee. Also, our actual payment experience in
the future may not be consistent with the assumptions used in the model.

Included among the GMIB contracts we have sold are contracts that provide
the contractholder with the right to annuitize based on the highest account
value at any anniversary date or on a guaranteed earnings rate based on the
initial account value over the specified period. The guaranteed benefit feature
was first offered in certain of our GMIB products beginning in 2002, with
guaranteed benefits available for election by the contractholders beginning in
2012. The present value of the guaranteed value of these benefits in excess of
the current account values at December 31, 2003 and 2002 is immaterial to our
financial condition.

As of December 31, 2003 we do not have a reserve established for GMDBs or
GMIBs; however, this will change with the adoption of Statement of Position
03-01 in 2004. See Note 2 of the financial statements for a discussion of this
pending accounting change.

Additional sales of variable annuity contracts will increase our equity
risk because of these benefits. An increase in the equity markets above the
December 31, 2003 level will increase account values for these contracts,
thereby decreasing the risk of the GMDBs, GMIBs and GMABs being utilized in the
future. Likewise, a decrease in the equity markets that causes a decrease in the
account values will increase our equity risk because of these benefits.

We are also exposed to equity risk in DAC. Fluctuations in the value of the
variable annuity and life contract account values due to the equity market
affect DAC amortization, because the expected 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 of the financial statements and the
Application of Critical Accounting Policies section of the MD&A.

20

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

CAPITAL RESOURCES AND LIQUIDITY

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

SHAREHOLDER'S EQUITY decreased in 2003 when compared to 2002 due to a
decrease in accumulated other comprehensive income of $30.9 million partially
offset by net income of $20.7 million. Shareholder's equity increased in 2002
when compared to 2001, due to an increase of $50.7 million in accumulated other
comprehensive income, net income of $24.2 million and a capital contribution of
$10.0 million from ALIC. In 2001, shareholder's equity increased as a result of
net income of $35.4 million and an increase of $753 thousand in accumulated
other comprehensive income.

FINANCIAL RATINGS AND STRENGTH Our insurance financial strength was rated Aa2,
AA, and A+g by Moody's, Standard & Poor's and A.M. Best, respectively, at
December 31, 2003.

Our ratings are influenced by many factors including our operating and
financial performance, asset quality, liquidity, asset/liability management,
overall portfolio mix, financial leverage (i.e., debt), exposure to risks and
the current level of operating leverage. In February 2004, A.M. Best revised the
outlook to stable from positive for the insurance financial strength ratings of
the Company, ALIC and certain rated ALIC subsidiaries and affiliates.

State laws specify regulatory actions if an insurer's risk-based capital
("RBC"), a measure of an insurer's solvency, falls below certain levels. The
NAIC has a standard formula for assessing RBC. The formula for calculating RBC
takes into account factors relating to insurance, business, asset and interest
rate risks. At December 31, 2003, our RBC was above levels that would require
regulatory actions.

The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or action from insurance regulatory
authorities. The NAIC analyzes data provided by insurance companies using
prescribed ratios, each with defined "usual ranges." Generally, regulators will
begin to monitor an insurance company if its ratios fall outside the usual
ranges for four or more of the ratios. If an insurance company has insufficient
capital, regulators may act to reduce the amount of insurance it can issue. Our
ratios are within these ranges.

LIQUIDITY SOURCES AND USES Our potential sources of funds principally include
the following activities:

Receipt of insurance premiums
Contractholder fund deposits
Reinsurance recoveries
Receipts of principal and interest on investments
Sales of investments
Funds from securities lending
Inter-company loans and tax refunds/settlements
Capital contributions from parent

Our potential uses of funds principally include the following activities:

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

21

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

Decreased operating cash flows in 2003 compared to 2002 primarily relates
to a decline in premiums from immediate annuities with life contingencies and
higher acquisition related expenses partially offset by increased investment
income. Cash flows in investing activities declined in 2003 as a result of
decreased cash available for investment resulting from decreased operating and
financing cash flows.

Declines in cash flow from financing activities during 2003 primarily
reflect a decrease in deposits received from contractholders and an
increase in withdrawals from contractholders' accounts. Increases in 2002 were
due to higher deposits received from contractholders.

To ensure we have the appropriate level of liquidity, we perform actuarial
tests on the impact to cash flows of policy surrenders and other actions under
various scenarios.

We have entered into an inter-company loan agreement with the Corporation.
The amount of inter-company loans available to us is at the discretion of the
Corporation. The maximum amount of loans the Corporation will have outstanding
to all its eligible subsidiaries at any given point in time is limited to $1.00
billion. We had no amounts outstanding under the inter-company loan agreement at
December 31, 2003 or 2002. The Corporation uses commercial paper borrowings and
bank lines of credit to fund intercompany borrowings.

Certain remote events and circumstances could constrain the Corporation's
liquidity. Those events and circumstances include, for example, a catastrophe
resulting in extraordinary losses, a downgrade in the Corporation's long-term
debt rating of A1 and A+ (from Moody's and Standard & Poor's, respectively) to
non-investment grade status of below Baa3/BBB-, a downgrade in AIC's financial
strength rating from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M.
Best, respectively) to below Baa/BBB/A- or a downgrade in ALIC's financial
strength ratings from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M.
Best, respectively) to below Aa3/AA-/A-. The rating agencies also consider the
interdependence of the Corporation's individually rated entities, and therefore,
a rating change in one entity could potentially affect the ratings of other
related entities.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of
December 31, 2003 and the payments due by period are shown in the following
table.

(1) Securities lending is typically fully collateralized with marketable
securities. We manage our short-term liquidity position to ensure the
availability of a sufficient amount of liquid assets to extinguish
short-term liabilities as they come due in the normal course of business.
(2) The putable/callable funding agreement program is very closely
asset/liability duration matched by us. Accordingly, we maintain assets
with a sufficient market value to extinguish the liabilities in the normal
course of business upon expected surrender or maturity of the related
contracts.
(3) We closely manage the assets supporting payout annuities/structured
settlement liabilities.

22

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

At December 31, 2003, we had $3.0 million in contractual conditional
commitments to invest in mortgage loans.

REGULATION AND LEGAL PROCEEDINGS

REGULATION We are subject to changing social, economic and regulatory
conditions. Recent state and federal regulatory initiatives and proceedings have
included efforts to remove barriers preventing banks from engaging in the
securities and insurance businesses, change tax laws affecting the taxation of
insurance companies and the tax treatment of insurance products or competing
non-insurance products that may impact the relative desirability of various
personal investment products and otherwise expand overall regulation of
insurance products and the insurance industry. The ultimate changes and eventual
effects of these initiatives on our business, if any, are uncertain.

LEGAL PROCEEDINGS We are involved in various legal and regulatory actions that
could have an effect on specific aspects of our business. Like other members of
the insurance industry, we are the target of an increasing number of lawsuits,
some of which involve claims for substantial or indeterminate amounts. For a
description of these actions, see Note 10 of the financial statements.

PENDING ACCOUNTING STANDARDS

As of December 31, 2003, there are several pending and proposed accounting
standards that we have not implemented either because the standard has not been
finalized or the implementation date has not yet occurred. These standards
include Statement of Position 03-01 and Emerging Issues Task Force Topic number
03-01. For a discussion of these pending and proposed standards, see Note 2 of
the financial statements. Based on our interpretation and application of
Statement of Position 03-01, we estimate that upon adoption on January 1, 2004,
it will impact our Statements of Operations and Comprehensive Income in the
range of $3 million to $10 million, after tax. However, the effect of
implementing certain accounting standards on our financial results and financial
condition is often based in part on market conditions at the time of
implementation of the standard and other factors we are unable to determine
prior to implementation. For this reason, we are sometimes unable to estimate
the effect of certain pending accounting standards until the relevant
authoritative body finalizes these standards or until we implement them.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

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

These forward-looking statements do not relate strictly to historical or
current facts and may be identified by their use of words like "plans," "seeks,"
"expects," "will," "should," "anticipates," "estimates," "intends," "believes,"
"likely," "targets" and other words with similar meanings. These statements may
address, among other things, our strategy for growth, product development,
regulatory approvals, market position, expenses, financial results, litigation
and reserves. We believe that these statements are based on reasonable
estimates, assumptions and plans. However, if the estimates, assumptions or
plans underlying the forward-looking statements prove inaccurate or if other
risks or uncertainties arise, actual results could differ materially from those
communicated in these forward-looking statements. Factors which could cause
actual results to differ materially from those suggested by such forward-looking
statements include but are not limited to those discussed or identified in this
document (including the risks described below) and in our public filings with
the SEC.

In addition to the normal risks of business, we are subject to significant
risks and uncertainties, including those listed below, which apply to us as an
insurer and a provider of other financial services.

RISKS RELATING TO THE BUSINESS

CHANGES IN RESERVE ESTIMATES MAY REDUCE PROFITABILITY
Reserve for life-contingent contract benefits is computed on the basis of
long-term actuarial assumptions of future investment yields, mortality,
morbidity, policy terminations and expenses. We periodically review and revise
our estimates and if future experience differs from assumptions, adjustments to
reserves may be required which could have a material adverse effect on our
operating results and financial condition.

23

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

CHANGES IN MARKET INTEREST RATES MAY LEAD TO A SIGNIFICANT DECREASE IN THE SALES
AND PROFITABILITY OF SPREAD-BASED PRODUCTS
Our ability to manage the investment margin for spread-based products is
dependent upon maintaining profitable spreads between investment yields and
interest crediting rates on business. As interest rates decrease or remain at
historically low levels, assets may be reinvested at lower yields, reducing
investment margin. For example, during 2003 the average pre-tax investment yield
for the portfolio declined to 6.7% from 7.1% in 2002. Lowering interest
crediting rates can offset decreases in investment margin on some products.
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. Decreases in the rates
offered on products could make those products less attractive, leading to lower
sales and/or changes in the level of surrenders and withdrawals for these
products. Increases in market interest rates can also have negative effects on
us, for example by increasing the attractiveness of other investments, which can
lead to higher surrenders at a time when our investment asset values are lower
as a result of the increase in interest rates. Unanticipated surrenders could
result in DAC unlocking or affect the recoverability of DAC and thereby increase
expenses and reduce profitability.

DECLINING EQUITY MARKETS MAY REDUCE BOTH SALES OF PRODUCTS AND INCOME FROM
CONTRACT CHARGES AND MAY ADVERSELY AFFECT OPERATING RESULTS AND FINANCIAL
CONDITION
Conditions in the United States and international stock markets affect our
sales of variable annuities. Recent allegations of improper or illegal trading
activities at large mutual fund complexes could affect the stock markets. In
general, sales of variable annuities decrease when stock markets are declining
over an extended period of time. The effect of decreasing separate accounts
balances resulting from volatile equity markets, lower underlying fund
performance or declining consumer confidence could cause contract charges earned
to decrease. In addition, it is possible that the assumptions and projections we
use to establish prices for GMDB, GMIB and GMAB products, particularly
assumptions and projections about investment performance, do not accurately
reflect the level of costs that we will ultimately incur in providing those
benefits, resulting in adverse margin trends. These factors may result in
accelerated DAC amortization and require increases in reserves, which would
reduce statutory capital and surplus and/or net income. Poor fund performance
could also result in higher partial withdrawals of account value which, for some
contracts, do not reduce the GMDB by a proportional amount.

CHANGES IN ESTIMATES OF PROFITABILITY ON INTEREST-SENSITIVE PRODUCTS MAY HAVE AN
ADVERSE EFFECT ON RESULTS THROUGH INCREASED AMORTIZATION OF DAC
DAC related to interest-sensitive life, variable annuity and investment
contracts is amortized in proportion to EGP over the estimated lives of the
contracts. Assumptions underlying EGP, including those relating to margins from
mortality, investment margin, contract administration, surrender and other
contract charges, are updated from time to time in order to reflect actual and
expected experience and its potential effect on the valuation of DAC. Updates to
these assumptions could result in DAC unlocking, which in turn could adversely
affect our operating results and financial condition.

A LOSS OF KEY PRODUCT DISTRIBUTION RELATIONSHIPS COULD MATERIALLY AFFECT SALES
Certain products are distributed under agreements with other members of the
financial services industry that are not affiliated with us. Termination of one
or more of these agreements due to, for example, a change in control of one of
these distributors, could have a detrimental effect on our sales. This risk may
be heightened by the enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB
Act"), which eliminated many federal and state law barriers to affiliations
among banks, securities firms, insurers and other financial service providers.

CHANGES IN TAX LAWS MAY DECREASE SALES AND PROFITABILITY OF PRODUCTS
Under current federal and state income tax law, certain products (primarily
life insurance and annuities) we offer receive favorable tax treatment. This
favorable treatment may give certain of our products a competitive advantage
over noninsurance products. Congress from time to time considers legislation
that would reduce or eliminate the favorable policyholder tax treatment
currently applicable to life insurance and annuities. Congress also considers
proposals to reduce the taxation of certain products or investments that may
compete with life insurance and annuities. One such proposal was enacted in May
2003 when President Bush signed the Jobs and Growth Tax Relief Reconciliation
Act of 2003, which reduced the federal income tax rates applicable to certain
dividends and capital gains realized by individuals. Legislation that increases
the taxation on insurance products or reduces the taxation on competing products
could lessen the advantage of certain of our products as compared to competing
products. Such proposals, if adopted, could have an adverse effect on our
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.

24

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

RISKS RELATING TO THE INSURANCE INDUSTRY

OUR FUTURE RESULTS ARE DEPENDENT IN PART ON OUR ABILITY TO SUCCESSFULLY OPERATE
IN AN INSURANCE INDUSTRY THAT IS HIGHLY COMPETITIVE
The insurance industry is highly competitive. Many of our competitors have
well-established national reputations and market similar insurance products.
Because of the competitive nature of the insurance industry, including
competition for producers such as exclusive and independent agents, there can be
no assurance that we will continue to effectively compete with our industry
rivals, or that competitive pressure will not have a material adverse effect on
our business, operating results or financial condition. In addition, we may face
increased competition from banks. Until passage of the GLB Act, the ability of
banks to engage in securities-related businesses was limited and banks were
restricted from being affiliated with insurers. With the passage of the GLB Act,
mergers that combine commercial banks, insurers and securities firms under one
holding company are now permitted. The ability of banks to affiliate with
insurers may have a material adverse effect on all of our product lines by
substantially increasing the number, size and financial strength of potential
competitors. Furthermore, certain competitors operate using a mutual insurance
company structure and therefore, may have dissimilar profitability and return
targets.

CHANGING INTEREST RATES AND DECLINES IN CREDIT QUALITY MAY HAVE ADVERSE EFFECTS
A decline in market interest rates could have an adverse effect on our
investment income as we invest cash in new investments that may yield less than
the portfolio's average rate. In a declining interest rate environment,
borrowers may prepay or redeem securities we hold more quickly than expected as
they seek to refinance at lower rates. An increase in market interest rates
could have an adverse effect on the value of our investment portfolio, for
example, by decreasing the fair values of the fixed income securities that
comprise a substantial majority of our investment portfolio. Increases in
interest rates also may lead to an increase in policy loans, surrenders and
withdrawals that generally would be funded at a time when fair values of fixed
income securities are lower. A decline in the quality of our investment
portfolio as a result of adverse economic conditions or otherwise could cause
additional realized losses on securities, including realized losses relating to
derivative strategies not adequately addressing portfolio risks.

WE MAY SUFFER LOSSES FROM LITIGATION
As is typical for a large insurance group, we are involved in a substantial
amount of litigation. Among other things, we, like other participants in the
insurance industry, have been subject in recent years to an increasing volume of
class action litigation challenging a range of industry practices. Our
litigation exposure could result in a material adverse effect on our operating
results and financial condition in a future period in the event of an unexpected
adverse outcome or if additional reserves are required to be established for
such litigation. For a description of our current material litigation matters,
see Note 11 of the financial statements.

WE ARE SUBJECT TO EXTENSIVE REGULATION AND POTENTIAL FURTHER RESTRICTIVE
REGULATION MAY INCREASE OUR OPERATING COSTS AND LIMIT OUR GROWTH
We are subject to extensive regulation by state insurance regulators. This
regulation is focused on the protection of policyholders and not investors. In
many cases, state regulations limit our ability to grow and improve the
profitability of our business. The laws regulating securities products and
activities are complex, numerous and subject to change. Further, in recent
years, the state insurance regulatory framework has come under increased federal
scrutiny, and proposals that would provide for optional federal chartering of
insurance companies have been discussed by members of Congress. We can make no
assurances as to whether further state or federal measures will be adopted to
change the nature or scope of the regulation of the insurance industry or as to
the effect that any such measures would have on us.

THE UNAVAILABILITY OF REINSURANCE MAY LIMIT OUR ABILITY TO WRITE NEW BUSINESS
Market conditions beyond our control determine the availability and cost of
the reinsurance we purchase. No assurances can be made that reinsurance will
remain continuously available to us to the same extent and on the same terms and
rates as are currently available. If we were unable to maintain our current
level of reinsurance or purchase new reinsurance protection in amounts that we
consider sufficient and at prices that we consider acceptable, we would have to
either accept an increase in our net liability exposure or reduce our insurance
writings.

REINSURANCE SUBJECTS US TO THE CREDIT RISK OF OUR REINSURERS AND MAY NOT BE
ADEQUATE TO PROTECT US AGAINST LOSSES ARISING FROM CEDED INSURANCE
The collectibility of reinsurance recoverables is subject to uncertainty
arising from a number of factors, including whether insured losses meet the
qualifying conditions of the reinsurance contract and whether reinsurers, or
their affiliates, have the financial capacity and willingness to make payments
under the terms of a

25

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

reinsurance treaty or contract. Our inability to collect a material recovery
from a reinsurer could have a material adverse effect on our operating results
and financial condition.

THE CONTINUED THREAT OF TERRORISM AND ONGOING MILITARY ACTIONS MAY ADVERSELY
AFFECT THE LEVEL OF CLAIM EXPENSE WE INCUR AND THE VALUE OF OUR INVESTMENT
PORTFOLIO
The continued threat of terrorism, both within the United States and
abroad, and ongoing military and other actions and heightened security measures
in response to these types of threats, may cause significant volatility and
declines in the equity markets in the United States, Europe and elsewhere, and
result in loss of life, property damage, additional disruptions to commerce and
reduced economic activity. Some of the assets in our investment portfolio may be
adversely affected by declines in the equity markets and reduced economic
activity caused by the continued threat of terrorism. In the event that a
terrorist act occurs, we may be adversely affected, depending on the nature of
the event. We seek to mitigate the potential impact of terrorism on our
commercial mortgage portfolio by limiting geographical concentrations in key
metropolitan areas and by requiring terrorism insurance to the extent that it is
commercially available.

ANY DECREASE IN OUR FINANCIAL STRENGTH RATINGS MAY HAVE AN ADVERSE EFFECT ON OUR
COMPETITIVE POSITION
Financial strength ratings are important factors in establishing the
competitive position of insurance companies and generally will have an effect on
an insurance company's business. On an ongoing basis, rating agencies review the
financial performance and condition of insurers and could downgrade or change
the outlook on an insurer's ratings due to, for example, a decline in the value
of an insurer's investment portfolio or increased liabilities for variable
contracts arising from additional GMDB, GMIB or GMAB exposure resulting from
market declines. Currently, the insurance financial strength ratings of AIC and
ALIC, as well as our insurance financial strength ratings, are Aa2, AA and A+
(from Moody's, Standard & Poor's and A.M. Best, respectively). Because these
ratings are subject to periodic review, the continued retention of these ratings
cannot be assured. A multiple level downgrade in any of these ratings could have
a material adverse effect on our sales, including the competitiveness and
marketability of our product offerings, as well as our liquidity, operating
results and financial condition.

CHANGES IN ACCOUNTING STANDARDS ISSUED BY THE FASB OR OTHER STANDARD-SETTING
BODIES MAY ADVERSELY AFFECT OUR FINANCIAL STATEMENTS
Our financial statements are subject to the application of GAAP, which is
periodically revised and/or expanded. Accordingly, we are required to adopt new
or revised accounting standards issued from time to time by recognized
authoritative bodies, including the FASB. It is possible that future changes we
are required to adopt could change the current accounting treatment that we
apply to our financial statements and that such changes could have a material
adverse effect on our results and financial condition. For a description of
potential changes in accounting standards that could affect us currently, see
Note 2 of the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated in this Item 7a by reference to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" Item 7.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

See notes to financial statements.

27

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION

See notes to financial statements.

28

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

See notes to financial statements.

29

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS

See notes to financial statements.

30

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

1. GENERAL

BASIS OF PRESENTATION

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

To conform to the 2003 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.

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

NATURE OF OPERATIONS

The Company markets a diversified portfolio of products to meet customers'
needs in the areas of financial protection, savings and retirement through a
variety of distribution channels. The products include term life; permanent life
such as whole life, interest-sensitive life, variable life and single premium
life; and fixed annuities such as traditional deferred annuities, market value
adjusted annuities, treasury-linked annuities and immediate annuities; variable
annuities and accident and health insurance.

The Company is authorized to sell life insurance and savings products in
the state of New York. The Company distributes its products through a variety of
distribution channels including Allstate exclusive agencies, financial
institutions, broker/dealers and specialized brokers. Although the Company
currently benefits from agreements with financial service entities that market
and distribute its products, change in control of these non-affiliated entities
could negatively impact sales.

The Company monitors economic and regulatory developments that have the
potential to impact its business. Federal legislation has allowed banks and
other financial organizations to have greater participation in the securities
and insurance businesses. This legislation may result in 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. Congress and various state legislatures have
considered proposals that, if enacted, could impose a greater tax burden on the
Company or could have an adverse impact on the tax treatment of some insurance
products offered by the Company, including favorable policyholder tax treatment
currently applicable to life insurance and annuities. Recent legislation that
reduced the federal income tax rates applicable to certain dividends and capital
gains realized by individuals, or other proposals, if adopted, that reduce the
taxation, or permit the establishment, of certain products or investments that
may compete with life insurance or annuities could have an adverse effect on the
Company's financial position or ability to sell such products. In addition,
recent changes in the federal estate tax laws have negatively affected the
demand for the types of life insurance used in estate planning.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed income securities include bonds, mortgage-backed and asset-backed
securities. 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 use 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 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

31

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

component of proceeds from sales. Cash received from maturities and pay-downs is
reflected as a component of investment collections.

Mortgage loans are carried at outstanding principal balances, net of
unamortized premium or discount and valuation allowances. Valuation allowances
are established for impaired loans when it is probable that contractual
principal and interest will not be collected. Valuation allowances for impaired
loans reduce the carrying value to the fair value of the collateral or the
present value of the loan's expected future repayment cash flows discounted at
the loan's original effective interest rate.

Short-term investments are carried at cost or amortized cost that
approximates fair value, and generally include the reinvestment of collateral
received in connection with securities lending activities. For these
transactions, the Company records an offsetting liability in other liabilities
and accrued expenses for the Company's obligation to repay the collateral.
Policy loans are carried at unpaid principal balances.

Investment income consists of interest and is recognized on an accrual
basis. Interest income on mortgage-backed and asset-backed securities is
determined using 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 include gains and losses on investment
dispositions, write-downs in value due to other than temporary declines in fair
value and changes in the fair value of certain derivatives including related
periodic and final settlements. Realized capital gains and losses on investment
dispositions are determined on a specific identification basis.

The Company writes down, to fair value, any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", as of January 1, 2001. The impact of SFAS No. 133 and SFAS No. 138
(the "statements") to the Company was a loss of $147 thousand, after-tax, and is
reflected as a cumulative effect of a change in accounting principle on the
Statements of Operations and Comprehensive Income for the year ended December
31, 2001.

The Company manages interest rate risk by holding financial futures
contracts that are derivative financial instruments and by a re-investment
related risk transfer reinsurance agreement with ALIC that meets the accounting
definition of a derivative (See Note 4). Derivatives are accounted for on a fair
value basis, and reported as other assets, other liabilities and accrued
expenses or contractholder funds as appropriate. The gains and losses pertaining
to the change in the fair value and settlements of the financial futures
contracts and the re-investment related risk transfer reinsurance agreement are
recognized in realized capital gains and losses during the period on a current
basis.

SECURITIES LOANED

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

RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES, AND RELATED BENEFITS AND
INTEREST CREDITED

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

Immediate annuities with life contingencies, including certain structured
settlement annuities, provide insurance protection over a period that extends
beyond the period during which premiums are collected. Gross premiums in excess
of the net premium on immediate annuities with life contingencies are deferred
and

32

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 contractholder fund deposits. Contract charges consist of fees
assessed against the contractholder account balance for cost of insurance
(mortality risk), contract administration and early surrender. These revenues
are recognized when assessed against the contractholder account balance.
Contract benefits include life-contingent benefit payments in excess of the
contractholder account balance.

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

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

Separate accounts products include variable annuities and variable life
insurance contracts. 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 products consist of fees assessed against the contractholder account
values for contract maintenance, administration, mortality, expense and early
surrender. 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 business are
deferred and recorded as deferred policy acquisition costs ("DAC"). These costs
are principally agents' and brokers' remuneration, certain underwriting costs
and direct mail solicitation expenses. All other acquisition expenses are
charged to operations as incurred and included in operating costs and expenses
on the Statements of Operations and Comprehensive income. DAC is periodically
reviewed for 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, DAC
is amortized in proportion to the estimated revenues on such business.
Assumptions used in amortization 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 in
force, 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, 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 proportion to the incidence of 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,
estimates of customer surrender rates result 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.

33

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

DAC amortization for variable annuity and life contracts is significantly
impacted by the return on the underlying funds. The Company's long-term
expectation of separate accounts fund performance after fees is approximately
8%, which is consistent with its pricing assumptions. Whenever actual separate
accounts fund performance based on the two most recent years varies from the 8%
expectation, the Company projects performance levels over the next five years
such that the mean return over that seven year period equals the long-term 8%
expectation. This approach is commonly referred to as "reversion to the mean"
and is commonly used by the life insurance industry as an appropriate method for
amortizing variable annuity and life DAC. In applying the reversion to the mean
process, the Company does not allow the future rates of return after fees
projected over the five-year period to exceed 12.75% or fall below 0%. The
Company periodically evaluates the utilization of this process to determine that
it is reasonably possible that variable annuity and life fund performance will
revert to the expected long-term mean within this time horizon.

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

The Company performs quarterly reviews of DAC recoverability for
interest-sensitive life, variable annuities and investment contracts in the
aggregate using current assumptions. If a change in the amount of EGP is
significant, it could result in the unamortized DAC not being recoverable,
resulting in a charge which is included as a component of amortization of
deferred policy acquisition costs on the Statements of Operations and
Comprehensive Income.

REINSURANCE RECOVERABLES

In the normal course of business, the Company seeks to limit aggregate and
single exposure to losses on large risks by purchasing reinsurance from
reinsurers (see Note 9). The amounts reported in the Statements of Financial
Position include amounts billed to reinsurers on losses paid as well as
estimates of amounts expected to be recovered from reinsurers on incurred losses
that have not yet been paid. Reinsurance recoverables on unpaid losses are
estimated based upon assumptions consistent with those used in establishing the
liabilities related to the underlying reinsured contract. Insurance liabilities
are reported gross of reinsurance recoverables. Prepaid reinsurance premiums are
deferred and reflected in income in a manner consistent with the recognition of
premiums on the reinsured contracts. Reinsurance does not extinguish the
Company's primary liability under the policies written. Therefore, the Company
regularly evaluates reinsurers and amounts recoverable and establishes
allowances for uncollectible reinsurance as appropriate.

The Company has a reinsurance treaty through which it cedes primarily
re-investment related risk on its structured settlement annuities to ALIC. The
terms of this treaty meet the accounting definition of a derivative under SFAS
No. 133. Accordingly, the treaty is recorded in the Statement of Financial
Position at fair value, and changes in the fair value of the treaty and premiums
paid to ALIC are recognized in realized capital gains (See Note 4).

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 and variable life insurance
contracts, 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 Statements of Operations and
Comprehensive Income. Revenues to the Company from the separate accounts consist
of contract charges for maintenance and administration services, mortality,
early surrender and expenses and are reflected in contract charges. Deposits to
the separate accounts are not included in the Statements of Cash Flows.

34

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 separate
accounts' funds may not meet their stated investment objectives.

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS

The reserve for life-contingent contract benefits, which relates to
traditional life insurance and immediate annuities with life contingencies, 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 8. 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 for certain immediate annuities with life contingencies is recorded
net of tax as a reduction of the unrealized net capital gains included in
accumulated other comprehensive income.

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 8.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

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

ADOPTED ACCOUNTING STANDARDS

SFAS NO. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("SFAS NO. 149")

In April 2003, the FASB issued SFAS No. 149, which amends, clarifies and
codifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and used
for hedging activities under SFAS No. 133. While this statement applies
primarily to certain derivative contracts and embedded derivatives entered into
or modified after June 30, 2003, it also codifies conclusions previously reached
by the FASB at various dates on certain implementation issues. The impact of
adopting the provisions of the statement was not material to the Company's
Statements of Operations and Comprehensive Income or Financial Position.

PENDING ACCOUNTING STANDARDS

STATEMENT OF POSITION 03-01, "ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES
FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS"
("SOP NO. 03-01")

In July 2003, the American Institute of Certified Public Accountants issued
SOP 03-01, which applies to several of the Company's insurance products and
product features. The effective date of the SOP is for fiscal years beginning
after December 15, 2003. A provision of the SOP requires the establishment of
reserves in addition to the account balance for contracts containing certain
features that provide guaranteed death or other insurance benefits and
guaranteed income benefits. These reserves are not currently established by the
Company. Recently, the Company implemented new actuarial models that permitted
determination of the estimated impact on the Statements of Operations and
Comprehensive Income. Based on the Company's application of the estimation
methodologies set forth in the SOP, the estimated after-tax impact of adopting
the SOP on the Statements of Operations and Comprehensive Income, including the
related impact on deferred acquisition costs is in the range of $3 million to
$10 million as of January 1, 2004, based on market conditions at December 31,
2003.

35

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

PROPOSED ACCOUNTING STANDARDS

EMERGING ISSUES TASK FORCE TOPIC NO. 03-01, "THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS" ("EITF NO. 03-01")

The Emerging Issues Task Force ("EITF") is currently deliberating EITF No.
03-01, which attempts to define other-than-temporary impairment and highlight
its application to investment securities accounted for under both SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115") and Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stocks"("APB No. 18"). The current issue
summary, which has yet to be finalized, proposes that if, at the evaluation
date, the fair value of an investment security is less than its carrying value
then an impairment exists for which a determination must be made as to whether
the impairment is other-than-temporary. If it is determined that an impairment
is other-than-temporary, then an impairment loss should be recognized equal to
the difference between the investment's carrying value and its fair value at the
reporting date. In recent deliberations, the EITF discussed different models to
assess whether impairment is other-than-temporary for different types of
investments (e.g. SFAS No. 115 marketable equity securities, SFAS No. 115 debt
securities, and equity and cost method investments subject to APB No. 18) and
subsequently decided to use a unified model. Due to the uncertainty of the final
model (or models) that may be adopted, the estimated impact to the Company's
Statements of Operations and Comprehensive Income and Financial Position is
presently not determinable. In November 2003, the EITF reached a consensus with
respect to certain disclosures effective for fiscal years ending after December
15, 2003. Quantitative and qualitative disclosures are required for fixed income
and marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115. The Company has included those disclosures
at December 31, 2003 (see Note 6).

3. DISPOSITIONS

The Company announced its intention to exit the direct response
distribution business. Based on its decision to sell the business, the Company
recorded an estimated loss on the disposition of $4.5 million ($2.9 million,
after-tax). An agreement was entered with American Health and Life Insurance
Company and Triton Insurance Company, subsidiaries of Citigroup Inc., to dispose
of a portion of the direct response business. If approved by the state insurance
departments, the transaction will be effective January 1, 2004.

4. RELATED PARTY TRANSACTIONS

BUSINESS OPERATIONS

The Company utilizes services performed by its affiliates, AIC, ALIC and
Allstate Investments LLC, and business facilities owned or leased and operated
by AIC in conducting its business activities. In addition, the Company shares
the services of employees with AIC. The Company reimburses its affiliates for
the operating expenses incurred on behalf of the Company. The Company is charged
for the cost of these operating expenses based on the level of services
provided. Operating expenses, including compensation, retirement and other
benefit programs, allocated to the Company were $37.2 million, $34.9 million and
$26.6 million in 2003, 2002 and 2001, respectively. A portion of these expenses
relates to the acquisition of business and are deferred and amortized over the
contract period.

STRUCTURED SETTLEMENT ANNUITIES

The Company issued $19.2 million, $23.8 million and $23.7 million of
structured settlement annuities, a type of immediate annuity, in 2003, 2002 and
2001, respectively, at prices based upon interest rates in effect at the time of
issuance, to fund structured settlement annuities in matters involving AIC. Of
these amounts, $3.9 million, $7.5 million and $4.9 million relate to structured
settlement annuities with life contingencies and are included in premium income
in 2003, 2002 and 2001, respectively. In most cases, these annuities were issued
under a "qualified assignment," which means the Company assumed AIC's obligation
to make future payments.

AIC has issued surety bonds to guarantee the payment of structured
settlement benefits assumed by Allstate Settlement Corporation ("ASC") (from
both AIC and non-related parties) and funded by certain annuity contracts issued
by the Company. ASC has entered into General Indemnity Agreements pursuant to
which it indemnified AIC for any liabilities associated with the surety bonds
and gives AIC certain collateral security rights with

36

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 $1.45 billion and $1.43 billion at December 31, 2003
and 2002, respectively.

BROKER/DEALER AGREEMENT

The Company received underwriting and distribution services from Allstate
Distributors, L.L.C. ("ADLLC"), a broker-dealer company owned by ALIC, for
certain variable annuity contracts sold pursuant to a joint venture agreement
between the Company and a third party which was dissolved in 2002. The Company
incurred $4.2 million and $10.5 million of commission expenses and other
distribution expenses payable to ADLLC during 2002 and 2001, respectively. Other
distribution expenses include administrative, legal, financial management and
sales support that the Company provided to ADLLC, for which the Company earned
administration fees of $83 thousand and $127 thousand for the years ended
December 31, 2002 and 2001, respectively. Other distribution expenses also
include marketing expenses for subsidized interest rates associated with the
Company's dollar cost averaging program offered on variable annuities, for which
ADLLC reimbursed the Company $60 thousand and $855 thousand for the years ended
December 31, 2002 and 2001, respectively.

During 2003, the Company entered into a service agreement with ADLLC,
whereby ADLLC promotes and markets the fixed and variable annuities sold by the
Company to unaffiliated financial services firms. In addition, ADLLC also acts
as the underwriter of variable annuities sold by the Company. In return for
these services, the Company recorded commission expense of $4.8 million for the
year ended December 31, 2003.

The Company receives underwriting and distribution services from
Allstate Financial Services, LLC ("AFS"), an affiliated broker/dealer
company, for certain variable annuity and variable life insurance contracts
sold by Allstate exclusive agencies. The Company recorded commission expense
of $455 thousand, $891 thousand and $672 thousand for the years ended
December 31, 2003, 2002 and 2001, respectively.

REINSURANCE TRANSACTIONS

The Company has reinsurance agreements with ALIC in order to limit
aggregate and single exposure on large risks. A portion of the Company's
premiums and policy benefits are ceded to ALIC and reflected net of such
reinsurance in the Statements of Operations and Comprehensive Income.
Reinsurance recoverables and the related reserve for life-contingent contract
benefits and contractholder funds are reported separately in the Statements of
Financial Position. The Company continues to have primary liability as the
direct insurer for risks reinsured (See Note 10).

Additionally, the Company entered into a reinsurance treaty through which
it primarily cedes re-investment related risk on its structured settlement
annuities to ALIC. Under the terms of the treaty, the Company pays a premium to
ALIC that varies with the aggregate structured settlement annuity statutory
reserve balance. In return, ALIC guarantees that the yield on the portion of the
Company's investment portfolio that supports structured settlement annuity
liabilities will not fall below contractually determined rates. The Company
ceded premium related to structured settlement annuities to ALIC of $2.6 million
and $2.4 million for the years ended December 31, 2003 and 2002, respectively,
that is included in realized capital gains and losses. At December 31, 2003, the
carrying value of the structured settlement reinsurance treaty was $225
thousand, which is recorded in other assets. At December 31, 2002, the carrying
value of the structured settlement reinsurance treaty was $(209) thousand, which
is recorded in other liabilities and accrued expenses.

DEBT

The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds available to the Company at a given point in
time is dependent upon the debt position of the Corporation. No amounts were
outstanding for the Company under the intercompany loan agreement during the
three years ended December 31, 2003.

INCOME TAXES

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

37

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

5. SUPPLEMENTAL CASH FLOW INFORMATION

Non-cash investment exchanges and modifications, which primarily reflect
refinancings of fixed income securities, totaled $5.4 million for 2002. There
were no exchanges or modifications in 2003 or 2001.

Secured borrowing reinvestment transactions excluded from cash flows from
investing activities in the Statements of Cash Flows for the years ended
December 31 are as follows:

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, 2003:

38

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

Actual maturities may differ from those scheduled as a result of
prepayments by the issuers. Because of the potential for prepayment on mortgage-
and asset-backed securities, they are not categorized by contractual maturity.

NET INVESTMENT INCOME

Net investment income for the years ended December 31 is as follows:

REALIZED CAPITAL GAINS AND LOSSES, AFTER-TAX

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

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

Excluding the effects of calls and prepayments, gross gains of $4.0
million, $3.0 million and $5.7 million and gross losses of $6.9 million, $7.8
million and $4.5 million were realized on sales of fixed income securities
during 2003, 2002 and 2001, respectively.

39

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

UNREALIZED NET CAPITAL GAINS AND LOSSES

Unrealized net capital gains and losses on fixed income securities included
in accumulated other comprehensive income at December 31, 2003 are as follows:

CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES

The change in unrealized net capital gains and losses for the years ended
December 31 is as follows:

The change in the deferred income taxes, deferred policy acquisition costs
and other is primarily due to increases of $42.8 million and $88.4 million and a
decrease of $8.5 million in the premium deficiency reserve for certain immediate
annuities with life contingencies at December 31, 2003, 2002 and 2001,
respectively.

PORTFOLIO MONITORING

Inherent in the Company's evaluation of a particular security are
assumptions and estimates about the operations of the issuer and its future
earnings potential. Some of the factors considered in evaluating whether a
decline in fair value is other than temporary are: 1) the Company's ability and
intent to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; 2) the recoverability of principal and interest;
3) the duration and extent to which the fair value has been less than amortized
cost; 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.

At December 31, 2003, the Company has unrealized losses of $19.0 million
which relate to 133 holdings of fixed income securities with a fair value of
$594.0 million, $16.2 million of which have been in an unrealized loss position
for a period less than twelve months. Substantially all of these unrealized
losses relate to investment grade securities. Investment grade is defined 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; a Standard & Poor's equivalent rating of AAA, AA, A or BBB; or a comparable
internal rating. Unrealized losses on investment grade securities are
principally related to changes in interest rates or changes in issuer and sector
related credit spreads since the securities were acquired. The remaining
unrealized losses of $2.8 million relate to securities that have been in an
unrealized loss position for a period of twelve months or more and are below
investment grade. Approximately $1.0 million relates to unrealized loss
positions that represented less than 20% of amortized cost. Also, $2.2 million
relates to airline industry issues which were evaluated considering factors such
as the financial condition and near-term and long-term prospects of the issuer
and were determined to have adequate resources to fulfill contractual
obligations, such as cash flows from operations or collateral. As of December
31, 2003, the Company had the intent and ability to hold these investments for a
period of time sufficient for them to recover in value.

MORTGAGE LOAN IMPAIRMENT

A mortgage loan is impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. The Company had no impaired loans at December 31, 2003 or 2002.

40

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

Interest income for impaired loans is recognized on an accrual basis if
payments are expected to continue to be received; otherwise cash basis is used.
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 $134 thousand on impaired loans during 2003 and $0 on impaired loans
during both 2002 and 2001. The average balance of impaired loans was $3.9
million, $0, and $0 during 2003, 2002 and 2001, respectively.

There were no valuation allowances for mortgage loans at December 31, 2003
and 2002. For the years ended December 31, 2003, 2002 and 2001, net reductions
to mortgage loan valuation allowances were $0, $0 and $119 thousand,
respectively.

INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE PORTFOLIOS
AND OTHER INVESTMENT INFORMATION

The Company maintains a diversified portfolio of municipal bonds. The
following table shows the principal geographic distribution of municipal bond
issuers represented in the Company's portfolio. No other state represents more
than 5.0% of the portfolio at December 31, 2003.

The Company's mortgage loans are collateralized by a variety of commercial
real estate property types located throughout the United States. Substantially
all of the commercial mortgage loans are non-recourse to the borrower. The
following table shows the principal geographic distribution of commercial real
estate represented in the Company's mortgage portfolio. No other state
represented more than 5.0% of the portfolio at December 31, 2003.

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

41

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 2003 for loans that were not in foreclosure are as follows:

In 2003, no commercial mortgage loans were contractually due. None were
foreclosed or in the process of foreclosure, and none were in the process of
refinancing or restructuring discussions.

Included in fixed income securities are below investment grade assets
totaling $181.2 million and $173.6 million at December 31, 2003 and 2002,
respectively.

At December 31, 2003, the carrying value of investments that were
non-income producing during 2003 was $276 thousand.

At December 31, 2003, fixed income securities with a carrying value of $2.6
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, mostly large
brokerage firms. At December 31, 2003 and 2002, fixed income securities with a
carrying value of $134.5 million and $160.0 million, respectively, were on loan
under these agreements. In return, the Company receives cash that it invests and
includes in short-term investments and fixed income securities, with an
offsetting liability recorded in other liabilities and accrued expenses to
account for the Company's obligation to return the collateral. Interest income
on collateral, net of fees, was $324 thousand, $370 thousand and $572 thousand,
for the years ending December 31, 2003, 2002 and 2001, 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) and liabilities
(including reserve for life-contingent contract benefits and deferred income
taxes) are not considered financial instruments and are not carried at fair
value. Other assets and liabilities considered financial instruments such as
accrued investment income and cash are generally of a short-term nature. Their
carrying values are deemed to approximate fair value.

FINANCIAL ASSETS

42

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

Fair values of publicly traded fixed income securities are based upon
quoted market prices 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 use internally developed ratings
and independent third party data (e.g., term structures and current publicly
traded bond prices) as inputs, or independent third party pricing sources.
Mortgage loans are valued based on discounted contractual cash flows. Discount
rates are selected using current rates at which similar loans would be made to
borrowers with similar characteristics, using similar properties as collateral.
Loans that exceed 100% loan-to-value are valued at the estimated fair value of
the underlying collateral. Short-term investments are highly liquid investments
with maturities of less than one year whose carrying values are deemed to
approximate fair value. The carrying value of policy loans is deemed to
approximate fair value. Separate accounts assets are carried in the Statements
of Financial Position at fair value based upon quoted market prices.

FINANCIAL LIABILITIES

Contractholder funds include interest-sensitive life insurance contracts
and investment contracts. Interest-sensitive life insurance contracts are not
considered 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. Immediate annuities without life contingencies are valued at the
present value of future benefits using current interest rates. Market value
adjusted annuities' fair value is estimated to be the market adjusted surrender
value. Separate accounts liabilities are carried at the fair value of the
underlying assets.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses financial futures contracts to reduce its exposure to
market risk, specifically interest rate risk, in conjunction with
asset/liability management. The Company does not buy, sell or hold these
instruments for trading purposes.

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

(1) Carrying value includes the effects of legally enforceable master
netting agreements, if any. 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.

43

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO 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 the re-investment related
risk transfer reinsurance agreement is based on a valuation model that uses
independent third party data as inputs.

The Company manages its exposure to credit risk primarily by establishing
risk control limits. To date, the Company has not incurred any losses on
derivative financial instruments due to counterparty nonperformance. Futures
contracts are traded on organized exchanges, which require margin deposits and
guarantee the execution of trades, thereby mitigating any associated potential
credit risk.

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

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

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

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 extend mortgage loans are agreements to lend to a borrower
provided there is no violation of any condition established in the contract. The
Company enters these agreements to commit to future loan fundings at
predetermined interest rates. Commitments generally have fixed expiration dates
or other termination clauses. Commitments to extend mortgage loans, which are
secured by the underlying properties, are valued based on estimates of fees
charged by other institutions to make similar commitments to similar borrowers.

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

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

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

44

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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

To the extent the unrealized gains on fixed income securities would result
in a premium deficiency had those gains actually been realized, a premium
deficiency reserve has been recorded for certain immediate annuities with life
contingencies. A liability of $215.4 million and $149.5 million is included in
the reserve for life-contingent contract benefits with respect to this
deficiency as of December 31, 2003 and 2002, respectively. The offset to this
liability is recorded as a reduction 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 relating to
contractholder funds:

45

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

Contractholder funds activity for the years ended December 31 is as
follows:

9. REINSURANCE

The Company reinsures certain of its risks to other insurers under yearly
renewable term and coinsurance agreements. These agreements result in a passing
of the agreed-upon percentage of risk to the reinsurer in exchange for
negotiated reinsurance premium payments.

Beginning in 2002, the Company cedes 80% of the mortality risk on certain
term life policies to a pool of nine unaffiliated reinsurers. Mortality risk on
policies in excess of $250 thousand per life are ceded to ALIC. As of December
31, 2003, $5.15 billion of life insurance in force was ceded to other companies.
Total amounts recoverable from unaffiliated reinsurers at December 31, 2003 and
2002 were $3.3 million and $1.6 million, respectively. Amounts recoverable from
reinsurers are estimated based upon assumptions consistent with those used in
establishing the liabilities related to the underlying reinsured contracts. No
single reinsurer had a material obligation to the Company nor is the Company's
business substantially dependent upon any reinsurance contract. See Note 3 for
discussion of reinsurance agreements with ALIC. The effects of reinsurance on
premiums and contract charges for the years ended December 31 are as follows:

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

Included in reinsurance recoverables at December 31, 2003 and 2002 are the
amounts due from ALIC of $1.3 million and $588 thousand, respectively. The
table above excludes $2.6 million and $2.4 million of

46

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

premiums ceded to ALIC during 2003 and 2002 under the terms of the structured
settlement annuity reinsurance treaty (See Note 4).

10. DEFERRED POLICY ACQUISITION COSTS

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

Amortization charged to income includes $1.7 million, ($1.0 million) and
$2.0 million in 2003, 2002 and 2001, respectively, due to realized capital gains
and losses.

11. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES

GUARANTEES

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.

In addition, the Company indemnifies its directors, officers and other
individuals serving at the request of the Company as a director or officer to
the extent provided in its charter and by-laws. Since these indemnifications are
generally not subject to limitation with respect to duration or amount, the
Company does not believe that it is possible to determine the maximum potential
amount due under these indemnifications.

The aggregate liability balance related to all guarantees was not material
as of December 31, 2003.

REGULATIONS

The Company is subject to changing social, economic and regulatory
conditions. Recent state and federal regulatory initiatives and proceedings have
included efforts to remove barriers preventing banks from engaging in the
securities and insurance businesses, change tax laws affecting the taxation of
insurance companies and the tax treatment of insurance products or competing
non-insurance products that may impact the relative desirability of various
personal investment products and otherwise expand overall regulation of
insurance products and the insurance industry. The ultimate changes and eventual
effects of these initiatives on the Company's business, if any, are uncertain.

LEGAL PROCEEDINGS

Legal proceedings involving Allstate agencies and AIC may impact the
Company, even when the Company is not directly involved, because the Company
sells its products through a variety of distribution channels including Allstate
agencies. Consequently, information about the more significant of these
proceedings is provided below.

AIC is defending various lawsuits involving worker classification issues.
These lawsuits include a number of putative class actions and one certified
class action 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. 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

47

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

benefit purposes. AIC has been vigorously defending these and various other
worker classification lawsuits. The outcome of these disputes is currently
uncertain.

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

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

12. INCOME TAXES

The Company joins the Corporation and its other eligible domestic
subsidiaries (the "Allstate Group") in the filing of a consolidated federal
income tax return and is party to a federal income tax allocation agreement (the
"Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the
Company pays to or receives from the Corporation the amount, if any, by which
the Allstate Group's federal income tax liability is affected by virtue of
inclusion of the Company in the consolidated federal income tax return.
Effectively, this results in the Company's annual income tax provision being
computed as if the Company filed a separate return.

The Internal Revenue Service ("IRS") has completed its review of the
Allstate Group's federal income tax returns through the 1996 tax year. Any
adjustments that may result from IRS examinations of tax returns are not
expected to have a material impact on the financial position, liquidity or
results of operations of the Company.

The components of the deferred income tax assets and liabilities at
December 31 are as follows:

48

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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 years ended December 31 are as
follows:

The Company paid income taxes of $15.7 million, $17.1 million and $13.1
million in 2003, 2002 and 2001, respectively. The Company had a current income
tax receivable of $8.2 million and $914 thousand at December 31, 2003 and 2002,
respectively.

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

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, 2003,
approximately $389 thousand, will result in federal income taxes payable of $136
thousand if distributed by the Company. No provision for taxes has been made as
the Company has no plan to distribute amounts from this account. No further
additions to the account have been permitted since 1983.

13. STATUTORY FINANCIAL INFORMATION

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

The Company prepares its statutory-basis financial statements in conformity
with accounting practices prescribed or permitted by the State of New York. The
State of New York requires insurance companies domiciled in its state to prepare
statutory-basis financial statements in conformity with the National Association
of Insurance Commissioners ("NAIC") Accounting Practices and Procedures Manual
("Codification"), subject to any deviations prescribed or permitted by the State
of New York insurance superintendent.

Accounting changes adopted to conform to the provisions of Codification are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to

49

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

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

DIVIDENDS

The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The payment of shareholder dividends by the Company without prior approval of
the state insurance regulator in any calendar year is limited to formula amounts
based on statutory surplus and statutory net gain from operations, determined in
conformity with statutory accounting practices, for the immediately preceding
calendar year. The maximum amount of dividends that the Company can distribute
during 2004 without prior approval of the New York State Insurance Department is
$29.2 million. In the twelve-month period beginning January 1, 2003, the Company
did not pay any dividends.

RISK-BASED CAPITAL

The NAIC has a standard for assessing the solvency of insurance companies,
which is referred to as risk-based capital ("RBC"). The requirement consists of
a formula for determining each insurer's RBC and a model law specifying
regulatory actions if an insurer's RBC falls below specified levels. At December
31, 2003, RBC for the Company was above a level that would require regulatory
action.

14. BENEFIT PLANS

PENSION AND OTHER POSTRETIREMENT PLANS

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

Defined pension plans, sponsored by AIC, cover most full-time employees and
certain part-time employees. Benefits under the pension plans are based upon the
employee's length of service and eligible annual compensation. The Company uses
the accrual method for its defined benefit plans in accordance with accepted
actuarial methods. AIC's funding policy for the pension plans is to make annual
contributions in accordance with accepted actuarial cost methods. The allocated
cost to the Company included in net income was $1.4 million and $518 thousand
for the pension plans in 2003 and 2002, respectively. The allocated benefit to
the Company included in net income was $87 thousand for the pension plans in
2001.

AIC also provides certain health care and life insurance subsidies for
employees hired before January 1, 2003 when they retire. Qualified employees may
become eligible for these benefits if they retire in accordance with AIC's
established retirement policy and are continuously insured under AIC's group
plans or other approved plans in accordance with the plan's participation
requirements. AIC shares the cost of the retiree medical benefits with retirees
based on years of service, with AIC's share being subject to a 5% limit on
annual medical cost inflation after retirement. AIC's postretirement benefit
plans are not funded. AIC has the right to modify or terminate these plans. The
allocated cost to the Company included in net income was $431 thousand, $439
thousand and $304 thousand for postretirement benefits other than pension plans
in 2003, 2002 and 2001, respectively.

PROFIT SHARING PLAN

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

The Company's allocation of profit sharing expense from the Corporation was
$1.1 million, $1.3 million and $374 thousand in 2003, 2002 and 2001,
respectively.

50

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS

15. OTHER COMPREHENSIVE INCOME

The components of other comprehensive income on a pretax and after-tax
basis for the years ended December 31 are as follows:

51

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

We have audited the accompanying Statements of Financial Position of
Allstate Life Insurance Company of New York (the "Company", an affiliate of The
Allstate Corporation) as of December 31, 2003 and 2002, and the related
Statements of Operations and Comprehensive Income, Shareholder's Equity and Cash
Flows for each of the three years in the period ended December 31, 2003. Our
audits also included Schedule I - Summary of Investments - Other Than
Investments In Related Parties, Schedule IV - Reinsurance and Schedule V -
Valuation and Qualifying Accounts. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, Schedule I - Summary of Investments - Other Than Investments In Related
Parties, Schedule IV - Reinsurance and Schedule V - Valuation 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 4, 2004

52

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

With the participation of our principal executive officer and principal
financial officer, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based upon this evaluation, the principal
executive officer and the principal financial officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports filed with
the Securities and Exchange Commission. However, the design of any system of
controls and procedures is based in part upon assumptions about the likelihood
of future events and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and are effective at the
"reasonable assurance" level.

During the fiscal quarter ended December 31, 2003, there have been no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

PART III

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1), (2), (3), (4) AND (5)(ii) DISCLOSURE OF FEES -

The following fees have been, or will be, billed by Deloitte & Touche LLP,
the member firms of Deloitte & Touche Tohmatsu, and their respective affiliates,
for professional services rendered to us for the fiscal year ending December 31,
2003 and 2002.

(a) Fees for audits of annual financial statements including financial
statements for the separate accounts, reviews of quarterly financial
statements, statutory audits, consents and review of documents filed with
the Commission.

(5)(i) AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES -

The Audit Committee of The Allstate Corporation has established
pre-approval policies and procedures for itself and its consolidated
subsidiaries, including the registrant. Those policies and procedures are
incorporated into this Item 14.5(i) by reference to Appendix D to The Allstate
Corporation's Notice of Annual Meeting and Proxy Statement dated March 26, 2004.
The Board of Directors of ALIC has recently formed an audit committee, which
will be responsible for these matters in the future as they relate to ALIC and
its subsidiaries, including the registrant.

53

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

(a) (1) The following financial statements, notes thereto and related
information of Allstate Life of New York are included in Item 8.

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

(2) The following additional financial statement schedules are furnished
herewith pursuant to the requirements of Form 10-K.

All other schedules have been omitted because they are not applicable or
required or because the required information is included in the financial
statements or notes thereto.

(3) The following is a list of the exhibits filed as part of this Form
10-K.

54

10.4 Administrative Services Agreement between Allstate Life Insurance Company of New York
and Allstate Distributors, L.L.C. effective May 1, 2000. Incorporated herein by
reference to Exhibit 10.5 to Allstate Life Insurance Company of New York's Quarterly
Report on Form 10-Q for quarter ended June 30, 2002.

10.5 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 10.3 to Northbrook Life Insurance
Company's Annual Report on Form 10-K for 2001.

10.6 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 10.2 to
Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for
quarter ended March 31, 2002.

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

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

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

10.10 Selling Agreement between Allstate Life Insurance Company of New York, ALFS, Inc. and
Allstate Financial Services, LLC, effective May 17, 2001. Incorporated herein by reference
to Exhibit 10.7 to Allstate Life Insurance Company's Annual Report on Form 10-K for
2003. (SEC File No. 000-31248)

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

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

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

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

55

June 30, 2002.

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

10.16 Stop Loss Reinsurance Agreement between Allstate Life Insurance Company and Allstate
Life Insurance Company of New York effective December 31, 2001.

23 Independent Auditors' Consent

31.1 Rule 15d-14(a) Certification of Principal Executive Officer

31.2 Rule 15d-14(a) Certification of Principal Financial Officer

32 Section 1350 Certifications

(b) No reports on Form 8-K were filed during the fourth quarter of 2003.

(c) The exhibits are listed in Item 15. (a) (3) above.

(d) The financial statement schedules are listed in Item 15. (a) (2) above.

56

SIGNATURES

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

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
(Registrant)

March 24, 2004 /s/ Samuel H. Pilch
-------------------
By: Samuel H. Pilch
(chief accounting officer and duly authorized
officer of the registrant)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

57

/s/ Michael J. Velotta Director March 24, 2004
- ----------------------
Michael J. Velotta

/s/ Patricia W. Wilson Director March 24, 2004
- ----------------------
Patricia W. Wilson

58

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

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

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

59

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS
IN RELATED PARTIES
DECEMBER 31, 2003

S-1

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

(IN THOUSANDS)

S-2

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS

S-3