Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

 

OR

 

o 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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

 

As of October 31, 2004 the Registrant had 100,000 common shares, $25 par value, outstanding, all of which are held by Allstate Life Insurance Company.

 

 

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2004

 

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30, 2004 and 2003 (unaudited)	3
	Condensed Statements of Financial Position as of September 30, 2004 (unaudited) and December 31, 2003	4
	Condensed Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2004 and 2003 (unaudited)	5
	Notes to Condensed Financial Statements (unaudited)	6
	Report of Independent Registered Public Accounting Firm	14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4.	Controls and Procedures	27
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 6.	Exhibits	27

 

2

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

 

CONDENSED STATEMENTS OF OPERATIONS

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)		2004			2003			2004			2003
		(Unaudited)						(Unaudited)
Revenues
Premiums		$	24,800		$	14,189		$	61,420		$	44,451
Contract charges		15,446			12,721			44,134			39,394
Net investment income		77,126			67,259			220,197			195,913
Realized capital gains and losses		(4,805		)	(1,923		)	(8,344		)	(6,406		)
		112,567			92,246			317,407			273,352
Costs and expenses
Contract benefits		50,474			38,278			138,314			119,712
Interest credited to contractholder funds		34,253			26,557			92,439			78,349
Amortization of deferred policy acquisition costs		6,590			7,527			15,298			23,649
Operating costs and expenses		10,004			11,452			30,262			26,788
		101,321			83,814			276,313			248,498
(Loss) gain on disposition of operations		—			(4,312		)	1,058			(4,312		)
Income from operations before income tax expense and cumulative effect of change in accounting principle, after-tax		11,246			4,120			42,152			20,542
Income tax expense		3,644			1,267			14,738			6,934
Income before cumulative effect of change in accounting principle, after-tax		7,602			2,853			27,414			13,608
Cumulative effect of change in accounting principle, after-tax		—			—			(7,586		)	—
Net income		$	7,602		$	2,853		$	19,828		$	13,608

 

See notes to condensed financial statements.

 

3

 

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

 

CONDENSED STATEMENTS OF FINANCIAL POSITION

 

(in thousands, except par value data)		September 30, 2004			December 31, 2003
		(Unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $4,648,546 and $3,935,447)		$	5,170,629		$	4,415,327
Mortgage loans		440,511			385,643
Short-term		114,874			22,756
Policy loans		34,572			34,107
Other		5,001			—
Total investments		5,765,587			4,857,833
Cash		25,004			10,731
Deferred policy acquisition costs		216,326			187,437
Accrued investment income		54,455			47,818
Reinsurance recoverables		6,755			4,584
Current income taxes receivable		1,602			8,170
Other assets		25,442			15,004
Separate Accounts		710,425			665,875
Total assets		$	6,805,596		$	5,797,452
Liabilities
Reserve for life-contingent contract benefits		$	1,760,334		$	1,683,771
Contractholder funds		3,416,919			2,658,325
Deferred income taxes		88,837			81,657
Other liabilities and accrued expenses		258,431			168,081
Payable to affiliates, net		2,594			5,061
Reinsurance payable to parent		1,071			1,108
Separate Accounts		710,425			665,875
Total liabilities		6,238,611			5,263,878
Commitments and Contingent Liabilities (Note 4)
Shareholder’s equity
Common stock, $25 par value, 100 thousand shares authorized and outstanding		2,500			2,500
Additional capital paid-in		55,787			55,787
Retained income		356,391			336,563
Accumulated other comprehensive income:
Unrealized net capital gains and losses and net gains and losses on derivative financial instruments		152,307			138,724
Total accumulated other comprehensive income		152,307			138,724
Total shareholder’s equity		566,985			533,574
Total liabilities and shareholder’s equity		$	6,805,596		$	5,797,452

 

See notes to condensed financial statements.

 

4

 

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK

 

CONDENSED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30,
		2004			2003
(in thousands)		(Unaudited)
Cash flows from operating activities
Net income		$	19,828		$	13,608
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items		(37,624		)	(36,760		)
Realized capital gains and losses		8,344			6,406
(Gain) loss on disposition of operations		(1,058		)	4,312
Cumulative effect of change in accounting principle		7,586			—
Interest credited to contractholder funds		92,439			78,349
Changes in:
Life-contingent contract benefits and contractholder funds		28,950			13,382
Deferred policy acquisition costs		(47,149		)	(22,172		)
Income taxes payable		10,519			(7,083		)
Other operating assets and liabilities		(426		)	(6,009		)
Net cash provided by operating activities		81,409			44,033
Cash flows from investing activities
Proceeds from sales of fixed income securities		342,905			200,613
Investment collections
Fixed income securities		145,165			179,900
Mortgage loans		21,129			21,967
Investment purchases
Fixed income securities		(1,204,327		)	(805,583		)
Mortgage loans		(74,900		)	(69,214		)
Change in short-term investments, net		7,581			(32,976		)
Change in other investments, net		1,203			1,098
Net cash used in investing activities		(761,244		)	(504,195		)
Cash flows from financing activities
Contractholder fund deposits		895,148			579,411
Contractholder fund withdrawals		(201,040		)	(134,124		)
Net cash provided by financing activities		694,108			445,287
Net increase (decrease) in cash		14,273			(14,875		)
Cash at beginning of period		10,731			21,686
Cash at end of period		$	25,004		$	6,811

 

See notes to condensed financial statements.

 

5

ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

 

1.   Basis of Presentation

 

The accompanying condensed financial statements include the accounts of Allstate Life Insurance Company of New York (the “Company”), a wholly owned subsidiary of Allstate Life Insurance Company (“ALIC”), which is wholly-owned by Allstate Insurance Company (“AIC”), a wholly-owned subsidiary of The Allstate Corporation (the “Corporation”).

 

The condensed financial statements and notes as of September 30, 2004, and for the three-month and nine-month periods ended September 30, 2004 and 2003 are unaudited.  The condensed financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.  These condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

To conform to the 2004 presentation, certain amounts in the prior year’s condensed financial statements have been reclassified.

 

Adopted accounting standards

 

Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”)

 

On January 1, 2004, the Company adopted SOP 03-1.  The major provisions of the SOP affecting the Company require:

 

•                  Establishment of reserves primarily related to death benefit and income benefit guarantees provided under variable annuity contracts;

 

•                  Deferral of sales inducements that meet certain criteria, and amortization using the same method used for deferred policy acquisition costs (“DAC”).

 

Effects of adoption

 

The cumulative effect of the change in accounting principle from implementing SOP 03-1 was a loss of $7.6 million, after-tax ($11.7 million, pre-tax).  It was comprised of an increase in contractholder funds and benefits reserves (primarily for variable annuity contracts) of $942 thousand, pre-tax, and a reduction in DAC and deferred sales inducements (“DSI”) of $10.7 million, pre-tax.

 

The SOP requires consideration of a range of potential results to estimate the cost of variable annuity death benefits and income benefits, which generally necessitates the use of stochastic modeling techniques.  To maintain consistency with the assumptions used in the establishment of reserves for variable annuity guarantees, the Company utilized the results of this stochastic modeling to estimate expected gross profits, which form the basis for determining the amortization of DAC and DSI.  This new modeling approach resulted in a lower estimate of expected gross profits, and therefore resulted in a write-down of DAC and DSI.

 

In 2004, DSI and related amortization is classified within the Condensed Statements of Financial Position and Operations as other assets and interest credited to contractholder funds, respectively.  The amounts are provided below.

 

Liabilities for contract guarantees

 

The Company offers various guarantees to variable contractholders including a return of no less than (a) total deposits made on the contract less any customer withdrawals, (b) total deposits made on the contract less any customer withdrawals plus a minimum return or (c) the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary.  These guarantees include benefits that are payable in the event of death (death benefits), upon annuitization (income benefits), or at specified dates during the accumulation period (accumulation benefits). To manage the risk associated with its accumulation benefits, the Company cedes 100% of these obligations to ALIC.

 

6

 

The table below presents information regarding the Company’s variable contracts with guarantees.  The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.

 

($ in millions)		September 30, 2004
In the event of death
Account value		$	709
Net amount at risk(1)		$	111
Average attained age of contractholders		63 years
At annuitization
Account value		$	37
Net amount at risk(2)		$	—
Weighted average waiting period until annuitization options available		9 years
Accumulation at specified dates
Account value		$	53
Net amount at risk(3)		$	—
Weighted average waiting period until guarantee date		11 years

 

(1)          Defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.

(2)          Defined as the present value of the minimum guaranteed annuity payments determined in accordance with the terms of the contract in excess of the current account balance.

(3)          Defined as the present value of the guaranteed minimum accumulation balance in excess of the current account balance.

 

Account balances of variable contracts’ separate accounts with guarantees were invested as follows:

 

(in millions)		September 30, 2004
Equity securities (including mutual funds)		$	678
Cash and cash equivalents		31
Total variable contracts’ separate account assets with guarantees		$	709

 

The following summarizes the liabilities for guarantees:

 

(in thousands)		Liability for guarantees  related to death benefits			Liability for guarantees related to income benefits			Total
Balance, January 1, 2004		$	868		$	74		$	942
Incurred guaranteed benefits		1,340			4			1,344
Paid guarantee benefits		(1,699		)	—			(1,699		)
Balance, September 30, 2004(1)		$	509		$	78		$	587

 

(1)          Included in the total reserve balance are reserves for variable annuity death benefits of $509 thousand, variable annuity income benefits of $15 thousand and other guarantees of $63 thousand.

 

The liability for death and income benefit guarantees is established equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments.  The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges.  For guarantees related to death benefits, benefits represent the current guaranteed minimum death benefit payments in excess of the current account balance.  For

 

7

 

guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.

 

Projected benefits and contract charges used in determining the liability for guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits.  Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant’s attained age. The liability for guarantees will be re-evaluated periodically, and adjustments will be made to the liability balance through a charge or credit to contract benefits.

 

Guarantees related to accumulation benefits are considered to be derivative financial instruments; therefore, the liability for accumulation benefits is established based on its fair value.

 

Deferred sales inducements

 

Costs related to sales inducements offered on sales to new customers, principally on investment contracts and primarily in the form of additional credits to the customer’s account value or enhancements to interest credited for a specified period, which are beyond amounts currently being credited to existing contracts, are deferred and recorded as other assets.  All other sales inducements are expensed as incurred and included in interest credited to contractholder funds on the Condensed Statements of Operations.  DSI is amortized to income using the same methodology and assumptions as DAC, and included in interest credited to contractholder funds.  DSI is periodically reviewed for recoverability and written down when necessary.

 

DSI activity for the nine months ended September 30, 2004 was as follows:

 

(in thousands)
Balance, January 1, 2004		$	2,165
Sales inducements deferred		1,149
Amortization charged to income		(527		)
Effects of unrealized gains and losses		(65		)
Balance, September 30, 2004		$	2,722

 

Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-1”) and Financial Accounting Standards Board (“FASB”) Staff Position No. EITF 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP EITF 03-1-1”)

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF 03-1, which was to be effective for fiscal periods beginning after June 15, 2004.  EITF 03-1 requires that when the fair value of an investment security is less than its carrying value an impairment exists for which a determination must be made as to whether the impairment is temporary or other-than-temporary.  An impairment loss should be recognized equal to the difference between the investment’s carrying value and its fair value when an impairment is other-than-temporary. Subsequent to an other-than temporary impairment loss, a debt security should be accounted for in accordance with Statement of Position No. 03-3, “Accounting for Loans and Certain Debt Securities Acquired in a Transfer”, which allows the accretion of the discount between the carrying value and expected value of a security if the amount and timing of the receipt of the expected cash flows is reasonably estimable.  EITF 03-1 also indicates that although not presumptive, a pattern of selling investments prior to the forecasted recovery may call into question an investor’s intent to hold the security until it recovers in value or otherwise matures.

 

The EITF 03-1 impairment model applies to all investment securities accounted for under Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and to investment securities accounted for under the cost method.  The final consensus on EITF 03-1 included additional disclosure requirements incremental to those adopted by the Company effective December 31, 2003 that will be effective December 31, 2004.

 

8

 

In September 2004, the FASB issued FSP EITF Issue 03-1-1, which deferred the effective date of the impairment measurement and recognition provisions contained in paragraphs 10-20 of EITF 03-1 until proposed FSP EITF 03-1-a is issued. (See Pending accounting standard.)

 

Pending and recently issued accounting standards

 

American Institute of Certified Public Accountants (“AICPA”) Technical Practice Aid (“TPA”) re. SOP 03-1

 

In September 2004, the staff of the AICPA, aided by industry experts, issued a set of technical questions and answers on financial accounting and reporting issues related to SOP 03-1 that will be included in the AICPA’s TPAs.  The TPA addresses a number of issues related to SOP 03-1 including when it is necessary to establish a liability in addition to the account balance for certain contracts that meet the definition of an insurance contract and have amounts assessed against the contractholder in a manner that is expected to result in profits in earlier years and losses in subsequent years from the insurance benefit function.  The Company is in the process of evaluating the impact of the TPA.  The impact of the TPA is not expected to be material to the Company’s Condensed Statements of Operations or Financial Position.

 

FSP EITF Issue 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP EITF Issue 03-1-a”)

 

In September 2004, the FASB issued proposed FSP EITF 03-1-a, that addresses the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of increases in interest rates, and/or credit sector spread.  Thereafter, in connection with its decision to defer the effective date of paragraphs 10—20 of EITF 03-1 through the issuance of FSP EITF Issue 03-1-1, the FASB requested from its constituents information about both the issues set forth in FSP EITF 03-1-a as well as the issues that arose during the FSP EITF 03-1-b, “Effective Date of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, comment letter process.

 

Due to the uncertainty as to how all of the relevant outstanding issues will be resolved, the Company is unable to determine the impact of adopting paragraphs 10-20 of EITF 03-1 until final implementation guidance is issued.  Adoption of paragraphs 10-20 of EITF 03-1 may have a material impact on the Company’s Condensed Statements of Operation but is not expected to have a material impact on the Company’s Condensed Statements of Financial Position since fluctuations in fair value are already recorded in accumulated other comprehensive income.

 

2.  Other Investments

 

In 2004, the Company entered into interest rate cap agreements, financial futures contracts and foreign currency swap agreements that are used to reduce exposure to rising or falling interest rates relative to certain annuity contracts or to change the interest rate characteristics of existing assets or liabilities. All are used for asset-liability management.

 

In exchange for a premium, interest rate cap agreements provide the holder with the right to receive at a future date, the amount, if any, by which a specified market interest rate exceeds the fixed cap rate applied to a notional amount.  Hedge accounting is not applied to these derivative contracts. The fair values of the instruments are reported as other investments and the related gains and losses from the changes in fair value and the accrued periodic settlements are recognized in realized capital gains and losses.

 

Financial futures contracts are commitments to purchase or sell designated financial instruments at a future date for a specified price or yield.  Hedge accounting is not applied to these derivative contracts.  The fair values of the instruments are reported as other investments or other liabilities and accrued expenses and the related gains and losses from the changes in fair value, some of which are recognized through daily cash settlements, are classified consistent with the risks being economically hedged and are reported as realized capital gains and losses or contract benefits.

 

Under cash flow hedge accounting, the Company designates its foreign currency swap agreements as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income.  The Company’s cash flow exposure is associated with an existing asset.  The fair value of the instruments is reported as other investments or other liabilities and accrued expenses and the changes in fair value of the instruments are reported in accumulated other comprehensive income on the Condensed Statements of Financial Position.  Amounts are reclassified to net investment income or realized capital gains and losses as the hedge transaction affects net income.  Accrued periodic settlements on instruments used in cash flow hedges are reported in net investment income.

 

9

 

		September 30, 2004						Nine Months Ended September 30, 2004
(in thousands)		Notional amount			Fair value			Realized capital gain (loss)
Interest rate cap agreements		$	145,800		$	4,384		$	(1,058	)
Financial futures contracts		26,500			(45		)	1,366
Foreign currency swap agreements		7,500			—			—

 

3.   Reinsurance

 

The effects of reinsurance on premiums and contract charges are as follows:

 

(in thousands)		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Premiums and contract charges
Direct		$	43,167		$	28,874		$	116,334		$	89,414
Assumed – non-affiliate		84			103			386			210
Ceded
Affiliate		8			(1,128		)	(2,175		)	(3,418		)
Non-affiliate		(3,013		)	(939		)	(8,991		)	(2,361		)
Premiums and contract charges, net of reinsurance		$	40,246		$	26,910		$	105,554		$	83,845

 

The effects of reinsurance on contract benefits are as follows:

 

(in thousands)		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Contract benefits
Direct		$	52,576		$	40,791		$	143,304		$	124,024
Assumed – non-affiliate		57			1			135			36
Ceded
Affiliate		(283		)	(1,312		)	(266		)	(1,425		)
Non-affiliate		(1,876		)	(1,202		)	(4,859		)	(2,923		)
Contract benefits, net of reinsurance		$	50,474		$	38,278		$	138,314		$	119,712

 

4.   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.

 

10

 

The aggregate liability balance related to all guarantees was not material as of September 30, 2004.

 

Regulation

 

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.

 

Regulatory bodies have contacted the parent of the Company and have requested information relating to variable insurance products, including such areas as market timing and late trading and sales practices. The Company believes that these inquiries are similar to those made to many financial services companies as part of an industry-wide investigation by various regulatory agencies into the practices, policies and procedures relating to variable insurance products sales and subaccount trading practices. The Company’s parent has and will continue to respond to these information requests and investigations. The Company at the present time is not aware of any systemic problems with respect to such matters that may have a material adverse effect on the Company’s financial position.

 

Legal Proceedings

 

Background

 

The Company and certain of its affiliates are named as defendants in a number of lawsuits and other legal proceedings arising out of various aspects of its business.  As background to the “Proceedings” sub-section below, please note the following:

 

•                  These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to, the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies, the fact that some of these matters are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined, the fact that some of these matters involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear, and the current challenging legal environment faced by large corporations and insurance companies.

 

•                  In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages.  In some cases, the monetary damages sought include punitive damages or are not specified.  Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings.  In our experience, monetary demands in plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, to the Company.

 

•                  For the reasons specified above, it is not possible to make meaningful estimates of the amount or range of loss that could result from these matters at this time.  The Company reviews these matters on an on-going basis and follows the provisions of SFAS No. 5, “Accounting for Contingencies”, when making accrual and disclosure decisions.  When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.

 

•                  In the opinion of the Company’s management, while some of these matters may be material to the Company’s operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on the financial condition of the Company.

 

11

 

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. A putative nationwide class action filed by former employee agents includes a worker classification issue; these agents are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice in late March 2004 by the trial court but will be the subject of further proceedings on appeal.  AIC has been vigorously defending this and various other worker classification lawsuits. The outcome of these disputes is currently uncertain.

 

AIC is defending certain matters relating to its agency program reorganization announced in 1999. These matters include a lawsuit filed in December 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws, a class action filed in August 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act, breach of contract and ERISA violations, and a lawsuit filed in October 2004 by the EEOC alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization.  AIC is also defending another action, in which a class was certified in June 2004, filed by former employee agents who terminated their employment prior to the agency program reorganization.  These plaintiffs have asserted claims under ERISA and for constructive discharge, and are seeking the benefits provided in connection with the reorganization.  AIC has asked the court to reconsider its class certification ruling.    In late March 2004, in the first EEOC lawsuit and class action lawsuit, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer.  The court also ordered that an agent who voids the release must return to AIC “any and all benefits received by the [agent] in exchange for signing the release.”  The court also “concluded that, on the undisputed facts of record, there is no basis for claims of age discrimination.”  The EEOC and plaintiffs have asked the court to clarify and/or reconsider its memorandum and order.  The case otherwise remains pending.  A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA. This matter was dismissed with prejudice in March 2004 by the trial court but will be the subject of further proceedings on appeal.  In these matters, plaintiffs seek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization.  The outcome of these disputes is currently uncertain.

 

Other Matters

 

The Corporation and its affiliates have received interrogatories and demands to produce information from several regulatory and enforcement authorities.  These authorities are seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, are seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging.  Published press reports have indicated that numerous demands of this nature have been sent to insurance companies as part of industry-wide investigations.  The Corporation intends to cooperate fully with these and any similar requests for information.

 

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 a number of lawsuits, some of which involve claims for substantial and/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.

 

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5.     Other Comprehensive Income

 

The components of other comprehensive income on a pretax and after-tax basis are as follows:

 

		Three Months Ended September 30,
		2004									2003
(in thousands)		Pretax			Tax			After-tax			Pretax			Tax			After-tax
Unrealized capital gains and losses
Unrealized holding gains (losses) arising during the period		$	64,736		$	(22,658	)	$	42,078		$	(38,089	)	$	13,332		$	(24,757	)
Less: reclassification adjustments		(5,089		)	1,781			(3,308		)	(1,924		)	673			(1,251		)
Unrealized net capital gains (losses)		69,825			(24,439		)	45,386			(36,165		)	12,659			(23,506		)
Net gains (losses) on derivative financial instruments arising during the period		—			—			—			—			—			—
Less: reclassification adjustments for derivative instruments		240			(84		)	156			—			—			—
Unrealized net gains (losses) on derivative financial instruments		(240		)	84			(156		)	—			—			—
Other comprehensive income (loss)		$	69,585		$	(24,355	)	45,230			$	(36,165	)	$	12,659		(23,506		)
Net income								7,602									2,853
Comprehensive income (loss)								$	52,832								$	(20,653	)

 

		Nine Months Ended September 30,
		2004									2003
(in thousands)		Pretax			Tax			After-tax			Pretax			Tax			After-tax
Unrealized capital gains and losses
Unrealized holding gains (losses) arising during the period		$	14,564		$	(5,098	)	$	9,466		$	8,806		$	(3,081	)	$	5,725
Less: reclassification adjustments		(6,334		)	2,217			(4,117		)	(5,445		)	1,906			(3,539		)
Unrealized net capital gains (losses)		20,898			(7,315		)	13,583			14,251			(4,987		)	9,264
Net gains (losses) on derivative financial instruments arising during the period		—			—			—			—			—			—
Less: reclassification adjustments for derivative instruments		—			—			—			—			—			—
Unrealized net gains (losses) on derivative financial instruments		—			—			—			—			—			—
Other comprehensive income (loss)		$	20,898		$	(7,315	)	13,583			$	14,251		$	(4,987	)	9,264
Net income								19,828									13,608
Comprehensive income (loss)								$	33,411								$	22,872

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholder of
Allstate Life Insurance Company of New York:

 

We have reviewed the accompanying condensed statement of financial position of Allstate Life Insurance Company of New York (the “Company”, an affiliate of The Allstate Corporation) as of September 30, 2004, and the related condensed statements of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, and the condensed statements of cash flows for the nine-month periods ended September 30, 2004 and 2003.  These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our reviews, we are not aware of any material modifications that should be made to such condensed interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the statement of financial position of Allstate Life Insurance Company of New York as of December 31, 2003, and the related statements of operations and comprehensive income, shareholder’s equity, and cash flows for the year then ended, not presented herein.  In our report dated February 4, 2004, we expressed an unqualified opinion on those financial statements.  In our opinion, the information set forth in the accompanying condensed statement of financial position as of December 31, 2003 is fairly stated, in all material respects, in relation to the statement of financial position from which it has been derived.

 

/s/ Deloitte & Touche LLP
Chicago, Illinois
November 10, 2004

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003

 

OVERVIEW

 

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”, “us” or the “Company”).  It should be read in conjunction with the condensed financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Allstate Life Insurance Company of New York Annual Report on Form 10-K for 2003.  We operate as a single segment entity, consistent with the way in which we use financial information to evaluate business performance and to determine the allocation of resources.

 

RESULTS OF OPERATIONS

 

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 on the Condensed Statements of Financial Position.  Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to the 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.

 

The following table summarizes premiums and contract charges by product.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)		2004			2003			2004			2003
Premiums
Traditional life		$	6,838		$	5,393		$	18,039		$	16,467
Immediate annuities with life contingencies		17,263			6,759			41,304			21,579
Other		699			2,037			2,077			6,405
Total premiums		24,800			14,189			61,420			44,451
Contract charges
Interest-sensitive life		10,611			8,727			30,021			28,173
Fixed annuities		1,462			1,389			4,494			3,990
Variable annuities		3,373			2,605			9,619			7,231
Total contract charges		15,446			12,721			44,134			39,394
Premiums and contract charges		$	40,246		$	26,910		$	105,554		$	83,845

 

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

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)		2004			2003			2004			2003
Premiums
Allstate agencies		$	6,731		$	5,310		$	17,742		$	16,219
Financial institutions and broker/dealers		—			—			107			34
Specialized brokers		17,262			6,724			41,196			21,544
Independent agents		865			476			2,350			1,099
Direct response		(58		)	1,679			25			5,555
Total premiums		24,800			14,189			61,420			44,451
Contract charges
Allstate agencies		10,201			8,789			29,757			28,515
Financial institutions and broker/dealers		4,397			2,961			11,343			8,083
Specialized brokers		782			922			2,844			2,683
Independent agents		66			49			190			113
Total contract charges		15,446			12,721			44,134			39,394
Premiums and contract charges		$	40,246		$	26,910		$	105,554		$	83,845

 

Total premiums increased 75.0% to $24.8 million in the third quarter of 2004 and 38.2% to $61.4 million in the first nine months of 2004 compared to the same periods of 2003.  The increases in both periods were the result of increased premiums on immediate annuities with life contingencies partially offset by decreased premiums resulting from the disposal of the majority of our direct response distribution business.

 

Contract charges increased 21.4% to $15.4 million in the third quarter of 2004 and 12.0% to $44.1 million in the first nine months of 2004 compared to the same periods of 2003.  The increases in both periods were primarily attributable to higher contract charges on interest-sensitive life products and variable annuities as a result of average higher account values in the current periods from new business and investment returns.

 

Contractholder funds represent interest-bearing liabilities arising from the sale of individual 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.

 

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The following table shows the changes in contractholder funds.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)		2004			2003			2004			2003
Contractholder funds, beginning balance		$	3,084,086		$	2,407,026		$	2,658,325		$	2,051,429
Impact of adoption of SOP 03-1(1)		—			—			2,031			—
Deposits:
Fixed annuities (immediate and deferred)		340,560			114,040			742,959			416,765
Interest-sensitive life		24,937			16,163			75,969			43,945
Variable annuity and life deposits allocated to fixed accounts		19,562			43,797			76,219			118,701
Total deposits		385,059			174,000			895,147			579,411
Interest credited		34,124			26,557			92,075			78,349
Benefits, withdrawals and other adjustments
Benefits and withdrawals		(66,800		)	(49,744		)	(170,993		)	(128,292		)
Contract charges		(10,756		)	(10,727		)	(31,084		)	(30,320		)
Net transfers to separate accounts		(9,388		)	(5,285		)	(30,782		)	(9,069		)
Other adjustments		594			3,572			2,200			3,891
Total benefits, withdrawals and other adjustments		(86,350		)	(62,184		)	(230,659		)	(163,790		)
Contractholder funds, ending balance		$	3,416,919		$	2,545,399		$	3,416,919		$	2,545,399

 

(1) The increase in contractholder funds due to the adoption of AICPA Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”) reflects the establishment of reserves for certain liabilities that are primarily related to death benefit and income benefit guarantees provided under variable annuity contracts and the reclassification of deferred sales inducements from contractholder funds to other assets.

 

Contractholder funds deposits increased 121.3% in the third quarter and 54.5% in the first nine months of 2004 compared to the same periods in 2003 due to increased fixed annuity and interest-sensitive life deposits in both periods. These new deposits contributed to increases in average contractholder funds, excluding the impact of adopting SOP 03-1, of 31.3% in the third quarter and 32.2% in the first nine months of 2004 compared to the same periods in 2003.  Fixed annuity deposits increased 198.6% and 78.3% in the third quarter and first nine months of 2004, respectively, compared to the same periods in 2003.  The increases were attributable to strong consumer demand and competitive pricing.

 

Benefits and withdrawals increased 34.3% in the third quarter and 33.3% in the first nine months of 2004 compared to the same periods in 2003.  Benefits and withdrawals for the third quarter and first nine months of 2004 represent an annualized withdrawal rate of 8.7% and 8.6%, respectively, based on the beginning of period contractholder funds balance compared to 8.3% for both the third quarter and the first nine months of 2003.  Benefits and withdrawals have been comparable to our pricing assumptions.

 

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.

 

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