<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>alnyfin01.txt
<DESCRIPTION>ALLSTATE LIFE OF NEW YORK
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
The registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-61846
ALLSTATE LIFE INSURANCE COMPANY
OF NEW YORK
(Exact name of registrant as specified in its charter)
NEW YORK 36-2608394
(State of Incorporation) (I.R.S. Employer Identification No.)
ONE ALLSTATE DRIVE
P.O. BOX 9095
FARMINGVILLE, NEW YORK 11738
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 516/451-5300
-----------
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 FILIERS 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 INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.
YES |X| NO | |
AS OF MARCH 25, 2002, THE REGISTRANT HAD 100,000 COMMON SHARES, $25 PAR VALUE,
OUTSTANDING, ALL OF WHICH ARE HELD BY ALLSTATE LIFE INSURANCE COMPANY.
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
<S> <C> <C>
PART I.
Item 1. Business * 2
Item 2. Properties * 2
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders * N/A
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 3
Item 6. Selected Financial Data ** N/A
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 22
Item 8. Financial Statements and Supplementary Data 22
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant ** N/A
Item 11. Executive compensation N/A
Item 12. Security Ownership and Certain Beneficial Owners and Management ** N/A
Item 13. Certain Relationships and Related Transactions ** N/A
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
Signatures 24
Index to Financial Statement Schedules 25
</Table>
* Item prepared in accordance with General Instruction I(2) of Form
10-K.
** Omitted pursuant to General Instruction I (2) of Form 10-K.
<Page>
PART I
ITEM 1. BUSINESS
Allstate Life Insurance Company of New York ("Allstate Life of New York" or
the "Company") was incorporated in 1967 as a stock life insurance company under
the laws of the State of New York and was known as "Financial Life Insurance
Company" from 1967 to 1978. From 1978 to 1984, the Company was known as "PM Life
Insurance Company." Since 1984, the Company has done business as "Allstate Life
Insurance Company of New York." Allstate Life of New York's products have been
approved by the State of New York.
Allstate Life of New York is a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), a stock life insurance company incorporated under
the laws of the State of Illinois. ALIC is a wholly owned subsidiary of Allstate
Insurance Company ("AIC"), a stock property-liability insurance company
incorporated under the laws of the State of Illinois. All of the outstanding
capital stock of AIC is owned by The Allstate Corporation (the "Corporation"), a
Delaware corporation which has several different classes of securities,
including common stock, registered with the Securities and Exchange Commission.
Allstate Life of New York, a single segment entity, markets a
diversified group of products to meet consumers' lifetime needs in the areas
of protection and retirement solutions in the State of New York through a
combination of Allstate agencies, financial services firms, direct marketing
and specialized brokers. The Company's life products include term life; whole
life and universal life; annuities such as fixed annuities, market value
adjusted annuities, variable annuities and immediate annuities; and other
protection products such as accidental death and hospital indemnity. ALFS,
Inc. ("ALFS") is the principal underwriter for certain Allstate Life of New
York investment products, such as variable annuities and fixed annuities with
a market value adjustment feature. ALFS is a wholly owned subsidiary of ALIC
and is a registered broker-dealer under the Securities Exchange Act of 1934.
Also, beginning May 1, 2000, Allstate Distributors, L.L.C. ("ADLLC") provided
underwriting and distribution services for variable annuities sold pursuant
to a joint venture agreement between Allstate Life of New York and Putnam
Investments, Inc. ("Putnam"). ADLLC is owned equally by ALIC and Putnam and
is a registered broker-dealer under the Securities Act of 1934.
The assets and liabilities of the variable contracts are held in
legally-segregated, unitized Separate Accounts. Allstate Life of New York's
general account assets must be invested in accordance with applicable state
laws. These laws govern the nature and quality of investments that may be made
by life insurance companies and the percentage of their assets that may be
committed to any particular type of investment.
Allstate Life of New York is engaged in a business that is highly
competitive because of the large number of stock and mutual life insurance
companies and other entities competing in the sale of insurance and
annuities. As of December 2000, the last year for which current information
is available, there were approximately 1,400 stock, mutual and other types of
insurers in business in the United States. Several independent rating
agencies regularly evaluate life insurer's claims paying ability, quality of
investments and overall stability. A.M. Best Company assigns Allstate Life of
New York the rating of A+ (superior). Under Best's rating policy and
procedure, the Company is assigned the Best's rating of its parent company
ALIC, and is based on the consolidated performance of ALIC and its
subsidiaries. Standard & Poor's Insurance Rating Services assigns an AA+
(very strong) to the Company's claim paying ability. Moody's Investors
Service assigns an Aa2 (Excellent) financial strength rating to the Company.
The Company shares the same ratings of its parent, ALIC. In February 2002,
Standard & Poor's affirmed its December 31, 2001 ratings. Standard & Poor's
revised its outlook for ALIC and its rated subsidiaries and affiliates to
"negative" from "stable". This revision is part of an ongoing life insurance
industry review recently initiated by Standard & Poor's. Moody's and A.M.
Best reaffirmed their ratings and outlook for the Company.
The Company's business is subject to the effects of a changing social,
economic and regulatory environment. State and federal regulatory initiatives
have varied and have included employee benefit regulations, removal of barriers
preventing banks from engaging in the securities and insurance businesses, tax
law changes affecting the taxation of insurance companies, the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles, and the overall expansion of regulation. The
ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
Allstate Life of New York is registered with the Securities and Exchange
Commission ("SEC") as an issuer of registered products. The SEC also regulates
certain Allstate Life of New York Separate Accounts which, together with the
Company, issue variable annuity contracts.
ITEM 2. PROPERTIES
Allstate Life of New York occupies office space in Farmingville, New York
and Northbrook, Illinois.
2
<Page>
ITEM 3. LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal
proceedings pending to which the Company is a party or which would materially
affect the Company. The Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not anticipate
the ultimate liability arising from such pending or threatened litigation to
have a material effect on the financial position or results of operations of the
Company.
PART II
ITEM 5. MARKET FOR REGISTRANTS'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by its parent, ALIC.
ALIC's outstanding shares are owned directly or indirectly by AIC. All of the
outstanding shares of AIC are owned by the Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING RESULTS
OF OPERATIONS AND CHANGES IN FINANCIAL POSITION OF ALLSTATE LIFE INSURANCE
COMPANY OF NEW YORK (THE "COMPANY"). IT SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES. TO CONFORM WITH THE 2001 PRESENTATION,
CERTAIN PRIOR YEAR AMOUNTS HAVE BEEN RECLASSIFIED.
CRITICAL ACCOUNTING POLICIES
In response to the Securities and Exchange Commission's ("SEC") release
"Cautionary Advice Regarding Disclosure about Critical Accounting Policies", the
Company identified critical accounting policies by considering policies that
involve the most complex or subjective judgments or assessments. The Company has
identified three policies as critical accounting policies because they involve a
higher degree of judgment and complexity. A brief summary of each critical
accounting policy follows. For a more complete discussion of the judgments and
other factors affecting the measurement of these items see the referenced
sections of Management's Discussion and Analysis ("MD&A").
- INVESTMENTS AND DERIVATIVE INSTRUMENTS -All fixed income securities
are carried at fair value and may be sold prior to their contractual
maturity ("available for sale"). The difference between the amortized
cost of fixed income securities and fair value, net of deferred income
taxes, certain life and annuity deferred policy acquisition costs, and
certain reserves for life-contingent contract benefits, is reflected
as a component of Shareholder's equity. Mortgage loans are carried at
outstanding principal balance, net of unamortized premium or discount
and valuation allowances.
The Company closely monitors its fixed income and mortgage loan
portfolios for declines in value that are other than temporary.
Securities are placed on non-accrual status when they are in default
or when timing or receipt of principal or interest payments are in
doubt. Provisions for losses are recognized for declines in the value
of fixed income securities and mortgage loans that are deemed to be
other than temporary. Such write-downs are included in Realized
capital gains and losses.
Derivative instruments include futures. Derivatives are accounted
for on a fair value basis and reported as Other assets. Beginning in
January 2001, hedge accounting is not applied to those strategies that
utilize financial futures contracts for interest rate risk management
purposes. Therefore, the gains and losses pertaining to the change in
the fair value of the financial futures contracts are recognized in
Realized capital gains and losses during the period on a current
basis.
Changes in the fair value of investments and derivative
instruments can result from changes in economic and market conditions.
Judgment is applied in the determination of fair value when
independent market quotations are not available and when determining
other than temporary declines in value. For further discussion of
these policies, see the Investments, Market Risk and Forward-looking
Statements and Risk Factors sections of MD&A.
- DEFERRED POLICY ACQUISITION COSTS ("DAC")- The Company establishes a
deferred asset for costs that vary with and are primarily related to
acquiring life and investment business, principally agents'
remuneration, certain underwriting costs and direct mail solicitation
expenses, which are deferred and amortized to income.
For traditional life insurance and structured settlement
annuities with life contingencies, these costs are amortized in
proportion to the estimated future revenues on such business.
3
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
For interest-sensitive life and investment contracts, the costs
are amortized in relation to the present value of estimated gross
profits on such business over the estimated terms of the contract
periods. Gross profits are determined at the date of contract issue
and comprise estimated future investment margins, mortality margins,
surrender charges and expenses. Assumptions underlying the gross
profits are periodically updated to reflect actual experience, and
changes in the amount or timing of estimated gross profits will result
in adjustments in the cumulative amortization of these costs. To the
extent that unrealized capital gains or losses on fixed income
securities carried at fair value would result in an adjustment of
estimated gross profits had those gains or losses actually been
realized, the related unamortized DAC is recorded net of tax as a
reduction of the Unrealized capital gains or losses included in
Shareholder's equity. For further discussion of these policies, see
the Market Risk and Forward-looking Statements and Risk Factors
section of MD&A.
- LIFE INSURANCE RESERVES AND CONTRACTHOLDER FUNDS - Reserves for
life-contingent contract benefits, which relate to traditional life
insurance and immediate annuities with life contingencies are computed
on the basis of long-term actuarial assumptions 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. To the extent that
unrealized capital gains on fixed income securities would result in a
premium deficiency had those gains actually been realized, the related
increase in reserve is recorded net of tax as a reduction of the
Unrealized capital gains included in Shareholder's equity.
Contractholder funds arise from the issuance of policies and
contracts that include an investment component, including fixed
annuities, interest-sensitive life policies and other 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, withdrawals, mortality charges and administrative
expenses. For further discussion of these policies, see the Market
Risk and Forward-looking Statements and Risk Factors section of MD&A.
The Company also discloses its significant accounting policies in Note
2 to the financial statements.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance
Company ("ALIC"), which is a wholly owned subsidiary of Allstate Insurance
Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets a diversified group of products to meet consumers'
lifetime needs in the areas of protection and retirement solutions in the
state of New York through a combination of Allstate agencies, financial
services firms, direct marketing and specialized brokers. The Company's life
products include term life; whole life and universal life; annuities such as
fixed annuities, market value adjusted annuities, variable annuities and
immediate annuities; and other protection products such as accidental death
and hospital indemnity.
The Company has identified itself as a single segment entity.
The Company earns revenue primarily from: (a) premiums on insurance
products with significant mortality or morbidity risk; (b) contract charges and
fees from investment contracts; (c) net investment income earned on its
investments, excluding those in Separate Accounts; and (d) realized capital
gains and losses recognized on its investments, excluding those in the Separate
Accounts. The Company's primary costs and expenses consist of contract benefits,
interest credited to contractholders' funds, amortization of DAC and operating
costs and expenses.
The process of developing product pricing involves analyzing several key
dynamic factors, including market conditions, competitive environment, mortality
assumptions, investment returns, surrender and withdrawal assumptions and
operating costs and expenses of the business. The Company's profitability
depends on the adequacy of investment margins (the spread between interest
credited to contractholder's account balances and the interest earned on the
investments, excluding those in Separate Accounts), the management of market and
credit risks associated with investments, the Company's ability to maintain
premiums and contract charges at a level to cover mortality benefits, the
adequacy of contract charges from variable annuity contracts to cover the costs
of various product features, the persistency of policies to ensure recovery of
acquisition expenses, and the management of operating costs and expenses within
anticipated pricing allowances. Legislation and regulation of the insurance
marketplace and products could also affect the Company's profitability.
4
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
The Company utilizes an alternative method of presenting its operating
results in the following discussion that differs from the presentation of the
financial information in the financial statements. This presentation allows
for a more complete analysis of results of operations. The net effects of
realized capital gains and losses, after-tax have been excluded from
operating income due to the volatility between periods and because such data
is often excluded when evaluating the overall financial performance of
insurers. Realized capital gains and losses, after-tax is presented net of
the effects of DAC to the extent that such effects resulted from the
recognition of realized capital gains and losses. Operating income should not
be considered a substitute for any measure of performance under accounting
principles generally accepted in the United States of America ("GAAP"). The
Company's method of calculating operating income may be different from the
method used by other companies and therefore comparability may be limited.
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Statutory premiums and deposits $ 687,965 $ 668,966 $ 304,535
============= ============= ============
Investments $ 3,227,855 $ 2,773,985 $ 2,156,688
Separate Accounts assets 602,657 560,089 443,705
-------------- ------------- ------------
Investments, including Separate Accounts assets $ 3,830,512 $ 3,334,074 $ 2,600,393
============== ============= ============
GAAP Premiums $ 104,068 $ 104,316 $ 63,748
Contract charges 41,241 41,885 38,626
Net investment income 204,467 176,539 148,331
Contract benefits 194,288 180,800 141,531
Interest credited to contractholders' funds 65,117 52,499 36,736
Amortization of deferred policy acquistion costs 5,192 13,597 8,983
Operating costs and expenses 31,266 23,985 20,151
------------- ------------- ------------
Operating income before tax 53,913 51,859 43,304
Income tax expense 18,459 17,535 15,406
------------- ------------- ------------
Operating income(1) 35,454 34,324 27,898
Realized capital gains and losses, after-tax (2) 105 (3,409) (1,332)
Cumulative effect of change in accounting principle, after-tax (147) -- --
------------- ------------- ------------
Net income $ 35,412 $ 30,915 $ 26,566
============= ============== ============
</Table>
(1) For a complete definition of operating income, see the operating income
discussion beginning on page 7.
(2) RECONCILIATION OF REALIZED CAPITAL GAINS AND LOSSES
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Realized capital gains and losses $ 2,158 $ (5,181) $ (2,096)
Reclassification of Amortization of DAC (1,995) (147) (2)
Reclassification of Income tax (expense) benefit (58) 1,919 766
--------- ------- -------
Realized capital gains and losses, after-tax $ 105 $ (3,409) $ (1,332)
========= ======= =======
</Table>
5
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
STATUTORY PREMIUMS AND DEPOSITS
Statutory premiums and deposits is a measure used by management to analyze
sales trends. Statutory premiums and deposits includes premiums and annuity
considerations determined in conformity with statutory accounting practices
prescribed or permitted by the insurance regulatory authorities of the state of
New York, and all other funds received from customers on deposit-type products
which are treated as liabilities. The statutory accounting practices differ in
certain, material aspects from GAAP. The following table summarizes statutory
premiums and deposits by product line:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
LIFE PRODUCTS
Interest-sensitive $ 47,684 50,726 49,588
Traditional 27,764 20,220 16,842
Other 8,510 7,415 6,080
--------- --------- ---------
Total life products 83,958 78,361 72,510
INVESTMENT PRODUCTS
Investment contracts
Fixed annuity 196,321 176,682 97,494
Immediate annuity 126,509 129,203 68,431
Variable Separate Accounts 281,177 284,310 66,100
--------- --------- ---------
Total investment products 604,007 590,605 232,025
--------- --------- ---------
TOTAL $ 687,965 $ 668,966 $ 304,535
========= ========= =========
</Table>
Statutory premiums and deposits increased $19.0 million or 2.8% in 2001 as
compared to 2000. In 2001, fixed investment products increased 11.1% from
increased sales in the financial services firms channel and increased focus on
investment products sold within the Allstate agencies channel. Traditional life
and other life products increased 37.3% and 14.8%, respectively, due to
strong sales stemming from a pricing change implemented late in 2000. In 2001,
interest-sensitive life products and variable Separate Accounts decreased 6.0%
and 1.1%, respectively, due to market conditions.
Statutory premiums and deposits increased $364.4 million or 119.7% in 2000
as compared to 1999, due to increases in all product categories. In 2000,
variable Separate Accounts, immediate annuity and fixed annuity increased
330.1%, 88.8% and 81.2%, respectively. Increased variable investment product
sales were primarily driven by $185.4 million of sales from the Putnam Allstate
Advisor variable annuity product that was launched in January 2000 pursuant to
an alliance between the Company, ALIC and Putnam Investments, Inc. The large
increase in fixed investment products resulted from new distribution outlets in
the financial services channel. Structured settlement annuities, a type of
immediate annuity, increased due to strong sales activity.
GAAP PREMIUMS AND CONTRACT CHARGES
Under GAAP, premiums represent premium generated from traditional life
products and immediate annuities with life contingencies which have
significant mortality or morbidity risk and contract charges generated from
interest-sensitive life products and investment contracts which classify
deposits as contractholder funds. Contract charges are assessed against
the contractholder account balance for maintenance, administration, cost of
insurance and early surrender.
6
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
The following table summarizes GAAP premiums and contract charges:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
PREMIUMS
Traditional life $ 25,785 $ 17,983 $ 16,844
Immediate annuities with life contingencies 68,580 78,958 40,067
Other 9,703 7,375 6,837
-------- -------- --------
Total premiums 104,068 104,316 63,748
-------- -------- --------
CONTRACT CHARGES
Interest-sensitive life 27,960 30,366 29,850
Variable Separate Accounts 9,547 8,656 6,930
Investment contracts 3,734 2,863 1,846
-------- -------- --------
Total contract charges 41,241 41,885 38,626
--------- -------- --------
TOTAL GAAP PREMIUMS AND CONTRACT CHARGES $ 145,309 $ 146,201 $ 102,374
======== ======== ========
</Table>
In 2001, total premiums were comparable to 2000. Increased premiums from
traditional life and other products were more than offset by a decrease in
premiums from immediate annuities with life contingencies. The sales mix of
immediate annuities with life contingencies and those without life contingencies
can cause fluctuations in premiums and contract charges from year to year. The
increase in sales of traditional products resulted, in part, due to an increase
in retention limits associated with third party reinsurance instituted during
the year.
In 2000, total premiums increased 63.6% over 1999, due in large part to a
97.1% increase in sales of immediate annuities with life contingencies. This
increase resulted from a more competitive pricing strategy introduced in late
1999, as well as, enhanced wholesaling efforts.
In 2001, contract charges remained fairly constant with 2000 as
decreased contract charges from interest-sensitive life products were
partially offset by increased contract charges from variable annuities and
investment contracts. Contract charges on variable Separate Accounts products
are generally calculated as a percentage of account value and therefore are
impacted by market volatility. Contract charges on immediate annuities
without life contingencies, included in investment contract charges,
increased due to an increase in premium deposits.
In 2000, contract charges increased 8.4% compared to 1999 levels as a
result of increases in all products types. Variable Separate Accounts
increased due to new sales and favorable market performance, partially offset
by benefit payments and increased contract charges. For 2000, contract
charges on interest-sensitive life products increased primarily as a result
of increased mortality charges as policyholders aged during 2000.
OPERATING INCOME
Operating income is a measure used by management to evaluate profitability.
Operating income is defined as income before the cumulative effect of changes in
accounting principle, after-tax, excluding the after-tax effects of realized
capital gains and losses. In this management measure, the effects of realized
capital gains and losses have been excluded due to the volatility between
periods and because such data is often excluded when evaluating the overall
financial performance and profitability of other insurers. These operating
results should not be considered as a substitute for any GAAP measure of
performance. A reconciliation of operating income to net income is provided in
the table on page 5. The Company's method of calculating operating income may be
different from the method used by other companies and therefore comparability
may be limited.
7
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Investment margin $ 45,880 $ 38,562 $ 33,407
Mortality margin 23,686 31,750 22,029
Maintenance charges 16,709 15,726 14,149
Surrender charges 4,096 3,403 2,853
Costs and expenses (36,458) (37,582) (29,134)
Income tax expense on operations (18,459) (17,535) (15,406)
------- ------- -------
OPERATING INCOME $ 35,454 $ 34,324 $ 27,898
====== ====== ======
</Table>
Operating income increased 3.3% in 2001 compared to 2000 primarily due to
increases in the investment margin partially offset by decreases in mortality
margin. Operating income increased 23.0% in 2000 compared to 1999 primarily due
to increases in the investment and mortality margin partially offset by higher
operating costs and expenses.
Investment margin, which represents the excess of investment income earned
over interest credited to policyholders and contractholders, increased 19.0% in
2001 compared to 2000. The increase was primarily due to a larger asset base
from additional sales of fixed annuities partially offset by an increase in
interest credited. Investment margin increased 15.4% in 2000 compared to 1999.
The increase was primarily due to a larger asset base coupled with slightly
higher yielding assets and lower investment expenses.
Mortality margin, which represents premiums and cost of insurance charges
in excess of related policy benefits, decreased 25.4% in 2001 compared to 2000.
The decrease in mortality margin was due to a higher number of incurred death
claims, including $6.6 million from the tragedy of the September 11 attack on
the World Trade Center in New York City and the Pentagon in Washington D.C., and
the plane crash in Pennsylvania. The 2001 mortality margin also includes an
increase in death benefits on variable annuity contracts over 2000. See the
Market Risk section for a detailed description of the equity risk related to
these death benefits. Mortality and morbidity loss experience can cause benefit
payments to fluctuate from period to period while underwriting and pricing
guidelines utilize a long-term view of the trends in mortality and morbidity
when determining premium rates and cost of insurance charges. Mortality margin
increased 44.1% in 2000 compared to 1999. The increase was due to positive
mortality results on immediate annuities with life contingencies.
Costs and expenses decreased 3.0% during 2001 compared to 2000 due to
higher marketing, technology and distribution expenses incurred on new growth
initiatives more than offset by lower DAC amortization. In 2000, operating costs
and expenses increased 29.0% compared to 1999 due to higher marketing,
distribution and technology expenses.
COMPANY OUTLOOK
- Consistent with the marketplace, the Company's sales continue to move
towards lower profit margin products, such as term life and variable
annuities. These lower profit margin products require a higher volume of
sales to increase the Company's operating results. The Company achieved
this increased volume in 2000 and expects product growth in 2002, as the
economy improves and additional products are offered and updated.
- The Company is encouraging exclusive Allstate agents to become Personal
Financial Representatives ("PFRs"). PFRs are licensed to sell products such
as variable annuities. As additional agents become licensed, the mix of
products sold through this channel could change.
- The Company's ability to manage its investment margin is dependent upon the
level of interest rates and the quality of its investment portfolio.
Changes in interest rates and the level of defaults may affect investment
income. The Company also has the ability to impact the investment margin by
changing the crediting rates on flexible rate contracts, but these changes
could be limited by market conditions and minimum rate guarantees on
certain contracts.
- The Company's contract charge revenue is dependent upon the value of the
accounts supporting its variable annuity products. Most account values for
these products are invested, at the discretion of the contractholder, in
equity mutual funds. Therefore, returns on these products are significantly
influenced by market performance, thus impacting contract charge revenue.
8
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
- In order to compete with major insurance company competitors, as well as
non-traditional competitors, such as banks, financial services firms and
securities firms, the Company will have to distribute its products within
its pricing parameters while increasing the amount of business inforce to
improve its economies of scale.
NET INVESTMENT INCOME
Net investment income increased 15.8% and 19.0% in 2001 and 2000,
respectively. Increases in both years were due to higher investment balances due
to positive cash flows from operations. Net investment income increased 19.0% in
2000 compared to 1999 due to higher yields. Investments, excluding Separate
Accounts assets and unrealized gains on fixed income securities, grew 17.7% and
21.7% in 2001 and 2000, respectively.
REALIZED CAPITAL GAINS AND LOSSES
After-tax realized capital gains were $105 thousand in 2001 compared to
after-tax realized capital losses of $3.4 million and $1.3 million in 2000 and
1999, respectively. After-tax realized capital gains and losses are presented
net of the effects of DAC amortization, to the extent that such effects resulted
from the recognition of realized capital gains and losses. The following table
describes the factors impacting the realized capital gains and losses results:
<Table>
<Caption>
(IN THOUSANDS) 2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Portfolio trading $ 2,250 $ (1,337) $ (1,331)
Investment write-downs (814) (1,978) --
Valuation of derivative securities (33) -- --
-------- -------- ----------
Subtotal 1,403 (3,315) (1,331)
Reclassification of amortization of DAC (1,298) (94) (1)
-------- -------- ----------
Total realized capital gains and losses, after-tax $ 105 $ (3,409) $ (1,332)
======== ========= ==========
</Table>
Realized capital gains and losses from the valuation of certain derivative
instruments in 2001 reflected the impact of new accounting policies adopted
during the year related to Statements of Financial Accounting Standards ("SFAS")
Nos. 133 and 138.
Period to period fluctuations in realized capital gains and losses are the
result of timing of sales decisions reflecting management's decision on
positioning the portfolio, as well as assessments of individual securities and
overall market conditions.
INVESTMENT OUTLOOK
- The Company expects to experience lower investment yields due, in part, to
the reinvestment of proceeds from prepayments, calls and maturities, and
the investment of cash flows from operations, in securities yielding less
than the average portfolio rate.
INVESTMENTS
An important ingredient of the Company's financial results is the return on
invested assets. The investment portfolios are managed based upon the nature of
the business and its corresponding liability structure.
The investment strategy for the Company is based upon a strategic asset
allocation framework that takes into account the need to manage on a risk
adjusted spread basis for the underwriting liability product portfolio and to
maximize return on retained capital. Generally, a combination of recognized
market modeling, analytical models and proprietary models is used to achieve a
desired optimal 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
limitations with respect to overall below investment grade exposure and
diversification requirements. On a tactical basis, decisions are made on an
option adjusted relative value basis staying within the constraints of the
strategic asset allocation framework. The Company believes it maximizes asset
spread by selecting assets that perform on a long-term basis and by using
trading to minimize the effect of downgrades and defaults. Total return
measurement is used on a selective basis where the asset risks are significant
(i.e., high yield fixed income securities). The Company expects that employing
this strategy in a declining interest rate market will slow the rate of decline
in investment income. This strategy is also expected provide sustainable
investment-related operating income over time.
9
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
The composition of the investment portfolio is presented in the table below
(see Notes 2 and 4 to the financial statements for investment accounting
policies and additional information):
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
PERCENT PERCENT
(IN THOUSANDS) TO TOTAL TO TOTAL
-------- --------
<S> <C> <C> <C> <C>
Fixed income securities(1) $ 2,894,461 89.7% $ 2,476,132 89.3%
Mortgage loans 242,727 7.5 207,857 7.5
Short-term 57,507 1.8 58,224 2.1
Policy loans 33,160 1.0 31,772 1.1
------------ ----- ------------- -----
Total $ 3,227,855 100.0% $ 2,773,985 100.0%
============ ===== ============= ======
</Table>
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $2.68 billion and $2.26 billion at December 31, 2001 and
2000, respectively.
Total investments were $3.23 billion at December 31, 2001 compared to $2.77
billion at December 31, 2000. The increase was due to positive cash flows
generated from operations.
The fair value of the Company's exchange traded marketable investment
securities is based on independent market quotations. The fair value of
non-exchange traded marketable investment securities is based on either
independent third party pricing sources or widely accepted pricing valuation
models which utilize internally developed ratings and independent third party
data as inputs. Periodic changes in the fair values are reported as a component
of other comprehensive income and are reclassified to net income only when
supported by the consummation of a transaction with an unrelated third party.
The following table shows the Company's investment portfolio, and the
sources of its fair value, at December 31, 2001.
<Table>
<Caption>
(IN THOUSANDS) FAIR PERCENT
VALUE TO TOTAL
----- --------
<S> <C> <C>
Value based on independent market quotations $ 2,245,872 69.5%
Value based on models and other valuation methods 706,096 21.9
Mortgage loans, policy loans and certain limited partnership
investments, all held at cost 275,887 8.6
--------- ------
Total $ 3,227,855 100.0%
=========== ======
</Table>
FIXED INCOME SECURITIES
The Company's fixed income securities portfolio consists of
privately-placed securities, publicly traded corporate bonds, U.S. government
bonds, asset and mortgage-backed securities and municipal bonds. The Company
generally holds its fixed income securities to maturity, but has classified all
of these securities as available for sale to allow maximum flexibility in
portfolio management. At December 31, 2001, unrealized net capital gains on the
fixed income securities portfolio were comparable to unrealized net capital
gains at December 31, 2000. As of December 31, 2001, all of the fixed income
securities portfolio was invested in taxable securities.
The Securities Valuation Office of the National Association of Insurance
Commissioners ("NAIC") evaluates the fixed income securities investments of
insurers for regulatory reporting purposes and assigns securities to one of six
investment categories called "NAIC designations." The NAIC designations parallel
the credit ratings of the Nationally Recognized Statistical Rating Organizations
for marketable securities. NAIC designations 1 and 2 include securities
considered investment grade (rated "Baa3" or higher by Moody's, or rate "BBB-"
or higher by Standard & Poor's ("S&P")) by such rating organizations. NAIC
designations 3 through 6 include securities considered below investment grade
(rated "Ba1" or lower by Moody's, or rated "BB+" or lower by S&P).
At December 31, 2001, 97.5% of the Company's fixed income securities
portfolio was rated investment grade, which is defined by the Company as a
security having a NAIC rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa,
or a comparable Company internal rating. The quality mix of the Company's fixed
income securities portfolio at December 31, 2001 is presented in the following
table:
10
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
<Table>
<Caption>
(IN THOUSANDS)
NAIC
RATINGS MOODY'S EQUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL
------- ------------------------------ ---------- ----------------
<S> <C> <C> <C>
1 Aaa/Aa/A $ 2,222,891 76.8%
2 Baa 600,343 20.7
3 Ba 40,000 1.4
4 B 20,663 0.7
5 Caa or lower 2,644 0.1
6 In or near default 7,920 0.3
------------- -------
$ 2,894,461 100.0%
============= ========
</Table>
Included among the securities that are rated below investment grade are
both public and privately-placed high-yield bonds and securities that were
purchased at investment grade but have since been downgraded. The Company
mitigates the credit risk of investing in below investment grade fixed income
securities by limiting the percentage of its portfolio invested in such
securities and through diversification of the portfolio. Based on these limits,
a minimum of 91.1% of the Company's fixed income securities portfolio will be
investment grade.
As of December 31, 2001, the fixed income securities portfolio contained
$879.7 million of privately-placed corporate obligations compared to $712.0
million at December 31, 2000. The benefits of privately-placed securities as
compared to public securities are generally higher yields, improved cash flow
predictability through pro-rata sinking funds on many bonds, and a combination
of covenant and call protection features designed to better protect the holder
against losses resulting from credit deterioration, reinvestment risk and
fluctuations in interest rates. A relative disadvantage of privately-placed
securities as compared to public securities is relatively reduced liquidity. At
December 31, 2001, 96.2% of the privately-placed securities were rated as
investment grade by either the NAIC or the Company's internal ratings. The
Company determines the fair value of privately-placed fixed income securities
based on discounted cash flows using current interest rates for similar
securities.
At December 31, 2001 and 2000, $442.1 million and $381.0 million,
respectively, of the fixed income securities portfolio was invested in
mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of
securities that were issued by, or have underlying collateral that is guaranteed
by, U.S. government agencies or sponsored entities. Therefore, the MBS portfolio
has relatively low credit risk.
The MBS portfolio is subject to interest rate risk since the price
volatility and ultimate realized yield are affected by the rate of repayment of
the underlying mortgages. The Company attempts to limit interest rate risk on
these securities by investing a portion of the portfolio in securities that
provide prepayment protection. At December 31, 2001, approximately 33.9% of the
MBS portfolio was invested in planned amortization class bonds.
The fixed income securities portfolio contained $55.0 million and $39.4
million of asset-backed securities ("ABS") at December 31, 2001 and 2000,
respectively. The ABS portfolio is subject to credit and interest rate risk.
Credit risk is mitigated by monitoring the performance of the collateral.
Approximately 29.2% of the ABS portfolio is rated in the highest rating category
by one or more credit rating agencies. The ABS portfolio is subject to interest
rate risk since the price volatility and ultimate realized yield are affected by
the rate of repayment of the underlying assets. Approximately 25.3% of the
Company's ABS portfolio is invested in securitized credit card receivables. The
remainder of the portfolio is backed primarily by securitized home equity,
manufactured housing, and auto loans.
The Company closely monitors its fixed income securities portfolio for
declines in value that are other than temporary. Securities are placed on
non-accrual status when they are in default or when the receipt of interest
payments is in doubt.
MORTGAGE LOANS
The Company's $242.7 million investment in mortgage loans at December 31,
2001 and $381.0 million at December 31, 2000 is comprised primarily of loans
secured by first mortgages on developed commercial real estate. Geographical and
property type diversification are key considerations used to manage the
Company's mortgage loan risk.
The Company closely monitors its commercial mortgage loan portfolio on a
loan-by-loan basis. Loans with an estimated collateral value less than the loan
balance, as well as loans with other characteristics indicative of higher than
normal credit risk, are reviewed by financial and investment management at least
quarterly for purposes of establishing valuation allowances and placing
11
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
loans on non-accrual status. The underlying collateral values are based upon
discounted property cash flow projections, which are updated as conditions
change, or at least annually.
In light of recent economic events, commercial mortgages might be adversely
affected due to the inability to obtain insurance coverage to restore the
related real estate or other property, thereby creating the potential for
increased default risk. As interest rates on mortgage loans continue to
decrease, the Company also faces the risk of prepayments and refinancing of
existing mortgage loans. As these mortgages are prepaid and new ones issued at
lower rates, the Company's investment income can also be adversely impacted.
SHORT-TERM INVESTMENTS
The Company's short-term investment portfolio was $57.5 million and $58.2
million at December 31, 2001 and 2000, respectively. The Company invests
available cash balances primarily in taxable short-term securities having a
final maturity date or redemption date of one year or less.
SECURITIES LENDING
The Company participates in securities lending programs primarily as an
investment yield enhancement with third parties, such as large brokerage firms.
The Company obtains collateral in an amount that approximates 102% of the fair
value of loaned securities and monitors the market value of the securities
loaned on a daily basis with additional collateral obtained as necessary. At
December 31, 2001, fixed income securities with a carrying value of $140.3
million have been pledged as collateral under these agreements. This compares to
$91.9 million at December 31, 2000. In return for these securities, the Company
receives cash that is subsequently invested and included in short-term
investments and an offsetting liability is recorded in Other liabilities.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs increased $32.0 million or 25.7% to
$156.6 million at December 31, 2001 from $124.6 million at December 31, 2000. In
2001, $51.2 million of costs were deferred and $7.2 million was amortized into
income. Costs that vary with and are primarily related to acquiring business,
principally agents' remuneration, certain underwriting costs and direct mail
solicitation expenses, are deferred and amortized into income over a period of
time, usually seven or ten years, that varies based upon the particular product
sold. Deferred policy acquisition costs are periodically reviewed as to
recoverability and written down where necessary. For additional information, see
Note 2 and Note 7 to the financial statements.
The present value of future profits inherent in acquired blocks of
insurance is classified as a component of deferred policy acquisition costs. The
present value of future profits is amortized over the life of the block of
insurance using current crediting rates.
To the extent unrealized gains or losses on fixed income securities carried
at fair value would result in an adjustment of estimated gross profits had those
gains or losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded net of tax as a reduction of the unrealized
capital gains or losses included in Shareholder's equity.
SEPARATE ACCOUNTS
Separate Accounts assets and liabilities increased 7.6% to $602.7 million
at December 31, 2001 from December 31, 2000. The increases were primarily
attributable to additional deposits and transfers from the fixed account fund to
variable Separate Accounts funds partially offset by declines in account values
due to equity market conditions.
The assets and liabilities related to variable annuity contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried at
the fair value of the assets. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and
therefore, are not included in the Company's Statements of Operations. Revenues
to the Company from the Separate Accounts consist of contract maintenance and
administration fees and mortality, surrender and expense charges.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
contractholders bear the investment risk that the Separate Accounts' funds may
not meet their stated objectives.
REINSURANCE RECOVERABLE
Reinsurance recoverable decreased $123 thousand, or 9.7%, to $1.1 million
at December 31, 2001 from $1.3 million at December 31, 2000. Reinsurance
recoverable decreased due to benefits paid partially offset by an increase in
traditional life insurance product sales. The Company purchases reinsurance to
limit aggregate and single losses on large risks. The Company continues to have
12
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
primary liability as a direct insurer for risks reinsured. Estimating amounts of
reinsurance recoverable is impacted by the uncertainties involved in the
establishment of loss reserves. Failure of reinsurers to honor their obligations
could result in losses to the Company.
The Company reinsures certain of its risks to other reinsurers under yearly
renewable term and coinsurance agreements. Yearly renewable term and coinsurance
agreements result in the passing of a portion of the risk to the reinsurer.
Generally, the reinsurer receives a proportionate amount of the premiums less
commissions and is liable for a corresponding proportionate amount of all
benefit payments. As of December 31, 2001, $2.19 billion or 12.5% of life
insurance in force was ceded to other companies.
RESERVE FOR LIFE CONTINGENT CONTRACT BENEFITS
The Company establishes and carries as liabilities, actuarially
determined reserves that are calculated to meet its future obligations for
life-contingent contract benefits. The calculation of reserves for
life-contingent contract benefits includes assumptions for mortality, future
investment yields, terminations and expenses at the time the policy is
issued. These assumptions include provisions for adverse deviation and
generally vary by such characteristics as type of coverage, year of issue and
policy duration. The assumptions for mortality generally utilized in
calculating reserves include the United States population with projected
calendar year improvements and age setbacks for impaired lives for structured
settlement annuities, the 1983 group annuity mortality table for other
immediate annuities, and actual experience plus loading for traditional life
insurance. Interest rate assumptions vary from 5.5% to 9.5% for structured
settlement annuities; 3.0% to 11.5% for immediate annuities with life
contingencies and 4.0% to 8.0% for traditional life insurance. Other
estimation techniques used in the calculation of these reserves include the
present value of contractually fixed future benefits for structured
settlement annuities, the present value of expected future benefits based on
historical experience for other immediate annuities and the net level premium
reserve method using withdrawal experience rates for traditional life
insurance. Premium deficiency reserves are established, if necessary, and
have been recorded for certain immediate annuities with life contingencies,
to the extent the unrealized gains on fixed income securities would result in
a premium deficiency had those gains actually been realized.
The Company's reserve for life contingent contract benefits are expected to
be sufficient to meet the Company's policy obligations at their maturities or in
the event of an insured's death. Reserves include claims incurred but not
reported and claims reported but not yet paid. Reserves for ceded reinsurance
are computed on bases essentially comparable to direct insurance reserves.
CONTRACTHOLDER FUNDS
<Table>
<Caption>
(IN THOUSANDS) 2001 2000
---- ----
<S> <C> <C>
Beginning balance $ 1,107,495 $ 839,159
Deposits 474,850 408,710
Surrenders and withdrawals (92,039) (69,778)
Death benefits (10,623) (8,366)
Credited interest 65,117 52,499
Transfers (to)/from Separate Accounts (88,986) (100,041)
Other adjustments (27,701) (14,688)
--------- ---------
Ending balance $ 1,428,113 $ 1,107,495
========= =========
</Table>
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. Interest rates credited range from 5.3% to
6.3% for interest-sensitive life contracts; 3.2% to 9.8% for immediate
annuities; 4.2% to 7.7% for deferred annuities; and 2.0% to 5.7% for other
investment contracts. Withdrawal and surrender charge protection includes i) for
interest-sensitive life, either a percentage of account balance or dollar amount
grading off generally over 20 years; and, ii) for deferred annuities not subject
to a market value adjustment, either a declining or a level percentage charge
generally over nine years or less. Approximately 1.2% of deferred annuities are
subject to a market value adjustment.
MARKET RISK
Market risk is the risk that the Company will incur losses due to adverse
changes in equity prices or interest rates. The Company's primary market risk
exposures are to changes in interest rates, although the Company also has
certain exposures to changes in equity prices.
The active management of market risk is integral to the Company's results
of operations. The Company may use the following approaches to manage its
exposure to market risk within defined tolerance ranges: 1) rebalance its
existing asset or liability portfolios, 2) change the character of investments
purchased in the future or 3) use derivative instruments to modify the market
risk characteristics of
13
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
existing assets and liabilities or assets expected to be purchased. For a more
detailed discussion of these derivative financial instruments, see Note 5 to the
financial statements.
CORPORATE OVERSIGHT
The Company's primary business operations provide substantial investable
funds. In formulating and implementing policies for investing funds, the Company
seeks to earn returns that enhance its ability to offer competitive rates and
prices to customers while contributing to attractive and stable profits and
long-term capital growth for the Company. Accordingly, the Company's investment
decisions and objectives are a function of its underlying risks and product
profiles.
The Company administers and oversees its investment risk management
processes primarily through its Board of Directors, Investment Committee and
the Credit and Risk Management Committee ("CRMC"). The Board of Directors and
Investment Committees provide executive oversight of investment activities
and set investment strategies, guidelines and policy that delineates the
investment limits and strategies that are appropriate given the Company's
liquidity, capital, product portfolios and regulatory requirements. The CRMC
is a senior investment management committee consisting of the Chief
Investment Officer, the Investment Risk Manager, and other investment
officers who are responsible for the day-to-day management of investment
risk. The CRMC meets at least monthly to provide detailed oversight of
investment risk, including market risk.
The Company manages its exposure to market risk through the use of asset
allocation limits and duration limits. It also uses stress tests when
appropriate. Asset allocation limits place restrictions on the aggregate fair
value that may be invested within an asset class. The Company sets duration
limits on its investment portfolios, and, in certain circumstances, on
individual components of these portfolios. These duration limits place a
restriction on the level of interest rate risk which is acceptable in the
investment portfolios. Stress tests measure downside risk to fair value and
earnings over longer time intervals and/or for adverse market scenarios.
The day-to-day management of market risk within defined tolerance ranges
occurs as portfolio managers buy and sell within their respective markets based
upon the acceptable boundaries inherent by the investment policy. The Company
has implemented a comprehensive daily measurement process, administered by the
Investment Risk Manager, for monitoring compliance to limits established by the
investment policy.
INTEREST RATE RISK
Interest rate risk is the risk that the Company will incur economic losses
due to adverse changes in interest rates. This risk arises from the Company's
primary activities, as the Company invests substantial funds in
interest-sensitive assets and also carries certain interest-sensitive
liabilities.
In a falling interest rate environment, the risk of pre-payment of some
fixed income securities increases, causing funds to be reinvested at lower
yields. The Company limits this risk by weighting the investments in the fixed
income portfolio on non-callable securities. The Company seeks to invest in
mortgage-backed securities that are structured to minimize cash volatility and
by securities that provide for make-whole type pre-payment fees. Falling
interest rates can also negatively impact demand for the Company's products
while increasing demand for products offered by other institutions. For example,
bank certificates of deposits that do not impose surrender charges, and equity
investments which may have higher average returns could become more attractive
than the Company's existing products to new and existing customers. Conversely,
in a rising interest rate environment, maintaining an acceptable investment
interest rate spread on inforce interest-sensitive liabilities may prompt
withdrawal by contractholders. The Company manages this risk by adjusting
crediting rates, at least on an annual basis, with due regard to the yield of
its investment portfolio and pricing assumptions and by prudently managing
interest rate risk of assets and liabilities
The Company manages the interest rate risk inherent in its assets relative
to the interest rate risk inherent in its liabilities. One of the measures the
Company uses to quantify this exposure is duration. Duration measures the
sensitivity of the fair value of assets and liabilities to changes in interest
rates. For example, if interest rates increase by 1%, the fair value of an asset
with a duration of 5 is expected to decrease in value by approximately 5%. At
December 31, 2001, the difference between the Company's liability and asset
duration was approximately 1.1 versus a 1.5 gap at December 31, 2000. This
duration gap indicates that the fair value of the Company's liabilities is more
sensitive to interest rate movements than the fair value of its assets.
The Company seeks to invest premiums and deposits to create future cash
flows that will fund future claims, benefits and expenses, and that will earn
stable margins across a wide variety of interest rate and economic scenarios. In
order to achieve this objective and limit its exposure to interest rate risk,
the Company adheres to a philosophy of managing the duration of assets and
related liabilities. The Company uses financial futures to hedge the interest
rate risk related to anticipatory purchases and sales of investments and product
sales to customers.
14
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
To calculate duration, the Company projects asset and liability cash flows,
and discounts them to a net present value using a risk-free market rate adjusted
for credit quality, sector attributes, liquidity and other specific risks.
Duration is calculated by revaluing these cash flows at an alternative level of
interest rates, and determining the percentage change in fair value from the
base case. The cash flows used in the model reflect the expected maturity and
repricing characteristics of the Company's derivative financial instruments, all
other financial instruments (as depicted in Note 5 to the financial statements),
and certain non-financial instruments including interest-sensitive life
insurance contract liabilities. The projections include assumptions (based
upon historical market experience and Company specific experience) reflecting
the impact of changing interest rates on the prepayment, lapse, leverage and/or
option features of instruments, where applicable. Assumptions utilized relate
primarily to assets such as mortgage-backed securities, collateralized mortgage
obligations, callable corporate and municipal obligations, and liabilities
including fixed rate single and flexible premium deferred annuities.
Based upon the information and assumptions the Company uses in its duration
calculation and interest rates in effect at December 31, 2001, management
estimates that a 100 basis point immediate, parallel increase in interest rates
("rate shock") would increase the net fair value of its assets and liabilities
identified above by approximately $6.0 million, versus a decrease of $25.2
million at December 31, 2000. The selection of a 100 basis point immediate
parallel increase in interest rates should not be construed as a prediction by
the Company's management of future market events, but only as an illustration of
the potential impact of such an event.
To the extent that actual results differ from the assumptions utilized, the
Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes that the current relationship
between short-term and long-term interest rates (referred to as the term
structure of interest rates) will remain constant over time. As a result, these
calculations may not fully capture the impact of non-parallel changes in the
term structure of interest rates and/or large changes in interest rates.
EQUITY PRICE RISK
Equity price risk is the risk that the Company will incur economic losses
due to adverse changes in a particular stock, stock fund or stock index.
At December 31, 2001, the Company had Separate Accounts assets with account
values totaling $602.7 million. This is an increase over the $560.1 million of
Separate Accounts assets at December 31, 2000. The Company earns mortality and
expense fees as a percentage of account values in the Separate Accounts. In the
event of an immediate decline of 10% in the account values due to equity market
declines, the Company would earn approximately $916 thousand less in annualized
fee income. This is an increase over the $700 thousand amount determined at
December 31, 2000.
Generally at the time of purchase, the contractholders of a variable
annuity contract receive a minimum death benefit guarantee and, for certain
contracts, may elect to purchase an enhanced minimum death benefit guarantee.
The Company charges a fee for these guarantees that is generally calculated as a
percentage of the account value. This guarantee subjects the Company to
additional equity risk as the beneficiary or contractholder may receive a
benefit for an amount greater than the fund balance under contractually defined
circumstances and terms.
Substantially all of the Company's variable annuity contracts in force
contain some type of death benefit guarantee. In general, the types of
guarantees offered include a return of premium, the highest anniversary value or
a guaranteed compound earnings rate on the initial deposit over the contract
period. At December 31, 2001, the guaranteed value in excess of the account
value, payable if all contractholders were to die, is estimated to be $118.8
million. However, the estimated present value of expected future payments for
guaranteed death benefits, net of estimated fee revenue, is approximately $950
thousand at December 31, 2001. In the event of an immediate decline of 10% in
contractholders' account values at December 31, 2001 due to equity market
declines, payments for guaranteed death benefits may increase by $1.1 million
during the next year, based on expected mortality rates. The selection of a 10%
immediate decrease should not be construed as a prediction by management of
future market events, but only as an example to illustrate the potential impact
to earnings and cash flow of equity market declines as a result of this
guarantee. Also, the actual mortality rates experienced by the Company in the
future may not be consistent with the rates expected by the Company.
Growth in variable annuity contracts in the future, stemming from both new
sales as well as market value appreciation, will increase the Company's amount
of overall exposure to equity price risk embedded in these contracts. An
increase in the equity markets above December 31, 2001 levels will increase the
contractholder returns on these products, thereby decreasing the risk from
utilizing these guarantees on the inforce business. A decrease in the equity
markets that causes a decrease in the variable annuity contracts' fund balances
will increase the equity risk profile of the inforce business.
The Company also is exposed to equity risk in its DAC. DAC represents costs
that are primarily related to acquiring
15
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
business. These costs are expensed as premiums on the related business are
earned, or are expensed based on the estimated gross profits of the related
business. Projected fee income and guaranteed benefits payable are components
of the estimated gross profits for these contracts sold through Separate
Accounts. For a more detailed discussion of DAC, see Note 2 to the financial
statements.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
The Company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources at December 31:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Common stock and retained income $ 339,981 $ 304,569 $ 273,654
Accumulated other comprehensive income 118,995 118,242 30,234
------- ------- ------
Total shareholder's equity $ 458,976 $ 422,811 $ 303,888
======= ======= =======
</Table>
SHAREHOLDER'S EQUITY
Shareholder's equity increased for 2001 and 2000 due to Net income and
increased Unrealized net capital gains.
DEBT
The Company had no outstanding debt at December 31, 2001 and 2000,
respectively. The Company has entered into an inter-company loan agreement with
the Corporation. The amount of inter-company loans available to the Company is
at the discretion of the Corporation. The maximum amount of loans the
Corporation will have outstanding to all its eligible subsidiaries at any given
point in time is limited to $1.00 billion. No amounts were outstanding for the
Company under the inter-company loan agreement at December 31, 2001 and 2000,
respectively. The Corporation uses commercial paper borrowings and bank lines of
credit to fund inter-company borrowings.
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and, generally, may
be expected to have an effect on an insurance company's sales. On an ongoing
basis, rating agencies review the financial performance and condition of
insurers. A downgrade, while not expected, could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company's current financial strength ratings are listed below:
<Table>
<Caption>
RATING AGENCY RATING RATING STRUCTURE
------------- ------ ----------------
<S> <C> <C>
Moody's Investors Service, Inc. Aa2 Second highest of nine ratings categories and
("Excellent") mid-range within the category based on modifiers
(e.g., Aa1, Aa2 and Aa3 are "Excellent")
Standard & Poor's Ratings Services AA+ Second highest of nine ratings categories and
("Very Strong") highest within the category based on modifiers
(e.g., AA+, AA and AA- are "Very Strong")
A.M. Best Company, Inc. A+ Highest of nine ratings categories and second
("Superior") highest within the category based on modifiers
(e.g., A++ and A+ are "Superior" while A and A- are
"Excellent")
</Table>
In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings.
Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and
affiliates to "negative" from "stable". This revision is part of an ongoing life
insurance industry review recently initiated by Standard & Poor's. Moody's and
A.M. Best reaffirmed its ratings and outlook for the Company.
16
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
The NAIC has a standard for assessing the solvency of insurance companies,
which is referred to as risk-based capital ("RBC"). The standard is based on a
formula for determining each insurer's RBC and a model law specifying regulatory
actions if an insurer's RBC falls below specified levels. The RBC formula, which
regulators use to assess the sufficiency of an insurer's capital, measures the
risk characteristics of a company's assets, liabilities and certain off-balance
sheet items. RBC is calculated by applying factors to various asset, premium and
liability items. Within a given risk category, these factors are higher for
those items with greater underlying risk and lower for items with lower
underlying risk. At December 31, 2001, RBC for the Company was significantly
above levels that would require regulatory actions.
The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or action from insurance regulatory
authorities. The NAIC analyzes data provided by insurance companies using
prescribed financial data ratios each with defined "usual ranges." Generally,
regulators will begin to monitor an insurance company if its ratios fall outside
the usual ranges for four or more of the ratios. If an insurance company has
insufficient capital, regulators may act to reduce the amount of insurance it
can issue. The Company is currently not under regulatory scrutiny based on these
ratios.
LIQUIDITY
The principal sources of funds for the Company are statutory premiums and
deposits; receipts of principal and interest from the investments; capital
contributions from ALIC; and intercompany loans from the Corporation. The
primary uses of these funds are purchases of investments and the payment of
policyholder claims, contract maturities, benefits, surrenders and withdrawals,
operating costs, income taxes, dividends to ALIC and the repayment of
intercompany loans to the Corporation. Management believes that cash flows from
operating and investing activities of the Company are adequate to satisfy
liquidity requirements of these operations based on the current liability
structure and considering a variety of reasonably foreseeable stress scenarios.
The maturity structure of the Company's fixed income securities, which
represent 89.7% of the Company's total investments, is managed to meet the
anticipated cash flow requirements of the underlying liabilities.
A portion of the Company's diversified product portfolio, primarily fixed
deferred annuity and interest-sensitive life is subject to discretionary
surrender and withdrawal by contractholders. As the Company's interest-sensitive
life policies and annuity contracts in force grow and age, the dollar amount of
surrenders and withdrawals could increase, as experienced in 2001 and 2000.
While the overall amount of surrenders may increase in the future, a significant
increase in the level of surrenders relative to total contractholder account
balances is not anticipated. Management believes the assets are sufficiently
liquid to meet future obligations to the Company's contractholders under various
interest rate scenarios.
The Company is also exposed to interest rate risk on certain insurance
liabilities. Decreases in interest rates can cause contractholders to surrender
their contracts
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, for the
immediately preceding calendar year. The maximum amount of dividends that the
Company can distribute during 2002 without prior approval of the New York State
Insurance Department is $8.7 million. In the twelve-month period beginning
January 1, 2001, the Company did not pay any dividends.
REGULATIONS AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social,
economic and regulatory environment. State and federal regulatory initiatives
have varied and have included employee benefit regulations, removal of barriers
preventing banks from engaging in the securities and insurance businesses, tax
law changes affecting the taxation of insurance companies, the tax treatment of
insurance products and its impact on the relative desirability of various
personal investment vehicles, and the overall expansion of regulation. The
ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
17
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
From time to time the Company is involved in pending and threatened
litigation in the normal course of its business in which claims for monetary
damages are asserted. In the opinion of management, the ultimate liability,
if any, in one or more of these actions in excess of amounts currently
reserved is not expected to have a material effect on the results of
operations, liquidity or financial position of the Company.
STATE INSURANCE REGULATION
State insurance authorities have broad administrative powers with respect
to all aspects of the life insurance business including:
- Licensing to transact business
- Licensing agents
- Admittance of assets to support statutory surplus
- Approving policy forms
- Regulating unfair trade and claims practices
- Establishing reserve requirements and solvency standards
- Regulating the type, amounts and valuations of investments permitted
and other matters
State insurance laws require the Company to file financial statements with
insurance departments in all states in which the Company does business. The
operations of the Company and the accounts are subject to examination by those
departments at any time. The Company prepares statutory financial statements in
accordance with accounting practices and procedures prescribed or permitted by
these departments.
State insurance departments conduct periodic examinations of the books and
records, financial reporting, policy filings and market conduct of insurance
companies domiciled in their states, generally once every three to five years.
Examinations are generally carried out in cooperation with the insurance
departments of other states under guidelines promulgated by the NAIC.
MARKET CONDUCT REGULATION
State insurance laws and regulations include numerous provisions governing
the marketplace activities of insurers, including provisions governing the form
and content of disclosure to consumers, illustrations, advertising, sales
practices and complaint handling. State regulatory authorities generally enforce
these provisions through periodic market conduct examinations.
FEDERAL REGULATION AND SECURITIES OPERATIONS
The Company's variable annuity products generally are considered securities
within the meaning of federal and state securities laws and are registered under
the Securities Act of 1933 and are subject to regulation by the SEC, the
National Association of Securities Dealers ("NASD") and state securities
regulations. The Company's Separate Accounts are registered as investment
companies under the Investment Company Act of 1940.
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a
state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to policyholders and claimants. Amounts
assessed to each company are typically related to its proportion of business
written in a particular state. The Company's expenses related to these funds
have been immaterial.
OTHER DEVELOPMENTS
The Company prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the State of New York. Effective
January 1, 2001, the State of New York required insurance companies domiciled in
its state to prepare statutory-basis financial statements in accordance with the
NAIC Accounting Practices and Procedures Manual -Version effective January 1,
2001 ("Codification") subject to any deviations prescribed or permitted by the
State of New York insurance commissioner.
The State of New York chose not to adopt Statement of Statutory Accounting
Principles No. 10, Income Taxes. If the State of New York did adopt Statement of
Statutory Accounting Principles No. 10, Income Taxes, the Company would have
reported an increase to surplus of $3.4 million for the year ended December 31,
2001.
Accounting changes adopted to conform to the provisions of Codification are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods. The Company reported an increase to surplus
of $1.9 million effective January 1, 2001.
18
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
The NAIC is currently in the process of clarifying and interpreting
requirements as the insurance industry implements Codification. As the NAIC
announces changes and as they are approved by the New York Department of
Insurance, the impact of the changes will be recorded.
PENDING ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
other Intangible Assets", which eliminates the requirement to amortize goodwill,
and requires that goodwill and separately identified intangible assets with
indefinite lives be evaluated for impairment on an annual basis (or more
frequently if impairment indicators arise) on a fair value as opposed to an
undiscounted basis. SFAS No. 142 is effective January 1, 2002. A transitional
goodwill impairment test is required to be completed within the first six months
of adoption with any resulting impairment charge recognized as the cumulative
effect of a change in accounting principle in the statement of operations. As of
December 31, 2001, the Company's unamortized goodwill balance was $160 thousand
and goodwill amortization expense recognized during 2001 was $6 thousand.
Transitional goodwill impairment testing is being conducted and the impact is
not expected to be material to the results of operations or financial position
of the Company.
In December 2001, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 01-6, "Accounting by Certain Entities
(Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others", which is effective for interim and annual financial
statements issued for the fiscal year beginning after December 15, 2001. The SOP
conforms accounting and financial reporting practices for certain lending and
financing activities, eliminating various specialized accounting practices that
developed from the issuance of AICPA finance company, bank, and credit union
audit guides. The SOP also explicitly incorporates lending and financing
activities of insurance companies within its scope. The Company's adoption of
SOP 01-6 is not expected to have a material effect on the results of operations
or financial position.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate results
based on management's plans are subject to uncertainty. These statements are
made subject to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or current
facts and may be identified by their use of words like "plans," "expects,"
"will," "anticipates," "estimates," "intends," "believes," "likely," and other
words with similar meanings. These statements may address, among other things,
the Company's strategy for growth, product development, regulatory approvals,
market position, expenses, financial results and reserves. Forward-looking
statements are based on management's current expectations of future events. The
Company cannot guarantee that any forward-looking statement will be accurate.
However, management believes that our forward-looking statements are based on
reasonable, current expectations and assumptions. We assume no obligation to
update any forward-looking statements as a result of new information or future
events or developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual results
could differ materially from those communicated in these forward-looking
statements. In addition to the normal risks of business, the Company is subject
to significant risk factors, including those listed below which apply to it as
an insurance business and provider of other financial services.
- In December 2001, the NAIC announced that it reached an agreement regarding
the wording of insurance policy exclusions for acts of terrorism for
commercial lines. In January 2002, the NAIC issued the following statement,
"It is the sense of NAIC membership that terrorism exclusions are generally
not necessary in personal lines property and casualty products to maintain
a competitive market, and they may violate state law. However we recognize
that state laws vary in their authority and discretion. Further, there may
be unique company circumstances that need to be considered in individual
cases. We expect these cases to be limited." In addition, several states
have announced that they will not approve terrorism exclusions for personal
and/or commercial lines of property and casualty insurance. Currently, the
Corporation is examining the potential exposure in any of its insurance
operations from acts of terrorism. The Corporation is also examining how
best to address this exposure, if any, considering the interests of
policyholders, shareholders, the lending community, regulators and others.
The Company does not exclude losses resulting from terrorist events in its
life insurance policies. In the event that a terrorist act occurs, the
Company may be adversely impacted, depending on the nature of the event.
With respect to the Company's investment portfolio, in the event that
commercial insurance coverage for terrorism becomes unavailable or very
expensive, there could be significant adverse impacts on some portion of
the Company's portfolio, particularly in sectors such as airlines and real
estate. For example, commercial mortgages or certain debt obligations might
be adversely affected
19
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
due to the inability to obtain coverage to restore the related real estate
or other property, thereby creating the potential for increased default
risk.
- Changes in market interest rates can have adverse effects on the Company's
investment portfolio, investment income, product sales, results of
operations and retention of existing business. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
Declining market interest rates could have an adverse impact on the
Company's investment income as the Company reinvests proceeds from positive
cash flows from operations and from maturing and called investments into
new investments that could be yielding less than the portfolio's average
rate. Changes in interest rates could also reduce the profitability from
spread business, particularly fixed annuities, as the difference between
the amount that the Company is required to pay on such products and the
rate of return earned on the general account investments could be reduced.
Changes in market interest rates, as compared to rates offered on some of
the Company's products, could make those products less attractive if
competitive investment margins are not maintained, leading to lower sales
and/or changes in the level of surrenders and withdrawals on these
products. Additionally, unanticipated surrenders could cause acceleration
of amortization of DAC and thereby increase expenses and reduce current
period profitability. The Company seeks to limit its exposure to this risk
on the Company's products by offering a diverse group of products,
periodically reviewing and revising crediting rates and providing for
surrender charges in the event of early withdrawal.
- The impact of decreasing Separate Accounts balances as a result of volatile
market conditions could cause contract charges realized by the Company to
decrease and increase the exposure of the Company to guaranteed minimum
death benefits.
- In order to meet the anticipated cash flow requirements of its obligations
to policyholders, from time to time the Company adjusts the effective
duration of investments, liabilities for contractholder funds and reserves
for life-contingent contract benefits. Those adjustments may have an impact
on the value of the investment portfolio, investment income, interest
credited on contractholder funds and the investment margin.
- The Company amortizes DAC related to contractholder funds in proportion to
gross profits over the estimated lives of the contract periods.
Periodically, the Company updates its assumptions underlying the gross
profits, which include estimated future fees, investment margins and
expense margins, in order to reflect actual experience. Updates to these
assumptions result in adjustments to the cumulative amortization of DAC.
These adjustments may have a material effect on the results of operations.
- It is possible that the assumptions and projections used by the Company in
establishing prices for the guaranteed minimum death benefits on variable
annuity contracts, particularly assumptions and projections about
investment performance, do not accurately anticipate the level of costs the
Company will ultimately incur in providing those benefits.
- Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not be made until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of benefits on claims to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations.
- Under current U.S. tax law and regulations, deferred and immediate
annuities and life insurance, including interest-sensitive products,
receive favorable policyholder tax treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance used
in estate planning.
- The Company distributes some of its products under agreements with other
members of the financial services industry that are not affiliated with the
Company. Termination of one or more these agreements due to, for example,
changes in control of any of these entities, could have a detrimental
effect on the Company's sales. This risk may be exacerbated by the
enactment of the Gramm-Leach-Bliley Act of 1999, which eliminated many
federal and state law barriers to affiliations among banks, securities
firms, insurers and other financial service providers.
20
<Page>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont.)
- The Corporation's liquidity could be constrained by a catastrophe which
results in extraordinary losses, a downgrade of the Corporation's current
long-term debt rating of A1 and A+ (from Moody's and Standard & Poor's,
respectively) to non-investment grade status of below Baa3/BBB-, a
downgrade in AIC's financial strength rating from Aa2, AA and A+ (from
Moody's Standard & Poor's and A.M. Best, respectively) to below Baa/BBB/B,
or a downgrade in ALIC's or the Company's financial strength rating from
Aa2, AA+ and A+ (from Moody's Standard & Poor's and A.M. Best,
respectively) to below Aa3/AA-/A-. In the event of a downgrade of the
Corporations' rating, ALIC and its subsidiaries would also experience a
similar downgrade.
- The events of September 11 and the resulting disruption in the financial
markets revealed weaknesses in the physical and operational infrastructure
that underlies the U.S. and worldwide financial systems. Those weaknesses
did not impair the Company's liquidity in the wake of the September 11.
However, if an event of similar or greater magnitude occurs in the future
and if the weaknesses in the physical and operational infrastructure of the
U.S. and worldwide financial systems are not remedied, the Company could
encounter significant difficulties in transferring funds, buying and
selling securities and engaging in other financial transactions that
support its liquidity.
- Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
sales. On an ongoing basis, rating agencies review the financial
performance and condition of insurers. A downgrade of either the Company or
ALIC, while not expected, could have a material adverse effect on the
Company's business, including the competitiveness of the Company's product
offerings, its ability to market products, and its financial condition and
results of operations.
- A portion of the unrealized capital gains and losses included as a
component of shareholder's equity relating to non-exchange traded
marketable investment securities accounted for at fair value are internally
developed using widely accepted valuation models and independent third
party data as model inputs. A decrease in these values would negatively
impact the Corporation's debt-to-capital ratio.
- State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends to ALIC and use its capital in other ways.
- Following enactment of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the U. S. insurance business in an effort to determine the proper
role of state insurance regulation in the U. S. financial services
industry. 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 affect any such measures would have on the Company.
- The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition grand-fathered unitary thrift holding
companies, including the Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
- In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
21
<Page>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The pertinent provisions of Management's Discussion and Analysis of
Financial Condition and Results of Operations are herein incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements filed with this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required by this Item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report
1. Financial Statements. The Registrant's financial statements, as of
December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000
and 1999, together with the Report of Independent Accountants are set forth
on pages F-1 to F-24 of this report.
2. Financial Statement Schedules. The following are included in Part IV of
this report:
Schedule IV - Reinsurance page F-25
Schedule V - Valuation and Qualifying Accounts page F-26
All other schedules have been omitted because they are not applicable or
not required or because the required information is included in the
financial statements or notes thereto.
3. Exhibits. The exhibits required to be filed by Item 601 of Regulation S-K are
listed under the caption "Exhibits" in Item 14(c).
(b) Reports On Form 8-K
No reports on Form 8-K were filed for the year ended December 31, 2001.
(c) Exhibits
EXHIBIT NO. DESCRIPTION
3(i) Certificate of Amendment of the Restated Certificate of
Incorporation of Allstate Life Insurance Company of New York
dated November 3, 1995. Incorporated herein by reference to
Exhibit 3(i) to Allstate Life Insurance Company of New
York's Annual Report on Form 10-K for 1998.
3(ii) Amended By-Laws of Allstate Life Insurance Company of New
York dated December 16, 1998. Incorporated herein by
reference to Exhibit 3(ii) to Allstate Life Insurance
Company of New York's Annual Report on Form 10-K for 1998.
10.1 Service and Expense Agreement among Allstate Insurance
Company and The Allstate Corporation and Certain Insurance
Subsidiaries. Incorporated herein by reference to Exhibit
10.2 to Northbrook Life Insurance Company's Annual Report on
Form 10-K for 2001.
10.2 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.
22
<Page>
Exhibit No. Description
23 Independent Auditor's Consent
23
<Page>
SIGNATURE
Pursuant to the requirements of the Section 13 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 28, 2002 By: /s/ Thomas J. Wilson, II.
--------------------------
PRESIDENT, DIRECTOR AND CHAIRMAN OF THE BOARD
(PRINCIPAL EXECUTIVE OFFICER)
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
Registrants and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS J. WILSON, II President, Director and Chairman of the
------------------------ Board (Principal Executive Officer)
Thomas J. Wilson, II
/s/ MICHAEL J. VELOTTA Vice President, Secretary, General Counsel
---------------------- and Director
Michael J. Velotta
/s/ SAMUEL H. PILCH Controller
------------------- (Principal Accounting Officer)
Samuel H. Pilch
/s/ STEVEN E. SHEBIK Vice President and Director
-------------------- (Principal Financial Officer)
Steven E. Shebik
/s/ MARCIA D. ALAZRAKI Director
----------------------
Marcia D. Alazraki
/s/ MARGARET G. DYER Director
--------------------
Margaret G. Dyer
/s/ MARLA G. FRIEDMAN Vice President and Director
---------------------
Marla G. Friedman
/S/ VINCENT A. FUSCO Director
--------------------
Vincent A. Fusco
/s/ CLEVELAND JOHNSON, JR. Director
--------------------------
Cleveland Johnson, Jr.
/s/ JOHN C. LOUNDS Director
------------------
John C. Lounds
/s/ J. KEVIN MCCARTHY Director
---------------------
J. Kevin McCarthy
/s/ KENNETH R. O'BRIEN Director
----------------------
Kenneth R. O'Brien
/s/ JOHN R. RABEN, JR. Director
----------------------
John R. Raben, Jr.
/s/ SALLY A. SLACKE Director
-------------------
Sally A. Slacke
/s/ PATRICIA W. WILSON Director
----------------------
Patricia W. Wilson
</Table>
24
<Page>
Financial Statements
INDEX
<Table>
<Caption>
PAGE
----
<S> <C>
Independent Auditors' Report F-1
Financial Statements:
Statements of Operations and Comprehensive Income for the Years Ended
December 31, 2001, 2000 and 1999 F-2
Statements of Financial Position
December 31, 2001 and 2000 F-3
Statements of Shareholder's Equity for the Years Ended
December 31, 2001, 2000 and 1999 F-4
Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999 F-5
Notes to Financial Statements F-6
Schedule IV - Reinsurance for the Years Ended
December 31, 2001, 2000 and 1999 F-25
Schedule V - Valuation and Qualifying Accounts
December 31, 2001, 2000 and 1999 F-26
</Table>
25
<Page>
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, 2001 and 2000, 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, 2001. Our
audits also included Schedule IV - Reinsurance and Schedule V - Valuation and
Qualifying Accounts. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2001 and
2000, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, Schedule IV - Reinsurance, and Schedule V - Valuation and Qualifying
Accounts, when considered in relation to the basic financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 2002
F-1
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS) 2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums (net of reinsurance ceded of $5,494, $5,491, $4,253) $ 104,068 $ 104,316 $ 63,748
Contract charges 41,241 41,885 38,626
Net investment income 204,467 176,539 148,331
Realized capital gains and losses 2,158 (5,181) (2,096)
------- ------- -------
351,934 317,559 248,609
------- ------- -------
COSTS AND EXPENSES
Contract benefits (net of reinsurance recoverable of $2,269, $715, $1,166) 259,405 233,299 178,267
Amortization of deferred policy acquisition costs 7,187 13,744 8,985
Operating costs and expenses 31,266 23,985 20,151
------- ------- -------
297,858 271,028 207,403
------- ------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 54,076 46,531 41,206
Income tax expense 18,517 15,616 14,640
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 35,559 30,915 26,566
Cumulative effect of change in accounting for derivative financial ------ ------ ------
instruments, after-tax (147) - -
------ ------ ------
NET INCOME 35,412 30,915 26,566
------ ------ ------
OTHER COMPREHENSIVE INCOME (LOSS), AFTER TAX
Change in unrealized net capital gains and losses 753 88,008 (52,672)
-------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 36,165 $ 118,923 $ (26,106)
======== ========= =========
</Table>
See notes to financial statements.
F-2
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION
<Table>
<Caption>
DECEMBER 31,
(IN THOUSANDS, EXCEPT PAR VALUE DATA) 2001 2000
---- ----
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $2,678,265 and $2,260,087) $ 2,894,461 $ 2,476,132
Mortgage loans 242,727 207,857
Short-term 57,507 58,224
Policy loans 33,160 31,772
------------ ------------
TOTAL INVESTMENTS 3,227,855 2,773,985
Cash 7,375 2,162
Deferred policy acquisition costs 156,615 124,601
Accrued investment income 33,601 32,422
Reinsurance recoverables, net 1,146 1,269
Other assets 13,800 7,980
Separate Accounts 602,657 560,089
------------ ------------
TOTAL ASSETS $ 4,043,049 $ 3,502,508
============ ============
LIABILITIES
Reserve for life-contingent contract benefits $ 1,317,816 $ 1,226,349
Contractholder funds 1,428,113 1,107,495
Current income taxes payable 6,049 11,723
Deferred income taxes 64,612 53,181
Other liabilities and accrued expenses 164,399 117,304
Payable to affiliates, net 427 3,556
Separate Accounts 602,657 560,089
------------ ------------
TOTAL LIABILITIES 3,584,073 3,079,697
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9)
SHAREHOLDER'S EQUITY
Common stock, $25 par value, 100,000 shares authorized and outstanding 2,500 2,500
Additional capital paid-in 45,787 45,787
Retained income 291,694 256,282
Accumulated other comprehensive income:
Unrealized net capital gains and losses 118,995 118,242
------------ ------------
Total accumulated other comprehensive income 118,995 118,242
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 458,976 422,811
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 4,043,049 $ 3,502,508
============ ============
</Table>
See notes to financial statements.
F-3
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SHAREHOLDER'S EQUITY
<Table>
<Caption>
DECEMBER 31,
------------
(IN THOUSANDS) 2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 2,500 $ 2,500 $ 2,000
Issuance of stock -- -- 500
------------ ------------ ------------
Balance, end of year 2,500 2,500 2,500
------------ ------------ ------------
ADDITIONAL CAPITAL PAID IN 45,787 45,787 45,787
------------ ------------ ------------
RETAINED INCOME
Balance, beginning of year 256,282 225,367 198,801
Net income 35,412 30,915 26,566
------------ ------------ ------------
Balance, end of year 291,694 256,282 225,367
------------ ------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year 118,242 30,234 82,906
Change in unrealized net capital gains and losses 753 88,008 (52,672)
------------ ------------ ------------
Balance, end of year 118,995 118,242 30,234
------------ ------------ ------------
TOTAL SHAREHOLDER'S EQUITY $ 458,976 $ 422,811 $ 303,888
============ ============ ============
</Table>
See notes to financial statements.
F-4
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS) 2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35,412 $ 30,915 $ 26,566
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and other non-cash items (50,375) (45,051) (37,619)
Realized capital gains and losses (2,158) 5,181 2,096
Cumulative effect of change in accounting for derivative financial
instruments 147 - -
Interest credited to contractholder funds 65,117 52,499 36,736
Changes in:
Life-contingent contract benefits and contractholder funds 76,756 75,031 38,527
Deferred policy acquisition costs (44,007) (25,303) (17,262)
Income taxes payable 5,429 4,305 2,094
Other operating assets and liabilities (14,095) (11,916) 13,049
------------ ------------ ------------
Net cash provided by operating activities 72,226 85,661 64,187
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities 232,233 164,125 161,443
Investment collections
Fixed income securities 94,121 42,449 21,822
Mortgage loans 15,460 15,681 7,479
Investments purchases
Fixed income securities (650,801) (516,908) (383,961)
Mortgage loans (50,200) (55,914) (31,888)
Change in short-term investments, net 10,361 16,139 29,493
Change in policy loans, net (1,388) (663) (1,489)
------------ ------------ ------------
Net cash used in investing activities (350,214) (335,091) (197,101)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - - 500
Contractholder fund deposits 474,849 408,711 197,439
Contractholder fund withdrawals (191,648) (158,254) (67,007)
------------ ------------ ------------
Net cash provided by financing activities 283,201 250,457 130,932
------------ ------------ ------------
NET INCREASE (DECREASE ) IN CASH 5,213 1,027 (1,982)
CASH AT BEGINNING OF YEAR 2,162 1,135 3,117
------------ ------------ ------------
CASH AT END OF YEAR $ 7,375 $ 2,162 $ 1,135
============ ============ ============
</Table>
See notes to financial statements.
F-5
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Allstate Life
Insurance Company of New York (the "Company"), a wholly owned subsidiary of
Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate
Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation
(the "Corporation"). These financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
("GAAP").
To conform with the 2001 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets a diversified group of products to meet consumers'
lifetime needs in the raeas of protection and retirement solutions in the
state of New York through a combination of Allstate agencies, financial
services firms, direct marketing and specialized brokers. The Company's life
products include term life; whole life and universal life; annuities such as
fixed annuities, market value adjusted annuities, variable annuities and
immediate annuities; and other protection products such as accidental death
and hospital indemnity.
In 2001, annuity premiums and deposits represented 87.8% of the Company's
total statutory premiums and deposits. Statutory premiums and deposits is a
measure used by management to analyze sales trends. Statutory premiums and
deposits includes premiums and annuity considerations determined in conformity
with statutory accounting practices prescribed or permitted by the insurance
regulatory authorities of the state of New York, and all other funds received
from customers on deposit-type products which are treated as liabilities. The
statutory accounting practices differ in certain, material aspects from GAAP.
The Company monitors economic and regulatory developments that have the
potential to impact its business. Federal legislation has allowed banks and
other financial organizations to have greater participation in the securities
and insurance businesses. This legislation may present an increased level of
competition for sales of the Company's products. Furthermore, under current U.S.
tax law and regulations, deferred and immediate annuities and life insurance,
including interest-sensitive products, receive favorable policyholder tax
treatment. Any legislative or regulatory changes that adversely alter this
treatment are likely to negatively affect the demand for these products. In
addition, recent changes in the federal estate tax laws will affect the demand
for the types of life insurance used in estate planning.
Additionally, traditional demutualizations of mutual insurance companies
and enacted and pending state legislation to permit mutual insurance companies
to convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by: 1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; and 2) increasing competition in capital
markets.
Although the Company currently benefits from agreements with financial
service entities that market and distribute its products, change in control of
these non-affiliated entities with which the Company has alliances could
negatively impact the Company's sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds and mortgage-backed and asset-backed
securities. All fixed income securities are carried at fair value and may be
sold prior to their contractual maturity ("available for sale"). The fair value
of exchange traded fixed income securities is based upon quoted market prices or
dealer quotes. The fair value of non-exchange traded fixed income securities is
based on either independent third party sources or widely accepted pricing
valuation models which utilize internally developed ratings and independent
third party data as inputs. The difference between amortized cost and fair
value, net of deferred income taxes, certain life and annuity deferred policy
acquisition costs, and certain reserves for life-contingent contract benefits,
is reflected as a component of Other comprehensive income.
F-6
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
Mortgage loans are carried at outstanding principal balance, net of
unamortized premium or discount and valuation allowances. Valuation allowances
are established for impaired loans when it is probable that contractual
principal and interest will not be collected. Valuation allowances for impaired
loans reduce the carrying value to the fair value of the collateral or the
present value of the loan's expected future repayment cash flows discounted at
the loan's original effective interest rate. Valuation allowances on loans not
considered to be impaired are established based on consideration of the
underlying collateral, borrower financial strength, current and expected market
conditions and other factors.
Short-term investments are carried at cost or amortized cost that
approximates fair value, and generally includes collateral received in
connection with certain securities lending activities. For securities lending
transactions, the Company records an offsetting liability in Other liabilities
and accrued expenses for the Company's obligation to repay the collateral.
Other investments, which consist primarily of policy loans, are carried at
the unpaid principal balances.
Investment income consists of interest which is recognized on an accrual
basis. Interest income on mortgage-backed and asset-backed securities is
determined on the effective yield method, based on estimated principal
repayments. Accrual of income is suspended for fixed income securities and
mortgage loans that are in default or when the receipt of interest payments is
in doubt.
Realized capital gains and losses are determined on a specific
identification basis. They include gains and losses on security dispositions,
write-downs in value due to other than temporary declines in fair value, and
changes in the value of certain derivative instruments.
The Company monitors its fixed income portfolio for ratings changes or
other events that may result in declines in value that are other than temporary.
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 duration for and extent to which the fair value has been less than cost; and
3) the financial condition and near-term prospects of the issuer.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," as of January 1, 2001. The impact of SFAS No. 133 and SFAS No. 138
(the "statements") to the Company was a loss of $147 thousand, after-tax, and is
reflected as a cumulative effect of change in accounting principle on the
Statements of Operations.
The statements require that all derivatives be recognized on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through Net income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through Net income or recognized in Accumulated other comprehensive
income until the hedged item is recognized in Net income.
The Company manages interest rate risk by holding financial futures
contracts that are derivative financial instruments. Derivatives are accounted
for on a fair value basis, and reported as Other assets. Beginning in January
2001, hedge accounting is not applied to these strategies which utilize the
financial futures contracts for interest rate risk management purposes.
Therefore, the gains and losses pertaining to the change in the fair value of
the financial futures contracts are recognized in Realized capital gains and
losses during the period on a current basis. The Company did not hold any
derivative financial instruments at December 31, 2001.
Prior to January 2001, if specific criteria were met, these futures were
designated as accounting hedges and accounted for on a deferral basis. In order
to qualify as accounting hedges, financial futures contracts must reduce the
primary market risk exposure on an enterprise or transaction basis in
conjunction with a hedge strategy; be designated as a hedge at the inception of
the transaction; and be highly correlated with the fair value of, or interest
income or expense associated with, the hedged item at inception and throughout
the hedge period. Derivatives that were not designated as accounting hedges were
accounted for on a fair value basis. Under deferral accounting, gains and losses
F-7
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
on financial futures contracts were deferred as Other liabilities and accrued
expenses. Once the anticipated transaction occurred, the deferred gains and
losses were considered part of the cost basis of the asset and reported net
of tax in shareholder's equity. The gains and losses deferred continue to be
recognized in conjunction with the earnings on the hedged item. Fees and
commissions paid on these derivatives were also deferred as an adjustment to
the carrying value of the hedged item.
SECURITIES LOANED
Securities loaned are treated as financing arrangements and are recorded at
the amount of cash received in Short-term investments 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 with additional collateral obtained as
necessary. Substantially all of the Company's securities loaned are with large
brokerage firms.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED
Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Premiums from these products are recognized as revenue when
due. Benefits are recognized in relation to such revenue so as to result in the
recognition of profits over the life of the policy and are reflected in contract
benefits.
Immediate annuities with life contingencies, including certain structured
settlement annuities, provide insurance protection over a period that extends
beyond the period during which premiums are collected. Gross premiums in excess
of the net premium on immediate annuities with life contingencies are deferred
and recognized over the contract period. Contract benefits are recognized in
relation to such revenue so as to result in the recognition of profits over the
life of the policy.
Interest-sensitive life contracts, such as universal life, are insurance
contracts whose terms are not fixed and guaranteed. The terms that may be
changed include premiums paid by the contractholder, interest credited to the
contractholder account balance and one or more amounts assessed against the
contractholder. Premiums from these contracts are reported as deposits to
contractholder funds. Contract charges consist of fees assessed against the
contractholder account balance for the cost of insurance (mortality risk),
contract administration and surrender charges. These revenues are recognized
when levied against the contract balance. Contract benefits include
life-contingent benefit payments in excess of the reserves held.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed annuities,
market value adjusted annuities and immediate annuities without life
contingencies are considered investment contracts. Deposits received for such
contracts are reported as deposits to contractholder funds. Contract charges for
investment contracts consist of charges assessed against the contractholder
account balance for contract administration and surrenders. These revenues are
recognized when levied against the contractholder account balance.
Interest credited to contractholders' funds represents contractual interest
accrued or paid for interest-sensitive life contracts and investment contracts.
Crediting rates for fixed rate annuities and interest-sensitive life contracts
are adjusted periodically by the Company to reflect current market conditions.
Variable annuity contracts are sold as Separate Accounts products. The
assets supporting these products are legally segregated and available only to
settle Separate Accounts contract obligations. Deposits received are reported as
Separate Accounts liabilities. Contract charges for these contracts consist of
fees assessed against the Separate Accounts fund balances for contract
maintenance, administration, mortality, expense and surrenders.
Contract benefits incurred for Separate Accounts include, for example,
guaranteed minimum death benefits paid in variable annuity contracts.
F-8
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
DEFERRED POLICY ACQUISITION COSTS
Costs that vary with and are primarily related to acquiring life and
investment business, principally agents' remuneration, certain underwriting
costs and direct mail solicitation expenses, are deferred and amortized to
income. Deferred policy acquisition costs are periodically reviewed as to
recoverability and written down where necessary.
For traditional life insurance and immediate annuities with life
contingencies, these costs are amortized in proportion to the estimated revenue
on such business. Assumptions relating to estimated revenue, as well as to all
other aspects of the deferred policy acquisition costs and reserve calculations,
are determined based upon conditions as of the date of the 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 and immediate annuities with
life contingencies, the unamortized balance of costs previously deferred under
the original contracts are charged to income. The new costs associated with the
exchange are deferred and amortized to income.
For interest-sensitive life and investment contracts, the costs are
amortized in relation to the estimated gross profits on such business over the
estimated lives of the contract periods. Gross profits are determined at the
date of contract issue and comprise estimated future investment, mortality,
expense margins and surrender charges. For 2001, the average long-term rate of
assumed future investment yield used in estimating gross profit margins is 8%
plus 1.25% for fees. Assumptions underlying the gross profits are periodically
updated to reflect actual experience, and changes in the amount or timing of
estimated gross profits will result in adjustments to the cumulative
amortization of these costs. New costs associated with internal exchanges of
investment contracts are deferred and amortized into income. The balance of the
original costs deferred and carried over, plus the new costs deferred due to
internal exchanges, is limited to the amount of costs that would be deferred
from the issuance of new investment contracts. Any excess costs are charged to
income at the time of the exchange. The Company periodically compares the
present value of future gross profits to costs deferred to ensure they are
sufficient to amortize deferred policy acquisition costs. As a result, the
Company concludes that the balance of deferred policy acquisition costs is
reasonable and recoverable at December 31, 2001.
To the extent unrealized gains or losses on fixed income securities carried
at fair value would result in an adjustment of estimated gross profits had those
gains or losses actually been realized, the related unamortized deferred policy
acquisition costs are recorded net of tax as a reduction of the unrealized
capital gains or losses included in Accumulated other comprehensive income.
All other acquisition expenses are charges to operations as incurred.
REINSURANCE RECOVERABLE
In the normal course of business, the Company seeks to limit aggregate and
single exposure to losses on large risks by purchasing reinsurance from other
insurers (See Note 8). The amounts reported in the statements of financial
position include amounts billed to reinsurers on losses paid as well as
estimates of amounts expected to be recovered from reinsurers on incurred losses
that have not yet been paid. Reinsurance recoverables on unpaid losses are
estimated based upon assumptions consistent with those used in establishing the
liabilities related to the underlying reinsured contract. Insurance liabilities
are reported gross of reinsurance recoverables. Prepaid reinsurance premiums are
deferred and reflected in income in a manner consistent with the recognition of
premiums on the reinsured contracts. Reinsurance does not extinguish the
Company's primary liability under the policies written and therefore reinsurers
and amounts recoverable are regularly evaluated by the Company and allowances
for uncollectible reinsurance are established as appropriate.
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.
F-9
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
SEPARATE ACCOUNTS
The assets and liabilities related to variable annuity contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried at
the fair value of the assets. Investment income and realized capital gains and
losses of the Separate Accounts accrue directly to the contractholders and
therefore, are not included in the Company's statements of operations. Revenues
to the Company from the Separate Accounts consist of contract maintenance and
administration fees and mortality, surrender and expense charges.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
contractholders bear the investment risk that the Separate Accounts' funds may
not meet their stated 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 6. To the
extent that unrealized gains on fixed income securities would result in a
premium deficiency had those gains actually been realized, the related increase
in reserves is recorded net of tax as a reduction of the unrealized net capital
gains included in Accumulated other comprehensive income.
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 protection
on contractholder funds are outlined in Note 6.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend mortgage loans have off-balance-sheet risk because
their contractual amounts are not recorded in the Company's statements of
financial position. The contractual amounts and fair values of these instruments
are outlined in Note 5.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
PENDING ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and other Intangible
Assets", which eliminates the requirement to amortize goodwill, and requires
that goodwill and separately identified intangible assets with indefinite lives
be evaluated for impairment on an annual basis (or more frequently if impairment
indicators arise) on a fair value as opposed to an undiscounted basis. SFAS No.
142 is effective January 1, 2002. A transitional goodwill impairment test is
required to be completed within the first six months of adoption with any
resulting impairment charge recognized as the cumulative effect of a change in
accounting principle in the statement of operations. As of December 31, 2001,
the Company's unamortized goodwill balance was $160 thousand and goodwill
amortization expense recognized during 2001 was $6 thousand. Transitional
goodwill impairment testing is being conducted and the impact is not expected to
be material to the results of operations or financial position of the Company.
F-10
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
In December 2001, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 01-6, "Accounting by Certain Entities
(Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others", which is effective for interim and annual financial
statements issued for the fiscal year beginning after December 15, 2001. The SOP
conforms accounting and financial reporting practices for certain lending and
financing activities, eliminating various specialized accounting practices that
developed from the issuance of AICPA finance company, bank, and credit union
audit guides. The SOP also explicitly incorporates lending and financing
activities of insurance companies within its scope. The Company's adoption of
SOP 01-6 is not expected to have a material effect on the results of operations
or financial position.
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements with ALIC in order to limit
aggregate and single exposure on large risks. A portion of the Company's
premiums and policy benefits are ceded to ALIC and reflected net of such
reinsurance in the statements of operations and comprehensive income.
Reinsurance recoverables and the related reserve for life-contingent contract
benefits and contractholder funds are reported separately in the statements of
financial position. The Company continues to have primary liability as the
direct insurer for risks reinsured (See Note 8).
STRUCTURED SETTLEMENT ANNUITIES
The Company issued $23.7 million, $16.2 million and $16.9 million of
structured settlement annuities, a type of immediate annuity, in 2001, 2000 and
1999, respectively, at prices determined based upon interest rates in effect at
the time of purchase, to fund structured settlement annuities in matters
involving AIC. Of these amounts, $4.9 million, $4.5 million and $4.8 million
relate to structured settlement annuities with life contingencies and are
included in premium income in 2001, 2000 and 1999, respectively. Additionally,
the reserve for life-contingent contract benefits was increased by approximately
94% of such premium received in each of these years. In most cases, these
annuities were issued to Allstate Settlement Corporation ("ASC"), a subsidiary
of ALIC, which, under a "qualified assignment", assumed AIC's obligation to make
the future payments.
AIC has issued surety bonds to guarantee the payment of structured
settlement benefits assumed by ASC (from both AIC and non-related parties) and
funded by certain annuity contracts issued by the Company. ASC has entered into
General Indemnity Agreements pursuant to which it indemnified AIC for any
liabilities associated with the surety bonds and gives AIC certain collateral
security rights with respect to the annuities and certain other rights in the
event of any defaults covered by the surety bonds. For contracts written on or
after July 1, 2001, AIC no longer issues surety bonds to guarantee the payment
of structured settlement benefits. Alternatively, ALIC guarantees the payment of
structured settlement benefits on all contracts issued on or after July 1, 2001.
Reserves recorded by the Company for annuities related to the surety bonds
were $1.40 billion and $1.29 billion at December 31, 2001 and 2000,
respectively.
BUSINESS OPERATIONS
The Company utilizes services performed by AIC and ALIC as well as business
facilities owned or leased, and operated by AIC in conducting its business
activities. In addition, the Company shares the services of employees with AIC.
The Company reimburses AIC and ALIC 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 $26.6 million, $15.6 million and $16.0 million in 2001, 2000 and 1999,
respectively. A portion of these expenses relate to the acquisition of business
that are deferred and amortized over the contract period.
DEBT
The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds available to the Company at a given point in
time is dependent upon the debt position of the Corporation. No amounts were
outstanding for the Company under the inter-company loan agreement at December
31, 2001 and 2000, respectively.
BROKER/DEALER AGREEMENT
Beginning May 1, 2000, the Company receives underwriting and distribution
services from Allstate Distributors, L.L.C. ("ADLLC"), a broker/dealer company
owned equally by ALIC and Putnam Investments, Inc. ("Putnam") for variable
annuity
F-11
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
contracts sold pursuant to a joint venture agreement between the Company and
Putnam. The Company incurred $10.5 million and $10.9 million of commission
expenses and other distribution expenses payable to ADLLC during 2001 and 2000,
respectively. Other distribution expenses include administrative, legal,
financial management and sales support that the Company provides to ADLLC, for
which the Company earned administration fees of $127 thousand for the year ended
December 31, 2001. Other distribution expenses also include marketing expenses
for subsidized interest rates associated with the Company's dollar cost
averaging program, for which ADLLC reimbursed the Company $855 thousand and $549
thousand for the year ended December 31, 2001 and December 31, 2000,
respectively.
INCOME TAXES
The Company is a party to a federal income tax allocation agreement with
the Corporation (Note 10).
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for
fixed income securities are as follows:
<Table>
<Caption>
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
(IN THOUSANDS)
AT DECEMBER 31, 2001
U.S. government and agencies $ 579,607 $ 117,918 $ (533) $ 696,992
Municipal 150,543 3,695 (47) 154,191
Corporate 1,467,636 96,973 (18,492) 1,546,117
Mortgage-backed securities 425,635 16,737 (228) 442,144
Asset-backed securities 54,844 1,081 (908) 55,017
------------ ------------ ------------ ------------
Total fixed income securities $ 2,678,265 $ 236,404 $ (20,208) $ 2,894,461
============ ============ ============ ============
AT DECEMBER 31, 2000
U.S. government and agencies $ 528,301 $ 151,317 $ (81) $ 679,537
Municipal 97,310 2,626 (858) 99,078
Corporate 1,227,247 70,431 (20,527) 1,277,151
Mortgage-backed securities 368,614 13,004 (669) 380,949
Asset-backed securities 38,615 831 (29) 39,417
------------ ------------ ------------ ------------
Total fixed income securities $ 2,260,087 $ 238,209 $ (22,164) $ 2,476,132
============ ============ ============ ============
</Table>
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at
December 31, 2001:
<Table>
<Caption>
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
(IN THOUSANDS)
Due in one year or less $ 43,628 $ 44,768
Due after one year through five years 382,760 401,443
Due after five years through ten years 399,176 421,689
Due after ten years 1,372,222 1,529,400
------------ ------------
2,197,786 2,397,300
Mortgage- and asset-backed securities 480,479 497,161
------------ ------------
Total $ 2,678,265 $ 2,894,461
============ ============
</Table>
Actual maturities may differ from those scheduled as a result of
prepayments by the issuers.
F-12
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NET INVESTMENT INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Fixed income securities $ 189,793 $ 160,919 $ 135,561
Mortgage loans 16,677 14,899 12,346
Other 1,307 3,227 3,495
------------ ------------ ------------
Investment income, before expense 207,777 179,045 151,402
Investment expense 3,310 2,506 3,071
------------ ------------ ------------
Net investment income $ 204,467 $ 176,539 $ 148,331
============ ============ ============
</Table>
REALIZED CAPITAL GAINS AND LOSSES, AFTER TAX
Realized capital gains and losses by security type, for the year ended
December 31, are as follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Fixed income securities $ 1,514 $ (5,878) $ (2,207)
Mortgage loans 166 697 42
Other 478 - 69
------------ ------------ ------------
Realized capital gains and losses 2,158 (5,181) (2,096)
Income taxes (755) 1,866 765
------------ ------------ ------------
Realized capital gains and losses, after tax $ 1,403 $ (3,315) $ (1,331)
============ ============ ============
</Table>
Realized capital gains and losses by transaction type, for the year ended
December 31, are as follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Portfolio trading $ 3,461 $ (2,089) $ (2,096)
Write-downs in value (1,252) (3,092) -
Derivative valuation adjustments (51) - -
------------ ------------ ------------
Realized capital gains and losses 2,158 (5,181) (2,096)
Income taxes (755) 1,866 765
------------ ------------ ------------
Realized capital gains and losses, after tax $ 1,403 $ (3,315) $ (1,331)
============ ============ ============
</Table>
F-13
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
Excluding calls and prepayments, gross gains of $7.4 million, $3.0 million
and $1.7 million and gross losses of $4.5 million, $8.9 million and $3.8 million
were realized on sales of fixed income securities during 2001, 2000 and 1999,
respectively.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses on fixed income securities included
in shareholder's equity at December 31, 2001 are as follows:
<Table>
<Caption>
COST/ GROSS UNREALIZED UNREALIZED
(IN THOUSANDS) AMORTIZED COST FAIR VALUE GAINS LOSSES NET GAINS
-------------- ---------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 2,678,265 $ 2,894,461 $ 236,404 $ (20,208) $ 216,196
============ ============ ============ ============ ============
Deferred income taxes, deferred policy acquisition
costs and other (97,201)
------------
Unrealized net capital gains and losses $ 118,995
============
</Table>
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001 2000 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed income securities $ 151 $ 161,716 $ (262,766)
Deferred income taxes, deferred policy acquisition costs and other 602 (73,708) 210,094
------------- ------------ ------------
Increase (decrease) in unrealized net capital gains and losses $ 753 $ 88,008 $ (52,672)
=============== ============ ============
</Table>
INVESTMENT LOSS PROVISIONS AND VALUATION ALLOWANCES
Pretax provisions for investment losses, principally relating to
write-downs on fixed income securities, were $1.3 million and $3.1 million in
2001 and 2000, respectively. There were no provisions for investment losses in
1999.
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, 2001 and 2000.
There was no valuation allowance balance at December 31, 2001. The
valuation allowance for mortgage loans at December 31, 2000 and 1999 was $119
thousand and $600 thousand, respectively. Net reductions to the mortgage loan
valuation allowances were $119 thousand, $481 thousand and none for the year
ended December 31, 2001, 2000 and 1999, respectively.
INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE PORTFOLIOS
AND OTHER INVESTMENT INFORMATION
The Company maintains a diversified portfolio of municipal bonds. The
largest concentrations in the portfolio are presented below. Except for the
following, holdings in no other state exceeded 5% of the portfolio at December
31, 2001:
<Table>
<Caption>
(% of municipal bond portfolio carrying value) 2001 2000
---- ----
<S> <C> <C>
California 15.0% 23.4%
Pennsylvania 12.8 14.9
Illinois 10.8 6.9
Missouri 8.6 -
Florida 8.2 -
Ohio 7.2 10.7
Alaska 6.5 -
Mississippi 6.4 -
Utah 5.2 8.1
</Table>
The Company's mortgage loans are collateralized by a variety of commercial
real estate property types located
F-14
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
throughout the United States. Substantially all of the commercial mortgage loans
are non-recourse to the borrower. The states with the largest portion of the
commercial mortgage loan portfolio are listed below. Except for the following,
holdings in no other state exceeded 5% of the portfolio at December 31, 2001:
<Table>
<Caption>
(% of commercial mortgage portfolio carrying value) 2001 2000
---- ----
<S> <C> <C>
California 24.9% 30.8%
New York 22.1 26.8
New Jersey 17.8 16.0
Illinois 14.3 14.3
Pennsylvania 13.4 6.8
</Table>
The types of properties collateralizing the commercial mortgage loans at
December 31, are as follows:
<Table>
<Caption>
(% of commercial mortgage portfolio carrying value) 2001 2000
---- ----
<S> <C> <C>
Office buildings 26.9% 21.2%
Retail 25.5 29.0
Warehouse 19.5 18.4
Apartment complex 18.4 17.4
Industrial 3.9 6.9
Other 5.8 7.1
----- -----
100.0% 100.0%
===== =====
</Table>
The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 2001, are as follows:
<Table>
<Caption>
NUMBER OF LOANS CARRYING VALUE PERCENT
--------------- -------------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
2002 1 $ 766 0.3%
2003 - - -
2004 2 1,955 0.8
2005 3 7,481 3.1
2006 5 29,910 12.3
Thereafter 44 202,615 83.5
-- ---------- -----
Total 55 $ 242,727 100.0%
== ========== ======
</Table>
In 2001, $3.1 million of commercial mortgage loans were contractually due
and paid.
SECURITIES LENDING
The Company participates in securities lending programs, primarily for
investment yield enhancement purposes, with third parties, which mostly include
large brokerage firms. At December 31, 2001, fixed income securities with a
carrying value of $140.3 million have been pledged as collateral under these
lending agreements. In return, the Company receives cash that is subsequently
invested and included in Short-term investments 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 was $572
thousand, $109 thousand and $33 thousand, as of December 31, 2001, 2000 and
1999, respectively.
SECURITIES ON DEPOSIT
At December 31, 2001, fixed income securities with a carrying value of $2.1
million were on deposit with regulatory authorities as required by law.
F-15
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
5. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving derivative financial instruments and other off-balance-sheet financial
instruments. The fair value estimates of financial instruments presented below
are not necessarily indicative of the amounts the Company might pay or receive
in actual market transactions. Potential taxes and other transaction costs have
not been considered in estimating fair value. The disclosures that follow do not
reflect the fair value of the Company as a whole since a number of the Company's
significant assets (including Deferred policy acquisition costs and Reinsurance
recoverables) and liabilities (including traditional life and interest-sensitive
life insurance reserves and Deferred income taxes) are not considered financial
instruments and are not carried at fair value. Other assets and liabilities
considered financial instruments such as Accrued investment income and Cash are
generally of a short-term nature. Their carrying values are deemed to
approximate fair value.
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are
as follows:
<Table>
<Caption>
2001 2000
------------------------------ -----------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Fixed income securities $ 2,894,461 $ 2,894,461 $ 2,476,132 $ 2,476,132
Mortgage loans 242,727 247,670 207,857 212,345
Short-term investments 57,507 57,507 58,224 58,224
Policy loans 33,160 33,160 31,772 31,772
Separate Accounts 602,657 602,657 560,089 560,089
</Table>
Fair values of exchange traded fixed income securities are based upon
quoted market prices or dealer quotes. The fair value of non-exchange traded
fixed income securities is based on either independent third party sources or
widely accepted pricing valuation models which utilize internally developed
ratings and independent third party data as inputs. Mortgage loans are valued
based on discounted contractual cash flows. Discount rates are selected using
current rates at which similar loans would be made to borrowers with similar
characteristics, using similar properties as collateral. Loans that exceed 100%
loan-to-value are valued at the estimated fair value of the underlying
collateral. Short-term investments are highly liquid investments with maturities
of less than one year whose carrying values are deemed to approximate fair
value. The carrying value of policy loans is deemed to approximate fair value.
Separate Accounts assets are carried in the statements of financial position at
fair value based on quoted market prices.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31,
are as follows:
<Table>
<Caption>
2001 2000
---------------------------- -----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Contractholder funds on investment contracts $ 1,173,357 $ 1,155,665 $ 874,158 $ 850,767
Separate Accounts 602,657 602,657 560,089 560,089
</Table>
Contractholder funds include interest-sensitive life insurance contracts
and investment contracts. Interest-sensitive life insurance contracts and
certain other contractholder liabilities are not considered to be financial
instruments subject to fair value disclosure requirements. The fair value of
investment contracts is based on the terms of the underlying contracts. Fixed
annuities and immediate annuities without life contingencies are valued at
the account balance less surrender charges. 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.
F-16
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes financial futures contracts to reduce its exposure to
market risk, specifically interest rate risk, in conjunction with
asset/liability management. The Company does not hold or issue these instruments
for trading purposes. Financial futures are commitments to either purchase or
sell designated financial instruments at a future date for a specified price or
yield. They may be settled in cash or through delivery. As part of its
asset/liability management, the Company generally utilizes futures to manage its
market risk related to forecasted investment purchases and sales. Futures used
to reduce interest rate risk related to forecasted transactions pertain to
identified transactions that are probable to occur and are generally completed
within 90 days.
Futures contracts have limited off-balance-sheet credit risk as they are
executed on organized exchanges and require security deposits, as well as the
daily cash settlement of margins. The Company did not hold a derivative position
and did not pledge any securities as collateral at December 31, 2001.
The following table summarizes the credit exposure, fair value and carrying
value of the Company's derivative financial instruments:
<Table>
<Caption>
CREDIT FAIR CARRYING VALUE CARRYING VALUE
(IN THOUSANDS) EXPOSURE VALUE ASSETS (LIABILITIES)
-------- ----- ------ -----------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 2001
--------------------
Financial futures contracts $ - $ - $ - $ -
AT DECEMBER 31, 2000
--------------------
Financial futures contracts $ - $ (32) $ - $ (54)
</Table>
Credit exposure represents the Company's potential loss if all of the
counterparties failed to perform under the contractual terms of the contracts
and all collateral, if any, became worthless. This exposure is measured by the
fair value of contracts with a positive fair value at the reporting date reduced
by the effect, if any, of master netting agreements.
The Company manages its exposure to credit risk primarily by establishing
risk control limits. To date, the Company has not incurred any losses as
financial futures contracts have limited off-balance-sheet credit risk as they
are executed on organized exchanges and require daily cash settlement of
margins.
Fair value is the estimated amount that the Company would receive (pay) to
terminate or assign the contracts at the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments that the Company holds, as these instruments may become
less valuable due to adverse changes in market conditions. The Company mitigates
this risk through established risk control limits set by senior management.
F-17
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, the Reserve for life-contingent contract benefits consists
of the following:
<Table>
<Caption>
2001 2000
---- ----
<S> <C> <C>
(IN THOUSANDS)
Immediate annuities:
Structured settlement annuities $ 1,234,918 $ 1,147,530
Other immediate annuities 5,079 4,449
Traditional life 75,082 72,157
Other 2,737 2,213
--------- ----------
Total Reserve for life-contingent contract benefits $ 1,317,816 $ 1,226,349
========= ==========
</Table>
The assumptions for mortality generally utilized in calculating reserves
include the U.S. population with projected calendar year improvements and age
setbacks for impaired lives for structured settlement annuities; the 1983 group
annuity mortality table for other immediate annuities; and actual Company
experience plus loading for traditional life. Interest rate assumptions vary
from 5.5% to 9.5% for structured settlement annuities;3.0% to 11.5% for
immediate annuities and 4.0% to 8.0% for traditional life. Other estimation
methods used include the present value of contractually fixed future benefits
for structured settlement annuities, the present value of expected future
benefits based on historical experience for other immediate annuities and the
net level premium reserve method using the Company's withdrawal experience rates
for traditional life.
To the extent the unrealized gains on fixed income securities would result
in a premium deficiency had those gains actually been realized, premium
deficiency reserves are established, if necessary, and have been recorded for
the structured settlement annuity business and for certain immediate annuities
with life contingencies. A liability of $13.5 million and $26.5 million is
included in the Reserve for life-contingent contract benefits with respect to
this deficiency for the years ended December 31, 2001 and 2000, respectively.
At December 31, Contractholder funds are as follows:
<Table>
<Caption>
2001 2000
---- ----
<S> <C> <C>
(IN THOUSANDS)
Interest-sensitive life $ 256,462 $ 233,320
Fixed annuities:
Immediate annuities 430,261 387,281
Deferred annuities 739,019 486,886
Other investment contracts 2,371 8
---------- ----------
Total contractholder funds $ 1,428,113 $ 1,107,495
========== ==========
</Table>
Contractholder funds activity for the year ended December 31,consists of
the following:
<Table>
<Caption>
(IN THOUSANDS) 2001 2000
---- ----
<S> <C> <C>
Balance, beginning of year $ 1,107,495 $ 839,159
Deposits 474,849 408,711
Surrenders and withdrawals (92,039) (69,778)
Death benefits (10,623) (8,366)
Interest credited to contractholders' funds 65,117 52,499
Transfers (to)/from Separate Accounts (88,986) (80,109)
Other adjustments (27,700) (34,621)
------- ---------
Balance; end of year $ 1,428,113 $ 1,107,495
========= =========
</Table>
F-18
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
Contractholder funds are equal to deposits received and interest credited
for the benefit of the contractholder less surrenders and withdrawals, mortality
charges and administrative expenses. Interest rates credited range from 5.3% to
6.3% for interest-sensitive life contracts; 3.2% to 9.8% for immediate
annuities; 4.2% to 7.7% for deferred annuities and 2.0% to 5.7% for other
investment contracts. Withdrawal and surrender charge protection includes: i)
for interest-sensitive life, either a percentage of account balance or dollar
amount grading off generally over 20 years; and ii) for deferred annuities not
subject to a market value adjustment, either a declining or a level percentage
charge generally over nine years or less. Approximately 1.2% of deferred
annuities are subject to a market value adjustment.
7. DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring business which were deferred and amortized for
the years ended December 31, 2001 and 2000 are as follows:
<Table>
<Caption>
2001 2000
---- ----
<S> <C> <C>
(IN THOUSANDS)
Balance, beginning of year $ 124,601 $ 106,932
Acquisition costs deferred 51,194 39,047
Amortization charged to income (7,187) (13,744)
Effect of unrealized gains and losses (11,993) (7,634)
-------- --------
Balance, end of year $ 156,615 $ 124,601
======== ========
</Table>
8. REINSURANCE
The Company purchases reinsurance to limit aggregate and single losses on
large risks. The Company continues to have primary liability as the direct
insurer for risks reinsured. Estimating amounts of reinsurance recoverable is
impacted by the uncertainties involved in the establishment of loss reserves.
Failure of reinsurers to honor their obligations could result in losses to the
Company. The Company cedes a portion of the mortality risk on certain term life
policies with a pool of reinsurers.
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 written and earned for the year
ended December 31, were as follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
PREMIUMS AND CONTRACT CHARGES
Direct $ 150,163 $ 150,498 $ 105,580
Assumed - non-affiliate 640 1,194 1,047
Ceded
Affiliate (4,617) (4,621) (3,408)
Non-affiliate (877) (870) (845)
--------- --------- ---------
Premiums and contract charges, net of reinsurance $ 145,309 $ 146,201 $ 102,374
========= ========= =========
</Table>
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
CONTRACT BENEFITS
Direct $ 261,504 $ 234,053 $ 179,265
Assumed - non-affiliate 170 (39) 168
Ceded
Affiliate (945) (492) (211)
Non-affiliate (1,324) (223) (955)
--------- --------- ---------
Contract benefits, net of reinsurance $ 259,405 $ 233,299 $ 178,267
========= ========= =========
</Table>
F-19
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
Included in reinsurance recoverables at December 31, 2001 and 2000 are the
net amounts owed to ALIC of $345 thousand and $569 thousand, respectively.
9. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATIONS AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social,
economic and regulatory environment. State and federal initiatives have varied
and have included employee benefit regulations, removal of barriers preventing
banks from engaging in the securities and insurance businesses, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and the overall expansion of regulation. The ultimate
changes and eventual effects, if any, of these initiatives are uncertain.
From time to time, the Company is involved in pending and threatened
litigation in the normal course of business in which claims for monetary damages
are asserted. In the opinion of management, the ultimate liability, if any, in
one or more of these actions in excess of amounts currently reserved is not
expected to have a material effect on the results of operations, liquidity or
financial position of the Company.
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a
state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to policyholders and claimants. Amounts assessed
to each company are typically related to its proportion of business written in
a particular state. The Company's expenses related to these funds have been
immaterial.
10. INCOME TAXES
The Company joins the Corporation and its other eligible domestic
subsidiaries (the "Allstate Group") in the filing of a consolidated federal
income tax return and is party to a federal income tax allocation agreement (the
"Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the
Company pays to or receives from the Corporation the amount, if any, by which
the Allstate Group's federal income tax liability is affected by virtue of
inclusion of the Company in the consolidated federal income tax return.
Effectively, this results in the Company's annual income tax provision being
computed, with adjustments, as if the Company filed a separate return.
Prior to June 30, 1995, the Corporation was a subsidiary of Sears, Roebuck
& Co. ("Sears") and, with its eligible domestic subsidiaries, was included in
the Sears consolidated federal income tax return and federal income tax
allocation agreement. Effective June 30, 1995, the Corporation and Sears entered
into a new tax sharing agreement, which governs their respective rights and
obligations with respect to federal income taxes for all periods during which
the Corporation was a subsidiary of Sears, including the treatment of audits of
tax returns for such periods.
The Internal Revenue Service ("IRS") has completed its review of the
Allstate Group's federal income tax returns through the 1993 tax year. Any
adjustments that may result from IRS examinations of tax returns are not
expected to have a material impact on the financial position, liquidity or
results of operations of the Company.
F-20
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
The components of the deferred income tax assets and liabilities at
December 31, are as follows:
<Table>
<Caption>
2001 2000
---- ----
<S> <C> <C>
(IN THOUSANDS)
DEFERRED ASSETS
Life and annuity reserves $ 51,989 $ 49,070
Discontinued operations 366 366
Other postretirement benefits 261 284
Other assets 1,046 1,150
--------- ---------
Total deferred assets 53,662 50,870
DEFERRED LIABILITIES
Deferred policy acquisition costs (44,950) (32,047)
Unrealized net capital gains (64,074) (63,669)
Difference in tax bases of investments (6,980) (5,952)
Prepaid commission expense (561) (759)
Other liabilities (1,709) (1,624)
--------- ---------
Total deferred liabilities (118,274) (104,051)
--------- ---------
Net deferred liability $ (64,612) $ (53,181)
========= =========
</Table>
Although realization is not assured, management believes it is more likely
than not that the deferred tax asset will be realized based on the assumptions
that certain levels of income will be achieved.
The components of income tax expense for the year ended December 31, are as
follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
(IN THOUSANDS)
Current $ 7,412 $ 12,901 $ 8,650
Deferred 11,105 2,715 5,990
-------- -------- --------
Total income tax expense $ 18,517 $ 15,616 $ 14,640
======== ======== ========
</Table>
The Company paid income taxes of $13.1 million, $11.3 million and $12.5
million in 2001, 2000 and 1999, respectively. The Company had a current income
tax liability of $6.0 million and $11.7 million at December 31, 2001 and 2000,
respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax 35.0% 35.0% 35.0%
State income tax expense 0.4 1.0 1.6
Other (1.2) (2.4) (1.1)
---- ---- ----
Effective income tax 34.2% 33.6% 35.5%
==== ==== ====
</Table>
F-21
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
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, 2001,
approximately $389 thousand, will result in federal income taxes payable of $136
thousand if distributed by the Company. No provision for taxes has been made as
the Company has no plan to distribute amounts from this account. No further
additions to the account have been permitted since 1983.
11. STATUTORY FINANCIAL INFORMATION
The following table reconciles Net income for the year ended December 31,
and Shareholder's equity at December 31, as reported herein in conformity with
GAAP with total statutory net income and capital and surplus of the Company,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities:
<Table>
<Caption>
NET INCOME SHAREHOLDER'S EQUITY
---------------------------------- ----------------------
(IN THOUSANDS) 2001 2000 1999 2001 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance per GAAP $ 35,412 $ 30,915 $ 26,566 $ 458,976 $ 422,811
Unrealized gain/loss on fixed income securities -- -- -- (216,196) (216,045)
Deferred policy acquisition costs (45,834) (25,528) (17,970) (156,615) (124,601)
Deferred income taxes 7,490 2,177 4,804 64,612 53,181
Employee benefits (372) (92) (351) (441) 343
Reserves and non-admitted assets 15,060 18,551 6,549 94,412 127,057
Separate Accounts -- -- -- 474 (24,820)
Other (921) 65 (831) (95) 233
--------- --------- --------- --------- ---------
Balance per statutory accounting practices $ 10,835 $ 26,088 $ 18,767 $ 245,127 $ 238,159
========= ========= ========= ========= =========
</Table>
The Company prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the State of New York.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners ("NAIC"), as well as state
laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
Effective January 1, 2001, the State of New York required insurance
companies domiciled in its state to prepare statutory-basis financial statements
in accordance with the NAIC Accounting Practices and Procedures Manual -Version
effective January 1, 2001 ("Codification") subject to any deviations prescribed
or permitted by the State of New York insurance commissioner.
The State of New York chose not to adopt Statement of Statutory Accounting
Principles No. 10, Income Taxes. If the State of New York did adopt Statement of
Statutory Accounting Principles No. 10, Income Taxes, the Company would have
reported an increase to surplus of $3.4 million for the year ended December 31,
2001.
Accounting changes adopted to conform to the provisions of Codification are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods. The Company reported an increase to surplus
of $1.9 million effective January 1, 2001.
F-22
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
The NAIC is currently in the process of clarifying and interpreting
requirements as the insurance industry implements Codification. As the NAIC
announces changes and as they are approved by the New York Department of
Insurance, the impact of the changes will be recorded.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The payment of shareholder dividends by the Company without prior approval of
the state insurance regulator in any calendar year is limited to formula amounts
based on statutory surplus and statutory net gain from operations, determined in
accordance with statutory accounting practices, for the immediately preceding
calendar year.. The maximum amount of dividends that the Company can distribute
during 2002 without prior approval of the New York State Insurance Department is
$8.7 million. In the twelve-month period beginning January 1, 2001, 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, 2001, RBC for the Company was significantly above a level that would require
regulatory action.
12. BENEFIT PLANS
PENSION 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.
AIC provides defined pension plans which cover most domestic full-time
employees and certain employee agents. Pension benefits are based upon the
employee's length of service and eligible annual compensation. AIC's pension
plan funding policy is to make annual contributions in accordance with accepted
actuarial cost methods. The benefit to the Company increased net income by $87
thousand, $62 thousand and $263 thousand for the pension plans in 2001, 2000 and
1999, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
AIC also provides certain health care and life insurance benefits for
employees 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 for
ten or more years prior to retirement. AIC shares the cost of the retiree
medical benefits with retirees based on years of service, with AIC's share being
subject to a 5% limit on annual medical cost inflation after retirement. AIC's
postretirement benefit plans currently are not funded. AIC has the right to
modify or terminate these plans. The cost to the Company reduced net income by
$304 thousand, $80 thousand and $96 thousand for postretirement benefits other
than pension plans in 2001, 2000 and 1999, respectively.
PROFIT SHARING PLAN
Most domestic full-time and certain part-time employees of AIC are eligible
to become members of The Savings and Profit Sharing Fund of Allstate Employees
("Profit Sharing Plan"). Contributions are based on the Corporation's matching
obligation and performance. The cost allocated to the Company for this benefit
was $374 thousand, $198 thousand and $176 thousand in 2001, 2000 and 1999,
respectively.
F-23
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
13. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis for the year ended December 31, are as follows:
<Table>
<Caption>
2001 2000 1999
-------------------------- ------------------------------ ------------------------------
AFTER- AFTER- AFTER-
(IN THOUSANDS) PRETAX TAX TAX PRETAX TAX TAX PRETAX TAX TAX
------ --- --- ------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNREALIZED CAPITAL GAINS
AND LOSSES AND NET LOSSES ON
DERIVATIVE FINANCIAL INSTRUMENTS
Unrealized holding
gains (losses) arising
during the period $ 1,457 $ (510) $ 947 $ 129,754 $ (45,414) $ 84,340 $ (83,241) $ 29,134 $ (54,107)
Less: reclassification
adjustments 299 (105) 194 (5,643) 1,975 (3,668) (2,207) 772 (1,435)
------- ------ --------- --------- --------- --------- --------- --------- ---------
Unrealized net capital
gains (losses) 1,158 (405) 753 135,397 (47,389) 88,008 (81,034) 28,362 (52,672)
------- ------ --------- --------- --------- --------- --------- --------- ---------
Net losses on derivative
financial instruments arising
during the period (51) 18 (33) - - - - - -
Less: reclassification
Adjustments for
derivative financial (51) 18 (33) - - - - - -
instruments ------- ----- --------- --------- --------- --------- --------- --------- ---------
Net losses on derivative
financial instruments - - - - - - - - -
------- ----- --------- --------- --------- --------- --------- --------- ---------
Other comprehensive
income (loss) $ 1,158 $ (405) $ 753 $ 135,397 $ (47,389) $ 88,008 $ (81,034) $ 28,362 $ (52,672)
======= ====== ========= ========= ========= ========= ========= ========= =========
</Table>
F-24
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE IV--REINSURANCE
(IN THOUSANDS)
<Table>
<Caption>
GROSS NET
YEAR ENDED DECEMBER 31, 2001 AMOUNT CEDED AMOUNT
---------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 17,584,475 $ 2,189,352 $ 15,395,123
============= ============= =============
Premiums and contract charges:
Life and annuities $ 141,420 $ 4,606 $ 136,814
Accident and health 9,383 888 8,495
------------- ------------- -------------
$ 150,803 $ 5,494 $ 145,309
============= ============= =============
GROSS NET
YEAR ENDED DECEMBER 31, 2000 AMOUNT CEDED AMOUNT
---------------------------- ------ ----- ------
Life insurance in force $ 15,916,421 $ 1,592,962 $ 14,323,459
============= ============= =============
Premiums and contract charges:
Life and annuities $ 143,550 $ 4,706 $ 138,844
Accident and health 8,142 785 7,357
------------- ------------- -------------
$ 151,692 $ 5,491 $ 146,201
============= ============= =============
GROSS NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT CEDED AMOUNT
---------------------------- ------ ----- ------
Life insurance in force $ 14,140,049 $ 1,066,993 $ 13,073,056
============= ============= =============
Premiums and contract charges:
Life and annuities $ 99,760 $ 3,397 $ 96,363
Accident and health 6,867 856 6,011
------------- ------------- -------------
$ 106,627 $ 4,253 $ 102,374
============= ============= =============
</Table>
F-25
<Page>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<Table>
<Caption>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- -------- ---------- ------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 2001
----------------------------
Allowance for estimated losses
on mortgage loans $ 119 $ - $ 119 $ -
========== ========== ========== ==========
YEAR ENDED DECEMBER 31, 2000
----------------------------
Allowance for estimated losses
on mortgage loans $ 600 $ - $ 481 $ 119
========== ========== ========== ==========
YEAR ENDED DECEMBER 31, 1999
----------------------------
Allowance for estimated losses
on mortgage loans $ 600 $ - $ - $ 600
========== ========== ========= ==========
</Table>
F-26
</TEXT>
</DOCUMENT>