-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B2C8E5T4cnv/9/nPB5CzTNnFSNqRb9otdjgzk3+n3rdpwCltLubDJSRrA0epX8uh 9Z6Aup0KyTFeCDHqMJ22wA== 0000950124-98-002670.txt : 19980512 0000950124-98-002670.hdr.sgml : 19980512 ACCESSION NUMBER: 0000950124-98-002670 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980511 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLSTATE LIFE INSURANCE CO OF NEW YORK CENTRAL INDEX KEY: 0000839759 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 362608394 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: SEC FILE NUMBER: 033-65355 FILM NUMBER: 98614651 BUSINESS ADDRESS: STREET 1: ONE ALLSTATE DR STREET 2: PO BOX 9095 CITY: FARMINGVILLE STATE: NY ZIP: 11738 BUSINESS PHONE: 5164515300 MAIL ADDRESS: STREET 1: ONE ALLSTATE DR STREET 2: PO BOX 9095 CITY: FARMINGVILLE STATE: NY ZIP: 11738 424B3 1 FINAL PROSPECTUS 1 ALLSTATE LIFE OF NEW YORK SEPARATE ACCOUNT A OFFERED BY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK ONE ALLSTATE DRIVE FARMINGVILLE, NEW YORK 11738 CUSTOMER SERVICE P.O. BOX 94038 PALATINE, IL 60094-4038 1-(800) 692-4682 FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACTS P ------------------------------ PROSPECTUS MAY 1, 1998 This prospectus describes the AIM Lifetime Plus(SM) Variable Annuity, a group Flexible Premium Deferred Variable Annuity Certificate (hereinafter referred to as "Contract") designed to aid you in long-term financial planning and which can be used for retirement planning. The Contracts are issued by Allstate Life Insurance Company of New York ("Company"), a wholly owned indirect subsidiary of Allstate Insurance Company. The Contracts are issued as group Contracts. A certificate is issued that summarizes the provisions of the group Contract. For convenience, this prospectus refers to both Contracts and certificates as "Contracts." Purchase payments for the Contracts will be allocated to a series of Variable Sub-accounts of the Allstate Life of New York Separate Account A ("Variable Account") and/or to a Fixed Account option(s) funded through the Company's general account. The Variable Sub-accounts invest in shares of AIM Variable Insurance Funds, Inc. (the "Fund Series"). Nine Funds are currently available for investment within the Variable Account: (1) AIM V.I. Capital Appreciation Fund; (2) AIM V.I. Diversified Income Fund; (3) AIM V.I. Global Utilities Fund; (4) AIM V.I. Government Securities Fund; (5) AIM V.I. Growth Fund; (6) AIM V.I. Growth and Income Fund; (7) AIM V.I. International Equity Fund; (8) AIM V.I. Money Market Fund; and (9) AIM V.I. Value Fund. This prospectus provides information you should know before making a decision to invest in the Contract and the available Investment Alternatives. The Contract Value will vary daily as a function of the investment performance of the Sub-accounts of our Variable Account and any interest credited to the Fixed Account. The Company does not guarantee any minimum Contract Value for amounts allocated to the Variable Account. Benefits provided by this Contract, when based on the Fixed Account, are subject to a Market Value Adjustment, the operation of which may result in upward or downward adjustments in withdrawal benefits, death benefits, settlement values, transfers to other Sub-accounts, or periodic income payments. THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS WHICH HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS; HOWEVER, THE CONTRACTS AND THE INVESTMENTS IN THE FUNDS ARE NOT DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK, AND THE FUNDS' SHARES ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THESE CONTRACTS ARE NOT FDIC INSURED. The Company has prepared and filed a Statement of Additional Information dated May 1, 1998 with the U.S. Securities and Exchange Commission. If you wish to receive the Statement of Additional Information, you may obtain a free copy by calling or writing the Company at the address above. For your convenience, an order form for the Statement of Additional Information may be found on page B-2 of this prospectus. Before ordering, you may wish to review the Table of Contents of the Statement of Additional Information on page B-1 of this prospectus. The Statement of Additional Information has been incorporated by reference into this prospectus. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR AIM VARIABLE INSURANCE FUNDS, INC. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE The Contract is only available in the State of New York. At least once each Contract year, the Company will send the Owner an annual statement that contains certain information about the individual Owner's Contract. The annual statement details values and specific Contract data for each particular Contract. The annual statement does not contain financial statements of the Company, although the Company's financial statements begin on page F-1 of this prospectus. Our Company files annual and quarterly reports and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's public reference room in Washington, D.C. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of its public reference room. Our SEC filings are also available to the public on the SEC internet site (http://www.sec.gov.). THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. 2 TABLE OF CONTENTS
PAGE ---- GLOSSARY................................. 3 HIGHLIGHTS............................... 4 SUMMARY OF VARIABLE ACCOUNT EXPENSES..... 5 CONDENSED FINANCIAL INFORMATION.......... 7 YIELD AND TOTAL RETURN DISCLOSURE........ 7 FINANCIAL STATEMENTS..................... 8 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK AND THE VARIABLE ACCOUNT.......... 8 Allstate Life Insurance Company of New York................................ 8 The Variable Account................... 8 THE FUND SERIES.......................... 9 AIM Variable Insurance Funds, Inc...... 9 Investment Advisor for the Funds....... 9 FIXED ACCOUNT............................ 10 Example of Interest Crediting During the Guarantee Period................ 10 Withdrawals or Transfers............... 11 Market Value Adjustment................ 11 PURCHASE OF THE CONTRACTS................ 11 Purchase Payment Limits................ 11 Free-Look Period....................... 12 Crediting of Initial Purchase Payment............................. 12 Allocation of Purchase Payments........ 12 Accumulation Units..................... 12 Accumulation Unit Value................ 12 Transfers Among Investment Alternatives........................ 12 Dollar Cost Averaging.................. 13 Automatic Fund Rebalancing............. 13 BENEFITS UNDER THE CONTRACT.............. 13 Withdrawals............................ 13 Income Payments........................ 14 Payout Start Date for Income Payments.......................... 14 Variable Account Income Payments.... 14 Fixed Amount Income Payments........ 14 Income Plans........................ 14 DEATH BENEFITS........................... 15 Distribution Upon Death Payment Provisions.......................... 15 Death Benefit Amount................... 15 CHARGES AND OTHER DEDUCTIONS............. 16 Deductions from Purchase Payments...... 16 Withdrawal Charge (Contingent Deferred Sales Charge)....................... 16 Contract Maintenance Charge............ 16 Administrative Expense Charge.......... 17 Mortality and Expense Risk Charge...... 17 Taxes.................................. 17 Transfer Charges....................... 17 Fund Expenses.......................... 17
PAGE ---- GENERAL MATTERS.......................... 17 Owner.................................. 17 Beneficiary............................ 17 Assignments............................ 18 Delay of Payments...................... 18 Modification........................... 18 Customer Inquiries..................... 18 FEDERAL TAX MATTERS...................... 18 Introduction........................... 18 Taxation of Annuities in General....... 18 Tax Deferral........................ 18 Non-Natural Owners.................. 18 Diversification Requirements........ 19 Ownership Treatment................. 19 Delayed Maturity Dates.............. 19 Taxation of Partial and Full Withdrawals....................... 19 Taxation of Annuity Payments........ 19 Taxation of Annuity Death Benefits.......................... 20 Penalty Tax on Premature Distributions..................... 20 Aggregation of Annuity Contracts.... 20 Tax Qualified Contracts............. 20 Restrictions Under Section 403(b) Plans............................. 20 Roth Individual Retirement Annuities......................... 20 Income Tax Withholding.............. 20 DISTRIBUTION OF THE CONTRACTS............ 21 VOTING RIGHTS............................ 21 SELECTED FINANCIAL DATA.................. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 22 COMPETITION.............................. 27 EMPLOYEES................................ 27 PROPERTIES............................... 27 STATE AND FEDERAL REGULATION............. 27 EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY................................ 27 EXECUTIVE COMPENSATION................... 30 LEGAL PROCEEDINGS........................ 30 EXPERTS.................................. 30 LEGAL MATTERS............................ 30 FINANCIAL STATEMENTS..................... F-1 APPENDIX A--Market Value Adjustment...... A-1 STATEMENT OF ADDITIONAL INFORMATION: TABLE OF CONTENTS...................... B-1 ORDER FORM............................... B-2
2 3 GLOSSARY ACCUMULATION UNIT: A measure of your ownership interest in a Sub-account of the Variable Account prior to the Payout Start Date. ACCUMULATION UNIT VALUE: The value of each Accumulation Unit which is calculated each Valuation Date. Each Variable Sub-account has its own distinct Accumulation Unit Value. ANNUITANT(S): The person or persons whose life determines the latest Payout Start Date and the amount and duration of any income payments for Income Plan options other than Guaranteed Payments for a Specified Period. Joint annuitants are only permitted on or after the Payout Start Date at the Company's discretion. BENEFICIARY(IES): The person(s) to whom any benefits are due when a death benefit is payable and there is no surviving Owner. COMPANY ("WE," "US"): Allstate Life Insurance Company of New York. CONTRACT: The Allstate Life Insurance Company of New York Flexible Premium Deferred Variable Annuity Contract, known as the "AIM Lifetime Plus(SM) Variable Annuity," that is described in this prospectus. CONTRACT ANNIVERSARY: An anniversary of the date that the Contract was issued. CONTRACT VALUE: The value of all amounts accumulated under the Contract prior to the Payout Start Date, equivalent to the Accumulation Units in each Variable Sub-account multiplied by the respective Accumulation Unit Value, plus the value in the Fixed Account. CONTRACT YEAR: A period of 12 months starting with the issue date or any Contract Anniversary. DEATH BENEFIT ANNIVERSARY: Every seventh Contract Anniversary beginning on the date that the Contract was issued. For example, the issue date, 7th and 14th Contract Anniversaries are the first three Death Benefit Anniversaries. FIXED ACCOUNT: All of the assets of the Company that are not in separate accounts. GUARANTEE PERIOD: A period of years for which a specified effective annual interest rate is guaranteed by the Company. A Guarantee Period is established when purchase payments are allocated to the Fixed Account; when previous Guarantee Periods expire and a new Guarantee Period is selected; and when You transfer an amount to the Fixed Account. INCOME PLAN: One of several ways in which a series of payments are made after the Payout Start Date. Income payments are based on the Contract Value adjusted by any applicable Market Value Adjustment and applicable taxes on the Payout Start Date. Income payment amounts may vary based on any Sub-account of the Variable Account and/or may be fixed for the duration of the Income Plan. INVESTMENT ALTERNATIVES: The Variable Sub-accounts and the Fixed Account. MARKET VALUE ADJUSTMENT: The Market Value Adjustment is the adjustment made to the money distributed from the Fixed Account, prior to the end of the Guarantee Period, to reflect the impact of changes in interest rates between the time the Guarantee Period began and the time of distribution. NON-QUALIFIED CONTRACTS: Contracts other than Qualified Contracts. OWNER(S) ("YOU"): The person or persons designated as the Owner in the Contract. PAYOUT START DATE: The date on which income payments begin. QUALIFIED CONTRACTS: Contracts issued under plans that qualify for special federal income tax treatment under Sections 401(a), 403(a), 403(b), 408A and 408 of the Internal Revenue Code. VALUATION DATE: Each day that the New York Stock Exchange is open for business. The Valuation Date does not include such Federal and non-Federal holidays as are observed by the New York Stock Exchange. VALUATION PERIOD: The period between successive Valuation Dates, commencing at the close of regular trading on the New York Stock Exchange (which is normally 4:00 p.m. Eastern Time) and ending as of the close of regular trading on the New York Stock Exchange on the next succeeding Valuation Date. VARIABLE ACCOUNT: Allstate Life of New York Separate Account A, a separate investment account established by the Company to receive and invest purchase payments paid under the Contracts. VARIABLE SUB-ACCOUNT: A portion of the Variable Account invested in shares of a corresponding Fund. The investment performance of each Variable Sub-account is linked directly to the investment performance of its corresponding Fund. 3 4 HIGHLIGHTS THE CONTRACT This Contract is designed for long-term financial planning and retirement planning. Money can be allocated to any combination of Funds and/or the Fixed Account. You have access to your monies either through withdrawals of Contract Value or through periodic income payments. You bear the entire investment risk for Contract Values and income payments based upon the Variable Account, because values will vary depending on the investment performance of the Fund(s) you select. See "Accumulation Unit Value," page 12 and "Income Plans," page 14. You will also bear the investment risk of adverse changes in interest rates if amounts are prematurely withdrawn or transferred from Sub-accounts of the Fixed Account. See "Fixed Account," page 10. FREE-LOOK You may cancel the Contract any time within 10 days after receipt of the Contract and receive a full refund of purchase payments allocated to the Fixed Account. Purchase payments allocated to the Variable Account will be returned after an adjustment to reflect investment gain or loss that occurred from the date of allocation through the date of cancellation, unless a refund of purchase payments is required by state or federal law. See "Free-Look Period," page 12. HOW TO INVEST Your first purchase payment must be at least $5,000 (for Qualified Contracts, $2,000). Subsequent purchase payments must be at least $500. Purchase payments may also be made pursuant to an Automatic Addition Program. See "Purchase Payment Limits," page 11. At the time of your application, you will allocate your purchase payment among the Investment Alternatives. All allocations must be in whole percents from 0% to 100% (total allocation equals 100%) or in whole dollars (total allocation equals entire dollar amount of purchase payment). Allocations may be changed by notifying the Company in writing. See "Allocation of Purchase Payments," page 12. INVESTMENT ALTERNATIVES The Variable Account invests in shares of AIM Variable Insurance Funds, Inc. (the "Fund Series"). The Fund Series has a total of nine Funds available under the Contract. The Funds include: (1) AIM V.I. Capital Appreciation Fund; (2) AIM V.I. Diversified Income Fund; (3) AIM V.I. Global Utilities Fund; (4) AIM V.I. Government Securities Fund; (5) AIM V.I. Growth Fund; (6) AIM V.I. Growth and Income Fund; (7) AIM V.I. International Equity Fund; (8) AIM V.I. Money Market Fund; and (9) AIM V.I. Value Fund. The assets of each Fund are held separately from the other Funds and each has distinct investment objectives and policies which are described in the accompanying prospectus for the Fund Series. In addition to the Variable Account, Owners can also allocate all or part of their purchase payments to the Fixed Account. See "Fixed Account," on page 10. TRANSFERS AMONG INVESTMENT ALTERNATIVES Prior to the Payout Start Date, you may transfer amounts among the Investment Alternatives. The Company reserves the right to assess a $10 charge on each transfer in excess of twelve per Contract Year. The Company is presently waiving this charge. Transfers to the Fixed Account must be at least $500. Certain Fixed Account transfers may be restricted. See "Transfers Among Investment Alternatives," page 12. You may want to enroll in a Dollar Cost Averaging Program or an Automatic Fund Rebalancing Program. See "Dollar Cost Averaging," page 13, and "Automatic Fund Rebalancing," page 13. Transfers made in the Dollar Cost Averaging Program or the Automatic Fund Rebalancing Program are not included in the twelve free transfers per Contract Year currently permitted by the Company. CHARGES AND DEDUCTIONS The costs of the Contract include: a contract maintenance charge ($35 annually), a mortality and expense risk charge (deducted daily, equal on an annual basis to 1.35% of the daily net assets of the Variable Account), and an administrative expense charge (deducted daily, equal on an annual basis to .10% of the daily net assets of the Variable Account). The Company reserves the right to assess a transfer charge ($10 on each transfer in excess of twelve per Contract Year). Additional deductions may be made for certain taxes. See "Contract Maintenance Charge," page 16, "Mortality and Expense Risk Charge," page 17, "Administrative Expense Charge," page 17, "Transfer Charges," page 17, and "Taxes," page 17. WITHDRAWALS You may withdraw all or part of the Contract Value before the earliest of the Payout Start Date, the death of any Owner or, if the Owner is not a natural person, the death of the Annuitant. No withdrawal charges or Market Value Adjustments will be applied to amounts withdrawn up to 10% of the amount of purchase payments. Amounts withdrawn in excess of the 10% may be subject to a withdrawal charge of 0% to 7% depending on how long purchase payments have been invested in the Contract. Amounts withdrawn from the Fixed 4 5 Account, in excess of the 10%, except during the 30 day period after the Guarantee Period expires, will be subject to a Market Value Adjustment. See "Withdrawals," page 13, "Withdrawals or Transfers," page 11, and "Taxation of Annuities in General," page 18. DEATH BENEFIT The Company will pay a death benefit prior to the Payout Start Date on the death of any Owner or, if the Owner is not a natural person, the death of the Annuitant. See "Death Benefit Amount," page 15. INCOME PAYMENTS You will receive periodic income payments beginning on the Payout Start Date. You may choose among several Income Plans to fit your needs. Income payments may be received for a specified period or for life (either single or joint life), with or without a guaranteed number of payments. You can select income payments that are fixed, variable or a combination of fixed and variable. See "Income Payments," page 14. SUMMARY OF VARIABLE ACCOUNT EXPENSES The following table illustrates all expenses and fees that you will incur. The expenses and fees set forth in the table are based on the charges under the Contracts and on the expenses of the Variable Account and the underlying Fund Series. OWNER TRANSACTION EXPENSES (ALL SUB-ACCOUNTS) Sales Load Imposed on Purchases (as a percentage of purchase payments)................................................. None Contingent Deferred Sales Charge (as a percentage of purchase payments)........................................ *
APPLICABLE YEAR APPLICABLE SINCE WITHDRAWAL PREMIUM PAYMENT ACCEPTED CHARGE PERCENTAGE ------------------------ ----------------- 1st Year............................................... 7% 2nd Year............................................... 6% 3rd Year............................................... 5% 4th Year............................................... 4% 5th Year............................................... 3% 6th Year............................................... 2% 7th Year............................................... 1% Thereafter............................................. 0% Transfer Fee................................................ ** Annual Contract Fee......................................... $35*** Variable Account Annual Expenses (as a percentage of the Contract's average net assets in the Variable Account): Mortality and Expense Risk Charge........................... 1.35%**** Administrative Expense Charge............................... .10%**** Total Variable Account Annual Expenses...................... 1.45%
- ------------ * Each Contract Year up to 10% of the amount of purchase payments may be withdrawn free from contingent deferred sales charge or a Market Value Adjustment. ** No charges will be imposed on the first twelve transfers in any Contract Year. The Company reserves the right to assess a $10 charge for each transfer in excess of twelve in any Contract Year, excluding transfers due to dollar cost averaging and automatic fund rebalancing. *** The annual Contract Fee will be waived if total purchase payments as of a Contract Anniversary, or upon a full withdrawal, are $50,000 or if the entire Contract Value is allocated to the Fixed Account. During the payout phase, different restrictions may apply. Please see your Contract for further details. **** For amounts allocated to the Variable Account, the Mortality and Expense Risk Charge and the Administrative Expense Charge are assessed during both the accumulation and the payout phases of the Contract. 5 6 FUND EXPENSES (AS A PERCENTAGE OF FUND ASSETS*)
TOTAL FUND MANAGEMENT OTHER ANNUAL FUND FEES EXPENSES EXPENSES ---- ---------- -------- ---------- AIM V.I. Capital Appreciation Fund.......................... 0.63% 0.05% 0.68% AIM V.I. Diversified Income Fund............................ 0.60% 0.20% 0.80% AIM V.I. Global Utilities Fund.............................. 0.65% 0.63% 1.28% AIM V.I. Government Securities Fund......................... 0.50% 0.37% 0.87% AIM V.I. Growth Fund........................................ 0.65% 0.08% 0.73% AIM V.I. Growth and Income Fund............................. 0.63% 0.06% 0.69% AIM V.I. International Equity Fund.......................... 0.75% 0.18% 0.93% AIM V.I. Money Market Fund.................................. 0.40% 0.19% 0.59% AIM V.I. Value Fund......................................... 0.62% 0.08% 0.70%
- --------------- * A I M Advisors, Inc., ("AIM") may from time to time voluntarily waive or reduce its respective fees. Effective May 1, 1998, the Funds reimburse AIM in an amount up to 0.25% of the average net asset value of each Fund, for expenses incurred in providing, or assuring that participating insurance companies provide, certain administrative services. Currently, the fee only applies to the average net asset value of each Fund in excess of the net asset value of each Fund as calculated on April 30, 1998. EXAMPLE You (the Owner) would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return under the following circumstances: If you terminate your Contract or annuitize for a specified period of less than 120 months at the end of the applicable time period:
FUND 1 YEAR 3 YEARS 5 YEAR 10 YEAR ---- ------ ------- ------ ------- AIM V.I. Capital Appreciation Fund.......................... $76 $105 $136 $254 AIM V.I. Diversified Income Fund............................ $78 $109 $143 $266 AIM V.I. Global Utilities Fund.............................. $83 $124 $167 $314 AIM V.I. Government Securities Fund......................... $78 $111 $146 $273 AIM V.I. Growth Fund........................................ $77 $107 $139 $259 AIM V.I. Growth and Income Fund............................. $77 $105 $137 $255 AIM V.I. International Equity Fund.......................... $79 $113 $149 $279 AIM V.I. Money Market Fund.................................. $76 $102 $132 $244 AIM V.I. Value Fund......................................... $77 $106 $137 $256
If you do not terminate your Contract or if you annuitize for a specified period of 120 months or more at the end of the applicable time period:
FUND 1 YEAR 3 YEARS 5 YEAR 10 YEAR ---- ------ ------- ------ ------- AIM V.I. Capital Appreciation Fund.......................... $22 $ 69 $118 $254 AIM V.I. Diversified Income Fund............................ $24 $ 73 $125 $266 AIM V.I. Global Utilities Fund.............................. $29 $ 88 $149 $314 AIM V.I. Government Securities Fund......................... $24 $ 75 $128 $273 AIM V.I. Growth Fund........................................ $23 $ 71 $121 $259 AIM V.I. Growth and Income Fund............................. $23 $ 69 $119 $255 AIM V.I. International Equity Fund.......................... $25 $ 77 $131 $279 AIM V.I. Money Market Fund.................................. $22 $ 66 $114 $244 AIM V.I. Value Fund......................................... $23 $ 70 $119 $256
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of the example is to assist you in understanding the various costs and expenses that you will bear directly or indirectly. No deductions were made for premium taxes in the above expense examples because New York does not charge premium taxes on annuities. 6 7 CONDENSED FINANCIAL INFORMATION Accumulation Unit Values and Number of Accumulation Units Outstanding for Each Variable Sub-Account since Inception
1996 1997 ------ ------- AIM V.I. CAPITAL APPRECIATION SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 9.855 11.387 Accumulation Unit Value, End of Period.................... 11.387 12.739 Number of Units Outstanding, End of Period................ 7,681 161,045 AIM V.I. DIVERSIFIED INCOME SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 10.086 10.934 Accumulation Unit Value, End of Period.................... 10.934 11.788 Number of Units Outstanding, End of Period................ 4,618 58,970 AIM V.I. GLOBAL UTILITIES SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 10.252 11.276 Accumulation Unit Value, End of Period.................... 11.276 13.518 Number of Units Outstanding, End of Period................ 0 8,278 AIM V.I. GOVERNMENT SECURITIES SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 10.080 10.164 Accumulation Unit Value, End of Period.................... 10.164 10.835 Number of Units Outstanding, End of Period................ 0 39,017 AIM V.I. GROWTH SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 9.892 11.466 Accumulation Unit Value, End of Period.................... 11.466 14.338 Number of Units Outstanding, End of Period................ 2,384 97,059 AIM V.I. GROWTH AND INCOME SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 9.926 11.699 Accumulation Unit Value, End of Period.................... 11.699 14.496 Number of Units Outstanding, End of Period................ 5,371 167,660 AIM V.I. INTERNATIONAL EQUITY SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 10.168 11.953 Accumulation Unit Value, End of Period.................... 11.953 12.598 Number of Units Outstanding, End of Period................ 5,404 85,952 AIM V.I. MONEY MARKET SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 10.023 10.369 Accumulation Unit Value, End of Period.................... 10.369 10.745 Number of Units Outstanding, End of Period................ 4,373 42,137 AIM V.I. VALUE SUB-ACCOUNT Accumulation Unit Value, Beginning of Period.............. 9.800 11.090 Accumulation Unit Value, End of Period.................... 11.090 13.520 Number of Units Outstanding, End of Period................ 5,921 180,478
All Sub-Accounts commenced operations on October 1, 1996. The Accumulation Unit Values in this table reflect a Mortality and Expense Risk Charge of 1.35% and an Administrative Expense Charge of 0.10%. YIELD AND TOTAL RETURN DISCLOSURE From time to time the Variable Account may advertise the yield and total return investment performance of one or more Variable Sub-accounts. Standardized yield and total return advertisements include charges and expenses attributable to the Contracts. Thus, the standardized performance reflects not only the actual investment performance of invested assets but also the effect of contractual fees and charges. Including these fees has the effect of decreasing the advertised performance of a Sub-account so that a Sub-account's investment performance will not be directly comparable to that of an ordinary mutual fund. When a Sub-account advertises its standardized total return it will usually be calculated for one year, five years, and ten years or since inception if the Sub-account has not been in existence for such periods. Total return is measured by comparing the value of an investment in the Sub-account at the end of the relevant period to the value of the investment at the beginning of the period. 7 8 In addition to the standardized total return, the Sub-account may advertise a non-standardized total return. This figure will usually be calculated for one year, five years, and ten years or other periods. Non-standardized total return is measured in the same manner as the standardized total return described above, except that the withdrawal charges under the Contract are not deducted. Therefore, non-standardized total return for a Sub-account can be higher than standardized total return for a Sub-account, as it assumes the Contract is held for its long-term retirement purposes. Certain Sub-accounts may advertise yield in addition to total return. Except in the case of the AIM V.I. Money Market Sub-account, the yield will be computed in the following manner: the net investment income per unit earned during a recent one month period is divided by the unit value on the last day of the period, and then annualized. This figure reflects the recurring charges at the separate account level. The AIM V.I. Money Market Sub-account may advertise, in addition to the total return, either yield or the effective yield. The yield in this case refers to the income generated by an investment in that Sub-account over a seven-day period net of recurring charges at the separate account level. The income is then annualized (i.e., the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment). The effective yield is calculated similarly but when annualized, the income earned by an investment in the AIM V.I. Money Market Sub-account is assumed to be reinvested at the end of each seven-day period. The effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment during a 52-week period. The Variable Account may also disclose yield, standard total return, and nonstandard total return for periods prior to the date that the Variable Account commenced operations. For periods prior to the date the Variable Account commenced operations, performance information for the Sub-accounts will be calculated based on the performance of the underlying Funds and the assumption that the Sub-accounts were in existence for the same periods as those of the underlying Funds, with a level of charges equal to those currently assessed against the Sub-accounts under the Contracts. Please refer to the Statement of Additional Information for a further description of the method used to calculate a Sub-account's yield and total return. FINANCIAL STATEMENTS The financial statements of Allstate Life Insurance Company of New York begin on page F-1 of this prospectus. The financial statements of Allstate Life of New York Separate Account A may be found in the Statement of Additional Information, which is incorporated by reference into this prospectus and which is available from the Company free of charge upon request. (See order form on page B-2). ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK AND THE VARIABLE ACCOUNT ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK The Company was incorporated in 1967 as a stock life insurance company under the laws 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 been known as "Allstate Life Insurance Company of New York." The Company's operations consist of one business segment which is the sale of annuities and life insurance. The Company is currently licensed to operate in New York. The Company's home office is located in Farmingville, New York. The Company's servicing center is located in Palatine, Illinois. The Company is an indirect, wholly owned subsidiary of Allstate Insurance Company ("Allstate") which is a stock property-liability insurance company incorporated under the laws of Illinois. With the exception of directors' qualifying shares, all of the outstanding capital stock of Allstate is owned by The Allstate Corporation ("Corporation"). On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed its 80.3% ownership in the Corporation to Sears common shareholders through a tax-free dividend. THE VARIABLE ACCOUNT Established on December 22, 1995, the Allstate Life of New York Separate Account A is a unit investment trust registered as such with the Securities and Exchange Commission under the Investment Company Act of 1940. However, such registration does not signify that the Commission supervises the management or investment practices or policies of the Variable Account. The investment performance of the Variable Account is independent of both the investment performance of the Company's general account and the performance of any other separate account. The Variable Account has been divided into nine Sub-accounts, each of which invests solely in a corresponding Fund of AIM Variable Insurance Funds, Inc. Additional Variable Sub-accounts may be added at the discretion of the Company. The assets of the Variable Account are held separately from the other assets of the Company. The assets are not chargeable with liabilities incurred in the Company's other business operations. Accordingly, the income, capital gains and capital losses, realized or unrealized, incurred on the assets of the Variable Account are credited to or charged against the assets of the Variable Account, without regard to the income, capital gains or capital losses arising out of any other business the Company may conduct. The Company's obligations arising under the Contracts are general corporate obligations of the Company. 8 9 THE FUND SERIES The Variable Account will invest in shares of the AIM Variable Insurance Funds, Inc. (the "Fund Series"). The Fund Series is registered with the Securities and Exchange Commission as an open-end, series, management investment company. Registration of the Fund Series does not involve supervision of its management, investment practices or policies by the Securities and Exchange Commission. The Funds are designed to provide investment vehicles for variable insurance contracts of various insurance companies, in addition to the Variable Account. Shares of the Funds are not deposits, or obligations of, or guaranteed or endorsed by any bank and the shares are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency. AIM VARIABLE INSURANCE FUNDS, INC. AIM Variable Insurance Funds, Inc. offers nine Funds for use with this Contract: (1) AIM V.I. Capital Appreciation Fund; (2) AIM V.I. Diversified Income Fund; (3) AIM V.I. Global Utilities Fund; (4) AIM V.I. Government Securities Fund; (5) AIM V.I. Growth Fund; (6) AIM V.I. Growth and Income Fund; (7) AIM V.I. International Equity Fund; (8) AIM V.I. Money Market Fund; and (9) AIM V.I. Value Fund. Each Fund has different investment objectives and policies and operates as a separate investment fund. The following is a brief description of the investment objectives and programs of the Funds: AIM V.I. CAPITAL APPRECIATION FUND ("CAPITAL APPRECIATION FUND") is a diversified Fund which seeks to provide capital appreciation through investments in common stocks, with emphasis on medium-sized and smaller emerging growth companies. AIM V.I. DIVERSIFIED INCOME FUND ("DIVERSIFIED INCOME FUND") is a diversified Fund which seeks to achieve a high level of current income primarily by investing in a diversified portfolio of foreign and U.S. government and corporate debt securities, including lower rated high yield debt securities (commonly known as "junk bonds"). The risks of investing in junk bonds are described in the accompanying prospectus for the Fund Series, which should be read carefully before investing. AIM V.I. GLOBAL UTILITIES FUND ("GLOBAL UTILITIES FUND") is a non-diversified Fund which seeks to achieve a high level of current income and, as a secondary objective, to achieve capital appreciation, by investing primarily in common and preferred stocks of public utility companies (either domestic or foreign). AIM V.I. GOVERNMENT SECURITIES FUND ("GOVERNMENT SECURITIES FUND") is a diversified Fund which seeks to achieve a high level of current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed or otherwise backed by the U.S. Government. AIM V.I. GROWTH FUND ("GROWTH FUND") is a diversified Fund which seeks to provide growth of capital through investments primarily in common stocks of leading U.S. companies considered by the Advisor to have strong earnings momentum. AIM V.I. GROWTH AND INCOME FUND ("GROWTH AND INCOME FUND") is a diversified Fund which seeks to provide growth of capital, with current income as a secondary objective by investing primarily in dividend paying common stocks which have prospects for both growth of capital and dividend income. AIM V.I. INTERNATIONAL EQUITY FUND ("INTERNATIONAL EQUITY FUND") is a diversified Fund which seeks to provide long-term growth of capital by investing in international equity securities, the issuers of which are considered by the Advisor to have strong earnings momentum. AIM V.I. MONEY MARKET FUND ("MONEY MARKET FUND") is a diversified Fund which seeks to provide as high a level of current income as is consistent with the preservation of capital and liquidity by investing in a diversified portfolio of money market instruments. AIM V.I. VALUE FUND ("VALUE FUND") is a diversified Fund which seeks to achieve long-term growth of capital by investing primarily in equity securities judged by the Advisor to be undervalued relative to the current or projected earnings of the companies issuing the securities, or relative to current market values of assets owned by the companies issuing the securities or relative to the equity markets generally. Income is a secondary objective. INVESTMENT ADVISOR FOR THE FUNDS A I M Advisors, Inc., ("AIM") serves as the investment advisor to each Fund. AIM was organized in 1976 and, together with its domestic subsidiaries, manages or advises over 50 investment company portfolios (including the Funds) encompassing a broad range of investment objectives. AIM is a wholly owned subsidiary of A I M Management Group Inc. ("AIM Management"). AIM Management is a holding company engaged in the financial services business and is an indirect wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are an independent investment management group engaged in institutional investment management and retail mutual fund business in the United States, Europe, and the Pacific Region. AIM manages each Fund's assets pursuant to a master investment advisory agreement dated February 28, 1997. The Company may receive compensation from the Funds or the investment advisor(s) to the Funds for services related to the Funds. The compensation will be consistent with the services rendered or the cost savings resulting from the arrangement(s). 9 10 There is no assurance that the Funds will attain their respective stated objectives. Additional information concerning the investment objectives and policies of the Funds can be found in the current prospectus for the Fund Series which accompanies this prospectus. You will find more complete information about the Funds, including the risks associated with each Fund, in the accompanying prospectus. You should read the prospectus for the Fund Series in conjunction with this prospectus. THE FUND SERIES PROSPECTUS SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING THE ALLOCATION OF PURCHASE PAYMENTS TO A PARTICULAR VARIABLE SUBACCOUNT. FIXED ACCOUNT Purchase payments and transfers allocated to one or more of the Guarantee Periods become part of the general account of the Company. Guarantee Periods will be offered at the Company's discretion and may range from one to ten years. Presently, the Company offers Guarantee Periods of one, three, five, seven and ten years. The Owner must select the Guarantee Period to which to allocate each purchase payment and transfer. No less than $500 may be allocated to any one Guarantee Period. The Company reserves the right to limit the number of additional purchase payments. Please consult with your sales representative for current information. Interest is credited daily at a rate which compounds to the effective annual interest rate declared for each Guarantee Period that has been selected. The following example illustrates how the value of purchase payments allocated to the Fixed Account would grow given an assumed purchase payment, Guarantee Period, and effective annual interest rate: EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD: Purchase Payment............................................ $10,000.00 Guarantee Period............................................ 5 years Effective Annual Rate:...................................... 4.50%
END OF CONTRACT YEAR:
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ---------- Beginning Account Value $10,000.00 X (1 + Effective Annual Rate) 1.045 ---------- $10,450.00 Account Value at end of Contract $10,450.00 year 1 X (1 + Effective Annual Rate) 1.045 ---------- $10,920.25 Account Value at end of Contract $10,920.25 year 2 X (1 + Effective Annual Rate) 1.045 ---------- $11,411.66 Account Value at end of Contract $11,411.66 year 3 X (1 + Effective Annual Rate) 1.045 ---------- $11,925.19 Account Value at end of Contract $11,925.19 year 4 X (1 + Effective Annual Rate) 1.045 ---------- Account Value at end of Guarantee Period: $12,461.82 ========== TOTAL INTEREST CREDITED IN GUARANTEE PERIOD: $2,461.82 ($12,461.82 -$10,000.00)
NOTE: The above illustration assumes no withdrawals of any amount during the entire five year period. A withdrawal charge and a Market Value Adjustment may apply to any amount withdrawn in excess of 10% of the amount of purchase payments. The hypothetical interest rate is for illustrative purposes only and is not intended to predict future interest rates to be declared under the Contract. The Company has no specific formula for determining the rate of interest that it will declare initially or in the future. Such interest rates will be reflective of investment returns available at the time of the determination. In addition, the management of the Company may also consider various other factors in determining interest rates, including regulatory and tax requirements, sales commissions and administrative expenses borne by the Company, general economic trends, and competitive factors. The Company guarantees that the 10 11 interest rates will never be less than the minimum guaranteed rate shown in the Contract. For current interest rate information, please contact your sales representative or the Company's Customer Support Unit at 1(800) 692-4682. THE MANAGEMENT OF THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO THE INTEREST RATES TO BE DECLARED. THE COMPANY CAN NEITHER PREDICT NOR GUARANTEE FUTURE INTEREST RATES TO BE DECLARED. Prior to the end of a Guarantee Period, a notice will be mailed to the Owner outlining the options available at the end of a Guarantee Period. During the 30 day period after a Guarantee Period expires the Owner may: -- take no action and the Company will automatically renew the Account Value to a Guarantee Period of the shortest duration then available and to be established on the day the previous Guarantee Period expired; or -- notify the Company to apply the Account Value to a new Guarantee Period or periods to be established on the day the previous Guarantee Period expired; or -- notify the Company to apply the Account Value to any Account of the Variable Account on the day we receive the notification; or -- receive a portion of the Account Value or the entire Account Value through a partial or full withdrawal that is not subject to a Market Value Adjustment. In this case, the amount withdrawn will be deemed to have been withdrawn on the day the Guarantee Period expired. The Automatic Laddering Program allows the Owner to choose, in advance, one renewal Guarantee Period for all renewals. The Owner can select the Automatic Laddering Program at any time during the accumulation phase, including on the issue date. The Automatic Laddering Program will continue until the Owner gives written notice to the Company that the program should end. The Company reserves the right to discontinue this program. For additional information on the Automatic Laddering Program, please call the Company's Customer Support Unit at 1(800) 692-4682. WITHDRAWALS OR TRANSFERS With the exception of withdrawals made as part of the 10% yearly free withdrawals and transfers made automatically through the Dollar Cost Averaging Program, all withdrawals and transfers paid from the Fixed Account other than during the 30 day period after a Guarantee Period expires are subject to a Market Value Adjustment. The amount received by the Owner under a withdrawal request equals the amount requested, adjusted by any Market Value Adjustment, less any applicable withdrawal charge (based upon the amount requested prior to any Market Value Adjustment), less premium taxes and withholding (if applicable). MARKET VALUE ADJUSTMENT The Market Value Adjustment reflects the relationship between (1) the Treasury Rate for the time remaining in the Guarantee Period at the time of the request for withdrawal or transfer, and (2) the Treasury Rate at the time the Guarantee Period was established. As such, the Owner bears some investment risk under the Contract. Treasury Rate means the U.S. Treasury Note Constant Maturity yield for the preceding week as reported in Federal Reserve Bulletin Release H.15. Generally, if the Treasury Rate for the Guarantee Period is higher than the applicable current Treasury Rate, then the Market Value Adjustment will result in a higher amount payable to the Owner or transferred. Similarly, if the Treasury Rate at the time the Guarantee Period was established is lower than the applicable Treasury Rate (interest rate for a period equal to the time remaining in the Guarantee Period), then the Market Value Adjustment will result in a lower amount payable to the Owner or transferred. For example, assume the Owner purchases a Contract and selects an initial Guarantee Period of five years and the five year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, the Owner makes a partial withdrawal. If, at that later time, the current two year Treasury Rate is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to the Owner. Similarly, if the current two year Treasury Rate is 4.80%, then the Market Value Adjustment will be negative, which will result in a decrease in the amount payable to the Owner. The formula for calculating the Market Value Adjustment is set forth in Appendix A to this prospectus which also contains additional examples of the application of the Market Value Adjustment. The Market Value Adjustment will be waived on withdrawals taken to satisfy IRS required minimum distribution rules for this Contract. PURCHASE OF THE CONTRACTS PURCHASE PAYMENT LIMITS Your first purchase payment must be at least $5,000 unless the Contract is a Qualified Contract, in which case the first purchase payment must be at least $2,000. All subsequent purchase payments must be $500 or more and may be made at any time prior to the 11 12 Payout Start Date. Subsequent purchase payments may also be made from your bank account through Automatic Additions. Under an Automatic Additions Program, the minimum purchase payment for allocation to the Variable Account is $100 and for allocation to the Fixed Account the minimum purchase payment is $500. Please consult with your sales representative for detailed information about Automatic Additions. We reserve the right to limit the amount of purchase payments we will accept. FREE-LOOK PERIOD You may cancel the Contract any time within 10 days after receipt of the Contract and receive a full refund of purchase payments allocated to the Fixed Account. Purchase payments allocated to the Variable Account will be returned after an adjustment to reflect investment gain or loss that occurred from the date of allocation through the date of cancellation unless a refund of purchase payments is required by state or federal law. CREDITING OF INITIAL PURCHASE PAYMENT The initial purchase payment accompanied by a duly completed application will be credited to the Contract within two business days of receipt by us at our servicing center. If an application is not duly completed, we will credit the purchase payment to the Contract within five business days or return it at that time unless you specifically consent to us holding the purchase payment until the application is complete. We reserve the right to reject any application. Subsequent purchase payments will be credited to the Contract at the close of the Valuation Period in which the purchase payment is received by the Company at its servicing center located at P.O. Box 94038, Palatine, IL 60094. ALLOCATION OF PURCHASE PAYMENTS On the application, you instruct us how to allocate the purchase payment among the Investment Alternatives. Purchase payments may be allocated to any Investment Alternative in whole percents, from 0% to 100% (total allocation equals 100%) or in whole dollars (total allocation must equal entire dollar amount of purchase payment). Unless you notify us in writing otherwise, subsequent purchase payments are allocated according to the allocation for the previous purchase payment. Any change in allocation instructions will be effective at the time we receive the notice in good order. ACCUMULATION UNITS Each purchase payment allocated to the Variable Account will be credited to the Contract as Accumulation Units. For example, if a $10,000 purchase payment is credited to the Contract when the Accumulation Unit value equals $10, then 1,000 Accumulation Units would be credited to the Contract. The Variable Account, in turn, purchases shares of the corresponding Fund. ACCUMULATION UNIT VALUE The Accumulation Units in each Sub-account of the Variable Account are valued separately. The value of Accumulation Units will change each Valuation Period according to the investment performance of the shares purchased by each Variable Sub-account and the deduction of certain expenses and charges. The value of an Accumulation Unit in a Variable Sub-account for any Valuation Period equals the value of the Accumulation Unit as of the immediately preceding Valuation Period, multiplied by the Net Investment Factor for that Sub-account for the current Valuation Period. The Net Investment Factor for a Valuation Period is a number representing the change, since the last Valuation Date in the value of Sub-account assets per Accumulation Unit due to investment income, realized or unrealized capital gain or loss, deductions for taxes, if any, and deductions for the mortality and expense risk charge and administrative expense charge. TRANSFERS AMONG INVESTMENT ALTERNATIVES Prior to the Payout Start Date, you may transfer amounts among Investment Alternatives. The Company reserves the right to assess a $10 charge on each transfer in excess of twelve per Contract Year. The Company is presently waiving this charge. Transfers to or from more than one Investment Alternative on the same day are treated as one transfer. Transfers through Dollar Cost Averaging or Automatic Fund Rebalancing are not included in the twelve free transfers per Contract Year. Transfers among Investment Alternatives before the Payout Start Date may be made at any time. See "Withdrawals or Transfers," page 11, for the requirements on transfers from the Fixed Account. After the Payout Start Date, transfers among Sub-accounts of the Variable Account or from a variable amount income payment to a fixed amount income payment may be made only once every six months and may not be made during the first six months following the Payout Start Date. After the Payout Start Date, transfers from a fixed amount income payment are not allowed. Telephone transfer requests will be accepted by the Company if received at 1(800) 692-4682 by 4:00 p.m., Eastern Time. Telephone transfer requests received at any other telephone number or after 4:00 p.m., Eastern Time will not be accepted by the Company. Telephone transfer requests received before 4:00 p.m., Eastern Time are effected at the next computed value. In the event that the New York Stock Exchange ("NYSE") closes early, i.e., before 4:00 p.m. Eastern Time, or in the event that the NYSE closes early for a period of time but then reopens for trading on the same day, telephone transfer requests will be processed by the 12 13 Company as of the close of the NYSE on that particular day. Telephone requests received at any telephone number other than the number that appears in this paragraph or received after the close of trading on the NYSE will not be accepted by the Company. The Company utilizes procedures which the Company believes will provide reasonable assurance that telephone authorized transfers are genuine. Such procedures include taping of telephone conversations with persons purporting to authorize such transfers and requesting identifying information from such persons. Accordingly, the Company disclaims any liability for losses resulting from such transfers by reason of their allegedly not having been properly authorized. However, if the Company does not take reasonable steps to help ensure that such authorizations are valid, the Company may be liable for such losses. The minimum amount that may be transferred into the Fixed Account is $500. Any transfer from the Fixed Account at a time other than during the 30 day period after a Guarantee Period expires will be subject to a Market Value Adjustment. If any transfer reduces the value in the Fixed Account to less than $500, the Company will treat the request as a transfer of the entire value. The Company reserves the right to waive transfer restrictions. DOLLAR COST AVERAGING Transfers may be made automatically through Dollar Cost Averaging prior to the Payout Start Date. Dollar Cost Averaging permits the Owner to transfer a specified amount monthly, quarterly, semi-annually or annually from the one year Guarantee Period or from any of the Variable Sub-accounts, to any other Sub-account of the Variable Account. Transfers made through Dollar Cost Averaging must be $50 or more. Dollar Cost Averaging cannot be used to transfer amounts to the Fixed Account. Transfers made through Dollar Cost Averaging are not subject to a Market Value Adjustment. In addition, such transfers are not assessed a $10 charge and are not included in the twelve free transfers per Contract Year. The theory of Dollar Cost Averaging is that, if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same purchase dates. However, participation in the Dollar Cost Averaging program does not assure you of a greater profit from your purchases under the program; nor will it prevent or alleviate losses in a declining market. AUTOMATIC FUND REBALANCING Transfers may be made automatically through Automatic Fund Rebalancing prior to the Payout Start Date. By electing Automatic Fund Rebalancing, all of the money allocated to the Variable Sub-accounts will be rebalanced to the desired allocation on a quarterly basis, determined from the first date that you decide to rebalance. Each quarter, money will be transferred among the Variable Sub-accounts to achieve the desired allocation. The desired allocation will be the allocation initially selected unless subsequently changed. Transfers made through Automatic Fund Rebalancing are not assessed a $10 charge and are not included in the twelve free transfers per Contract Year. Any money allocated to the Fixed Account will not be included in the rebalancing. BENEFITS UNDER THE CONTRACT WITHDRAWALS You may withdraw all or part of the Contract Value at any time prior to the earlier of the death of the Owner (or the Annuitant if the Owner is not a natural person) or the Payout Start Date. The amount available for withdrawal is the Contract Value next computed after the Company receives the request for a withdrawal at its servicing center, adjusted by any applicable Market Value Adjustment, less any withdrawal charges, contract maintenance charges and any premium taxes. See "Charges and Other Deductions," page 16. Withdrawals from the Variable Account will be paid within seven days of receipt of the request, subject to postponement in certain circumstances. See "Delay of Payments," page 18. Money can be withdrawn from the Variable Account or the Fixed Account. To complete the partial withdrawal from the Variable Account, the Company will redeem Accumulation Units in an amount equal to the withdrawal and any applicable withdrawal charge and premium taxes. The Owner must name the Investment Alternative from which the withdrawal is to be made. If no Investment Alternative is named, then the withdrawal request is incomplete and cannot be honored. The minimum partial withdrawal is $50. If any withdrawal reduces the value of the Fixed Account to less than $500, we will treat the request as a withdrawal of the entire value. If the Contract Value after a partial withdrawal would be less than $1,000, then the Company will treat the request as one for termination of the Contract and the entire Contract Value, adjusted by any Market Value Adjustment, less any charges and premium taxes, will be paid out. Partial withdrawals may also be taken automatically through Systematic Withdrawals on a monthly, quarterly, semi-annual or annual basis. Systematic Withdrawals of $50 or more may be requested at any time prior to the Payout Start Date. At the Company's discretion, Systematic Withdrawals may not be offered in conjunction with Dollar Cost Averaging or Automatic Fund Rebalancing. 13 14 Partial and full withdrawals may be subject to income tax and a 10% tax penalty. This tax and penalty are explained in "Federal Tax Matters," on page 18. After the Payout Start Date, withdrawals are only permitted when payments from the Variable Account are being made that do not involve life contingencies. In that case, you may terminate the Variable Account portion of the income payments at any time and receive a lump sum equal to the commuted balance of the remaining variable payments due, less any applicable withdrawal charge. INCOME PAYMENTS PAYOUT START DATE FOR INCOME PAYMENTS The Payout Start Date is the day that income payments will start under the Contract. You may change the Payout Start Date at any time by notifying the Company in writing of the change at least 30 days before the scheduled Payout Start Date. The Payout Start Date must be (a) at least one month after the issue date; and (b) no later than the day the Annuitant reaches age 90. VARIABLE ACCOUNT INCOME PAYMENTS The amount of Variable Account income payments depends upon the investment experience of the Sub-accounts selected by the Owner and any premium taxes, the age and sex of the Annuitant, and the Income Plan chosen. The Company guarantees that the amount of the income payment will not be affected by (1) actual mortality experience and (2) the amount of the Company's administration expenses. The Contracts offered by this prospectus contain income payment tables that provide for different benefit payments to men and women of the same age. Nevertheless, in accordance with the U.S. Supreme Court's decision in Arizona Governing Committee v. Norris, in certain employment-related situations, annuity tables that do not vary on the basis of sex will be used. The total income payments received may be more or less than the total purchase payments made because (a) Variable Account income payments vary with the investment results of the underlying Funds, and (b) Annuitants may not live as long as, or may live longer than, expected. The Income Plan option selected will affect the dollar amount of each income payment. For example, if an Income Plan for a Life Income is chosen, the income payments will be greater than income payments under an Income Plan for a Life Income with Guaranteed Payments. If the actual net investment experience of the Variable Account is less than the assumed investment rate, then the dollar amount of the income payments will decrease. The dollar amount of the income payments will stay level if the net investment experience equals the assumed investment rate and the dollar amount of the income payments will increase if the net investment experience exceeds the assumed investment rate. For purposes of the Variable Account income payments, the assumed investment rate is 3 percent. For more detailed information as to how Variable Account income payments are determined see the Statement of Additional Information. FIXED AMOUNT INCOME PAYMENTS Income payment amounts derived from any monies allocated to the Fixed Account during the accumulation phase are fixed for the duration of the Income Plan. The fixed amount income payment amount is calculated by applying the portion of the Contract Value in the Fixed Account on the Payout Start Date, adjusted by any Market Value Adjustment and less any applicable premium tax, to the greater of the appropriate value from the income payment table selected or such other value as we are offering at that time. INCOME PLANS The Income Plans include: INCOME PLAN 1--LIFE INCOME WITH GUARANTEED PAYMENTS The Company will make payments for as long as the Annuitant lives. If the Annuitant dies before the selected number of guaranteed payments have been made, the Company will continue to pay the remainder of the guaranteed payments. INCOME PLAN 2--JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS The Company will make payments for as long as either the Annuitant or Joint Annuitant, named at the time of Income Plan selection, is living. If both the Annuitant and the Joint Annuitant die before the selected number of guaranteed payments have been made, the Company will continue to pay the remainder of the guaranteed payments. INCOME PLAN 3--GUARANTEED NUMBER OF PAYMENTS The Company will make payments for a specified number of months beginning on the Payout Start Date. These payments do not depend on the Annuitant's life. The number of months guaranteed may be from 60 to 360. The mortality and expense risk charge will be deducted from Variable Account assets supporting these payments even though the Company does not bear any mortality risk. 14 15 The Owner may change the Income Plan until 30 days before the Payout Start Date. If an Income Plan is chosen which depends on the Annuitant or Joint Annuitant's life, proof of age will be required before income payments begin. Applicable premium taxes will be assessed. In the event that an Income Plan is not selected, the Company will make income payments in accordance with Income Plan 1 with Guaranteed Payments for 120 Months. At the Company's discretion, other Income Plans may be available upon request. The Company currently uses sex-distinct annuity tables. However, if legislation is passed by Congress or the State of New York, the Company reserves the right to use income payment tables which do not distinguish on the basis of sex. Special rules and limitations may apply to certain Qualified Contracts. If the Contract Value to be applied to an Income Plan is less than $2,000, or if the monthly payments determined under the Income Plan are less than $20, the Company may pay the Contract Value adjusted by any Market Value Adjustment and less any applicable taxes in a lump sum or change the payment frequency to an interval which results in income payments of at least $20. DEATH BENEFITS DISTRIBUTION UPON DEATH PAYMENT PROVISIONS A distribution upon death may be paid to the Owner determined immediately after the death if, prior to the Payout Start Date: -- any Owner dies; or -- the Annuitant dies and the Owner is not a natural person. If the Owner eligible to receive a distribution upon death is not a natural person, then the Owner may elect to receive the distribution upon death in one or more distributions. Otherwise, if the Owner is a natural person, the Owner may elect to receive a distribution upon death in one or more distributions or periodic payments through an Income Plan. A death benefit will be paid if: 1) the Owner elects to receive the death benefit in a single payment distributed within 180 days of the date of death; and 2) the death benefit is paid as of the day the value of the death benefit is determined. Otherwise, the settlement value will be paid. Although the Company is currently waiving the 180 day limitation, the Company reserves the right to enforce the limitation in the future. The settlement value is the same amount that would be paid in the event of withdrawal of the Contract Value. The Company will calculate the settlement value at the end of the Valuation Period coinciding with the requested distribution date for payment or on the mandatory distribution date of 5 years after the date of death. In any event, the entire distribution upon death must be distributed within five years after the date of death unless an Income Plan is selected or a surviving spouse continues the Contract in accordance with the following sections: Payments from the Income Plan must begin within one year of the date of death and must be payable throughout: -- the life of the Owner; or -- a period not to exceed the life expectancy of the Owner; or -- the life of the Owner with payments guaranteed for a period not to exceed the life expectancy of the Owner. If the surviving spouse of the deceased Owner is the new Owner, then the spouse may elect one of the options listed above or may continue the Contract in the accumulation phase as if the death had not occurred. The Company will only permit the Contract to be continued once. If the Contract is continued in the accumulation phase, the surviving spouse may make a single withdrawal of any amount within one year of the date of death without incurring a withdrawal charge. However, any applicable Market Value Adjustment, determined as of the date of the withdrawal, will apply. DEATH BENEFIT AMOUNT Prior to the Payout Start Date, the death benefit is equal to the greatest of: (a) the Contract Value on the date the Company determines the death benefit; or (b) the amount that would have been payable in the event of a full withdrawal of the Contract Value on the date the Company determines the death benefit; or (c) the Contract Value on the Death Benefit Anniversary immediately preceding the date we determine the death benefit adjusted by any purchase payments, withdrawals and charges made between such Death Benefit Anniversary and the date we determine the death benefit; or (d) the greatest of the anniversary values as of the date we determine the death benefit. The anniversary value is equal to the Contract Value on a Contract Anniversary, increased by purchase payments made since that anniversary and reduced by the amount of any partial withdrawals since that anniversary. Anniversary values will be calculated for each Contract Anniversary 15 16 prior to the earlier of: (i) the date we determine the death benefit, or (ii) the deceased's attained age 75 or 5 years after the date the Contract was established, if later. The value of the death benefit will be determined at the end of the Valuation Period during which the Company receives a complete request for payment of the death benefit, which includes due proof of death. The Company will not settle any death claim until it receives due proof of death. CHARGES AND OTHER DEDUCTIONS DEDUCTIONS FROM PURCHASE PAYMENTS No deductions are made from purchase payments. Therefore, the full amount of every purchase payment is invested in the Investment Alternative(s) you select. WITHDRAWAL CHARGE (CONTINGENT DEFERRED SALES CHARGE) You may withdraw the Contract Value at any time before the earliest of the Payout Start Date, the death of any Owner or, if the Owner is not a natural person, the death of the Annuitant. There are no withdrawal charges on amounts withdrawn in a Contract Year up to 10% of the amount of purchase payments. Amounts withdrawn in excess of this 10% may be subject to a withdrawal charge. Amounts not subject to a withdrawal charge and not withdrawn in a Contract Year are not carried over to later Contract Years. Withdrawal charges, if applicable, will be deducted from the amount paid. Free withdrawals and other partial withdrawals will be allocated on a first in, first out basis to purchase payments. For purposes of calculating the amount of the withdrawal charge, withdrawals are assumed to come from purchase payments first, beginning with the oldest payment. Withdrawals made after all purchase payments have been withdrawn, will not be subject to a withdrawal charge. For partial withdrawals, the Contract Value will be adjusted to reflect the amount of payment received by the Owner, any withdrawal charge, any applicable taxes and any Market Value Adjustment. Withdrawals in excess of the free withdrawal amount will be subject to a withdrawal charge as set forth below:
APPLICABLE YEAR APPLICABLE SINCE WITHDRAWAL PURCHASE PAYMENT ACCEPTED CHARGE PERCENTAGE ------------------------- ----------------- 1st Year............................................. 7% 2nd Year............................................. 6% 3rd Year............................................. 5% 4th Year............................................. 4% 5th Year............................................. 3% 6th Year............................................. 2% 7th Year............................................. 1% Thereafter........................................... 0%
Withdrawal charges will be used to pay sales commissions and other promotional or distribution expenses associated with the marketing of the Contracts. In addition, federal and state income tax may be withheld from withdrawal amounts. Certain terminations may also be subject to a federal tax penalty. See "Federal Tax Matters," page 18. The Company reserves the right to waive the withdrawal charge with respect to Contracts issued to employees and registered representatives of any broker-dealer that has entered into a sales agreement with Allstate Life Financial Services, Inc. ("ALFS") to sell the Contracts and all wholesalers and their employees that are under agreement with ALFS to wholesale the Contract. The withdrawal charge will also be waived on withdrawals taken to satisfy IRS required minimum distribution rules for this Contract. CONTRACT MAINTENANCE CHARGE A contract maintenance charge is deducted annually from the Contract Value to reimburse the Company for its costs in maintaining each Contract and the Variable Account. The Company guarantees that the amount of this charge will not exceed $35 per Contract Year over the life of the Contract. This charge will be waived if the total purchase payments are $50,000 or more on a Contract Anniversary or if all money is allocated to the Fixed Account on the Contract Anniversary. Maintenance costs include but are not limited to expenses incurred in billing and collecting purchase payments; keeping records; processing death claims, cash withdrawals, and policy changes; calculating Accumulation Unit and Annuity Unit values; and issuing reports to Owners and regulatory agencies. 16 17 On each Contract Anniversary prior to the Payout Start Date, the contract maintenance charge will be deducted from Sub-accounts of the Variable Account in the same proportion that the Owner's value in each bears to the total value in all Variable Sub-accounts. After the Payout Start Date, a pro rata share of the annual contract maintenance charge will be deducted from each income payment. For example, 1/12 of the $35, or $2.92, will be deducted if there are twelve income payments during the Contract Year. A full contract maintenance charge will be deducted if the Contract is terminated on any date other than a Contract Anniversary. ADMINISTRATIVE EXPENSE CHARGE The Company will deduct an administrative expense charge which is equal, on an annual basis, to .10% of the daily net assets you have allocated to the Variable Subaccounts. This charge is designed to cover actual administrative expenses which exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributable to that Contract. MORTALITY AND EXPENSE RISK CHARGE The Company will deduct a mortality and expense risk charge which is equal, on an annual basis, to 1.35% of the daily net assets you have allocated to the Variable Subaccounts. The Company guarantees that the amount of this charge will not increase over the life of the Contract. For amounts allocated to the Variable Account, the mortality and expense risk charge is deducted during the accumulation and the payout phases of the Contract. The mortality risk arises from the Company's guarantee to cover all death benefits and to make income payments in accordance with the Income Plan selected and the Income Payment Tables. The expense risk arises from the possibility that the contract maintenance and administrative expense charges, both of which are guaranteed not to increase, will be insufficient to cover actual administrative expenses. TAXES The Company will deduct applicable state premium taxes or other similar policyholder taxes relative to the Contract (collectively referred to as "premium taxes") either at the Payout Start Date, or when a total withdrawal occurs. The Company reserves the right to deduct premium taxes from the purchase payments. Currently, no deductions are made because New York does not charge premium taxes on annuities. At the Payout Start Date, the charge for applicable premium taxes will be deducted from each Investment Alternative in the proportion that the Owner's value in the Investment Alternative bears to the total Contract Value. TRANSFER CHARGES The Company reserves the right to assess a $10 charge on each transfer in excess of twelve per Contract Year, excluding transfers through Dollar Cost Averaging and Automatic Fund Rebalancing. The Company is presently waiving this charge. FUND EXPENSES A complete description of the expenses and deductions from the Funds is found in the prospectus for the Fund Series which accompanies this prospectus. GENERAL MATTERS OWNER The Owner has the sole right to exercise all rights and privileges under the Contract, except as otherwise provided in the Contract. The Contract cannot be jointly owned by both a non-natural person and a natural person. BENEFICIARY Subject to the terms of any irrevocable Beneficiary designation, the Owner may change the Beneficiary at any time by notifying the Company in writing. Any change will be effective at the time it is signed by the Owner, whether or not the Annuitant is living when the change is received by the Company. The Company will not, however, be liable as to any payment or settlement made prior to receiving the written notice. Unless otherwise provided in the Beneficiary designation, if a Beneficiary predeceases the Owner and there are no other surviving beneficiaries, the new Beneficiary will be: the Owner's spouse if living; otherwise, the Owner's children, equally, if living; otherwise, the Owner's estate. Multiple Beneficiaries may be named. Unless otherwise provided in the Beneficiary designation, if more than one Beneficiary survives the Owner, the surviving Beneficiaries will share equally in any amounts due. 17 18 ASSIGNMENTS The Company will not honor an assignment of an interest in a Contract as collateral or security for a loan. Otherwise, the Owner may assign benefits under the Contract prior to the Payout Start Date. No Beneficiary may assign benefits under the Contract until they are due. No assignment will bind the Company unless it is signed by the Owner and filed with the Company. The Company is not responsible for the validity of an assignment. Federal law prohibits or restricts the assignment of benefits under many types of retirement plans and the terms of such plans may themselves contain restrictions on assignments. DELAY OF PAYMENTS Payment of any amounts due from the Variable Account under the Contract will occur within seven days, unless: 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the Securities and Exchange Commission; or 3. The Securities and Exchange Commission permits delay for the protection of the Owners. Payments or transfers from the Fixed Account may be delayed for up to 6 months. MODIFICATION The Company may not modify the Contract without the consent of the Owner except to make the Contract meet the requirements of the Investment Company Act of 1940, or to make the Contract comply with any changes in the Internal Revenue Code or to make any changes required by the Code or by any other applicable law. CUSTOMER INQUIRIES The Owner or any persons interested in the Contract may make inquiries regarding the Contract by calling or writing your representative or the Company at: ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK CUSTOMER SERVICE CENTER P.O. BOX 94038 PALATINE, IL 60094 1 (800) 692-4682 FEDERAL TAX MATTERS INTRODUCTION THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax consequences of ownership or receipt of distributions under an annuity contract depend on the individual circumstances of each person. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF ANNUITIES IN GENERAL TAX DEFERRAL Generally, an annuity contract owner is not taxed on increases in the Contract Value until a distribution occurs. This rule applies only where (1) the owner is a "natural person," (see "Non-Natural Owners" below for exception) (2) the investments of the Variable Account are "adequately diversified" in accordance with Treasury Department Regulations, and (3) the issuing insurance company, instead of the annuity owner, is considered the owner for federal income tax purposes of any separate account assets funding the contract. NON-NATURAL OWNERS As a general rule, annuity contracts owned by non-natural persons such as corporations, trusts, or other entities are not treated as annuity contracts for federal income tax purposes and the income on such contracts is taxed as ordinary income received or accrued by the owner during the taxable year. There are several exceptions to the general rule for contracts owned by non-natural persons which are discussed in the Statement of Additional Information. 18 19 DIVERSIFICATION REQUIREMENTS For a Contract to be treated as an annuity for federal income tax purposes, the investments in the Variable Account must be "adequately diversified" in accordance with the standards provided in the Treasury regulations. If the investments in the Variable Account are not adequately diversified, then the Contract will not be treated as an annuity contract for federal income tax purposes and the Owner will be taxed on the excess of the Contract Value over the investment in the Contract. Although the Company does not have control over the Funds or their investments, the Company expects the Funds to meet the diversification requirements. OWNERSHIP TREATMENT In connection with the issuance of the regulations on the adequate diversification standards, the Department of the Treasury announced that the regulations do not provide guidance concerning the extent to which contract owners may direct their investments among Sub-accounts of a variable account. The Internal Revenue Service has previously stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the owner possesses incidents of ownership in those assets such as the ability to exercise investment control over the assets. At the time the diversification regulations were issued, Treasury announced that guidance would be issued in the future regarding the extent that owners could direct their investments among Sub-accounts without being treated as owners of the underlying assets of the Variable Account. The ownership rights under this contract are similar to, but different in certain respects from, those described by the Service in rulings in which it was determined that contract owners were not owners of separate account assets. For example, the owner of this contract has the choice of more investment options to which to allocate premiums and contract values, and may be able to transfer among investment options more frequently than in such rulings. These differences could result in the contract owner being treated as the owner of the assets of the Variable Account. In those circumstances, income and gains from the Variable Account assets would be includible in the Contract Owners' gross income. In addition, the Company does not know what standards will be set forth in the regulations or rulings which the Treasury Department has stated it expects to issue. It is possible that the Treasury's position, when announced, may adversely affect the tax treatment of existing contracts. The Company, therefore, reserves the right to modify the Contract as necessary to attempt to prevent the Owner from being considered the federal tax owner of a pro rata share of the assets of the Variable Account. However, the Company makes no guarantee that such modification to the contract will be successful. DELAYED MATURITY DATES If the contract's scheduled maturity date is at a time when the annuitant has reached an advanced age, it is possible that the contract would not be treated as an annuity. In that event, the income and gains under the contract could be currently includible in the owner's income. TAXATION OF PARTIAL AND FULL WITHDRAWALS In the case of a partial withdrawal under a non-qualified contract, amounts received are taxable to the extent the contract value, without regard to any surrender charges, exceeds the investment in the contract. The contract value is the sum of all account values. No matter which account a withdrawal is made from, all account values are combined and the total contract value is used to determine the amount of taxable income. The investment in the contract is the gross premium or other consideration paid for the contract reduced by any amounts previously received from the contract to the extent such amounts were properly excluded from the owner's gross income. In the case of a partial withdrawal under a qualified contract, the portion of the payment that bears the same ratio to the total payment that the investment in the contract (i.e., nondeductible IRA contributions, after tax contributions to qualified plans) bears to the contract value, can be excluded from income. No definitive guidance exists on the proper tax treatment of Market Value Adjustments and you should consult a competent tax advisor with respect to the potential tax consequences of a Market Value Adjustment. In the case of a full withdrawal under a non-qualified contract or a qualified contract, the amount received will be taxable only to the extent it exceeds the investment in the contract. If an individual transfers an annuity contract without full and adequate consideration to a person other than the individual's spouse (or to a former spouse incident to a divorce), the owner will be taxed on the difference between the contract value and the investment in the contract at the time of transfer. Other than in the case of certain qualified contracts, any amount received as a loan under a contract, and any assignment or pledge (or agreement to assign or pledge) of the contract value is treated as a withdrawal of such amount or portion. TAXATION OF ANNUITY PAYMENTS Generally, the rule for income taxation of payments received from an annuity contract provides for the return of the owner's investment in the contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. In the case of variable annuity payments, the amount excluded from taxable income is determined by dividing the investment in the contract by the total number of expected payments. In the case of fixed annuity payments, the amount excluded from income is determined by multiplying the payment by the ratio of the investment in the contract (adjusted for any refund feature or period certain) to the total expected value of annuity payments for the term of the contract. Once the total amount of the investment in the contract is excluded using these ratios, the annuity payments will be fully taxable. If annuity payments cease because of the death of the annuitant before the total 19 20 amount of the investment in the contract is recovered, the unrecovered amount generally will be allowed as a deduction to the Owner for the last taxable year. TAXATION OF ANNUITY DEATH BENEFITS Amounts may be distributed from an annuity contract because of the death of an owner or annuitant. Generally, such amounts are includible in income as follows: (1) if distributed in a lump sum, the amounts are taxed in the same manner as a full withdrawal or (2) if distributed under an annuity option, the amounts are taxed in the same manner as an annuity payment. PENALTY TAX ON PREMATURE DISTRIBUTIONS There is a 10% penalty tax on the taxable amount of any premature distribution from a non-qualified annuity contract. The penalty tax generally applies to any distribution made prior to the date the owner attains age 59 1/2. However, there should be no penalty tax on distributions to owners (1) made on or after the date the owner attains age 59 1/2; (2) made as a result of an owner's death or disability; (3) made in substantially equal periodic payments over life or life expectancy; (4) made under an immediate annuity; or (5) attributable to an investment in the contract before August 14, 1982. Similar rules apply for distributions from qualified contracts. A competent tax advisor should be consulted to determine if any other exceptions to the penalty apply to your specific circumstances. AGGREGATION OF ANNUITY CONTRACTS All non-qualified deferred annuity contracts issued by the Company (or its affiliates) to the same owner during any calendar year will be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. TAX QUALIFIED CONTRACTS Annuity contracts may be used as investments with certain tax qualified plans such as: (1) Individual Retirement Annuities under Section 408(b) of the Code; (2) Roth Individual Retirement Annuities under Section 408A of the Code; (3) Simplified Employee Pension Plans under Section 408(k) of the Code; (4) Savings Incentive Match Plans for Employees (SIMPLE) Plans under Section 408(p) of the code; (5) Tax Sheltered Annuities under Section 403(b) of the Code; (6) Corporate and Self Employed Pension and Profit Sharing Plans; and (7) State and Local Government and Tax-Exempt Organization Deferred Compensation Plans. In the case of certain tax qualified plans, the terms of the plans may govern the right to benefits, regardless of the terms of the contract. RESTRICTIONS UNDER SECTION 403(B) PLANS Section 403(b) of the Code provides for tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. In accordance with the requirements of Section 403(b), any annuity contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only after the employee attains age 59 1/2, separates from service, dies, becomes disabled or on account of hardship (earnings on salary reduction contributions may not be distributed on the account of hardship). These limitations do not apply to withdrawals where the Company is directed to transfer some or all of the contract value to another Section 403(b) plans. ROTH INDIVIDUAL RETIREMENT ANNUITIES Section 408A of the Code permits eligible individuals to make nondeductible contributions to an individual retirement program known as a Roth Individual Retirement Annuity. Roth Individual Retirement Annuities are subject to limitations on the amount that can be contributed and on the time when distributions may commence. "Qualified distributions" from Roth Individual Retirement Annuities are not includible in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to the Roth Individual Retirement Annuity, and which are made on or after the date the individual attains age 59 1/2, made to a beneficiary after the owner's death, attributable to the owner being disabled or for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" are treated as made from contributions first and are includible in gross income to the extent such distributions exceed the contributions made to the Roth Individual Retirement Annuity. The taxable portion of a "nonqualified distribution" may be subject to the 10% penalty tax on premature distribution. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The taxable portion of a conversion or rollover distribution is includible in gross income, but is exempted from the 10% penalty tax on premature distributions. INCOME TAX WITHHOLDING The Company is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless an individual elects to make a "direct rollover" of such amounts to another qualified plan or Individual Retirement Account or Annuity (IRA). Eligible rollover distributions generally include all distributions from qualified contracts, excluding IRAs, with the exception of (1) required minimum distributions, or (2) a series of substantially equal periodic payments made over a period of at least 10 years, or the life (joint lives) of the participant (and beneficiary). For any distributions from non-qualified annuity contracts, or distributions from qualified 20 21 contracts which are not considered eligible rollover distributions, the Company may be required to withhold federal and state income taxes unless the recipient elects not to have taxes withheld and properly notifies the Company of such election. DISTRIBUTION OF THE CONTRACTS Allstate Life Financial Services, Inc. ("ALFS"), 3100 Sanders Road, Northbrook Illinois, an indirect, wholly owned subsidiary of Allstate Insurance Company, acts as the principal underwriter of the Contracts. ALFS is registered as a broker-dealer under the Securities Exchange Act of 1934 and became a member of the National Association of Securities Dealers, Inc. on June 30, 1993. Contracts are sold by registered representatives of unaffiliated broker-dealers or bank employees who are licensed insurance agents appointed by the Company, either individually or through an incorporated insurance agency and who have entered into a selling agreement with ALFS and the Company to sell the Contract. In some states, Contracts may be sold by representatives or employees of banks which may be acting as broker-dealers without separate registration under the Securities Exchange Act of 1934, pursuant to legal and regulatory exceptions. Commissions paid may vary, but in aggregate are not anticipated to exceed 8.00% of any purchase payment. In addition, under certain circumstances, certain sellers of the Contracts may be paid persistency bonuses which will take into account, among other things, the length of time purchase payments have been held under a Contract, and the amount of purchase payments. A persistency bonus is not expected to exceed .56%, on an annual basis, of the Contract Value considered in connection with the bonus. These commissions are intended to cover distribution expenses. The underwriting agreement with ALFS provides for indemnification of ALFS by the Company for liability to Owners arising out of services rendered or Contracts issued. VOTING RIGHTS The Owner or anyone with a voting interest in a Sub-account of the Variable Account may instruct the Company on how to vote at shareholder meetings of the Fund Series. The Company will solicit and cast each vote according to the procedures set up by the Fund Series and to the extent required by law. The Company reserves the right to vote the eligible shares in its own right, if subsequently permitted by the Investment Company Act of 1940, its regulations or interpretations thereof. Fund shares as to which no timely instructions are received will be voted in proportion to the voting instructions which are received with respect to all Contracts participating in that Sub-account. Voting instructions to abstain on any item to be voted upon will be applied on a pro-rata basis to reduce the votes eligible to be cast. Before the Payout Start Date, the Owner holds the voting interest in the Sub-account of the Variable Account (The number of votes for the Owner will be determined by dividing the Contract Value attributable to a Sub-account by the net asset value per share of the applicable eligible Fund.) After the Payout Start Date, the person receiving income payments has the voting interest. After the Payout Start Date, the votes decrease as income payments are made and as the reserves for the Contract decrease. That person's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Sub-account by the net asset value per share of the corresponding eligible Fund. SELECTED FINANCIAL DATA The following selected financial data for the Company should be read in conjunction with the 1997 financial statements and notes thereto included in this prospectus beginning on page F-1. ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SELECTED FINANCIAL DATA (IN THOUSANDS)
YEAR-END FINANCIAL DATA 1997 1996 1995 1994 1993 ----------------------- ---------- ---------- ---------- ---------- ---------- For the Years Ended December 31: Revenues....................................... $ 244,551 $ 228,387 $ 250,854 $ 186,249 $ 227,445 Net Income..................................... 22,716 20,561 19,522 18,221 13,163 As of December 31: Total Assets................................... 2,318,549 1,990,284 1,842,969 1,449,993 1,410,895
21 22 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. The Company, which is wholly owned by a wholly owned subsidiary of Allstate Insurance Company ("AIC"), an affiliate of The Allstate Corporation, markets a broad line of life insurance and annuity products in the State of New York. Life insurance includes traditional products such as whole life and term life insurance, as well as universal life and other interest-sensitive life products. Annuities include deferred annuities, such as variable annuities and fixed rate single and flexible premium annuities, and immediate annuities such as structured settlement annuities. The Company distributes its products using a combination of Allstate agents which include life specialists, banks, independent agents, brokers and direct response marketing. FINANCIAL HIGHLIGHTS
1997 1996 1995 ---------- ---------- ---------- ($ IN THOUSANDS) Statutory premiums and deposits............................. $ 208,090 $ 235,634 $ 216,361 ========== ========== ========== Investments................................................. $1,907,997 $1,636,654 $1,541,329 Separate Account assets..................................... 308,595 260,668 220,141 ---------- ---------- ---------- Investments, including Separate Account assets.............. $2,216,592 $1,897,322 $1,761,470 ========== ========== ========== Premiums and contract charges............................... $ 118,963 $ 117,106 $ 148,316 Net investment income....................................... 124,887 112,862 104,384 Life and annuity contract benefits.......................... 179,872 172,772 198,055 Operating costs and expenses................................ 28,667 23,386 23,366 ---------- ---------- ---------- Income from operations...................................... 35,311 33,810 31,279 Income tax expense on operations............................ 13,051 12,221 10,557 ---------- ---------- ---------- Operating income............................................ 22,260 21,589 20,722 Realized capital gains and losses, after-tax................ 456 (1,028) (1,200) ---------- ---------- ---------- Net income.................................................. $ 22,716 $ 20,561 $ 19,522 ========== ========== ==========
PREMIUMS, DEPOSITS, CONTRACT CHARGES AND CONTRACT BENEFITS Statutory premiums and deposits include premiums and deposits for all products. Total statutory premiums and deposits decreased $27.5 million, or 11.7%, in 1997 from 1996. Increased sales of variable annuities, life insurance policies and fixed annuities were more than offset by a reduction in premiums relating to funding agreements. Funding agreements, a type of investment contract first sold by the Company in 1996, are entered into based on the Company's assessment of market opportunities. In 1996, total statutory premiums and deposits increased $19.3 million, or 8.9%, compared to 1995 levels. The increase was largely the result of the sale of a funding agreement, as well as higher sales of variable annuities and life insurance policies, partially offset by lower sales of structured settlement annuities. Premiums and contract charges under generally accepted accounting principles ("GAAP") increased slightly in 1997 and decreased 21.0% in 1996. Under GAAP, revenues exclude deposits on most annuity contracts and premiums on universal life insurance policies, and will vary with the mix of business sold during the period. In 1997, an increase in contract charges on universal life policies and variable annuity contracts was partially offset by a decrease in sales of life-contingent structured settlement annuities. The decrease in 1996 arose primarily from a fluctuation in the level of sales of structured settlement annuities sold with life contingencies. Provision for life and annuity contract benefits increased $7.1 million, or 4.1%, during 1997, and decreased $25.3 million, or 12.8%, during 1996. These changes resulted primarily from fluctuations in the level of sales of structured settlement annuities with life contingencies. OPERATING INCOME Pretax net investment income increased 10.7% in 1997 and 8.1% in 1996. The increases are due primarily to higher investment balances in each period. Investments, excluding Separate Account assets and unrealized gains on fixed income securities, grew 9.8% and 13.3% in 1997 and 1996, respectively. The increases in net investment income were partially offset by slightly lower portfolio yields. In low interest rate environments as have existed in 1997 and 1996, funds from maturing investments may be invested at substantially lower interest rates than which prevailed when the funds were previously invested, thereby reducing the average portfolio yield. Operating costs and expenses increased $5.3 million, or 22.6%, for the year ended December 31, 1997. The increase is related to growth in business and the recognition of costs related to the relocation of the policy administration function, offset by a reduction in amortization of deferred acquisition costs due to the revised estimates of future gross profits on interest-sensitive life products. 22 23 In 1997, the Company received approval from the State of New York Insurance Department to relocate its policy administration function to an affiliate's facility in Illinois. The move is scheduled for the second quarter of 1998. The Company recognized an after-tax charge of $1.9 million in 1997 for certain costs relating to the consolidation of these operations. Operating income increased 3.1% in 1997 and 4.2% in 1996. The increase in 1997 is primarily due to favorable mortality experience on the structured settlement annuity business and higher investment margins due to additional sales of structured settlement annuities. The increase in 1996 is the result of growth in investments partially offset by less favorable mortality experience on life-contingent structured settlement annuities. REALIZED CAPITAL GAINS AND LOSSES The Company had realized capital gains of $456 thousand after tax in 1997 compared with realized capital losses of $1.0 million after tax in 1996. In 1997, increased gains on fixed income securities and reduced losses on other investments were partially offset by increased writedowns on mortgage loans. Realized capital losses in 1996 were 14.3% lower than those reported in 1995. Reduced mortgage losses were partially offset by losses incurred on the sale of fixed income securities to reposition a portion of the investment portfolio to improve overall yield in 1996. INVESTMENTS The composition of the investment portfolio at December 31, 1997 is presented in the table below (see Notes 2 and 4 to the financial statements for investment accounting policies and additional information).
PERCENT TO TOTAL ($ IN THOUSANDS) ---------------- Fixed income securities(1).................................. $1,756,257 92.0% Mortgage loans.............................................. 114,627 6.0 Policy loans................................................ 27,600 1.5 Short-term.................................................. 9,513 0.5 ---------- ----- Total................................................ $1,907,997 100.0% ========== =====
- ------------ (1) Fixed income securities are carried at fair value. Amortized cost for these securities was $1,510,110 at December 31, 1997. Total investments increased to $1.91 billion at December 31, 1997 from $1.64 billion at December 31, 1996. The increase in the Company's investments was primarily due to increased unrealized capital gains of $123.5 million on fixed income securities and amounts invested from positive cash flows generated from operations. FIXED INCOME SECURITIES The Company's fixed income securities portfolio consists of privately-placed securities, U.S. government bonds, publicly traded corporate bonds, mortgage-backed securities, asset-backed securities and tax-exempt municipal bonds. The Company generally holds its fixed income securities for the long term, but has classified all of these securities as available for sale to allow maximum flexibility in portfolio management. At December 31, 1997, unrealized net capital gains on the fixed income securities portfolio were $246.1 million compared to $122.6 million as of December 31, 1996. The increase in the unrealized gain position is primarily attributable to lower interest rates. At the end of 1997, substantially all of the Company's fixed income securities portfolio is rated investment grade, which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating. As of December 31, 1997, the fixed income securities portfolio contained $540.9 million of privately-placed corporate obligations, compared with $492.8 million at December 31, 1996. The benefits of privately-placed securities as compared to public securities are generally higher yields, improved cash flow predictability through pro-rata sinking funds on many bonds, and a combination of covenant and call protection features designed to better protect the holder against losses resulting from credit deterioration, reinvestment risk and fluctuations in interest rates. A relative disadvantage of privately-placed securities as compared to public securities is reduced liquidity. All of the privately-placed securities are 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, 1997 and 1996, $228.7 million and $194.2 million, respectively, of the fixed income securities portfolio were invested in mortgage-backed securities ("MBS"). At December 31, 1997, all of the MBS were investment grade and approximately 96% have underlying collateral that is guaranteed by U.S. government entities, thus credit risk was minimal. 23 24 MBS, however, are subject to interest rate risk as the duration and ultimate realized yield are affected by the rate of repayment of the underlying mortgages. The Company attempts to limit interest rate risk by purchasing MBS whose cost does not significantly exceed par value, and with repayment protection to provide a more certain cash flow to the Company. At December 31, 1997, the amortized cost of the MBS portfolio was below par value by $7.4 million and over 40% of the MBS portfolio was invested in planned amortization class bonds. This type of MBS is purchased to provide additional protection against rising interest rates. The fixed income securities portfolio contained $39.7 million and $31.5 million of asset-backed securities ("ABS") at December 31, 1997 and 1996, respectively. ABS are subject to some of the same risks as MBS, but to a lesser degree because of the nature of the underlying assets. The Company attempts to mitigate these risks by primarily investing in highly-rated, publicly-traded, intermediate term ABS at or below par value. At December 31, 1997, the amortized cost of the ABS portfolio was below par value by $233 thousand. Over 43% of the Company's ABS are invested in securitized credit card receivables. The remainder of the portfolio is backed primarily by securitized manufactured housing, home equity and recreational vehicles. 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 $114.6 million investment in mortgage loans at December 31, 1997 is comprised primarily of loans secured by first mortgages on developed commercial real estate. Property type diversification is a key consideration used to manage the Company's mortgage loan risk. The Company closely monitors its commercial mortgage loan portfolio on a loan-by-loan basis. Loans with an estimated collateral value less than the loan balance, as well as loans with other characteristics indicative of higher than normal credit risk, are reviewed by financial and investment management at least quarterly for purposes of establishing valuation allowances and placing loans on non-accrual status. The underlying collateral values are based upon discounted property cash flow projections, which are updated as conditions change or at least annually. SHORT-TERM INVESTMENTS The Company's short-term investment portfolio was $9.5 million and $25.9 million at December 31, 1997 and 1996, respectively. The Company invests available cash balances in taxable short-term securities having a final maturity date or redemption date of one year or less. SEPARATE ACCOUNTS Separate Account assets and liabilities increased 18.4% from $260.7 million at December 31, 1996 to $308.6 million at December 31, 1997 due primarily to favorable investment performance of the Separate Account investment portfolios and sales of flexible premium deferred variable annuity contracts, partially offset by variable annuity contract surrenders and withdrawals. MARKET RISK Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The Company's primary market risk exposure is to changes in interest rates. The active management of market risk is integral to the Company's 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 future investments purchased or 3) use derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased. See Note 5 to the financial statements for a more detailed discussion of these instruments. CORPORATE OVERSIGHT AIC administers and oversees investment risk management processes primarily through three oversight bodies: the Boards of Directors and Investment Committees of its operating subsidiaries, and the Credit and Risk Management Committee ("CRMC"). The Boards of Directors and Investment Committees provide executive oversight of investment activities. The CRMC is a senior 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 market risk. The CRMC meets at least monthly to provide detailed oversight of investment risk, including market risk. AIC has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. In addition, AIC has specific investment policies for each of its affiliates, including the Company, that delineate the investment limits and strategies that are appropriate given each entity's liquidity, surplus, product and regulatory requirements. 24 25 AIC manages its exposure to market risk through asset allocation limits,duration limits, value-at-risk limits, and, as appropriate, stress tests. Asset allocation limits place restrictions on the aggregate fair value which may be invested within an asset class. Duration limits on the life and annuity investment portfolios, and, as appropriate, on individual components of these portfolios (such as those of the Company), place restrictions on the amount of interest rate risk which may be taken. Value-at-risk measures the potential loss in fair value that could arise from adverse movements in the fixed income, equity, and currency markets over a time interval, based on historical volatilities and correlations between market risk factors. Stress tests measure downside risk to fair value and earnings over longer time intervals and/or for adverse market scenarios. The day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by asset allocation, duration and other limits, including but not limited to credit and liquidity. 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 has certain interest-sensitive liabilities. The Company manages the interest rate risk inherent in its assets relative to the interest rate risk inherent in its liabilities. One of the measures the Company uses to quantify this exposure is duration. Duration measures the sensitivity of the fair value of assets and liabilities to changes in interest rates. For example, if interest rates increase 1%, the fair value of an asset with a duration of 5 years is expected to decrease in value by approximately 5%. At December 31, 1997, the difference between the Company's liability and asset duration was approximately 2.8 years. 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 on universal life policies and investment contracts to create future cash flows that will fund future claims, benefits and expenses, and 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, and uses financial futures to hedge the interest rate risk related to anticipatory purchases and sales of investments and product sales to customers. To calculate duration, the Company projects asset and liability cash flows, and discounts them to a net present value basis using a risk-free market rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates, and determining the percentage change in fair value from the base case. The cash flows used in the model reflect the expected maturity and repricing characteristics of the Company's derivative financial instruments, all other financial instruments (see Note 5 to the financial statements), and certain non-financial instruments including interest-sensitive annuity liabilities. The projections include assumptions (based upon historical market and Company specific experience) reflecting the impact of changing interest rates on the prepayment, lapse, leverage and/or option features of instruments, where applicable. Such assumptions relate primarily to mortgage-backed securities, collateralized mortgage obligations, municipal bonds, municipal and corporate obligations, and fixed rate single and flexible premium deferred annuities. Based upon the information and assumptions the Company uses in its duration calculation and in effect at December 31, 1997, management estimates that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would decrease the net fair value of its assets and liabilities identified above by approximately $16.8 million. The selection of a 100 basis point immediate rate shock should not be construed as a prediction by the Company's management of future market events; but rather, to illustrate 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 (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. LIQUIDITY AND CAPITAL RESOURCES CAPITAL RESOURCES The NAIC has a standard for assessing the solvency of insurance companies, which is referred to as risk-based capital ("RBC"). The requirement consists of a formula for determining each insurer's RBC and a model law specifying regulatory actions if an insurer's RBC falls below specified levels. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks. At December 31, 1997, RBC for the Company was significantly above a level that would require regulatory action. 25 26 FINANCIAL RATINGS AND STRENGTH Claims-paying ability ratings at December 31, 1997 assigned to the Company include AA+, A+(g) and Aa2 from Standard & Poor's, A.M. Best and Moody's, respectively. LIQUIDITY The Company's principal sources of funds are collections of principal and interest from the investment portfolio and the receipt of premiums and deposits. The primary uses of these funds are to purchase investments and pay policyholder claims, benefits, contract maturities and surrenders, and operating costs. The maturity structure of the Company's fixed income securities, which represent 92.0% 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 product portfolio, primarily fixed deferred annuity and universal life insurance products, is subject to discretionary surrender and withdrawal by contractholders. Management believes its assets are sufficiently liquid to meet future obligations to its life and annuity contractholders under various interest rate scenarios. OTHER DEVELOPMENTS Final approval of the NAIC's proposed "Comprehensive Guide" on statutory accounting principles is expected in early 1998. Implementation could be as early as January 1, 1999. The requirements of the Comprehensive Guide are not expected to have a material impact on statutory surplus. YEAR 2000 The Company is heavily dependent upon complex computer systems for all phases of its operations, including customer service, risk management and policy and contract administration. Since many of the Company's older computer software programs recognize only the last two digits of the year in any date, some software may fail to operate properly in or after the year 1999, if the software is not reprogrammed or replaced, ("Year 2000 Issue"). The Company believes that many of its counterparties and suppliers also have Year 2000 Issues which could affect the Company. In 1995, AIC commenced a plan intended to mitigate and/or prevent the adverse effects of Year 2000 Issues. These strategies include normal development and enhancement of new and existing systems, upgrades to operating systems already covered by maintenance agreements and modifications to existing systems to make them Year 2000 compliant. The plan also includes the Company actively working with its major external counterparties and suppliers to assess their compliance efforts and the Company's exposure to them. The Company presently believes that it will resolve the Year 2000 Issue in a timely manner, and the financial impact will not materially affect its results of operations, liquidity or financial position. Year 2000 costs are and will be expensed as incurred. PENDING ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 requires the presentation of comprehensive income in the financial statements. Comprehensive income is a measurement of all changes in equity that result from transactions and other economic events other than transactions with stockholders. The requirements of this statement will be adopted effective January 1, 1998. SFAS No. 131 redefines how segments are determined and requires additional segment disclosures for both annual and quarterly reporting. Under this statement, segments are determined using the "management approach" for financial statement reporting. The management approach is based on the way an enterprise makes operating decisions and assesses performance of its businesses. The Company is currently reviewing the requirements of this SFAS and has yet to determine its impact on its current reporting segments. The requirements of this statement will be adopted effective December 31, 1998. In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP provides guidance concerning when to recognize a liability for insurance-related assessments and how those liabilities should be measured. Specifically, insurance-related assessments should be recognized as liabilities when all of the following criteria have been met: a) an assessment has been imposed or it is probable that an assessment will be imposed, b) the event obligating an entity to pay an assessment has occurred and c) the amount of the assessment can be reasonably estimated. The requirements of this standard will be adopted in 1999 and are not expected to have a material impact on the results of operations, cash flows or financial position of the Company. The SOP is expected to be adopted in 1999. In March 1998, the Accounting Standards Executive Committee of the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. Specifically, certain external, payroll and payroll related costs should be capitalized during the application development state of a project and depreciated over the computer software's useful life. The Company currently 26 27 expenses these costs as incurred and is evaluating the effects of this SOP on its accounting for internally developed software. The SOP is expected to be adopted in 1998. FORWARD-LOOKING STATEMENTS The statements contained in this Management's Discussion and Analysis that are not historical information are forward-looking statements that are based on management's estimates, assumptions and projections. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of 1933 and The Securities Exchange Act of 1934 for forward-looking statements. COMPETITION The Company 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. There are approximately 1,700 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 A+(g) to the Company. Under Best's rating policy and procedure, the Company is assigned the Best's rating of its parent Company, and the rating is based on the consolidated performance of the parent and its subsidiary. Standard & Poor's Insurance Rating Services assigns AA+ (Excellent) to the Company's claims-paying ability and Moody's assigns an Aa2 (Excellent) financial strength rating to the Company. These ratings do not relate to the investment performance of the Variable Account. EMPLOYEES As of December 31, 1997, the Company had approximately 66 employees at its home office in Farmingville, New York who work primarily on the Company's matters. PROPERTIES The Company occupies office space in Farmingville, New York and Northbrook, Illinois, both of which are owned by its parent company. STATE AND FEDERAL REGULATION The insurance business of the Company is subject to comprehensive and detailed regulation and supervision in the State of New York. The laws of New York establish a supervisory agency with broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amounts of investments permitted. Each insurance company is required to file detailed annual reports with the supervisory agency and its operations and accounts are subject to examination by such agency at regular intervals. Under insurance guaranty fund law, for the State of New York, insurers doing business therein can be assessed up to prescribed limits for contract owner losses incurred as a result of company insolvencies. The amount of any future assessments on the Company under these laws cannot be reasonably estimated. These laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. In addition, the State of New York regulates affiliated groups of insurers, such as the Company and its affiliates, under insurance holding company legislation. Under such laws, intercompany transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefit regulation, controls on medical care costs, removal of barriers preventing banks from engaging in the securities and insurance business, 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 proposed legislation to prohibit the use of gender in determining insurance and pension rates and benefits. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The directors and executive officers are listed below, together with information as to their ages, dates of election and principal business occupations during the last five years (if other than their present business occupations). 27 28 LOUIS G. LOWER, II, 52, Chairman of the Board and President (1992)* Also Director (1986-Present) and Senior Vice President (1995-Present) of Allstate Insurance Company; Director (1991-Present) of Allstate Life Financial Services, Inc.; Director (1986-Present) and President (1990-Present) Allstate Life Insurance Company; Director (1983-Present) and Chairman of the Board (1990-Present) of Allstate Life Insurance Company of New York; Chairman of the Board of Directors and Chief Executive Officer (1995-1997), Chairman of the Board of Directors and President (1990-1995) of Glenbrook Life Insurance Company; Director (1992-Present), Chairman of the Board of Directors and Chief Executive Officer (1995-Present) of Glenbrook Life and Annuity Company; Director and Chairman of the Board (1995-Present) of Laughlin Group Holdings, Inc.; Director and Chairman of the Board of Directors and Chief Executive Officer (1989-Present) Lincoln Benefit Life Company; Chairman of the Board of Directors and Chief Executive Officer (1995-Present) of Northbrook Life Insurance Company; and Chairman of the Board of Directors and Chief Executive Officer (1995-Present) Surety Life Insurance Company. MICHAEL J. VELOTTA, 52, Vice President, Secretary, General Counsel, and Director (1993)* Also Director and Secretary (1993-Present) of Allstate Life Financial Services, Inc.; Director (1992-Present) Vice President, Secretary and General Counsel (1993-Present) Allstate Life Insurance Company; Director (1992-Present) Vice President, Secretary and General Counsel (1993-Present) Allstate Life Insurance Company of New York; Director (1992-1997) Vice President, Secretary and General Counsel (1993-1997) Glenbrook Life Insurance Company; Director (1992-Present) Vice President, Secretary and General Counsel (1993-Present) Glenbrook Life and Annuity Company; Director and Secretary (1995-Present) Laughlin Group Holdings, Inc.; Director (1992-Present) and Assistant Secretary (1995-Present) Lincoln Benefit Life Company; Director (1992-Present) Vice President, Secretary and General Counsel (1993-Present) Northbrook Life Insurance Company; and Director and Assistant Secretary (1995-Present) Surety Life Insurance Company. VINCENT FUSCO, 42, Chief Operations Officer and Director, (1997)* Prior to 1997, Mr. Fusco was a Regional Vice President for Allstate Insurance Company. SHARMAINE M. MILLER, 43, Director and Chief Administrative Officer (1996)* Prior to 1996, Ms. Miller was a Department manager for Allstate Insurance Company. PETER H. HECKMAN, 52, Vice President (1992)* Also Director and Vice President (1988-Present) of Allstate Life Insurance Company; Director (1990-1996), Vice President (1989-Present), Allstate Life Insurance Company of New York; Director (1991-1993) of Allstate Life Financial Services, Inc.; Director (1990-1997), President and Chief Operating Officer (1996-1997), and Vice President (1990-1996), Glenbrook Life Insurance Company; Director (1992-Present) President and Chief Operating Officer (1996-Present), and was Vice President (1995-1996), Glenbrook Life and Annuity Company; Director (1995-Present) and Vice Chairman of the Board (1996-Present) Laughlin Group Holdings, Inc.; Director (1990-Present) and Vice Chairman of the Board (1996-Present) Lincoln Benefit Life Company; Director (1988-Present) President and Chief Operating Officer (1996-Present), and was Vice President (1989-1996), Northbrook Life Insurance Company; and Director (1995-Present) and Vice Chairman of the Board (1996-Present) Surety Life Insurance Company TIMOTHY H. PLOHG, 51, Vice President and Director (1995)* Also Assistant Vice President (1991-Present), Allstate Life Insurance Company; Vice President and Director (1995-Present) Allstate Life Insurance Company of New York. Prior to 1995, he was Vice President of the Allstate Life Service Center; Assistant Vice President Sales, Regional Vice President. MARLA G. FRIEDMAN, 44, Vice President and Director (1997)* Also Director (1991-Present) and Vice President (1988-Present) Allstate Life Insurance Company; Director (1993-1996) Allstate Life Financial Services, Inc.; Director (1991-1996), President and Chief Operating Officer (1995-1996) and Vice President (1990-1995) and (1996-1997) Glenbrook Life Insurance Company; Vice President (1996-Present) Glenbrook Life and Annuity Company; Director and Vice Chairman of the Board (1995-1996) Laughlin Group Holdings, Inc.; and Director (1989-1996), President and Chief Operating Officer (1995-1996) and Vice President (1996-Present) Northbrook Life Insurance Company. KAREN C. GARDNER, 44, Vice President (1996)* Vice President (1996-Present) Allstate Insurance Company; Vice President (1996-Present) Allstate Life Insurance Company; Vice President (1996-Present) Allstate Life Insurance Company of New York; Vice President (1996-1997) Glenbrook Life Insurance Company; Vice President (1996-Present) Laughlin Group Holdings, Inc.; Assistant Vice President (1996-Present) Lincoln Benefit Life Company; Vice President (1996-Present) Northbrook Life Insurance Company; Assistant Vice President (1996-Present) Surety Life Insurance Company. Prior to 1996 she was a Partner (1975-1996) Ernst & Young LLP. 28 29 THOMAS A. MCAVITY, 56, Vice President (1996)* Also Vice President (1996-Present) Allstate Life Insurance Company. Prior to 1996 he was Vice President of Lincoln Investment Management. KEVIN R. SLAWIN, 40, Director and Vice President (1996)* Also Assistant Vice President and Assistant Treasurer (1995-1996) Allstate Insurance Company; Director (1996-Present) and Assistant Treasurer (1995-1996) Allstate Life Financial Services, Inc.; Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Allstate Life Insurance Company; Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Allstate Life Insurance Company of New York; Director and Vice President (1996-1997) and Assistant Treasurer (1995-1996) Glenbrook Life Insurance Company; Vice President (1996-Present) and Assistant Treasurer (1995-1996) Glenbrook Life and Annuity Company; Director (1996-Present) and Assistant Treasurer (1995-1996) Laughlin Group Holdings, Inc.; Director (1996-Present) Lincoln Benefit Life Company; Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Northbrook Life Insurance Company; Director (1996-Present) Surety Life Insurance Company; Assistant Treasurer and Director (1994-1995) Sears Roebuck and Co.; and Treasurer and First Vice President (1986-1994) Sears Mortgage Corporation. CASEY J. SYLLA, 54, Chief Investment Officer and Director (1995)* Also Director (1995-Present ) Senior Vice President and Chief Investment Officer (1995-Present) Allstate Insurance Company; Director (1995-Present) Chief Investment Officer (1995-Present) Allstate Life Insurance Company; Chief Investment Officer (1995-Present) Allstate Life Insurance Company of New York; Chief Investment Officer (1995-1997) Glenbrook Life Insurance Company; Chief Investment Officer (1995-Present) Glenbrook Life and Annuity Company; and Director and Chief Investment Officer (1995-Present) Northbrook Life Insurance Company. Prior to 1995 he was Senior Vice President and Executive Officer - Investments (1992-1995) of Northwestern Mutual Life Insurance Company. JAMES P. ZILS, 47, Treasurer (1995)* Also Vice President and Treasurer (1995-Present) Allstate Insurance Company; Treasurer (1995-Present) Allstate Life Financial Services, Inc.; Treasurer (1995-Present) Allstate Life Insurance Company; Treasurer (1995-Present) Allstate Life Insurance Company of New York; Treasurer (1995-1997) Glenbrook Life Insurance Company; Treasurer (1995-Present) Glenbrook Life and Annuity Company; Treasurer (1995-Present) Laughlin Group Holdings, Inc. and Treasurer (1995-Present) Northbrook Life Insurance Company. Prior to 1995, he was Vice President of Allstate Life Insurance Company. Prior to 1993, he held various management positions. MARCIA D. ALAZRAKI, 56, Director (1993)* Ms. Alazraki is an attorney practicing with the firm of Simpson, Thatcher & Bartlett, New York, New York. Prior to 1991, she practiced with the firm of Shea & Gould, New York, New York. JOSEPH F. CARLINO, 80, Director (1983)* Mr. Carlino is a self-employed practicing attorney in Mineola, New York. CLEVELAND JOHNSON, JR., 63, Director (1983)* Mr. Johnson, Jr. is currently a Business Development Advocate for the Town of Islip, Division of Economic Development. Previously he was a Vice president with State University of New York in Farmingdale, New York. GERARD F. MCDERMOTT, 51, Director (1995)* Mr. McDermott is also a Regional Vice President of Allstate Insurance Company. Prior to 1992, he held various management positions. JOSEPH P. MCFADDEN, 59, Director (1992)* Mr. McFadden is also a Territorial Vice President of Allstate Insurance Company. Prior to 1992, he was a Claim Vice President of Allstate Insurance Company. JOHN R. RABEN, JR., 52, Director (1988)* Mr. Raben, Jr. is also Vice President & Municipal Bond/Public Finance Liaison with J.P. Morgan Securities, Inc. SALLY A. SLACKE, 65, (Director) (1983)* Ms. Slacke is also President of Slacke Test Boring, Inc. PATRICIA W. WILSON, 45, Director (1997)* Also Assistant Vice President (1993-Present), Assistant Secretary and Assistant Treasurer (1997-Present), Allstate Life Insurance Company; Assistant Treasurer (1997-Present) Glenbrook Life and Annuity Company; Director (1997-Present) Lincoln Benefit Life 29 30 Company; Assistant Vice President, Assistant Secretary and Assistant Treasurer (1997-Present) Northbrook Life Insurance Company; and Director (1997-Present) Surety Life Insurance Company. - ------------ *Date elected/appointed to current office. EXECUTIVE COMPENSATION Executive officers of the Company also serve as officers of its parent company and receive no compensation directly from the Company. Some of the officers also serve as officers of other companies affiliated with the Company. Allocations have been made as to each individual's time devoted to his or her duties as an executive officer of the Company. However, no officer's compensation allocated to the Company exceeded $100,000 in 1997. The allocated cash compensation of all officers of the Company as a group for services rendered in all capacities to the Company during 1997 totaled $13,025.14. Directors of the Company receive no compensation in addition to their compensation as employees of the Company. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ---------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS -------------------------- ------------ ---------- (A) (B) (C) (D) (F) (E) SECURITIES (G) (H) (I) OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) AWARD(S) (#) ($) ($) --------------------------- ---- -------- -------- ------------ ---------- ------------ -------- ------------ Louis G. Lower, II............. 1997 $453,225 $500,000 $27,768 $280,589 25,914 $570,068 $8,000(1) President and Chairman 1996 $436,800 $246,781 $10,246 0 18,258 0 $5,250(1) of the Board of Directors 1995 $416,000 $286,650 $17,044 $ 0 89,359 $411,122 $5,250(1) James J. Brazda(2)............. 1995 $115,870 $ 27,808 $ 175 0 N/A 0 $5,761(3) Chief Administrative Officer and Director
- ------------ (1) Amount received by Mr. Lower which represents the value allocated to his account from employer contributions under The Savings and Profit Sharing Fund of Allstate Employees and prior to 1996, to The Profit Sharing Fund and to its predecessor, The Savings and Profit Sharing Fund of Sears employees. (2) Mr. Brazda no longer serves in this capacity for Allstate Life Insurance Company of New York. (3) Amount received by Mr. Brazda which represents the value allocated to his account from employer contributions under The Profit Sharing Fund and to its predecessor, The Savings and Profit Sharing Fund of Sears employees. Shares of the Company are not directly owned by any director or officer of the Company. The percentage of shares of The Allstate Corporation beneficially owned by any director, and by all directors and officers of the Company as a group, does not exceed one percent of the class outstanding. LEGAL PROCEEDINGS 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. 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 condition of the Company. EXPERTS The financial statements of the Variable Account incorporated by reference in this prospectus, and the financial statements and financial statement schedules of the Company included in this prospectus have been audited by Deloitte & Touche LLP, Two Prudential Plaza, 180 North Stetson Avenue, Chicago, Illinois, 60601-6779, independent auditors, as stated in their reports appearing herein and incorporated by reference in this prospectus, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS Jorden Burt Boros Cicchetti Berenson & Johnson LLP, Washington, D.C., has provided advice on certain legal matters relating to the federal securities laws applicable to the issue and sale of the Contracts. All matters of New York law pertaining to the Contracts, including the validity of the Contracts and the Company's right to issue such Contracts under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of the Company. 30 31 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") as of December 31, 1997 and 1996, and the related Statements of Operations, Shareholder's Equity and Cash Flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. 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, 1998 F-1 32 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- ($ IN THOUSANDS) ASSETS Investments Fixed income securities, at fair value (amortized cost $1,510,110 and $1,378,155)............................ $1,756,257 $1,500,783 Mortgage loans......................................... 114,627 84,657 Policy loans........................................... 27,600 25,359 Short-term............................................. 9,513 25,855 ---------- ---------- Total investments...................................... 1,907,997 1,636,654 Deferred acquisition costs................................ 71,946 61,559 Accrued investment income................................. 21,725 20,321 Reinsurance recoverables.................................. 1,726 2,566 Cash...................................................... 393 1,027 Other assets.............................................. 6,167 7,489 Separate Accounts......................................... 308,595 260,668 ---------- ---------- Total assets...................................... $2,318,549 $1,990,284 ========== ========== LIABILITIES Reserve for life-contingent contract benefits............. $1,084,409 $ 911,457 Contractholder funds...................................... 607,474 572,480 Income taxes payable...................................... 1,419 -- Deferred income taxes..................................... 16,990 3,692 Other liabilities and accrued expenses.................... 10,985 6,405 Net payable to affiliates................................. 5,267 2,515 Separate Accounts......................................... 308,595 260,668 ---------- ---------- Total liabilities................................. 2,035,139 1,757,217 ---------- ---------- SHAREHOLDER'S EQUITY Common stock, $25 par value, 80,000 shares authorized, issued and outstanding................................. 2,000 2,000 Additional capital paid-in................................ 45,787 45,787 Unrealized net capital gains.............................. 64,479 36,852 Retained income........................................... 171,144 148,428 ---------- ---------- Total shareholder's equity........................ 283,410 233,067 ---------- ---------- Total liabilities and shareholder's equity........ $2,318,549 $1,990,284 ========== ==========
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- ($ IN THOUSANDS) REVENUES Premiums (net of reinsurance ceded of $3,087, $2,273 and $2,147)................................................ $ 90,366 $ 91,825 $126,713 Contract charges.......................................... 28,597 25,281 21,603 Net investment income..................................... 124,887 112,862 104,384 Realized capital gains and losses......................... 701 (1,581) (1,846) -------- -------- -------- 244,551 228,387 250,854 -------- -------- -------- COSTS AND EXPENSES Contract benefits (net of reinsurance recoveries of $1,985, $2,827 and $1,581)............................. 179,872 172,772 198,055 Amortization of deferred acquisition costs................ 5,023 6,512 5,502 Operating costs and expenses.............................. 23,644 16,874 17,864 -------- -------- -------- 208,539 196,158 221,421 -------- -------- -------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE............ 36,012 32,229 29,433 INCOME TAX EXPENSE.......................................... 13,296 11,668 9,911 -------- -------- -------- NET INCOME.................................................. $ 22,716 $ 20,561 $ 19,522 ======== ======== ========
See notes to financial statements. F-2 33 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 -------- -------- -------- ($ IN THOUSANDS) COMMON STOCK................................................ $ 2,000 $ 2,000 $ 2,000 -------- -------- -------- ADDITIONAL CAPITAL PAID-IN.................................. 45,787 45,787 45,787 -------- -------- -------- UNREALIZED NET CAPITAL GAINS Balance, beginning of year................................ 36,852 74,413 (6,891) Net change................................................ 27,627 (37,561) 81,304 -------- -------- -------- Balance, end of year...................................... 64,479 36,852 74,413 -------- -------- -------- RETAINED INCOME Balance, beginning of year................................ 148,428 127,867 108,345 Net income................................................ 22,716 20,561 19,522 -------- -------- -------- Balance, end of year...................................... 171,144 148,428 127,867 -------- -------- -------- Total shareholder's equity............................. $283,410 $233,067 $250,067 ======== ======== ========
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 --------- --------- --------- ($ IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 22,716 $ 20,561 $ 19,522 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, amortization and other non-cash items.... (31,112) (26,172) (22,348) Realized capital gains and losses...................... (701) 1,581 1,846 Interest credited to contractholder funds.............. 31,667 25,817 26,924 Increase in life-contingent contract benefits and contractholder funds.................................. 68,114 75,217 103,513 Increase in deferred acquisition costs................. (10,781) (6,859) (5,537) Increase in accrued investment income.................. (1,404) (1,493) (2,497) Change in deferred income taxes........................ (1,578) 257...... (2,677) Changes in other operating assets and liabilities...... 11,369 (4,234) 3,897 --------- --------- --------- Net cash provided by operating activities......... 88,290 84,675 122,643 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of fixed income securities............ 15,723 28,454 13,526 Investment collections Fixed income securities available for sale............. 120,061 72,751 30,871 Fixed income securities held to maturity............... -- -- 3,067 Mortgage loans......................................... 5,365 12,508 6,499 Investment purchases Fixed income securities available for sale............. (236,984) (236,252) (142,205) Fixed income securities held to maturity............... -- -- (32,046) Mortgage loans......................................... (35,200) (10,325) (9,864) Change in short-term investments, net..................... 16,342 (18,598) (45) Change in policy loans, net............................... (2,241) (2,574) (859) --------- --------- --------- Net cash used in investing activities............. (116,934) (154,036) (131,056) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits.............................. 79,384 115,420 76,534 Contractholder fund withdrawals........................... (51,374) (46,504) (68,412) --------- --------- --------- Net cash provided by financing activities......... 28,010 68,916 8,122 --------- --------- --------- NET DECREASE IN CASH........................................ (634) (445) (291) CASH AT BEGINNING OF YEAR................................... 1,027 1,472 1,763 --------- --------- --------- CASH AT END OF YEAR......................................... $ 393 $ 1,027 $ 1,472 ========= ========= =========
See notes to financial statements. F-3 34 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 1. GENERAL BASIS OF PRESENTATION The accompanying financial statements include the accounts of Allstate Life Insurance Company of New York (the "Company"). The Company is wholly owned by a wholly owned subsidiary ("Parent") of Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"). On June 30, 1995, Sears, Roebuck and Co. ( "Sears") distributed its 80.3% ownership in the Corporation to Sears common shareholders through a tax-free dividend (the "Distribution"). These financial statements have been prepared in conformity with generally accepted accounting principles. To conform with the 1997 presentation, certain amounts in the prior years' financial statements and notes have been reclassified. NATURE OF OPERATIONS The Company markets a broad line of life insurance and annuity products in the State of New York. Life insurance includes traditional products such as whole life and term life insurance, as well as universal life and other interest-sensitive life products. Annuities include deferred annuities, such as variable annuities and fixed rate single and flexible premium annuities, and immediate annuities such as structured settlement annuities. The Company distributes its products using a combination of Allstate agents which include life specialists, banks, independent agents, brokers and direct response marketing. Structured settlement annuity contracts issued by the Company are long-term in nature and involve fixed guarantees relating to the amount and timing of benefit payments. Single and flexible premium deferred annuity contracts issued by the Company are subject to discretionary withdrawal or surrender by the customers, subject to applicable surrender charges. In a low interest rate environment, funds from maturing investments, particularly those supporting long-term structured settlement annuity obligations, may be reinvested at substantially lower interest rates than those which prevailed when the funds were previously invested. The Company utilizes various modeling techniques in managing the relationship between assets and liabilities. The fixed income securities supporting the Company's obligations have been selected to meet, to the extent possible, the anticipated cash flow requirements of the related liabilities. The Company employs strategies to minimize its exposure to interest rate risk and to maintain investments which are sufficiently liquid to meet obligations to contractholders in various interest rate scenarios. The Company monitors economic and regulatory developments which have the potential to impact its business. There continues to be new and proposed federal and state regulation and legislation that would allow banks greater participation in the securities and insurance businesses, which will present an increased level of competition for sales of the Company's life and annuity products. Furthermore, the market for deferred annuities and interest-sensitive life insurance is enhanced by the tax incentives available under current law. Any legislative changes which lessen these incentives are likely to negatively impact the demand for these products. Although the Company currently benefits from agreements with financial services entities who market and distribute its products, consolidation within that industry and specifically, a change in control of those entities with which the Company partners, could affect the Company's sales. 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; (2) increasing competition in capital markets; and (3) reopening stock/mutual company disagreements related to such issues as taxation disparity between mutual and stock insurance companies. 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 difference between amortized cost and fair value, net of deferred income taxes, certain deferred acquisition costs, and reserves for life-contingent contract benefits, is reflected as a component of shareholder's equity. Provisions are recognized for declines in the value of fixed income securities that are other than temporary. Such writedowns are included in realized capital gains and losses. 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 F-4 35 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 future market conditions, and other factors. Short-term investments are carried at amortized cost which approximates fair value. Policy loans are carried at the unpaid principal balances. Investment income consists primarily 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. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes futures contracts which are derivative financial instruments. When futures meet specific criteria they may be designated as accounting hedges and accounted for on a deferral basis, depending upon the nature of the hedge strategy and the method used to account for the hedged item. If, subsequent to entering into a hedge transaction, the futures contract becomes ineffective (including if the hedged item is sold or otherwise extinguished or the occurrence of a hedged anticipatory transaction is no longer probable), the Company terminates the derivative position. Gains and losses on these terminations are reported in realized capital gains and losses in the period they occur. The Company may also terminate derivatives as a result of other events or circumstances. Gains and losses on these terminations are either deferred and amortized over the remaining life of either the hedge or the hedged item, whichever is shorter, or are reported in shareholder's equity, consistent with the accounting for the hedged item. Futures contracts must reduce the primary market risk exposure on an enterprise basis in conjunction with the 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. Under deferral accounting, gains and losses on derivatives are deferred on the statement of financial position and recognized in earnings in conjunction with earnings on the hedged item. The Company accounts for interest rate futures contracts as hedges using deferral accounting for anticipatory investment purchases and sales when the criteria for futures (discussed above) are met. In addition, anticipated transactions must be probable of occurrence and their significant terms and characteristics identified. Changes in fair values of these types of derivatives are initially deferred as other liabilities and accrued expenses. Once the anticipated transaction occurs, the deferred gains or losses are considered part of the cost basis of the asset and reported net of tax in shareholder's equity or recognized as a gain or loss from disposition of the asset, as appropriate. The Company reports initial margin deposits on futures in short-term investments. Fees and commissions paid on these derivatives are also deferred as an adjustment to the carrying value of the hedged item. RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES Premiums for traditional life insurance are recognized as revenue when due. Accident and disability premiums are earned on a pro rata basis over the policy period. Revenues on interest-sensitive life insurance policies are comprised of contract charges and fees, and are recognized when assessed against the policyholder account balance. Revenues on most annuities, which are considered investment contracts, include contract charges and fees for contract administration and surrenders. These revenues are recognized when levied against the contract balance. Gross premium in excess of the net premium on limited payment contracts, primarily structured settlement annuities when sold with life contingencies, are deferred and recognized over the contract period. REINSURANCE Certain premiums and contract benefits are ceded and reflected net of such cessions in the statements of operations. Reinsurance recoverable and the related reserves for life-contingent contract benefits are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. DEFERRED ACQUISITION COSTS Certain costs of acquiring life and annuity business, principally agents' remuneration, premium taxes, certain underwriting costs and direct mail solicitation expenses are deferred and amortized to income. For traditional life insurance, limited payment contracts and F-5 36 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) accident and disability insurance, these costs are amortized in proportion to the estimated revenues on such business. For universal life-type policies and investment contracts, the costs are amortized in relation to the present value of estimated gross profits on such business. 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 gains or losses on fixed income securities carried at fair value would result in an adjustment of deferred acquisition costs had those gains or losses actually been realized, the related unamortized deferred acquisition costs are recorded as a reduction of the unrealized gains or losses included in shareholder's equity, net of deferred income taxes. 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 insurance reserves and deferred acquisition costs. Deferred income taxes also arise from unrealized capital gains and losses on fixed income securities carried at fair value. SEPARATE ACCOUNTS The Company issues flexible premium deferred variable annuity contracts, the assets and liabilities of which are legally segregated and reflected in the accompanying statements of financial position as assets and liabilities of the Separate Accounts (Allstate Life of New York Variable Annuity Account, Allstate Life of New York Variable Annuity Account II and Allstate Life of New York Separate Account A, unit investment trusts registered with the Securities and Exchange Commission). The assets of the Separate Accounts are carried at fair value. 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 fees, administration fees and mortality and expense risk charges. RESERVES FOR LIFE-CONTINGENT CONTRACT BENEFITS The reserve for life-contingent contract benefits, which relates to traditional life insurance, group annuities and structured settlement annuities with life contingencies, disability insurance and accident insurance, is computed on the basis of 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. Reserve interest rates ranged from 4.00% to 11.00% during 1997. 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 as a reduction of the unrealized gains included in shareholder's equity, net of deferred income taxes. CONTRACTHOLDER FUNDS Contractholder funds arise from the issuance of individual or group policies and contracts that include an investment component, including most annuities and universal life policies. Payments received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less withdrawals, mortality charges and administrative expenses. Credited interest rates on contractholder funds ranged from 3.30% to 9.75% for those contracts with fixed interest rates and from 3.25% to 7.75% for those with flexible rates during 1997. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Commitments to extend mortgage loans have only off-balance-sheet risk because their contractual amounts are not recorded in the Company's statements of financial position. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-6 37 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 3. RELATED PARTY TRANSACTIONS REINSURANCE The Company cedes business to the Parent under reinsurance treaties to limit aggregate and single exposures on large risks. Premiums and policy benefits ceded totaled $2,171 and $327 in 1997, $1,383 and $1,662 in 1996, and $1,259 and $278 in 1995, respectively. Included in the reinsurance recoverable at December 31, 1997 and 1996 are amounts due from the Parent of $342 and $965, respectively. STRUCTURED SETTLEMENT ANNUITIES AIC, through an affiliate, purchased $12,766, $15,610 and $11,243 of structured settlement annuities from the Company in 1997, 1996 and 1995, respectively. Of these amounts, $3,468, $8,517 and $4,164 relate to structured settlement annuities with life contingencies and are included in premium income in 1997, 1996 and 1995, respectively. Additionally, the reserve for life-contingent contract benefits was increased by approximately 94% of such premium received in each of these years. BUSINESS OPERATIONS The Company utilizes services and business facilities owned or leased, and operated by AIC in conducting its business activities. The Company reimburses AIC for the operating expenses incurred by AIC on behalf of the Company. The cost to the Company is determined by various allocation methods and is primarily related to the level of services provided. Expenses allocated to the Company were $27,632, $23,134 and $21,288 in 1997, 1996 and 1995, respectively. A portion of these expenses related to the acquisition of life and annuity business is deferred and amortized over the contract period. 4. INVESTMENTS FAIR VALUES The amortized cost, gross unrealized gains and losses, and fair value for fixed income securities are as follows:
GROSS UNREALIZED AMORTIZED ------------------ FAIR COST GAINS LOSSES VALUE ---------- -------- ------- ---------- AT DECEMBER 31, 1997 U.S. government and agencies............................... $ 416,203 $126,824 $ (212) $ 542,815 Municipal.................................................. 35,382 2,449 (22) 37,809 Corporate.................................................. 803,935 103,700 (479) 907,156 Mortgage-backed securities................................. 215,465 13,442 (166) 228,741 Asset-backed securities.................................... 39,125 642 (31) 39,736 ---------- -------- ------- ---------- Total fixed income securities............................ $1,510,110 $247,057 $ (910) $1,756,257 ========== ======== ======= ========== AT DECEMBER 31, 1996 U.S. government and agencies............................... $ 387,806 $ 54,349 $(2,642) $ 439,513 Municipal.................................................. 36,158 1,883 (406) 37,635 Corporate.................................................. 734,500 68,022 (4,592) 797,930 Mortgage-backed securities................................. 188,480 6,793 (1,106) 194,167 Asset-backed securities.................................... 31,211 394 (67) 31,538 ---------- -------- ------- ---------- Total fixed income securities............................ $1,378,155 $131,441 $(8,813) $1,500,783 ========== ======== ======= ==========
F-7 38 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 4. INVESTMENTS (CONTINUED) SCHEDULED MATURITIES The scheduled maturities for fixed income securities are as follows at December 31, 1997:
AMORTIZED FAIR COST VALUE ---------- ---------- Due in one year or less..................................... $ 18,751 $ 18,839 Due after one year through five years....................... 74,886 77,931 Due after five years through ten years...................... 221,116 237,020 Due after ten years......................................... 940,767 1,153,990 ---------- ---------- 1,255,520 1,487,780 Mortgage- and asset-backed securities....................... 254,590 268,477 ---------- ---------- Total..................................................... $1,510,110 $1,756,257 ========== ==========
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- Fixed income securities..................................... $116,763 $104,583 $ 95,212 Mortgage loans.............................................. 7,896 7,113 7,999 Other....................................................... 2,200 2,942 2,744 -------- -------- -------- Investment income, before expense......................... 126,859 114,638 105,955 Investment expense........................................ 1,972 1,776 1,571 -------- -------- -------- Net investment income..................................... $124,887 $112,862 $104,384 -------- -------- --------
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- Fixed income securities..................................... $ 922 $ (1,522) $ 422 Mortgage loans.............................................. (221) (59) (2,268) -------- -------- -------- Realized capital gains and losses......................... 701 (1,581) (1,846) Income tax expense (benefit).............................. 245 (553) (646) -------- -------- -------- Realized capital gains and losses, after tax.............. $ 456 $ (1,028) $ (1,200) ======== ======== ========
Excluding calls and prepayments, gross gains of $471, $480 and $172 and gross losses of $105, $2,308 and $105 were realized on sales of fixed income securities during 1997, 1996 and 1995, respectively. UNREALIZED NET CAPITAL GAINS Unrealized net capital gains on fixed income securities included in shareholder's equity at December 31, 1997 are as follows:
COST/ UNREALIZED AMORTIZED FAIR NET COST VALUE GAINS ---------- ---------- ---------- Fixed income securities..................................... $1,510,110 $1,756,257 $ 246,147 ========== ========== Reserves for life insurance policy benefits................. (145,455) Deferred income taxes....................................... (34,720) Deferred acquisition costs and other........................ (1,493) --------- Unrealized net capital gains.............................. $ 64,479 ---------
F-8 39 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 4. INVESTMENTS (CONTINUED) CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31, ------------------------------------ 1997 1996 1995 -------- -------- -------- Fixed income securities..................................... $123,519 $(82,847) $216,975 Reserves for life insurance policy benefits................. (80,155) 24,300 (89,600) Deferred income taxes....................................... (14,876) 20,224 (43,779) Deferred acquisition costs and other........................ (861) 762 (2,292) -------- -------- -------- Increase (decrease) in unrealized net capital gains......... $ 27,627 $(37,561) $ 81,304 ======== ======== ========
INVESTMENT LOSS PROVISIONS AND VALUATION ALLOWANCES Pretax provisions for investment losses, principally relating to other than temporary declines in value of fixed income securities and valuation allowances on mortgage loans were $261, $208 and $2,448 in 1997, 1996 and 1995, respectively. MORTGAGE LOAN IMPAIRMENT A mortgage loan is impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company had no impaired loans at December 31, 1997 and 1996. The net carrying value of impaired loans at December 31, 1995 was $9,647, measured at the fair value of the collateral. The total investment in impaired mortgage loans before valuation allowance at December 31, 1995 was $11,581 and the related allowance on these impaired loans was $1,934. Activity in the valuation allowance for all mortgage loans for the years ended December 31, 1997, 1996 and 1995 is summarized as follows:
1997 1996 1995 -------- -------- ------- Balance at January 1........................................ $ 225 $ 1,952 $ 1,179 Net additions (reductions).................................. 261 (296) 1,923 Direct write-downs.......................................... -- (1,431) (1,150) -------- -------- ------- Balance at December 31...................................... $ 486 $ 225 $ 1,952 ======== ======== =======
Interest income is recognized on a cash basis for impaired loans carried at the fair value of the collateral, beginning at the time of impairment. For other impaired loans, interest is accrued based on the net carrying value. There were no impaired loans during 1997. The Company recognized interest income of $281 and $1,398 on impaired loans during 1996 and 1995, respectively, of which $281 and $1,194 was received in cash during 1996 and 1995, respectively. The average recorded investment in impaired loans was $5,154 and $8,900 during 1996 and 1995, respectively. F-9 40 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 4. INVESTMENTS (CONTINUED) 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, 1997 and 1996:
1997 1996 ----- ----- (% OF MUNICIPAL BOND PORTFOLIO CARRYING VALUE) Ohio........................................................ 28.4% 25.9% California.................................................. 22.7 24.3 Illinois.................................................... 19.8 19.0 Maryland.................................................... 8.0 7.8 Maine....................................................... 5.6 5.7 Minnesota................................................... 5.5 5.3 New York.................................................... 5.4 5.3
The Company's mortgage loans are collateralized by a variety of commercial real estate property types located throughout the United States. Substantially all of the commercial mortgage loans are non-recourse to the borrower. The states with the largest portion of the commercial mortgage loan portfolio are listed below. Except for the following, holdings in no other state exceed 5% of the portfolio at December 31, 1997 and 1996:
1997 1996 ---- ---- (% OF COMMERCIAL MORTGAGE PORTFOLIO CARRYING VALUE) California.................................................. 47.7% 49.1% New York.................................................... 30.5 21.1 Illinois.................................................... 15.3 21.3
The types of properties collateralizing the commercial mortgage loans at December 31, are as follows:
1997 1996 ----- ----- (% OF COMMERCIAL MORTGAGE PORTFOLIO CARRYING VALUE) Retail...................................................... 38.8% 39.1% Warehouse................................................... 25.4 24.2 Office buildings............................................ 15.3 14.3 Apartment complex........................................... 14.9 14.6 Industrial.................................................. 4.9 6.8 Other....................................................... 0.7 1.0 ----- ----- 100.0% 100.0% ===== =====
The contractual maturities of the commercial mortgage loan portfolio as of December 31, 1997, for loans that were not in foreclosure are as follows:
NUMBER OF LOANS CARRYING VALUE PERCENT --------------- -------------- ------- 1999........................................................ 3 $ 5,302 4.6% 2000........................................................ 4 7,927 6.9 2001........................................................ 5 7,340 6.4 2002........................................................ 2 6,385 5.6 Thereafter.................................................. 23 87,673 76.5 -- -------- ----- Total..................................................... 37 $114,627 100.0% == ======== =====
F-10 41 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 4. INVESTMENTS (CONTINUED) In 1997, $7.3 million of commercial mortgage loans were contractually due. Of these, 20.9% were paid as due and 79.1% were refinanced at prevailing market terms. SECURITIES ON DEPOSIT At December 31, 1997, fixed income securities with a carrying value of $1,981 were on deposit with regulatory authorities as required by law. 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 acquisition costs and reinsurance recoverables) and liabilities (including reserve for life-contingent contract benefits and deferred income taxes) are not considered financial instruments and are not carried at fair value. Other assets and liabilities considered financial instruments, accrued investment income and cash are generally of a short-term nature. It is assumed that their carrying value approximates fair value. FINANCIAL ASSETS The carrying value and fair value of financial assets at December 31, are as follows:
1997 1996 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- Fixed income securities..................................... $1,756,257 $1,756,257 $1,500,783 $1,500,783 Mortgage loans.............................................. 114,627 120,849 84,657 83,789 Short-term investments...................................... 9,513 9,513 25,855 25,855 Policy loans................................................ 27,600 27,600 25,359 25,359 Separate Accounts........................................... 308,595 308,595 260,668 260,668
Carrying value and fair value include the effects of derivative financial instruments where applicable. Fair values for fixed income securities are based on quoted market prices where available. Non-quoted securities are valued based on discounted cash flows using current interest rates for similar securities. 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 value approximates fair value. The carrying value of policy loans approximates its fair value. Separate Accounts assets are carried in the statements of financial position at fair value. FINANCIAL LIABILITIES The carrying value and fair value of financial liabilities at December 31, are as follows:
1997 1996 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- Contractholder funds on investment contracts................ $437,449 $466,136 $421,642 $430,696 Separate Accounts........................................... 308,595 308,595 260,668 260,668
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts. Reserves on investment contracts with no stated maturities (single premium and flexible premium deferred annuities) are valued at the account balance less surrender charges. The fair value of immediate annuities and annuities without life contingencies with fixed terms is F-11 42 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 5. FINANCIAL INSTRUMENTS (CONTINUED) estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and durations. Separate Accounts liabilities are carried at the fair value of the underlying assets. DERIVATIVE FINANCIAL INSTRUMENTS The Company primarily uses derivative financial instruments to reduce its exposure to market risk, specifically interest rate risk, in conjunction with asset/liability management. The Company does not hold or issue these instruments for trading purposes. The following table summarizes the contract or notional amount, credit exposure, fair value and carrying value of the Company's derivative financial instruments:
CARRYING CONTRACT/ VALUE NOTIONAL CREDIT FAIR ASSETS/ AMOUNT EXPOSURE VALUE (LIABILITIES) --------- -------- ----- ------------- AT DECEMBER 31, 1997 Financial futures contracts................................. $29,800 $ -- $(153) $(810) AT DECEMBER 31, 1996 Financial futures contracts................................. $ 6,700 $ 56 $ 56 $ 266
The contract or notional amounts are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential for gain or loss on these agreements. Credit exposure represents the Company's potential loss if all of the counterparties failed to perform under the contractual terms of the contracts and all collateral, if any, became worthless. This exposure is represented 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 by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements and obtaining collateral where appropriate. To date, the Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. 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. Dealer and exchange quotes are available for the Company's derivatives. 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 contracts to manage its market risk related to fixed income securities and anticipatory investment purchases and sales. Futures used as hedges of anticipatory transactions pertain to identified transactions which are probable to occur and are generally completed within ninety 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. Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. Market risk exists for all of the derivative financial instruments that the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. The Company mitigates this risk through established risk limits set by senior management. In addition, the change in the value of the Company's derivative financial instruments designated as hedges are generally offset by the change in the value of the related assets and liabilities. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Commitments to extend mortgage loans are agreements to lend to a borrower provided there is no violation of any condition established in the contract. The Company enters these agreements to commit to future loan fundings at a predetermined interest rate. Commitments generally have fixed expiration dates or other termination clauses. Commitments to extend mortgage loans, which are secured by the underlying properties, are valued based on estimates of fees charged by other institutions to make similar commitments to similar borrowers. At December 31, 1997 and 1996, the Company had $18,000 and $6,190 in mortgage loan commitments which had a fair value of $180 and $62, respectively. F-12 43 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 6. INCOME TAXES The Company joins the Corporation and its other eligible domestic subsidiaries in the filing of a consolidated federal income tax return (the "Allstate Group") and is party to a federal income tax allocation agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement, the Company paid to or received from the Corporation the amount, if any, by which the Allstate Group's federal income tax liability was 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 the Distribution, the Corporation and all of its eligible domestic subsidiaries, including the Company, joined with Sears and its domestic business units (the "Sears Group") in the filing of a consolidated federal income tax return (the "Sears Tax Group") and were parties to a federal income tax allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax Sharing Agreement, the Company, through the Corporation, paid to or received from the Sears Group the amount, if any, by which the Sears Tax Group's federal income tax liability was affected by virtue of inclusion of the Company in the consolidated federal income tax return. Effectively, this resulted in the Company's annual income tax provision being computed as if the Allstate Group filed a separate consolidated return, except that items such as net operating losses, capital losses or similar items, which might not be recognized in a separate return, were allocated according to the Sears Tax Sharing Agreement. The Allstate Group and Sears Group have entered into an agreement which governs their respective rights and obligations with respect to federal income taxes for all periods prior to the Distribution ("Consolidated Tax Years"). The agreement provides that all Consolidated Tax Years will continue to be governed by the Sears Tax Sharing Agreement with respect to the Allstate Group's federal income tax liability. The components of the deferred income tax assets and liabilities at December 31, are as follows:
AT DECEMBER 31, ------------------- 1997 1996 -------- -------- DEFERRED ASSETS Life-contingent contract reserves and contractholder funds..................................................... $ 34,084 $ 27,951 Difference in tax bases of investments...................... 742 270 Loss on disposal of discontinued operations................. 364 375 Other postretirement benefits............................... 352 524 Other assets................................................ 255 1,789 -------- -------- Total deferred assets..................................... 35,797 30,909 -------- -------- DEFERRED LIABILITIES Unrealized net capital gains................................ (34,720) (19,844) Deferred acquisition costs.................................. (15,821) (14,020) Prepaid commission expense.................................. (792) (717) Other liabilities........................................... (1,454) (20) -------- -------- Total deferred liabilities................................ (52,787) (34,601) -------- -------- Net deferred liability.................................... $(16,990) $ (3,692) ======== ========
The components of income tax expense for the year ended December 31, are as follows:
1997 1996 1995 ------- ------- ------- Current..................................................... $14,874 $11,411 $12,588 Deferred.................................................... (1,578) 257 (2,677) ------- ------- ------- Total income tax expense.................................. $13,296 $11,668 $ 9,911 ======= ======= =======
The Company paid income taxes of $13,350, $11,968 and $12,096 in 1997, 1996 and 1995, respectively. The Company had an income tax payable of $1,419 at December 31, 1997 and an income tax recoverable of $105 at December 31, 1996. F-13 44 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 6. INCOME TAXES (CONTINUED) 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:
1997 1996 1995 ---- ---- ---- Statutory federal income tax rate........................... 35.0% 35.0% 35.0% State income tax expense.................................... 2.2 2.4 2.3 Other....................................................... (.3) (1.2) (1.3) ---- ---- ---- Effective income tax rate................................. 36.9% 36.2% 36.0% ==== ==== ====
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, 1997, approximately $389, will result in federal income taxes payable of $136 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 are allowed under the Tax Reform Act of 1984. 7. STATUTORY FINANCIAL INFORMATION The following tables reconcile net income for the year ended December 31, and shareholder's equity at December 31, as reported herein in conformity with generally accepted accounting principles with statutory net income and capital and surplus, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities:
NET INCOME --------------------------- 1997 1996 1995 ------- ------- ------- Balance per generally accepted accounting principles........ $22,716 $20,561 $19,522 Deferred acquisition costs................................ (10,782) (6,858) (5,537) Deferred income taxes..................................... (1,578) 257 (2,677) Statutory reserves........................................ 7,749 6,101 11,380 Other postretirement and postemployment benefits.......... (36) (34) 71 Other..................................................... 522 (1,882) 441 ------- ------- ------- Balance per statutory accounting practices.................. $18,591 $18,145 $23,200 ======= ======= =======
SHAREHOLDER'S EQUITY ------------------------ 1997 1996 -------- --------- Balance per generally accepted accounting principles........ $283,410 $ 233,067 Deferred acquisition costs................................ (71,946) (61,559) Deferred income taxes..................................... 16,990 3,692 Unrealized gain/loss on fixed income securities........... (246,147) (122,628) Non-admitted assets....................................... (4,301) (2,739) Statutory reserves........................................ 207,163 115,725 Other postretirement and postemployment benefits.......... 1,007 1,074 Other..................................................... (1,556) (1,613) -------- --------- Balance per statutory accounting practices................ $184,620 $ 165,019 ======== =========
PERMITTED STATUTORY ACCOUNTING PRACTICES The Company prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the New York Department of Insurance. 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. The Company does not follow any permitted statutory accounting practices that have a material effect on statutory surplus, statutory net income or risk-based capital. Final approval of the NAIC's proposed "Comprehensive Guide" on statutory accounting principles is expected in early 1998. The requirements may be effective as early as January 1, 1999, and are not expected to have a material impact on statutory surplus of the Company. F-14 45 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 7. STATUTORY FINANCIAL INFORMATION (CONTINUED) DIVIDENDS The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. Under New York Insurance Law, a notice of intention to distribute any dividend must be filed with the New York Superintendent of Insurance not less than 30 days prior to the distribution. Such proposed declaration is subject to the Superintendent's disapproval. 8. BENEFIT PLANS PENSION PLANS Defined benefit pension plans, sponsored by the Corporation, cover domestic full-time employees and certain part-time employees. Benefits under the pension plans are based upon the employee's length of service, average annual compensation and estimated social security retirement benefits. The Corporation's funding policy for the pension plans is to make annual contributions in accordance with accepted actuarial cost methods. The costs to the Company included in net income were $597, $490 and $446 for the pension plans in 1997, 1996 and 1995, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation provides certain health care and life insurance benefits for retired employees. Qualified employees may become eligible for these benefits if they retire in accordance with the Corporation's established retirement policy and are continuously insured under the Corporation's group plans or other approved plans for 10 or more years prior to retirement. The Corporation shares the cost of the retiree medical benefits with retirees based on years of service, with the Corporation's share being subject to a 5% limit on annual medical cost inflation after retirement. The Corporation's postretirement benefit plans currently are not funded. The Corporation has the right to modify or terminate these plans. PROFIT SHARING FUND Employees of the Corporation and its domestic subsidiaries are also eligible to become members of The Savings and Profit Sharing Fund of Allstate Employees ("Allstate Plan"). The Corporation's contributions are based on the Corporation's matching obligation and performance. The Allstate Plan includes an Employee Stock Ownership Plan ("Allstate ESOP") to pre-fund a portion of the Corporation's anticipated contribution. The Allstate Plan and the Allstate ESOP split from The Savings and Profit Sharing Fund of Sears Employees ("Sears Plan") on the date of the Distribution. In connection with this, the Corporation paid Sears $327 million, and in return received a note from the Allstate ESOP for a like principal amount and 50% of the unallocated shares. The note has a fixed interest rate of 7.9% and matures in 2019. The Corporation expects to make net contributions to the Allstate ESOP annually in the amount necessary to allow the Allstate ESOP to fund interest and principal payments on the note after considering the dividends paid on ESOP shares, which are available for debt service. The Company's defined contribution to the Allstate Plan was $164 and $111 in 1997 and 1996, respectively. F-15 46 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE IV -- REINSURANCE ($ IN THOUSANDS)
GROSS NET AMOUNT CEDED AMOUNT ----------- -------- ----------- YEAR ENDED DECEMBER 31, 1997 Life insurance in force..................................... $11,339,990 $721,040 $10,618,950 =========== ======== =========== Premiums and contract charges: Life and annuities........................................ $ 116,167 $ 2,185 $ 113,982 Accident and health....................................... 5,846 864 4,982 ----------- -------- ----------- $ 122,013 $ 3,049 $ 118,964 =========== ======== ===========
GROSS NET AMOUNT CEDED AMOUNT ----------- -------- ----------- YEAR ENDED DECEMBER 31, 1996 Life insurance in force..................................... $ 9,962,300 $553,628 $ 9,408,672 =========== ======== =========== Premiums and contract charges: Life and annuities........................................ $ 114,296 $ 1,398 $ 112,898 Accident and health....................................... 5,044 834 4,210 ----------- -------- ----------- $ 119,340 $ 2,232 $ 117,108 =========== ======== ===========
GROSS NET AMOUNT CEDED AMOUNT ----------- -------- ----------- YEAR ENDED DECEMBER 31, 1995 Life insurance in force..................................... $ 8,513,295 $398,025 $ 8,115,270 ----------- -------- ----------- Premiums and contract charges: Life and annuities........................................ $ 146,732 $ 1,246 $ 145,486 Accident and health....................................... 3,731 901 2,830 ----------- -------- ----------- $ 150,463 $ 2,147 $ 148,316 =========== ======== ===========
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS ($ IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES DEDUCTIONS PERIOD ---------- ---------- ---------- ---------- YEAR ENDED DECEMBER 31, 1997 Allowance for estimated losses on mortgage loans............ $ 225 $ 261 $ -- $ 486 ====== ====== ====== ====== YEAR ENDED DECEMBER 31, 1996 Allowance for estimated losses on mortgage loans............ $1,952 $ (296) $1,431 $ 225 ====== ====== ====== ====== YEAR ENDED DECEMBER 31, 1995 Allowance for estimated losses on mortgage loans............ $1,179 $1,923 $1,150 $1,952 ====== ====== ====== ======
F-16 47 APPENDIX A MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the Sub-account's Guarantee Period for the week preceding the establishment of the Sub-account. N = the number of whole and partial years from the date we receive the withdrawal, or death benefit request, or from the Payout Start Date to the end of the Sub-account's Guarantee Period. J = the Treasury Rate for a maturity of length N for the week preceding the receipt of the withdrawal request, death benefit request, or income payment request. If a Note with a maturity of length N is not available, a weighted average will be used. If N is one year or less, J will be the 1-year Treasury Rate. Treasury Rate means the U.S. Treasury Note Constant Maturity yield as reported in Federal Reserve Bulletin Release H.15. The Market Value Adjustment factor is determined from the following formula: .9 X (I-J) X N Any transfer, withdrawal in excess of the preferred withdrawal amount, or death benefit paid from a Sub-account of the Fixed Account will be multiplied by the Market Value Adjustment factor to determine the Market Value Adjustment. ILLUSTRATION EXAMPLE OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 Guarantee Period: 5 Years Guaranteed Interest Rate: 4.50% 5 Year Treasury Rate at the time the Sub-account is established: 4.50% Full Withdrawal: End of Contract Year 3
NOTE: THIS ILLUSTRATION ASSUMES THAT PREMIUM TAXES WERE NOT APPLICABLE. EXAMPLE 1: (ASSUMES DECLINING INTEREST RATES) Step 1: Calculate Account Value at End of Contract Year 3: = 10,000 X (1.045)(3) = 11,411.66 Step 2: Calculate the Preferred Withdrawal Amount: = 10% X (10,000.00) = $1,000.00 Step 3: Calculate the Market Value Adjustment: I = 4.50% J = 4.20% N = 730 days = 2 ------------------------------------------------------------------------- 365 days Market Value Adjustment Factor .9 X (I-J) X N = .9 X (.045 - .042) X 2 = .0054 Market Value Adjustment = Factor X Amount Subject to Market Value Adjustment: = .0054 X (11,411.66 - 1,000) = $56.22 Step 4: Calculate the Withdrawal Charge: = .05 X (10,000 - 1,000 + 56.22) = $452.81 Step 5: Calculate The Amount Received by Customers as a Result of a Full Withdrawal at the end of Contract Year 3: 11,411.66 - 452.81 + 56.22 = $11,015.07 A-1 48 EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1: Calculate Account Value at End of Contract Year 3: = 10,000 X (1.045)(3) = 11,411.66 Step 2: Calculate the Preferred Withdrawal Amount = 10% X (10,000.00) = $1,000.00 Step 3: Calculate the Market Value Adjustment: I = 4.50% J = 4.80% N = 730 days = 2 ------------------------------------------------------------------------- 365 days Market Value Adjustment Factor .9 X (I-J) X N = .9 X (.045 - .048) X 2 = -.0054 Market Value Adjustment = Factor X Amount Subject to Market Value Adjustment: = -.0054 X (11,411.66 - 1,000) = -$56.22 Step 4: Calculate the Withdrawal Charge: = .05 X (10,000 - 1,000 - 56.22) = $447.19 Step 5: Calculate The Net Withdrawal Value at End of Contract Year 3: $11,411.66 - 447.19 - 56.22 = $10,908.25 A-2 49 STATEMENT OF ADDITIONAL INFORMATION: TABLE OF CONTENTS
PAGE ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS........ B-4 REINVESTMENT................................................ B-4 THE CONTRACT................................................ B-5 Purchase of the Contracts................................. B-5 Performance Data.......................................... B-5 Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers)............................................. B-6 Premium Taxes............................................. B-7 Tax Reserves.............................................. B-7 INCOME PAYMENTS............................................. B-7 Calculation of Variable Annuity Unit Values............... B-7 GENERAL MATTERS............................................. B-7 Incontestability.......................................... B-7 Settlements............................................... B-7 Safekeeping of the Variable Account's Assets.............. B-7 FEDERAL TAX MATTERS......................................... B-7 Introduction.............................................. B-7 Taxation of Allstate Life Insurance Company of New York... B-8 Exceptions to the Non-Natural Owner Rule.................. B-8 IRS Required Distribution at Death Rules.................. B-8 Qualified Plans........................................... B-8 Types of Qualified Plans.................................. B-8 VARIABLE ACCOUNT FINANCIAL STATEMENTS....................... F-1
B-1 50 ORDER FORM Please send me a copy of the most recent Statement of Additional Information for the Allstate Life of New York Separate Account A. - --------------------------------- - -------------------------------------------------------------------------------- (Date) (Name) ---------------------------------------------------- (Street Address) ---------------------------------------------------- (City) (State) (Zip Code) Send to: Allstate Life Insurance Company of New York Customer Service Center P.O. Box 94038 Palatine, IL 60094-4038 B-2 -----END PRIVACY-ENHANCED MESSAGE-----