-----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, Co+YjVhj0ZBvt+qJGMbZWm2bFEfdVKlPFiR9eaTSKCGMbgc+JRMuQkxb1NDgobwV dHf+VgNU94Qx376zSieQxA== 0000950131-96-001925.txt : 19960507 0000950131-96-001925.hdr.sgml : 19960507 ACCESSION NUMBER: 0000950131-96-001925 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960503 SROS: NASD 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: 1933 Act SEC FILE NUMBER: 033-47245 FILM NUMBER: 96556396 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 N Y CUSTOM ANNUNITY Filed Pursuant to Rule 424b(3) File No. 33-47245 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK P.O. BOX 9095 FARMINGVILLE, NEW YORK 11738 (516) 451-5170 INDIVIDUAL DEFERRED ANNUITY CONTRACTS DISTRIBUTED BY DEAN WITTER REYNOLDS INC. TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 ---------------- This Prospectus describes the individual Single Premium Deferred Annuity Contract ("Contract") offered by Allstate Life Insurance Company of New York ("Company"), an indirect wholly-owned subsidiary of Allstate Insurance Company. Dean Witter Reynolds Inc. ("Dean Witter") is the principal underwriter and distributor of the Contract. The Contract is designed to aid you in your choice of short-term, mid-term or long-term financial planning and can be used for retirement planning regardless of whether the plan qualifies for special federal income tax treatment. A minimum Purchase Payment of $4,000 must be presented at the time of application for a Contract ($1,000 for a Qualified Contract). Presently, the Company will accept a Purchase Payment of $1,000 for all Contracts, but reserves the right to increase this amount to no more than $4,000. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES 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 DATE OF THIS PROSPECTUS IS MAY 1, 1996 The Contracts are available only in New York. At least once each Contract year, the Company will send the Owner an annual statement that contains certain information pertinent to the Owner's individual Contract. The annual statement details values and specific Contract data that applies to each particular Contract. The annual statement does not contain financial statements of the Company. The Company, however, is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Reports and other information filed by the Company can be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, at prescribed rates. 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. TABLE OF CONTENTS
PAGE ---- GLOSSARY............................... 3 INTRODUCTION........................... 5 THE CONTRACT........................... 6 Purchase of the Contract............. 6 THE ACCUMULATION PHASE................. 7 The Accumulation Phase Defined....... 7 Initial and Subsequent Guarantee Periods............................. 7 Interest Credited.................... 7 Example of Interest Crediting During the Guarantee Period................ 8 Partial Withdrawals and Surrenders... 9 Withdrawal Charge.................... 9 Market Value Adjustment.............. 9 Withdrawals at the End of a Guarantee Period.............................. 10 Taxes................................ 10 Payment Upon Partial Withdrawal or Surrender........................... 10 Death Benefits....................... 10 THE PAYOUT PHASE....................... 11 Income Plans......................... 11 Payout Terms......................... 12 AMENDMENT OF THE CONTRACT.............. 13 DISTRIBUTION OF THE CONTRACT........... 13 CUSTOMER INQUIRIES..................... 13
PAGE ---- FEDERAL TAX MATTERS.................... 13 Introduction......................... 13 Taxation of the Company.............. 13 Taxation of Annuities in General..... 14 Qualified Plans...................... 15 Other Considerations................. 16 THE COMPANY............................ 17 Business............................. 17 Investments by the Company........... 17 SELECTED FINANCIAL DATA................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 20 General.............................. 20 Results of Operations................ 20 Financial Position................... 21 Liquidity and Capital Resources...... 23 COMPETITION............................ 24 EMPLOYEES.............................. 24 PROPERTIES............................. 24 STATE AND FEDERAL REGULATION........... 24 EXECUTIVE OFFICERS AND DIRECTORS....... 25 EXECUTIVE COMPENSATION................. 27 LEGAL PROCEEDINGS...................... 28 EXPERTS................................ 28 LEGAL MATTERS.......................... 28 FINANCIAL STATEMENTS................... F-1 APPENDIX A............................. A-1
2 GLOSSARY Accumulation Phase--The Accumulation Phase is the first of two phases in the life of the Contract. The Accumulation Phase begins on the Issue Date. The Ac- cumulation Phase will continue until the Payout Start Date unless the Contract is terminated before that date. Account Value--The Account Value is the Purchase Payment accumulated with credited interest. Any withdrawals will affect the Account Value. Age--Age on last birthday. Annuitant--The person designated in the Contract, whose life determines the duration of Income Payments involving life contingencies. Includes any Joint Annuitant. Beneficiary--The person(s) designated in the Contract who, during the Accumu- lation Phase, after the death of all Owners, may elect to receive the Death Benefit or continue the Contract as described in the "Death Benefits" section. If the sole surviving Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed Income Payments scheduled to continue. Company--The issuer of the Contract, Allstate Life Insurance Company of New York, which is an indirect wholly-owned subsidiary of Allstate Insurance Com- pany ("Allstate"). Allstate is a wholly-owned subsidiary of The Allstate Corpo- ration. Contract--The Allstate Life Insurance Company of New York single premium de- ferred annuity contract, known as the "Custom Annuity", that is described in this Prospectus. Date of Death--The date that an Owner and/or last surviving Annuitant dies. Death Benefit--The Death Benefit is the greater of: (1) the Account Value or (2) the Settlement Value. Due Proof of Death--one of the following: (a) A certified copy of a death certificate. (b) A certified copy of a decree of a court of competent jurisdiction as to the finding of death. (c) Any other proof satisfactory to the Company. Guarantee Period--The period for which a particular declared effective annual interest rate is guaranteed. Income Payments--A series of periodic payments made by the Company to the Owner during the Payout Phase of the Contract. Issue Date--The date the Contract becomes effective. Joint Annuitant--The person, along with the Annuitant, whose life determines the duration of Income Payments under a joint and last survivor annuity. Market Value Adjustment--The Market Value Adjustment is the adjustment made to the money distributed prior to the end of a Guarantee Period to reflect the impact of changes in interest rates between the time money was allocated to the Guarantee Period and the time of distribution. Non-Qualified Contracts--Contracts that do not qualify for special federal tax treatment. Owner--The person(s) designated as the Owner(s) in the Contract. The Owner will receive the Death Benefit upon the death of the last surviving Annuitant, who is not also an Owner. Payout Phase--The Payout Phase is the second of the two phases in the life of the Contract. It begins on the Payout Start Date. 3 Payout Start Date--The date Income Payments are to begin under the Contract. Preferred Withdrawal Amount--A portion of the Account Value which may be an- nually withdrawn without incurring a Withdrawal Charge or a Market Value Ad- justment. Purchase Payment--The premium paid by the Owner to the Company. Qualified Contracts--Contracts issued under plans that qualify for special federal tax treatment. Settlement Value--The Settlement Value is the Account Value adjusted by any applicable Market Value Adjustment less any applicable Withdrawal Charges and premium tax. Surrender--Termination of the Contract. Systematic Withdrawals--Periodic partial withdrawals of $100 or more may be deposited in the Owner's bank account or Dean Witter Active Assets(TM) Account. Systematic Withdrawals are available monthly, quarterly, semi-annually and annually. Withdrawal Charge--The charge that will be assessed by the Company on full or partial withdrawals in excess of the Preferred Withdrawal Amount. 4 INTRODUCTION - -------------------------------------------------------------------------------- 1. WHAT IS THE PURPOSE OF THE CONTRACT? The Contract described in this Prospectus provides a cash withdrawal benefit and a Death Benefit during the Accumulation Phase and periodic Income Payments beginning on the Payout Start Date during the Payout Phase. (See "Partial Withdrawals and Surrenders", pg. 9, "Death Benefits", pg. 10, and "The Payout Phase", pg. 11.) The cash withdrawal benefit may be subject to a Market Value Adjustment. As such, the Owner bears some investment risk under the Contract. (See, "Market Value Adjustment", pg. 9.) 2. HOW DO I PURCHASE A CONTRACT? You may purchase the Contract from Dean Witter, the Company's sales representative. The Purchase Payment must be at least $4,000 ($1,000 for a Qualified Contract). Presently, the Company will accept a Purchase Payment of $1,000 for all Contracts, but reserves the right to increase this amount to no more than $4,000. At the time of purchase, you will select a Guarantee Period in which to allocate your Purchase Payment. Guarantee Periods, which are offered at the discretion of the Company, may range from one to ten years. (See, "Purchase of the Contract", pg. 6.) 3. WHAT IS A GUARANTEE PERIOD AND WHAT HAPPENS AT THE END OF IT? Interest is credited at an effective annual rate declared by the Company for the Guarantee Period. You will have two options at the end of a Guarantee Period: you may either withdraw your entire Account Value free of a Withdrawal Charge and a Market Value Adjustment or you may select a renewal Guarantee Period. If you do not choose either option within 10 calendar days after the end of a Guarantee Period, the Company will establish a one-year renewal Guarantee Period for you. At the end of any future Guarantee Period you may withdraw your Account Value or select a renewal Guarantee Period. (See, "Initial and Subsequent Guarantee Periods", pg. 7.) 4. IS THERE A FREE-LOOK PROVISION? The Owner may cancel the Contract anytime within 10 days after the receipt of the Contract and receive a full refund of the Purchase Payment. 5. DOES THE CONTRACT HAVE CHARGES OR DEDUCTIONS? There are no front-end charges under the Contract. A Withdrawal Charge will be applied to a partial withdrawal or full surrender during the initial Guarantee Period. Withdrawal Charges will be the lesser of: (a) one-half the interest crediting rate for the Guarantee Period multiplied by the amount withdrawn in excess of the Preferred Withdrawal Amount; or (b) interest earned on the amount withdrawn. The Withdrawal Charge will not exceed 10%, reduced by 1% for every year the Contract is in force, multiplied by the sum of: (1) the amount withdrawn; and (2) the Market Value Adjustment. No Withdrawal Charge will be applied to a withdrawal following the end of the initial Guarantee Period. If money is withdrawn from the Contract prior to the end of an initial or a renewal Guarantee Period, a Market Value Adjustment will be applied to the money distributed in excess of the Preferred 5 Withdrawal Amount. The Market Value Adjustment may be positive or negative. (See, "Withdrawal Charge", pg. 9, and "Market Value Adjustment", pg. 9.) Money may be withdrawn from a Contract during the 10 calendar days after the end of a Guarantee Period without being subject to a Market Value Adjustment. If a surrender request is received by the Company at its home office within 10 calendar days after the end of a Guarantee Period, the Account Value as of the end of that Guarantee Period will be paid. 6. CAN I GET MY MONEY IF I NEED IT? All or part of the Account Value can be withdrawn before the earliest of the Payout Start Date, the death of the Owner, or the death of the Annuitant. Withdrawal Charges, taxes, and a Market Value Adjustment may be applied to the partial withdrawal or surrender. (See, "Partial Withdrawals and Surrenders", pg. 9, and "Taxation of Annuities in General", pg. 14.) Withdrawal restrictions may apply to Qualified Contracts as well as Non-Qualified Contracts. (See, "Qualified Plans", pg. 15.) THE COMPANY GUARANTEES THAT IF YOU SURRENDER THE CONTRACT, YOU WILL RECEIVE AN AMOUNT AT LEAST EQUAL TO THE PURCHASE PAYMENT LESS ANY PRIOR PARTIAL WITHDRAWALS. 7. DOES THE CONTRACT HAVE A GUARANTEED DEATH BENEFIT? Prior to the Payout Start Date, the Contract offers a Death Benefit upon the death of any Owner or last surviving Annuitant, whichever occurs first. The Death Benefit is the greater of the Account Value or the Settlement Value as of the receipt of a complete request for payment of the Death Benefit. (See, "Death Benefits", pg. 10.) Death Benefits after the Payout Start Date depend on the income plan chosen. 8. WHAT HAPPENS IN THE PAYOUT PHASE OF THE CONTRACT? During this phase, the Account Value less premium tax and any other applicable tax is applied to the income plan you choose and monies are paid to you on a scheduled basis as provided in that plan. The Payout Phase begins on the Payout Start Date. It continues until the Company makes the last payment as provided by the income plan chosen. (See, "The Payout Phase", pg. 11.) THE CONTRACT - -------------------------------------------------------------------------------- PURCHASE OF THE CONTRACT The Contract may be purchased through sales representatives of Dean Witter, the principal underwriter of the Contract. The Company will apply the Purchase Payment to the Contract within seven days of the receipt of the Purchase Payment and required issuing information. The Purchase Payment must be at least $4,000 ($1,000 for a Qualified Contract). Presently, the Company will accept a Purchase Payment of $1,000 for all Contracts, but reserves the right to increase this amount to no more than $4,000. Additional Purchase Payments to an existing Contract are not allowed. The Contract described in this Prospectus is made up of two phases -- the Accumulation Phase and the Payout Phase. 6 THE ACCUMULATION PHASE - -------------------------------------------------------------------------------- THE ACCUMULATION PHASE DEFINED The Accumulation Phase begins on the Issue Date stated on the Annuity Data Page and continues until the Payout Start Date. During this phase, cash withdrawal benefits and a Death Benefit are available. No deductions are made by the Company from the Purchase Payment. Therefore, the full amount of the Purchase Payment is invested and accumulates interest beginning on the Issue Date. At least once every year, the Company will send the Owner a statement containing Account Value information. INITIAL AND SUBSEQUENT GUARANTEE PERIODS The Owner will be required to designate a Guarantee Period, from the Guarantee Periods which are offered at the Company's discretion, in which to allocate the Purchase Payment. Guarantee Periods may range from one to ten years. A notice will be mailed 35 calendar days prior to the end of a Guarantee Period reminding you of the event. If the Company has not had any instructions from the Owner within 10 calendar days after the end of the Guarantee Period, a one-year renewal Guarantee Period will be established. INTEREST CREDITED Interest will be credited daily based on the effective annual interest rate declared by the Company at that time for that particular Guarantee Period. "Effective annual rate" means the yield earned when interest credited at the underlying daily rate has compounded for a full year. Effective annual interest rates will be declared periodically for each initial and renewal Guarantee Period then being offered. The declared rates will be greater than or equal to the minimum guaranteed interest rate under the Contract. The "minimum guaranteed interest rate under the Contract" is a rate of interest specified in the Contract that is guaranteed for the life of 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 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. The following illustration is an example of how interest will be credited to the funds during your Guarantee Period. NOTE: The following illustration assumes no withdrawals of any amount during the entire five year period. A Market Value Adjustment and Withdrawal Charge would apply to any such interim withdrawal in excess of the Preferred Withdrawal Amount. The hypothetical interest rate is for illustrative purposes only and is not intended to predict future interest rates to be declared under the Contract. Actual interest rates declared for any given Guarantee Period may be more or less than those shown. 7 EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD Purchase Payment:................................................... $10,000.00 Guarantee Period: .................................................. 5 years Effective Annual Rate: ............................................. 5.25%
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) 1.0525 ---------- 10,525.00 ---------- Account Value at end of Contract 10,525.00 year 1 X (1 + Effective Annual Rate) 1.0525 ---------- 11,077.56 ---------- Account Value at end of Contract 11,077.56 year 2 X (1 + Effective Annual Rate) 1.0525 ---------- 11,659.13 ---------- Account Value at end of Contract 11,659.13 year 3 X (1 + Effective Annual Rate) 1.0525 ---------- 12,271.24 ---------- Account Value at end of Contract 12,271.24 year 4 X (1 + Effective Annual Rate) 1.0525 ---------- 12,915.48 ----------
Total Interest Credited in Guarantee Period: $2,915.48 ($12,915.48 - $10,000) 8 PARTIAL WITHDRAWALS AND SURRENDERS You have the right to make a partial withdrawal or full surrender at any time during the Accumulation Phase. A Preferred Withdrawal Amount free of Withdrawal Charges and Market Value Adjustments will be available in each year. The Preferred Withdrawal Amount is 10% of the amount of the Purchase Payment or funds allocated to a Guarantee Period. Any Preferred Withdrawal Amount not withdrawn in a year may not be carried over to increase the Preferred Withdrawal Amount in a subsequent Contract year. Amounts withdrawn from the Account Value in excess of the Preferred Withdrawal Amount will be adjusted by any applicable Withdrawal Charge, Market Value Adjustment, and taxes. The minimum partial withdrawal is $100.00. If a partial withdrawal reduces the Account Value of the Contract to less than $1,000, the Company will treat the request as a withdrawal of the entire Account Value and the Contract will terminate. Partial withdrawals may also be taken automatically through Systematic Withdrawals. The Systematic Withdrawal program is not available for Qualified Contracts issued pursuant to a Dean Witter Custodial Account. Withdrawals and surrenders may be subject to income tax and a 10% tax penalty. The tax and penalty are explained in "Federal Tax Matters" on page 13. Subject to state approval, both the Withdrawal Charge and Market Value Adjustment will be waived on withdrawals taken to satisfy IRS required distribution rules for this Contract. WITHDRAWAL CHARGE A Withdrawal Charge will be applied to a full surrender or partial withdrawal in excess of the Preferred Withdrawal Amount made prior to the end of the initial Guarantee Period and will be deducted from the amount distributed. Withdrawal Charges will be the lesser of: a. one-half the interest crediting rate for the Guarantee Period multiplied by the amount withdrawn in excess of the Preferred Withdrawal Amount; or b. interest earned on the amount withdrawn. The Withdrawal Charge will not exceed 10%, reduced by 1% for every year the Contract is in force, multiplied by the sum of: (1) the amount withdrawn; and (2) the Market Value Adjustment. No Withdrawal Charge will be applied to a withdrawal following the end of the initial Guarantee Period. MARKET VALUE ADJUSTMENT The amount payable on a partial withdrawal or full surrender made prior to the end of any Guarantee Period may be adjusted up or down, or not at all, by the application of the Market Value Adjustment. The Market Value Adjustment factor is applied to the amount withdrawn in excess of the Preferred Withdrawal Amount. The Market Value Adjustment will reflect the relationship between the current effective annual interest rate for the duration remaining in the Guarantee Period at the time of the request for withdrawal or surrender, and the effective annual interest rate guaranteed for that Guarantee Period. Generally, if the effective annual interest rate for the Guarantee Period is lower than the applicable current effective annual interest rate (interest rate for a duration equal to the time remaining in the Guarantee Period), then the Market Value Adjustment will result in a lower payment upon surrender. Similarly, if the effective annual interest rate for the Guarantee Period is higher than the applicable current effective annual interest rate, then the Market Value Adjustment will result in a higher payment upon surrender. 9 For example, the Owner purchases a Contract and selects a Guarantee Period of five years, and the Company's effective annual rate for that duration is 5.25%. Assume that at the end of 3 years, the Owner makes a partial withdrawal. If the current interest rate for a 2-year Guarantee Period is 4.95%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to the Owner upon the partial withdrawal. If the current interest rate for a 2-year Guarantee Period is 5.55%, then the Market Value Adjustment will be negative, resulting in a decrease in the amount payable to the Owner upon the partial withdrawal. Since current interest rates are based, in part, upon investment yields available at the time, the effect of the Market Value Adjustment will be closely related to the levels of such yields. It is theoretically possible, therefore, that, should such yields increase significantly from the time the Purchase Payment was made, coupled with the application of the Withdrawal Charge, the amount received by the Owner upon full surrender of the Contract would be less than the Purchase Payment plus interest at the minimum guaranteed interest rate under the Contract. HOWEVER, THE COMPANY GUARANTEES THAT THE AMOUNT RECEIVED UPON SURRENDER WILL BE AT LEAST EQUAL TO THE PURCHASE PAYMENT LESS ANY PRIOR PARTIAL WITHDRAWALS. The renewal of any individual Sub- Account(s) within the entire Contract does not in any way change the return of Purchase Payment guarantee provided by this Contract. Upon Sub-Account renewal the return of Purchase Payment guarantee will not be adjusted to include any accrual interest, but will continue to apply to the Purchase Payment. The formula for calculating the Market Value Adjustment is set forth in Appendix A to this Prospectus, which also contains additional illustrations of the application of the Market Value Adjustment. WITHDRAWALS AT THE END OF A GUARANTEE PERIOD During the first 10 days of a renewal Guarantee Period, any amount withdrawn will not incur a Market Value Adjustment, nor will it reflect any interest earned during this 10-day period. TAXES A premium tax deduction will be made, if provided under applicable law, on full surrender, or upon annuitization of the Contract. Any other applicable taxes will be deducted as well. Currently, no deductions are made because New York does not charge premium taxes on annuities. PAYMENT UPON PARTIAL WITHDRAWAL OR SURRENDER The Company may defer payment of any partial withdrawal or Surrender for a period not exceeding six months from the date of the receipt of the request. DEATH BENEFITS If any Owner or last surviving Annuitant dies prior to the Payout Start Date, a Death Benefit may be paid. If an Owner dies (first Owner's death) prior to the Payout Start Date, the new Owner (any surviving Joint Owner(s), or if none, the Beneficiary) may elect, within 180 days of the Date of Death, to receive the Death Benefit in a lump sum or to apply the Death Benefit to an income plan. Payments from the income plan must begin within one year of the Date of Death and must be over the life of the new Owner, or a period not to exceed the life expectancy of the new Owner. If no election is made within 180 days of the Date of Death, the new Owner may elect to receive the Settlement Value payable in a lump sum within five years of the Date of Death. Any remaining Settlement Value will be distributed at the end of the five-year period. An Annuitant is necessary to continue the Contract between the date of the Owner's death and the final distribution. If there is no Annuitant at that time, the new Annuitant will be the youngest new Owner. 10 If the new Owner is the surviving spouse of the deceased Owner, then the spouse may continue the Contract in the Accumulation Phase as if the death had not occurred. If there is no Annuitant at that time, the new Annuitant will be the surviving spouse. The surviving spouse may also select one of the options listed above. If the new Owner is a non-natural person (other than a grantor trust), then the Owner must receive a lump sum payment, and the options listed above are not available. If the Company receives Due Proof of Death within 180 days of the date of death, a Death Benefit will be paid. Otherwise, a Settlement Value will be paid. If the last surviving Annuitant, not also an Owner, dies prior to the Payout Start Date, then in most cases and subject to state approval, the Owner has the following three options: continue the Contract as if the death had not occurred. The new Annuitant will be the youngest Owner unless the Owner names a different Annuitant; or receive the Death Benefit in a lump sum. The Death Benefit is equal to the greater of the Account Value and the Cash Surrender Value; or apply the Death Benefit to an Income Plan. This section is intended to comply with Internal Revenue Code Section 72(s), pertaining to required distributions upon death. THE PAYOUT PHASE - -------------------------------------------------------------------------------- The Payout Phase is the second of the two phases in the Contract. The Payout Phase begins on the Payout Start Date and continues until the Company makes the last payment as provided by the income plan. Unless the Owner notifies the Company in writing, the Payout Start Date will be the later of the Annuitant's 85th birthday or the 10th anniversary date of the Contract. The Owner may change the Payout Start Date at any time by notifying the Company in writing of the change at least 30 days before the current Payout Start Date. The Payout Start Date must be no later than the oldest Annuitant's 85th birthday or the 10th anniversary date of the Contract, if later. The Owner of a Qualified Contract may be limited by the plan under which the Contract is issued with regard to a Payout Start Date after age 70 1/2. INCOME PLANS The Owner may elect an income plan which distributes Income Payments on a scheduled basis. Up to 30 days before the Payout Start Date, the Owner may change the income plan or request any other form of income plan agreeable to both the Company and the Owner. If the Company does not receive a written choice from the Owner, the income plan will be life income with 120 monthly payments guaranteed. 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. If the sole surviving Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed Income Payments scheduled to continue under the income plan in effect. The Account Value on the Payout Start Date, less any applicable tax, will be applied to the income plan selected by the Owner. The income plans include: INCOME PLAN 1--Life Income with Guaranteed Payments Payments will be made to the Owner for as long as the Annuitant lives. If the Annuitant dies 11 before all the guaranteed payments have been made, the remainder of the guaranteed payments will be paid to the Owner. INCOME PLAN 2--Joint and Survivor Life Income with Guaranteed Payments Payments beginning on the Payout Start Date will be made to the Owner for as long as either the Annuitant or Joint Annuitant is living. If both the Annuitant and Joint Annuitant die before all guaranteed payments have been made, the remainder of the guaranteed payments will be made to the Owner. INCOME PLAN 3--Guaranteed Payments for a Specified Period Payments beginning on the Payout Start Date will be made to the Owner for a specified period. Payments under this option do not depend on the continuation of the Annuitant's life. The number of guaranteed months may be 60 to 360 months. At the Company's discretion, other income plans may be available. PAYOUT TERMS The Contract, described in this Prospectus, contains life annuity 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 may be used. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan, consideration should be given, in consultation with legal counsel, to the impact of Norris on any such plan before making any contributions under this Contract. The duration of the income plan will generally affect the dollar amounts of each Income Payment. For example, if an income plan guaranteed for life is chosen, the Income Payments may be greater or less than Income Payments under an income plan for a specified period depending on the life expectancy of the Annuitant. After the Account Value has been applied to an income plan on the Payout Start Date, the income plan cannot be changed and no withdrawals can be made. The Company may require proof that the Annuitant or Joint Annuitant is still alive before the Company makes each payment that depends on the annuitant's life. If any Owner dies during the Payout Phase, Income Payments will continue as scheduled, in accordance with the income plan in effect. If the Account Value to be applied to an income plan is less than $2,000, or if the monthly Income Payments determined under the income plan are less than $20, the Company may pay the Account Value in a lump sum or change the payment frequency to an interval which results in Income Payments of at least $20. 12 AMENDMENT OF THE CONTRACT - -------------------------------------------------------------------------------- The Company reserves the right to amend the Contract to meet the requirements of applicable federal or State of New York laws or regulations. The Company will notify the Owner of any such amendments. DISTRIBUTION OF THE CONTRACT - -------------------------------------------------------------------------------- The Contract will be distributed exclusively by Dean Witter which serves as the principal underwriter of the Contract under a General Agents' Agreement with the Company. Dean Witter Reynolds Inc. ("Dean Witter") is the principal underwriter of the Contract. Dean Witter is located at Two World Trade Center, New York, New York. Dean Witter is a member of the New York Stock Exchange and the National Association of Securities Dealers, Inc. The Company may pay up to a maximum sales commission of 8% both upon sale of the Contract and upon renewal of a Guarantee Period. The General Agents' Agreement between the Company and Dean Witter provides that the Company will indemnify Dean Witter for certain damages that may be caused by actions, statements or omissions by the Company. CUSTOMER INQUIRIES - -------------------------------------------------------------------------------- The Owner or any persons interested in the Contract may make inquiries regarding the Contract by calling or writing their Dean Witter Account Executive. FEDERAL TAX MATTERS - -------------------------------------------------------------------------------- INTRODUCTION The Contract was designed for use by individuals in retirement plans which may or may not be plans qualified for special tax treatment under Section 401, 403, 408, or 457 of the Internal Revenue Code ("Code"). The ultimate effect of federal income taxes on the Account Value, on Income Payments and on the economic benefit to the Owner, the Annuitant or the Beneficiary depends on the type of retirement plan for which the Contract is purchased, on the tax and employment status of the individual concerned and on the Company's tax status. Recipients of certain distributions from Qualified Plans may be subject to special withholding rules. THE TAX DISCUSSION BELOW IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. Any person concerned about these tax implications should consult a competent tax adviser. This discussion is based upon the Company's understanding of the present federal income tax laws as they are currently interpreted by the Internal Revenue Service. No representation is made as to the likelihood of continuation of these present federal income tax laws or of the current interpretations by the Internal Revenue Service. Moreover, no attempt has been made to consider any applicable state or other tax laws. TAXATION OF THE COMPANY The Company is taxed as a life insurance company under Part I of Subchapter L of the Code. 13 The following discussion assumes that the Company will continue to be taxed as a life insurance company under Part I of Subchapter L. TAXATION OF ANNUITIES IN GENERAL The following discussion assumes that the Contract will qualify as an annuity Contract for federal income tax purposes. Such qualifications are discussed below. Generally, an annuity contract owner who is a natural person is not taxed on increases in the Account Value until a distribution occurs. For federal income tax purposes, distributions include the receipt of proceeds from loans and an assignment or pledge of any portion of the value of the contract, as well as withdrawals, Income Payments, or Death Benefits. The exception to this rule is that Owners who are not natural persons generally must include in income any increase during the taxable year in the Account Value (once the Account Value exceeds the investment in the Contract). However, there are exceptions to this non-natural owner rule and you should discuss these with your tax adviser. The following discussion only applies to Contracts owned by natural persons. Generally, in the case of a surrender, withdrawal, loan, assignment or pledge under a Non-Qualified Contract, before the Payout Start Date, amounts received are first treated as taxable income to the extent that the Account Value of the Contract immediately before the surrender exceeds the "investment in the contract" (as defined in the Code) at that time. Any additional amount is not taxable. The recipient of periodic Income Payments under the Contract is, in general, taxed on a portion of each payment. Generally, for Income Payments there is no tax on the amount of each payment which represents the same ratio that the "investment in the contract" bears to the total expected value of the Income Payments for the term of the payments; however, the remainder of each Income Payment is taxable. After the Owner's investment in the Contract has been recovered, the full amount of any additional payments will be taxed. The taxable portion of a distribution (in the form of an Income Payment or a lump sum payment) is taxed as ordinary income. Premature distributions from Non-Qualified Contracts may be subject to a penalty equal to ten percent (10%) of the amount treated as taxable income. The penalty applies to the taxable portion of any distribution except those (1) made on or after the Owner attains age 59 1/2; (2) made as a result of the Owner's death or disability; (3) received in substantially equal installments as a life annuity or over a period not exceeding the life expectancy of the owner; or (4) allocable to investments in the Contract prior to August 14, 1982. Other tax penalties may apply to certain distributions under Qualified Contracts. All Non-Qualified deferred annuity contracts that are issued by the Company (or its affiliates) to the same Owner during any calendar year will be aggre- gated and treated as one annuity contract for purposes of determining the amount includable in gross income under section 72(e) of the Code. Accordingly, an Owner should consult a competent tax adviser when purchasing more than one Non-Qualified deferred annuity contract in one calendar year. Transfer of ownership of a Contract, the designation of an Annuitant or a Beneficiary who is not also the Owner, or the exchange of a Contract may result in certain tax consequences to the Owner that are not discussed herein. An Owner contemplating any such transfer, assignment, or exchange of a Contract should contact a competent tax adviser with respect to the potential tax effects of such a transaction. 14 In order to be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires any Non-Qualified Contract issued after January 18, 1985 to provide that (a) if any Owner dies on or after the Payout Start Date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly under the method of distribution being used as of the date of that Owner's death; and (b) if any Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within five years after the date of the Owner's death. These requirements shall be considered satisfied with respect to any portion of the Owner's interest which is payable to or for the benefit of a "designated beneficiary," if such portion is distributed over the life of such "designated beneficiary" or over a period not extending beyond the life expectancy of that Beneficiary and such distributions begin within one year of that Owner's death. The Owner's "designated beneficiary" is the surviving Owner(s) or the person(s) designated by such Owner as a Beneficiary. The "designated beneficiary" is the person to whom ownership of the Contract passes by reason of death and must be a natural person. If the Owner's "designated beneficiary" is the surviving spouse of the Owner, the Contract may be continued with the surviving spouse as the new Owner. Non-Qualified Contracts contain provisions which are intended to comply with the requirements of section 72(s) of the Code, although regulations interpreting these requirements have not yet been issued. The Company intends to review such provisions and modify them if necessary to assure that they comply with the requirements of Code section 72(s) when clarified by regulation or otherwise. Additional rules may apply to Qualified Contracts. QUALIFIED PLANS The Contract is designed for use with several types of qualified plans. The tax rules applicable to participants in such qualified plans vary according to the type of plan and the terms and conditions of the plan itself. Adverse tax consequences may result from contributions in excess of specified limits, distributions prior to age 59 1/2, distributions that do not conform to specified commencement and minimum distribution rules, aggregate distributions in excess of a specified annual amount and in other circumstances. Therefore, the Company makes no attempt to provide more than general information about the use of the Contracts with the various types of qualified plans. Owners and participants under qualified plans as well as Annuitants and Beneficiaries are cautioned that the rights of any person to any benefits under qualified plans may be subject to the terms and conditions of the plans themselves regardless of the terms and conditions of the Contract issued in connection therewith. Purchasers of the Contracts for use with any qualified plan should seek competent advice regarding the suitability of the Contract. (a) Section 403(b) Plans. Under Section 403(b) of the Code, payments made by public school systems and certain not-for-profit organizations to purchase annuity contracts for their employees are excludable from the gross income of the employee, subject to certain limitations. In accordance with the requirements of Section 403(b), any Contract used for a Section 403(b) Plan will prohibit distributions of (i) elective contributions made in years beginning after December 31, 1988, (ii) earnings on those contributions, and (iii) earnings on amounts attributable to elective contributions held as of the end of the last year beginning before January 1, 1989. However, distributions of such amounts 15 will be allowed upon death of an employee, attainment of age 59 1/2, separation from service, disability, or financial hardship, except that income attributable to elective contributions may not be distributed in the case of hardship. (b) H.R. 10 Plans. The Self-Employed Individuals Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10," or "Keogh," permits self-employed individuals to establish qualified plans for themselves and their employees. These plans are limited by law to maximum permissible contributions, distribution dates, and nonforfeitability of interests. In order to establish such a plan, a plan document, usually in a form approved in advance by the Internal Revenue Service, is adopted and implemented by the employer. (c) Individual Retirement Annuities. Sections 219 and 408 of the Code permit individuals or their employers to contribute to an individual retirement program known as an "Individual Retirement Annuity." Individual Retirement Annuities are subject to limitations on the amount which may be contributed and on the time when distribution may commence. In addition, distributions from certain other types of qualified plans may be placed into an Individual Retirement Annuity on a tax-deferred basis. (d) Corporate Pension and Profit-Sharing Plans. Section 401(a) and 403(a) of the Code permit corporate employers to establish various types of retirement plans for employees. Such retirement plans may permit the purchase of the Contract to provide benefits under the plans. (e) State and Local Governments' Deferred Compensation Plans. Section 457 of the Code, while not actually providing for a qualified plan as that term is normally used, provides for certain Deferred Compensation Plans with respect to service to state governments, local governments, political subdivisions, agencies, instrumentalities and certain affiliates of such entities and certain tax exempt organizations which enjoy special treatment. The Contract can be used with such plans. Under such plans a participant may specify the form of investment in which his or her participation will be made. All such investments, however, are owned by and subject to the claims of general creditors of the sponsoring employer. OTHER CONSIDERATIONS The Company is required to withhold federal income tax at a rate of 20% on all distributions which constitute "eligible rollover distributions," unless the recipient elects to rollover such amounts to another qualified plan or IRA in a direct rollover. Eligible rollover distributions generally include all distributions from qualified plans, excluding IRA's and 457 plans, with the ex- ception of (1) minimum distributions pursuant to Section 401(a)(9), and (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 beneficiaries). In addition, some states require that state income tax be withheld. For any distributions which do not constitute "eligible rollover distribu- tions," the Company is required to withhold federal and, where required, state income taxes on all distributions, unless the recipient elects not to have taxes withheld and properly notifies the Company of that election. The foregoing comments about the federal tax consequences under this Contract are not 16 exhaustive, and special rules are provided with respect to other tax situations not discussed in this Prospectus. Before making an investment, a competent tax adviser should be consulted. Further, the federal income tax consequences discussed herein reflect current law. Federal estate, state and local estate, inheritance, and other tax consequences of ownership or receipt of distributions under the Contract depend on the individual circumstances of each Owner or recipient of the distribution. A competent tax adviser should be consulted for further information. THE COMPANY - -------------------------------------------------------------------------------- BUSINESS 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." The Company's operations consist of one business segment which is the sale of individual 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 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"). In June 1995, Sears, Roebuck and Co. ("Sears") distributed in a tax-free dividend to its stockholders its remaining 80.3% ownership interest of the Corporation. As a result of the distribution, Sears no longer has an ownership interest in the Corporation. INVESTMENTS BY THE COMPANY The Company's general account assets must be invested in accordance with applicable state laws. These laws govern the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state, and municipal obligations, corporate bonds, preferred stocks, real estate mortgages, real estate and certain other investments. All of the Company's general account assets are available to meet the Company's obligations. Purchase Payments under the Contract will be accounted for in a non-unitized Separate Account of the Company. Owners have no priority claims on assets accounted for in this Separate Account. All general account assets of the Company, including those accounted for in this non-unitized Separate Account, are available to meet the guarantees under the Contract. The Company will primarily invest its general account assets in investment- grade fixed income securities including the following: Securities issued by the United States Government or its agencies or instrumentalities, which may or may not be guaranteed by the United States Government; Debt instruments, including, but not limited to, issues of or guaranteed by banks or bank holding companies, and of corporations, which are deemed by the Company's management to have qualities appropriate for inclusion in this portfolio; Commercial mortgages, mortgage-backed securities collateralized by real estate 17 mortgage loans, or securities collateralized by other assets, that are insured or guaranteed by the Federal Home Loan Mortgage Association, the Federal National Mortgage Association or the Government National Mortgage Association, or that have an investment grade at time of purchase within the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating service; Commercial paper, cash, or cash equivalents, and other short-term investments having a maturity of less than one year that are considered by the Company's management to have investment quality comparable to securities having the ratings stated above; Participations in or assignments of loans made to business entities by banks and other financial institutions (so long as the loan is one in which the Company is permitted to invest directly) and/or collateralized loan obligations. These are both typically floating-rate instruments so they would be combined with a swap agreement to create a fixed-rate asset to better match fixed-rate liabilities; In addition, interest rate swaps, futures, options, rate caps, and other hedging instruments may be used solely for non-speculative hedging purposes. Anticipated use of these financial instruments shall be limited to protecting the value of portfolio sales or purchases, or to enhance yield through the creation of a synthetic security. At inception, the Company will purchase only investment grade assets for the non-unitized Separate Account; however, this position and the investment strategy may be readdressed as market conditions change. Additionally, the Company maintains certain unitized Separate Accounts which invest in shares of an open-end investment company registered under the Investment Company Act of 1940. These Separate Account assets do not support the Company's obligations under the Contract. 18 SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- The following selected financial data for the Company should be read in conjunction with the 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 1995 1994 1993 1992 1991 - ----------------------- ---------- ---------- --------- ---------- -------- For the Years Ended December 31: Revenues.................. $ 250,854 $ 186,249 $ 227,445 $ 203,809 $186,955 Income from Continuing Operations............... 19,522 18,221 13,163 12,225 15,996 Net Income................ 19,522 18,221 13,163 12,225 15,996 As of December 31: Total Assets.............. 1,842,969 1,449,993 1,410,895 1,162,763 943,871
In 1992, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions," which resulted in a charge of $623 thousand on an after tax basis. (See note 3 to the Financial Statements.) As of December 31, 1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, fixed income securities classified as available for sale are carried at market value. In prior years, these securities were carried at the lower of amortized cost or market, determined in aggregate. (See note 3 to the Financial Statements.) 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following highlights significant factors influencing results of opera- tions and financial position. Allstate Life Insurance Company of New York ("the Company"), which is wholly owned by a wholly-owned subsidiary ("Parent") of Allstate Insurance Company ("Allstate"), markets life insurance and group and individual annuities in the state of New York, with products consisting predominately of structured set- tlement annuities sold through independent brokers. The Company also utilizes Allstate agencies and direct marketing to distribute its traditional and uni- versal life and accident and disability insurance products. Additionally, flexible premium deferred variable annuity contracts and certain single and flexible premium annuities are marketed to individuals through the account ex- ecutives of Dean Witter Reynolds, Inc. RESULTS OF OPERATIONS
1995 1994 1993 ---------- ---------- ---------- ($ IN THOUSANDS) Statutory premiums and deposits.............. $ 216,361 $ 153,000 $ 226,993 ========== ========== ========== Invested assets (1).......................... 1,335,854 1,184,024 1,148,709 Separate Account assets (2).................. 220,141 175,918 145,866 ---------- ---------- ---------- Invested assets, including Separate Account assets...................................... 1,555,995 1,359,942 1,294,575 ========== ========== ========== Premium income and contract charges.......... 148,316 88,560 126,913 Net investment income........................ 104,384 96,911 95,956 Policy benefits.............................. 198,055 137,434 175,676 Operating expenses........................... 23,366 20,205 31,894 Early retirement program..................... 1,210 ---------- ---------- ---------- Income from operations....................... 31,279 26,622 15,299 Income tax on operations..................... 10,557 8,907 5,110 ---------- ---------- ---------- Net operating income......................... 20,722 17,715 10,189 Realized capital gains and losses, after tax. (1,200) 506 2,974 ---------- ---------- ---------- Net income................................... $ 19,522 $ 18,221 $ 13,163 ========== ========== ==========
(1) Fixed income securities included in invested assets are carried at amortized cost in the table above and at fair value in the statements of financial position. (2) Separate Accounts are included at fair value. STATUTORY PREMIUMS AND DEPOSITS Statutory premiums, which include premiums and deposits for all products, increased $63.4 million or 41.4% in 1995 from 1994. The increase is primarily due to growth in sales of individual annuities, which comprised 77.3% of stat- utory premiums and deposits in 1995. Increased sales of structured settlement annuities in 1995 were partially offset by a decrease in the sales of variable annuities. In 1994, statutory premiums decreased 32.6% from 1993 levels. The decrease was due primarily to lower sales of structured settlement annuities. PREMIUM INCOME, CONTRACT CHARGES AND PROVISION FOR POLICY BENEFITS Premium income and contract charges under generally accepted accounting principles ("GAAP") increased 67.5% in 1995 and decreased 30.2% in 1994. Under GAAP, revenues exclude deposits on most annuities and premiums on universal life insurance policies. The changes in premium and contract charges in 1995 and 1994 reflect fluctuations primarily in the level of sales of structured settlement annuities sold with life contingencies. Policy benefits increased $60.6 million, or 44.1% during 1995, and decreased $38.2 million or 21.8% in 1994. These changes also reflect fluctuations primarily in the level of sales of structured settlement annuities with life contingencies. NET INVESTMENT INCOME Pre-tax net investment income increased 7.7% in 1995 and was essentially un- changed in 1994. The increase in 1995 was related to the 12.8% or $151.8 mil- lion increase in invested assets resulting primarily from growth in new busi- ness, partially offset by surrenders and other benefits paid. OPERATING EXPENSES Operating expenses increased by $2.0 million, or 9.1%, resulting from an in- crease in amortization of deferred acquisition costs, partially offset by the costs of an 20 early retirement program recorded in 1994. The decrease of $10.5 million, or 32.9%, in 1994 operating expense is attributable to a decrease in amortization of deferred acquisition costs, which were higher in 1993 as a result of annu- ity contract surrenders. In 1994, an after tax charge of $0.8 million related to the cost of an early retirement program offered to certain home office employees was recorded. The program provides one year of salary continuation and related benefits during the salary continuation period, and an enhanced retirement benefit. NET OPERATING INCOME Net operating income increased 17.0% in 1995 from 1994, which in turn in- creased 73.9% from 1993. The increase in net operating income in 1995 was pri- marily due to higher margins and growth in revenues. The increase in 1994 over 1993 was primarily due to a decrease in operating expenses. REALIZED CAPITAL GAINS AND LOSSES Net realized capital losses were reported in 1995 as compared to net real- ized capital gains in 1994. Capital losses in 1995 were realized primarily from writedowns of mortgage loans, partially offset by gains on sales of fixed income securities. Realized capital gains in 1994 decreased from gains real- ized in 1993. While the Company experienced lower asset writedowns in 1994, realized capital gains from sales of securities and bond calls were also sig- nificantly lower than the prior year. Realized capital gains in 1993 included the effect of sales related to repositioning a portion of the investment port- folio to improve the matching of assets with related liabilities. FINANCIAL POSITION INVESTMENTS The Company follows an investment strategy that combines the goals of safe- ty, stability, liquidity, growth and total return. It seeks to balance preser- vation of principal with after-tax yield while maintaining portfolio diversi- fication. The composition of the portfolio is the result of various interre- lated investment considerations including protection of principal, apprecia- tion potential, tax consequences, and yield, as well as asset/liability man- agement issues such as cash flow and duration matching. To achieve an economic balance between assets and liabilities, the investment portfolios are segmented by type of insurance product. The composition of the investment portfolio at December 31, 1995 is pre- sented in the table below (see Notes 2 and 6 to the financial statements for investment accounting policies and additional information).
($ IN THOUSANDS) PERCENT TO TOTAL Fixed income securities Privately placed corporate bonds.......................... $ 466,208 30.2% U.S. government and agencies.............................. 435,555 28.3 Publicly traded corporate bonds........................... 258,829 16.8 Mortgage-backed securities................................ 225,560 14.6 State and municipal....................................... 38,741 2.5 ---------- ----- Total fixed income securities............................. $1,424,893 92.4 Mortgage loans............................................. 86,394 5.6 Policy loans............................................... 22,785 1.5 Short-term and other....................................... 7,257 .5 ---------- ----- Total...................................................... $1,541,329 100.0% ========== =====
FIXED INCOME SECURITIES The Company generally holds its fixed income securities for the long term, but has classified all of these securities at December 31, 1995, as "available for sale" which are carried in the statement of financial position at fair value, to allow maximum flexibility in portfolio management. At December 31, 1995, net unrealized capital gains on the fixed income securities portfolio totaled $205.5 million compared to an unrealized capital loss of $11.5 million as of December 31, 1994. The significant change in the unrealized gain/loss position is primarily attributable to declining interest rates. As of December 31, 1995, the fixed income securities portfolio included $466.2 million or 30.2% of the portfolio invested in privately placed corpo- rate obligations, stated at fair value. Compared to public securities, private placements generally afford the advantages of higher yields, improved cash flow predictability through pro-rata 21 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 losses resulting from fluctua- tions in interest rates. The relative disadvantages of private placements in- clude the fact that the securities are generally less liquid than public secu- rities and that access to information regarding privately placed securities is generally more restricted than for public securities. 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, 1995 the Company had $225.6 million or 14.6% of the portfo- lio invested in mortgage-backed securities ("MBS"). These securities provide higher-than-average credit quality and liquidity. The Company mitigates credit risk primarily by purchasing securities with underlying collateral that is guaranteed by U.S. government entities. MBS are subject to risks associated with repayment of principal, which may result in the securities having a different actual maturity and yield than an- ticipated at the time of purchase. Securities that have an amortized cost greater than par value, will incur a decrease in yield if mortgages repay faster than expected. Those securities that have an amortized cost lower than par value generate an increase in yield if mortgages repay faster than expect- ed. The degree to which a security is susceptible to changes in yield is in- fluenced by the difference between its amortized cost and par value, the rela- tive sensitivity to repayment of the underlying mortgages backing the securi- ties in a changing interest rate environment, and the repayment priority of the securities in the overall securitization structure. The Company attempts to limit repayment 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, 1995, the amortized cost of the MBS port- folio was below par value by $8.1 million. The Company closely monitors its fixed income portfolio for declines in value that are other than temporary. Securities are placed on non-accrual sta- tus when they are in default or when the receipt of interest payments is in doubt. The total pretax provisions for losses attributable to fixed income se- curities for 1995, 1994 and 1993 were $2.4, $0.6 and $1.2 million, respective- ly. The Company monitors the quality of its fixed income portfolio, in part, by categorizing certain investments as problem, restructured or potential prob- lem. Problem fixed income securities are securities in default with respect to principal and/or interest and/or securities issued by companies that went into bankruptcy subsequent to acquisition of the security. Restructured fixed in- come securities have modified terms and conditions that were not at current market rates or terms at the time of the restructuring. Potential problem fixed income securities are current with respect to contractual principal and/or interest, but because of other facts and circumstances, management has serious doubts regarding the borrower's ability to pay future interest and principal, which causes management to believe these securities may be classi- fied as problem or restructured in the future. There were no problem and potential problem fixed income investments as of December 31, 1995, compared to $7.0 million of potential problem fixed income securities at December 31, 1994. The $7.0 million of potential problem fixed income securities at December 31, 1994 related to a single security and has been removed from the potential problem category due to its improved status. FINANCIAL FUTURES CONTRACTS As part of its asset/liability management, the Company generally utilizes futures contracts to hedge its interest rate risk related to anticipatory in- vestment purchases as well as to enhance asset/liability management. The Com- pany does not hold or issue these instruments for trading purposes. At Decem- ber 31, 1995, the Company had $22.9 million in notional amount of futures con- tracts outstanding, all of which mature within one year. MORTGAGE LOANS The Company's $86.4 million investment in mortgage loans at December 31, 1995 is comprised primarily of loans secured by first mortgages on developed, com- 22 mercial real estate. Geographical and property type diversification are key considerations used to manage the Company's mortgage loan risk. The Company closely monitors its commercial mortgage loan portfolio on a loan-by-loan basis. Loans with an estimated collateral value less than the loan's balance, as well as loans with other characteristics indicative of a higher than normal credit risk, are reviewed by financial and investment man- agement 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 at least annually or as con- ditions change. The total pretax provisions for loan losses were $2.2, $0.7 and $1.2 million, during 1995, 1994 and 1993, respectively. The Company defines problem commercial mortgage loans as loans that are in foreclosure, loans for which a principal or interest payment is over 60 days past due, or are current with respect to interest payments, but considered in- substance foreclosed. Restructured commercial loans have modified terms and conditions that were not at prevailing market rates or terms at the time of the restructuring. Potential problem commercial mortgage loans are current with respect to interest payments, or less than 60 days delinquent as to con- tractual principal and interest payments, but because of other facts and cir- cumstances, management has serious doubts regarding the borrower's ability to pay future interest and principal which causes management to believe these loans may be classified as problem or restructured in the future. At December 31, 1995 and December 31, 1994 total problem, restructured and potential problem loans, net of valuation allowances, were $9.6 million and $8.4 million, respectively. The net carrying value of impaired loans (see Note 6 of the financial statements) at December 31, 1995 was $9.6 million. All problem, restructured and potential problem loans were considered to be im- paired at December 31, 1995. SEPARATE ACCOUNTS Separate Account balances increased 25.1% from $175.9 million at December 31, 1994 to $220.1 million at December 31, 1995 due to sales of flexible pre- mium deferred variable annuity contracts, transfers from fixed annuities to variable annuities and favorable investment performance of the Separate Ac- counts, partially offset by surrenders. RESERVE FOR LIFE INSURANCE POLICY BENEFITS The reserve for life insurance policy benefits increased 33.4% to $838.7 million at December 31, 1995, resulting primarily from the sales of structured settlement annuities with life contingencies. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of funds consists primarily of premiums and annuity deposits and collections of principal and income from the investment portfolio. The Company generates substantial positive cash flows from operat- ing activities. The major use of these funds are policyholder claims and bene- fits, contract maturities, surrenders and other operating costs. FINANCIAL RATINGS AND STRENGTH Liquidity for life insurance companies is measured by their ability to pay contractual benefits, pay operating expenses and fund investment commitments. Independent insurance industry rating organizations rate life insurance compa- nies based on their overall performance and ability to meet their policyholder obligations over a long period of time. Such ratings are directed toward the protection of policyholders, not investors. Claims-paying ability ratings at December 31, 1995 assigned to the Company include AA+ and A+(g) from Standard & Poor's and A.M. Best, respectively. In addition, Moody's assigns the Company an Aa3 financial stability rating at December 31, 1995. The National Association of Insurance Commissioners ("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 deter- mining 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 risk, busi- ness risk, asset risk and interest rate risk. At December 31, 1995, RBC for the Company was significantly above levels which would require regulatory ac- tion. 23 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 2,000 stock, mutual and other types of insurers in business in the United States. A.M. Best Company assigns A+r (Superior) to the Company. Under Best's rating policy and procedure, the Company is assigned the Best's rating of its parent company, and is based on the consolidated performance of the parent and its subsidiary. Standard & Poor's Insurance Rating Services assigns AA+ (Excellent) to the Company and Moody's assigns an Aa3 (Excellent) financial stability rating to the Company. The Company shares the same ratings of its parent. EMPLOYEES - -------------------------------------------------------------------------------- As of December 31, 1995, Allstate Life Insurance Company of New York had approximately 80 employees at its Home Office in Farmingville, New York who work on the Company's matters. PROPERTIES - -------------------------------------------------------------------------------- The Company occupies office space in Farmingville, New York. Expenses associated with these offices are allocated to the Company. STATE AND FEDERAL REGULATION - -------------------------------------------------------------------------------- The insurance business of the Company is subject to comprehensive and detailed regulation and supervision by 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 by insolvent companies. 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 24 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 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 - -------------------------------------------------------------------------------- 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). Except as otherwise indicated, the directors and executive officers of the Company have been associated with the Company more than five years either in the position shown or in other positions. LOUIS G. LOWER, II, 50, President and Chairman of the Board (1990)* Louis G. Lower, II, is also President of Allstate Life Insurance Company; President and Chairman of the Board of Northbrook Life Insurance Company, Glenbrook Life Insurance Company, and Glenbrook Life and Annuity Company; Chairman of the Board and Chief Executive Officer of Lincoln Benefit Life Company and Surety Life Insurance Company; Chairman of the Board of Allstate Settlement Corporation and a Director of Allstate Life Financial Services, Inc. MICHAEL J. VELOTTA, 50, Vice President, Secretary, General Counsel, and Director (1993)* Michael J. Velotta is also Vice President, Secretary, General Counsel and Director of Allstate Life Insurance Company, Northbrook Life Insurance Company, Glenbrook Life Insurance Company, Glenbrook Life and Annuity Company; a Director and General Counsel of Surety Life Insurance Company; and a Director of Lincoln Benefit Life Company, Allstate Settlement Corporation and Allstate Life Financial Services, Inc. Prior to 1993, he was Vice President, Assistant General Counsel of Allstate Life Insurance Company and from 1986 to 1989, he was Assistant Secretary and Assistant General Counsel of Allstate Insurance Company. PETER H. HECKMAN, 50, Vice President and Director (1989)* Peter H. Heckman is also Vice President and Director of Allstate Life Insurance Company, Northbrook Life Insurance Company, Glenbrook Life Insurance Company and Glenbrook Life and Annuity Company; Director of Lincoln Benefit Life Company, Surety Life Insurance Company, Allstate Settlement Corporation and Allstate Life Financial Services, Inc. Prior to September 1, 1988 he was an Assistant Vice President of Allstate Insurance Company. CASEY J. SYLLA, 52, Chief Investment Officer (1995) Casey J. Sylla is also Director of Allstate Insurance Company, Allstate Indemnity Company, Allstate Property and Casualty Insurance Company, Deerbrook Insurance Company, First Assurance Company, Northbrook Indemnity Company, Northbrook National Insurance Company, Northbrook Property and Casualty Insurance 25 Company. He is also Chief Investment Officer of Glenbrook Life and Annuity Company, Allstate Settlement Corporation, The Northbrook Corporation, Allstate Insurance Company, Allstate Indemnity Company, Allstate Property and Casualty, Deerbrook Insurance Company, First Assurance Company, Northbrook Indemnity Company, Northbrook National Insurance Company, Northbrook Property and Casualty Insurance Company. Prior to 1995, he was Senior Vice President and Executive Officer of Investments for Northwestern Mutual Life Insurance Company. JAMES P. ZILS, 44, Treasurer (1995) James P. Zils is also Treasurer of Allstate Life Financial Services, Inc., Allstate Settlement Corporation, Allstate Life Insurance Company, Glenbrook Life and Annuity Company, Glenbrook Life Insurance Company, Northbrook Life Insurance Company, The Northbrook Corporation. He is Treasurer and Vice President of AEI Group, Inc., Allstate International Inc., Allstate Motor Club, Inc., Direct Marketing Center, Inc., Enterprises Services Corporation, The Allstate Foundation, Forestview Mortgage Insurance Company, Allstate Indemnity Company, Allstate Property and Casualty, Deerbrook Insurance Company, First Assurance Company, Northbrook Indemnity Company, Northbrook National Insurance Company, Northbrook Property and Casualty Insurance Company. Prior to 1995 he was Vice President of Allstate Life Insurance Company. Prior to 1993 he held various management positions within Allstate. JAMES J. BRAZDA, 51, Chief Administrative Officer and Director (1983)* James J. Brazda is also a Department Manager for Allstate Life Insurance Company. MARCIA D. ALAZRAKI, 54, Director (1993)* Marcia D. Alazraki is an attorney practicing with the firm of Simpson, Thacher & Bartlett, New York, New York. Prior to 1991, she practiced with the firm of Shea & Gould, New York, New York. JOSEPH F. CARLINO, 78, Director (1983)* Joseph F. Carlino is a self-employed practicing attorney in Mineola, New York. CLEVELAND JOHNSON, JR., 61, Director (1983)* Cleveland 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. PHILLIP E. LAWSON, 42, Director (1994)* Phillip E. Lawson is also a Regional Vice President of Allstate Insurance Company. GERARD F. MCDERMOTT, 49, Director (1995) Gerard F. McDermott is also a Regional Vice President of Allstate Insurance Company. Prior to 1986, he held various management positions. JOSEPH P. MCFADDEN, 57, Director (1992)* Joseph P. McFadden is also a Territorial Vice President of Allstate Insurance Company. Prior to 1992, he was a Claim Vice President of Allstate Insurance Company. TIMOTHY H. PLOHG, 49, Director (1995) Timothy H. Plohg is also Vice President and Director of Allstate Life Insurance Company. Prior to 1995, he was Vice President of the ALSC; Assistant Vice President Sales, Regional Vice President. JOHN R. RABEN, JR., 50, Director (1988)* John R. Raben, Jr. is a Vice President & Municipal Bond/Public Finance Liaison with J.P. Morgan Securities, Inc. THEODORE A. SCHNELL, 47, Director (1995)* Theodore A. Schnell is also Assistant Treasurer of Glenbrook Life & Annuity Company, 26 Glenbrook Life Insurance Company and Allstate Life Insurance Company. SALLY A. SLACKE, 62, Director (1983)* Sally A. Slacke is also President of Slacke Test Boring, Inc. BARRY S. PAUL, 40, Assistant Vice President and Controller Barry S. Paul is also Assistant Vice President and Controller of Allstate Life Insurance Company; Assistant Vice President and Controller of Northbrook Life Insurance Company, Glenbrook Life Insurance Company and Glenbrook Life and Annuity Company. *Year elected to current office EXECUTIVE COMPENSATION - ------------------------------------------------------------------------------- Some executive officers of the Company also serve as officers of the Company's parent 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 duties as an executive officer of the Company. However, no officer's compensation allocated to the Company exceeded $100,000 in 1995. The allocated cash compensation of all officers of the Company as a group for services rendered in all capacities to the Company during 1995 totalled $175,227. Directors of the Company receive no compensation in addition to their compensation as employees of the Company. Directors of the Company who are not also employees of the Company receive compensation for services provided. Marcia D. Alazraki, John R. Raben, Jr. and Sally A. Slacke receive $5,500 annually; Cleveland Johnson, Jr. receives $5,500 annually; and Joseph F. Carlino receives $5,500 annually. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------ --------------------- -------- (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/ PAYOUTS COMPENSATION POSITION YEAR ($) ($) ($) AWARD(S) SARS(#) ($) ($) ------------------ ---- -------- -------- ------------ ---------- ---------- -------- ------------ Louis G. Lower, II...... 1995 $416,000 $266,175 $17,044 $199,890 N/A $411,122 $5,250(1) President and 1994 $389,050 $ 26,950 $25,889 $170,660 N/A 0 $1,890(1) Chairman of the 1993 $374,200 $294,683 $52,443 $318,625 N/A $ 13,451 $6,296(1) Board of Directors James J. Brazda......... 1995 $115,870 $ 27,808 $ 175 0 N/A 0 $5,761(2) Chief Administrative Of- 1994 $108,195 $ 21,707 0 $ 16,935 N/A 0 $1,608(2) ficer and Director
- ------- (1) Amount received by Mr. Lower 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. (2) 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. 27 LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- 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 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, IL 60601-6779, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS - -------------------------------------------------------------------------------- Certain legal matters relating to the federal securities laws applicable to the issue and sale of the Contract have been passed upon by Routier and Johnson, P.C., of Washington , D.C. All matters of New York law pertaining to the Contract, including the validity of the Contract and the Company's right to issue such Contract under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of the Company. 28 INDEPENDENT AUDITOR'S 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 as of December 31, 1995 and 1994, and the related Statements of Operations, Shareholder's Equity and Cash Flows for each of the three years in the period ended December 31, 1995. 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 Allstate Life Insurance Company of New York as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 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. As discussed in Note 3 to financial statements, in 1993 the Company changed its method of accounting for investments in fixed income securities. Deloitte & Touche LLP Chicago, Illinois March 1, 1996 F-1 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, --------------------- 1995 1994 ---------- ---------- ($ IN THOUSANDS) ASSETS Investments Fixed income securities Available for sale, at fair value (amortized cost $1,219,418 and $468,518)......................... $1,424,893 $ 457,018 Held to maturity, at amortized cost (fair value $583,000)........................................ 601,359 Mortgage loans...................................... 86,394 86,435 Policy loans........................................ 22,785 20,500 Short-term.......................................... 7,257 7,212 ---------- ---------- Total investments............................... 1,541,329 1,172,524 Deferred acquisition costs............................ 53,944 50,699 Accrued investment income............................. 18,828 16,518 Reinsurance recoverable............................... 3,331 10,365 Deferred income taxes................................. 17,443 Cash.................................................. 1,472 1,763 Other assets.......................................... 3,924 4,763 Separate Accounts..................................... 220,141 175,918 ---------- ---------- Total assets.................................... $1,842,969 $1,449,993 ========== ========== LIABILITIES Reserve for life insurance policy benefits............ $ 838,739 $ 626,316 Contractholder funds.................................. 499,548 483,812 Deferred income taxes................................. 23,659 Other liabilities and accrued expenses................ 8,950 13,304 Net payable to affiliates............................. 1,865 1,402 Separate Accounts..................................... 220,141 175,918 ---------- ---------- Total liabilities............................... 1,592,902 1,300,752 ---------- ---------- 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 (losses)................. 74,413 (6,891) Retained income....................................... 127,867 108,345 ---------- ---------- Total shareholder's equity...................... 250,067 149,241 ---------- ---------- Total liabilities and shareholder's equity...... $1,842,969 $1,449,993 ========== ==========
See notes to financial statements. F-2 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------- 1995 1994 1993 -------- -------- -------- ($ IN THOUSANDS) Revenues Premium income (net of reinsurance ceded of $2,147, $2,198 and $4,929)...................... $126,713 $ 70,070 $110,051 Contract charges................................. 21,603 18,490 16,862 Net investment income............................ 104,384 96,911 95,956 Realized capital (losses) gains.................. (1,846) 778 4,576 -------- -------- -------- 250,854 186,249 227,445 -------- -------- -------- Costs and expenses Provision for policy benefits (net of reinsurance recoveries of $1,581, $1,860 and $1,773)........ 198,055 137,434 175,676 Amortization of deferred acquisition costs ...... 5,502 3,875 10,319 Operating costs and expenses..................... 17,864 16,330 21,575 Early retirement program......................... 1,210 -------- -------- -------- 221,421 158,849 207,570 -------- -------- -------- Income before income taxes......................... 29,433 27,400 19,875 Income tax expense................................. 9,911 9,179 6,712 -------- -------- -------- Net income......................................... $ 19,522 $ 18,221 $ 13,163 ======== ======== ========
See notes to financial statements. F-3 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF SHAREHOLDER'S EQUITY
UNREALIZED NET ADDITIONAL CAPITAL COMMON CAPITAL GAINS RETAINED STOCK PAID-IN (LOSSES) INCOME TOTAL ------- ---------- ---------- -------- -------- ($ IN THOUSANDS) Balance, December 31, 1992.... $ 2,000 $45,787 -- $ 76,961 $124,748 Net income.................. 13,163 13,163 Change in unrealized net capital gains and losses... $25,391 25,391 ------- ------- ------- -------- -------- Balance, December 31, 1993.... 2,000 45,787 25,391 90,124 163,302 Net income.................. 18,221 18,221 Change in unrealized net capital gains and losses... (32,282) (32,282) ------- ------- ------- -------- -------- Balance, December 31, 1994.... 2,000 45,787 (6,891) 108,345 149,241 Net income.................. 19,522 19,522 Change in unrealized net capital gains and losses... 81,304 81,304 ------- ------- ------- -------- -------- Balance, December 31, 1995.... $ 2,000 $45,787 $74,413 $127,867 $250,067 ======= ======= ======= ======== ========
See notes to financial statements. F-4 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 -------- --------- --------- ($ IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................... $ 19,522 $ 18,221 $ 13,163 Adjustments to reconcile net income to net cash from operating activities: Realized capital losses (gains)............ 1,846 (778) (4,576) Depreciation, amortization and other non- cash items................................ (22,348) (18,969) (14,618) Interest credited to contractholder funds.. 26,924 27,233 26,476 Increase in reserve for policy benefits and contractholder funds...................... 103,513 55,233 101,348 Increase in deferred acquisition costs..... (5,537) (6,850) (2,396) Increase in accrued investment income...... (2,497) (102) (114) Change in deferred income taxes............ (2,674) (5,993) 7,564 Changes in other operating assets and lia- bilities.................................. 3,894 (18,082) (3,609) -------- --------- --------- Net cash from operating activities....... 122,643 49,913 123,238 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales Fixed income securities available for sale. 13,526 49,903 Fixed income securities.................... 46,496 Investment collections Fixed income securities available for sale. 30,871 54,796 Fixed income securities held to maturity... 3,067 17,186 Fixed income securities.................... 153,518 Mortgage loans............................. 6,499 9,744 2,382 Investment purchases Fixed income securities available for sale. (142,205) (137,684) Fixed income securities held to maturity... (32,046) (38,709) Fixed income securities.................... (282,979) Mortgage loans............................. (9,864) (10,132) (15,642) Change in short-term investments, net........ (45) 41,528 4,254 Change in policy loans, net.................. (859) (2,133) 84 -------- --------- --------- Net cash from investing activities....... (131,056) (15,501) (91,887) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Contractholder fund deposits................. 76,543 57,468 84,024 Contractholder fund withdrawals.............. (68,412) (92,574) (115,698) -------- --------- --------- Net cash from financing activities....... 8,122 (35,106) (31,674) -------- --------- --------- Net decrease in cash........................... (291) (694) (323) Cash at beginning of year...................... 1,763 2,457 2,780 -------- --------- --------- Cash at end of year............................ $ 1,472 $ 1,763 $ 2,457 ======== ========= =========
See notes to financial statements. F-5 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 1. ORGANIZATION AND NATURE OF OPERATIONS Allstate Life Insurance Company of New York (the "Company") is wholly owned by a wholly-owned subsidiary ("Parent") of Allstate Insurance Company ("Allstate"), 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"). The Company markets life insurance and group and individual annuities in the state of New York, with products consisting predominately of structured settlement annuities sold through independent brokers. The Company also utilizes Allstate agencies and direct marketing to distribute its traditional and universal life and accident and disability insurance products. Additionally, flexible premium deferred variable annuity contracts and certain single and flexible premium annuities are marketed to individuals through the account executives of Dean Witter Reynolds, Inc. ("Dean Witter") (Note 4). The Company utilizes various modeling techniques in managing the relationship between assets and liabilities. 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. In addition, single and flexible premium annuity contracts issued by the Company are subject to discretionary withdrawal or surrender by the contractholder, subject to applicable surrender charges. The fixed income securities supporting these obligations have been selected to meet the anticipated cash flow requirements of the related liabilities; however, 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 employs strategies to minimize 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. Currently, there is proposed legislation which would permit banks greater participation in securities businesses, which could eventually present an increased level of competition for sales of the Company's annuity contracts. Furthermore, the federal government may enact changes which could possibly eliminate the tax-advantaged nature of annuities or eliminate consumers' need for tax deferral, thereby reducing the incentive for customers to purchase the Company's products. While it is not possible to predict the outcome of such issues with certainty, management evaluates the likelihood of various outcomes and develops strategies, as appropriate, to respond to such challenges. To conform with the 1995 presentation, certain items in the prior year's financial statements and notes have been reclassified. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LIFE INSURANCE ACCOUNTING The Company writes traditional life, accident and disability insurance. The Company also writes long-duration insurance contracts with terms that are not fixed and guaranteed, including single premium life F-6 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) insurance contracts, which are considered universal life-type contracts. The Company also sells long-duration contracts that do not involve significant risk of policyholder mortality or morbidity (principally single and flexible premium fixed and variable annuities and structured settlement annuities when sold without life contingencies), which are considered investment contracts. Limited payment contracts (policies with premiums paid over a period shorter than the contract period) primarily consist of group annuities and structured settlement annuities, when sold with life contingencies. 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 universal life-type contracts are comprised of contract charges and fees and are recognized when assessed against the policyholder account balance. Revenues on investment contracts include contract charges and fees for contract administration and surrenders. These revenues are recognized when levied against the contract balances. Gross premiums in excess of the net premium on limited payment contracts are deferred and recognized over the contract period. The reserve for life insurance policy benefits, which relates to traditional life, group annuities and structured settlement annuities with life contingencies, and accident and disability insurance, is computed on the basis of assumptions as to future investment yields, mortality, morbidity, terminations and expenses. These assumptions, which for traditional life are applied using the net level premium method, include provisions for adverse deviation and generally vary by such characteristics as plan, year of issue and policy duration. Reserve interest rates ranged from 6.2% to 9.5% during 1995. To the extent that unrealized gains on available for sale 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. Contractholder funds arise from the issuance of individual contracts that include an investment component, including most annuities and universal life- type contracts. Payments received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest accrued to the benefit of the contractholder less withdrawals, mortality charges, and administrative expenses. Credited interest rates on contractholder funds ranged from 3.0% to 6.8% for those contracts with fixed interest rates and from 3.6% to 8.5% for those with flexible rates during 1995. Certain costs of acquiring insurance business, principally agents' compensation, premium taxes, certain underwriting costs and direct mail solicitation expenses, are deferred and amortized to income. For traditional life, limited payment contracts and accident and disability, these costs are amortized in proportion to the estimated revenues on such business. For universal life-type 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 F-7 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 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. 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. Assets and liabilities of the Separate Accounts represent funds of Allstate Life of New York Variable Annuity Account and Allstate Life of New York Variable Annuity Account II ("Separate Accounts"), unit investment trusts registered with the Securities and Exchange Commission. The assets and liabilities 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 accompanying statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance fees, administration fees and mortality and expense risk charges. INVESTMENTS Fixed income securities include bonds and mortgage-backed securities. Fixed income securities which may be sold prior to their contractual maturity ("available for sale") are carried at fair value. The difference between amortized cost and fair value, net of deferred income taxes, certain deferred acquisition costs and reserves for life insurance policy benefits, is reflected as a component of shareholder's equity. Fixed income securities which the Company has both the ability and positive intent to hold to maturity ("held to maturity") are carried at amortized cost. Provisions are made to write down the value of fixed income securities for declines in value 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 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 future market conditions and other factors. While the Company believes its mortgage loans were carried at appropriate levels at December 31, 1995, further allowances may be required if market conditions or other circumstances surrounding the loans change. Short-term investments are carried at cost which approximates fair value. Policy loans are carried at the unpaid principal balances. F-8 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Investment income consists primarily of interest, which is recognized on an accrual basis. Interest income on mortgage-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 designates financial futures contracts as hedges of fixed income securities and anticipated transactions when certain criteria are met. These criteria require financial futures contracts to reduce the interest rate risk associated with designated assets or anticipated transactions. In addition, at the inception of the hedge and throughout the hedge period, high correlation between changes in the market value of the financial future contract and the fair value of, or interest income or expense associated with, the hedged item must exist. The Company only hedges those anticipated transactions that are probable of occurrence and whose significant terms and expected characteristics can be identified. When the hedged item is an existing asset, gains and losses on financial futures contracts are deferred as an adjustment to the amortized cost basis of the hedged item and are reported net of tax in shareholder's equity. When the hedged item is an anticipated transaction, gains and losses on financial futures contracts are deferred as other liabilities and accrued expenses. Once the anticipated transaction occurs, the deferred gains or losses are considered part of the amortized cost basis of the hedged asset. Accordingly, they are recognized in net investment income over the life of the hedged asset or are included in the recognition of gain or loss from disposition of that asset. Initial margin deposits are reported in short-term investments. Fees and commissions on financial futures contracts are deferred as an adjustment to the amortized cost basis of the hedged item. If, subsequent to entering into a hedge transaction, the financial futures contract becomes ineffective (including if the hedged item is sold or otherwise extinguished), the Company terminates the contract position. Gains and losses on these terminations are reported in realized capital gains (losses) in the period they occur. The Company may also terminate financial futures contracts as a result of other events or circumstances. Gains and losses on these terminations are reported in shareholder's equity, consistent with the accounting for the hedged item. 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. F-9 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) REINSURANCE Certain premiums and policy benefits are ceded and reflected net of such cessions in the statements of operations. Reinsurance recoverable and the related reserves for policy benefits are reported separately in the statements of financial position. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. 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 and the enacted tax rates. The principal assets and liabilities giving rise to such differences are insurance reserves and deferred policy acquisition costs. Deferred income taxes also arise from unrealized capital gains or losses on fixed income securities carried at fair value. USE OF ESTIMATES The preparation of the 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. 3. ACCOUNTING CHANGES Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 114 defines impaired loans as loans in which it is probable that a creditor will be unable to collect all amounts contractually due under the terms of a loan agreement and requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on impaired loans. The adoption of these statements did not have a material impact on net income or financial position. Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments classified as available for sale be carried at fair value. Previously, fixed income securities classified as available for sale were carried at the lower of amortized cost or fair value, determined in the aggregate. Unrealized holding gains and losses are reflected as a separate component of shareholder's equity, net of deferred income taxes, certain life deferred acquisition costs and reserves for life insurance policy benefits. The net effect of adoption of this statement increased shareholder's equity at December 31, 1993 by $25,391 and did not have a material impact on net income. F-10 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 4. RELATED PARTY TRANSACTIONS REINSURANCE The Company cedes business to the Parent under reinsurance treaties. Premiums and policy benefits ceded totaled $1,259 and $278 in 1995, $1,181 and $1,877 in 1994, and $4,109 and $1,288 in 1993. Included in the reinsurance recoverable at December 31, 1995 and 1994 are amounts due from the Parent of $1,212 and $1,120, respectively. STRUCTURED SETTLEMENT ANNUITIES Allstate, through an affiliate, purchased $11,243, $7,568 and $24,778 of structured settlement annuities from the Company in 1995, 1994 and 1993, respectively. Included in premium income are $4,164, $1,221 and $7,170, for 1995, 1994 and 1993, respectively, for the amounts related to structured settlement annuities with life contingencies. Additionally, the provision for policy 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 Allstate in conducting its business activities. The Company reimburses Allstate for the operating expenses incurred by Allstate on its behalf. The cost to the Company is determined by various allocation methods and is primarily related to the level of the services provided. Expenses allocated to the Company were $21,288, $17,320 and $16,313 in 1995, 1994 and 1993, respectively. A portion of these expenses related to the acquisition of insurance business is deferred and amortized over the policy period. DEAN WITTER Dean Witter is the primary distributor of the Company's single and flexible premium annuities. Dean Witter is also the distributor of flexible premium deferred variable annuity contracts and the investment manager for the Dean Witter Variable Investment Series, the fund in which the assets of the Separate Accounts are invested. Additionally, Dean Witter loans funds to an affiliate of the Parent under the terms of a strategic alliance. 5. INCOME TAXES A consolidated federal income tax return will be filed by the Parent and its life insurance subsidiaries, including the Company. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective subsidiaries, whether or not such benefits generated by the subsidiaries would be available on a separate return basis. The Corporation and its domestic subsidiaries, including the Company, (the "Allstate Group"), will be eligible to file a consolidated tax return beginning in the year 2000. F-11 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Prior to the Distribution, the Allstate Group 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 "Tax Sharing Agreement"). As a member of the Sears Tax Group, the Corporation was jointly and severally liable for the consolidated income tax liability of the Sears Tax Group. Under the 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 Allstate Group in the consolidated federal income tax return. Effectively, this resulted in the Company's annual income tax provision being computed as if the Company filed a separate return, except that items such as net operating losses, capital losses, or similar items, which might not be immediately recognizable in a separate return, were allocated according to the Tax Sharing Agreement and reflected in the Company's provision to the extent that such items reduced the Sears Tax Group's federal tax liability. 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 Tax Sharing Agreement with respect to the Company's federal income tax liability and taxes payable to or recoverable from the Sears Group. The components of the deferred income tax assets and liabilities at December 31, 1995 and 1994 are as follows:
1995 1994 -------- -------- Deferred assets Reserve for policy benefits............................... $ 25,562 $ 21,447 Difference in tax bases of investments.................... 1,536 1,708 Loss on disposal of discontinued operations............... 376 378 Reserve for postretirement benefits....................... 496 446 Unrealized loss on fixed income securities................ 3,711 Other assets.............................................. 1,701 2,402 -------- -------- Total deferred assets................................... 29,671 30,092 -------- -------- Deferred liabilities Unrealized gain on fixed income securities................ (40,069) Policy acquisition costs.................................. (12,655) (12,116) Prepaid commission expense................................ (578) (520) Other liabilities......................................... (28) (13) -------- -------- Total deferred liabilities.............................. (53,330) (12,649) -------- -------- Net deferred (liability) asset.......................... $(23,659) $ 17,443 ======== ========
F-12 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) The Company has not established a valuation reserve as it is more likely than not that the Company will produce sufficient taxable income in the future to realize the deferred tax asset. The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ------- ------- ------- Current.............................................. $12,589 $15,172 $12,821 Deferred............................................. (2,678) (5,993) (6,109) ------- ------- ------- Income tax expense................................. $ 9,911 $ 9,179 $ 6,712 ======= ======= =======
The Company paid income taxes of $11,000, $27,682 and $13,079 in 1995, 1994 and 1993, respectively to the Parent under the Tax Sharing Agreement. Additionally, the Company had income taxes payable to the Parent of $1,729 and $141 at December 31, 1995 and 1994, respectively. 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, 1995 of approximately $389 will result in taxes payable of $136 if distributed to the Company's shareholder. The Company has no plan to distribute amounts from the policyholder surplus account, and no further additions to the account are allowed by the Tax Reform Act of 1984. 6. INVESTMENTS In 1995, the Company transferred its held to maturity fixed income securities portfolio, with an amortized cost of $644,005 to the available for sale fixed income portfolio. The fair value of these fixed income securities was $726,820, resulting in an increase to shareholder's equity of $82,815 after adjustment for deferred income taxes, certain deferred acquisition costs and reserves for life insurance policy benefits. While the Company's investment philosophy has not changed, management chose to transfer these fixed income securities to available for sale to maximize the Company's flexibility in responding to changes in market conditions. F-13 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) FAIR VALUES The amortized cost, fair value and gross unrealized gains and losses for fixed income securities are as follows:
GROSS UNREALIZED AMORTIZED ---------------- FAIR DECEMBER 31, 1995 COST GAINS LOSSES VALUE - ----------------- ---------- -------- ------- ---------- Available for sale U.S. government and agencies............ $ 336,331 $ 99,750 $ 526 $ 435,555 State and municipal..................... 36,002 2,831 92 38,741 Corporate............................... 633,731 92,073 767 725,037 Mortgage-backed securities.............. $ 213,354 12,370 164 225,560 ---------- -------- ------- ---------- Total available for sale.............. $1,219,418 $207,024 $ 1,549 $1,424,893 ========== ======== ======= ========== GROSS UNREALIZED AMORTIZED ---------------- FAIR DECEMBER 31, 1994 COST GAINS LOSSES VALUE - ----------------- ---------- -------- ------- ---------- Available for sale U.S. government and agencies............ $ 28,621 $ 299 $ 825 $ 28,095 State and municipal..................... 33,939 303 1,024 33,218 Corporate............................... 221,740 3,871 6,748 218,863 Mortgage-backed securities.............. 184,218 1,188 8,564 176,842 ---------- -------- ------- ---------- Total available for sale.............. $ 468,518 $ 5,661 $17,161 $ 457,018 ========== ======== ======= ========== Held to maturity U.S. government and agencies............ $ 267,521 $ 5,203 $24,723 $ 248,001 Corporate............................... 328,194 8,462 7,377 329,279 Mortgage-backed securities.............. 5,644 92 16 5,720 ---------- -------- ------- ---------- Total held to maturity................ $ 601,359 $ 13,757 $32,116 $ 583,000 ========== ======== ======= ==========
SCHEDULED MATURITIES The scheduled maturities for fixed income securities at December 31, 1995 are as follows:
AMORTIZED COST FAIR VALUE -------------- ---------- Due in one year or less.............................. $ 21,352 $ 21,841 Due after one year through five years................ 78,391 83,922 Due after five years through ten years............... 165,998 182,739 Due after ten years.................................. 740,323 910,831 ---------- ---------- 1,006,064 1,199,333 Mortgage-backed securities......................... 213,354 225,560 ---------- ---------- Total............................................ $1,219,418 $1,424,893 ========== ==========
F-14 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Actual maturities may differ from those scheduled as a result of prepayments by the issuers. UNREALIZED NET CAPITAL GAINS AND LOSSES Unrealized net capital gains and losses on fixed income securities available for sale included in shareholder's equity at December 31, 1995 are as follows:
AMORTIZED FAIR UNREALIZED NET COST VALUE GAINS/(LOSSES) ---------- ---------- -------------- Fixed income securities available for sale..................................... $1,219,418 $1,424,893 $205,475 ========== ========== Reserves for life insurance policy bene- fits..................................... (89,600) Deferred income taxes..................... (40,068) Deferred acquisition costs................ (1,394) -------- Total................................... $ 74,413 ========
The change in unrealized net capital gains and losses for fixed income securities is as follows:
YEAR ENDED DECEMBER 31, ------------------ 1995 1994 -------- -------- Fixed income securities available for sale.................. $216,975 $(52,740) Reserves for life insurance policy benefits................. (89,600) Deferred income taxes....................................... (43,779) 17,382 Deferred acquisition costs.................................. (2,292) 3,076 -------- -------- Change in unrealized net capital gains and losses......... $ 81,304 $(32,282) ======== ========
INVESTMENT INCOME Investment income by type of investment is as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 -------- ------- ------- Fixed income securities............................... $ 95,212 $88,149 $87,524 Mortgage loans........................................ 7,999 8,092 7,435 Policy loans.......................................... 1,309 1,153 1,017 Short-term............................................ 1,435 1,093 1,385 -------- ------- ------- Investment income, before expense..................... 105,955 98,487 97,361 Investment expense.................................... 1,571 1,576 1,405 -------- ------- ------- Net investment income................................. $104,384 $96,911 $95,956 ======== ======= =======
F-15 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) REALIZED CAPITAL GAINS AND LOSSES Realized capital gains and losses on investments are as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ------- ------ ------- Fixed income securities............................... $ 422 $1,570 $ 5,657 Mortgage loans........................................ (2,268) (792) (1,081) ------- ------ ------- Realized capital (losses) gains..................... (1,846) 778 4,576 Income tax (benefit) expense........................ (646) 272 1,602 ------- ------ ------- Realized capital (losses) gains..................... $(1,200) $ 506 $ 2,974 ======= ====== =======
PROCEEDS FROM SALES OF FIXED INCOME SECURITIES The proceeds from sales of investments in fixed income securities, excluding calls, and related gross realized gains and losses are as follows:
YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ------- ------- ------- Proceeds............................................. $13,526 $49,903 $46,496 ------- ------- ------- Gross realized gains................................. $ 172 $ 1,743 $ 1,780 Gross realized losses................................ (105) (973) (30) ------- ------- ------- Net realized gains................................. $ 67 $ 770 $ 1,750 ======= ======= =======
INVESTMENT LOSS PROVISIONS AND VALUATION RESERVES Pretax provisions for investment losses, principally relating to other than temporary declines in value on fixed income securities, and valuation allowances on mortgage loans were $2,448, $627 and $1,200 in 1995, 1994 and 1993, 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 components of impaired loans at December 31, 1995 are as follows: Net carrying value of impaired loans With valuation allowances.............................. $ 9,353 Less: valuation allowances............................. (1,934) Without valuation allowances........................... 2,228 ------- Total.............................................. $ 9,647 =======
F-16 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) All impaired loans were measured at the fair value of the collateral at December 31, 1995. Activity in the valuation allowance for all mortgage loans for the year ended December 31, 1995 is summarized as follows: Balance at January 1.............................................. $1,179 Additions....................................................... 1,930 Direct write-downs.............................................. (1,157) ------ Balance at December 31............................................ $1,952 ======
Interest income is recognized on a cash basis for impaired loans carried at the fair value of collateral, beginning at the time of impairment. For other impaired loans, interest is accrued based on the net carrying value. The Company recognized interest income of $1,398 on impaired loans during the period, of which $1,193 was received in cash. The average recorded investment in impaired loans during the period was $8,900. INVESTMENT CONCENTRATION AND OTHER INVESTMENT INFORMATION The Company maintains a diversified portfolio of municipal bonds. The largest concentrations in the portfolio are presented below. Except for the following, holdings in no other state exceed 5.0% of the carrying value of the portfolio at December 31, 1995.
1995 1994 ---- ---- Ohio.......................................................... 26.8% 26.9% California.................................................... 23.1 23.0 Illinois...................................................... 19.7 22.0 Maryland...................................................... 7.6 9.0 Maine......................................................... 5.7 5.9 New York...................................................... 5.3 6.1 Minnesota..................................................... 5.2 --
The Company's mortgage loans are collateralized primarily by a variety of commercial real estate property types, located throughout the United States. Substantially all of the commercial mortgage loans are non-recourse to the borrower. The three states with the largest portion of the commercial mortgage loan portfolio are as listed below. Holdings in no other state exceed 5.0% of the portfolio at December 31: (% of commercial mortgage portfolio carrying value)
1995 1994 ---- ---- California.................................................... 56.7% 58.5% Illinois...................................................... 22.9 16.3 New York...................................................... 11.1 10.9
F-17 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) The types of properties collateralizing the mortgage loans are as follows: (% of commercial mortgage portfolio carrying value)
1995 1994 ----- ----- Retail...................................................... 39.5% 31.4% Warehouse................................................... 32.1 36.8 Office...................................................... 16.0 19.3 Industrial.................................................. 6.9 7.1 Apartment................................................... 4.5 4.4 Other....................................................... 1.0 1.0 ----- ----- 100.0% 100.0% ===== =====
At December 31, 1995, fixed income securities with a carrying value of $1,988 were on deposit with regulatory authorities as required by law. During 1995, the Company held one fixed income security which exceeded 10% of shareholder's equity, the State of Israel Government Loan Trust, with a fair value of $83,980. This security, issued through the United States Agency for International Development, is secured by the credit of the United States government and is backed by government guaranteed loans to Israel. F-18 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 7. FINANCIAL INSTRUMENTS In the normal course of business, the Company invests in various financial assets, incurs various financial liabilities and enters into agreements involving derivative financial instruments. 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. As a number of the Company's significant assets, including deferred acquisition costs and deferred income taxes, and liabilities, including traditional and universal life-type life insurance reserves, are not considered financial instruments, the disclosures that follow do not reflect the fair value of the Company as a whole. FINANCIAL ASSETS
CARRYING AT DECEMBER 31, 1995 VALUE FAIR VALUE -------------------- ---------- ---------- Fixed income securities............................ $1,424,893 $1,424,893 Mortgage loans..................................... 86,394 89,517 Short-term investments............................. 7,257 7,257 Policy loans....................................... 22,785 22,785 Accrued investment income.......................... 18,828 18,828 Cash............................................... 1,472 1,472 Other financial assets............................. 7,169 7,169 Separate Accounts.................................. 220,141 220,141 CARRYING AT DECEMBER 31, 1994 VALUE FAIR VALUE -------------------- ---------- ---------- Fixed income securities............................ $1,058,377 $1,040,018 Mortgage loans..................................... 86,435 80,785 Short-term investments............................. 7,212 7,212 Policy loans....................................... 20,500 20,500 Accrued investment income.......................... 16,518 16,518 Cash............................................... 1,763 1,763 Other financial assets............................. 4,763 4,763 Separate Accounts.................................. 175,918 175,918
Carrying value and fair value include the effects of derivative financial instruments where applicable. Fair value for fixed income securities are based on quoted market prices where available. Non-quoted securities are valued based on discounted cash flows using current interest rates for similar securities. Mortgage loans are valued based on discounted contractual cash flows. Discount rates are selected using F-19 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) current rates at which 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 fair value of policy loans is estimated at book value since the loan may be repaid at any time. Accrued investment income and other financial assets are valued at their carrying value as they are short-term in nature. Assets of the Separate Accounts are carried in the statements of financial position at fair value. FINANCIAL LIABILITIES The Company had the following financial liabilities:
CARRYING FAIR AT DECEMBER 31, 1995 VALUE VALUE -------------------- -------- -------- Contractholder funds on investment contracts............ $366,481 $392,111 Other financial liabilities............................. 5,383 5,383 Separate Accounts....................................... 220,141 220,141 CARRYING FAIR AT DECEMBER 31, 1994 VALUE VALUE -------------------- -------- -------- Contractholder funds on investment contracts............ $368,780 $362,221 Other financial liabilities............................. 7,725 7,725 Separate Accounts....................................... 175,918 175,918
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts. Reserves on investment contracts with no stated maturities (single premium and flexible premium deferred annuities) are valued at the account balance less surrender charge. The fair value of immediate annuities and annuities without life contingencies with fixed terms are estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and durations. Other financial liabilities are generally valued at their carrying value due to their short-term nature. Separate Accounts liabilities are carried at the fair value of the underlying assets. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses financial futures contracts to reduce its exposure to interest rate risk on its invested assets, as well as to improve asset/liability management. The Company does not hold or issue these instruments for trading purposes. The following table summarizes the contract or notional amount and carrying value of the Company's financial futures contracts: F-20 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS)
CARRYING CONTRACT/ VALUE NOTIONAL ASSET/ AT DECEMBER 31, 1995 AMOUNT (LIABILITY) -------------------- --------- ---------- Financial futures................................... $22,900 $576 CARRYING CONTRACT/ VALUE NOTIONAL ASSET/ AT DECEMBER 31, 1994 AMOUNT (LIABILITY) -------------------- --------- ---------- Financial futures................................... $20,700 $(65)
The contract or notional amounts are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential gain or loss on these agreements. Financial futures contracts 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 hedge its interest rate risk related to anticipatory investment purchases. 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 exposure 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 future changes in market conditions may cause an instrument to become less valuable or more costly to settle. Market risk exists for the financial futures contracts that the Company currently holds. The Company mitigates this risk through established risk limits set by senior management. In addition, the change in the value of the Company's financial futures contracts are generally offset by the change in the value of certain on-balance-sheet items or anticipated transactions. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Commitments to extend new mortgage loans are agreements to lend to a customer 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, 1994, the Company had $3,075 in mortgage loan commitments which had a fair value of $31. No such commitments existed at December 31, 1995. F-21 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 8. BENEFIT PLANS PENSION PLANS Defined benefit pension plans, sponsored by Allstate, cover all 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. Allstate'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 income were $446, $344 and $340 for the pension plans in 1995, 1994 and 1993, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Allstate provides certain health care and life insurance benefits for retired employees. Generally, qualified employees may become eligible for these benefits if they retire in accordance with Allstate's established retirement policy and are continuously insured under Allstate's group plans or other approved plans for 10 or more years prior to retirement. Allstate shares the cost of the retiree medical benefits with retirees based on years of service, with the Company's share being subject to a 5% limit on annual medical cost inflation after retirement. Allstate's postretirement benefit plans currently are not funded. Allstate has the right to modify or terminate these plans. PROFIT SHARING FUND Employees of Allstate and its domestic subsidiaries are also eligible to become members of the Savings and Profit Sharing Fund of Allstate Employees ("Allstate Plan"). Allstate contributions are based on 6% of consolidated income, as defined, with Allstate contributions limited to 70% of eligible deposits. The Allstate Plan includes an Employee Stock Ownership Plan ("Allstate ESOP") to pre-fund a portion of the Company's anticipated contribution through 2004. The Allstate Plan and the Allstate ESOP split from The Savings and Profit Sharing Fund of Sears Employees, which included a leveraged employee stock ownership plan ("Sears ESOP") feature, on June 30, 1995, the date of the Distribution. Fifty percent of the unallocated shares of the Sears ESOP and 50% of the amount of the Sears ESOP debt (payable to Sears) were transferred to the Allstate Plan. In connection with this transfer, Allstate paid Sears $327 million, an amount equal to 50% of the Sears ESOP debt. Concurrently, Allstate received a note from the Allstate ESOP for a like principal amount with interest rate and maturity identical to the debt obligation transferred from the Sears ESOP. Allstate will make contributions to the Allstate ESOP annually in the amount necessary to allow the Allstate ESOP to fund interest and principal payments. The Company's contribution to The Savings and Profit Sharing Fund of Allstate Employees was $141 in 1995. The costs to the Company prior to the Distribution and the split from the Savings and Profit Sharing Fund of Sears Employees were $123 and $176 in 1994 and 1993, respectively. F-22 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) EARLY RETIREMENT PROGRAM During 1994, Allstate offered a voluntary early retirement incentive program to eligible home office employees. The Company's portion of the total cost of the program of $1,210 was charged to 1994 income. 9. STATUTORY FINANCIAL INFORMATION The following tables reconcile net income and shareholder's equity 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 ------------------------- YEAR ENDED DECEMBER 31, 1995 1994 1993 - ----------------------- ------- ------- ------- Balance per generally accepted accounting princi- ples............................................... $19,522 $18,221 $13,163 Deferred acquisition costs........................ (5,537) (6,849) (2,397) Income taxes...................................... (3,109) (8,337) (6,074) Non-admitted assets and statutory reserves........ 12,786 6,900 20,157 Other postretirement and postemployment benefits.. 71 105 (54) Other............................................. (533) 901 1,236 ------- ------- ------- Balance per statutory accounting practices.......... $23,200 $10,941 $26,031 ======= ======= =======
SHAREHOLDER'S EQUITY DECEMBER 31, ------------------ 1995 1994 -------- -------- Balance per generally accepted accounting principles........ $250,067 $149,241 Deferred acquisition costs................................ (53,944) (50,699) Income taxes.............................................. 20,839 (17,443) Unrealized net capital gains (losses)..................... (114,500) 11,500 Non-admitted assets and statutory reserves................ 43,624 31,074 Other postretirement and postemployment benefits.......... 1,058 1,036 Other..................................................... 1,153 106 -------- -------- Balance per statutory accounting practices.................. $148,297 $124,815 ======== ========
PERMITTED STATUTORY ACCOUNTING PRACTICES The Company prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the New York state insurance department. Prescribed statutory F-23 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) accounting principles include a variety of publications of the National Association of Insurance Commissioners, 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 or risk-based capital. DIVIDENDS The ability of the Company to pay dividends is dependent, in part, on business conditions, income, cash requirements of the Company and other relevant factors and is subject to New York Insurance Regulations. 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. F-24 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE IV--REINSURANCE ($ IN THOUSANDS)
GROSS NET YEAR ENDED DECEMBER 31, 1995 AMOUNT CEDED AMOUNT - ---------------------------- ---------- ---------- ---------- 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 ========== ========== ========== GROSS NET YEAR ENDED DECEMBER 31, 1994 AMOUNT CEDED AMOUNT - ---------------------------- ---------- ---------- ---------- Life insurance in force....................... $7,598,374 $ 321,623 $7,276,751 ========== ========== ========== Premiums and contract charges: Life and annuities.......................... $ 87,562 $ 1,193 $ 86,369 Accident and health......................... 3,276 1,005 2,271 ---------- ---------- ---------- $ 90,838 $ 2,198 $ 88,640 ========== ========== ========== GROSS NET YEAR ENDED DECEMBER 31, 1993 AMOUNT CEDED AMOUNT - ---------------------------- ---------- ---------- ---------- Life insurance in force....................... $6,853,083 $1,746,724 $5,106,359 ========== ========== ========== Premiums and contract charges: Life and annuities.......................... $ 128,816 $ 4,122 $ 124,694 Accident and health......................... 3,026 807 2,219 ---------- ---------- ---------- $ 131,842 $ 4,929 $ 126,913 ========== ========== ==========
F-25 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS ($ IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTION OF PERIOD - ----------- ---------- ---------- --------- --------- Year Ended December 31, 1995 Allowance for estimated losses on mortgage loans.................... $1,179 $2,170 $1,397 $1,952 Year Ended December 31, 1994 Allowance for estimated losses on mortgage loans.................... $2,297 $ 667 $1,785 $1,179 Year Ended December 31, 1993 Allowance for estimated losses on mortgage loans.................... $2,531 $1,225 $1,459 $2,297
F-26 APPENDIX A MARKET VALUE ADJUSTMENT 1 The Market Value Adjustment is based on the following: I= the effective annual Interest Crediting Rate for that Guarantee Period; N = the number of complete days from the withdrawal to the end of the Guarantee Period; and J= the current initial or current renewal interest rate credited for a withdrawal from an initial or renewal guarantee period, respectively, on the date the withdrawal request is received for a Guarantee Period of duration N. If a Guarantee Period of duration N is not currently being offered, J will be determined by linear interpolation (weighted average) between the two nearest periods being offered. If N is less than or equal to 365 days, J will be the rate for a Guarantee Period of duration 365. For any withdrawal, if J is not available, J will be equal to the most recent Moody's Corporate Bond Yield Average--Monthly Average Corporates (for the applicable duration) as published by Moody's Investor Services, Inc. In the event that the Moody's Corporate Bond Yield Average--Monthly Average Corporates is no longer available, a suitable replacement index, subject to the approval of the New York Insurance Department, would be utilized. The Market Value Adjustment factor is determined from the following formula: [.9 x (I-J) x (N/365)]. The amount withdrawn less any applicable Preferred Withdrawal Amount 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 Interest Rate: ....................................................... 5.25%
Full Surrender: ......................................... 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. = 10,000.00 X (1.0525)/3/ = $11,659.13 Step 2: Calculate The Amount Withdrawn in Excess of the Preferred Withdrawal Amount. Amount Withdrawn: 11,659.13 Preferred Withdrawal Amount: .10 X 10,000.00 = 1,000.00 Amount Withdrawn in Excess of the Preferred Withdrawal Amount: = 11,659.13 - 1,000.00 = $10,659.13 A-1 Step 3: Calculate the Withdrawal Charge. .02625 (represents 1/2 of interest crediting rate of .0525) X 10,659.13 = $279.80 Step 4: Calculate the Market Value Adjustment. I = 5.25% J = 4.95% N = 730 days Market Value Adjustment Factor: .9 X (I - J) X (N/365) = .9 X (.0525 - .0495) X (730/365) = .0054 Market Value Adjustment = Factor X Amount in Excess of Preferred Withdrawal Amount. = .0054 X 10,659.13 = $57.56 Step 5: Calculate The Net Surrender Value at End of Contract Year 3. 11,659.13 - 279.80 + 57.56 = $11,436.89 EXAMPLE 2: (Assumes rising interest rates) Step 1: Calculate Account Value at End of Contract Year 3. = 10,000.00 X (1.0525)/3/ = $11,659.13 Step 2: Calculate The Amount Withdrawn in Excess of the Preferred Withdrawal Amount. Amount Withdrawn: 11,659.13 Preferred Withdrawal Amount: .10 X 10,000.00 = 1,000.00 Amount Withdrawn in Excess of the Preferred Withdrawal Amount: = 11,659.13 - 1,000.00 = $10,659.13 Step 3: Calculate the Withdrawal Charge. .02625 X 10,659.13 = $279.80 Step 4: Calculate the Market Value Adjustment. I = 5.25% J = 5.55% N = 730 days Market Value Adjustment Factor: .9 X (I - J) X (N/365) = .9 X (.0525 - .0555) X (730/365) = -.0054 Market Value Adjustment = Factor X Amount in Excess of Preferred Withdrawal Amount. = -.0054 X 10,659.13 = -$57.56 Step 5: Calculate The Net Surrender Value at End of Contract Year 3. 11,659.13 - 279.80 - 57.56 = $11,321.77 A-2 -----END PRIVACY-ENHANCED MESSAGE-----