ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
ONE ALLSTATE DRIVE
FARMINGVILLE, NEW YORK 11738
CUSTOMER SERVICE
P.O. BOX 94038
PALATINE, IL 60094-4038
1-800-256-9392
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"), a wholly owned subsidiary of Morgan
Stanley Dean Witter & Co., 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.
Partial withdrawals and Surrenders under the Contract may be subject to a Market
Value Adjustment. Therefore, the Owner bears some investment risk under the
Contract.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Please read this prospectus carefully and retain it for future reference.
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 individual Owner's
Contract. The annual statement details values and specific Contract data for
each Contract. The annual statement does not contain financial statements of the
Company, although the Company's financial statements are on page F-1 of this
prospectus.
Our Company files annual and quarterly reports and other information with the
SEC. You may read and copy any reports, statements or other information we file
at the SEC's public reference room in Washington, DC. You can request copies of
these documents upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings are also available to the public on the
SEC Internet site (http://www.sec.gov).
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesman, or other person is
authorized to give any information or make any representations in connection
with this offering other than those contained in this prospectus, and, if given
or made, such other information or representations must not be relied upon.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
GLOSSARY .................................................................. 3
INTRODUCTION............................................................... 5
THE CONTRACT............................................................... 6
Purchase of the Contract................................................... 6
THE ACCUMULATION PHASE .................................................... 6
The Accumulation Phase Defined ............................................ 6
Initial and Subsequent Guarantee Periods .................................. 6
Interest Credited ......................................................... 6
Example of Interest Crediting During
the Guarantee Period ................................................. 7
Partial Withdrawals and Surrenders ........................................ 7
Withdrawal Charge ......................................................... 8
Market Value Adjustment ................................................... 8
Withdrawals at the End of a Guarantee Period .............................. 8
Taxes ..................................................................... 8
Payment Upon Partial Withdrawal or Surrender .............................. 8
Death Benefits ............................................................ 9
THE PAYOUT PHASE .......................................................... 9
Income Plans .............................................................. 9
Payout Terms .............................................................. 10
AMENDMENT OF THE CONTRACT ................................................. 10
DISTRIBUTION OF THE CONTRACT .............................................. 10
CUSTOMER INQUIRIES ........................................................ 11
FEDERAL TAX MATTERS ....................................................... 11
Introduction .............................................................. 11
Taxation of the Company ................................................... 11
Taxation of Annuities in General .......................................... 11
Qualified Plans ........................................................... 12
Types of Qualified Plans .................................................. 12
Tax Sheltered Annuities ................................................... 13
Corporate and Self-Employed Pension and
Profit Sharing Plans ................................................. 13
State and Local Government and Tax-Exempt
Organization Deferred Compensation Plans ............................. 13
Income Tax Withholding .................................................... 13
THE COMPANY ............................................................... 14
Business .................................................................. 14
Investments by the Company ................................................ 14
SELECTED FINANCIAL DATA ................................................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................ 15
COMPETITION ............................................................... 22
EMPLOYEES ................................................................. 22
PROPERTIES ................................................................ 22
STATE AND FEDERAL REGULATION .............................................. 22
EXECUTIVE OFFICERS AND DIRECTORS .......................................... 23
EXECUTIVE COMPENSATION .................................................... 26
LEGAL PROCEEDINGS ......................................................... 26
EXPERTS ................................................................... 26
LEGAL MATTERS ............................................................. 26
FINANCIAL STATEMENTS ................................................... F-1
APPENDIX A ................................................................ A-1
<PAGE>
GLOSSARY
Account Value--The Account Value is the Purchase Payment accumulated with
credited interest. Any withdrawals will affect the Account Value.
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
Accumulation Phase will continue until the Payout Start Date unless the Contract
is terminated before that date.
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
Accumulation 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 Company
("Allstate"). Allstate is a wholly owned subsidiary of The Allstate Corporation.
Contract--The Allstate Life Insurance Company of New York single premium
deferred 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.
Payout Start Date--The date Income Payments are to begin under the Contract.
<PAGE>
Preferred Withdrawal Amount--A portion of the Account Value which may be
annually withdrawn without incurring a Withdrawal Charge or a Market Value
Adjustment.
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.
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. 7 "Death Benefits," pg. 9 and "The Payout
Phase," pg. 9)
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. 8.)
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. 6.)
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 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 Withdrawal Amount. The Market Value
Adjustment may be positive 0or negative. (See "Withdrawal Charge," pg. 8, and
"Market Value Adjustment," pg. 8.)
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.
7, and "Taxation of Annuities in General," pg. 11.) Withdrawal restrictions may
apply to Qualified Contracts as well as Non-Qualified Contracts. (See,
"Qualified Plans," pg. 12.)
<PAGE>
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. 9.)
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. 9.)
<PAGE>
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 Company reserves the right to limit the amount of purchase payments it will
accept.
The Contract described in this Prospectus is made up of two phases -- the
Accumulation Phase and the Payout Phase.
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.
<PAGE>
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.
<TABLE>
<CAPTION>
Example of Interest Crediting During The Guarantee Period
<S> <C>
Purchase Payment:.................................................................. $10,000.00
Guarantee Period:.................................................................. 5 years
Effective Annual Rate:............................................................. 4.50%
</TABLE>
<TABLE>
<CAPTION>
END OF CONTRACT YEAR:
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Beginning Account Value $10,000.00
x (1 + Effective Annual Rate) 1.045
----------
$10,450.00
----------
Account Value at end of Contract $10,450.00
year 1 x (1 + Effective Annual Rate) 1.045
----------
$10,920.25
----------
Account Value at end of Contract $10,920.25
year 2 x (1 + Effective Annual Rate) 1.045
----------
$11,411.66
----------
Account Value at end of Contract $11,411.60
year 3 x (1 + Effective Annual Rate) 1.045
----------
$11,925.19
----------
Account Value at end of Contract $11,925.19
year 4 x (1 + Effective Annual Rate) 1.045
----------
$12,461.82
----------
Total Interest Credited in Guarantee Period: $2,461.82 ($12,461.82 - $10,000.00)
</TABLE>
<PAGE>
Partial Withdrawals and Surrenders
You have the right to make a partial withdrawal or 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 Contract 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 11. 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 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.
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 4.50%.
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 4.80%, then the Market
Value Adjustment will be negative, resulting in a decrease in the amount payable
to the Owner upon the partial withdrawal. If the current interest rate for a
2-year Guarantee Period is 4.20%, 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.
<PAGE>
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. The
Company is currently waiving the 180 day limit. The Company reserves the right
to enforce the limitation in the future.
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. The Company is currently waiving the 180 day limit. The
Company reserves the right to enforce the limitation in the future. 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.
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. The Company is currently waiving the 180 day limit. The Company
reserves the right to enforce the limitation in the future.
<PAGE>
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 or 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; but not to exceed age 90.
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; but not to exceed age
90. 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.
<PAGE>
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 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.
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.
<PAGE>
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, a wholly owned subsidiary of Morgan Stanley Dean Witter & Co., is
the principal underwriter of the Contract. Dean Witter is located at Two World
Trade Center, New York, New York, 10048. 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 FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax
consequences of ownership or receipt of distributions under an annuity contract
depend on the individual circumstances of each person. If you are concerned
about any tax consequences with regard to your individual circumstances, you
should consult a competent tax adviser.
Taxation of the Company
The Company is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code. The following discussion assumes that the Company is
taxed as a life insurance company under Part I of Subchapter L.
Taxation of Annuities in General
Tax Deferral
In general, an annuity contract owned by a natural person is not taxed on
increases in the contract value until a distribution occurs. Annuity contracts
owned by non-natural persons are generally not treated as annuity contracts for
federal income tax purposes and the income on such contracts is taxed as
ordinary income received or accrued by the owner during the taxable year. There
are exceptions to the non-natural owner rule and you should discuss these with
your tax advisor.
Delayed Maturity Date
If the contract's scheduled maturity date is at a time when the annuitant has
reached an advanced age, it is possible that the contract would not be treated
as an annuity. In that event, the income and gains under the contract would be
currently includible in the owner's income.
Taxation of Partial and Full Withdrawals
In the case of a partial withdrawal under a non-qualified contract, amounts
received are taxable to the extent the contract value, without regard to any
surrender charges exceeds the investment in the contract. The contract value is
the sum of all sub-account values. The investment in the contract is the gross
premium or other consideration paid for the contract reduced by any amounts
previously received from the contract to the extent such amounts were properly
excluded from gross income. No matter which sub-account a withdrawal is made
from, all sub-account values are combined and the total contract value is used
to determine the amount of taxable income. In the case of a partial withdrawal
under a qualified contract, the portion of the payment that bears the same ratio
to the total payment that the investment in the contract bears to the contract
value, can be excluded from income. No definitive guidance exists on the proper
tax treatment of Market Value Adjustments and you should contact a competent tax
advisor with respect to the potential tax consequences of a Market Value
Adjustment. In the case of a full withdrawal under a non-qualified contract or a
qualified contract, the amount received will be taxable only to the extent it
exceeds the investment in the contract. If an individual transfers an annuity
contract without full and adequate consideration to a person other than the
individual's spouse (or to a former spouse incident to a divorce), the owner
will be taxed on the difference between the contract value and the investment in
the contract at the time of transfer. Other than in the case of certain
qualified contracts, any amount received as a loan under a contract, and any
assignment or pledge (or agreement to assign or pledge) of the contract value is
treated as a withdrawal of such amount or portion.
<PAGE>
Taxation of Annuity Payments
Generally, the rule for income taxation of payments received from an annuity
contract provides for the return of the owner's investment in the contract in
equal tax-free amounts over the payment period. The balance of each payment
received is taxable. In the case of fixed annuity payments, the amount excluded
from income is determined by multiplying the payment by the ratio of the
investment in the contract (adjusted for any refund feature or period certain)
to the total expected value of annuity payments for the term of the contract.
Once the total amount of the investment in the contract is excluded using this
ratio, the annuity payments are fully taxable. If annuity payments cease because
of the death of the annuitant before the total amount of the investment in the
contract is recovered, the unrecovered amount will be allowed as a deduction to
the annuitant for his last taxable year.
Taxation of Annuity Death Benefits
Amounts may be distributed from an annuity contract because of the death of an
owner or annuitant. Generally, such amounts are includible in income as follows:
(1) if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal or (2) if distributed under an annuity option, the amounts are
taxed in the same manner as an annuity payment.
Penalty Tax on Premature Distributions
There is a 10% penalty tax on the taxable amount of any premature distribution
from a non-qualified annuity contract. The penalty tax generally applies to any
distribution made prior to the date the owner attains age 59 1/2. However, there
should be no penalty tax on distributions to owners: (1) made on or after the
date the owner attains age 59 1/2; (2) made as a result of the owner's death or
disability; (3) made in substantially equal periodic payments over life or life
expectancy; or (4) made under an immediate annuity. Similar rules apply for
distributions from qualified contracts. Consult a competent tax advisor for
other possible exceptions to the penalty tax.
Aggregation of Annuity Contracts
All non-qualified deferred annuity contracts issued by the Company (or its
affiliates) to the same owner during any calendar year will be aggregated and
treated as one annuity contract for purposes of determining the taxable amount
of a distribution.
IRS Required Distribution at Death Rules
In order to be considered an annuity contract for federal income tax purposes,
an annuity contract must provide: (1) if any owner dies on or after the annuity
start date but before the entire interest in the contract has been distributed,
the remaining portion of such interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of the owner's
death; (2) if any owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which is payable to, or for the benefit of, a designated
beneficiary is distributed over the life of such beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary) and the
distributions begin within one year of the owner's death. 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. If the owner of the
contract is a nonnatural person, then the annuitant will be treated as the owner
for purposes of applying the distribution at death rules. Also, a change of
annuitant on a contract owned by a nonnatural person will be treated as the
death of the owner.
Qualified Plans
This annuity contract may be used 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 excess contributions, premature distributions,
distributions that do not conform to specified commencement and minimum
distribution rules, excess distributions and in other circumstances. Owners and
participants under the plan and annuitants and beneficiaries under the contract
may be subject to the terms and conditions of the plan regardless of the terms
of the contract.
<PAGE>
Types of Qualified Plans
Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity.
Individual Retirement Annuities are subject to limitations on the amount that
can be contributed and on the time when distributions may commence. Certain
distributions from other types of qualified plans may be "rolled over" on a
tax-deferred basis into an Individual Retirement Annuity.
Roth Individual Retirement Annuities
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth Individual
Retirement Annuity. Roth Individual Retirement Annuities are subject to
limitations on the amount that can be contributed and on the time when
distributions may commence. "Qualified distributions" from Roth Individual
Retirement Annuities are not includible in gross income. "Qualified
distributions" are any distributions made more than five taxable years after the
taxable year of the first contribution to the Roth Individual Retirement
Annuity, and which are made on or after the date the individual attains age 59
1/2, made to a beneficiary after the owner's death, attributable to the owner
being disabled or for a first time home purchase (first time home purchases are
subject to a lifetime limit of $10,000). "Nonqualified distributions" are
treated as made from contributions first and are includible in gross income to
the extent such distributions exceed the contributions made to the Roth
Individual Retirement Annuity. The taxable portion of a "nonqualified
distribution" may be subject to the 10% penalty tax on premature distributions.
Subject to certain limitations, a traditional Individual Retirement Account or
Annuity may be converted or "rolled over" to a Roth Individual Retirement
Annuity. The taxable portion of a conversion or rollover distribution is
includible in gross income, but is exempted from the 10% penalty tax on
premature distributions.
<PAGE>
Simplified Employee Pension Plans
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' Individual Retirement
Annuities if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to their Individual Retirement Annuities.
Savings Incentive Match Plans for Employees (SIMPLE Plans)
Section 408(p) and 401(k) of the Code allow employers with 100 or fewer
employees to establish SIMPLE retirement plans for their employees. SIMPLE plans
may be structured as a SIMPLE retirement account using an employee's Individual
Retirement Annuity to hold the assets or as a Section 401(k) qualified cash or
deferred arrangement. In general, a SIMPLE plan consists of a salary deferral
program for eligible employees and matching contributions made by employers.
Employers intending to use the contract in conjunction with SIMPLE plans should
seek competent tax and legal advice.
Tax Sheltered Annuities
Section 403(b) of the Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase annuity contracts for them, and subject
to certain limitations, to exclude the purchase payments from the employees'
gross income. An annuity contract used for a Section 403(b) plan must provide
that distributions attributable to salary reduction contributions made after
12/31/88, and all earnings on salary reduction contributions, may be made only
on or after the date the employee attains age 59 1/2, separates from service,
dies, becomes disabled or on the account of hardship (earnings on salary
reduction contributions may not be distributed for hardship).
Corporate and Self-Employed Pension and Profit Sharing Plans
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax favored retirement plans for employees. The Self-Employed
Individuals Retirement Act of 1962, as amended, (commonly referred to as "H.R.
10" or "Keogh") permits self-employed individuals to establish tax favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of annuity contracts in order to provide benefits under the
plans.
State and Local Government and Tax-Exempt Organization Deferred Compensation
Plans
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as owner of the contract has the sole right to the proceeds of the
contract. Generally, under the non-natural owner rules, such contracts are not
treated as annuity contracts for federal income tax purposes. However, under
these plans, contributions made for the benefit of the employees will not be
includible in the employees' gross income until distributed from the plan.
Income Tax Withholding
The Company is required to withhold federal income tax at a rate of 20% on all
"eligible rollover distributions" unless an individual elects to make a "direct
rollover" of such amounts to another qualified plan or Individual Retirement
Account or Annuity (IRA). Eligible rollover distributions generally include all
distributions from qualified contracts, excluding IRAs, with the exception of
(1) required minimum distributions, or (2) a series of substantially equal
periodic payments made over a period of at least 10 years, or the life (joint
lives) of the participant (and beneficiary). For any distributions from
non-qualified annuity contracts, or distributions from qualified contracts which
are not considered eligible rollover distributions, the Company may be required
to withhold federal and state income taxes unless the recipient elects not to
have taxes withheld and properly notifies the Company of such election.
<PAGE>
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." Since 1984 the Company has been known as "Allstate Life Insurance
Company of New York." The Company's operations consist of one business segment
which is the issuance 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"). 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.
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 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.
<PAGE>
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.
<TABLE>
<CAPTION>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SELECTED FINANCIAL DATA
(in thousands)
Year-End Financial Data 1997 1996 1995 1994 1993
- ----------------------- ---- ---- ---- ---- ----
For the Years Ended December 31:
<S> <C> <C> <C> <C> <C>
Revenues ..................... $ 244,551 $ 228,387 $ 250,854 $ 186,249 $ 227,445
Net Income ................... 22,716 20,561 19,522 18,221 13,163
As of December 31:
Total Assets ................. 2,318,549 1,990,284 1,842,969 1,449,993 1,410,895
</TABLE>
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Allstate Life
Insurance Company of New York (the "Company"). It should be read in conjunction
with the financial statements and related notes.
The Company, which is wholly owned by a wholly owned subsidiary of
Allstate Insurance Company ("AIC"), an affiliate of The Allstate Corporation,
markets a broad line of life insurance and annuity products in the State of New
York. Life insurance includes traditional products such as whole life and term
life insurance, as well as universal life and other interest-sensitive life
products. Annuities include deferred annuities, such as variable annuities and
fixed rate single and flexible premium annuities, and immediate annuities such
as structured settlement annuities. The Company distributes its products using a
combination of Allstate agents which include life specialists, banks,
independent agents, brokers and direct response marketing.
FINANCIAL HIGHLIGHTS
($ in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory premiums and deposits $ 208,090 $ 235,634 $ 216,361
=============== =============== ===============
Investments $ 1,907,997 $ 1,636,654 $ 1,541,329
Separate Account assets 308,595 260,668 220,141
--------------- --------------- ---------------
Investments, including Separate Account assets $ 2,216,592 $ 1,897,322 $ 1,761,470
=============== =============== ===============
Premiums and contract charges $ 118,963 $ 117,106 $ 148,316
Net investment income 124,887 112,862 104,384
Life and annuity contract benefits 179,872 172,772 198,055
Operating costs and expenses 28,667 23,386 23,366
--------------- --------------- ---------------
Income from operations 35,311 33,810 31,279
Income tax expense on operations 13,051 12,221 10,557
--------------- --------------- ---------------
Operating income 22,260 21,589 20,722
Realized capital gains and losses, after-tax 456 (1,028) (1,200)
--------------- ---------------- ----------------
Net income $ 22,716 $ 20,561 $ 19,522
=============== ================ ================
</TABLE>
<PAGE>
Premiums, deposits, contract charges and contract benefits
Statutory premiums and deposits include premiums and deposits for all
products. Total statutory premiums and deposits decreased $27.5 million, or
11.7%, in 1997 from 1996. Increased sales of variable annuities, life insurance
policies and fixed annuities were more than offset by a reduction in premiums
relating to funding agreements. Funding agreements, a type of investment
contract first sold by the Company in 1996, are entered into based on the
Company's assessment of market opportunities. In 1996, total statutory premiums
and deposits increased $19.3 million, or 8.9%, compared to 1995 levels. The
increase was largely the result of the sale of a funding agreement, as well as
higher sales of variable annuities and life insurance policies, partially offset
by lower sales of structured settlement annuities.
Premiums and contract charges under generally accepted accounting
principles ("GAAP") increased slightly in 1997 and decreased 21.0% in 1996.
Under GAAP, revenues exclude deposits on most annuity contracts and premiums on
universal life insurance policies, and will vary with the mix of business sold
during the period. In 1997, an increase in contract charges on universal life
policies and variable annuity contracts was partially offset by a decrease in
sales of life-contingent structured settlement annuities. The decrease in 1996
arose primarily from a fluctuation in the level of sales of structured
settlement annuities sold with life contingencies. Provision for life and
annuity contract benefits increased $7.1 million, or 4.1%, during 1997, and
decreased $25.3 million, or 12.8%, during 1996. These changes resulted primarily
from fluctuations in the level of sales of structured settlement annuities with
life contingencies.
Operating income
Pretax net investment income increased 10.7% in 1997 and 8.1% in 1996.
The increases are due primarily to higher investment balances in each period.
Investments, excluding Separate Account assets and unrealized gains on fixed
income securities, grew 9.8% and 13.3% in 1997 and 1996, respectively. The
increases in net investment income were partially offset by slightly lower
portfolio yields. In low interest rate environments as have existed in 1997 and
1996, funds from maturing investments may be invested at substantially lower
interest rates than which prevailed when the funds were previously invested,
thereby reducing the average portfolio yield.
Operating costs and expenses increased $5.3 million, or 22.6%, for the
year ended December 31, 1997. The increase is related to growth in business and
the recognition of costs related to the relocation of the policy administration
function, offset by a reduction in amortization of deferred acquisition costs
due to the revised estimates of future gross profits on interest-sensitive life
products.
In 1997, the Company received approval from the State of New York
Insurance Department to relocate its policy administration function to an
affiliate's facility in Illinois. The move is scheduled for the second quarter
of 1998. The Company recognized an after-tax charge of $1.9 million in 1997 for
certain costs relating to the consolidation of these operations.
Operating income increased 3.1% in 1997 and 4.2% in 1996. The increase in
1997 is primarily due to favorable mortality experience on the structured
settlement annuity business and higher investment margins due to additional
sales of structured settlement annuities. The increase in 1996 is the result of
growth in investments partially offset by less favorable mortality experience on
life-contingent structured settlement annuities.
Realized capital gains and losses
The Company had realized capital gains of $456 thousand after tax in 1997
compared with realized capital losses of $1.0 million after tax in 1996. In
1997, increased gains on fixed income securities and reduced losses on other
investments were partially offset by increased writedowns on mortgage loans.
Realized capital losses in 1996 were 14.3% lower than those reported in 1995.
Reduced mortgage losses were partially offset by losses incurred on the sale of
fixed income securities to reposition a portion of the investment portfolio to
improve overall yield in 1996.
<PAGE>
INVESTMENTS
The composition of the investment portfolio at December 31, 1997 is
presented in the table below (see Notes 2 and 4 to the financial statements for
investment accounting policies and additional information).
Percent
($ in thousands) to total
Fixed income securities (1) $ 1,756,257 92.0%
Mortgage loans 114,627 6.0
Policy loans 27,600 1.5
Short-term 9,513 0.5
------------------ ------
Total $ 1,907,997 100.0%
================== ======
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $1,510,110 at December 31, 1997.
Total investments increased to $1.91 billion at December 31, 1997 from
$1.64 billion at December 31, 1996. The increase in the Company's investments
was primarily due to increased unrealized capital gains of $123.5 million on
fixed income securities and amounts invested from positive cash flows generated
from operations.
Fixed income securities
The Company's fixed income securities portfolio consists of
privately-placed securities, U.S. government bonds, publicly traded corporate
bonds, mortgage-backed securities, asset-backed securities and tax-exempt
municipal bonds. The Company generally holds its fixed income securities for the
long term, but has classified all of these securities as available for sale to
allow maximum flexibility in portfolio management. At December 31, 1997,
unrealized net capital gains on the fixed income securities portfolio were
$246.1 million compared to $122.6 million as of December 31, 1996. The increase
in the unrealized gain position is primarily attributable to lower interest
rates.
At the end of 1997, substantially all of the Company's fixed income
securities portfolio is rated investment grade, which is defined by the Company
as a security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating.
As of December 31, 1997, the fixed income securities portfolio contained
$540.9 million of privately-placed corporate obligations, compared with $492.8
million at December 31, 1996. The benefits of privately-placed securities as
compared to public securities are generally higher yields, improved cash flow
predictability through pro-rata sinking funds on many bonds, and a combination
of covenant and call protection features designed to better protect the holder
against losses resulting from credit deterioration, reinvestment risk and
fluctuations in interest rates. A relative disadvantage of privately-placed
securities as compared to public securities is reduced liquidity. All of the
privately-placed securities are rated as investment grade by either the NAIC or
the Company's internal ratings. The Company determines the fair value of
privately-placed fixed income securities based on discounted cash flows using
current interest rates for similar securities.
At December 31, 1997 and 1996, $228.7 million and $194.2 million,
respectively, of the fixed income securities portfolio were invested in
mortgage-backed securities ("MBS"). At December 31, 1997, all of the MBS were
investment grade and approximately 96% have underlying collateral that is
guaranteed by U.S. government entities, thus credit risk was minimal.
<PAGE>
MBS, however, are subject to interest rate risk as the duration and
ultimate realized yield are affected by the rate of repayment of the underlying
mortgages. The Company attempts to limit interest rate risk by purchasing MBS
whose cost does not significantly exceed par value, and with repayment
protection to provide a more certain cash flow to the Company. At December 31,
1997, the amortized cost of the MBS portfolio was below par value by $7.4
million and over 40% of the MBS portfolio was invested in planned amortization
class bonds. This type of MBS is purchased to provide additional protection
against rising interest rates.
The fixed income securities portfolio contained $39.7 million and $31.5
million of asset-backed securities ("ABS") at December 31, 1997 and 1996,
respectively. ABS are subject to some of the same risks as MBS, but to a lesser
degree because of the nature of the underlying assets. The Company attempts to
mitigate these risks by primarily investing in highly-rated, publicly-traded,
intermediate term ABS at or below par value. At December 31, 1997, the amortized
cost of the ABS portfolio was below par value by $233 thousand. Over 43% of the
Company's ABS are invested in securitized credit card receivables. The remainder
of the portfolio is backed primarily by securitized manufactured housing, home
equity and recreational vehicles.
<PAGE>
The Company closely monitors its fixed income securities portfolio for
declines in value that are other than temporary. Securities are placed on
non-accrual status when they are in default or when the receipt of interest
payments is in doubt.
Mortgage loans
The Company's $114.6 million investment in mortgage loans at December 31,
1997 is comprised primarily of loans secured by first mortgages on developed
commercial real estate. Property type diversification is a key consideration
used to manage the Company's mortgage loan risk.
The Company closely monitors its commercial mortgage loan portfolio on a
loan-by-loan basis. Loans with an estimated collateral value less than the loan
balance, as well as loans with other characteristics indicative of higher than
normal credit risk, are reviewed by financial and investment management at least
quarterly for purposes of establishing valuation allowances and placing loans on
non-accrual status. The underlying collateral values are based upon discounted
property cash flow projections, which are updated as conditions change or at
least annually.
Short-term investments
The Company's short-term investment portfolio was $9.5 million and $25.9
million at December 31, 1997 and 1996, respectively. The Company invests
available cash balances in taxable short-term securities having a final maturity
date or redemption date of one year or less.
SEPARATE ACCOUNTS
Separate Account assets and liabilities increased 18.4% from $260.7
million at December 31, 1996 to $308.6 million at December 31, 1997 due
primarily to favorable investment performance of the Separate Account investment
portfolios and sales of flexible premium deferred variable annuity contracts,
partially offset by variable annuity contract surrenders and withdrawals.
MARKET RISK
Market risk is the risk that the Company will incur losses due to
adverse changes in market rates and prices. The Company's primary market risk
exposure is to changes in interest rates.
The active management of market risk is integral to the Company's
operations. The Company may use the following approaches to manage its exposure
to market risk within defined tolerance ranges: 1) rebalance its existing asset
or liability portfolios, 2) change the character of future investments purchased
or 3) use derivative instruments to modify the market risk characteristics of
existing assets and liabilities or assets expected to be purchased. See Note 5
to the financial statements for a more detailed discussion of these instruments.
<PAGE>
Corporate oversight
AIC administers and oversees investment risk management processes
primarily through three oversight bodies: the Boards of Directors and Investment
Committees of its operating subsidiaries, and the Credit and Risk Management
Committee ("CRMC"). The Boards of Directors and Investment Committees provide
executive oversight of investment activities. The CRMC is a senior management
committee consisting of the Chief Investment Officer, the Investment Risk
Manager, and other investment officers who are responsible for the day-to-day
management of market risk. The CRMC meets at least monthly to provide detailed
oversight of investment risk, including market risk.
AIC has investment guidelines that define the overall framework for
managing market and other investment risks, including the accountabilities and
controls over these activities. In addition, AIC has specific investment
policies for each of its affiliates, including the Company, that delineate the
investment limits and strategies that are appropriate given each entity's
liquidity, surplus, product and regulatory requirements.
AIC manages its exposure to market risk through asset allocation limits,
duration limits, value-at-risk limits, and, as appropriate, stress tests. Asset
allocation limits place restrictions on the aggregate fair value which may be
invested within an asset class. Duration limits on the life and annuity
investment portfolios, and, as appropriate, on individual components of these
portfolios (such as those of the Company), place restrictions on the amount of
interest rate risk which may be taken. Value-at-risk measures the potential loss
in fair value that could arise from adverse movements in the fixed income,
equity, and currency markets over a time interval, based on historical
volatilities and correlations between market risk factors. Stress tests measure
downside risk to fair value and earnings over longer time intervals and/or for
adverse market scenarios.
The day-to-day management of market risk within defined tolerance ranges
occurs as portfolio managers buy and sell within their respective markets based
upon the acceptable boundaries established by asset allocation, duration and
other limits, including but not limited to credit and liquidity.
Interest rate risk
Interest rate risk is the risk that the Company will incur economic
losses due to adverse changes in interest rates. This risk arises from the
Company's primary activities, as the Company invests substantial funds in
interest-sensitive assets and also has certain interest-sensitive liabilities.
The Company manages the interest rate risk inherent in its assets
relative to the interest rate risk inherent in its liabilities. One of the
measures the Company uses to quantify this exposure is duration. Duration
measures the sensitivity of the fair value of assets and liabilities to changes
in interest rates. For example, if interest rates increase 1%, the fair value of
an asset with a duration of 5 years is expected to decrease in value by
approximately 5%. At December 31, 1997, the difference between the Company's
liability and asset duration was approximately 2.8 years. This duration gap
indicates that the fair value of the Company's liabilities is more sensitive to
interest rate movements than the fair value of its assets.
The Company seeks to invest premiums and deposits on universal life
policies and investment contracts to create future cash flows that will fund
future claims, benefits and expenses, and earn stable margins across a wide
variety of interest rate and economic scenarios. In order to achieve this
objective and limit its exposure to interest rate risk, the Company adheres to a
philosophy of managing the duration of assets and related liabilities, and uses
financial futures to hedge the interest rate risk related to anticipatory
purchases and sales of investments and product sales to customers.
<PAGE>
To calculate duration, the Company projects asset and liability cash
flows, and discounts them to a net present value basis using a risk-free market
rate adjusted for credit quality, sector attributes, liquidity and other
specific risks. Duration is calculated by revaluing these cash flows at an
alternative level of interest rates, and determining the percentage change in
fair value from the base case. The cash flows used in the model reflect the
expected maturity and repricing characteristics of the Company's derivative
financial instruments, all other financial instruments (see Note 5 to the
financial statements), and certain non-financial instruments including
interest-sensitive annuity liabilities. The projections include assumptions
(based upon historical market and Company specific experience) reflecting the
impact of changing interest rates on the prepayment, lapse, leverage and/or
option features of instruments, where applicable. Such assumptions relate
primarily to mortgage-backed securities, collateralized mortgage obligations,
municipal bonds, municipal and corporate obligations, and fixed rate single and
flexible premium deferred annuities.
Based upon the information and assumptions the Company uses in its
duration calculation and in effect at December 31, 1997, management estimates
that a 100 basis point immediate, parallel increase in interest rates ("rate
shock") would decrease the net fair value of its assets and liabilities
identified above by approximately $16.8 million. The selection of a 100 basis
point immediate rate shock should not be construed as a prediction by the
Company's management of future market events; but rather, to illustrate the
potential impact of such an event.
To the extent that actual results differ from the assumptions utilized,
the Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes that the current relationship
between short-term and long-term interest rates (the term structure of interest
rates) will remain constant over time. As a result, these calculations may not
fully capture the impact of non-parallel changes in the term structure of
interest rates and/or large changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Capital resources
The NAIC has a standard for assessing the solvency of insurance
companies, which is referred to as risk-based capital ("RBC"). The requirement
consists of a formula for determining each insurer's RBC and a model law
specifying regulatory actions if an insurer's RBC falls below specified levels.
The RBC formula for life insurance companies establishes capital requirements
relating to insurance, business, asset and interest rate risks. At December 31,
1997, RBC for the Company was significantly above a level that would require
regulatory action.
Financial ratings and strength
Claims-paying ability ratings at December 31, 1997 assigned to the
Company include AA+, A+(g) and Aa2 from Standard & Poor's, A.M. Best and
Moody's, respectively.
<PAGE>
Liquidity
The Company's principal sources of funds are collections of principal and
interest from the investment portfolio and the receipt of premiums and deposits.
The primary uses of these funds are to purchase investments and pay policyholder
claims, benefits, contract maturities and surrenders, and operating costs.
The maturity structure of the Company's fixed income securities, which
represent 92.0% of the Company's total investments, is managed to meet the
anticipated cash flow requirements of the underlying liabilities. A portion of
the Company's product portfolio, primarily fixed deferred annuity and universal
life insurance products, is subject to discretionary surrender and withdrawal by
contractholders. Management believes its assets are sufficiently liquid to meet
future obligations to its life and annuity contractholders under various
interest rate scenarios.
OTHER DEVELOPMENTS
Final approval of the NAIC's proposed "Comprehensive Guide" on
statutory accounting principles is expected in early 1998. Implementation could
be as early as January 1, 1999. The requirements of the Comprehensive Guide are
not expected to have a material impact on statutory surplus.
YEAR 2000
The Company is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, risk management and policy
and contract administration. Since many of the Company's older computer software
programs recognize only the last two digits of the year in any date, some
software may fail to operate properly in or after the year 1999, if the software
is not reprogrammed or replaced, ("Year 2000 Issue"). The Company believes that
many of its counterparties and suppliers also have Year 2000 Issues which could
affect the Company. In 1995, AIC commenced a plan intended to mitigate and/or
prevent the adverse effects of Year 2000 Issues. These strategies include normal
development and enhancement of new and existing systems, upgrades to operating
systems already covered by maintenance agreements and modifications to existing
systems to make them Year 2000 compliant. The plan also includes the Company
actively working with its major external counterparties and suppliers to assess
their compliance efforts and the Company's exposure to them. The Company
presently believes that it will resolve the Year 2000 Issue in a timely manner,
and the financial impact will not materially affect its results of operations,
liquidity or financial position. Year 2000 costs are and will be expensed as
incurred.
PENDING ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 130 requires the presentation of comprehensive income in
the financial statements. Comprehensive income is a measurement of all changes
in equity that result from transactions and other economic events other than
transactions with stockholders. The requirements of this statement will be
adopted effective January 1, 1998.
SFAS No. 131 redefines how segments are determined and requires additional
segment disclosures for both annual and quarterly reporting. Under this
statement, segments are determined using the "management approach" for financial
statement reporting. The management approach is based on the way an enterprise
makes operating decisions and assesses performance of its businesses. The
Company is currently reviewing the requirements of this SFAS and has yet to
determine its impact on its current reporting segments. The requirements of this
statement will be adopted effective December 31, 1998.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance concerning when to
recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related assessments
should be recognized as liabilities when all of the following criteria have been
met: a) an assessment has been imposed or it is probable that an assessment will
be imposed, b) the event obligating an entity to pay an assessment has occurred
and c) the amount of the assessment can be reasonably estimated. The
requirements of this standard will be adopted in 1999 and are not expected to
have a material impact on the results of operations, cash flows or financial
position of the Company. The SOP is expected to be adopted in 1999.
<PAGE>
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Specifically,
certain external, payroll and payroll related costs should be capitalized during
the application development state of a project and depreciated over the computer
software's useful life. The Company currently expenses these costs as incurred
and is evaluating the effects of this SOP on its accounting for internally
developed software. The SOP is expected to be adopted in 1998.
FORWARD-LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis that
are not historical information are forward-looking statements that are based on
management's estimates, assumptions and projections. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of
1933 and The Securities Exchange Act of 1934 for forward-looking statements.
<PAGE>
COMPETITION
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
competing in the sale of insurance and annuities. There are approximately 1,700
stock, mutual and other types of insurers in business in the United States.
Several independent rating agencies regularly evaluate life insurer's
claims-paying ability, quality of investments and overall stability. A.M. Best
Company assigns A+g (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) claims
paying ability to the Company and Moody's assigns an Aa2 (Excellent) financial
strength rating to the Company. The Company shares the same ratings of its
parent.
EMPLOYEES
As of December 31, 1997, Allstate Life Insurance Company of New York had
approximately 66 employees at its Home Office in Farmingville, New York and its
Service Center in Illinois who work on the Company's matters.
PROPERTIES
The Company occupies office space in Farmingville, New York and Northbrook,
Illinois. 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 legislation.
Under such laws, intercompany transfers of assets and dividend payments from
insurance subsidiaries may be subject to prior notice or approval, depending on
the size of such transfers and payments in relation to the financial positions
of the companies.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
controls on medical care costs, removal of barriers preventing banks from
engaging in the securities and insurance business, tax law changes affecting the
taxation of insurance companies, the tax treatment of insurance products and its
impact on the relative desirability of various personal investment vehicles, and
proposed legislation to prohibit the use of gender in determining insurance and
pension rates and benefits.
EXECUTIVE OFFICERS AND DIRECTORS
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, 52, Chairman of the Board and President (1992)*
Also Director (1986-Present) and Senior Vice President (1995-Present) of
Allstate Insurance Company; Director (1991-Present) of Allstate Life Financial
<PAGE>
Services, Inc.; Director (1986-Present) and President (1990-Present) Allstate
Life Insurance Company; Director (1983-Present) and Chairman of the Board
(1990-Present) of Allstate Life Insurance Company of New York; Chairman of the
Board of Directors and Chief Executive Officer (1995-1997), Chairman of the
Board of Directors and President (1990-1995) of Glenbrook Life Insurance
Company; Director (1992-Present), Chairman of the Board of Directors and Chief
Executive Officer (1995-Present) of Glenbrook Life and Annuity Company; Director
and Chairman of the Board (1995-Present) of Laughlin Group Holdings, Inc.;
Director and Chairman of the Board of Directors and Chief Executive Officer
(1989-Present) Lincoln Benefit Life Company; Chairman of the Board of Directors
and Chief Executive Officer (1995-Present) of Northbrook Life Insurance Company;
and Chairman of the Board of Directors and Chief Executive Officer
(1995-Present) Surety Life Insurance Company.
MICHAEL J. VELOTTA, 52, Vice President, Secretary, General Counsel, and Director
(1993)*
Also Director and Secretary (1993-Present) of Allstate Life Financial Services,
Inc.; Director (1992-Present) Vice President, Secretary and General Counsel
(1993-Present) Allstate Life Insurance Company; Director (1992- Present) Vice
President, Secretary and General Counsel (1993-Present) Allstate Life Insurance
Company of New York; Director (1992-1997) Vice President, Secretary and General
Counsel (1993-1997) Glenbrook Life Insurance Company; Director (1992-Present)
Vice President, Secretary and General Counsel (1993- Present) Glenbrook Life and
Annuity Company; Director and Secretary (1995- Present) Laughlin Group Holdings,
Inc.; Director (1992-Present) and Assistant Secretary (1995-Present) Lincoln
Benefit Life Company; Director (1992-Present) Vice President, Secretary and
General Counsel (1993-Present) Northbrook Life Insurance Company; and Director
and Assistant Secretary (1995-Present) Surety Life Insurance Company.
SHARMAINE M. MILLER, 43, Director and Chief Administrative Officer (1996)*
Prior to 1996, she was a Department manager for Allstate Insurance Company.
MARLA G. FRIEDMAN, 44, Vice President and Director (1997)*
Also Director (1991-Present) and Vice President (1988-Present) Allstate Life
Insurance Company; Director (1993-1996) Allstate Life Financial Services, Inc.;
Director (1995-1996) Allstate Settlement Corporation; Director (1991-1996)
President and Chief Operating Officer (1995-1996) and Vice President (1990-1995)
and (1996-1997) Glenbrook Life Insurance Company; Director (1992-1996) President
and Chief Operating Officer (1995-1996) and Vice President (1992-1995) and
(1996-1997) Glenbrook Life and Annuity Company; and Director and Vice Chairman
of the Board (1995-1996) Laughlin Group Holdings, Inc.
VINCENT A. FUSCO, 43, Director and Chief Operations Officer (1997)*
Prior to 1997, he was a Regional Vice President (1978-1997) Allstate Insurance
Company.
PETER H. HECKMAN, 52, Vice President (1992)*
Also Director and Vice President (1988-Present) of Allstate Life Insurance
Company; Director (1990-1996), Vice President (1989-Present), Allstate Life
Insurance Company of New York; Director (1991-1993) of Allstate Life Financial
Services, Inc.; Director (1990-1997), President and Chief Operating Officer
(1996-1997), and Vice President (1990-1996), Glenbrook Life Insurance Company;
Director (1992-Present) President and Chief Operating Officer (1996- Present),
and was Vice President (1995-1996), Glenbrook Life and Annuity Company; Director
(1995-Present) and Vice Chairman of the Board (1996-Present) Laughlin Group
Holdings, Inc.; Director (1990-Present) and Vice Chairman of the Board
(1996-Present) Lincoln Benefit Life Company; Director (1988-Present) President
and Chief Operating Officer (1996-Present), and was Vice President (1989-1996),
Northbrook Life Insurance Company; and Director (1995-Present) and Vice Chairman
of the Board (1996-Present) Surety Life Insurance Company.
THOMAS A. MCAVITY, 56, Vice President (1997)*
Also, Vice President (1996-Present) Allstate Life Insurance Company. Prior to
1996 he was Vice President of Lincoln Investment Management.
TIMOTHY H. PLOHG, 51, Vice President and Director (1995)*
Timothy H. Plohg is also Assistant Vice President (1991-Present), Allstate
Insurance Company; Assistant Vice President (1992-1995), and Vice President and
Director (1995-Present) Allstate Life Insurance Company; Vice President and
Director (1995-Present), Allstate Life Insurance Company of New York. Prior to
1995, he was Vice President of the ALSC; Assistant Vice President Sales,
Regional Vice President.
KAREN C. GARDNER, 44, Vice President (1996)*
Vice President (1996-Present) Allstate Insurance Company; Vice President
(1996-Present) Allstate Life Insurance Company; Vice President (1996-Present)
Allstate Life Insurance Company of New York; Vice President (1997-Present)
Allstate Life Financial Services, Inc.; Vice President (1996-1997) Glenbrook
Life Insurance Company; Vice President (1996-Present) Laughlin Group Holdings,
Inc.; Assistant Vice President (1996-Present) Lincoln Benefit Life Company; Vice
President (1996-Present) Northbrook Life Insurance Company; Assistant Vice
President (1996-Present) Surety Life Insurance Company. Prior to 1996 she was a
Partner (1975-1996) Ernst & Young LLP.
KEVIN R. SLAWIN, 40, Director and Vice President (1996)*
Also Assistant Vice President and Assistant Treasurer (1995-1996) Allstate
Insurance Company; Director (1996-Present) and Assistant Treasurer (1995-1996)
Allstate Financial Services, Inc.; Director and Vice President (1996-Present)
and Assistant Treasurer (1995-1996) Allstate Life Insurance Company; Director
and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Allstate
Life Insurance Company of New York; Director and Vice President (1996-1997) and
Assistant Treasurer (1995-1996) Glenbrook Life Insurance Company; Vice President
(1996-Present) and Assistant Treasurer (1995-1996) Glenbrook Life and Annuity
Company; Director (1996-Present) and Assistant Treasurer (1995- 1996) Laughlin
Group Holdings, Inc.; Director (1996-Present) Lincoln Benefit Life Company;
Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996)
Northbrook Life Insurance Company; Director (1996- Present) Surety Life
Insurance Company; Assistant Treasurer and Director (1994-1995) Sears Roebuck
and Co.; and Treasurer and First Vice President (1986-1994) Sears Mortgage
Corporation.
CASEY J. SYLLA, 54, Chief Investment Officer and Director (1995)*
Also Director (1995-Present) Senior Vice President and Chief Investment Officer
(1995-Present) Allstate Insurance Company; Director (1995-Present) Chief
Investment Officer (1995- Present) Allstate Life Insurance Company; Chief
Investment Officer (1995-Present) Allstate Life Insurance Company of New York;
Chief Investment Officer (1995-1997) Glenbrook Life Insurance Company; Chief
Investment Officer (1995-Present) Glenbrook Life and Annuity Company; and
Director and Chief Investment Officer (1995-Present) Northbrook Life Insurance
Company. Prior to 1995 he was Senior Vice President and Executive
Officer-Investments (1992-1995) of Northwestern Mutual Life Insurance Company.
JAMES P. ZILS, 47, Treasurer (1995)*
Also Vice President and Treasurer (1995- Present) Allstate Insurance Company;
Treasurer (1995-Present) Allstate Life Financial Services, Inc.; Treasurer
(1995-Present) Allstate Life Insurance Company; Treasurer (1995-Present)
Allstate Life Insurance Company of New York; Treasurer (1995-1997) Glenbrook
Life Insurance Company; Treasurer (1995-Present) Glenbrook Life and Annuity
Company; Treasurer (1995-Present) Laughlin Group Holdings, Inc. and Treasurer
(1995-Present) Northbrook Life Insurance Company. Prior to 1995, he was Vice
President of Allstate Life Insurance Company and prior to 1993, he held various
management positions.
MARCIA D. ALAZRAKI, 56, 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, 80, Director (1983)*
Joseph F. Carlino is a self-employed practicing attorney in Mineola, New York.
CLEVELAND JOHNSON, JR., 63, 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.
GERARD F. MCDERMOTT, 51, Director (1995)*
Gerard F. McDermott is also a Regional Vice President of Allstate Insurance
Company. Prior to 1992, he held various management positions.
JOSEPH P. MCFADDEN, 59, Director (1992)*
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.
JOHN R. RABEN, JR., 52, Director (1988)*
John R. Raben, Jr. is also Vice President & Municipal Bond/Public Finance
Liaison with J.P. Morgan Securities, Inc.
SALLY A. SLACKE, 65, (Director) (1983)*
Sally A. Slacke is also President of Slacke Test Boring, Inc.
PATRICIA W. WILSON, 45, Director (1997)*
Also Assistant Vice President (1991 - Present) Allstate Life Insurance Company
of New York; Assistant Vice President, (1993-Present) Assistant Secretary and
Assistant Treasurer (1997 - Present) Allstate Life Insurance Company; Assistant
Treasurer (1997 - Present) Glenbrook Life and Annuity Company; Director (1997 -
Present) Lincoln Benefit Life Company; Assistant Vice President, Assistant
Secretary and Assistant Treasurer (1997 - Present) Northbrook Life Insurance
Company; Director (1997 Present) Surety Life Insurance Company.
*Date 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 1997. The allocated cash
compensation of all officers of the Company as a group for services rendered in
all capacities to the Company during 1997 totaled $13,025.14. Directors of the
Company receive no compensation in addition to their compensation as employees
of the Company. Directors of the Company who are not also employees of the
Company receive compensation for services provided. Marcia D. Alazraki receives
$9,000 annually; John R. Raben, Jr. and Sally A. Slacke receive $10,000
annually; Cleveland Johnson, Jr. receives $11,500 annually; and Joseph F.
Carlino receives $5,500 annually.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
(A) (B) (C) (D) (F)
(E) SECURITIES (G) (H) (I)
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) AWARD(S) (#) ($) ($)
- --------------------------- ---- --- --- --- -------- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louis G. Lower, II............. 1997 $453,225 $500,000 $27,768 $280,589 25,914 $570,068 $8,000(1)
President and Chairman 1996 $436,800 $246,781 $10,246 $ 0 18,258 $ 0 $5,250(1)
of the Board of Directors 1995 $416,000 $286,650 $17,044 $ 0 89,359 $411,122 $5,250(1)
James J. Brazda(2)............. 1995 $115,870 $27,808 $ 175 $ 0 N/ A $ 0 $5,761(3)
Chief Administrative Officer
and Director
(1) Amount received by Mr. Lower which represents the value allocated to his
account from employer contributions under The Savings and Profit Sharing
Fund of Allstate Employees and prior to 1996, The Profit Sharing Fund and
to its predecessor, The Savings and Profit Sharing Fund of Sears employees.
(2) Mr. Brazda no longer serves in this capacity for Allstate Life Insurance
Company of New York.
(3) Amount received by Mr. Brazda which represents the value allocated to his
account from employer contributions under The Profit Sharing Fund and to
its predecessor, The Savings and Profit Sharing Fund of Sears employees.
</TABLE>
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
Freedman, Levy, Kroll & Simonds, Washington, DC has advised the Company on
certain federal securities law matters. 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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF ALLSTATE LIFE INSURANCE COMPANY OF
NEW YORK:
We have audited the accompanying Statements of Financial Position of Allstate
Life Insurance Company of New York (the "Company") as of December 31, 1997 and
1996, and the related Statements of Operations, Shareholder's Equity and Cash
Flows for each of the three years in the period ended December 31, 1997. Our
audits also included Schedule IV - Reinsurance and Schedule V - Valuation and
Qualifying Accounts. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance
and Schedule V - Valuation and Qualifying Accounts, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
F-1
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
------------
($ in thousands) 1997 1996
---- ----
<S> <C> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value (amortized cost
$1,510,110 and $1,378,155) $ 1,756,257 $ 1,500,783
Mortgage loans 114,627 84,657
Policy loans 27,600 25,359
Short-term 9,513 25,855
--------------- ---------------
Total investments 1,907,997 1,636,654
Deferred acquisition costs 71,946 61,559
Accrued investment income 21,725 20,321
Reinsurance recoverables 1,726 2,566
Cash 393 1,027
Other assets 6,167 7,489
Separate Accounts 308,595 260,668
--------------- ---------------
Total assets $ 2,318,549 $ 1,990,284
=============== ===============
LIABILITIES
Reserve for life-contingent contract benefits $ 1,084,409 $ 911,457
Contractholder funds 607,474 572,480
Income taxes payable 1,419 -
Deferred income taxes 16,990 3,692
Other liabilities and accrued expenses 10,985 6,405
Net payable to affiliates 5,267 2,515
Separate Accounts 308,595 260,668
--------------- ---------------
Total liabilities 2,035,139 1,757,217
--------------- -----------
SHAREHOLDER'S EQUITY
Common stock, $25 par value, 80,000 shares
authorized, issued and outstanding 2,000 2,000
Additional capital paid-in 45,787 45,787
Unrealized net capital gains 64,479 36,852
Retained income 171,144 148,428
--------------- ---------------
Total shareholder's equity 283,410 233,067
--------------- ---------------
Total liabilities and shareholder's equity $ 2,318,549 $ 1,990,284
=============== ===============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums (net of reinsurance
ceded of $3,087, $2,273 and $2,147) $ 90,366 $ 91,825 $ 126,713
Contract charges 28,597 25,281 21,603
Net investment income 124,887 112,862 104,384
Realized capital gains and losses 701 (1,581) (1,846)
------------- ------------- -------------
244,551 228,387 250,854
------------- ------------- -------------
COSTS AND EXPENSES
Contract benefits (net of reinsurance recoveries
of $1,985, $2,827 and $1,581) 179,872 172,772 198,055
Amortization of deferred acquisition costs 5,023 6,512 5,502
Operating costs and expenses 23,644 16,874 17,864
------------- ------------- -------------
208,539 196,158 221,421
------------- ------------- -------------
INCOME FROM OPERATIONS BEFORE
INCOME TAX EXPENSE 36,012 32,229 29,433
INCOME TAX EXPENSE 13,296 11,668 9,911
------------- ------------- -------------
NET INCOME $ 22,716 $ 20,561 $ 19,522
============= ============= =============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK $ 2,000 $ 2,000 $ 2,000
-------------- -------------- --------------
ADDITIONAL CAPITAL PAID-IN 45,787 45,787 45,787
-------------- -------------- --------------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 36,852 74,413 (6,891)
Net change 27,627 (37,561) 81,304
-------------- -------------- --------------
Balance, end of year 64,479 36,852 74,413
-------------- -------------- --------------
RETAINED INCOME
Balance, beginning of year 148,428 127,867 108,345
Net income 22,716 20,561 19,522
-------------- -------------- --------------
Balance, end of year 171,144 148,428 127,867
-------------- -------------- --------------
Total shareholder's equity $ 283,410 $ 233,067 $ 250,067
============== ============== ==============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,716 $ 20,561 $ 19,522
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, amortization and other
non-cash items (31,112) (26,172) (22,348)
Realized capital gains and losses (701) 1,581 1,846
Interest credited to contractholder funds 31,667 25,817 26,924
Increase in life-contingent contract
benefits and contractholder funds 68,114 75,217 103,513
Increase in deferred acquisition costs (10,781) (6,859) (5,537)
Increase in accrued investment income (1,404) (1,493) (2,497)
Change in deferred income taxes (1,578) 257 (2,677)
Changes in other operating assets and
liabilities 11,369 (4,234) 3,897
-------------- -------------- --------------
Net cash provided by operating
activities 88,290 84,675 122,643
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities 15,723 28,454 13,526
Investment collections
Fixed income securities available for sale 120,061 72,751 30,871
Fixed income securities held to maturity - - 3,067
Mortgage loans 5,365 12,508 6,499
Investment purchases
Fixed income securities available for sale (236,984) (236,252) (142,205)
Fixed income securities held to maturity - - (32,046)
Mortgage loans (35,200) (10,325) (9,864)
Change in short-term investments, net 16,342 (18,598) (45)
Change in policy loans, net (2,241) (2,574) (859)
-------------- -------------- --------------
Net cash used in investing activities (116,934) (154,036) (131,056)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 79,384 115,420 76,534
Contractholder fund withdrawals (51,374) (46,504) (68,412)
-------------- -------------- --------------
Net cash provided by financing
activities 28,010 68,916 8,122
-------------- -------------- --------------
NET DECREASE IN CASH (634) (445) (291)
CASH AT BEGINNING OF YEAR 1,027 1,472 1,763
-------------- -------------- --------------
CASH AT END OF YEAR $ 393 $ 1,027 $ 1,472
============== ============== ==============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. General
Basis of presentation
The accompanying financial statements include the accounts of Allstate Life
Insurance Company of New York (the "Company"). The Company is wholly owned by a
wholly owned subsidiary ("Parent") of Allstate Insurance Company ("AIC"), a
wholly owned subsidiary of The Allstate Corporation (the "Corporation"). On June
30, 1995, Sears, Roebuck and Co. ( "Sears") distributed its 80.3% ownership in
the Corporation to Sears common shareholders through a tax-free dividend (the
"Distribution"). These financial statements have been prepared in conformity
with generally accepted accounting principles.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
Nature of operations
The Company markets a broad line of life insurance and annuity products in the
State of New York. Life insurance includes traditional products such as whole
life and term life insurance, as well as universal life and other
interest-sensitive life products. Annuities include deferred annuities, such as
variable annuities and fixed rate single and flexible premium annuities, and
immediate annuities such as structured settlement annuities. The Company
distributes its products using a combination of Allstate agents which include
life specialists, banks, independent agents, brokers and direct response
marketing.
Structured settlement annuity contracts issued by the Company are long-term in
nature and involve fixed guarantees relating to the amount and timing of benefit
payments. Single and flexible premium deferred annuity contracts issued by the
Company are subject to discretionary withdrawal or surrender by the customers,
subject to applicable surrender charges. In a low interest rate environment,
funds from maturing investments, particularly those supporting long-term
structured settlement annuity obligations, may be reinvested at substantially
lower interest rates than those which prevailed when the funds were previously
invested.
The Company utilizes various modeling techniques in managing the relationship
between assets and liabilities. The fixed income securities supporting the
Company's obligations have been selected to meet, to the extent possible, the
anticipated cash flow requirements of the related liabilities. The Company
employs strategies to minimize its exposure to interest rate risk and to
maintain investments which are sufficiently liquid to meet obligations to
contractholders in various interest rate scenarios.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be new and proposed federal
and state regulation and legislation that would allow banks greater
participation in the securities and insurance businesses, which will present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and interest-sensitive
life insurance is enhanced by the tax incentives available under current law.
Any legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Although the Company currently benefits from agreements with financial services
entities who market and distribute its products, consolidation within that
industry and specifically, a change in control of those entities with which the
Company partners, could affect the Company's sales.
Enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; (2) increasing competition in capital
markets; and (3) reopening stock/mutual company disagreements related to such
issues as taxation disparity between mutual and stock insurance companies.
F-6
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds and mortgage-backed and asset-backed
securities. All fixed income securities are carried at fair value and may be
sold prior to their contractual maturity ("available for sale"). The difference
between amortized cost and fair value, net of deferred income taxes, certain
deferred acquisition costs, and reserves for life-contingent contract benefits,
is reflected as a component of shareholder's equity. Provisions are recognized
for declines in the value of fixed income securities that are other than
temporary. Such writedowns are included in realized capital gains and losses.
Mortgage loans are carried at outstanding principal balance, net of unamortized
premium or discount and valuation allowances. Valuation allowances are
established for impaired loans when it is probable that contractual principal
and interest will not be collected. Valuation allowances for impaired loans
reduce the carrying value to the fair value of the collateral or the present
value of the loan's expected future repayment cash flows discounted at the
loan's original effective interest rate. Valuation allowances on loans not
considered to be impaired are established based on consideration of the
underlying collateral, borrower financial strength, current and expected future
market conditions, and other factors.
Short-term investments are carried at amortized cost which approximates fair
value. Policy loans are carried at the unpaid principal balances.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed and asset-backed securities is
determined on the effective yield method, based on estimated principal
repayments. Accrual of income is suspended for fixed income securities and
mortgage loans that are in default or when the receipt of interest payments is
in doubt. Realized capital gains and losses are determined on a specific
identification basis.
Derivative financial instruments
The Company utilizes futures contracts which are derivative financial
instruments. When futures meet specific criteria they may be designated as
accounting hedges and accounted for on a deferral basis, depending upon the
nature of the hedge strategy and the method used to account for the hedged item.
If, subsequent to entering into a hedge transaction, the futures contract
becomes ineffective (including if the hedged item is sold or otherwise
extinguished or the occurrence of a hedged anticipatory transaction is no longer
probable), the Company terminates the derivative position. Gains and losses on
these terminations are reported in realized capital gains and losses in the
period they occur. The Company may also terminate derivatives as a result of
other events or circumstances. Gains and losses on these terminations are either
deferred and amortized over the remaining life of either the hedge or the hedged
item, whichever is shorter, or are reported in shareholder's equity, consistent
with the accounting for the hedged item. Futures contracts must reduce the
primary market risk exposure on an enterprise basis in conjunction with the
hedge strategy; be designated as a hedge at the inception of the transaction;
and be highly correlated with the fair value of, or interest income or expense
associated with, the hedged item at inception and throughout the hedge period.
Under deferral accounting, gains and losses on derivatives are deferred on the
statement of financial position and recognized in earnings in conjunction with
earnings on the hedged item. The Company accounts for interest rate futures
contracts as hedges using deferral accounting for anticipatory investment
purchases and sales when the criteria for futures (discussed above) are met. In
addition, anticipated transactions must be probable of occurrence and their
significant terms and characteristics identified.
Changes in fair values of these types of derivatives are initially deferred as
other liabilities and accrued expenses. Once the anticipated transaction occurs,
the deferred gains or losses are considered part of the cost basis of the asset
and reported net of tax in shareholder's equity or recognized as a gain or loss
from disposition of the asset, as appropriate. The Company reports initial
margin deposits on futures in short-term investments. Fees and commissions paid
on these derivatives are also deferred as an adjustment to the carrying value of
the hedged item.
F-7
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Recognition of premium revenues and contract charges
Premiums for traditional life insurance are recognized as revenue when due.
Accident and disability premiums are earned on a pro rata basis over the policy
period. Revenues on interest-sensitive life insurance policies are comprised of
contract charges and fees, and are recognized when assessed against the
policyholder account balance. Revenues on most annuities, which are considered
investment contracts, include contract charges and fees for contract
administration and surrenders. These revenues are recognized when levied against
the contract balance. Gross premium in excess of the net premium on limited
payment contracts, primarily structured settlement annuities when sold with life
contingencies, are deferred and recognized over the contract period.
Reinsurance
Certain premiums and contract benefits are ceded and reflected net of such
cessions in the statements of operations. Reinsurance recoverable and the
related reserves for life-contingent contract benefits are reported separately
in the statements of financial position. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Deferred acquisition costs
Certain costs of acquiring life and annuity business, principally agents'
remuneration, premium taxes, certain underwriting costs and direct mail
solicitation expenses are deferred and amortized to income. For traditional life
insurance, limited payment contracts and accident and disability insurance,
these costs are amortized in proportion to the estimated revenues on such
business. For universal life-type policies and investment contracts, the costs
are amortized in relation to the present value of estimated gross profits on
such business. Changes in the amount or timing of estimated gross profits will
result in adjustments in the cumulative amortization of these costs. To the
extent that unrealized gains or losses on fixed income securities carried at
fair value would result in an adjustment of deferred acquisition costs had those
gains or losses actually been realized, the related unamortized deferred
acquisition costs are recorded as a reduction of the unrealized gains or losses
included in shareholder's equity, net of deferred income taxes.
Income taxes
The income tax provision is calculated under the liability method. Deferred tax
assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
insurance reserves and deferred acquisition costs. Deferred income taxes also
arise from unrealized capital gains and losses on fixed income securities
carried at fair value.
Separate Accounts
The Company issues flexible premium deferred variable annuity contracts, the
assets and liabilities of which are legally segregated and reflected in the
accompanying statements of financial position as assets and liabilities of the
Separate Accounts (Allstate Life of New York Variable Annuity Account, Allstate
Life of New York Variable Annuity Account II and Allstate Life of New York
Separate Account A, unit investment trusts registered with the Securities and
Exchange Commission).
The assets of the Separate Accounts are carried at fair value. Investment income
and realized capital gains and losses of the Separate Accounts accrue directly
to the contractholders and, therefore, are not included in the Company's
statements of operations. Revenues to the Company from the Separate Accounts
consist of contract maintenance fees, administration fees and mortality and
expense risk charges.
F-8
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Reserves for life-contingent contract benefits
The reserve for life-contingent contract benefits, which relates to traditional
life insurance, group annuities and structured settlement annuities with life
contingencies, disability insurance and accident insurance, is computed on the
basis of assumptions as to future investment yields, mortality, morbidity,
terminations and expenses. These assumptions, which for traditional life
insurance are applied using the net level premium method, include provisions for
adverse deviation and generally vary by such characteristics as type of
coverage, year of issue and policy duration. Reserve interest rates ranged from
4.00% to 11.00% during 1997. To the extent that unrealized gains on fixed income
securities would result in a premium deficiency had those gains actually been
realized, the related increase in reserves is recorded as a reduction of the
unrealized gains included in shareholder's equity, net of deferred income taxes.
Contractholder funds
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most annuities and
universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. Credited interest rates on contractholder
funds ranged from 3.30% to 9.75% for those contracts with fixed interest rates
and from 3.25% to 7.75% for those with flexible rates during 1997.
Off-balance-sheet financial instruments
Commitments to extend mortgage loans have only off-balance-sheet risk because
their contractual amounts are not recorded in the Company's statements of
financial position.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Related Party Transactions
Reinsurance
The Company cedes business to the Parent under reinsurance treaties to limit
aggregate and single exposures on large risks. Premiums and policy benefits
ceded totaled $2,171 and $327 in 1997, $1,383 and $1,662 in 1996, and $1,259 and
$278 in 1995, respectively. Included in the reinsurance recoverable at December
31, 1997 and 1996 are amounts due from the Parent of $342 and $965,
respectively.
Structured settlement annuities
AIC, through an affiliate, purchased $12,766, $15,610 and $11,243 of structured
settlement annuities from the Company in 1997, 1996 and 1995, respectively. Of
these amounts, $3,468, $8,517 and $4,164 relate to structured settlement
annuities with life contingencies and are included in premium income in 1997,
1996 and 1995, respectively. Additionally, the reserve for life-contingent
contract benefits was increased by approximately 94% of such premium received in
each of these years.
Business operations
The Company utilizes services and business facilities owned or leased, and
operated by AIC in conducting its business activities. The Company reimburses
AIC for the operating expenses incurred by AIC on behalf of the Company. The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Expenses allocated to the Company
were $27,632, $23,134 and $21,288 in 1997, 1996 and 1995, respectively. A
portion of these expenses related to the acquisition of life and annuity
business is deferred and amortized over the contract period.
F-9
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
4. Investments
Fair values
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
Gross Unrealized
----------------
Amortized Fair
Cost Gains Losses Value
--------- ----- ------ -----
<S> <C> <C> <C> <C>
At December 31, 1997
- --------------------
U.S. government and agencies $ 416,203 $ 126,824 $ (212) $ 542,815
Municipal 35,382 2,449 (22) 37,809
Corporate 803,935 103,700 (479) 907,156
Mortgage-backed securities 215,465 13,442 (166) 228,741
Asset-backed securities 39,125 642 (31) 39,736
-------------- -------------- -------------- --------------
Total fixed income securities $ 1,510,110 $ 247,057 $ (910) $ 1,756,257
============== ============== ============== ==============
At December 31, 1996
- --------------------
U.S. government and agencies $ 387,806 $ 54,349 $ (2,642) $ 439,513
Municipal 36,158 1,883 (406) 37,635
Corporate 734,500 68,022 (4,592) 797,930
Mortgage-backed securities 188,480 6,793 (1,106) 194,167
Asset-backed securities 31,211 394 (67) 31,538
-------------- -------------- -------------- --------------
Total fixed income securities $ 1,378,155 $ 131,441 $ (8,813) $ 1,500,783
============== ============== ============== ==============
</TABLE>
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
-------------- ---------------
<S> <C> <C>
Due in one year or less $ 18,751 $ 18,839
Due after one year through five years 74,886 77,931
Due after five years through ten years 221,116 237,020
Due after ten years 940,767 1,153,990
--------------- ---------------
1,255,520 1,487,780
Mortgage- and asset-backed securities 254,590 268,477
--------------- ---------------
Total $ 1,510,110 $ 1,756,257
=============== ===============
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
F-10
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Net investment income
Year ended December 31, 1997 1996 1995
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed income securities $ 116,763 $ 104,583 $ 95,212
Mortgage loans 7,896 7,113 7,999
Other 2,200 2,942 2,744
------------- ------------- -------------
Investment income, before expense 126,859 114,638 105,955
Investment expense 1,972 1,776 1,571
------------- ------------- -------------
Net investment income $ 124,887 $ 112,862 $ 104,384
============== ============= =============
Realized capital gains and losses
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
Fixed income securities $ 922 $ (1,522) $ 422
Mortgage loans (221) (59) (2,268)
------------- ------------- -------------
Realized capital gains and losses 701 (1,581) (1,846)
Income tax expense (benefit) 245 (553) (646)
------------- ------------- -------------
Realized capital gains and losses, after tax $ 456 $ (1,028) $ (1,200)
============= ============= =============
</TABLE>
Excluding calls and prepayments, gross gains of $471, $480 and $172 and gross
losses of $105, $2,308 and $105 were realized on sales of fixed income
securities during 1997, 1996 and 1995, respectively.
Unrealized net capital gains
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Cost/ Unrealized
Amortized Fair Net
Cost Value Gains
------------- ------------- -------------
<S> <C> <C> <C>
Fixed income securities $ 1,510,110 $ 1,756,257 $ 246,147
============= =============
Reserves for life insurance policy benefits (145,455)
Deferred income taxes (34,720)
Deferred acquisition costs and other (1,493)
-------------
Unrealized net capital gains $ 64,479
=============
Change in unrealized net capital gains
Year ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
Fixed income securities $ 123,519 $ (82,847) $ 216,975
Reserves for life insurance policy benefits (80,155) 24,300 (89,600)
Deferred income taxes (14,876) 20,224 (43,779)
Deferred acquisition costs and other (861) 762 (2,292)
------------- ------------- -------------
Increase (decrease) in unrealized net
capital gains $ 27,627 $ (37,561) $ 81,304
============= ============= =============
</TABLE>
F-11
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Investment loss provisions and valuation allowances
Pretax provisions for investment losses, principally relating to other than
temporary declines in value of fixed income securities and valuation allowances
on mortgage loans were $261, $208 and $2,448 in 1997, 1996 and 1995,
respectively.
Mortgage loan impairment
A mortgage loan is impaired when it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement.
The Company had no impaired loans at December 31, 1997 and 1996. The net
carrying value of impaired loans at December 31, 1995 was $9,647, measured at
the fair value of the collateral. The total investment in impaired mortgage
loans before valuation allowance at December 31, 1995 was $11,581 and the
related allowance on these impaired loans was $1,934.
Activity in the valuation allowance for all mortgage loans for the years
ended December 31, 1997, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 225 $ 1,952 $ 1,179
Net additions (reductions) 261 (296) 1,923
Direct write-downs - (1,431) (1,150)
----------- -------- --------
Balance at December 31 $ 486 $ 225 $ 1,952
=========== ======== ========
</TABLE>
Interest income is recognized on a cash basis for impaired loans carried at the
fair value of the collateral, beginning at the time of impairment. For other
impaired loans, interest is accrued based on the net carrying value. There were
no impaired loans during 1997. The Company recognized interest income of $281
and $1,398 on impaired loans during 1996 and 1995, respectively, of which $281
and $1,194 was received in cash during 1996 and 1995, respectively. The average
recorded investment in impaired loans was $5,154 and $8,900 during 1996 and
1995, respectively.
F-12
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Investment concentration for municipal bond and commercial mortgage portfolios
and other investment information
The Company maintains a diversified portfolio of municipal bonds. The largest
concentrations in the portfolio are presented below. Except for the following,
holdings in no other state exceeded 5% of the portfolio at December 31, 1997 and
1996:
(% of municipal bond portfolio carrying value) 1997 1996
---- ----
Ohio 28.4% 25.9%
California 22.7 24.3
Illinois 19.8 19.0
Maryland 8.0 7.8
Maine 5.6 5.7
Minnesota 5.5 5.3
New York 5.4 5.3
The Company's mortgage loans are collateralized by a variety of commercial real
estate property types located throughout the United States. Substantially all of
the commercial mortgage loans are non-recourse to the borrower. The states with
the largest portion of the commercial mortgage loan portfolio are listed below.
Except for the following, holdings in no other state exceed 5% of the portfolio
at December 31, 1997 and 1996:
(% of commercial mortgage portfolio carrying value) 1997 1996
---- ----
California 47.7% 49.1%
New York 30.5 21.1
Illinois 15.3 21.3
The types of properties collateralizing the commercial mortgage loans at
December 31, are as follows:
(% of commercial mortgage portfolio carrying value) 1997 1996
---- ----
Retail 38.8% 39.1%
Warehouse 25.4 24.2
Office buildings 15.3 14.3
Apartment complex 14.9 14.6
Industrial 4.9 6.8
Other 0.7 1.0
------ ------
100.0% 100.0%
====== ======
The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 1997, for loans that were not in foreclosure are as follows:
Number of Loans Carrying Value Percent
--------------- --------------- -------
1999 3 $ 5,302 4.6%
2000 4 7,927 6.9
2001 5 7,340 6.4
2002 2 6,385 5.6
Thereafter 23 87,673 76.5
----- --------------- ------
Total 37 $ 114,627 100.0%
===== =============== ======
In 1997, $7.3 million of commercial mortgage loans were contractually due. Of
these, 20.9% were paid as due and 79.1% were refinanced at prevailing market
terms.
F-13
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Securities on deposit
At December 31, 1997, fixed income securities with a carrying value of $1,981
were on deposit with regulatory authorities as required by law.
5. Financial Instruments
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving derivative financial instruments and other off-balance-sheet financial
instruments. The fair value estimates of financial instruments presented below
are not necessarily indicative of the amounts the Company might pay or receive
in actual market transactions. Potential taxes and other transaction costs have
not been considered in estimating fair value. The disclosures that follow do not
reflect the fair value of the Company as a whole since a number of the Company's
significant assets (including deferred acquisition costs and reinsurance
recoverables) and liabilities (including reserve for life-contingent contract
benefits and deferred income taxes) are not considered financial instruments and
are not carried at fair value. Other assets and liabilities considered financial
instruments, accrued investment income and cash are generally of a short-term
nature. It is assumed that their carrying value approximates fair value.
Financial assets
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Fixed income securities $ 1,756,257 $ 1,756,257 $ 1,500,783 $ 1,500,783
Mortgage loans 114,627 120,849 84,657 83,789
Short-term investments 9,513 9,513 25,855 25,855
Policy loans 27,600 27,600 25,359 25,359
Separate Accounts 308,595 308,595 260,668 260,668
</TABLE>
F-14
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Carrying value and fair value include the effects of derivative financial
instruments where applicable.
Fair values for fixed income securities are based on quoted market prices where
available. Non-quoted securities are valued based on discounted cash flows using
current interest rates for similar securities. Mortgage loans are valued based
on discounted contractual cash flows. Discount rates are selected using current
rates at which similar loans would be made to borrowers with similar
characteristics, using similar properties as collateral. Loans that exceed 100%
loan-to-value are valued at the estimated fair value of the underlying
collateral. Short-term investments are highly liquid investments with maturities
of less than one year whose carrying value approximates fair value.
The carrying value of policy loans approximates its fair value. Separate
Accounts assets are carried in the statements of financial position at fair
value.
Financial liabilities
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $437,449 $466,136 $421,642 $430,696
Separate Accounts 308,595 308,595 260,668 260,668
</TABLE>
F-15
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
Derivative financial instruments
The Company primarily uses derivative financial instruments to reduce its
exposure to market risk, specifically interest rate risk, in conjunction with
asset/liability management. The Company does not hold or issue these instruments
for trading purposes.
The following table summarizes the contract or notional amount, credit exposure,
fair value and carrying value of the Company's derivative financial instruments:
<TABLE>
<CAPTION>
Contract/ Carrying Value
Notional Credit Fair Assets/
Amount Exposure Value (Liabilities)
--------- -------- ----- --------------
At December 31, 1997
- --------------------
<S> <C> <C> <C> <C>
Financial futures contracts $ 29,800 $ - $ (153) $ (810)
At December 31, 1996
- --------------------
Financial futures contracts $ 6,700 $ 56 $ 56 $ 266
</TABLE>
The contract or notional amounts are used to calculate the exchange of
contractual payments under the agreements and are not representative of the
potential for gain or loss on these agreements.
Credit exposure represents the Company's potential loss if all of the
counterparties failed to perform under the contractual terms of the contracts
and all collateral, if any, became worthless. This exposure is represented by
the fair value of contracts with a positive fair value at the reporting date
reduced by the effect, if any, of master netting agreements.
The Company manages its exposure to credit risk by utilizing highly rated
counterparties, establishing risk control limits, executing legally enforceable
master netting agreements and obtaining collateral where appropriate. To date,
the Company has not incurred any losses on derivative financial instruments due
to counterparty nonperformance.
Fair value is the estimated amount that the Company would receive (pay) to
terminate or assign the contracts at the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer and
exchange quotes are available for the Company's derivatives.
Financial futures are commitments to either purchase or sell designated
financial instruments at a future date for a specified price or yield. They may
be settled in cash or through delivery. As part of its asset/liability
management, the Company generally utilizes futures contracts to manage its
market risk related to fixed income securities and anticipatory investment
purchases and sales. Futures used as hedges of anticipatory transactions pertain
to identified transactions which are probable to occur and are generally
completed within ninety days. Futures contracts have limited off-balance-sheet
credit risk as they are executed on organized exchanges and require security
deposits, as well as the daily cash settlement of margins.
F-16
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments that the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions. The Company
mitigates this risk through established risk limits set by senior management. In
addition, the change in the value of the Company's derivative financial
instruments designated as hedges are generally offset by the change in the value
of the related assets and liabilities.
Off-balance-sheet financial instruments
Commitments to extend mortgage loans are agreements to lend to a borrower
provided there is no violation of any condition established in the contract. The
Company enters these agreements to commit to future loan fundings at a
predetermined interest rate. Commitments generally have fixed expiration dates
or other termination clauses. Commitments to extend mortgage loans, which are
secured by the underlying properties, are valued based on estimates of fees
charged by other institutions to make similar commitments to similar borrowers.
At December 31, 1997 and 1996, the Company had $18,000 and $6,190 in mortgage
loan commitments which had a fair value of $180 and $62, respectively.
6. Income Taxes
The Company joins the Corporation and its other eligible domestic subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
and is party to a federal income tax allocation agreement (the "Tax Sharing
Agreement"). Under the Tax Sharing Agreement, the Company paid to or received
from the Corporation the amount, if any, by which the Allstate Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this results in the
Company's annual income tax provision being computed, with adjustments, as if
the Company filed a separate return.
Prior to the Distribution, the Corporation and all of its eligible domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax
Sharing Agreement, the Company, through the Corporation, paid to or received
from the Sears Group the amount, if any, by which the Sears Tax Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Allstate Group
filed a separate consolidated return, except that items such as net operating
losses, capital losses or similar items, which might not be recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.
F-17
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The Allstate Group and Sears Group have entered into an agreement which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution ("Consolidated Tax Years"). The agreement
provides that all Consolidated Tax Years will continue to be governed by the
Sears Tax Sharing Agreement with respect to the Allstate Group's federal income
tax liability.
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Deferred assets
<S> <C> <C>
Life-contingent contract reserves and
contractholder funds $ 34,084 $ 27,951
Difference in tax bases of investments 742 270
Loss on disposal of discontinued operations 364 375
Other postretirement benefits 352 524
Other assets 255 1,789
--------- --------
Total deferred assets 35,797 30,909
--------- --------
Deferred liabilities
Unrealized net capital gains (34,720) (19,844)
Deferred acquisition costs (15,821) (14,020)
Prepaid commission expense (792) (717)
Other liabilities (1,454) (20)
--------- --------
Total deferred liabilities (52,787) (34,601)
--------- --------
Net deferred liability $ (16,990) $ (3,692)
========= ========
</TABLE>
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 14,874 $ 11,411 $ 12,588
Deferred (1,578) 257 (2,677)
-------- -------- --------
Total income tax expense $ 13,296 $ 11,668 $ 9,911
======== ======== ========
</TABLE>
The Company paid income taxes of $13,350, $11,968 and $12,096 in 1997, 1996 and
1995, respectively. The Company had an income tax payable of $1,419 at December
31, 1997 and an income tax recoverable of $105 at December 31, 1996.
F-18
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income tax expense 2.2 2.4 2.3
Other (.3) (1.2) (1.3)
---- ---- ----
Effective income tax rate 36.9% 36.2% 36.0%
==== ==== ====
</TABLE>
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1997, approximately $389,
will result in federal income taxes payable of $136 if distributed by the
Company. No provision for taxes has been made as the Company has no plan to
distribute amounts from this account. No further additions to the account are
allowed under the Tax Reform Act of 1984.
7. Statutory Financial Information
The following tables reconcile net income for the year ended December 31, and
shareholder's equity at December 31, as reported herein in conformity with
generally accepted accounting principles with statutory net income and capital
and surplus, determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities:
Net Income
----------
1997 1996 1995
---- ---- ----
Balance per generally accepted accounting
principles $ 22,716 $ 20,561 $ 19,522
Deferred acquisition costs (10,782) (6,858) (5,537)
Deferred income taxes (1,578) 257 (2,677)
Statutory reserves 7,749 6,101 11,380
Other postretirement and postemployment
benefits (36) (34) 71
Other 522 (1,882) 441
-------- -------- --------
Balance per statutory accounting practices $ 18,591 $ 18,145 $ 23,200
======== ======== ========
Shareholder's Equity
--------------------
1997 1996
---- ----
Balance per generally accepted accounting principles $ 283,410 $ 233,067
Deferred acquisition costs (71,946) (61,559)
Deferred income taxes 16,990 3,692
Unrealized gain/loss on fixed income securities (246,147) (122,628)
Non-admitted assets (4,301) (2,739)
Statutory reserves 207,163 115,725
Other postretirement and postemployment benefits 1,007 1,074
Other (1,556) (1,613)
--------- ---------
Balance per statutory accounting practices $ 184,620 $ 165,019
========= =========
F-19
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Permitted statutory accounting practices
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the New York
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company does not follow any permitted statutory accounting
practices that have a material effect on statutory surplus, statutory net income
or risk-based capital.
Final approval of the NAIC's proposed "Comprehensive Guide" on statutory
accounting principles is expected in early 1998. The requirements may be
effective as early as January 1, 1999, and are not expected to have a material
impact on statutory surplus of the Company.
Dividends
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. Under New
York Insurance Law, a notice of intention to distribute any dividend must be
filed with the New York Superintendent of Insurance not less than 30 days prior
to the distribution. Such proposed declaration is subject to the
Superintendent's disapproval.
8. Benefit Plans
Pension plans
Defined benefit pension plans, sponsored by the Corporation, cover domestic
full-time employees and certain part-time employees. Benefits under the pension
plans are based upon the employee's length of service, average annual
compensation and estimated social security retirement benefits. The
Corporation's funding policy for the pension plans is to make annual
contributions in accordance with accepted actuarial cost methods. The costs to
the Company included in net income were $597, $490 and $446 for the pension
plans in 1997, 1996 and 1995, respectively.
Postretirement benefits other than pensions
The Corporation provides certain health care and life insurance benefits for
retired employees. Qualified employees may become eligible for these benefits if
they retire in accordance with the Corporation's established retirement policy
and are continuously insured under the Corporation's group plans or other
approved plans for 10 or more years prior to retirement. The Corporation shares
the cost of the retiree medical benefits with retirees based on years of
service, with the Corporation's share being subject to a 5% limit on annual
medical cost inflation after retirement. The Corporation's postretirement
benefit plans currently are not funded. The Corporation has the right to modify
or terminate these plans.
F-20
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
($ IN THOUSANDS)
Profit sharing fund
Employees of the Corporation and its domestic subsidiaries are also eligible to
become members of The Savings and Profit Sharing Fund of Allstate Employees
("Allstate Plan"). The Corporation's contributions are based on the
Corporation's matching obligation and performance. The Allstate Plan includes an
Employee Stock Ownership Plan ("Allstate ESOP") to pre-fund a portion of the
Corporation's anticipated contribution. The Allstate Plan and the Allstate ESOP
split from The Savings and Profit Sharing Fund of Sears Employees ("Sears Plan")
on the date of the Distribution. In connection with this, the Corporation paid
Sears $327 million, and in return received a note from the Allstate ESOP for a
like principal amount and 50% of the unallocated shares. The note has a fixed
interest rate of 7.9% and matures in 2019. The Corporation expects to make net
contributions to the Allstate ESOP annually in the amount necessary to allow the
Allstate ESOP to fund interest and principal payments on the note after
considering the dividends paid on ESOP shares, which are available for debt
service.
The Company's defined contribution to the Allstate Plan was $164 and $111 in
1997 and 1996, respectively.
F-21
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
Gross Net
Year Ended December 31, 1997 Amount Ceded Amount
- ---------------------------- ------ ----- ------
Life insurance in force $11,339,990 $ 721,040 $10,618,950
=========== =========== ===========
Premiums and contract charges:
Life and annuities $ 116,167 $ 2,185 $ 113,982
Accident and health 5,846 864 4,982
----------- ----------- -----------
$ 122,013 $ 3,049 $ 118,964
=========== =========== ===========
Gross Net
Year Ended December 31, 1996 Amount Ceded Amount
- ---------------------------- ------ ----- ------
Life insurance in force $ 9,962,300 $ 553,628 $ 9,408,672
=========== =========== ===========
Premiums and contract charges: $ 114,296 $ 1,398 $ 112,898
Life and annuities 5,044 834 4,210
Accident and health ----------- ----------- -----------
$ 119,340 $ 2,232 $ 117,108
=========== =========== ===========
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
=========== =========== ===========
F-22
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
---------- ---------- ---------- ----------
Year Ended December 31, 1997
<S> <C> <C> <C> <C>
Allowance for estimated losses
on mortgage loans $ 225 $ 261 $ - $ 486
============ ============ ============ ============
Year Ended December 31, 1996
Allowance for estimated losses
on mortgage loans $ 1,952 $ (296) $ 1,431 $ 225
============ ============ ============ ============
Year Ended December 31, 1995
Allowance for estimated losses
on mortgage loans $ 1,179 $ 1,923 $ 1,150 $ 1,952
============ ============ ============ ============
</TABLE>
F-23
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
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.
<TABLE>
<CAPTION>
ILLUSTRATION
Example of Market Value Adjustment
<S> <C>
Purchase Payment:..................................................................... $10,000
Guarantee Period:..................................................................... 5 years
Interest Rate:........................................................................ 4.50%
Full Surrender:........................................................ End of Contract Year 3
NOTE: This illustration assumes that premium taxes were not applicable.
</TABLE>
EXAMPLE 1: (Assumes declining interest rates)
Step 1: Calculate Account Value at End of Contract Year 3.
= 10,000.00 x (1.045)3 = $11,411.66
Step 2: Calculate The Amount Withdrawn in Excess of the Preferred Withdrawal
Amount.
Amount Withdrawn: 11,411.66
Preferred Withdrawal Amount: .10 x 10,000.00 = 1,000.00
Amount Withdrawn in Excess of the Preferred Withdrawal Amount:
= 11,411.66 - 1,000.00 = $10,411.66
Step 3: Calculate the Withdrawal Charge.
.0225 (represents 1/2 of interest crediting rate of .045) x 10,411.66 = $234.26
Step 4: Calculate the Market Value Adjustment.
I = 4.50%
J = 4.20%
N = 730 days
Market Value Adjustment Factor: .9 x (I - J) X (N/365)
= .9 x (.045 - .042) x (730/365) = .0054
Market Value Adjustment = Factor x Amount in Excess of Preferred Withdrawal
Amount.
= .0054 x 10,411.66 = $56.22
Step 5: Calculate The Net Surrender Value at End of Contract Year 3.
11,411.66 - 234.26 + 56.22 = $11,233.62
EXAMPLE 2: (Assumes rising interest rates)
Step 1: Calculate Account Value at End of Contract Year 3.
= 10,000.00 x (1.045)3 = $11,411.66
Step 2: Calculate The Amount Withdrawn in Excess of the Preferred Withdrawal
Amount.
Amount Withdrawn: 11,411.66
Preferred Withdrawal Amount: .10 x 10,000.00 = 1,000.00
Amount Withdrawn in Excess of the Preferred Withdrawal Amount:
= 11,411.66 - 1,000.00 = $10,411.66
Step 3: Calculate the Withdrawal Charge.
.0225 x 10,411.66 = $234.26
Step 4: Calculate the Market Value Adjustment.
I = 4.50%
J = 4.80%
N = 730 days
Market Value Adjustment Factor: .9 x (I - J) x (N/365)
= .9 x (.045 - .048) x (730/365) = -.0054
Market Value Adjustment = Factor x Amount in Excess of Preferred Withdrawal
Amount.
= -.0054 x 10,411.66 = -$56.22
Step 5: Calculate The Net Surrender Value at End of Contract Year 3.
11,411.66 - 234.26 - 56.22 = $11,121.18
