The following discussion highlights significant factors influencing results of operations and changes in financial position of Allstate Life Insurance Company of New York (the "Company"). It should be read in conjunction with the financial statements and related notes. To conform with the 1999 presentation, certain prior year amounts have been reclassified.
STATUTORY PREMIUMS AND DEPOSITS Statutory premiums and deposits, which include premiums and deposits for all products, are used to analyze sales trends. In 1999, total statutory premiums and deposits increased $40.2 million or 15.2%. The increase was primarily due to higher fixed and variable annuity sales, partially offset by lower sales of immediate annuities. The increase in fixed annuity sales was primarily due to new marketing partnerships in the banking distribution channel. In 1998, total statutory premiums and deposits increased $57.5 million or 27.8%. The increase was due primarily to sales of fixed annuities in the banking distribution channel.
GAAP PREMIUMS AND CONTRACT CHARGES Under generally accepted accounting principles ("GAAP"), premiums represent revenue generated from traditional life products with significant mortality risks. Revenues for interest-sensitive life insurance and fixed and variable annuity contracts, for which deposits are treated as liabilities, are reflected as contract charges. Immediate annuities may be purchased with a life contingency whereby mortality risk is a significant factor. For this reason the GAAP revenues generated on these contracts are recognized as premiums. Total premiums were $63.7 million in 1999 compared to $85.8 million in 1998, as higher traditional life premiums were more than offset by lower sales of immediate annuities with life contingencies. The higher traditional life premiums were due to increased marketing efforts in the direct response marketing distribution channel. The types of immediate annuities sold may fluctuate significantly from year to year, which impacts premiums reported. The lower sales of immediate annuities with life contingencies in 1999 also caused a decrease in the reserve for life-contingent contracts which is a component of contract benefits reported in the statement of operations and comprehensive income. In 1998, total premiums were $85.8 million compared to $90.4 million in 1997 primarily due to lower sales of immediate annuities with life contingencies.
NET INVESTMENT INCOME Pretax net investment income increased 10.4% and 7.6% in 1999 and 1998, respectively. Increases in both years were due to higher investment balances, before the impact of unrealized gains and losses on fixed income securities, partially offset by slightly lower portfolio yields. Investments, excluding Separate Accounts assets and unrealized gains on fixed income securities, grew 10.7% and 14.3% in 1999 and 1998, respectively. Despite recent increases in interest rates, current investment yields are still lower than average portfolio yields, therefore funds from maturing investments were generally reinvested at lower yields resulting in reduced investment income. If interest rates continue to rise, this trend may reverse over time.
REALIZED CAPITAL GAINS AND LOSSES Realized capital losses, after-tax, were $1.3 million in 1999 compared to realized capital gains, after-tax, of $2.6 million in 1998. In 1999, realized capital losses were generated primarily from the sale of publicly traded corporate securities. The sales were made to better manage asset and liability duration and facilitate investing in higher yielding securities. Realized capital gains in 1998 were due primarily to sales and pre-payments of fixed income securities. Year to year fluctuations in realized capital gains are largely the result of the timing of sales decisions reflecting management's view of individual securities and overall market conditions.
OPERATING INCOME Operating income increased 11.5% in 1999 to $27.9 million. The increase was due to higher net investment income and contract charges and lower operating costs and expenses partially offset by less favorable mortality experience. Operating income increased 12.4% in 1998 to $25.0 million as favorable mortality experience and increased contract charges were partially offset by higher expenses.
The composition of the investment portfolio at December 31, 1999 is presented in the table below (see Notes 2 and 4 to the financial statements for investment accounting policies and additional information).
At December 31, 1999 and 1998, $288.7 million and $305.1 million, respectively, of the fixed income securities portfolio were invested in mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of securities which were issued by or have underlying collateral that is guaranteed by U.S. government agencies or sponsored entities, thus minimizing credit risk.
MORTGAGE LOANS The Company's $167.0 million investment in mortgage loans at December 31, 1999 is comprised primarily of loans secured by first mortgages on developed commercial real estate. Geographical and property type diversification are key considerations used to manage the Company's mortgage loan risk.
SHORT-TERM INVESTMENTS The Company's short-term investment portfolio was $46.0 million and $76.1 million at December 31, 1999 and 1998, respectively. The Company invests available cash balances primarily in taxable short-term securities having a final maturity date or redemption date of one year or less. The short-term investment portfolio at December 31, 1999 decreased primarily due to the settlement of a $34.0 million intercompany payable in early January 1999.
Separate Accounts assets and liabilities increased 21.1% to $443.7 million at December 31, 1999. The increases were primarily attributable to sales of variable annuity contracts and favorable investment performance of the Separate Accounts investment portfolios, partially offset by surrenders and withdrawals.
The active management of market risk is integral to the Company's results of operations. The Company may use the following approaches to manage its exposure to market risk within defined tolerance ranges: 1) rebalance its existing asset or liability portfolios, 2) change the character of 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. The derivative financial instruments section in note 5 to the financial statements provides a more detailed discussion of these instruments.
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, 1999, the difference between the Company's liability and asset duration was approximately .9 years, versus a 2.7 year gap at December 31, 1998. 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 change in the gap is due to the large percentage of structured settlement annuity assets and liabilities in the portfolio and its duration gaps sensitivity to changes in interest rates. Structured settlement annuities are a type of immediate annuity.
The Company seeks to invest premiums and deposits to generate 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. The Company uses financial futures to hedge the interest rate risk related to anticipatory purchases and sales of investments and product sales to customers.
The Company's principal sources of funds are collections of principal, interest and dividends 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, contract surrenders and withdrawals and operating costs.
At December 31, 1999, the Moody's and Standard and Poor's claims-paying ratings for the Company were Aa2 and AA+, respectively.
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 the 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, 1999, RBC for the Company was significantly above a level that would require regulatory action.
conditions existing at the date of adoption. Based on existing interpretations of the requirements of SFAS No. 133, the impact of the adoption is not expected to be material to the results of operations or financial position of the Company.