Allstate Life of New York occupies office space at One Allstate Drive, Farmingville, New York 11738.
The following highlights significant factors influencing results of opera- tions and financial position.
Allstate Life Insurance Company of New York ("the Company"), which is wholly owned by a wholly-owned subsidiary ("Parent") of Allstate Insurance Company ("Allstate"), markets life insurance and group and individual annuities in the state of New York, with products consisting predominately of structured set- tlement annuities sold through independent brokers. The Company also utilizes Allstate agencies and direct marketing to distribute its traditional and uni- versal life and accident and disability insurance products. Additionally, flexible premium deferred variable annuity contracts and certain single and flexible premium annuities are marketed to individuals through the account ex- ecutives of Dean Witter Reynolds, Inc.
Operating expenses increased by $2.0 million, or 9.1%, resulting from an increase in amortization of deferred acquisition costs, partially offset by the costs of an early retirement program recorded in 1994. The decrease of $10.5 million, or 32.9%, in 1994 operating expense is attributable to a decrease in amortization of deferred acquisition costs, which were higher in 1993 as a result of annuity contract surrenders.
Net operating income increased 17.0% in 1995 from 1994, which in turn increased 73.9% from 1993. The increase in net operating income in 1995 was primarily due to higher margins and growth in revenues. The increase in 1994 over 1993 was primarily due to a decrease in operating expenses.
The composition of the investment portfolio at December 31, 1995 is pre- sented in the table below (see Notes 2 and 6 to the financial statements for investment accounting policies and additional information).
The Company generally holds its fixed income securities for the long term, but has classified all of these securities at December 31, 1995, as "available for sale" which are carried in the statement of financial position at fair value, to allow maximum flexibility in portfolio management. At December 31, 1995, net unrealized capital gains on the fixed income securities portfolio totaled $205.5 million compared to an unrealized capital loss of $11.5 million as of December 31, 1994. The significant change in the unrealized gain/loss position is primarily attributable to declining interest rates.
At December 31, 1995 the Company had $225.6 million or 14.6% of the portfo- lio invested in mortgage-backed securities ("MBS"). These securities provide higher-than-average credit quality and liquidity. The Company mitigates credit risk primarily by purchasing securities with underlying collateral that is guaranteed by U.S. government entities.
There were no problem and potential problem fixed income investments as of December 31, 1995, compared to $7.0 million of potential problem fixed income securities at December 31, 1994. The $7.0 million of potential problem fixed income securities at December 31, 1994 related to a single security and has been removed from the potential problem category due to its improved status.
As part of its asset/liability management, the Company generally utilizes futures contracts to hedge its interest rate risk related to anticipatory investment purchases as well as to enhance asset/liability management. The Company does not hold or issue these instruments for trading purposes. At December 31, 1995, the Company had $22.9 million in notional amount of futures contracts outstanding, all of which mature within one year.
The Company's $86.4 million investment in mortgage loans at December 31, 1995 is comprised primarily of loans secured by first mortgages on developed, commercial real estate. Geographical and property type diversification are key considerations used to manage the Company's mortgage loan risk.
The Company closely monitors its commercial mortgage loan portfolio on a loan-by-loan basis. Loans with an estimated collateral value less than the loan's balance, as well as loans with other characteristics indicative of a higher than normal credit risk, are reviewed by financial and investment man- agement for purposes of establishing valuation allowances and placing loans on non-accrual status. The underlying collateral values are based upon discounted property cash flow projections, which are up-
The Company defines problem commercial mortgage loans as loans that are in foreclosure, loans for which a principal or interest payment is over 60 days past due, or are current with respect to interest payments, but considered in- substance foreclosed. Restructured commercial loans have modified terms and conditions that were not at prevailing market rates or terms at the time of the restructuring. Potential problem commercial mortgage loans are current with respect to interest payments, or less than 60 days delinquent as to con- tractual principal and interest payments, but because of other facts and cir- cumstances, management has serious doubts regarding the borrower's ability to pay future interest and principal which causes management to believe these loans may be classified as problem or restructured in the future.
At December 31, 1995 and December 31, 1994 total problem, restructured and potential problem loans, net of valuation allowances, were $9.6 million and $8.4 million, respectively. The net carrying value of impaired loans (see Note 6 of the financial statements) at December 31, 1995 was $9.6 million. All problem, restructured and potential problem loans were considered to be im- paired at December 31, 1995.
The reserve for life insurance policy benefits increased 33.4% to $838.7 million at December 31, 1995, resulting primarily from the sales of structured settlement annuities with life contingencies.
Liquidity for life insurance companies is measured by their ability to pay contractual benefits, pay operating expenses and fund investment commitments. Independent insurance industry rating organizations rate life insurance companies based on their overall performance and ability to meet their policyholder obligations over a long period of time. Such ratings are directed toward the protection of policyholders, not investors. Claims-paying ability ratings at December 31, 1995 assigned to the Company include AA+ and A+(g) from Standard & Poor's and A.M. Best, respectively. In addition, Moody's assigned the Company an Aa3 financial stability rating at December 31, 1995.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Allstate Life Insurance Company of New York as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance and Schedule V - Valuation and Qualifying Accounts, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 3 to the financial statements, in 1993 the Company changed its method of accounting for investments in fixed income securities.
The Company utilizes various modeling techniques in managing the relationship between assets and liabilities. Structured settlement annuity contracts issued by the Company are long-term in nature and involve fixed guarantees relating to the amount and timing of benefit payments. In addition, single and flexible premium annuity contracts issued by the Company are subject to discretionary withdrawal or surrender by the contractholder, subject to applicable surrender charges. The fixed income securities supporting these obligations have been selected to meet the anticipated cash flow requirements of the related liabilities; however, in a low interest rate environment, funds from maturing investments, particularly those supporting long-term structured settlement annuity obligations, may be reinvested at substantially lower interest rates than those which prevailed when the funds were previously invested. The Company employs strategies to minimize exposure to interest rate risk and to maintain investments which are sufficiently liquid to meet obligations to contractholders in various interest rate scenarios.
The Company monitors economic and regulatory developments which have the potential to impact its business. Currently, there is proposed legislation which would permit banks greater participation in securities businesses, which could eventually present an increased level of competition for sales of the Company's annuity contracts. Furthermore, the federal government may enact changes which could possibly eliminate the tax-advantaged nature of annuities or eliminate consumers' need for tax deferral, thereby reducing the incentive for customers to purchase the Company's products. While it is not possible to predict the outcome of such issues with certainty, management evaluates the likelihood of various outcomes and develops strategies, as appropriate, to respond to such challenges.
Premiums for traditional life insurance are recognized as revenue when due. Accident and disability premiums are earned on a pro rata basis over the policy period. Revenues on universal life-type contracts are comprised of contract charges and fees and are recognized when assessed against the policyholder account balance. Revenues on investment contracts include contract charges and fees for contract administration and surrenders. These revenues are recognized when levied against the contract balances. Gross premiums in excess of the net premium on limited payment contracts are deferred and recognized over the contract period.
The reserve for life insurance policy benefits, which relates to traditional life, group annuities and structured settlement annuities with life contingencies, and accident and disability insurance, is computed on the basis of assumptions as to future investment yields, mortality, morbidity, terminations and expenses. These assumptions, which for traditional life are applied using the net level premium method, include provisions for adverse deviation and generally vary by such characteristics as plan, year of issue and policy duration. Reserve interest rates ranged from 6.2% to 9.5% during 1995. To the extent that unrealized gains on available for sale securities would result in a premium deficiency had those gains actually been realized, the related increase in reserves is recorded as a reduction of the unrealized gains included in shareholder's equity.
Contractholder funds arise from the issuance of individual contracts that include an investment component, including most annuities and universal life- type contracts. Payments received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest accrued to the benefit of the contractholder less withdrawals, mortality charges, and administrative expenses. Credited interest rates on contractholder funds ranged from 3.0% to 6.8% for those contracts with fixed interest rates and from 3.6% to 8.5% for those with flexible rates during 1995.
($ IN THOUSANDS) an adjustment of deferred acquisition costs had those gains or losses actually been realized, the related unamortized deferred acquisition costs are recorded as a reduction of the unrealized gains or losses included in shareholder's equity.
The Company issues flexible premium deferred variable annuity contracts, the assets and liabilities of which are legally segregated and reflected in the accompanying statements of financial position as assets and liabilities of the Separate Accounts. Assets and liabilities of the Separate Accounts represent funds of Allstate Life of New York Variable Annuity Account and Allstate Life of New York Variable Annuity Account II ("Separate Accounts"), unit investment trusts registered with the Securities and Exchange Commission. The assets and liabilities of the Separate Accounts are carried at fair value. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contractholders and, therefore, are not included in the accompanying statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance fees, administration fees and mortality and expense risk charges.
Initial margin deposits are reported in short-term investments. Fees and commissions on financial futures contracts are deferred as an adjustment to the amortized cost basis of the hedged item.
Certain premiums and policy benefits are ceded and reflected net of such cessions in the statements of operations. Reinsurance recoverable and the related reserves for policy benefits are reported separately in the statements of financial position. Reinsurance ceded arrangements do not discharge the Company as the primary insurer.
The income tax provision is calculated under the liability method. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities and the enacted tax rates. The principal assets and liabilities giving rise to such differences are insurance reserves and deferred policy acquisition costs. Deferred income taxes also arise from unrealized capital gains or losses on fixed income securities carried at fair value.
The Company cedes business to the Parent under reinsurance treaties. Premiums and policy benefits ceded totaled $1,259 and $278 in 1995, $1,181 and $1,877 in 1994, and $4,109 and $1,288 in 1993. Included in the reinsurance recoverable at December 31, 1995 and 1994 are amounts due from the Parent of $1,212 and $1,120, respectively.
Allstate, through an affiliate, purchased $11,243, $7,568 and $24,778 of structured settlement annuities from the Company in 1995, 1994 and 1993, respectively. Included in premium income are $4,164, $1,221 and $7,170, for 1995, 1994 and 1993, respectively, for the amounts related to structured settlement annuities with life contingencies. Additionally, the provision for policy benefits was increased by approximately 94% of such premium received in each of these years.
The Company utilizes services and business facilities owned or leased, and operated by Allstate in conducting its business activities. The Company reimburses Allstate for the operating expenses incurred by Allstate on its behalf. The cost to the Company is determined by various allocation methods and is primarily related to the level of the services provided. Expenses allocated to the Company were $21,288, $17,320 and $16,313 in 1995, 1994 and 1993, respectively. A portion of these expenses related to the acquisition of insurance business is deferred and amortized over the policy period.
Dean Witter is the primary distributor of the Company's single and flexible premium annuities. Dean Witter is also the distributor of flexible premium deferred variable annuity contracts and the investment manager for the Dean Witter Variable Investment Series, the fund in which the assets of the Separate Accounts are invested. Additionally, Dean Witter loans funds to an affiliate of the Parent under the terms of a strategic alliance.
A consolidated federal income tax return will be filed by the Parent and its life insurance subsidiaries, including the Company. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective subsidiaries, whether or not such benefits generated by the subsidiaries would be available on a separate return basis. The Corporation and its domestic subsidiaries, including the Company, (the "Allstate Group"), will be eligible to file a consolidated tax return beginning in the year 2000.
The Allstate group and Sears Group have entered into an agreement which governs their respective rights and obligations with respect to federal income taxes for all periods prior to the Distribution ("Consolidated Tax Years"). The agreement provides that all Consolidated Tax Years will continue to be governed by the Tax Sharing Agreement with respect to the Company's federal income tax liability and taxes payable to or recoverable from the Sears Group.
The components of the deferred income tax assets and liabilities at December 31, 1994 and 1993 are as follows:
Interest income is recognized on a cash basis for impaired loans carried at the fair value of collateral, beginning at the time of impairment. For other impaired loans, interest is accrued based on the net carrying value. The Company recognized interest income of $1,398 on impaired loans during the period, of which $1,193 was received in cash. The average recorded investment in impaired loans during the period was $8,900.
The Company maintains a diversified portfolio of municipal bonds. The largest concentrations in the portfolio are presented below. Except for the following, holdings in no other state exceed 5.0% of the carrying value of the portfolio at December 31, 1995.
The Company's mortgage loans are collateralized primarily by a variety of commercial real estate property types, located throughout the United States. Substantially all of the commercial mortgage loans are non-recourse to the borrower. The three states with the largest portion of the commercial mortgage loan portfolio are as listed below. Holdings in no other state exceed 5.0% of the portfolio at December 31:
At December 31, 1995, fixed income securities with a carrying value of $1,988 were on deposit with regulatory authorities as required by law.
In the normal course of business, the Company invests in various financial assets, incurs various financial liabilities and enters into agreements involving derivative financial instruments. The fair value estimates of financial instruments presented below are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential taxes and other transaction costs have not been considered in estimating fair value. As a number of the Company's significant assets, including deferred acquisition costs and deferred income taxes, and liabilities, including traditional and universal life-type life insurance reserves, are not considered financial instruments, the disclosures that follow do not reflect the fair value of the Company as a whole.
Fair value for fixed income securities are based on quoted market prices where available. Non-quoted securities are valued based on discounted cash flows using current interest rates for similar securities. Mortgage loans are valued based on discounted contractual cash flows. Discount rates are selected using
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts. Reserves on investment contracts with no stated maturities (single premium and flexible premium deferred annuities) are valued at the account balance less surrender charge. The fair value of immediate annuities and annuities without life contingencies with fixed terms are estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and durations. Other financial liabilities are generally valued at their carrying value due to their short-term nature. Separate Accounts liabilities are carried at the fair value of the underlying assets.
The contract or notional amounts are used to calculate the exchange of contractual payments under the agreements and are not representative of the potential gain or loss on these agreements.
Market risk is the risk that future changes in market conditions may cause an instrument to become less valuable or more costly to settle. Market risk exists for the financial futures contracts that the Company currently holds. The Company mitigates this risk through established risk limits set by senior management. In addition, the change in the value of the Company's financial futures contracts are generally offset by the change in the value of certain on-balance-sheet items or anticipated transactions.
Allstate provides certain health care and life insurance benefits for retired employees. Generally, qualified employees may become eligible for these benefits if they retire in accordance with Allstate's established retirement policy and are continuously insured under Allstate's group plans or other approved plans for 10 or more years prior to retirement. Allstate shares the cost of the retiree medical benefits with retirees based on years of service, with the Company's share being subject to a 5% limit on annual medical cost inflation after retirement. Allstate's postretirement benefit plans currently are not funded. Allstate has the right to modify or terminate these plans.
Employees of Allstate and its domestic subsidiaries are also eligible to become members of the Savings and Profit Sharing Fund of Allstate Employees ("Allstate Plan"). Allstate contributions are based on 6% of consolidated income, as defined, with Allstate contributions limited to 70% of eligible deposits. The Allstate Plan includes an Employee Stock Ownership Plan ("Allstate ESOP") to pre-fund a portion of the Company's anticipated contribution through 2004. The Allstate Plan and the Allstate ESOP split from The Savings and Profit Sharing Fund of Sears Employees, which included a leveraged employee stock ownership plan ("Sears ESOP") feature, on June 30, 1995, the date of the Distribution. Fifty percent of the unallocated shares of the Sears ESOP and 50% of the amount of the Sears ESOP debt (payable to Sears) were transferred to the Allstate Plan. In connection with this transfer, Allstate paid Sears $327 million, an amount equal to 50% of the Sears ESOP debt. Concurrently, Allstate received a note from the Allstate ESOP for a like principal amount with interest rate and maturity identical to the debt obligation transferred from the Sears ESOP. Allstate will make contributions to the Allstate ESOP annually in the amount necessary to allow the Allstate ESOP to fund interest and principal payments.
During 1994, Allstate offered a voluntary early retirement incentive program to eligible home office employees. The Company's portion of the total cost of the program of $1,210 was charged to 1994 income.
The Company prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the New York state insurance department. Prescribed statutory
The ability of the Company to pay dividends is dependent, in part, on business conditions, income, cash requirements of the Company and other relevant factors and is subject to New York Insurance Regulations. Under New York Insurance Law, a notice of intention to distribute any dividend must be filed with the New York Superintendent of Insurance not less than 30 days prior to the distribution. Such proposed declaration is subject to the Superintendent's disapproval.