-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A1DmJ3ROMvcZZLPcbN7T7ipmKZNXXGdEiGW8EBGG9czZ6+0cS+pvDVXRX4PI22ab RtDYQx6Lr3++kX5xXN8diw== 0001193125-10-079562.txt : 20100408 0001193125-10-079562.hdr.sgml : 20100408 20100408162443 ACCESSION NUMBER: 0001193125-10-079562 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20100408 DATE AS OF CHANGE: 20100408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLSTATE LIFE INSURANCE CO OF NEW YORK CENTRAL INDEX KEY: 0000839759 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 362608394 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 333-158183 FILM NUMBER: 10740036 BUSINESS ADDRESS: STREET 1: 100 MOTOR PARKWAY STREET 2: SUITE 132 CITY: HAPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 631 357-8920 MAIL ADDRESS: STREET 1: 100 MOTOR PARKWAY STREET 2: SUITE 132 CITY: HAPPAUGE STATE: NY ZIP: 11788 POS AM 1 dposam.txt ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK As filed with the Securities and Exchange Commission on April 8, 2010 FILE NO. 333-158183 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-1 POST-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (Exact Name of Registrant) NEW YORK 36-2608394 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 6300 (Primary Standard Industrial Classification Code Number) 100 MOTOR PARKWAY SUITE 132 HAUPPAUGE, NEW YORK 11788 631/357-8920 (Address and Phone Number of Principal Executive Office) SUSAN L. LEES DIRECTOR, VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK 3100 SANDERS ROAD NORTHBROOK, ILLINOIS 60062 847/402-5000 (Name, Complete Address and Telephone Number of Agent for Service) COPIES TO: JOCELYN LIU, ESQUIRE ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK 3100 SANDERS ROAD SUITE J5B NORTHBROOK, IL 60062 Approximate date of commencement of proposed sale to the Public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] (Do not check if a smaller reporting company) Smaller reporting company [ ] Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK Supplement Dated May 1, 2010 To the following Prospectuses, as supplemented ALLSTATE PROVIDER PROSPECTUS DATED MAY 1, 2002 SELECTDIRECTIONS PROSPECTUS DATED APRIL 30, 2005 AIM LIFETIME PLUS PROSPECTUS DATED APRIL 30, 2005 AIM LIFETIME PLUS II PROSPECTUS DATED APRIL 30, 2005 CUSTOM PORTFOLIO PROSPECTUS DATED APRIL 30, 2005 The following information supplements the prospectus for your variable annuity contract issued by Allstate Life Insurance Company of New York. SUPPLEMENTAL INFORMATION ABOUT ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK INDEX
PAGE ---- Item 11(a) Description of Business............................................................... 1 Item 11(b) Description of Property............................................................... 3 Item 11(c) Legal Proceedings..................................................................... 3 Item 11(e) Financial Statements and Notes to Financial Statements................................ 4 Item 11(f) Selected Financial Data............................................................... 58 Item 11(h) Management's Discussion and Analysis of Financial Condition and Results of Operations. 58 Item 11(i) Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 100 Item 11(j) Quantitative and Qualitative Disclosures About Market Risk............................ 100 Item 11(k) Directors, Executive Officers, Promoters and Control Persons.......................... 100 Item 11(l) Executive Compensation................................................................ 103 Item 11(m) Security Ownership of Certain Beneficial Owners and Management........................ 130 Item 11(n) Transactions with Related Persons, Promoters and Certain Control Persons.............. 132 Other Information................................................................................. 134 Filing of Reports..................................................................... 134 Disclosure of Commission Position on Indemnification for Securities Act Liabilities... 134 Experts............................................................................... 135
ITEM 11(A).DESCRIPTION OF BUSINESS Allstate Life Insurance Company of New York ("Allstate Life of New York," "Allstate New York" or "ALNY") was incorporated in 1967 as a stock life insurance company under the laws of the State of New York. In 1984, Allstate Life of New York was purchased by Allstate Life Insurance Company ("ALIC"). Allstate Life of New York is a wholly owned subsidiary of ALIC, a stock life insurance company incorporated under the laws of the State of Illinois. ALIC is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a stock property-liability insurance company organized under the laws of the State of Illinois. All of the outstanding capital stock of AIC is owned by Allstate Insurance Holdings, LLC, which is wholly owned by The Allstate Corporation (the "Corporation" or "Allstate"), a publicly owned holding company incorporated under the laws of the State of Delaware. The Allstate Corporation is the largest publicly held personal lines insurer in the United States. Widely known through the "You're In Good Hands With Allstate(R)" slogan, Allstate is reinventing protection and retirement to help individuals in approximately 17 million households protect what they have today and better prepare for tomorrow. Customers can access Allstate products and services such as auto insurance and homeowners insurance through more than 14,000 exclusive Allstate agencies and financial representatives in the United States and Canada. Allstate is the 2/nd/ largest personal property and casualty insurer in the United States on the basis of 2008 statutory direct premiums earned. In addition, according to A.M. Best, it is the nation's 16/th/ largest issuer of life insurance business on the basis of 2008 ordinary life insurance in force and 17/th/ largest on the basis of 2008 statutory admitted assets. To achieve its goals in 2010, Allstate is focused on three priorities: improve customer loyalty, reinvent protection and retirement for the consumer, and grow its businesses. In our reports, we occasionally refer to statutory financial information. All domestic United States insurance companies are required to prepare statutory-basis financial statements. As a result, industry data is available that enables comparisons between insurance companies, including competitors that are not subject to the requirement to prepare financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). We frequently use industry publications containing statutory financial information to assess our competitive position. We provide life insurance, retirement and investment products, and voluntary accident and health insurance products. Our principal products are fixed annuities, including deferred and immediate; interest-sensitive, traditional and variable life insurance; and voluntary accident and health insurance. We sell products through multiple intermediary distribution channels, including Allstate exclusive agencies and exclusive financial specialists, independent agents (including workplace enrolling agents), specialized structured settlement brokers and, through March 31, 2010, banks and broker-dealers. We compete on a wide variety of factors, including the scope of our distribution systems, the types of our product offerings, the recognition of our brand, our financial strength and ratings, our differentiated product features and prices, and the level of customer service that we provide. The market for life insurance, retirement and investment products continues to be highly fragmented and competitive. As of December 31, 2009, there were approximately 480 groups of life insurance companies in the United States, most of which offered one or more similar products. In addition, because many of these products include a savings or investment component, our competition includes domestic and foreign securities firms, investment advisors, mutual funds, banks and other financial institutions. Competitive pressure continues to grow due to several factors, including cross marketing alliances between unaffiliated businesses, as well as consolidation activity in the financial services industry. Allstate Life of New York is subject to extensive regulation, primarily, but not exclusively, from the New York State Insurance Department. The method, extent and substance of such regulation generally has its source in statutes that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to the New York State Insurance Department. In general, such regulation is intended for the protection of those who purchase or use our insurance products. These rules have a substantial effect on our business and relate to a wide variety of matters including insurance company licensing and examination, agent licensing, price setting, trade practices, policy forms, accounting methods, corporate governance, the nature and amount of investments, claims practices, participation in guaranty funds, reserve adequacy, insurer solvency, transactions with affiliates, the payment of dividends, and underwriting standards. For a discussion of statutory financial information, see Note 13 of the Financial Statements. For a discussion of regulatory contingencies, see Note 11 of the Financial Statements. Notes 11 and 13 are incorporated in this, Item 11(a) by reference. In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Legislation that would provide for increased federal regulation of insurance, including the federal chartering of insurance companies, has been proposed. Moreover, as part of an effort to strengthen the regulation of the financial services market, the federal government has proposed a set of regulatory reforms, including the establishment of an Office of National Insurance within the Treasury Department. The reforms could increase the regulation of large insurance conglomerates whose failure could pose a systemic risk to the financial system. In addition, state legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation. We cannot predict whether any specific state or federal measures will be adopted to change the nature or scope of the regulation of the insurance or financial services business or what effect any such measures would have on Allstate Life of New York. 2 ITEM 11(B).DESCRIPTION OF PROPERTY Allstate Life of New York occupies office space in Hauppauge, New York and Northbrook, Illinois that is owned or leased by Allstate Insurance Company. Expenses associated with these facilities are allocated to us on both a direct and indirect basis, depending on the nature and use. We believe that these facilities are suitable and adequate for our operations. ITEM 11(C).LEGAL PROCEEDINGS Information required for Item 11(c) is incorporated by reference to the discussion under the headings "Regulation and Compliance" and under the heading "Legal and regulatory proceedings and inquiries" in Note 11 of the Financial Statements. 3 ITEM 11(E).FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, ----------------------------- 2009 2008 2007 ($ IN THOUSANDS) -------- --------- -------- REVENUES Premiums (net of reinsurance ceded of $29,907, $18,215 and $21,020)............ $ 47,659 $ 59,248 $ 69,124 Contract charges (net of reinsurance ceded of $25,999, $18,780 and $21,158)..................................................................... 51,834 61,108 59,530 Net investment income.......................................................... 372,395 402,931 386,738 Realized capital gains and losses: Total other-than-temporary impairment losses................................ (52,207) (117,790) (6,793) Portion of loss recognized in other comprehensive income.................... 1,131 -- -- -------- --------- -------- Net other-than-temporary impairment losses recognized in earnings.............................................................. (51,076) (117,790) (6,793) Sales and other realized capital gains and losses........................... 196,544 40,585 5,962 -------- --------- -------- Total realized capital gains and losses................................. 145,468 (77,205) (831) -------- --------- -------- 617,356 446,082 514,561 COSTS AND EXPENSES Contract benefits (net of reinsurance ceded of $5,510, $40,307 and $16,913)..................................................................... 170,075 184,192 181,803 Interest credited to contractholder funds (net of reinsurance ceded of $8,757, $10,485 and $13,058)......................................................... 201,549 191,208 177,407 Amortization of deferred policy acquisition costs.............................. 148,450 17,778 53,445 Operating costs and expenses................................................... 41,183 40,869 37,624 -------- --------- -------- 561,257 434,047 450,279 (Loss) gain on disposition of operations....................................... -- (358) 429 -------- --------- -------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE............................... 56,099 11,677 64,711 Income tax expense............................................................. 19,729 4,005 22,802 -------- --------- -------- NET INCOME..................................................................... 36,370 7,672 41,909 OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX Change in unrealized net capital gains and losses.............................. 153,340 (174,102) (12,850) -------- --------- -------- COMPREHENSIVE INCOME (LOSS).................................................... $189,710 $(166,430) $ 29,059 ======== ========= ========
See notes to financial statements. 4 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ---------------------- 2009 2008 ($ IN THOUSANDS, EXCEPT PAR VALUE DATA) ---------- ---------- ASSETS Investments Fixed income securities, at fair value (amortized cost $6,073,235 and $5,776,451).............................................................. $6,073,765 $5,496,365 Mortgage loans............................................................. 543,007 700,268 Equity securities, at fair value (cost $100,168 and $--)................... 123,311 -- Short-term, at fair value (amortized cost $348,456 and $409,737)........... 348,453 409,802 Policy loans............................................................... 40,569 39,672 Other...................................................................... 10,292 2,478 ---------- ---------- Total investments...................................................... 7,139,397 6,648,585 Cash.......................................................................... 8,977 4,965 Deferred policy acquisition costs............................................. 213,325 538,248 Reinsurance recoverables...................................................... 327,173 367,957 Accrued investment income..................................................... 69,557 61,581 Current income taxes receivable............................................... 18,032 -- Deferred income taxes......................................................... -- 65,397 Other assets.................................................................. 24,686 64,440 Separate Accounts............................................................. 587,044 533,760 ---------- ---------- TOTAL ASSETS.................................................... $8,388,191 $8,284,933 ========== ========== LIABILITIES Contractholder funds.......................................................... $4,990,879 $5,086,965 Reserve for life-contingent contract benefits................................. 1,875,579 1,953,157 Deferred income taxes......................................................... 37,887 -- Current income taxes payable.................................................. -- 12,769 Other liabilities and accrued expenses........................................ 180,061 172,286 Payable to affiliates, net.................................................... 6,591 8,457 Reinsurance payable to parent................................................. 3,266 971 Separate Accounts............................................................. 587,044 533,760 ---------- ---------- TOTAL LIABILITIES............................................... 7,681,307 7,768,365 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 11) SHAREHOLDER'S EQUITY Common stock, $25 par value, 100 thousand shares authorized, issued and outstanding................................................................. 2,500 2,500 Additional capital paid-in.................................................... 140,529 140,000 Retained income............................................................... 539,805 482,982 Accumulated other comprehensive income (loss): Unrealized net capital gains and losses: Unrealized net capital losses on fixed income securities with OTTI..... (2,452) -- Other unrealized net capital gains and losses.......................... 18,038 (180,877) Unrealized adjustment to DAC, DSI and insurance reserves............... 8,464 71,963 ---------- ---------- Total unrealized net capital gains and losses....................... 24,050 (108,914) ---------- ---------- Total accumulated other comprehensive income (loss)............. 24,050 (108,914) ---------- ---------- TOTAL SHAREHOLDER'S EQUITY...................................... 706,884 516,568 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................... $8,388,191 $8,284,933 ========== ==========
See notes to financial statements. 5 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, ------------------------------ 2009 2008 2007 ($ IN THOUSANDS) --------- --------- -------- COMMON STOCK............................................. $ 2,500 $ 2,500 $ 2,500 --------- --------- -------- ADDITIONAL CAPITAL PAID-IN Balance, beginning of year............................... 140,000 140,000 140,000 Forgiveness of payable due to an affiliate (see Note 4).. 529 -- -- --------- --------- -------- Balance, end of year..................................... 140,529 140,000 140,000 --------- --------- -------- RETAINED INCOME Balance, beginning of year............................... 482,982 473,184 432,458 Net income............................................... 36,370 7,672 41,909 Cumulative effect of change in accounting principle...... 20,376 -- (1,183) Forgiveness of payable due to an affiliate (see Note 4).. 77 -- -- Gain on purchase of investments from parent (see Note 4). -- 2,126 -- --------- --------- -------- Balance, end of year..................................... 539,805 482,982 473,184 --------- --------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of year............................... (108,914) 65,188 78,038 Cumulative effect of change in accounting principle...... (20,376) -- -- Change in unrealized net capital gains and losses........ 153,340 (174,102) (12,850) --------- --------- -------- Balance, end of year..................................... 24,050 (108,914) 65,188 --------- --------- -------- TOTAL SHAREHOLDER'S EQUITY............................... $ 706,884 $ 516,568 $680,872 ========= ========= ========
See notes to financial statements. 6 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------- 2009 2008 2007 ($ IN THOUSANDS) ----------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................................ $ 36,370 $ 7,672 $ 41,909 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and other non-cash items.............................. (50,399) (80,807) (75,534) Realized capital gains and losses.................................. (145,468) 77,205 831 Loss (gain) on disposition of operations........................... -- 358 (429) Interest credited to contractholder funds.......................... 201,549 191,208 177,407 Changes in: Policy benefit and other insurance reserves.................... (20,919) (7,034) 13,877 Deferred policy acquisition costs.............................. 115,890 (33,612) 5,871 Income taxes................................................... (10,125) 383 69 Other operating assets and liabilities......................... (21,232) (16,998) (39,455) ----------- --------- --------- Net cash provided by operating activities................... 105,666 138,375 124,546 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales Fixed income securities............................................ 1,850,519 640,634 409,552 Equity securities.................................................. 204 -- -- Mortgage loans..................................................... 12,580 12,175 -- Investment collections Fixed income securities............................................ 309,185 162,268 108,565 Mortgage loans..................................................... 141,726 52,030 61,128 Investment purchases Fixed income securities............................................ (2,250,840) (668,526) (762,846) Equity securities.................................................. (100,215) -- -- Mortgage loans..................................................... (10,000) (41,141) (77,854) Change in short-term investments, net................................. 95,366 (421,483) 55,621 Change in policy loans and other investments, net..................... 21,425 7,585 2,509 Disposition of operations............................................. -- (2,500) (243) ----------- --------- --------- Net cash provided by (used in) investing activities......... 69,950 (258,958) (203,568) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits.......................................... 296,991 615,564 542,517 Contractholder fund withdrawals....................................... (468,595) (497,372) (463,229) ----------- --------- --------- Net cash (used in) provided by financing activities......... (171,604) 118,192 79,288 ----------- --------- --------- NET INCREASE (DECREASE) IN CASH....................................... 4,012 (2,391) 266 CASH AT BEGINNING OF YEAR............................................. 4,965 7,356 7,090 ----------- --------- --------- CASH AT END OF YEAR................................................... $ 8,977 $ 4,965 $ 7,356 =========== ========= =========
See notes to financial statements. 7 NOTES TO FINANCIAL STATEMENTS 1. GENERAL BASIS OF PRESENTATION The accompanying financial statements include the accounts of Allstate Life Insurance Company of New York (the "Company"), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"). All of the outstanding common stock of AIC is owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the "Corporation"). These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). To conform to the current year presentation, certain amounts in the prior years' financial statements and notes have been reclassified. The preparation of financial statements in conformity with GAAP 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. NATURE OF OPERATIONS The Company sells life insurance, retirement and investment products, and voluntary accident and health insurance to customers in the State of New York. The principal products are fixed annuities; traditional, interest-sensitive and variable life insurance; and voluntary accident and health insurance. The following table summarizes premiums and contract charges by product.
2009 2008 2007 ($ IN THOUSANDS) ------- -------- -------- PREMIUMS Traditional life insurance/(1)/............. $20,159 $ 29,597 $ 24,997 Immediate annuities with life contingencies. 17,934 21,451 37,491 Accident and health......................... 9,566 8,200 6,636 ------- -------- -------- TOTAL PREMIUMS.............................. 47,659 59,248 69,124 CONTRACT CHARGES Interest-sensitive life insurance/(1)/...... 47,071 54,972 51,155 Fixed annuities............................. 4,763 6,136 8,375 ------- -------- -------- TOTAL CONTRACT CHARGES...................... 51,834 61,108 59,530 ------- -------- -------- TOTAL PREMIUMS AND CONTRACT CHARGES......... $99,493 $120,356 $128,654 ======= ======== ========
- -------- (1)Beginning in 2008, certain ceded reinsurance premiums previously included as a component of traditional life insurance premiums were reclassified prospectively to be reported as a component of interest-sensitive life insurance contract charges. In 2007, these ceded reinsurance premiums were $2.5 million. The Company distributes its products to individuals through multiple distribution channels, including Allstate exclusive agencies, which include exclusive financial specialists, independent agents (including master brokerage agencies and workplace enrolling agents), specialized structured settlement brokers and, through March 31, 2010, financial services firms, such as banks and broker-dealers. Effective March 31, 2010, the Company will no longer wholesale or provide distribution support to banks and broker-dealers. Although the Company will continue to service inforce contracts sold through these channels, the Company will no longer solicit new sales through the Company's direct relationships with banks and broker-dealers. Certain of the Company's master brokerage agencies and independent agents may continue to wholesale the Company's products to banks and broker-dealers through their relationships. 8 NOTES TO FINANCIAL STATEMENTS--CONTINUED The Company has exposure to market risk as a result of its investment portfolio. Market risk is the risk that the Company will incur realized and unrealized net capital losses due to adverse changes in interest rates, credit spreads or equity prices. Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of its interest bearing assets and liabilities. This risk arises from many of the Company's primary activities, as it invests substantial funds in interest-sensitive assets and issues interest-sensitive liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. Credit spread risk is the risk that the Company will incur a loss due to adverse changes in credit spreads. This risk arises from many of the Company's primary activities, as the Company invests substantial funds in spread-sensitive fixed income assets. Equity price risk is the risk that the Company will incur losses due to adverse changes in the general levels of the equity markets. The Company monitors economic and regulatory developments that have the potential to impact its business. The ability of banks to affiliate with insurers may have a material adverse effect on all of the Company's product lines by substantially increasing the number, size and financial strength of potential competitors. The Company currently benefits from agreements with financial services entities that market and distribute its products; change in control of these non-affiliated entities could negatively impact the Company's sales. Furthermore, federal and state laws and regulations affect the taxation of insurance companies and life insurance and annuity products. Congress and various state legislatures have considered proposals that, if enacted, could impose a greater tax burden on the Company or could have an adverse impact on the tax treatment of some insurance products offered by the Company, including favorable policyholder tax treatment currently applicable to life insurance and annuities. Legislation that reduced the federal income tax rates applicable to certain dividends and capital gains realized by individuals, or other proposals, if adopted, that reduce the taxation or permit the establishment of certain products or investments that may compete with life insurance or annuities, could have an adverse effect on the Company's financial position or ability to sell such products and could result in the surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Fixed income securities include bonds, asset-backed securities ("ABS"), residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS") and redeemable preferred stocks. Fixed income securities, which may be sold prior to their contractual maturity, are designated as available for sale and are carried at fair value. The difference between amortized cost and fair value, net of deferred income taxes, certain deferred policy acquisition costs ("DAC"), certain deferred sales inducement costs ("DSI") and certain reserves for life-contingent contract benefits, is reflected as a component of accumulated other comprehensive income. Cash received from calls, principal payments and make-whole payments is reflected as a component of proceeds from sales and cash received from maturities and pay-downs is reflected as a component of investment collections within the Statements of Cash Flows. Equity securities include index-based securities. Equity securities are classified as available for sale and are carried at fair value. The difference between cost and fair value, net of deferred income taxes, is reflected as a component of accumulated other comprehensive income. Mortgage loans are carried at outstanding principal balances, 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. 9 NOTES TO FINANCIAL STATEMENTS--CONTINUED Short-term investments, including money market funds, commercial paper and other short-term investments, are carried at fair value. Policy loans are carried at the respective unpaid principle balances. Other investments consist of a note due from a related party and derivative financial instruments. Investment income consists primarily of interest and dividends, and income from certain derivative transactions. Interest is recognized on an accrual basis using the effective yield method and dividends are recorded at the ex-dividend date. Interest income for certain asset backed-securities, residential mortgage-backed securities and commercial mortgage-backed securities is determined considering estimated principal repayments obtained from third party data sources and internal estimates. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For beneficial interests in securitized financial assets not of high credit quality, the effective yield is recalculated on a prospective basis. For all other asset-backed securities, residential mortgage-backed securities and commercial mortgage-backed securities, the effective yield is recalculated on a retrospective basis. For other-than-temporarily impaired fixed income securities, the effective yield method utilizes the difference between the amortized cost basis at impairment and the cash flows expected to be collected. Accrual of income is suspended for other-than-temporarily impaired fixed income securities when the timing and amount of cash flows expected to be received is not reasonably estimable. Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. Realized capital gains and losses include gains and losses on investment sales, write-downs in value due to other-than-temporary declines in fair value and periodic changes in the fair value and settlements of certain derivatives including hedge ineffectiveness. Realized capital gains and losses on investment sales include calls and prepayments and are determined on a specific identification basis. The Company recognizes other-than-temporary impairment losses on fixed income securities when the decline in fair value is deemed other than temporary including when the Company has made the decision to sell or it is more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis. Additionally, if the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss deemed to be related to other factors and recognized in other comprehensive income ("OCI"). Fixed income securities subject to other-than-temporary impairment write-downs continue to earn investment income when future expected payments are reasonably estimable, and any discount or premium is recognized using the effective yield method over the expected life of the security; otherwise income recognition is discontinued. The Company recognizes other-than-temporary impairment losses on equity securities when the decline in fair value is deemed other than temporary including when the Company does not have a positive intent and ability to hold an impaired security until recovery. DERIVATIVE AND EMBEDDED DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments include interest rate swaps and caps, foreign currency swaps, and a re-investment related risk transfer reinsurance agreement with ALIC that meet the accounting definition of a derivative (see Note 4). Derivatives that are required to be separated from the host instrument and accounted for as derivative financial instruments ("subject to bifurcation") are embedded in reinsured variable annuity contracts (see Note 7). All derivatives are accounted for on a fair value basis and reported as other investments, other assets, other liabilities and accrued expenses or contractholder funds. Embedded derivative instruments subject to bifurcation are also accounted for on a fair value basis and are reported together with the host contract. The change in fair value of derivatives embedded in annuity product contracts and subject to bifurcation is reported in contract benefits. Cash flows from embedded derivatives requiring bifurcation and derivatives receiving hedge accounting 10 NOTES TO FINANCIAL STATEMENTS--CONTINUED are reported consistently with the host contracts and hedged risks respectively within the Statements of Cash Flows. Cash flows from other derivatives are reported in cash flows from investing activities within the Statements of Cash Flows. When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The hedged item may be either all or a specific portion of a recognized asset, liability or an unrecognized firm commitment attributable to a particular risk for the fair value hedges. At the inception of the hedge, the Company formally documents the hedging relationship and risk management objective and strategy. The documentation identifies the hedging instrument, the hedged item, the nature of the risk being hedged and the methodology used to assess the effectiveness of the hedging instrument in offsetting the exposure to changes in the hedged item's fair value attributable to the hedged risk. In the case of a cash flow hedge, this documentation includes the exposure to changes in the variability in cash flows attributable to the hedged risk. The Company does not exclude any component of the change in fair value of the hedging instrument from the effectiveness assessment. At each reporting date, the Company confirms that the hedging instrument continues to be highly effective in offsetting the hedged risk. Ineffectiveness in fair value hedges and cash flow hedges, if any, is reported in realized capital gains and losses. Cash flow hedges For hedging instruments used in cash flow hedges, the changes in fair value of the derivatives representing the effective portion of the hedge are reported in accumulated other comprehensive income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged or forecasted transaction affects net income. Accrued periodic settlements on derivatives used in cash flow hedges are reported in net investment income. The amount reported in accumulated other comprehensive income for a hedged transaction is limited to the lesser of the cumulative gain or loss on the derivative less the amount reclassified to net income, or the cumulative gain or loss on the derivative needed to offset the cumulative change in the expected future cash flows on the hedged transaction from inception of the hedge less the derivative gain or loss previously reclassified from accumulated other comprehensive income to net income. If the Company expects at any time that the loss reported in accumulated other comprehensive income would lead to a net loss on the combination of the hedging instrument and the hedged transaction which may not be recoverable, a loss is recognized immediately in realized capital gains and losses. If an impairment loss is recognized on an asset or an additional obligation is incurred on a liability involved in a hedge transaction, any offsetting gain in accumulated other comprehensive income is reclassified and reported together with the impairment loss or recognition of the obligation. Termination of hedge accounting If, subsequent to entering into a hedge transaction, the derivative becomes ineffective (including if the hedged item is sold or otherwise extinguished, the occurrence of a hedged forecasted transaction is no longer probable or the hedged asset becomes other-than-temporarily impaired), the Company may terminate the derivative position. The Company may also terminate derivative instruments or redesignate them as non-hedge as a result of other events or circumstances. When a derivative instrument used in a cash flow hedge of an existing asset or liability is no longer effective or is terminated, the gain or loss recognized on the derivative is reclassified from accumulated other comprehensive income to net income as the hedged risk impacts net income. If the derivative instrument is not terminated when a cash flow hedge is no longer effective, the future gains and losses recognized on the derivative are reported in realized capital gains and losses. When a derivative instrument used in a cash flow hedge of a forecasted transaction is terminated because the forecasted transaction is no longer probable, the gain or loss recognized on the derivative is immediately reclassified from accumulated other comprehensive income to realized capital gains and losses in the period that hedge accounting is no longer applied. Non-hedge derivative financial instruments Based upon the type of derivative instrument and strategy, the income statement effects, including fair value gains and losses and accrued periodic settlements, of derivatives for which hedge accounting is not applied are reported in a single line item with the results of the associated risk. 11 NOTES TO FINANCIAL STATEMENTS--CONTINUED SECURITIES LOANED The Company's business activities include securities lending transactions, which are used primarily to generate net investment income. The proceeds received are reinvested in short-term investments or fixed income securities. These transactions are short-term in nature, usually 30 days or less. The Company receives cash collateral for securities loaned in an amount generally equal to 102% of the fair value of securities and records the related obligations to return the collateral in other liabilities and accrued expenses. The carrying value of these obligations approximates fair value because of their relatively short-term nature. The Company monitors the market value of securities loaned on a daily basis and obtains additional collateral as necessary under the terms of the agreements to mitigate counterparty credit risk. The Company maintains the right and ability to redeem the securities loaned on short notice. Substantially all of the Company's securities loaned are placed with large banks. RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES, AND RELATED BENEFITS AND INTEREST CREDITED Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Premiums from these products are recognized as revenue when due from policyholders. Benefits are reflected in contract benefits and recognized in relation to premiums, so that profits are recognized over the life of the policy. Immediate annuities with life contingencies, including certain structured settlement annuities, provide insurance protection over a period that extends beyond the period during which premiums are collected. Premiums from these products are recognized as revenue when received at the inception of the contract. Benefits and expenses are recognized in relation to premiums. Profits from these policies come from investment income, which is recognized over the life of the contract. Interest sensitive life contracts, such as universal life and single premium life, are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and contract charges assessed against the contractholder account balance. Premiums from these contracts are reported as contractholder fund deposits. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and early surrender. These contract charges are recognized as revenues when assessed against the contractholder account balance. Contract benefits include life-contingent benefit payments in excess of the contractholder account balance. Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, including market value adjusted annuities and immediate annuities without life contingencies, are considered investment contracts. Consideration received for such contracts is reported as contractholder fund deposits. Contract charges for investment contracts consist of fees assessed against the contractholder account balance for maintenance, administration and surrender of the contract prior to contractually specified dates, and are recognized when assessed against the contractholder account balance. Interest credited to contractholder funds represents interest accrued or paid on interest-sensitive life contracts and investment contracts. Crediting rates for certain fixed annuities and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions subject to contractually guaranteed minimum rates. Interest credited also includes amortization of DSI expenses. DSI is amortized into interest credited using the same method used to amortize DAC. Contract charges for variable life and variable annuity products consist of fees assessed against the contractholder account values for contract maintenance, administration, mortality, expense and early surrender. Contract benefits incurred for variable annuity products include guaranteed minimum death, income, withdrawal 12 NOTES TO FINANCIAL STATEMENTS--CONTINUED and accumulation benefits. All of the Company's variable annuity business is ceded through reinsurance agreements, and the contract charges and contract benefits related thereto are reported net of reinsurance ceded. DEFERRED POLICY ACQUISITION AND SALES INDUCEMENT COSTS Costs that vary with and are primarily related to acquiring life insurance and investment contracts are deferred and recorded as DAC. These costs are principally agents' and brokers' remuneration and certain underwriting expenses. DSI costs, which are deferred and recorded as other assets, relate to sales inducements offered on sales to new customers, principally on annuities and primarily in the form of additional credits to the customer's account value or enhancements to interest credited for a specified period which are in excess of the rates currently being credited to similar contracts without sales inducements. All other acquisition costs are expensed as incurred and included in operating costs and expenses on the Statements of Operations and Comprehensive Income. Amortization of DAC is included in amortization of deferred policy acquisition costs on the Statements of Operations and Comprehensive Income and is described in more detail below. DSI is amortized to income using the same methodology and assumptions as DAC and is included in interest credited to contractholder funds on the Statements of Operations and Comprehensive Income. DAC and DSI are periodically reviewed for recoverability and adjusted if necessary. For traditional life insurance, DAC is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Assumptions used in amortization of DAC and reserve calculations are established at the time the policy is issued and are generally not revised during the life of the policy. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximates the estimated lives of the policies. For interest-sensitive life, fixed annuities and other investment contracts, DAC and DSI are amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits ("AGP") and estimated future gross profits ("EGP") expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance and uses rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of customer surrender rates, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 20 years for interest-sensitive life and 5-10 years for fixed annuities. The cumulative DAC and DSI amortization is reestimated and adjusted by a cumulative charge or credit to results of operations when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP. When DAC or DSI amortization or a component of gross profits for a quarterly period is potentially negative (which would result in an increase of the DAC or DSI balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the financial statements. Negative amortization is only recorded when the increased DAC or DSI balance is determined to be recoverable based on facts and circumstances. Recapitalization of DAC and DSI is limited to the originally deferred costs plus interest. AGP and EGP consist primarily of the following components: contract charges for the cost of insurance less mortality costs and other benefits; investment income and realized capital gains and losses less interest credited; and surrender and other contract charges less maintenance expenses. The principal assumptions for determining the amount of EGP are investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of persistency, mortality, expenses, and hedges if applicable. For products exposed to investment credit losses in excess of the Company's expectations that may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC and DSI amortization may be modified to exclude the higher credit losses. 13 NOTES TO FINANCIAL STATEMENTS--CONTINUED The Company performs quarterly reviews of DAC and DSI recoverability for interest-sensitive life, fixed annuities and other investment contracts in the aggregate using current assumptions. If a change in the amount of EGP is significant, it could result in the unamortized DAC and DSI not being recoverable, resulting in a charge which is included as a component of amortization of deferred policy acquisition costs or interest credited to contractholder funds, respectively, on the Statements of Operations and Comprehensive Income. The DAC and DSI balances presented include adjustments to reflect the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized capital gains or losses in the respective product portfolios were actually realized. The adjustments are recorded net of tax in accumulated other comprehensive income. DAC, DSI and deferred income taxes detemined on unrealized capital gains and losses and reported in accumulated other comprehensive income recognize the impact on shareholder's equity consistently with the amounts that would be recognized in the income statement on realized capital gains and losses. Customers of the Company may exchange one insurance policy or investment contract for another offered by the Company, or make modifications to an existing life or investment contract issued by the Company. These transactions are identified as internal replacements for accounting purposes. Internal replacement transactions that are determined to result in replacement contracts that are substantially unchanged from the replaced contracts are accounted for as continuations of the replaced contracts. Unamortized DAC and DSI related to the replaced contract continue to be deferred and amortized in connection with the replacement contract. For interest-sensitive life insurance and investment contracts, the EGP of the replacement contract is treated as a revision to the EGP of the replaced contract in the determination of amortization of DAC and DSI. For traditional life insurance policies, any changes to unamortized DAC and benefit reserves that result from the replacement contract are treated as prospective revisions. Any costs associated with the issuance of the replacement contract are characterized as maintenance costs and expensed as incurred. Internal replacement transactions that are determined to result in a substantial change to the replaced contracts are accounted for as an extinguishment of the replaced contracts, and any unamortized DAC and DSI related to the replaced contracts are eliminated with a corresponding charge to the Statements of Operations and Comprehensive Income. REINSURANCE In the normal course of business, the Company seeks to limit aggregate and single exposure to losses on large risks by purchasing reinsurance (see Note 9). The Company has also used reinsurance to effect the disposition of certain blocks of business. The amounts reported in the Statements of Financial Position as reinsurance recoverables include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities and contractholder funds that have not yet been paid. Reinsurance recoverables on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverables. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company's primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers and establishes allowances for uncollectible reinsurance recoverables as appropriate. The Company has a reinsurance treaty with ALIC through which it primarily cedes re-investment related risk on its structured settlement annuities. The terms of the treaty meet the accounting definition of a derivative. Accordingly, the treaty is recorded in the Statement of Financial Position at fair value. Changes in the fair value of the treaty and premiums paid to ALIC are recognized in realized capital gains and losses (see Note 4). 14 NOTES TO FINANCIAL STATEMENTS--CONTINUED 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 unrealized capital gains and losses on certain investments, DAC, differences in tax bases of invested assets and insurance reserves. A deferred tax asset valuation allowance is established when there is uncertainty that such assets will be realized. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS The reserve for life-contingent contract benefits payable under insurance policies, including traditional life insurance, life-contingent immediate annuities and voluntary health products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses (see Note 8). These assumptions, which for traditional life insurance are applied using the net level premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration. 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 for certain immediate annuities with life contingencies is recorded net of tax as a reduction of unrealized net capital gains included in accumulated other comprehensive income. CONTRACTHOLDER FUNDS Contractholder funds represent interest-bearing liabilities arising from the sale of products, such as interest-sensitive life and fixed annuities. Contractholder funds are comprised primarily of deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses (see Note 8). Contractholder funds also include reserves for certain guarantees on reinsured variable annuity contracts. SEPARATE ACCOUNTS Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and available only to settle separate account contract obligations. Separate accounts liabilities represent the contractholders' claims to the related assets and are carried at an amount equal to the separate accounts assets. 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 and Comprehensive Income. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in cash flows. Absent any contract provision wherein the Company provides a guarantee, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts' funds may not meet their stated investment objectives. All of the Company's variable annuity business was reinsured to Prudential beginning in 2006. ADOPTED ACCOUNTING STANDARDS Recognition and Presentation of Other-Than-Temporary Impairments In April 2009, the FASB issued new accounting guidance for the recognition of other-than-temporary impairments ("OTTI") of debt securities. If the fair value of a debt security is less than its amortized cost basis at the reporting date, an entity shall assess whether the impairment is an OTTI. When an entity intends to sell an impaired security or more likely than not will be required to sell an impaired security before recovery of its 15 NOTES TO FINANCIAL STATEMENTS--CONTINUED amortized cost basis, an OTTI is recognized in earnings. If the entity does not expect to recover the entire amortized cost basis of an impaired debt security, even if it does not intend to sell the security and it is not more likely than not that it would be required to sell the security before recovery of its amortized cost basis, the entity must consider, based upon an estimate of the present value of cash flows expected to be collected on the debt security as compared to its amortized cost basis, whether a credit loss exists. The portion of the total OTTI related to a credit loss shall be recognized in earnings while the portion of the total OTTI related to factors other than credit shall be recognized in OCI. The statement of operations is required to present the total OTTI with an offset for the amount of the total OTTI that is recognized in OCI. The statement disclosing accumulated other comprehensive income ("AOCI") is required to separately present amounts recognized for debt securities for which a portion of an OTTI has been recognized in earnings. The new guidance expands disclosure requirements for both debt and equity securities and requires a more detailed, risk-oriented breakdown of security types and related information. In addition, new disclosures are required about significant inputs used in determining credit losses as well as a rollforward of credit losses. The disclosures are not required for earlier periods presented for comparative purposes. The new guidance applies to existing and new investments held as of the beginning of the period of adoption. The Company adopted the provisions of the new guidance as of April 1, 2009. The adoption resulted in the reclassification of $44.9 million of previously recorded OTTI write-downs from retained income to unrealized capital losses. The cumulative effect of adoption, net of related DAC, DSI and tax adjustments, was an increase in retained income of $20.4 million and a decrease in unrealized net capital gains and losses of $20.4 million. The adoption did not have an impact on the Company's Statement of Operations and Comprehensive Income. The effect of the adoption on net income for the 2009 period after adoption is not determinable. The accounting standard incorporates management's intent as a critical component to the determination of the amount recorded and this assessment process was changed as of April 1, 2009 to an intent to sell model from an intent to hold model. Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly In April 2009, the FASB issued new accounting guidance relating to fair value measurements to provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. Guidance on identifying circumstances that indicate a transaction is not orderly is also provided. If it is concluded that there has been a significant decrease in the volume and level of market activity for an asset or liability in relation to normal market activity, transaction or quoted prices may not be determinative of fair value and further analysis of transaction or quoted prices may be necessary. Determination of whether a transaction is orderly is based on the weight of relevant evidence. The disclosure requirements are expanded to include the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs during the reporting period. Disclosures of assets and liabilities measured at fair value are to be presented by major security type. Disclosures are not required for earlier periods presented for comparative purposes. Revisions resulting from a change in valuation technique or its application shall be accounted for as a change in accounting estimate and disclosed, along with the total effect of the change in valuation technique and related inputs, if practicable, by major category. The Company adopted the provisions of the new guidance as of April 1, 2009. The adoption had no effect on the Company's results of operations or financial position. Disclosures about Derivative Instruments and Hedging Activities In March 2008, the FASB issued new accounting guidance, which amends and expands the disclosure requirements for derivatives. The new disclosures are designed to enhance the understanding of how and why an entity uses derivative instruments and how derivative instruments affect an entity's financial position, results of 16 NOTES TO FINANCIAL STATEMENTS--CONTINUED operations, and cash flows. The standard requires quantitative disclosures about the potential cash outflows associated with the triggering of credit-risk-contingent features, if any; tabular disclosures about the classification and fair value amounts of derivative instruments reported in the statement of financial position; disclosure of the location and amount of gains and losses on derivative instruments reported in the statement of operations; and qualitative information about how and why an entity uses derivative instruments and how derivative instruments and related hedged items affect the entity's financial statements. Disclosures are not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only and therefore the adoption as of March 31, 2009 had no impact on the Company's results of operations or financial position. PENDING ACCOUNTING STANDARD Disclosures about Fair Value Measurements In January 2010, the FASB issued new accounting guidance which expands disclosure requirements relating to fair value measurements. The guidance adds requirements for disclosing amounts of and reasons for significant transfers into and out of Levels 1 and 2 and requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The guidance also provides clarification that fair value measurement disclosures are required for each class of assets and liabilities. Disclosures about the valuation techniques and inputs used to measure fair value for measurements that fall in either Level 2 or Level 3 are also required. The new disclosures and clarifications of existing disclosures are effective for periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which are required for fiscal years beginning after December 15, 2010. Disclosures are not required for earlier periods presented for comparative purposes. The new guidance affects disclosures only and therefore its adoption will have no impact on the Company's results of operations or financial position. 3. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash investment exchanges, including modifications of certain fixed income securities, totaled $53.6 million and $162 thousand for the years ended December 31, 2009 and 2007, respectively. There were no non-cash investment exchanges or modifications in 2008. Liabilities for collateral received in conjunction with the Company's securities lending business activities were $149.4 million, $117.3 million and $198.1 million at December 31, 2009, 2008 and 2007, respectively, and are reported in other liabilities and accrued expenses in the Statements of Financial Position. The accompanying cash flows are included in cash flows from operating activities in the Statements of Cash Flows along with the activities resulting from management of the proceeds, which for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) --------- --------- --------- NET CHANGE IN PROCEEDS MANAGED Net change in fixed income securities......... $ -- $ 36,778 $ (73,464) Net change in short-term investments.......... (32,065) 44,063 74,812 --------- --------- --------- Operating cash flow (used) provided........ $ (32,065) $ 80,841 $ 1,348 ========= ========= ========= NET CHANGE IN LIABILITIES Liabilities for collateral, beginning of year. $(117,297) $(198,138) $(199,486) Liabilities for collateral, end of year....... (149,362) (117,297) (198,138) --------- --------- --------- Operating cash flow provided (used)........ $ 32,065 $ (80,841) $ (1,348) ========= ========= =========
17 NOTES TO FINANCIAL STATEMENTS--CONTINUED In 2009, the Company sold mortgage loans with a carrying value of $8.3 million to an affiliate in exchange for a note receivable with a principal sum equal to the mortgage loans (see Note 4). In addition, in 2009, a payable associated with postretirement benefit obligations due to AIC totaling $606 thousand was forgiven. The forgiveness of the payable reflects a non-cash financing activity. 4. RELATED PARTY TRANSACTIONS BUSINESS OPERATIONS The Company uses services performed by its affiliates, AIC, ALIC and Allstate Investments LLC, and business facilities owned or leased and operated by AIC in conducting its business activities. In addition, the Company shares the services of employees with AIC. The Company reimburses its affiliates for the operating expenses incurred on behalf of the Company. The Company is charged for the cost of these operating expenses based on the level of services provided. Operating expenses, including compensation, retirement and other benefit programs, allocated to the Company (see Note 14) were $50.4 million, $54.3 million and $54.5 million in 2009, 2008 and 2007, respectively. A portion of these expenses relate to the acquisition of business, which are deferred and amortized into income as described in Note 2. STRUCTURED SETTLEMENT ANNUITIES The Company issued $9.1 million, $12.9 million and $12.7 million of structured settlement annuities, a type of immediate annuity, in 2009, 2008 and 2007, respectively, at prices determined using interest rates in effect at the time of purchase, to fund structured settlements in matters involving AIC. Of these amounts, $806 thousand, $866 thousand and $1.5 million relate to structured settlement annuities with life contingencies and are included in premium income for 2009, 2008 and 2007, respectively. In most cases, these annuities were issued under a "qualified assignment" whereby prior to July 1, 2001 Allstate Settlement Corporation ("ASC"), and on and subsequent to July 1, 2001 Allstate Assignment Corporation ("AAC"), both wholly owned subsidiaries of ALIC, purchased annuities from the Company and assumed AIC's obligation to make future payments. Reserves recorded by the Company for annuities issued to ASC and AAC, including annuities to fund structured settlements in matters involving AIC, were $1.99 billion and $1.97 billion at December 31, 2009 and 2008, respectively. BROKER-DEALER AGREEMENTS The Company has a service agreement with Allstate Distributors, LLC. ("ADLLC"), a broker-dealer company owned by ALIC, whereby ADLLC promotes and markets the fixed annuities sold by the Company to unaffiliated financial services firms. In return for these services, the Company recorded commission expense of $2.5 million, $4.1 million and $4.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. The Company receives distribution services from Allstate Financial Services, LLC ("AFS"), an affiliated broker-dealer company, for certain variable life insurance contracts sold by Allstate exclusive agencies. For these services, the Company incurred $358 thousand, $838 thousand and $971 thousand of commission and other distribution expenses for the years ending December 31, 2009, 2008 and 2007, respectively. REINSURANCE TRANSACTIONS The Company has reinsurance agreements with unaffiliated reinsurers and ALIC in order to limit aggregate and single exposure on large risks. A portion of the Company's premiums and policy benefits are ceded to ALIC 18 NOTES TO FINANCIAL STATEMENTS--CONTINUED and reflected net of such reinsurance in the Statements of Operations and Comprehensive Income. Reinsurance recoverables and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the Statements of Financial Position. The Company continues to have primary liability as the direct insurer for risks reinsured (see Note 9). In 2008, additional expenses were recorded relating to a rescission of reinsurance coverage due to the nonpayment of premium for certain traditional and interest-sensitive life insurance policies reinsured to ALIC in accordance with an agreement between the Company and ALIC (the "rescission"). The rescission resulted in a reduction to 2008 net income of $4.1 million, which included contract benefits of $7.1 million, accretion of DAC of $876 thousand and an income tax benefit of $2.2 million. The Company paid $8.7 million to ALIC in order to return amounts previously received from ALIC for ceded contract benefits on policies subject to the rescission of coverage. The Company has a reinsurance treaty through which it primarily cedes re-investment related risk on its structured settlement annuities to ALIC. Under the terms of the treaty, the Company pays a premium to ALIC that varies with the aggregate structured settlement annuity statutory reserve balance. In return, ALIC guarantees that the yield on the portion of the Company's investment portfolio that supports structured settlement annuity liabilities will not fall below contractually determined rates. The Company ceded premium related to structured settlement annuities to ALIC of $3.4 million, $3.3 million and $3.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. At December 31, 2009 and 2008, the carrying value of the structured settlement reinsurance treaty was $(5.1) million and $(1.8) million, respectively, which is recorded in other assets. The premiums ceded and changes in the fair value of the reinsurance treaty are reflected as a component of realized capital gains and losses on the Statements of Operations and Comprehensive Income as the treaty is recorded as a derivative instrument. INTERCOMPANY LOAN AGREEMENT The Company has an intercompany loan agreement with the Corporation. The amount of intercompany loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. The Corporation may use commercial paper borrowings, bank lines of credit and repurchase agreements to fund intercompany borrowings. The Company had no amounts outstanding under the intercompany loan agreement at December 31, 2009 and 2008. NOTE RECEIVABLE-INVESTMENT SALE In September 2009, in accordance with an asset purchase agreement between the Company and Road Bay Investments, LLC ("RBI"), a subsidiary of ALIC, the Company sold to RBI mortgage loans with a carrying value of $8.3 million on the date of sale. As payment, RBI issued a 7.00% note due September 25, 2016 to the Company for the same amount. As security for the performance of RBI's obligations under the agreement and note, RBI granted a pledge of and security interest in RBI's right, title and interest in the mortgage loans and their proceeds. The note due from RBI is classified as other investments in the Statements of Financial Position. In 2009, the Company recorded net investment income of $154 thousand on the note due from RBI. INVESTMENT PURCHASE In September 2008, the Company purchased investments from its parent ALIC. The Company paid $199.1 million in cash for the investments, which included fixed income securities with a fair value on the date of sale of $197.5 million and $1.6 million of accrued investment income. Since the transaction was between affiliates under common control, the fixed income securities were recorded at the amortized cost basis on the date of sale of 19 NOTES TO FINANCIAL STATEMENTS--CONTINUED $200.8 million. The difference between the fair value and the amortized cost basis of these investments on the date of sale, was recorded as an increase to retained income of $2.1 million after-tax ($3.3 million pre-tax). INCOME TAXES The Company is a party to a federal income tax allocation agreement with the Corporation (see Note 12). POSTRETIREMENT BENEFIT PLANS Effective September 30, 2009, the Corporation became the sponsor of a group medical plan and a group life insurance plan to provide covered benefits to certain retired employees ("postretirement benefits"). Prior to September 30, 2009, AIC was the sponsor of these plans. In connection with the change in the sponsorship, amounts payable by the Company to the previous plan sponsor, AIC, totaling $606 thousand were forgiven. The forgiveness of this liability was recorded as an increase in additional capital paid-in of $529 thousand and an increase to retained income of $77 thousand. 5. INVESTMENTS FAIR VALUES The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
GROSS UNREALIZED ($ IN THOUSANDS) AMORTIZED ------------------ FAIR COST GAINS LOSSES VALUE - ---------- -------- --------- ---------- AT DECEMBER 31, 2009 U.S. government and agencies..... $ 534,590 $ 51,977 $ (365) $ 586,202 Municipal........................ 929,688 12,502 (63,780) 878,410 Corporate........................ 3,173,030 158,579 (60,407) 3,271,202 Foreign government............... 241,141 50,715 (1,000) 290,856 RMBS............................. 666,118 11,539 (25,985) 651,672 CMBS............................. 472,835 1,884 (127,978) 346,741 ABS.............................. 46,588 5 (6,549) 40,044 Redeemable preferred stock....... 9,245 -- (607) 8,638 ---------- -------- --------- ---------- Total fixed income securities. $6,073,235 $287,201 $(286,671) $6,073,765 ========== ======== ========= ========== AT DECEMBER 31, 2008 U.S. government and agencies..... $ 676,655 $241,196 $ (120) $ 917,731 Municipal........................ 462,664 4,442 (81,725) 385,381 Corporate........................ 3,158,588 55,307 (326,758) 2,887,137 Foreign government............... 262,307 109,235 -- 371,542 RMBS............................. 456,452 9,953 (26,360) 440,045 CMBS............................. 721,707 -- (252,839) 468,868 ABS.............................. 28,788 -- (8,586) 20,202 Redeemable preferred stock....... 9,290 -- (3,831) 5,459 ---------- -------- --------- ---------- Total fixed income securities. $5,776,451 $420,133 $(700,219) $5,496,365 ========== ======== ========= ==========
20 NOTES TO FINANCIAL STATEMENTS--CONTINUED SCHEDULED MATURITIES The scheduled maturities for fixed income securities are as follows at December 31, 2009:
AMORTIZED FAIR COST VALUE ($ IN THOUSANDS) ---------- ---------- Due in one year or less................ $ 144,768 $ 146,996 Due after one year through five years.. 1,602,668 1,662,456 Due after five years through ten years. 1,255,890 1,357,590 Due after ten years.................... 2,357,203 2,215,007 ---------- ---------- 5,360,529 5,382,049 RMBS and ABS........................... 712,706 691,716 ---------- ---------- Total............................... $6,073,235 $6,073,765 ========== ==========
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity. The CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk. NET INVESTMENT INCOME Net investment income for the years ended December 31 is as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- -------- -------- Fixed income securities.............. $338,563 $362,671 $358,547 Mortgage loans....................... 36,658 41,949 40,916 Equity securities.................... 1,751 -- -- Short-term and other................. 5,038 12,949 14,487 -------- -------- -------- Investment income, before expense. 382,010 417,569 413,950 Investment expense................ (9,615) (14,638) (27,212) -------- -------- -------- Net investment income......... $372,395 $402,931 $386,738 ======== ======== ========
REALIZED CAPITAL GAINS AND LOSSES Realized capital gains and losses by security type for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- -------- ------- Fixed income securities.............. $114,122 $(55,775) $ 3,614 Mortgage loans....................... (5,327) (2,049) (86) Equity securities.................... 110 -- -- Derivatives.......................... 36,526 (19,381) (4,359) Other................................ 37 -- -- -------- -------- ------- Realized capital gains and losses. $145,468 $(77,205) $ (831) ======== ======== =======
21 NOTES TO FINANCIAL STATEMENTS--CONTINUED Realized capital gains and losses by transaction type for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- --------- ------- Impairment write-downs/(1)/............ $(30,255) $ (38,528) $ -- Change in intent write-downs/(2)/...... (20,821) (79,262) (6,793) -------- --------- ------- Net OTTI losses recognized in earnings. (51,076) (117,790) (6,793) Sales.................................. 160,294 59,966 10,321 Valuation of derivative instruments.... 29,831 (29,525) (8,166) Settlement of derivative instruments... 6,419 10,144 3,807 -------- --------- ------- Realized capital gains and losses... $145,468 $ (77,205) $ (831) ======== ========= =======
- -------- (1)Beginning April 1, 2009 for fixed income securities, impairment write-downs reflect the credit loss component of issue specific other-than-temporary declines in fair value where the amortized cost basis is not expected to be entirely recovered. For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, impairment write-downs reflect issue specific other-than-temporary declines in fair value, including instances where the Company could not reasonably assert that the recovery period would be temporary. (2)Beginning April 1, 2009 for fixed income securities, change in intent write-downs reflect instances where the Company has made a decision to sell the security or it is more likely than not the Company will be required to sell the security before recovery of its amortized cost basis. For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, change in intent write-downs reflect instances where the Company could not assert a positive intent to hold until recovery. Gross gains of $180.8 million, $62.4 million and $2.9 million and gross losses of $23.1 million, $8.8 million and $6.3 million were realized on sales of fixed income securities during 2009, 2008 and 2007, respectively. Other-than-temporary impairment losses by asset type for the year ended December 31 are as follows:
2009 ($ IN THOUSANDS) --------------------------- INCLUDED TOTAL IN OCI NET - -------- -------- -------- Fixed income securities: Municipal............................. $ (2,298) $ -- $ (2,298) Corporate............................. (17,993) (938) (18,931) RMBS.................................. (6,494) 3,895 (2,599) CMBS.................................. (19,458) (1,826) (21,284) -------- ------- -------- Total fixed income securities..... (46,243) 1,131 (45,112) Mortgage loans........................... (5,950) -- (5,950) Equity securities........................ (14) -- (14) -------- ------- -------- Other-than-temporary impairment losses... $(52,207) $ 1,131 $(51,076) ======== ======= ========
22 NOTES TO FINANCIAL STATEMENTS--CONTINUED The total amount of other-than-temporary impairment losses included in accumulated other comprehensive income for fixed income securities at December 31, 2009, which were not included in earnings, are presented in the following table. The amount excludes $8.7 million of net unrealized gains related to changes in valuation of the fixed income securities subsequent to the impairment measurement date.
($ IN THOUSANDS) Corporate..... $ (1,197) RMBS.......... (11,296) -------- Total....... $(12,493) ========
A rollforward of the amount recognized in earnings related to credit losses for fixed income securities is presented in the following table.
($ IN THOUSANDS) Beginning balance of cumulative credit loss for securities held at April 1, 2009........ $(33,493) Additional credit loss for securities previously other-than-temporarily impaired........ (3,328) Additional credit loss for securities not previously other-than-temporarily impaired.... (17,665) Reduction in credit loss for securities disposed or collected........................... 28,993 Reduction in credit loss for securities other-than-temporarily impaired to fair value... -- Change in credit loss due to accretion of increase in cash flows and time value of cash flows for securities previously other-than-temporarily impaired....................... -- -------- Ending balance at December 31, 2009..................................................... $(25,493) ========
The Company uses its best estimate of future cash flows expected to be collected from the fixed income security discounted at the security's original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition of the issue or issuer(s), expected defaults, expected recoveries, the value of underlying collateral and current subordination levels, vintage, geographic concentration, available reserves or escrows, third party guarantees and other credit enhancements. Additionally, other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral may be used to estimate recovery value if the Company determines that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The unrealized loss deemed to be related to factors other than credit remains classified in OCI. If the Company determines that the fixed income security does not have sufficient cash flow or other information to determine a recovery value for the security, the Company may conclude that the entire decline in fair value is deemed to be credit related and is recorded in earnings. 23 NOTES TO FINANCIAL STATEMENTS--CONTINUED UNREALIZED NET CAPITAL GAINS AND LOSSES Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
GROSS UNREALIZED FAIR ------------------ UNREALIZED NET VALUE GAINS LOSSES GAINS (LOSSES) ($ IN THOUSANDS) ---------- -------- --------- -------------- AT DECEMBER 31, 2009 Fixed income securities/(1)/.......................... $6,073,765 $287,201 $(286,671) $ 530 Equity securities..................................... 123,311 23,143 -- 23,143 Short-term investments................................ 348,453 1 (4) (3) Derivative instruments................................ -- 309 -- 309 -------- Unrealized net capital gains and losses, pre-tax... 23,979 Amounts recognized for: Insurance reserves/(2)/............................ (40,551) DAC and DSI/(3)/................................... 53,572 -------- Amounts recognized................................. 13,021 Deferred income taxes.............................. (12,950) -------- Unrealized net capital gains and losses, after-tax. $ 24,050 ========
- -------- (1)Unrealized net capital gains and losses for fixed income securities as of December 31, 2009 comprises $(3.8) million related to unrealized net capital losses on fixed income securities with OTTI and $4.3 million related to other unrealized net capital gains and losses. (2)The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although the Company evaluates premium deficiencies on the combined performance of life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to certain payout annuities with life contingencies. (3)The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized.
GROSS UNREALIZED FAIR ------------------ UNREALIZED NET VALUE GAINS LOSSES GAINS (LOSSES) AT DECEMBER 31, 2008 ---------- -------- --------- -------------- Fixed income securities............................... $5,496,365 $420,133 $(700,219) $(280,086) Short-term investments................................ 409,802 77 (12) 65 Derivative instruments................................ 1,749 1,749 -- 1,749 --------- Unrealized net capital gains and losses, pre-tax... (278,272) Amounts recognized for: Insurance reserves................................. (155,935) DAC and DSI........................................ 266,647 --------- Amounts recognized................................. 110,712 Deferred income taxes.............................. 58,646 --------- Unrealized net capital gains and losses, after-tax. $(108,914) =========
24 NOTES TO FINANCIAL STATEMENTS--CONTINUED CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES The change in unrealized net capital gains and losses for the years ended December 31 is as follows:
2009 2008 2007 ($ IN THOUSANDS) --------- --------- -------- Fixed income securities..................................... $ 280,616 $(622,315) $ (2,683) Equity securities........................................... 23,143 -- -- Short-term investments...................................... (68) 65 -- Derivative instruments...................................... (1,440) 2,515 126 --------- --------- -------- Total.................................................... 302,251 (619,735) (2,557) Amounts recognized for: Insurance reserves....................................... 115,384 105,911 (26,190) DAC and DSI.............................................. (213,075) 245,975 8,978 --------- --------- -------- (Decrease) increase in amounts recognized............ (97,691) 351,886 (17,212) Deferred income taxes.................................... (71,596) 93,747 6,919 --------- --------- -------- Increase (decrease) in unrealized net capital gains and losses................................................. $ 132,964 $(174,102) $(12,850) ========= ========= ========
PORTFOLIO MONITORING The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made a decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security's decline in fair value is deemed other than temporary and is recorded in earnings. If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates if it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security by comparing the estimated recovery value calculated by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, with the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss deemed to be related to other factors and recognized in OCI. For equity securities, the Company considers various factors, including whether the Company has the intent and ability to hold the equity security for a period of time sufficient to recover its cost basis. Where the Company lacks the intent and ability to hold to recovery, or believes the recovery period is extended, the equity security's decline in fair value is considered other than temporary and is recorded in earnings. For equity securities managed by a third party, the Company has contractually retained its decision making authority as it pertains to selling equity securities that are in an unrealized loss position. The Company's portfolio monitoring process includes a quarterly review of all securities through a screening process which identifies instances where the fair value compared to amortized cost for fixed income securities and cost for equity securities is below established thresholds, and also includes the monitoring of other criteria such as ratings, ratings downgrades or payment defaults. The securities identified, in addition to other 25 NOTES TO FINANCIAL STATEMENTS--CONTINUED securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company's evaluation of other-than-temporary impairment for these fixed income and equity securities are assumptions and estimates about the financial condition of the issue or issuer and its future earnings potential. Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the length of time and extent to which the fair value has been less than amortized cost for fixed income securities, or cost for equity securities; 2) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; and 3) the specific reasons that a security is in a significant unrealized loss position, including overall market conditions which could affect liquidity. The following table summarizes the gross unrealized losses and fair value of fixed income securities by the length of time that individual securities have been in a continuous unrealized loss position. There are no equity securities with gross unrealized losses as of December 31, 2009.
LESS THAN 12 MONTHS 12 MONTHS OR MORE ------------------------------ ---------------------------- TOTAL NUMBER OF FAIR UNREALIZED NUMBER OF FAIR UNREALIZED UNREALIZED ISSUES VALUE LOSSES ISSUES VALUE LOSSES LOSSES ($ IN THOUSANDS) --------- ---------- ---------- --------- -------- ---------- ---------- AT DECEMBER 31, 2009 Fixed income securities U.S. government and agencies..... 9 $ 209,201 $ (365) -- $ -- $ -- $ (365) Municipal........................ 31 258,153 (8,197) 46 244,537 (55,583) (63,780) Corporate........................ 83 401,910 (11,534) 77 343,942 (48,873) (60,407) Foreign government............... 3 36,618 (1,000) -- -- -- (1,000) RMBS............................. 24 68,199 (1,158) 41 81,536 (24,827) (25,985) CMBS............................. 3 20,648 (339) 34 239,448 (127,639) (127,978) ABS.............................. 6 20,200 (105) 3 17,776 (6,444) (6,549) Redeemable preferred stock....... -- -- -- 1 8,639 (607) (607) --- ---------- --------- --- -------- --------- --------- Total fixed income securities/(1)/.. 159 $1,014,929 $ (22,698) 202 $935,878 $(263,973) $(286,671) === ========== ========= === ======== ========= ========= Investment grade fixed income securities......................... 151 $ 995,984 $ (19,518) 150 $837,804 $(227,091) $(246,609) Below investment grade fixed income securities......................... 8 18,945 (3,180) 52 98,074 (36,882) (40,062) --- ---------- --------- --- -------- --------- --------- Total fixed income securities....... 159 $1,014,929 $ (22,698) 202 $935,878 $(263,973) $(286,671) === ========== ========= === ======== ========= ========= AT DECEMBER 31, 2008 Fixed income securities U.S. government and agencies..... 1 $ 24,844 $ (120) -- $ -- $ -- $ (120) Municipal........................ 62 273,931 (75,612) 4 17,482 (6,113) (81,725) Corporate........................ 369 1,526,621 (204,006) 103 369,897 (122,752) (326,758) RMBS............................. 13 43,388 (7,479) 37 61,209 (18,881) (26,360) CMBS............................. 69 410,165 (112,645) 19 52,917 (140,194) (252,839) ABS.............................. 1 6,185 (2,651) 3 14,015 (5,935) (8,586) Redeemable preferred stock....... 1 5,458 (3,831) -- -- -- (3,831) --- ---------- --------- --- -------- --------- --------- Total fixed income securities....... 516 $2,290,592 $(406,344) 166 $515,520 $(293,875) $(700,219) === ========== ========= === ======== ========= ========= Investment grade fixed income securities......................... 472 $2,209,606 $(386,500) 139 $476,712 $(275,226) $(661,726) Below investment grade fixed income securities......................... 44 80,986 (19,844) 27 38,808 (18,649) (38,493) --- ---------- --------- --- -------- --------- --------- Total fixed income securities....... 516 $2,290,592 $(406,344) 166 $515,520 $(293,875) $(700,219) === ========== ========= === ======== ========= =========
- -------- (1)Gross unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which the Company has recorded a credit loss in earnings total $464 thousand for the less than 12 month category and $6.1 million for the 12 months or greater category. 26 NOTES TO FINANCIAL STATEMENTS--CONTINUED As of December 31, 2009, $80.8 million of unrealized losses are related to securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. Of the $80.8 million, $76.0 million are related to unrealized losses on investment grade fixed income securities. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody's, a rating of AAA, AA, A or BBB from Standard & Poor's ("S&P"), Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available, which is consistent with the National Association of Insurance Commissioners ("NAIC") rating. Unrealized losses on investment grade securities are principally related to rising interest rates or changes in credit spreads since the securities were acquired. As of December 31, 2009, the remaining $205.9 million of unrealized losses are related to securities in unrealized loss positions greater than or equal to 20% of amortized cost. Investment grade securities comprising $170.6 million of these unrealized losses were evaluated based on factors such as discounted cash flows, the financial condition and near-term and long-term prospects of the issue or issuer and were determined to have adequate resources to fulfill contractual obligations, such as recent financings or bank loans, cash flows from operations, collateral or the position of a subsidiary with respect to its parent's bankruptcy. Of the $205.9 million, $35.3 million are related to below investment grade fixed income securities. Of this amount, $29.1 million had been in an unrealized loss position for a period of twelve or more consecutive months as of December 31, 2009. Unrealized losses on below investment grade securities are principally related to RMBS and CMBS and were the result of wider credit spreads than at initial purchase which was largely due to the impact of macroeconomic conditions and credit market deterioration on real estate valuations. Securities in an unrealized loss position were evaluated based on discounted cash flows and credit ratings, as well as the performance of the underlying collateral relative to the securities' positions in the securities' respective capital structure. RMBS and ABS in an unrealized loss position were evaluated with credit enhancements from bond insurers where applicable. Municipal bonds in an unrealized loss position were evaluated based on the quality of the underlying security, as well as with credit enhancements from bond insurers, where applicable. As of December 31, 2009, the Company has not made a decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis. MORTGAGE LOAN IMPAIRMENT A mortgage loan is impaired when it is probable that the Company will not collect the contractual principal and interest. The net carrying value of impaired loans at December 31, 2009 and 2008 was $24.0 million and $3.4 million, respectively. Total valuation allowances of $4.3 million and $449 thousand were held on impaired loans at December 31, 2009 and 2008, respectively. The Company recognized $5.3 million and $449 thousand of realized capital losses related to increases in the valuation allowances on impaired loans for the years ended December 31, 2009 and 2008, respectively. There were no valuation allowances prior to December 31, 2008. Realized capital losses recognized on mortgage loans held for sale totaled $686 thousand, $2.0 million and $2.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. Interest income for impaired loans is recognized on an accrual basis if payments are expected to continue to be received. Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. The Company recognized interest income on impaired loans of $598 thousand and $202 thousand during 2009 and 2008, respectively. The average balance of impaired loans was $17.0 million and $1.9 million during 2009 and 2008, respectively. There were no impaired loans in 2007. 27 NOTES TO FINANCIAL STATEMENTS--CONTINUED INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE PORTFOLIOS The Company maintains a diversified portfolio of municipal bonds. The following table shows the principal geographic distribution of municipal bond issuers represented in the Company's portfolio. No other state represents more than 5% of the portfolio at December 31.
2009 2008 (% OF MUNICIPAL BOND PORTFOLIO CARRYING VALUE) ---- ---- California.................... 21.7% 25.6% Texas......................... 10.8 10.9 Illinois...................... 8.7 1.8 Delaware...................... 3.1 7.0 Virginia...................... 1.8 5.4
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 following table shows the principal geographic distribution of commercial real estate represented in the Company's mortgage portfolio. No other state represented more than 5% of the portfolio at December 31.
2009 2008 (% OF COMMERCIAL MORTGAGE PORTFOLIO CARRYING VALUE) ---- ---- California....................... 24.8% 22.1% Illinois......................... 13.9 11.9 Arizona.......................... 7.0 5.5 Pennsylvania..................... 7.0 8.8 New Jersey....................... 5.0 6.1 Ohio............................. 4.8 5.0 New York......................... 3.8 5.5 Texas............................ 2.8 5.3
The types of properties collateralizing the commercial mortgage loans at December 31 are as follows:
2009 2008 (% OF COMMERCIAL MORTGAGE PORTFOLIO CARRYING VALUE) ----- ----- Warehouse........................... 39.8% 34.0% Office buildings.................... 31.4 28.7 Retail.............................. 15.7 19.5 Apartment complex................... 10.0 15.3 Other............................... 3.1 2.5 ----- ----- Total............................ 100.0% 100.0% ===== =====
The contractual maturities of the commercial mortgage loan portfolio as of December 31, 2009 for loans that were not in foreclosure are as follows:
NUMBER OF CARRYING LOANS VALUE PERCENT ($ IN THOUSANDS) --------- -------- ------- 2010........... 11 $ 58,607 10.8% 2011........... 15 66,925 12.3 2012........... 9 41,087 7.6 2013........... 14 64,671 11.9 Thereafter..... 63 311,717 57.4 --- -------- ----- Total....... 112 $543,007 100.0% === ======== =====
28 NOTES TO FINANCIAL STATEMENTS--CONTINUED In 2009, $39.2 million of commercial mortgage loans were contractually due. Of these 87% were paid as due and 13% were extended generally for less than one year. As of December 31, 2009, the Company has $4.8 million of delinquent loans that are not in the process of foreclosure. None were in the process of refinancing or restructuring discussions. CONCENTRATION OF CREDIT RISK At December 31, 2009, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of shareholder's equity. SECURITIES LOANED The Company's business activities include securities lending programs with third parties, mostly large banks. At December 31, 2009 and 2008, fixed income securities with a carrying value of $145.0 million and $113.6 million, respectively, were on loan under these agreements. In return, the Company receives cash that it invests and includes in short-term investments and fixed income securities, with an offsetting liability recorded in other liabilities and accrued expenses to account for the Company's obligation to return the collateral. Interest income on collateral, net of fees, was $681 thousand, $5.1 million and $1.4 million, for the years ending December 31, 2009, 2008 and 2007, respectively. OTHER INVESTMENT INFORMATION Included in fixed income securities are below investment grade assets totaling $227.4 million and $139.7 million at December 31, 2009 and 2008, respectively. At December 31, 2009, fixed income securities and short-term investments with a carrying value of $2.6 million were on deposit with regulatory authorities as required by law. At December 31, 2009, the carrying value of fixed income securities that were non-income producing was $5 thousand. No other investments were non-income producing at December 31, 2009 6. FAIR VALUE OF ASSETS AND LIABILITIES Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows: Level 1: Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access. Level 2: Assets and liabilities whose values are based on the following: a)Quoted prices for similar assets or liabilities in active markets; b)Quoted prices for identical or similar assets or liabilities in markets that are not active; or c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
29 NOTES TO FINANCIAL STATEMENTS--CONTINUED Level 3: Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company's estimates of the assumptions that market participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to remeasurement at fair value after initial recognition and the resulting remeasurement is reflected in the financial statements. As of December 31, 2009, 85.2% of total assets are measured at fair value and 0.3% of total liabilities are measured at fair value. Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis Level 1 measurements . Fixed income securities: Comprise U.S. Treasuries. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access. . Equity securities: Comprise indexed-based securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access. . Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access. . Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers. Level 2 measurements . Fixed income securities: U.S. government and agencies: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active. Municipal: Externally rated municipals are valued based on inputs including quoted prices for identical or similar assets in markets that are not active. Corporate, including privately placed: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active. Also includes privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer. 30 NOTES TO FINANCIAL STATEMENTS--CONTINUED Foreign government; RMBS--U.S. government sponsored entities ("U.S. Agency"), Prime residential mortgage-backed securities ("Prime") and Alt-A residential mortgage-backed securities ("Alt-A"); ABS; Redeemable preferred stock: Valued based on inputs including quoted prices for identical or similar assets in markets that are not active. CMBS: Valuation is principally based on inputs including quoted prices for identical or similar assets in markets that are not active. . Short-term: Commercial paper and other short-term investments are valued based on quoted prices for identical or similar assets in markets that are not active or amortized cost. . Other investments: Free-standing exchange listed derivatives that are not actively traded are valued based on quoted prices for identical instruments in markets that are not active. Over-the-counter ("OTC") derivatives, including interest rate swaps and foreign currency swaps, are valued using models that rely on inputs such as interest rate yield curves, currency rates and adjustment for counterparty credit risks that are observable for substantially the full term of the contract. The valuation techniques underlying the models are widely accepted in the financial services industry and do not involve significant judgment. Level 3 measurements . Fixed income securities: Municipal: Auction rate securities ("ARS") backed by student loans that have become illiquid due to failures in the auction market are valued based on a discounted cash flow model with certain inputs to the valuation model that are significant to the valuation, but are not market observable, including estimates of future coupon rates if auction failures continue, maturity assumptions, and illiquidity premium. Municipal bonds that are not rated by third party credit rating agencies but are generally rated by the NAIC are valued based on valuation models that are widely accepted in the financial services industry and are categorized as Level 3 as a result of the significance of non-market observable inputs, which may include projections of future cash flows. Corporate, including privately placed: Valued based on non-binding broker quotes or based on models that are widely accepted in the financial services industry with certain inputs to the valuation model that are significant to the valuation, but are not market observable. RMBS--Subprime residential mortgage-backed securities ("Subprime") and Alt-A: Subprime and certain Alt-A are principally valued based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements. Certain Subprime and Alt-A are valued based on non-binding broker quotes. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, Subprime and certain Alt-A are categorized as Level 3. CMBS: Valued based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, certain CMBS are categorized as Level 3. ABS--Collateralized debt obligations ("CDO"): Valued based on non-binding broker quotes received from brokers who are familiar with the investments. Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, all CDO are categorized as Level 3. 31 NOTES TO FINANCIAL STATEMENTS--CONTINUED . Other investments: Certain OTC derivatives, such as interest rate caps, are valued using valuation models that are widely accepted in the financial services industry. Non-market observable inputs such as volatility assumptions may be significant to the valuation of the instruments. . Other assets: Includes a structured settlement annuity reinsurance agreement accounted for as a derivative instrument. Valued internally utilizing a model that uses interest rate and volatility assumptions to generate stochastically determined cash flows. This item is categorized as Level 3 as a result of the significance of non-market observable inputs. . Contractholder funds: Derivatives embedded in certain annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable market data. These are categorized as Level 3 as a result of the significance of non-market observable inputs. Assets and liabilities measured at fair value on a non-recurring basis Mortgage loans written-down to fair value in connection with recognizing other-than-temporary impairments are valued using valuation models that are widely accepted in the financial services industry. Inputs to the valuation models include non-market observable inputs such as credit spreads. The following table summarizes the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2009:
QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT COUNTERPARTY MARKETS FOR OBSERVABLE UNOBSERVABLE AND CASH BALANCE AS OF IDENTICAL INPUTS INPUTS COLLATERAL DECEMBER 31, (LEVEL 1) (LEVEL 2) (LEVEL 3) NETTING 2009 ($ IN THOUSANDS) ------------- ----------- ------------ ------------ ------------- ASSETS: Fixed income securities: U.S. government and agencies............ $ 335,264 $ 250,938 $ -- $ 586,202 Municipal............................... -- 754,667 123,743 878,410 Corporate............................... -- 3,069,927 201,275 3,271,202 Foreign government...................... -- 290,856 -- 290,856 RMBS.................................... -- 612,548 39,124 651,672 CMBS.................................... -- 173,647 173,094 346,741 ABS..................................... -- 22,268 17,776 40,044 Redeemable preferred stock.............. -- 8,638 -- 8,638 ---------- ---------- -------- ---------- Total fixed income securities........ 335,264 5,183,489 555,012 6,073,765 Equity securities........................... 123,311 -- -- 123,311 Short-term investments...................... 11,247 337,206 -- 348,453 Other investments: Free-standing derivatives............... -- 368 2,013 $(344) 2,037 Separate account assets..................... 587,044 -- -- 587,044 Other assets................................ -- -- (5,059) (5,059) ---------- ---------- -------- ----- ---------- TOTAL RECURRING BASIS ASSETS............ 1,056,866 5,521,063 551,966 (344) 7,129,551 Non-recurring basis/(1)/.................... -- -- 13,861 13,861 ---------- ---------- -------- ----- ---------- TOTAL ASSETS AT FAIR VALUE..................... $1,056,866 $5,521,063 $565,827 $(344) $7,143,412 ========== ========== ======== ===== ========== % of total assets at fair value................ 14.8% 77.3% 7.9% -- 100.0%
32 NOTES TO FINANCIAL STATEMENTS--CONTINUED
QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT COUNTERPARTY MARKETS FOR OBSERVABLE UNOBSERVABLE AND CASH BALANCE AS OF IDENTICAL INPUTS INPUTS COLLATERAL DECEMBER 31, (LEVEL 1) (LEVEL 2) (LEVEL 3) NETTING 2009 ($ IN THOUSANDS) ------------- ----------- ------------ ------------ ------------- LIABILITIES: Contractholder funds: Derivatives embedded in annuity contracts.......................... $ -- $ -- $(13,211) $(13,211) Other liabilities: Free-standing derivatives............ -- (3,917) (2,885) $ 344 (6,458) ---- ------- -------- ----- -------- TOTAL LIABILITIES AT FAIR VALUE............. $ -- $(3,917) $(16,096) $ 344 $(19,669) ==== ======= ======== ===== ======== % of total liabilities at fair value........ -- % 19.9% 81.8% (1.7)% 100.0%
- -------- (1)Includes mortgage loans written-down to fair value in connection with recognizing other-than-temporary impairments. The following table summarizes the Company's assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2008:
QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE BALANCE AS OF IDENTICAL INPUTS INPUTS DECEMBER 31, (LEVEL 1) (LEVEL 2) (LEVEL 3) 2008 ($ IN THOUSANDS) ------------- ----------- ------------ ------------- ASSETS Fixed income securities: U.S. government and agencies.................. $154,119 $ 763,612 $ -- $ 917,731 Municipal..................................... -- 287,597 97,784 385,381 Corporate..................................... -- 1,795,022 1,092,115 2,887,137 Foreign government............................ -- 371,542 -- 371,542 RMBS.......................................... -- 361,843 78,202 440,045 CMBS.......................................... -- 422,632 46,236 468,868 ABS........................................... -- -- 20,202 20,202 Redeemable preferred stock.................... -- 5,459 -- 5,459 -------- ---------- ---------- ---------- Total fixed income securities.............. 154,119 4,007,707 1,334,539 5,496,365 Short-term investments............................ 33,315 376,487 -- 409,802 Other investments: Free-standing derivatives..................... -- 1,764 714 2,478 Separate account assets........................... 533,760 -- -- 533,760 Other assets...................................... -- -- (1,829) (1,829) -------- ---------- ---------- ---------- TOTAL RECURRING BASIS ASSETS.................. 721,194 4,385,958 1,333,424 6,440,576 Non-recurring basis/(1)/.......................... -- -- 10,589 10,589 -------- ---------- ---------- ---------- TOTAL ASSETS AT FAIR VALUE........................... $721,194 $4,385,958 $1,344,013 $6,451,165 ======== ========== ========== ========== % of total assets at fair value...................... 11.2% 68.0% 20.8% 100.0% LIABILITIES Contractholder funds: Derivatives embedded in annuity contracts..... $ -- $ -- $ (30,051) $ (30,051) Other liabilities: Free-standing derivatives..................... -- (20,849) (5,450) (26,299) -------- ---------- ---------- ---------- TOTAL LIABILITIES AT FAIR VALUE...................... $ -- $ (20,849) $ (35,501) $ (56,350) ======== ========== ========== ========== % of total liabilities at fair value................. -- % 37.0% 63.0% 100.0%
- -------- (1)Includes mortgage loans written-down to fair value in connection with recognizing other-than-temporary impairments. 33 NOTES TO FINANCIAL STATEMENTS--CONTINUED When the inputs used to measure fair value fall into different levels of the fair value hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The following table provides a summary of changes in fair value during the year ended December 31, 2009 of Level 3 assets and liabilities held at fair value on a recurring basis. Net transfers in and/or out of Level 3 are reported as having occurred at the beginning of the quarter the transfer occurred; therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the table below.
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) INCLUDED IN: ----------------------------- OCI ON PURCHASES, NET BALANCE AS OF STATEMENT SALES, ISSUANCES TRANSFERS IN BALANCE AS OF DECEMBER 31, NET OF FINANCIAL AND AND/OR (OUT) DECEMBER 31, 2008 INCOME/(1)/ POSITION SETTLEMENTS, NET OF LEVEL 3 2009 ($ IN THOUSANDS) ------------- ---------- ------------ ---------------- ------------ ------------- ASSETS Fixed income securities: Municipal............. $ 97,784 $ (150) $ 6,371 $ (3,932) $ 23,670 $ 123,743 Corporate............. 1,092,115 11,445 121,540 (111,828) (911,997) 201,275 Foreign government....... -- -- 42 4,974 (5,016) -- RMBS.................. 78,202 (1,877) 4,014 (17,839) (23,376) 39,124 CMBS.................. 46,236 (27,157) 82,059 (10,148) 82,104 173,094 ABS................... 20,202 13 2,142 (4,581) -- 17,776 ---------- -------- -------- --------- --------- --------- Total fixed income securities.............. 1,334,539 (17,726) 216,168 (143,354) (834,615) 555,012 Other investments: Free-standing derivatives, net..... (4,736) 2,045 -- 1,819 -- (872)/(2)/ Other assets.......... (1,829) (3,230) -- (5,059) ---------- -------- -------- --------- --------- --------- TOTAL RECURRING LEVEL 3 ASSETS....... $1,327,974 $(18,911) $216,168 $(141,535) $(834,615) $(549,081) ========== ======== ======== ========= ========= ========= LIABILITIES Contractholder funds: Derivatives embedded in annuity contracts....... $ (30,051) $ 15,975 $ -- $ 865 $ -- $ (13,211) ---------- -------- -------- --------- --------- --------- TOTAL RECURRING LEVEL 3 LIABILITIES.. $ (30,051) $ 15,975 $ -- $ 865 $ -- $ (13,211) ========== ======== ======== ========= ========= =========
TOTAL GAINS (LOSSES) INCLUDED IN NET INCOME FOR ASSETS AND LIABILITIES STILL HELD AT DECEMBER 31, 2009/(3)/ ($ IN THOUSANDS) --------------- ASSETS Fixed income securities: Municipal............. $ (160) Corporate............. 4,091 Foreign government....... -- RMBS.................. (1,846) CMBS.................. (17,109) ABS................... -- -------- Total fixed income securities.............. (15,024) Other investments: Free-standing derivatives, net..... 4,280 Other assets.......... (3,230) -------- TOTAL RECURRING LEVEL 3 ASSETS....... $(13,974) ======== LIABILITIES Contractholder funds: Derivatives embedded in annuity contracts....... $ 15,975 -------- TOTAL RECURRING LEVEL 3 LIABILITIES.. $ 15,975 ========
- -------- (1)The effect to net income totals $(2.9) million and is reported in the Statements of Operations and Comprehensive Income as follows: $(27.5) million in realized capital gains and losses, $8.6 million in net investment income and $(16.0) million in contract benefits. (2)Comprises $2.0 million of assets and $(2.9) million of liabilities. (3)The amounts represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $2.0 million and are reported in the Statements of Operations and Comprehensive Income as follows: $(22.2) million in realized capital gains and losses, $8.2 million in net investment income and $(16.0) million in contract benefits. 34 NOTES TO FINANCIAL STATEMENTS--CONTINUED The following table provides a summary of changes in fair value during the year ended December 31, 2008 of Level 3 assets and liabilities held at fair value on a recurring basis.
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) INCLUDED IN: ---------------------------- OCI ON PURCHASES, NET BALANCE AS OF STATEMENT OF SALES, ISSUANCES TRANSFERS IN BALANCE AS OF JANUARY 1, FINANCIAL AND AND/OR (OUT) DECEMBER 31, 2008 NET INCOME/(1)/ POSITION SETTLEMENTS, NET OF LEVEL 3 2008 ($ IN THOUSANDS) ------------- -------------- ------------ ---------------- ------------ ------------- ASSETS Fixed income securities: Municipal.............. $ 33,200 $ -- $ (11,066) $ (22,250) $ 97,900 $ 97,784 Corporate.............. 1,249,898 5,947 (115,386) (76,075) 27,731 1,092,115 RMBS................... 119,238 (7,847) (12,879) (20,310) -- 78,202 CMBS................... 36,794 (29,092) (57,164) (23,105) 118,803 46,236 ABS.................... 30,768 269 (7,549) (3,286) -- 20,202 ---------- -------- --------- --------- -------- ---------- Total fixed income securities............... 1,469,898 (30,723) (204,044) (145,026) 244,434 1,334,539 Other investments: Free-standing derivatives, net...... (980) (7,124) -- 3,368 -- (4,736)/(2)/ Other assets........... (1,733) (96) -- -- -- (1,829) ---------- -------- --------- --------- -------- ---------- TOTAL RECURRING LEVEL 3 ASSETS........ $1,467,185 $(37,943) $(204,044) $(141,658) $244,434 $1,327,974 ========== ======== ========= ========= ======== ========== LIABILITIES Contractholder funds: Derivatives embedded in annuity contracts............. $ 174 $(30,389) $ -- $ 164 $ -- $ (30,051) ---------- -------- --------- --------- -------- ---------- TOTAL RECURRING LEVEL 3 LIABILITIES... $ 174 $(30,389) $ -- $ 164 $ -- $ (30,051) ========== ======== ========= ========= ======== ==========
TOTAL GAINS (LOSSES) INCLUDED IN NET INCOME FOR ASSETS AND LIABILITIES STILL HELD AT DECEMBER 31, 2008/(3)/ ($ IN THOUSANDS) --------------- ASSETS Fixed income securities: Municipal.............. $ -- Corporate.............. (7,065) RMBS................... (7,655) CMBS................... (22,438) ABS.................... -- -------- Total fixed income securities............... (37,158) Other investments: Free-standing derivatives, net...... (1,424) Other assets........... (96) -------- TOTAL RECURRING LEVEL 3 ASSETS........ $(38,678) ======== LIABILITIES Contractholder funds: Derivatives embedded in annuity contracts............. $(30,389) -------- TOTAL RECURRING LEVEL 3 LIABILITIES... $(30,389) ========
- -------- (1)The effect to net income totals $(68.3) million and is reported in the Statements of Operations and Comprehensive Income as follows: $(45.9) million in realized capital gains and losses, $8.0 million in net investment income, and $30.4 million in contract benefits. (2)Comprises $0.7 million of assets and $(5.4) million of liabilities. (3)The amounts represent gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. These gains and losses total $(69.1) million and are reported in the Statements of Operations and Comprehensive Income as follows: $(46.5) million in realized capital gains and losses, $7.8 million in net investment income and $30.4 million in contract benefits. Presented below are the carrying values and fair value estimates of financial instruments not carried at fair value. FINANCIAL ASSETS
DECEMBER 31, 2009 DECEMBER 31, 2008 ----------------- ----------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ($ IN THOUSANDS) -------- -------- -------- -------- Mortgage loans.............. $543,007 $431,116 $700,268 $629,394 Note due from related party. 8,255 8,243 -- --
The fair value of mortgage loans is based on discounted contractual cash flows or if the loans are impaired due to credit reasons, the fair value of collateral less costs to sell. Risk adjusted discount rates are selected using 35 NOTES TO FINANCIAL STATEMENTS--CONTINUED current rates at which similar loans would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of the note due from related party is based on discounted cash flow calculations using current interest rates for instruments with comparable terms. FINANCIAL LIABILITIES
DECEMBER 31, 2009 DECEMBER 31, 2008 --------------------- --------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ($ IN THOUSANDS) ---------- ---------- ---------- ---------- Contractholder funds on investment contracts. $4,082,995 $3,974,490 $4,181,874 $3,832,699 Liability for collateral..................... 149,362 149,362 117,297 117,297
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for credit risk. Deferred annuities included in contractholder funds are valued using discounted cash flow models which incorporate market value margins, which are based on the cost of holding economic capital, and the Company's own credit risk. Immediate annuities without life contingencies are valued at the present value of future benefits using market implied interest rates which include the Company's own credit risk. The liability for collateral is valued at carrying value due to its short-term nature. 7. DERIVATIVE FINANCIAL INSTRUMENTS The Company primarily uses derivatives for risk management. In addition, the Company has derivatives embedded in non-derivative "host" contracts, which are required to be separated from the host contracts and accounted for at fair value as derivative instruments. With the exception of non-hedge embedded derivatives, all of the Company's derivatives are evaluated for their ongoing effectiveness as either accounting hedge or non-hedge derivative financial instruments on at least a quarterly basis. The Company does not use derivatives for trading purposes. Non-hedge accounting is generally used for "portfolio" level hedging strategies where the terms of the individual hedged items do not meet the strict homogeneity requirements to permit the application of hedge accounting. Asset-liability management is a risk management strategy that is principally employed to balance the respective interest-rate sensitivities of the Company's assets and liabilities. Depending upon the attributes of the assets acquired and liabilities issued, derivative instruments such as interest rate swaps and caps are acquired to change the interest rate characteristics of existing assets and liabilities to ensure the relationship is maintained within specified ranges and to reduce exposure to rising or falling interest rates. The Company uses foreign currency swaps primarily to reduce foreign currency risk associated with holding foreign currency denominated investments. The Company also has a reinsurance treaty that is recorded as a derivative instrument, under which it primarily cedes re-investment related risk on its structured settlement annuities to ALIC. When derivatives meet specific criteria, they may be designated as accounting hedges and accounted for as fair value, cash flow, foreign currency fair value or foreign currency cash flow hedges. The Company designates certain of its foreign currency swap contracts as cash flow hedges when the hedging instrument is highly effective in offsetting the exposure of variations in cash flows for the hedged risk that could affect net income. Amounts are reclassified to net investment income or realized capital gains and losses as the hedged item affects net income. The Company's primary embedded derivatives are guaranteed minimum accumulation and withdrawal benefits related to the Company's variable annuity business, which is fully reinsured. 36 NOTES TO FINANCIAL STATEMENTS--CONTINUED The notional amounts specified in the contracts are used to calculate the exchange of contractual payments under the agreements and are generally not representative of the potential for gain or loss on these agreements. Fair value, which is equal to the carrying value, is the estimated amount that the Company would receive (pay) to terminate the derivative contracts at the reporting date. The carrying value amounts for OTC derivatives have been further adjusted for the effects, if any, of legally enforceable master netting agreements and are presented on a net basis in the Statements of Financial Position. The net impact to pre-tax income for derivatives includes valuation and settlements of derivatives. For cash flow hedges, gains and losses amortized from accumulated other comprehensive income are reported in net income. The following table provides a summary of the volume and fair value positions of derivative instruments as well as their reporting location in the Statements of Financial Position at December 31, 2009.
ASSET DERIVATIVES ---------------------------------------------------------------------------- Volume- Fair notional value, Gross Gross Balance sheet location amount net asset liability ($ in thousands) ------------------------------------- -------- ----------- ------- --------- DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGING INSTRUMENTS INTEREST RATE CONTRACTS Interest rate cap agreements Other investments $ 52,000 $ 1,670 $ 1,670 $ -- FOREIGN CURRENCY CONTRACTS Foreign currency swap agreements Other investments 3,103 367 367 -- OTHER CONTRACTS Structured settlement annuity reinsurance agreement Other assets -- (5,059) (5,059) -- -------- -------- ------- -------- TOTAL DERIVATIVE ASSETS $ 55,103 $ (3,022) $(3,022) $ -- ======== ======== ======= ======== LIABILITY DERIVATIVES ---------------------------------------------------------------------------- Volume- notional Fair value, Gross Gross Balance sheet location amount net asset liability ($ in thousands) ------------------------------------- -------- ----------- ------- --------- DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGING INSTRUMENTS INTEREST RATE CONTRACTS Interest rate swap agreements Other liabilities & accrued expenses $400,000 $ (3,917) $ -- $ (3,917) Interest rate cap agreements Other liabilities & accrued expenses 275,500 (2,541) 344 (2,885) EMBEDDED DERIVATIVE FINANCIAL INSTRUMENTS Guaranteed accumulation benefits Contractholder funds 186,459 (11,024) -- (11,024) Guaranteed withdrawal benefits Contractholder funds 43,469 (2,187) -- (2,187) -------- -------- ------- -------- TOTAL DERIVATIVE LIABILITIES $905,428 $(19,669) $ 344 $(20,013) ======== ======== ======= ======== TOTAL DERIVATIVES $960,531 $(22,691) ======== ========
37 NOTES TO FINANCIAL STATEMENTS--CONTINUED The following table summarizes the notional amount, fair value and carrying value of the Company's derivative financial instruments at December 31, 2008.
CARRYING VALUE ----------------------- NOTIONAL FAIR AMOUNT VALUE ASSETS (LIABILITIES) ($ IN THOUSANDS) -------- -------- ------- ------------- INTEREST RATE CONTRACTS Interest rate swap agreements................ $400,000 $(20,849) $ -- $(20,849) Interest rate cap agreements................. 334,300 (4,736) 714 (5,450) -------- -------- ------- -------- Total interest rate contracts............ 734,300 (25,585) 714 (26,299) FOREIGN CURRENCY CONTRACTS Foreign currency swap agreements............. 7,500 1,764 1,764 -- EMBEDDED DERIVATIVE FINANCIAL INSTRUMENTS Guaranteed accumulation benefits............. 160,310 (24,033) -- (24,033) Guaranteed withdrawal benefits............... 37,639 (6,018) -- (6,018) -------- -------- ------- -------- Total embedded derivative financial instruments............................ 197,949 (30,051) -- (30,051) OTHER DERIVATIVE FINANCIAL INSTRUMENT Structured settlement annuity reinsurance agreement.................................. -- (1,829) (1,829) -- -------- -------- ------- -------- TOTAL DERIVATIVE FINANCIAL INSTRUMENTS.......... $939,749 $(55,701) $ 649/(1)/ $(56,350)/(2)/ ======== ======== ======= ========
- -------- (1)Presented in the Statements of Financial Position as $2.5 million other investments and $(1.8) million other assets. (2)Presented in the Statements of Financial Position as $30.1 million contractholder funds and $26.3 million other liabilities and accrued expenses. The following table provides a summary of the impacts of the Company's foreign currency contracts in cash flow hedging relationships in the Statements of Operations and Comprehensive Income and the Statements of Financial Position. Amortization of net gains from accumulated other comprehensive income related to cash flow hedges is expected to be $7 thousand during the next twelve months.
YEAR ENDED DECEMBER 31, 2009 ($ IN THOUSANDS) ------------ EFFECTIVE PORTION Loss recognized in OCI on derivatives during the period.............. $(1,107) Gain recognized in OCI on derivatives during the term of the hedging relationship....................................................... $ 309 Gain reclassified from AOCI into income (net investment income)...... $ 57 Gain reclassified from AOCI into income (realized capital gains and losses)........................................................ $ 276 INEFFECTIVE PORTION AND AMOUNT EXCLUDED FROM EFFECTIVENESS TESTING Gain recognized in income on derivatives (realized capital gains and losses)........................................................ $ --
38 NOTES TO FINANCIAL STATEMENTS--CONTINUED For cash flow hedges, unrealized net pre-tax gains and losses included in accumulated other comprehensive income were $309 thousand and $1.7 million at December 31, 2009 and 2008, respectively. The net pre-tax changes in accumulated other comprehensive income due to cash flow hedges were $(1.4) million, $2.5 million and $126 thousand in 2009, 2008 and 2007, respectively. Gains and losses from valuation and settlements on derivatives not designated as accounting hedging instruments recorded in realized capital gains and losses for the year ended December 31, 2009 were $42.9 million related to interest rate contracts and $(6.6) million related to the structured settlement annuity reinsurance agreement. Also, gains of $16.8 million were recorded in contract benefits related to embedded derivative financial instruments, which in turn were ceded under reinsurance agreements. There was no hedge ineffectiveness in 2009, 2008 or 2007. The Company manages its exposure to credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master netting agreements ("MNAs") and obtaining collateral where appropriate. The Company uses MNAs for OTC derivative transactions, including interest rate swap, foreign currency swap and interest rate cap agreements. These agreements permit either party to net payments due for transactions covered by the agreements. Under the provisions of the agreements, collateral is either pledged or obtained when certain predetermined exposure limits are exceeded. As of December 31, 2009, the Company pledged $4.5 million in securities to counterparties which includes $3.0 million of collateral posted under MNAs for contracts containing credit-risk-contingent provisions that are in a liability position and $1.5 million of collateral posted under MNAs for contracts without credit-risk-contingent liabilities. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance. Counterparty credit exposure represents the Company's potential loss if all of the counterparties concurrently fail to perform under the contractual terms of the contracts and all collateral, if any, becomes worthless. This exposure is measured by the fair value of OTC derivative contracts with a positive fair value at the reporting date reduced by the effect, if any, of legally enforceable master netting agreements. The following table summarizes the counterparty credit exposure by counterparty credit rating at December 31 as it relates to interest rate swap, foreign currency swap and interest rate cap agreements.
2009 2008 ($ IN THOUSANDS) ---------------------------------------------- ---------------------------------------------- Number of Exposure, Number of Exposure, counter- Notional Credit net of counter- Notional Credit net of RATING/(1)/ parties amount exposure/(2)/ collateral/(2)/ parties amount exposure/(2)/ collateral/(2)/ - ---------- --------- -------- ------------ -------------- --------- -------- ------------ -------------- A......... 1 $55,103 $2,037 $2,037 1 $59,500 $2,478 $2,478
- -------- (1)Rating is the lower of S&P or Moody's ratings. (2)Only OTC derivatives with a net positive fair value are included for each counterparty. 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 the Company currently holds, as these instruments may become less valuable due to adverse changes in market conditions. To limit this risk, the Company's senior management has established risk control limits. In addition, changes in fair value of the derivative financial instruments that the Company uses for risk management purposes are generally offset by the change in the fair value or cash flows of the hedged risk component of the related assets, liabilities or forecasted transactions. Certain of the Company's derivative instruments contain credit-risk-contingent termination events, cross-default provisions and credit support annex agreements. Credit-risk-contingent termination events allow the counterparties to terminate the derivative on certain dates if the Company's financial strength credit ratings by Moody's or S&P fall below a certain level or in the event the Company is no longer rated by both Moody's and S&P. Credit-risk-contingent cross-default provisions allow the counterparties to terminate the derivative 39 NOTES TO FINANCIAL STATEMENTS--CONTINUED instruments if the Company defaults by pre-determined threshold amounts on certain debt instruments. Credit-risk-contingent credit support annex agreements specify the amount of collateral the Company must post to counterparties based on the Company's financial strength credit ratings by Moody's or S&P, or in the event the Company is no longer rated by both Moody's and S&P. The following summarizes the fair value of derivative instruments with termination, cross-default or collateral credit-risk-contingent features that are in a liability position as of December 31, 2009, as well as the fair value of assets and collateral that are netted against the liability in accordance with provisions within legally enforceable MNAs.
($ IN THOUSANDS) Gross liability fair value of contracts containing credit-risk-contingent features................. $ 3,327 Gross asset fair value of contracts containing credit-risk-contingent features and subject to MNAs. (12) Collateral posted under MNAs for contracts containing credit-risk-contingent features.............. (2,999) ------- Maximum amount of additional exposure for contracts with credit-risk-contingent features if all features were triggered concurrently............................................................. $ 316 =======
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS There were no off-balance-sheet financial instruments at December 31, 2009 or 2008. 8. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS At December 31, the reserve for life-contingent contract benefits consists of the following:
2009 2008 ---------- ---------- ($ IN THOUSANDS) Immediate fixed annuities: Structured settlement annuities..................... $1,701,522 $1,792,808 Other immediate fixed annuities..................... 14,913 12,553 Traditional life insurance............................. 150,400 140,121 Accident and health.................................... 6,286 5,570 Other.................................................. 2,458 2,105 ---------- ---------- Total reserve for life-contingent contract benefits. $1,875,579 $1,953,157 ========== ==========
The following table highlights the key assumptions generally used in calculating the reserve for life-contingent contract benefits:
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD - ---------------------- ------------------- ----------------- ----------------------- Structured settlement U.S. population Interest rate Present value of annuities with projected assumptions range contractually specified calendar year from 2.7% to 9.2% future benefits improvements; mortality rates adjusted for each impaired life based on reduction in life expectancy
40 NOTES TO FINANCIAL STATEMENTS--CONTINUED
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD - --------------------------- -------------------- ------------------ ----------------------- Other immediate fixed 1983 group annuity Interest rate Present value of annuities mortality table; assumptions range expected future Annuity 2000 from 1.8% to 11.5% benefits based on mortality table historical experience with internal modifications; 1983 individual annuity mortality table with internal modifications Traditional life insurance Actual company Interest rate Net level premium experience plus assumptions range reserve method using loading from 4.0% to 8.0% the Company's withdrawal experience rates Accident and health Actual company Unearned premium; experience plus additional contract loading reserves for mortality risk Other: Variable annuity 100% of Annuity Interest rate Projected benefit ratio guaranteed minimum 2000 mortality table assumptions range applied to cumulative death benefits/(1)/ from 4.5% to 5.5% assessments
- -------- (1)In 2006, the Company disposed of its variable annuity business through reinsurance agreements with Prudential Financial, Inc. and its subsidiary, The Prudential Insurance Company of America (collectively "Prudential"). To the extent that unrealized gains on fixed income securities would result in a premium deficiency had those gains actually been realized, a premium deficiency reserve is recorded for certain immediate annuities with life contingencies. A liability of $40.6 million and $155.9 million is included in the reserve for life-contingent contract benefits with respect to this deficiency as of December 31, 2009 and 2008, respectively. The offset to this liability is recorded as a reduction of the unrealized net capital gains included in accumulated other comprehensive income. At December 31, contractholder funds consist of the following:
2009 2008 ($ IN THOUSANDS) ---------- ---------- Interest-sensitive life insurance..... $ 627,362 $ 576,167 Investment contracts: Fixed annuities.................... 4,345,165 4,477,278 Other investment contracts......... 18,352 33,520 ---------- ---------- Total contractholder funds..... $4,990,879 $5,086,965 ========== ==========
41 NOTES TO FINANCIAL STATEMENTS--CONTINUED The following table highlights the key contract provisions relating to contractholder funds:
PRODUCT INTEREST RATE WITHDRAWAL/SURRENDER CHARGES - ------------------------------------- ---------------------------------- -------------------------------- Interest-sensitive life insurance Interest rates credited range from Either a percentage of account 2.7% to 5.0% balance or dollar amount grading off generally over 20 years Fixed annuities Interest rates credited range from Either a declining or a level 1.4% to 9.2% for immediate percentage charge generally annuities and 0.5% to 6.9% for over nine years or less. other fixed annuities Additionally, approximately 10.8% of fixed annuities are subject to a market value adjustment for discretionary withdrawals Other investment contracts: Guaranteed minimum income, Interest rates used in Withdrawal and surrender accumulation and withdrawal establishing reserves range from charges are based on the terms benefits on variable annuities/(1)/ 1.8% to 10.3% of the related variable annuity
- -------- (1)In 2006, the Company disposed its variable annuity business through reinsurance agreements with Prudential. Contractholder funds activity for the years ended December 31 is as follows:
2009 2008 ($ IN THOUSANDS) ---------- ---------- Balance, beginning of year......... $5,086,965 $4,848,461 Deposits........................... 296,990 612,004 Interest credited.................. 182,665 190,945 Benefits........................... (160,351) (161,813) Surrenders and partial withdrawals. (308,244) (335,521) Contract charges................... (57,157) (54,138) Net transfers to separate accounts. -- (38) Other adjustments.................. (49,989) (12,935) ---------- ---------- Balance, end of year............... $4,990,879 $5,086,965 ========== ==========
The Company offered various guarantees to variable annuity contractholders. Liabilities for variable contract guarantees related to death benefits are included in the reserve for life-contingent contract benefits and the liabilities related to the income, withdrawal and accumulation benefits are included in contractholder funds in the Statements of Financial Position. All liabilities for variable contract guarantees are reported on a gross basis on the balance sheet with a corresponding reinsurance recoverable asset. Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death, a specified contract anniversary date, partial withdrawal or annuitization, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts' funds may not meet their stated investment objectives. The account balances of variable annuities contracts' separate accounts with guarantees included $547.3 million and $491.7 million of equity, fixed income and balanced mutual funds and $41.0 million and $45.1 million of money market mutual funds at December 31, 2009 and 2008, respectively. 42 NOTES TO FINANCIAL STATEMENTS--CONTINUED The table below presents information regarding the Company's variable annuity contracts with guarantees. The Company's variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts' separate accounts with guarantees.
DECEMBER 31, ------------------- 2009 2008 ($ IN MILLIONS) --------- --------- In the event of death Separate account value............................. $ 588.3 $ 536.8 Net amount at risk/(1)/............................ $ 105.5 $ 236.1 Average attained age of contractholders............ 62 years 62 years At annuitization (includes income benefit guarantees) Separate account value............................. $ 41.2 $ 36.0 Net amount at risk/(2)/............................ $ 11.1 $ 21.2 Weighted average waiting period until annuitization options available.................. 4 years 5 years For cumulative periodic withdrawals Separate account value............................. $ 42.9 $ 37.0 Net amount at risk/(3)/............................ $ 1.7 $ 8.6 Accumulation at specified dates Separate account value............................. $ 186.5 $ 160.3 Net amount at risk/(4)/............................ $ 12.1 $ 34.7 Weighted average waiting period until guarantee date............................................. 7 years 8 years
- -------- (1)Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. (2)Defined as the estimated present value of the guaranteed minimum annuity payments in excess of the current account balance. (3)Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance at the balance sheet date. (4)Defined as the estimated present value of the guaranteed minimum accumulation balance in excess of the current account balance. The liability for death and income benefit guarantees is equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges. The establishment of reserves for these guarantees requires the projection of future separate account fund performance, mortality, persistency and customer benefit utilization rates. These assumptions are periodically reviewed and updated. For guarantees related to death benefits, benefits represent the current guaranteed minimum death benefit payments in excess of the current account balance. For guarantees related to income benefits, benefits represent the present value of the minimum guaranteed annuitization benefits in excess of the current account balance. Projected benefits and contract charges used in determining the liability for certain guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based on factors such as the extent of benefit to the potential annuitant, eligibility conditions and the annuitant's attained age. The liability for guarantees is re-evaluated periodically, and adjustments are made to the liability balance through a charge or credit to contract benefits. Guarantees related to withdrawal and accumulation benefits are considered to be derivative financial instruments; therefore, the liability for these benefits is established based on its fair value. 43 NOTES TO FINANCIAL STATEMENTS--CONTINUED As of December 31, 2009, reserves for variable annuity contracts related to death, income, accumulation and withdrawal benefits were $2.3 million, $5.1 million, $11.0 million and $2.2 million, respectively. As of December 31, 2008, reserves for variable annuity contracts related to death, income, accumulation and withdrawal benefits were $2.0 million, $3.5 million, $24.0 million and $6.0 million, respectively. All of these reserves are ceded to Prudential. 9. REINSURANCE The Company reinsures certain of its risks to unaffiliated reinsurers and ALIC under yearly renewable term, coinsurance and modified coinsurance agreements. These agreements result in a passing of the agreed-upon percentage of risk to the reinsurer in exchange for negotiated reinsurance premium payments. Modified coinsurance is similar to coinsurance, except that the cash and investments that support the liability for contract benefits are not transferred to the assuming company and settlements are made on a net basis between the companies. As of December 31, 2009 and 2008, 35.0% and 34.9%, respectively, of our face amount of life insurance in force was reinsured to non-affiliates and ALIC. As of December 31, 2009 and 2008, for certain term life insurance policies, we ceded up to 90% of the mortality risk depending on the year of policy issuance. Further, we ceded the mortality risk associated with coverage in excess of $250 thousand per life to ALIC. In addition, the Company has used reinsurance to effect the disposition of certain blocks of business. The Company had reinsurance recoverables of $287.5 million and $335.8 million at December 31, 2009 and 2008, respectively, due from Prudential related to the disposal of its variable annuity business that was effected through reinsurance agreements. In 2009, premiums and contract charges of $11.7 million, contract benefits of $(11.6) million, interest credited to contractholder funds of $8.8 million, and operating costs and expenses of $1.2 million were ceded to Prudential. In 2008, premiums and contract charges of $16.3 million, contract benefits of $35.5 million, interest credited to contractholder funds of $10.5 million, and operating costs and expenses of $2.5 million were ceded to Prudential. In 2007, premiums and contract charges of $21.2 million, contract benefits of $2.9 million, interest credited to contractholder funds of $13.5 million, and operating costs and expenses of $4.8 million were ceded to Prudential. In addition, as of December 31, 2009 and 2008, the Company had reinsurance recoverables of $429 thousand and $690 thousand, respectively, due from a subsidiary of Citigroup (Triton Insurance Company) in connection with the disposition of the direct response distribution business in 2003. As of December 31, 2009, the gross life insurance in force was $34.62 billion of which $462.5 million and $11.65 billion was ceded to affiliated and unaffiliated reinsurers, respectively. The effects of reinsurance on premiums and contract charges for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- -------- -------- PREMIUMS AND CONTRACT CHARGES Direct............................................ $154,440 $156,187 $169,559 Assumed--non-affiliate............................ 959 1,164 1,273 Ceded Affiliate...................................... (26,250) (4,470) (3,982) Non-affiliate.................................. (29,656) (32,525) (38,196) -------- -------- -------- Premiums and contract charges, net of reinsurance.............................. $ 99,493 $120,356 $128,654 ======== ======== ========
44 NOTES TO FINANCIAL STATEMENTS--CONTINUED The effects of reinsurance on contract benefits for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- -------- -------- CONTRACT BENEFITS Direct........................................... $174,909 $223,859 $197,929 Assumed--non-affiliate........................... 676 640 787 Ceded Affiliate/(1)/................................ (6,225) 7,022 (3,830) Non-affiliate................................. 715 (47,329) (13,083) -------- -------- -------- Contract benefits, net of reinsurance..... $170,075 $184,192 $181,803 ======== ======== ========
- -------- (1)The Company recorded additional expenses for contract benefits in 2008 relating to a rescission of reinsurance coverage for certain traditional and interest-sensitive life insurance policies provided in accordance with an agreement between the Company and ALIC. These contract benefits are reflected as a component of contract benefits ceded to affiliate for 2008 and totaled $7.1 million. See Note 4 for further details. The effects of reinsurance on interest credited to contractholder funds for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- -------- -------- INTEREST CREDITED TO CONTRACTHOLDER FUNDS Direct..................................................... $210,289 $201,661 $190,882 Assumed--non-affiliate..................................... 17 32 33 Ceded Affiliate............................................... -- -- -- Non-affiliate........................................... (8,757) (10,485) (13,508) -------- -------- -------- Interest credited to contractholder funds, net of reinsurance.................................... $201,549 $191,208 $177,407 ======== ======== ========
In addition to amounts included in the table above are reinsurance premiums ceded to ALIC of $3.4 million, $3.3 million and $3.2 million during 2009, 2008 and 2007, respectively, under the terms of the structured settlement annuity reinsurance agreement (see Note 4). 45 NOTES TO FINANCIAL STATEMENTS--CONTINUED 10. DEFERRED POLICY ACQUISITION AND SALES INDUCEMENT COSTS Deferred policy acquisitions costs for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) --------- -------- -------- Balance, beginning of year............................................... $ 538,248 $278,664 $278,625 Impact of adopting new OTTI accounting guidance before unrealized impact/(1)/............................................................ (11,825) -- -- Impact of adoption of new OTTI accounting guidance effect of unrealized capital gains and losses/(2)/.......................................... 11,825 -- -- Impact of adoption of new internal replacements accounting guidance/(3)/. -- -- (1,577) Acquisition costs deferred............................................... 32,560 51,390 47,575 Amortization charged to income........................................... (148,450) (17,778) (53,445) Effect of unrealized gains and losses.................................... (209,033) 225,972 7,486 --------- -------- -------- Balance, end of year..................................................... $ 213,325 $538,248 $278,664 ========= ======== ========
- -------- (1)The adoption of new OTTI accounting guidance on April 1, 2009 resulted in an adjustment to DAC to reverse previously recorded DAC accretion related to realized capital losses that were reclassified to other comprehensive income upon adoption. (2)The adoption of new OTTI accounting guidance resulted in an adjustment to DAC due to the change in unrealized capital gains and losses that occurred upon adoption on April 1, 2009 when previously recorded realized capital losses were reclassified to other comprehensive income. The adjustment was recorded as an increase of the DAC balance and unrealized capital gains and losses. (3)The adoption of new accounting guidance related to internal replacements resulted in a $1.6 million adjustment to unamortized DAC related to the impact on future estimated gross profits from the changes in accounting for certain costs associated with contract continuations that no longer qualify for deferral. DSI activity, which primarily relates to fixed annuities, for the years ended December 31 was as follows:
2009 2008 2007 ($ IN THOUSANDS) -------- ------- ------- Balance, beginning of year................................................... $ 47,319 $27,991 $24,731 Impact of adopting new OTTI accounting guidance before unrealized impact/(1)/................................................................ (1,732) -- -- Impact of adopting new OTTI accounting guidance effect of unrealized capital gains and losses/(2)/...................................................... 1,732 -- -- Impact of adoption of new internal replacements accounting guidance/(3)/..... -- -- (243) Sales inducements deferred................................................... 3,454 7,579 8,511 Amortization charged to income............................................... (22,337) (7,843) (6,500) Effect of unrealized gains and losses........................................ (17,345) 19,592 1,492 -------- ------- ------- Balance, end of year......................................................... $ 11,091 $47,319 $27,991 ======== ======= =======
- -------- (1)The adoption of new OTTI accounting guidance on April 1, 2009 resulted in an adjustment to DSI to reverse previously recorded DSI accretion related to realized capital losses that were reclassified to other comprehensive income upon adoption. (2)The adoption of new OTTI accounting guidance resulted in an adjustment to DSI due to the change in unrealized capital gains and losses that occurred upon adoption on April 1, 2009 when previously recorded realized capital losses were reclassified to other comprehensive income. The adjustment was recorded as an increase of the DSI balance and unrealized capital gains and losses. (3)The adoption of new accounting guidance related to internal replacements resulted in a $243 thousand adjustment to unamortized DSI related to the impact on future estimated gross profits from the changes in accounting for certain costs associated with contract continuations that no longer qualify for deferral. 46 NOTES TO FINANCIAL STATEMENTS--CONTINUED 11. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES GUARANTY FUNDS Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. Amounts assessed to each company are typically related to its proportion of business written in each state. The Company's policy is to accrue a guaranty fund assessment when the entity for which the insolvency relates has met its state of domicile's statutory definition of insolvency and the amount of the loss is reasonably estimable. In most states, the definition is met with a declaration of financial insolvency by a court of competent jurisdiction. In certain states there must also be a final order of liquidation. As of December 31, 2009 and 2008, the liability balance included in other liabilities and accrued expenses was $790 thousand and $806 thousand, respectively. The related premium tax offsets included in other assets were $739 thousand and $752 thousand as of December 31, 2009 and 2008, respectively. The New York Liquidation Bureau (the "Bureau") has publicly reported that Executive Life Insurance Company of New York ("Executive Life") is currently under its jurisdiction as part of a 1992 court-ordered rehabilitation plan. However, Executive Life does not have a liquidity problem at this time, and an order of liquidation has not been sought by the Bureau. The current publicly available estimated shortfall from the Bureau is $1.27 billion. If Executive Life were to be declared insolvent in the future, the Company may have exposure to future guaranty fund assessments. The Company's exposure will ultimately depend on the level of guaranty fund system participation, as well as the viability of a plan of the Bureau to obtain voluntary contributions, primarily from the original insurance companies that acquired structured settlement annuity contracts from Executive Life. New York law currently contains an aggregate limit on guaranty funds under the Life Insurance Corporation of New York of $500 million, of which approximately $40 million has been used. Under current law, the Company may be allowed to recoup a portion of the amount of any additional guaranty fund assessment in periods subsequent to the recognition of the assessment by offsetting future premium taxes. The Company's average market share for New York, based on assessable premiums, was approximately 3.1% in 2009. GUARANTEES Related to the disposal through reinsurance of our variable annuity business to Prudential Financial, Inc. and its subsidiary in 2006, the Company, ALIC and the Corporation have agreed to indemnify Prudential for certain pre-closing contingent liabilities (including extra-contractual liabilities of the Company and liabilities specifically excluded from the transaction) that the Company and ALIC have agreed to retain. In addition, the Company, ALIC and the Corporation will each indemnify Prudential for certain post-closing liabilities that may arise from the acts of the Company and ALIC and their agents, including in connection with the Company's and ALIC's provision of transition services. The reinsurance agreements contain no limitations or indemnifications with regard to insurance risk transfer, and transferred all of the future risks and responsibilities for performance on the underlying variable annuity contracts to Prudential, including those related to benefit guarantees. Management does not believe this agreement will have a material adverse effect on results of operations, cash flows or financial position of the Company. In the normal course of business, the Company provides standard indemnifications to contractual counterparties in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and are entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is 47 NOTES TO FINANCIAL STATEMENTS--CONTINUED not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations. The aggregate liability balance related to all guarantees was not material as of December 31, 2009. REGULATION AND COMPLIANCE The Company is subject to changing social, economic and regulatory conditions. From time to time, regulatory authorities or legislative bodies seek to impose additional regulations regarding agent and broker compensation and otherwise expand overall regulation of insurance products and the insurance industry. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company's business, if any, are uncertain. LEGAL AND REGULATORY PROCEEDINGS AND INQUIRIES BACKGROUND The Company and certain affiliates are involved in a number of lawsuits, regulatory inquiries, and other legal proceedings arising out of various aspects of its business. As background to the "Proceedings" subsection below, please note the following: . These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including the underlying facts of each matter; novel legal issues; variations between jurisdictions in which matters are being litigated, heard, or investigated; differences in applicable laws and judicial interpretations; the length of time before many of these matters might be resolved by settlement, through litigation or otherwise; the fact that some of the lawsuits are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined; the fact that some of the lawsuits involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear; and the current challenging legal environment faced by large corporations and insurance companies. . The outcome of these matters may be affected by decisions, verdicts, and settlements, and the timing of such decisions, verdicts, and settlements, in other individual and class action lawsuits that involve the Company, other insurers, or other entities and by other legal, governmental, and regulatory actions that involve the Company, other insurers, or other entities. The outcome may also be affected by future state or federal legislation, the timing or substance of which cannot be predicted. . In the lawsuits, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought include punitive damages. Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings. In the Company's experience, when specific monetary demands are made in pleadings, they bear little relation to the ultimate loss, if any, to the Company. . In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution and changes in business practices. The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding. 48 NOTES TO FINANCIAL STATEMENTS--CONTINUED . For the reasons specified above, it is often not possible to make meaningful estimates of the amount or range of loss that could result from the matters described below in the "Proceedings" subsection. The Company reviews these matters on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals. . Due to the complexity and scope of the matters disclosed in the "Proceedings" subsection below and the many uncertainties that exist, the ultimate outcome of these matters cannot be reasonably predicted. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved, if any, and may be material to the Company's operating results or cash flows for a particular annual period. However, based on information currently known to it, management believes that the ultimate outcome of all matters described below, as they are resolved over time, is not likely to have a material adverse effect on the financial position of the Company. PROCEEDINGS Legal proceedings involving Allstate agencies and AIC may impact the Company, even when the Company is not directly involved, because the Company sells its products through a variety of distribution channels including Allstate agencies. Consequently, information about the more significant of these proceedings is provided in the following paragraph. AIC is defending certain matters relating to its agency program reorganization announced in 1999. These matters are in various stages of development. . These matters include a lawsuit filed in 2001 by the U.S. Equal Employment Opportunity Commission ("EEOC") alleging retaliation under federal civil rights laws (the "EEOC I" suit) and a class action filed in 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act ("ADEA"), breach of contract and ERISA violations (the "Romero I" suit). In 2004, in the consolidated EEOC I and Romero I litigation, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court's declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids the release must return to AIC "any and all benefits received by the [agent] in exchange for signing the release." The court also stated that, "on the undisputed facts of record, there is no basis for claims of age discrimination." The EEOC and plaintiffs asked the court to clarify and/or reconsider its memorandum and order and in January 2007, the judge denied their request. In June 2007, the court granted AIC's motions for summary judgment. Following plaintiffs' filing of a notice of appeal, the U.S. Court of Appeals for the Third Circuit ("Third Circuit") issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted AIC's summary judgment motions, remanded the cases to the trial court for additional discovery, and directed that the cases be reassigned to another trial court judge. . A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005. In June 2007, the court granted AIC's motion to dismiss the case. Following plaintiffs' 49 NOTES TO FINANCIAL STATEMENTS--CONTINUED filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time. In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Third Circuit along with the merits of the appeal. In July 2009, the Third Circuit vacated the decision which granted AIC's motion to dismiss the case, remanded the case to the trial court for additional discovery, and directed that the case be reassigned to another trial court judge. In all of these various matters, plaintiffs seek compensatory and punitive damages, and equitable relief. AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization. OTHER MATTERS Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries are currently pending that involve the company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of a number of lawsuits and other types of proceedings, some of which involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and target a range of the Company's practices. The outcome of these disputes is currently unpredictable. One or more of these matters could have an adverse effect on the Company's operating results or cash flows for a particular annual period. However, based on information currently known to it, Management believes that the ultimate outcome of all matters described in this "Other Matters" subsection, in excess of amounts currently reserved, if any, as they are resolved over time is not likely to have a material effect on the operating results, cash flows or financial position of the Company. 12. INCOME TAXES The Company joins with the Corporation and its other domestic subsidiaries (the "Allstate Group") in the filing of a consolidated federal income tax return and is party to a federal income tax allocation agreement (the "Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the Company pays to or receives from the Corporation the amount, if any, by which the Allstate Group's federal income tax liability is 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. The Internal Revenue Service ("IRS") is currently examining the Allstate Group's 2007 and 2008 federal income tax returns. The IRS has completed its examination of the Allstate Group's federal income tax returns filed for 2005-2006 and the case is under consideration at the IRS Appeals Office. The Allstate Group's tax years prior to 2005 have been examined by the IRS and the statute of limitations has expired on those years. Any adjustments that may result from IRS examinations of tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company. The Company had no liability for unrecognized tax benefits at December 31, 2009 or 2008, and believes it is reasonably possible that the liability balance will not significantly increase within the next twelve months. No amounts have been accrued for interest or penalties. 50 NOTES TO FINANCIAL STATEMENTS--CONTINUED The components of the deferred income tax assets and liabilities at December 31 are as follows:
2009 2008 ($ IN THOUSANDS) -------- -------- DEFERRED ASSETS Life and annuity reserves................. $ 17,820 $ 54,957 Unrealized net capital losses............. -- 58,646 Difference in tax bases of investments.... -- 19,226 Other assets.............................. 701 1,065 -------- -------- Total deferred assets.................. 18,521 133,894 -------- -------- DEFERRED LIABILITIES DAC....................................... (23,825) (67,126) Unrealized net capital gains.............. (12,950) -- Difference in tax bases of investments.... (18,594) -- Other liabilities......................... (1,039) (1,371) -------- -------- Total deferred liabilities............. (56,408) (68,497) -------- -------- Net deferred (liability) asset..... $(37,887) $ 65,397 ======== ========
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company's assessment that the deductions ultimately recognized for tax purposes will be fully utilized. The components of income tax expense for the years ended December 31 are as follows:
2009 2008 2007 ($ IN THOUSANDS) ------- -------- ------- Current..................... $ (946) $ 16,537 $23,448 Deferred.................... 20,675 (12,532) (646) ------- -------- ------- Total income tax expense. $19,729 $ 4,005 $22,802 ======= ======== =======
The Company paid income taxes of $29.9 million, $3.6 million and $22.7 million in 2009, 2008 and 2007, respectively. A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the years ended December 31 is as follows:
2009 2008 2007 ---- ---- ---- Statutory federal income tax rate......... 35.0% 35.0% 35.0% State income tax expense.................. 2.8 13.1 2.1 Dividends received deduction.............. (1.1) (6.0) (1.3) Tax credits............................... (1.0) (4.6) (0.1) Adjustment for prior year tax liabilities. (0.5) (3.4) (0.5) Other..................................... -- 0.2 -- ---- ---- ---- Effective income tax rate.............. 35.2% 34.3% 35.2% ==== ==== ====
51 NOTES TO FINANCIAL STATEMENTS--CONTINUED 13. STATUTORY FINANCIAL INFORMATION The Company prepares its statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the State of New York. The State of New York requires insurance companies domiciled in its state to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the State of New York Insurance Superintendent. Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis. Statutory net (loss) income for 2009, 2008 and 2007 was $(8.6) million, $(18.9) million and $38.2 million, respectively. Statutory capital and surplus was $506.3 million and $410.5 million as of December 31, 2009 and 2008, respectively. DIVIDENDS The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. The payment of shareholder dividends by the Company without the prior approval of the state insurance regulator is limited to formula amounts based on net income and capital and surplus, determined in conformity with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. The Company did not pay any dividends in 2009. Based on the Company's statutory capital and surplus as of December 31, 2009, the maximum amount of dividends that the Company will be able to pay without prior approval of the New York State Insurance Department at a given point in time during 2010 is $25.0 million, less dividends paid during the preceding twelve months measured at that point in time 14. BENEFIT PLANS PENSION AND OTHER POSTRETIREMENT PLANS The Company utilizes the services of AIC employees. AIC and the Corporation provide various benefits, described in the following paragraphs, to its employees. The Company is allocated an appropriate share of the costs associated with these benefits in accordance with a service and expense agreement. Defined benefit pension plans, sponsored by AIC, cover most full-time employees and certain part-time employees. Benefits under the pension plans are based upon the employee's length of service and eligible annual compensation. The Company uses the accrual method for its defined benefit plans in accordance with accepted actuarial methods. The allocated cost to the Company for the pension plans in 2009, 2008 and 2007 was $1.4 million, $1.8 million and $2.3 million, respectively. The Corporation provides certain health care subsidies for eligible employees hired before January 1, 2003 when they retire and their eligible dependents and certain life insurance benefits for eligible employees hired before January 1, 2003 when they retire ("postretirement benefits"). Qualified employees may become eligible for these benefits if they retire in accordance with Corporation's established retirement policy and are continuously insured under Corporation's group plans or other approved plans in accordance with the plan's participation requirements. The Corporation shares the cost of the retiree medical benefits with non Medicare-eligible retirees based on years of service, with the Corporation's share being subject to a 5% limit on annual medical cost inflation after retirement. 52 NOTES TO FINANCIAL STATEMENTS--CONTINUED During 2009, the Corporation decided to change its approach for delivering benefits to Medicare-eligible retirees. The Corporation will no longer offer medical benefits for Medicare-eligible retirees but will instead provide a fixed company contribution (based on years of service and other factors), which is not subject to adjustments for inflation. The allocated cost to the Company was $206 thousand, $339 thousand and $566 thousand for postretirement benefits other than pension plans in 2009, 2008 and 2007, respectively. AIC and the Corporation have reserved the right to modify or terminate their benefit plans at any time or for any reason. ALLSTATE 401(K) SAVINGS PLAN Employees of AIC are eligible to become members of the Allstate 401(k) Savings Plan. The Corporation's contributions are based on the Corporation's matching obligation and certain performance measures. The allocated cost to the Company for the 401(k) Savings Plan was $912 thousand, $667 thousand and $1.5 million in 2009, 2008 and 2007, respectively. 15. OTHER COMPREHENSIVE INCOME The components of other comprehensive income (loss) on a pre-tax and after-tax basis for the years ended December 31 are as follows:
2009 ------------------------------- PRE-TAX TAX AFTER-TAX ($ IN THOUSANDS) --------- --------- --------- Unrealized net holding gains arising during the period, net of related offsets............................................................... $ 337,657 $(118,180) $ 219,477 Less: reclassification adjustment of realized capital gains and losses.. 101,749 (35,612) 66,137 --------- --------- --------- Unrealized net capital gains and losses................................. 235,908 (82,568) 153,340 --------- --------- --------- Other comprehensive income.............................................. $ 235,908 $ (82,568) $ 153,340 ========= ========= ========= 2008 ------------------------------- PRE-TAX TAX AFTER-TAX ($ IN THOUSANDS) --------- --------- --------- Unrealized net holding losses arising during the period, net of related offsets............................................................... $(323,776) $ 113,321 $(210,455) Less: reclassification adjustment of realized capital gains and losses.. (55,927) 19,574 (36,353) --------- --------- --------- Unrealized net capital gains and losses................................. (267,849) 93,747 (174,102) --------- --------- --------- Other comprehensive loss................................................ $(267,849) $ 93,747 $(174,102) ========= ========= ========= 2007 ------------------------------- PRE-TAX TAX AFTER-TAX ($ IN THOUSANDS) --------- --------- --------- Unrealized net holding losses arising during the period, net of related offsets............................................................... $ (15,895) $ 5,563 $ (10,332) Less: reclassification adjustment of realized capital gains and losses.. 3,874 (1,356) 2,518 --------- --------- --------- Unrealized net capital gains and losses................................. (19,769) 6,919 (12,850) --------- --------- --------- Other comprehensive loss................................................ $ (19,769) $ 6,919 $ (12,850) ========= ========= =========
53 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2009
AMOUNTS AT WHICH COST/ SHOWN IN AMORTIZED FAIR THE BALANCE COST VALUE SHEET ($ IN THOUSANDS) ---------- ---------- ----------- Type of investment Fixed Maturities: Bonds: United States government, government agencies and authorities.......................................... $ 534,590 $ 586,202 $ 586,202 States, municipalities and political subdivisions...... 929,688 878,410 878,410 Foreign governments.................................... 241,141 290,856 290,856 Public utilities....................................... 683,334 721,708 721,708 All other corporate bonds.............................. 2,489,696 2,549,494 2,549,494 Asset-backed securities.................................... 46,588 40,044 40,044 Residential mortgage-backed securities..................... 666,118 651,672 651,672 Commercial mortgage-backed securities...................... 472,835 346,741 346,741 Redeemable preferred stocks................................ 9,245 8,638 8,638 ---------- ---------- ---------- Total fixed maturities................................. 6,073,235 $6,073,765 6,073,765 ---------- ========== ---------- Equity securities: Common stocks: Industrial, miscellaneous and all other................ 100,168 $ 121,311 123,311 ========== Mortgage loans on real estate................................. 543,007 $ 431,116 543,007 ========== Policy loans.................................................. 40,569 40,569 Derivative instruments........................................ 2,037 $ 2,037 2,037 ========== Other long-term investments................................... 8,255 8,255 Short-term investments........................................ 348,456 $ 348,453 348,453 ---------- ========== ---------- Total investments.......................................... $7,115,727 $7,139,397 ========== ==========
54 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE IV--REINSURANCE
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES/(1)/ COMPANIES AMOUNT TO NET ($ IN THOUSANDS) ----------- ------------- ---------- ----------- ---------- YEAR ENDED DECEMBER 31, 2009 Life insurance in force......... $33,925,356 $12,115,820 $695,124 $22,504,660 3.1% =========== =========== ======== =========== Premiums and contract charges: Life and annuities........... $ 142,563 $ 53,595 $ 959 $ 89,927 1.1% Accident and health.......... 11,877 2,311 -- 9,566 -- ----------- ----------- -------- ----------- Total premiums and contract charges.................... $ 154,440 $ 55,906 $ 959 $ 99,493 1.0% =========== =========== ======== =========== YEAR ENDED DECEMBER 31, 2008 Life insurance in force......... $32,704,176 $11,655,410 $737,572 $21,786,338 3.4% =========== =========== ======== =========== Premiums and contract charges: Life and annuities........... $ 145,521 $ 34,529 $ 1,164 $ 112,156 1.0% Accident and health.......... 10,666 2,466 -- 8,200 -- ----------- ----------- -------- ----------- Total premiums and contract charges.................... $ 156,187 $ 36,995 $ 1,164 $ 120,356 1.0% =========== =========== ======== =========== YEAR ENDED DECEMBER 31, 2007 Life insurance in force......... $30,804,623 $12,578,676 $772,742 $18,998,689 4.1% =========== =========== ======== =========== Premiums and contract charges: Life and annuities........... $ 159,811 $ 39,066 $ 1,273 $ 122,018 1.0% Accident and health.......... 9,748 3,112 -- 6,636 -- ----------- ----------- -------- ----------- Total premiums and contract charges.................... $ 169,559 $ 42,178 $ 1,273 $ 128,654 1.0% =========== =========== ======== ===========
- -------- (1)No reinsurance or coinsurance income was netted against premium ceded in 2009, 2008 or 2007. 55 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK SCHEDULE V--VALUATION ALLOWANCES AND QUALIFYING ACCOUNTS
ADDITIONS ($ IN THOUSANDS) -------------------- BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ADDITIONS DEDUCTIONS PERIOD - ----------- ---------- ---------- --------- ---------- ---------- YEAR ENDED DECEMBER 31, 2009 Allowance for estimated losses on mortgage loans. $449 $5,264 $-- $1,463 $4,250 YEAR ENDED DECEMBER 31, 2008 Allowance for estimated losses on mortgage loans. $ -- $ 449 $-- $ -- $ 449 YEAR ENDED DECEMBER 31, 2007 Allowance for estimated losses on mortgage loans. $ -- $ -- $-- $ -- $ --
56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholder of Allstate Life Insurance Company of New York Hauppauge, NY We have audited the accompanying Statements of Financial Position of Allstate Life Insurance Company of New York (the "Company"), an affiliate of The Allstate Corporation, as of December 31, 2009 and 2008, and the related Statements of Operations and Comprehensive Income, Shareholder's Equity, and Cash Flows for each of the three years in the period ended December 31, 2009. Our audits also included Schedule I-Summary of Investments-Other Than Investments in Related Parties, Schedule IV-Reinsurance, and Schedule V-Valuation Allowances 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Allstate Life Insurance Company of New York as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Schedule I-Summary of Investments-Other Than Investments in Related Parties, Schedule IV-Reinsurance, and Schedule V-Valuation Allowances 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 2 to the financial statements, the Company changed its recognition and presentation for other-than-temporary impairments of debt securities in 2009. /s/ Deloitte & Touche LLP Chicago, Illinois March 12, 2010 57 ITEM 11(F).SELECTED FINANCIAL DATA ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK 5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2009 2008 2007 2006 2005 ($ IN THOUSANDS) ---------- ---------- ---------- ---------- ---------- OPERATING RESULTS Premiums...................................... $ 47,659 $ 59,248 $ 69,124 $ 84,313 $ 68,538 Contract charges.............................. 51,834 61,108 59,530 63,426 66,280 Net investment income......................... 372,395 402,931 386,738 373,064 356,162 Realized capital gains and losses............. 145,468 (77,205) (831) (22,085) (5,192) Total revenues................................ 617,356 446,082 514,561 498,718 485,788 Net income.................................... 36,370 7,672 41,909 34,342 34,521 FINANCIAL POSITION Investments................................... $7,139,397 $6,648,585 $7,057,629 $6,779,874 $6,726,547 Total assets.................................. 8,388,191 8,284,933 8,785,177 8,619,988 8,088,681 Reserve for life-contingent contract benefits and contractholder funds.................... 6,866,458 7,040,122 6,865,432 6,634,920 6,219,270 Shareholder's equity.......................... 706,884 516,568 680,872 652,996 667,433
ITEM 11(H).MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion highlights significant factors influencing the financial position and results of operations of Allstate Life Insurance Company of New York (referred to in this document as "we", "ALNY", "our", "us" or the "Company"). It should be read in conjunction with the financial statements and related notes found under Item 11(e) contained herein. We operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and determine the allocation of resources. The most important factors we monitor to evaluate the financial condition and performance of our company include: . For operations: benefit and investment spread, amortization of deferred policy acquisition costs, expenses, net income, invested assets, premiums and deposits, and new business returns; . For investments: credit quality/experience, realized capital gains and losses, investment income, unrealized capital gains and losses, stability of long-term returns, total returns, cash flows, and asset and liability duration; and . For financial condition: liquidity, financial strength ratings, operating leverage, and return on equity. APPLICATION OF CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the financial statements. The most critical estimates include those used in determining: . Fair value of financial assets . Impairment of fixed income and equity securities . Deferred policy acquisition costs ("DAC") amortization . Reserve for life-contingent contract benefits estimation 58 In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our financial statements. A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see Note 2 of the financial statements. FAIR VALUE OF FINANCIAL ASSETS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We categorize our financial assets measured at fair value into a three-level hierarchy based on the observability of inputs to the valuation techniques as follows: Level 1: Financial assets are based on unadjusted quoted prices for identical assets in an active market that we can access. Level 2: Financial assets values are based on the following: (a)Quoted prices for similar assets in active markets; (b)Quoted prices for identical or similar assets in markets that are not active; or (c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset. Level 3: Financial assets values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the financial assets.
Observable inputs are inputs that reflect the assumptions market participants would use in valuing financial assets that are developed based on market data obtained from independent sources. In the absence of sufficient observable inputs, unobservable inputs reflect our estimates of the assumptions market participants would use in valuing financial assets and are developed based on the best information available in the circumstances. The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information. If valuation inputs used to measure fair value fall into different levels of the fair value hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement in its entirety. We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation input assumptions, valuation methodologies and compliance with accounting standards for fair value determination through the execution of various processes and controls designed to ensure that our financial assets are appropriately valued. We monitor fair values received from third parties and those derived internally on an ongoing basis. We employ independent third-party valuation service providers, broker quotes and internal pricing methods to determine fair values, which provide a single quote or price for each financial instrument. We obtain or calculate only one quote or price per instrument. Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary algorithms, produce valuation information in the form of a single fair value for individual securities for which a fair value has been requested under the terms of our agreements. For certain equity securities, valuation service providers provide market quotations for completed 59 transactions on the measurement date. For other security types, fair values are derived from the valuation service providers' proprietary valuation models. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer specific information. Executing valuation models effectively requires seasoned professional judgment and experience. In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information. For certain of our financial assets carried at fair value, where our valuation service providers cannot provide fair value determinations, we obtain a single non-binding price quote from a broker familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities, as applicable, among other information. The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise regarding the security subject to valuation. The fair value of certain financial assets, including privately placed corporate securities, Auction Rate Securities ("ARS") backed by student loans, and certain free-standing derivatives, where our valuation service providers or brokers do not provide fair value determinations, is determined using valuation methods and models widely accepted in the financial services industry. Internally developed valuation models, which include inputs that may not be market observable and as such involve some degree of judgment, are considered appropriate for each class of security to which they are applied. Our internal pricing methods are primarily based on models using discounted cash flow methodologies that develop a single best estimate of fair value. Our models generally incorporate inputs that we believe are representative of inputs other market participants would use to determine fair value of the same instruments, including yield curves, quoted market prices of comparable securities, published credit spreads, and other applicable market data. Additional inputs that are used to model fair value include internally-derived assumptions such as liquidity premium and credit ratings, as well as instrument-specific characteristics that include, but are not limited to, coupon rate, expected cash flows, sector of issuer, and call provisions. Internally assigned credit ratings are generally consistent with external ratings published by the National Association of Insurance Commissioners ("NAIC"); however, they are developed at a more finite level. For example, an NAIC rating of 1 includes securities rated triple, double and single A by at least one nationally recognized statistical rating organization ("NRSRO"). We believe our internal ratings provide for a more reliable estimate of fair value since we can more precisely match these ratings to other market observable valuation inputs, such as credit and sector spreads, when performing these valuations. Due to the existence of non-market observable inputs, such as liquidity premiums, judgment is required in developing these fair values. As a result, the fair value of these financial assets may differ from the amount actually received to sell an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the financial assets' fair values. For the majority of our financial assets measured at fair value, all significant inputs are based on market observable data and significant management judgment does not affect the periodic determination of fair value. The determination of fair value using discounted cash flow models involves management judgment when significant model inputs are not based on market observable data. However, where market observable data is available, it takes precedence, and as a result, no range of reasonably likely inputs exists from which the basis of a sensitivity analysis could be constructed. 60 There is one primary situation where a discounted cash flow model utilizes a significant input that is not market observable. It relates to the determination of fair value for our ARS backed by student loans. The significant input is the assumption about the anticipated date liquidity will return to this market (that is, when auction failures will cease). Determination of this assumption allows for matching to market observable inputs when performing these valuations. The following table displays the sensitivity of reasonably likely changes in the assumption about the anticipated date liquidity will return to the ARS backed by student loans market as of December 31, 2009. The selection of these hypothetical scenarios represents an illustration of the estimated potential proportional effect of alternate assumptions and should not be construed as either a prediction of future events or an indication that it would be reasonably likely that all securities would be similarly affected.
($ IN THOUSANDS) ARS BACKED BY STUDENT LOANS AT FAIR VALUE.................. $99,115 PERCENTAGE CHANGE IN FAIR VALUE RESULTING FROM: Decrease in assumption by four months for the anticipated date liquidity will return to this market. 0.4% Increase in assumption by four months for the anticipated date liquidity will return to this market. (0.4)%
We believe our most significant exposure to changes in fair value is due to market risk. Our exposure to changes in market conditions is discussed fully in the Market Risk section of the MD&A. We employ specific control processes to determine the reasonableness of the fair values of our financial assets. Our processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, we assess the reasonableness of individual security values received from valuation service providers and those derived from internal models that exceed certain thresholds as compared to previous values received from those valuation service providers or derived from internal models. In addition, we may validate the reasonableness of fair values by comparing information obtained from our valuation service providers to other third party valuation sources for selected securities. For internal pricing models, we have implemented price validation procedures such as back-testing of actual sales, which corroborates the various model inputs to market observable data. When fair value determinations are expected to be more variable, we validate them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions. We also perform an analysis to determine whether there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity, and if so, whether transactions may not be orderly. Among the indicators we consider in determining whether a significant decrease in the volume and level of market activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, level of credit spreads over historical levels, bid-ask spread, and price consensuses among market participants and sources. If evidence indicates that prices are based on transactions that are not orderly, we place little, if any, weight on the transaction price and will estimate fair value using an internal pricing model. As of December 31, 2009 and 2008, we did not alter fair values provided by our valuation service providers or brokers or substitute them with an internal pricing model. 61 The following table identifies fixed income and equity securities and short-term investments as of December 31, 2009 by source of value determination:
FAIR PERCENT VALUE TO TOTAL ($ IN THOUSANDS) ---------- -------- Fair value based on internal sources...... $1,088,149 16.6% Fair value based on external sources/(1)/. 5,457,380 83.4 ---------- ----- Total..................................... $6,545,529 100.0% ========== =====
- -------- (1)Includes $98.2 million that are valued using broker quotes. For more detailed information on our accounting policy for the fair value of financial assets and the financial assets by level in the fair value hierarchy, see Notes 2 and 6 of the financial statements. IMPAIRMENT OF FIXED INCOME AND EQUITY SECURITIES For investments classified as available for sale, the difference between fair value and amortized cost for fixed income securities and cost for equity securities, net of certain other items and deferred income taxes (as disclosed in Note 5), is reported as a component of accumulated other comprehensive income on the Statements of Financial Position and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when the decline in fair value is deemed other than temporary. We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired. For each fixed income security in an unrealized loss position, we assess whether management with the appropriate authority has made a decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security's decline in fair value is deemed other than temporary and is recorded in earnings. If we have not made the decision to sell the fixed income security and it is not more likely than not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best estimate of future cash flows expected to be collected from the fixed income security discounted at the security's original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security, prepayment speeds, foreign exchange rates, the financial condition of the issue or issuer(s), expected defaults, expected recoveries, the value of underlying collateral and current subordination levels, vintage, geographic concentration, available reserves or escrows, third party guarantees and other credit enhancements. Additionally, other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral may be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The unrealized loss deemed to be related to factors other than credit remains classified in other comprehensive income. If we determine that the fixed income security does not have sufficient cash flow or other information to determine a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and is recorded in earnings. 62 There are a number of assumptions and estimates inherent in evaluating impairments of equity securities and determining if they are other than temporary, including: 1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the length of time and extent to which the fair value has been less than cost; 3) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; and 4) the specific reasons that a security is in a significant unrealized loss position, including overall market conditions which could affect liquidity. Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income or equity security is other than temporarily impaired, including: 1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or issuer's ability to meet all of its contractual obligations; and 3) changes in facts and circumstances that result in changes to management's intent to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost of a fixed income security or causes a change in our ability or intent to hold an equity security until it recovers in value. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on shareholder's equity, since the majority of our portfolio is designated as available-for-sale and carried at fair value and as a result, any related unrealized loss, net of deferred income taxes, DAC, deferred sales inducements ("DSI") and reserves for life-contingent contract benefits, would already be reflected as a component of accumulated other comprehensive income in shareholder's equity. The determination of the amount of impairment is an inherently subjective process based on periodic evaluation of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in other-than-temporary impairments in results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of impairments may have a material effect on the amounts presented within the financial statements. Fixed income securities subject to other-than-temporary impairment write-downs continue to earn investment income when future expected payments are reasonably estimable, and any discount or premium is recognized using the effective yield method over the expected life of the security; otherwise income recognition is discontinued. For additional detail on investment impairments, see Note 5 of the financial statements. DEFERRED POLICY ACQUISITION COSTS AMORTIZATION We incur significant costs in connection with acquiring insurance policies and investment contracts. In accordance with GAAP, costs that vary with and are primarily related to acquiring insurance policies and investment contracts are deferred and recorded as an asset on the Statements of Financial Position. DAC related to traditional life insurance is amortized over the premium paying period of the related policies in proportion to the estimated revenues on such business. Significant assumptions relating to estimated premiums, investment returns, as well as mortality, persistency and expenses to administer the business are established at the time the policy is issued and are generally not revised during the life of the policy. The assumptions for determining the timing and amount of DAC amortization are consistent with the assumptions used to calculate the reserve for life-contingent contract benefits. Any deviations from projected business in force resulting from actual policy terminations differing from expected levels and any estimated premium deficiencies may result in a change to the rate of amortization in the period such events occur. Generally, the amortization periods for these policies approximates the estimated lives of the policies. The recovery of DAC is dependent upon the future profitability of the business. We periodically review the adequacy of reserves and recoverability 63 of DAC for these policies on an aggregate basis using actual experience. We aggregate all traditional life insurance products and immediate annuities with life contingencies in the analysis. In the event actual experience is significantly adverse compared to the original assumptions, a premium deficiency is deemed to exist and any remaining unamortized DAC balance must be expensed to the extent not recoverable and a premium deficiency reserve may be required if the remaining DAC balance is insufficient to absorb the deficiency. In 2009, 2008 and 2007, our reviews concluded that no premium deficiency adjustments were necessary. DAC related to interest-sensitive life, fixed annuities and other investment contracts is amortized in proportion to the incidence of the total present value of gross profits, which includes both actual historical gross profits ("AGP") and estimated future gross profits ("EGP") expected to be earned over the estimated lives of the contracts. The amortization is net of interest on the prior period DAC balance using rates established at the inception of the contracts. Actual amortization periods generally range from 15-30 years; however, incorporating estimates of customer surrender rates, partial withdrawals and deaths generally results in the majority of the DAC being amortized during the surrender charge period, which is typically 20 years for interest-sensitive life and 5-10 years for fixed annuities. The cumulative DAC amortization is reestimated and adjusted by a cumulative charge or credit to results of operations when there is a difference between the incidence of actual versus expected gross profits in a reporting period or when there is a change in total EGP. AGP and EGP consist primarily of the following components: contract charges for the cost of insurance less mortality costs and other benefits (benefit margin); investment income and realized capital gains and losses less interest credited (investment margin); and surrender and other contract charges less maintenance expenses (expense margin). The principal assumptions for determining the amount of EGP are investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of persistency, mortality, expenses, and hedges if applicable, and these assumptions are reasonably likely to have the greatest impact on the amount of DAC amortization. Changes in these assumptions can be offsetting and we are unable to reasonably predict their future movements or offsetting impacts over time. Each reporting period, DAC amortization is recognized in proportion to AGP for that period adjusted for interest on the prior period DAC balance. This amortization process includes an assessment of AGP compared to EGP, the actual amount of business remaining in-force and realized capital gains and losses on investments supporting the product liability. The impact of realized capital gains and losses on amortization of DAC depends upon which product liability is supported by the assets that give rise to the gain or loss. If the AGP is greater than EGP in the period, but the total EGP is unchanged, the amount of DAC amortization will generally increase, resulting in a current period decrease to earnings. The opposite result generally occurs when the AGP is less than the EGP in the period, but the total EGP is unchanged. However, when DAC amortization or a component of gross profits for a quarterly period is potentially negative (which would result in an increase of the DAC balance) as a result of negative AGP, the specific facts and circumstances surrounding the potential negative amortization are considered to determine whether it is appropriate for recognition in the financial statements. Negative amortization is only recorded when the increased DAC balance is determined to be recoverable based on facts and circumstances. Negative amortization was not recorded for certain fixed annuities during 2009 and 2008 periods in which significant capital losses were realized on their related investment portfolio. For products exposed to investment credit losses in excess of our expectations that may cause periodic AGP to become temporarily negative, EGP and AGP utilized in DAC amortization may be modified to exclude the higher credit losses. Annually, we review and update all assumptions underlying the projections of EGP, including investment returns, comprising investment income and realized capital gains and losses, interest crediting rates, persistency, mortality, expenses and the effect of any hedges. At each reporting period, we assess whether any revisions to assumptions used to determine DAC amortization are required. These reviews and updates may result in amortization acceleration or deceleration, which are commonly referred to as "DAC unlocking". If the update of assumptions causes total EGP to increase, the rate of DAC amortization will generally decrease, resulting in a current period increase to earnings. A decrease to earnings generally occurs when the assumption update causes the total EGP to decrease. 64 Over the past three years, our most significant DAC assumption updates that resulted in a change to EGP and the amortization of DAC have been revisions to expected future investment returns, primarily realized capital losses, mortality, expenses and the number of contracts in force or persistency. The following table provides the effect on DAC amortization of changes in assumptions relating to the gross profit components of investment margin, benefit margin and expense margin during the years ended December 31.
2009 2008 2007 ($ IN THOUSANDS) -------- ------- -------- Investment margin. $(50,219) $(9,358) $ 18,720 Benefit margin.... 7,483 4,029 3,491 Expense margin.... 812 (3,762) (28,029) -------- ------- -------- Net acceleration.. $(41,924) $(9,091) $ (5,818) ======== ======= ========
DAC amortization acceleration related to changes in the EGP component of investment margin in the first quarter of 2009 was primarily due to an increase in the level of expected realized capital losses in 2009 and 2010. The deceleration related to benefit margin was due to more favorable projected life insurance mortality. DAC amortization acceleration related to changes in the EGP component of investment margin in 2008 was primarily due to the level of realized capital losses impacting actual gross profits in 2008 and the impact of realized capital losses on expected gross profits in 2009. The deceleration related to benefit margin was due to more favorable projected life insurance mortality. The acceleration related to expense margin resulted from current and expected expense levels higher than previously projected. DAC amortization deceleration related to changes in the EGP component of investment margin in 2007 was due to higher yields from repositioning of the investment portfolio and reduced interest crediting rates on annuities. The deceleration related to benefit margin was due to more favorable projected life insurance mortality. The acceleration related to expense margin was a result of expenses being higher than expected. The following table displays the sensitivity of reasonably likely changes in assumptions included in the gross profit components of investment margin or benefit margin to amortization of the DAC balance as of December 31, 2009.
DECEMBER 31, 2009 INCREASE/(REDUCTION) IN DAC ($ IN THOUSANDS) --------------------------- Increase in future investment margins of 25 basis points. $ 2,766 Decrease in future investment margins of 25 basis points. $(2,998) Decrease in future life mortality by 1%.................. $ 1,457 Increase in future life mortality by 1%.................. $(1,497)
Any potential changes in assumptions discussed above are measured without consideration of correlation among assumptions. Therefore, it would be inappropriate to add them together in an attempt to estimate overall variability in amortization. For additional detail related to DAC, see the Operations section of this document. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS ESTIMATION Due to the long term nature of these policies, benefits are payable over many years; accordingly, the reserves are calculated as the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. Long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses are used when establishing the reserve for life-contingent contract benefits payable under insurance policies including traditional life insurance, life-contingent immediate annuities and voluntary health products. 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. Future investment yield assumptions are determined based upon prevailing investment yields as well as 65 estimated reinvestment yields. Mortality, morbidity and policy termination assumptions are based on our experience and industry experience. Expense assumptions include the estimated effects of inflation and expenses to be incurred beyond the premium-paying period. These assumptions are established at the time the policy is issued, are consistent with assumptions for determining DAC amortization for these policies, and are generally not changed during the policy coverage period. However, if actual experience emerges in a manner that is significantly adverse relative to the original assumptions, adjustments to DAC or reserves may be required resulting in a charge to earnings which could have a material adverse effect on our operating results and financial condition. We periodically review the adequacy of these reserves and recoverability of DAC for these policies on an aggregate basis using actual experience. In the event that actual experience is significantly adverse compared to the original assumptions, a premium deficiency is deemed to exist and any remaining unamortized DAC balance must be expensed to the extent not recoverable and the establishment of a premium deficiency reserve may be required. In 2009, 2008 and 2007, our reviews concluded that no premium deficiency adjustments were necessary. We anticipate that mortality, investment and reinvestment yields, and policy terminations are the factors that would be most likely to require premium deficiency adjustment to these reserves or related DAC. For further detail on the reserve for life-contingent contract benefits, see Note 8 of the financial statements. OPERATIONS OVERVIEW AND STRATEGY We are a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a wholly owned subsidiary of Allstate Insurance Holdings, LLC, which is wholly owned by The Allstate Corporation (the "Corporation"). We provide life insurance, retirement and investment products, and voluntary accident and health insurance. We serve our customers through Allstate exclusive agencies and non-proprietary distribution channels. Our strategic vision is to reinvent protection and retirement for the consumer. We plan to offer a suite of products that are easy for middle market and emerging affluent consumers to understand, meet their protection needs and help them better prepare for retirement. To achieve our vision and reach our financial goals, our primary objectives are to deepen financial services relationships with Allstate customers and improve profitability through operational excellence and portfolio optimization. We plan to bring value to our ultimate parent, The Allstate Corporation (the "Corporation"), in three principal ways: through profitable growth of our products, improving the economics of the Corporation's property-liability insurance business through increased customer loyalty and renewal rates by cross selling our products to their customers, and by attracting new customers to Allstate. We plan to continue to shift our product mix by decreasing sales of our spread based products, principally fixed annuities, and by growing sales of underwritten products having mortality or morbidity risk, principally life insurance. In addition to focusing on higher return markets, products, and distribution channels, we will continue to emphasize capital efficiency and enterprise risk and return management strategies and actions. Our strategy provides a platform to profitably grow our business. Based upon Allstate's strong financial position and brand, our customers seek assistance in meeting their protection and retirement needs through trusted relationships. We have unique access to potential customers through cross-sell opportunities within the Allstate exclusive agencies. Our products include fixed annuities such as deferred and immediate annuities; interest-sensitive, traditional and variable life insurance; and voluntary accident and health insurance. Our products are sold through multiple distribution channels including Allstate exclusive agencies, which include exclusive financial specialists, independent agents (including master brokerage agencies and workplace enrolling agents), specialized structured settlement brokers and, through March 31, 2010, financial service firms such as banks and broker-dealers. Effective March 31, 2010, we will no longer wholesale or provide distribution support to banks and broker-dealers. Although we will continue to service inforce contracts sold through these channels, we will no longer solicit new sales through our direct relationships with banks and broker-dealers. Certain of our master brokerage 66 agencies and independent agents may continue to wholesale our products to banks and broker-dealers through their relationships. SUMMARY ANALYSIS Summarized financial data for the years ended December 31 is presented in the following table.
2009 2008 2007 ($ IN THOUSANDS) ---------- ---------- ---------- REVENUES Premiums.................................. $ 47,659 $ 59,248 $ 69,124 Contract charges.......................... 51,834 61,108 59,530 Net investment income..................... 372,395 402,931 386,738 Realized capital gains and losses......... 145,468 (77,205) (831) ---------- ---------- ---------- Total revenues............................ 617,356 446,082 514,561 COSTS AND EXPENSES Contract benefits......................... (170,075) (184,192) (181,803) Interest credited to contractholder funds. (201,549) (191,208) (177,407) Amortization of DAC....................... (148,450) (17,778) (53,445) Operating costs and expenses.............. (41,183) (40,869) (37,624) ---------- ---------- ---------- Total costs and expenses.................. (561,257) (434,047) (450,279) (Loss) gain on disposition of operations.. -- (358) 429 Income tax expense........................ (19,729) (4,005) (22,802) ---------- ---------- ---------- Net income................................ $ 36,370 $ 7,672 $ 41,909 ========== ========== ========== Investments at December 31................ $7,139,397 $6,648,585 $7,057,629 ========== ========== ==========
Net income was $36.4 million, $7.7 million and $41.9 million in 2009, 2008 and 2007, respectively. The increase of $28.7 million in 2009 compared to 2008 was primarily the result of net realized capital gains in 2009 compared to net realized capital losses in 2008, partially offset by higher amortization of DAC and decreased net investment income. The decrease in net income of $34.2 million in 2008 compared to 2007 was the result of higher net realized capital losses and, to a much lesser extent, higher interest credited to contractholder funds, lower premiums, and higher operating cost and expenses, partially offset by lower amortization of DAC, increased net investment income and higher contract charges. Net income in 2008 included additional expenses for contract benefits relating to a rescission of reinsurance coverage for certain traditional and interest-sensitive life insurance policies in accordance with an agreement between the Company and ALIC (the "rescission"). The rescission reduced net income by $4.1 million in 2008. For further detail on the rescission, see Note 4 to the financial statements. ANALYSIS OF REVENUES Total revenues increased 38.4% or $171.3 million in 2009 compared to 2008 due primarily to a $222.7 million improvement in realized capital gains and losses, partially offset by a $30.5 million decrease in net investment income and a $20.9 million decrease in premiums and contract charges. Total revenues decreased 13.3% or $68.5 million in 2008 compared to 2007, due primarily to an increase in net realized capital losses, partially offset by an increase in net investment income. Premiums represent revenues generated from traditional life insurance, immediate annuities with life contingencies, and accident and health insurance products that have significant mortality or morbidity risk. 67 Contract charges are revenues generated from interest-sensitive and variable life insurance and fixed annuities for which deposits are classified as contractholder funds or separate accounts liabilities. Contract charges are assessed against the contractholder account values for maintenance, administration, cost of insurance and surrender prior to contractually specified dates. As a result, changes in contractholder funds are considered in the evaluation of growth and as indicators of future levels of revenues. The following table summarizes premiums and contract charges by product.
2009 2008 2007 ($ IN THOUSANDS) ------- -------- -------- PREMIUMS Traditional life insurance/(1)/............. $20,159 $ 29,597 $ 24,997 Immediate annuities with life contingencies. 17,934 21,451 37,491 Accident and health......................... 9,566 8,200 6,636 ------- -------- -------- TOTAL PREMIUMS.............................. 47,659 59,248 69,124 CONTRACT CHARGES Interest-sensitive life insurance/(1)/...... 47,071 54,972 51,155 Fixed annuities............................. 4,763 6,136 8,375 ------- -------- -------- TOTAL CONTRACT CHARGES/(2)/................. 51,834 61,108 59,530 ------- -------- -------- TOTAL PREMIUMS AND CONTRACT CHARGES......... $99,493 $120,356 $128,654 ======= ======== ========
- -------- (1)Beginning in 2008, certain ceded reinsurance premiums previously included as a component of traditional life insurance premiums were reclassified prospectively to be reported as a component of interest-sensitive life insurance contract charges. In 2007, these ceded reinsurance premiums were $2.5 million. (2)Total contract charges for 2009, 2008 and 2007 include contract charges related to the cost of insurance totaling $26.7 million, $36.8 million and $35.2 million, respectively. Total premiums decreased 19.6% in 2009 compared to 2008 due to lower premiums on traditional life insurance and immediate annuities with life contingencies. The decline in premiums on traditional life insurance was primarily the result of higher premiums ceded to ALIC due to a greater utilization of reinsurance. The decline in premiums on immediate annuities with life contingencies was due to lower sales. Total premiums decreased 14.3% in 2008 compared to 2007 due to lower premiums on immediate annuities with life contingencies resulting from highly competitive market conditions and our continued focus on returns. This decline was partially offset by higher premiums on traditional life insurance and, to a lesser extent, accident and health products. The increase in premiums on traditional life insurance included the impact of a prospective reporting reclassification for certain ceded reinsurance premiums and higher renewal premium. Excluding the impact of the reporting reclassification, total premiums decreased 17.3% in 2008 compared to 2007. Total contract charges decreased 15.2% in 2009 compared to 2008 due primarily to lower contract charges on interest-sensitive life insurance policies resulting from higher cost of insurance contract charges ceded to ALIC due to a greater utilization of reinsurance, partially offset by increased contract charge rates and growth in business in force. Total contract charges increased 2.7% in 2008 compared to 2007. This increase included the impact of the prospective reporting reclassification for certain ceded reinsurance premiums. Excluding the impact of this reclassification, total contract charges increased 7.2% in 2008 due to higher contract charges on interest-sensitive life insurance policies resulting from increased contract charge rates and growth in business in force, partially offset by decreased contract charges on fixed annuities. Contractholder funds represent interest-bearing liabilities arising from the sale of fixed annuities, interest-sensitive life insurance policies and variable life deposits allocated to fixed accounts. The balance of 68 contractholder funds is equal to the cumulative deposits received and interest credited to the contractholder less cumulative contract maturities, benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses. The following table shows the changes in contractholder funds.
2009 2008 2007 ($ IN THOUSANDS) ---------- ---------- ---------- CONTRACTHOLDER FUNDS, BEGINNING BALANCE............ $5,086,965 $4,848,461 $4,708,428 DEPOSITS Fixed annuities.................................... 180,327 509,146 431,832 Interest-sensitive life insurance.................. 116,543 102,752 105,854 Variable life deposits allocated to fixed accounts. 120 106 69 ---------- ---------- ---------- Total deposits..................................... 296,990 612,004 537,755 INTEREST CREDITED.................................. 182,665 190,945 179,417 BENEFITS, WITHDRAWALS AND OTHER ADJUSTMENTS Benefits........................................... (160,351) (161,813) (146,828) Surrenders and partial withdrawals................. (308,244) (335,521) (316,399) Contract charges................................... (57,157) (54,138) (49,086) Net transfers to separate accounts................. -- (38) (2) Other adjustments/(1)/............................. (49,989) (12,935) (64,824) ---------- ---------- ---------- Total benefits, withdrawals and other adjustments.. (575,741) (564,445) (577,139) ---------- ---------- ---------- CONTRACTHOLDER FUNDS, ENDING BALANCE............... $4,990,879 $5,086,965 $4,848,461 ========== ========== ==========
- -------- (1)The table above illustrates the changes in contractholder funds, which are presented gross of reinsurance recoverables on the Statements of Financial Position. The table above is intended to supplement our discussion and analysis of revenues, which are presented net of reinsurance on the Statements of Operations and Comprehensive Income. As a result, the net change in contractholder funds associated with products reinsured to third parties is reflected as a component of the other adjustments line. Contractholder funds decreased 1.9% in 2009 and increased 4.9% and 3.0% in 2008 and 2007, respectively. Average contractholder funds increased 1.4% in 2009 compared to 2008 and increased 4.0% in 2008 compared to 2007. Contractholder deposits decreased 51.5% in 2009 compared to 2008 due to lower deposits on fixed annuities. Deposits on fixed annuities decreased 64.6% in 2009 compared to 2008 due to pricing actions to improve returns on new business and reduce our concentration in spread based products. Contractholder deposits increased 13.8% in 2008 compared to 2007 due to higher deposits on fixed annuities. Deposits on fixed annuities increased 17.9% in 2008 compared to 2007 due primarily to increased consumer demand as the attractiveness of fixed annuities relative to competing products improved, partially offset by pricing decisions aimed to increase new business returns. Surrenders and partial withdrawals decreased 8.1% in 2009 compared to 2008 due to lower surrenders and partial withdrawals on traditional fixed annuities, partially offset by higher surrenders and partial withdrawals on market value adjusted annuities and interest-sensitive life insurance. Surrenders and partial withdrawals on deferred fixed annuities and interest-sensitive life insurance products increased 6.0% in 2008 compared to 2007 due to an increase in surrenders and partial withdrawals on fixed annuities and, to a lesser extent, interest-sensitive life insurance products. The surrender and partial withdrawal rate on deferred fixed annuities and interest-sensitive life insurance products, based on the beginning of period contractholder funds, was 7.4% in 2009 compared to 8.6% in 2008 and 8.5% in 2007. 69 Net investment income decreased 7.6% or $30.5 million to $372.4 million in 2009 from $402.9 million in 2008. Net investment income increased 4.2% or $16.2 million to $402.9 million in 2008 from $386.7 million in 2007. For further discussion of net investment income, see the Investments section of the MD&A. Net realized capital gains and losses reflected net gains of $145.5 million in 2009 compared to net losses of $77.2 million and $831 thousand in 2008 and 2007, respectively. For further discussion of realized capital gains and losses, see the Investments section of the MD&A. ANALYSIS OF COSTS AND EXPENSES Total costs and expenses increased 29.3% or $127.2 million in 2009 compared to 2008. Total costs and expenses in 2008 included expenses for contract benefits related to the rescission. Excluding the net impact of the rescission, which increased total costs and expenses by $6.3 million in 2008, total costs and expenses increased 31.2% or $133.5 million in 2009 compared to 2008 due primarily to higher amortization of DAC and, to a much lesser extent, higher interest credited to contractholder funds, partially offset by lower contract benefits. Total costs and expenses decreased 3.6% or $16.2 million in 2008 compared to 2007 due primarily to lower amortization of DAC, partially offset by higher interest credited to contractholder funds and the additional expenses for contract benefits in 2008 relating to the rescission. Excluding the net impact of the rescission, total costs and expenses decreased 5.0% or $22.5 million in 2008 compared to 2007. Contract benefits decreased 7.7% or $14.1 million in 2009 compared to 2008 due primarily to the rescission. Excluding the impact of the rescission, which increased contract benefits by $7.1 million in 2008, total contract benefits decreased 3.9% or $7.0 million in 2009 compared to 2008 due to lower contract benefits on annuities and traditional life insurance. The decline in contract benefits on annuities reflects improved mortality experience and the impact of lower sales of immediate annuities with life contingencies. The decline in contract benefits on traditional life insurance was due to improved mortality experience resulting primarily from a reduction in large claim counts and higher contract benefits ceded to ALIC due to a greater utilization of reinsurance. Contract benefits increased 1.3% or $2.4 million in 2008 compared to 2007 due to the rescission. Excluding the impact of the rescission, total contract benefits decreased 2.6% or $4.7 million in 2008 compared to 2007. This decrease reflects lower contract benefits on annuities partially offset by higher contract benefits on life insurance products. The decline in contract benefits on annuities was due to the impact of lower sales of immediate annuities with life contingencies, partially offset by unfavorable mortality experience. The increase in contract benefits on life insurance products was due to unfavorable mortality experience. We analyze our mortality and morbidity results using the difference between premiums and contract charges earned for the cost of insurance and contract benefits excluding the portion related to the implied interest on immediate annuities with life contingencies ("benefit spread"). This implied interest totaled $111.3 million, $108.1 million and $107.5 million in 2009, 2008 and 2007, respectively. The benefit spread by product group is disclosed in the following table.
2009 2008/(1)/ 2007/(1)/ ($ IN THOUSANDS) ------- -------- -------- Life insurance....... $12,627 $18,858 $26,345 Accident and health.. 4,355 3,875 2,475 Annuities............ (1,334) (2,826) 1,243 ------- ------- ------- Total benefit spread. $15,648 $19,907 $30,063 ======= ======= =======
- -------- (1)To conform to the current year presentation, certain amounts in the prior years have been reclassified. Benefit spread decreased 21.4% or $4.3 million in 2009 compared to 2008. Benefit spread decreased 33.8% or $10.2 million in 2008 compared to 2007 due primarily to the rescission. Excluding the impact of the rescission, benefit spread decreased 10.0% or $3.1 million in 2008 compared to 2007. 70 Interest credited to contractholder funds increased 5.4% or $10.3 million in 2009 compared to 2008 due primarily to higher amortization of DSI, partially offset by lower weighted average interest crediting rates on deferred fixed annuities. Amortization of DSI in 2009 and 2008 was $22.3 million and $7.8 million, respectively. The increase primarily relates to an unfavorable change in amortization relating to realized capital gains and losses of $14.6 million. Interest credited to contractholder funds increased 7.8% or $13.8 million in 2008 compared to 2007 due to higher average contractholder funds, higher acceleration of amortization of DSI due to changes in assumptions, and an increase in the weighted average interest crediting rate on deferred fixed annuities, partially offset by a favorable change in amortization of DSI relating to realized capital gains and losses, and a decline in the weighted average interest crediting rate on immediate fixed annuities. The acceleration of amortization of DSI due to changes in assumptions increased interest credited to contractholder funds by $7.0 million, $7.5 million and $844 thousand in 2009, 2008 and 2007, respectively. In order to analyze the impact of net investment income and interest credited to contractholders on net income, we monitor the difference between net investment income and the sum of interest credited to contractholder funds and the implied interest on immediate annuities with life contingencies, which is included as a component of contract benefits on the Statements of Operations and Comprehensive Income ("investment spread"). The investment spread by product group is shown in the following table.
2009 2008/(1)/ 2007/(1)/ ($ IN THOUSANDS) ------- -------- -------- Annuities....................................... $28,775 $ 56,314 $ 60,162 Life insurance.................................. 1,090 2,767 3,087 Accident and health............................. (17) (11) (23) Net investment income on investments supporting capital....................................... 29,670 44,555 38,611 ------- -------- -------- Total investment spread......................... $59,518 $103,625 $101,837 ======= ======== ========
- -------- (1)To conform to the current year presentation, certain amounts in the prior years have been reclassified. Investment spread declined 42.6% or $44.1 million in 2009 compared to 2008 and was consistent in 2008 compared to 2007. The decline in 2009 compared to 2008 reflects lower net investment income and, to a lesser extent, higher amortization of DSI. To further analyze investment spreads, the following table summarizes the weighted average investment yield on assets supporting product liabilities and capital, interest crediting rates and investment spreads for 2009, 2008 and 2007.
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE INVESTMENT YIELD INTEREST CREDITING RATE INVESTMENT SPREADS ------------- ---------------------- ----------------- 2009 2008 2007 2009 2008 2007 2009 2008 2007 ---- ---- ---- ---- ---- ---- ---- ---- ---- Interest-sensitive life insurance.................... 5.1% 5.7% 5.7% 4.6% 4.6% 4.6% 0.5% 1.1% 1.1% Deferred fixed annuities............................. 5.1 5.6 5.7 3.3 3.5 3.4 1.8 2.1 2.3 Immediate fixed annuities with and without life contingencies...................................... 6.6 7.1 7.4 6.5 6.5 6.6 0.1 0.6 0.8 Investments supporting capital, traditional life and other products..................................... 4.2 6.5 6.0 N/A N/A N/A N/A N/A N/A
71 The following table summarizes our product liabilities as of December 31 and indicates the account value of those contracts and policies for which an investment spread is generated.
2009 2008 2007 ($ IN THOUSANDS) ---------- ---------- ---------- Immediate fixed annuities with life contingencies.............. $1,675,884 $1,649,426 $1,619,758 Other life contingent contracts and other...................... 199,695 303,731 397,213 ---------- ---------- ---------- Reserve for life-contingent contract benefits............... $1,875,579 $1,953,157 $2,016,971 ========== ========== ========== Interest-sensitive life insurance.............................. $ 627,362 $ 576,167 $ 530,763 Deferred fixed annuities....................................... 3,753,232 3,885,089 3,733,197 Immediate fixed annuities without life contingencies and other. 610,285 625,709 584,501 ---------- ---------- ---------- Contractholder funds........................................ $4,990,879 $5,086,965 $4,848,461 ========== ========== ==========
Amortization of DAC increased $130.7 million in 2009 compared to 2008 and decreased to $35.7 million in 2008 compared to 2007. The components of amortization of DAC are shown in the following table.
2009 2008 2007 ($ IN THOUSANDS) --------- -------- -------- Amortization of DAC before amortization relating to realized capital gains and losses and changes in assumptions.................................... $ (52,307) $(41,471) $(47,431) (Amortization) accretion relating to realized capital gains and losses..... (54,219) 32,784 (196) Amortization acceleration for changes in assumptions ("DAC unlocking")..... (41,924) (9,091) (5,818) --------- -------- -------- Total amortization of DAC............................................... $(148,450) $(17,778) $(53,445) ========= ======== ========
The increase of $130.7 million in 2009 compared to 2008 was due primarily to an unfavorable change in amortization relating to realized capital gains and losses, and to a lesser extent, higher amortization acceleration for changes in assumptions. The decrease of $35.7 million in 2008 compared to 2007 was due primarily to a favorable change in accretion (amortization) relating to realized capital gains and losses and lower amortization on fixed annuities due to lower investment spread, partially offset by higher amortization acceleration for changes in assumptions. The impact of realized capital gains and losses on amortization of DAC is dependent upon the relationship between the assets that give rise to the gain or loss and the product liability supported by the assets. Fluctuations result from changes in the impact of realized capital gains and losses on actual and expected gross profits. In 2009, DAC amortization relating to realized capital gains and losses resulted primarily from realized capital gains on derivatives. Additionally, DAC amortization reflects our decision in the second half of 2009 not to recapitalize DAC for credit losses on investments supporting certain fixed annuities following concerns that an increase in the level of expected realized capital losses in 2010 and 2011 may reduce EGP and adversely impact the product DAC recoverability. In 2008, DAC accretion resulted primarily from realized capital losses on derivatives and other-than-temporary impairment losses. Despite the recent improvement in the credit markets and the overall economy, the cumulative impact of realized capital losses through December 31, 2009 has negatively impacted both the actual and expected gross profits of our fixed annuity business. In the fourth quarter of 2009, we reviewed and updated the gross profit assumptions used in substantially all of our fixed annuity DAC models to exclude excess realized capital losses when determining gross profits used for calculating DAC amortization. This is consistent with our decision not to record negative amortization related to realized capital losses for these fixed annuities, which is expected to be our practice during periods when realized capital losses are reported. This treatment results in a lower DAC amortization rate for these fixed annuities. The lower rate of amortization will be applied to a higher level of actual gross profits, as gross profits used to determine DAC amortization will exclude excess realized capital losses. 72 The DAC adjustment relating to unrealized capital gains and losses (disclosed in footnote 4 to the table that follows this discussion) represents the amount by which the amortization of DAC would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized. The DAC adjustment balance, subject to limitations, is determined by applying the DAC amortization rate to unrealized net capital gains or losses. The fixed annuity DAC adjustment for unrealized capital gains and losses declined as of December 31, 2009 as a result of lower unrealized capital losses and the lower rate of DAC amortization used for certain fixed annuities discussed above. Changes in the DAC adjustment balance relating to unrealized capital gains and losses are reported through other comprehensive income. Our annual comprehensive review of the profitability of our products to determine DAC balances for our interest-sensitive life, fixed annuities and other investment contracts covers assumptions for investment returns, including capital gains and losses, interest crediting rates to policyholders, the effect of any hedges, persistency, mortality and expenses in all product lines. In the first quarter of 2009, the review resulted in an acceleration of DAC amortization (charge to income) of $41.9 million pre-tax, including amortization acceleration of $45.2 million related to fixed annuities, partially offset by amortization deceleration (credit to income) of $3.3 million for interest-sensitive life insurance. The principal assumption impacting EGP and the related DAC amortization for fixed annuities was an increase in the level of expected realized capital losses in 2009 and 2010 and, to a lesser extent, reduced investment spread. Reduced EGP for fixed annuities resulted in accelerated DAC amortization. For our interest-sensitive life insurance products, the amortization deceleration was due to higher EGP due to a favorable change in our mortality assumptions, partially offset by increased expected capital losses and, to a lesser extent, reduced investment spread. In 2008, DAC amortization acceleration for changes in assumptions, recorded in connection with comprehensive reviews of the DAC balances resulted in an increase to amortization of DAC of $9.1 million. The principle assumption impacting the amortization acceleration in 2008 was the level of realized capital losses impacting actual gross profits in 2008 and the impact of realized capital losses on EGP in 2009. During the fourth quarter of 2008, our assumptions for EGP were impacted by a view of higher impairments in our investment portfolio. In 2007, DAC amortization acceleration for changes in assumptions was $5.8 million. 73 The changes in the DAC asset are summarized in the following tables.
TRADITIONAL LIFE AND ACCIDENT INTEREST-SENSITIVE FIXED AND HEALTH LIFE INSURANCE ANNUITIES TOTAL ---------------- ------------------ ------------------- ------------------- 2009 2008 2009 2008 2009 2008 2009 2008 ($ IN THOUSANDS) ------- ------- -------- -------- --------- -------- --------- -------- Beginning balance........................ $45,332 $41,568 $153,106 $ 92,861 $ 339,810 $144,235 $ 538,248 $278,664 Acquisition costs deferred............... 7,844 8,218 15,483 15,868 9,233 27,304 32,560 51,390 Impact of adoption of new OTTI accounting before unrealized impact/(1)/............................. -- -- (832) -- (10,993) -- (11,825) -- Impact of adoption of new OTTI accounting effect of unrealized capital gains and losses/(2)/................... -- -- 832 -- 10,993 -- 11,825 -- Amortization of DAC before amortization relating to realized capital gains and losses and changes in assumptions/(3)/.. (5,308) (4,454) (3,902) (7,423) (43,097) (29,594) (52,307) (41,471) (Amortization) accretion relating to realized capital gains and losses/(3)/.. -- -- (935) 5,021 (53,284) 27,763 (54,219) 32,784 Amortization (acceleration) deceleration for changes in assumptions ("DAC unlocking")/(3)/........................ -- -- 3,281 (8,207) (45,205) (884) (41,924) (9,091) Effect of unrealized capital gains and losses/(4)/............................. -- -- (47,059) 54,986 (161,974) 170,986 (209,033) 225,972 ------- ------- -------- -------- --------- -------- --------- -------- Ending balance........................... $47,868 $45,332 $119,974 $153,106 $ 45,483 $339,810 $ 213,325 $538,248 ======= ======= ======== ======== ========= ======== ========= ========
- -------- (1)The adoption of new OTTI accounting guidance resulted in an adjustment to DAC to reverse previously recorded DAC accretion related to realized capital losses that were reclassified to other comprehensive income upon adoption on April 1, 2009. The adjustment was recorded as a reduction of the DAC balance and retained income. (2)The adoption of new OTTI accounting guidance resulted in an adjustment to DAC due to the change in unrealized capital gains and losses that occurred upon adoption on April 1, 2009 when previously recorded realized capital losses were reclassified to other comprehensive income. The adjustment was recorded as an increase of the DAC balance and unrealized capital gains and losses. (3)Included as a component of amortization of DAC on the Statements of Operations and Comprehensive Income. (4)Represents the change in the DAC adjustment for unrealized capital gains and losses. The DAC adjustment balance was $46.8 million and $244.0 million as of December 31, 2009 and 2008, respectively, and represents the amount by which the amortization of DAC would increase or decrease if the unrealized gains and losses in the respective product portfolios were realized. Recapitalization of DAC is limited to the originally deferred policy acquisition costs plus interest. Operating costs and expenses increased 0.8% in 2009 compared to 2008 due primarily to higher insurance department assessments and restructuring and related charges, partially offset by lower non-deferrable commissions and decreased employee and professional services expenses. During 2009, restructuring and related charges of $2.2 million were recorded in connection with our plan to improve efficiency and narrow our focus of product offerings. Operating costs and expenses increased 8.6% in 2008 compared to 2007 due primarily to higher expenses related to growth initiatives, partially offset by lower non-deferrable commissions. In addition, 2007 benefited to a greater degree from a servicing fee paid by Prudential Financial Inc ("Prudential") for our servicing of the variable annuity business that we ceded to them during a transition period beginning in 2006 which ended in May 2008. Income tax expense increased by $15.7 million in 2009 compared to 2008 and decreased by $18.8 million in 2008 compared to 2007. These changes were proportionate with the changes in pre-tax income. The Company's effective tax rate is impacted by tax favored investment income such as dividends qualifying for the dividends received deduction ("DRD"). In 2007, the Internal Revenue Service ("IRS") announced its intention to issue regulations dealing with certain computational aspects of the DRD related to separate account assets ("separate accounts DRD"). The ultimate timing and substance of any such regulations 74 are unknown at this time, but may result in the elimination of some or all of the separate accounts DRD tax benefit reflected as a component of the Company's income tax expense. The Company recognized a tax benefit from the separate accounts DRD of $3.1 million, $2.9 million and $3.1 million in 2009, 2008 and 2007, respectively. REINSURANCE CEDED We enter into reinsurance agreements with ALIC and unaffiliated reinsurers to limit our risk of mortality and morbidity losses and re-investment risk. In addition, we have used reinsurance to effect the disposition of certain blocks of business. We retain primary liability as a direct insurer for all risks ceded to reinsurers. As of December 31, 2009 and 2008, 35.0% and 34.9%, respectively, of our face amount of life insurance in force was reinsured. As of December 31, 2009 and 2008, for certain term life insurance policies, we ceded up to 90% of the mortality risk depending on the year of policy issuance. Further, we ceded the mortality risk associated with coverage in excess of $250 thousand per life to ALIC. Additionally, we ceded all of the risk associated with our variable annuity business. The estimation of reinsurance recoverables is impacted by the uncertainties involved in the establishment of reserves. Our reinsurance recoverables, summarized by reinsurer as of December 31, are shown in the following table.
STANDARD & POOR'S FINANCIAL REINSURANCE STRENGTH RECOVERABLE ON PAID RATING/(1)/ AND UNPAID BENEFITS ---------- ------------------- 2009 2008 ($ IN THOUSANDS) ---------- -------- -------- Prudential Insurance Company of America. AA- $287,545 $335,844 Transamerica Life Group................. AA- 22,146 18,570 RGA Reinsurance Company................. AA- 5,975 5,420 Allstate Life Insurance Company......... AA- 3,449 905 Swiss Re Life and Health America, Inc... A+ 3,032 2,173 Canada Life............................. AA 1,149 1,023 Security Life of Denver................. A+ 977 925 Generali USA............................ A 902 865 American United Life.................... AA- 767 757 Triton Insurance Company................ NR 429 690 Scottish Re Life Corporation............ NR 423 447 Cologne Re.............................. AAA 121 132 Metropolitan Life....................... AA- 99 46 Minnesota Mutual........................ AA- 87 84 Mutual of Omaha......................... AA- 72 76 -------- -------- Total................................... $327,173 $367,957 ======== ========
- -------- (1)NR reflects not rated. Certain of our reinsurers experienced rating downgrades by one or more rating agencies in 2009. These reinsurers include Prudential Insurance Company of America, Transamerica Life Group, Swiss Re Life and Health America, Inc., Scottish Re Life Corporation and Security Life of Denver. We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three-years ended December 31, 2009. 75 We have a reinsurance treaty through which we primarily cede re-investment related risk on our structured settlement annuities to ALIC. The terms of this treaty meet the accounting definition of a derivative. Accordingly, the treaty is recorded in the Statements of Financial Position at fair value, and changes in the fair value of the treaty and premiums paid to ALIC are recognized in realized capital gains and losses. INVESTMENTS OVERVIEW AND STRATEGY The return on our investment portfolio is an important component of our financial results. We manage our portfolio based upon the nature of our business and our corresponding liability structure. We employ a strategic asset allocation approach which uses models that consider the nature of our liabilities and risk tolerances, as well as the risk and return parameters of the various asset classes in which we invest. This asset allocation is informed by our global economic and market outlook, as well as other inputs and constraints, including diversification effects, duration, liquidity and capital considerations. We will continue to manage risks associated with rising interest rates, commercial real estate, municipal bonds and equity market declines. Our investment strategy focuses on the total return of assets needed to support our underlying liabilities and to achieve an appropriate return on capital. Within the ranges set by the strategic asset allocation model, tactical investment decisions are made in consideration of prevailing market conditions. RISK MITIGATION We continue to focus our strategic risk mitigation efforts towards managing interest rate, credit and real estate investment risks, while our return optimization efforts focus on investing in market opportunities to generate income and capital appreciation. As a result, during 2009 we took the following actions: . Reduced our commercial real estate exposure by 29.5% or $435.7 million of amortized cost primarily through targeted dispositions and principal repayments from borrowers. . Sold $50.2 million of below investment grade assets, primarily corporate fixed income securities, as a result of improved market conditions. PORTFOLIO COMPOSITION The composition of the investment portfolio at December 31, 2009 is presented in the table below. Also see Notes 2 and 5 of the financial statements for investment accounting policies and additional information.
PERCENT TO TOTAL ($ IN THOUSANDS) ---------- Fixed income securities/(1)/. $6,073,765 85.1% Mortgage loans............... 543,007 7.6 Equity Securities/(2)/....... 123,311 1.7 Short-term/(3)/.............. 348,453 4.9 Policy loans................. 40,569 0.6 Other........................ 10,292 0.1 ---------- ----- Total..................... $7,139,397 100.0% ========== =====
- -------- (1)Fixed income securities are carried at fair value. Amortized cost basis for these securities was $6.07 billion. (2)Equity securities are carried at fair value. Cost basis for these securities was $100.2 million. (3)Short-term investments are carried at fair value. Amortized cost basis for these investments was $348.5 million. Total investments increased to $7.14 billion at December 31, 2009, from $6.65 billion at December 31, 2008, primarily due to higher valuations for fixed income securities from improved market conditions and operating cash flows that more than offset net reductions in contractholder obligations of $96.1 million. 76 FIXED INCOME SECURITIES The following table shows fixed income securities by type.
FAIR VALUE AT PERCENT TO FAIR VALUE AT PERCENT TO DECEMBER 31, TOTAL DECEMBER 31, TOTAL 2009 INVESTMENTS 2008 INVESTMENTS ($ IN THOUSANDS) ------------- ----------- ------------- ----------- U.S. government and agencies.................... $ 586,202 8.2% $ 917,731 13.8% Municipal....................................... 878,410 12.3 385,381 5.8 Corporate....................................... 3,271,202 45.8 2,887,137 43.4 Foreign government.............................. 290,856 4.1 371,542 5.6 Residential mortgage-backed securities ("RMBS"). 651,672 9.1 440,045 6.7 Commercial mortgage-backed securities ("CMBS").. 346,741 4.9 468,868 7.0 Asset-backed securities ("ABS")................. 40,044 0.6 20,202 0.3 Redeemable preferred stock...................... 8,638 0.1 5,459 0.1 ---------- ---- ---------- ---- Total fixed income securities................... $6,073,765 85.1% $5,496,365 82.7% ========== ==== ========== ====
At December 31, 2009, 96.3% of the fixed income securities portfolio was rated investment grade, which is defined as a security having of rating of Aaa, Aa, A or Baa from Moody's, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion, or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available, which is consistent with the NAIC rating. The Valuation of Securities Taskforce of the NAIC instituted a new process to be used by insurance companies during the fourth quarter of 2009 for statutory accounting, reporting and estimating risk-based capital requirements for non-agency RMBS, and as a result the NAIC ratings used for statutory reporting may differ from those shown below which are based on credit ratings. The following table summarizes the credit rating of the fixed income securities portfolio at December 31, 2009.
($ IN THOUSANDS) NAIC PERCENT RATING CREDIT RATING FAIR VALUE TO TOTAL ---------------- ----------------------- ---------- -------- 1 Aaa/Aa/A............... $4,276,686 70.4% 2 Baa.................... 1,569,671 25.9 ---------- ----- Investment grade....... 5,846,357 96.3 3 Ba..................... 158,556 2.6 4 B...................... 45,399 0.7 5 Caa or lower........... 21,489 0.4 6 In or near default..... 1,964 -- ---------- ----- Below investment grade. 227,408 3.7 ---------- ----- Total.................. $6,073,765 100.0% ========== =====
The table above includes 9 securities with a fair value totaling $27.9 million that have not yet received an NAIC rating, for which we have assigned a comparable internal rating. Due to lags between the funding of an investment, execution of final legal documents, filing with the Securities Valuation Office ("SVO") of the NAIC, and rating by the SVO, we generally have a small number of securities that have a pending NAIC rating. 77 The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of December 31, 2009.
AAA AA A ($ IN THOUSANDS) --------------------- ------------------- --------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) ---------- ----------- -------- ----------- ---------- ----------- U.S. government and agencies........ $ 586,202 $ 51,612 $ -- $ -- $ -- $ -- Municipal Tax exempt....................... -- -- 3,100 115 -- -- Taxable.......................... 47,148 873 319,229 (2,821) 280,684 (17,013) ARS.............................. 90,318 (4,082) -- -- 8,797 (928) Corporate Public........................... 32,147 (31) 160,209 5,009 617,338 36,004 Privately placed................. 118,755 7,274 100,990 5,494 332,488 20,107 Hybrid........................... -- -- -- -- 45,125 (1,977) Foreign government.................. 271,417 47,754 4,978 (20) 14,461 1,981 RMBS U.S. government sponsored entities ("U.S. Agency")....... 549,404 11,063 -- -- -- -- Prime residential mortgage- backed securities ("Prime").... 45,425 (2,094) -- -- -- -- Alt-A residential mortgage- backed securities ("Alt-A").... -- -- 7,573 (2,013) 8,402 (1,520) Subprime residential mortgage- backed securities ("Subprime")................... 6,607 (674) 11,429 (3,181) 607 (333) CMBS................................ 221,915 (16,601) 21,812 (22,702) 48,588 (18,593) ABS Collateralized debt obligations ("CDO")........................ -- -- -- -- 17,777 (6,443) Consumer and other asset-backed securities ("Consumer and other ABS").................... 5,350 (58) 7,596 (38) 1,528 -- Redeemable preferred stock.......... -- -- -- -- -- -- ---------- -------- -------- -------- ---------- -------- Total fixed income securities....... $1,974,688 $ 95,036 $636,916 $(20,157) $1,375,795 $ 11,285 ========== ======== ======== ======== ========== ========
78
BAA BA OR LOWER TOTAL ($ IN THOUSANDS) --------------------- ------------------- --------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) ---------- ----------- -------- ----------- ---------- ----------- U.S. government and agencies.. $ -- $ -- $ -- $ -- $ 586,202 $ 51,612 Municipal Tax exempt................. 5,024 565 -- -- 8,124 680 Taxable.................... 122,327 (27,706) 1,783 (281) 771,171 (46,948) ARS........................ -- -- -- -- 99,115 (5,010) Corporate Public..................... 914,619 33,142 80,456 (3,458) 1,804,769 70,666 Privately placed........... 632,330 18,449 140,463 (11,354) 1,325,026 39,970 Hybrid..................... 50,422 (7,561) 45,860 (2,926) 141,407 (12,464) Foreign government............ -- -- -- -- 290,856 49,715 RMBS U.S. Agency................ -- -- -- -- 549,404 11,063 Prime...................... -- -- -- -- 45,425 (2,094) Alt-A...................... 7,870 (2,065) -- -- 23,845 (5,598) Subprime................... 1,527 (348) 12,828 (13,281) 32,998 (17,817) CMBS.......................... 24,190 (28,827) 30,236 (39,371) 346,741 (126,094) ABS CDO........................ -- -- -- -- 17,777 (6,443) Consumer and other ABS..... 7,793 (5) -- -- 22,267 (101) Redeemable preferred stock.... 8,638 (607) -- -- 8,638 (607) ---------- -------- -------- -------- ---------- --------- Total fixed income securities. $1,774,740 $(14,963) $311,626 $(70,671) $6,073,765 $ 530 ========== ======== ======== ======== ========== =========
U.S. government and agencies securities totaled $586.2 million, with 100.0% rated Aaa, at December 31, 2009. Municipal bonds, including tax exempt, taxable and ARS securities, totaled $878.4 million as of December 31, 2009 with an unrealized net capital loss of $51.3 million. Taxable municipal bonds have an unrealized net capital loss of $46.9 million resulting from wider credit spreads than at initial purchase, which is largely due to the macroeconomic conditions and credit market deterioration that persisted throughout 2009, as well as specific issue or issuer conditions. ARS totaled $99.1 million with an unrealized net capital loss of $5.0 million as of December 31, 2009. Our holdings primarily have a credit rating of Aaa. All of our holdings are collateralized by pools of student loans for which at least 85% of the collateral was insured by the U.S. Department of Education at the time we purchased the security. As of December 31, 2009, $76.2 million of our ARS backed by student loans was 100% insured by the U.S. Department of Education and $22.9 million was 90% to 99% insured. All of our student loan ARS holdings are experiencing failed auctions and we receive the failed auction rate or, for those which contain maximum reset rate formulas, we receive the contractual maximum rate. We anticipate that failed auctions may persist and most of our holdings will continue to pay the failed auction rate or, for those that contain maximum rate reset formulas, the maximum rate. Auctions continue to be conducted as scheduled for each of the securities. At December 31, 2009, interest on $9.0 million of our ARS has reset using the maximum rate reset formula. Also, included in our municipal bond holdings at December 31, 2009 are $8.1 million of municipal securities which are not rated by third party credit rating agencies, but are rated by the NAIC and also internally rated. All of these municipal bond holdings are rated investment grade. Our initial investment decisions and ongoing monitoring procedures for these securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, structure, and liquidity risks of each issue. 79 26.0% or $228.7 million of our municipal bond portfolio is insured by five bond insurers and 33.3% of these securities have a credit rating of Aaa or Aa. Our practices for acquiring and monitoring municipal bonds primarily are based on the credit quality of the primary obligor. As of December 31, 2009, we believe valuations substantially reflected the decline in the value of the insurance, and further related valuation declines if any, are not expected to be material. While the valuation of these holdings may be temporarily impacted by negative market developments, we expect to receive all of the contractual cash flows. As of December 31, 2009, 60.9% of our insured municipal bond portfolio was insured by National Public Finance Guarantee Corporation, Inc., 15.8% by Ambac Assurance Corporation, 14.1% by Assured Municipal Guaranty Ltd and 5.1% by Syncora Holdings. Corporate bonds, including publicly traded, privately placed and hybrid securities, totaled $3.27 billion as of December 31, 2009 with an unrealized net capital gain of $98.2 million. Privately placed securities primarily consist of corporate issued senior debt securities that are in unregistered form or are directly negotiated with the borrower. Privately placed corporate securities are rated by the NAIC in instances when information is provided to them. 37.8% of the privately placed corporate securities in our portfolio are rated by an independent rating agency. Our portfolio of privately placed securities are broadly diversified by issuer, industry sector and country. The portfolio is made up of 198 issuers with each issue averaging $7.0 million. Privately placed corporate obligations generally have higher yields and contain structural security features such as financial covenants and call protections that provide investors greater protection against credit deterioration, reinvestment risk or fluctuations in interest rates than those typically found in publicly registered debt securities. Additionally, investments in these securities are made after extensive due diligence of the issuer, typically including direct discussions with senior management and on-site visits to company facilities. Ongoing monitoring includes direct periodic dialog with senior management of the issuer and continuous monitoring of operating performance and financial position. Every issue not rated by an independent rating agency is internally rated with a formal rating affirmation approximately once a year. The following table shows details of hybrid securities as of December 31, 2009.
PUBLIC PRIVATELY PLACED TOTAL - - ------------------ ------------------ ------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) ($ IN THOUSANDS) ------- ----------- ------- ----------- -------- ----------- United Kingdom ("UK"). $35,844 $(2,233) $10,752 $ (712) $ 46,596 $ (2,945) Europe (non-UK)....... 11,808 1,328 31,549 (6,501) 43,357 (5,173) Asia/Australia........ -- -- 15,620 (2,171) 15,620 (2,171) North America......... 27,973 (1,769) 7,861 (406) 35,834 (2,175) ------- ------- ------- ------- -------- -------- Total.............. $75,625 $(2,674) $65,782 $(9,790) $141,407 $(12,464) ======= ======= ======= ======= ======== ========
Hybrid securities have attributes most similar to those of fixed income securities such as stated interest rates, mandatory redemption dates or an interest rate step-up feature which is intended to incent the issuer to redeem the security at a specified call date. Hybrid securities include publicly-traded and privately placed securities. While hybrid securities are generally issued by investment grade-rated financial institutions, they have structural features which make them more sensitive to credit market deterioration. Specifically, features allowing deferral of payment have significantly impacted prices as the issuers continue to be impacted by the stress in the global financial system. $113.5 million of our hybrid securities with $11.3 million of unrealized net capital losses are Tier 1 securities, and $27.9 million with $1.1 million of unrealized net capital losses are Tier 2 securities. Tier 1 securities are lower in the capital structure than Tier 2 securities. Foreign government securities totaled $290.9 million, with 100.0% rated investment grade, at December 31, 2009. Of these securities, 91.6% are backed by the U.S. government and the remaining 8.4% are highly diversified across foreign governments. 80 RMBS, CMBS and ABS are structured securities that are primarily collateralized by residential and commercial real estate related loans and other consumer related borrowings. The cash flows are generally applied in a pre-determined order and are designed so that each security issued qualifies for a specific original rating. The security issue is typically referred to as the "class". For example, the "senior" portion or "top" of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving the principal repayments on the collateral. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings and include other "junior" or "subordinate" securities. The collateral can have fixed interest rates, variable interest rates (such as adjustable rate mortgages ("ARM")) or may contain features of both fixed and variable rate mortgages. RMBS, including U.S. Agency, Prime, Alt-A and Subprime totaled $651.7 million, with 98.0% rated investment grade, at December 31, 2009. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to significant prepayment risk from the underlying mortgages. The credit risk associated with our RMBS is mitigated due to the fact that 84.3% of the portfolio consists of securities that were issued by, or have underlying collateral that is guaranteed by, U.S. government agencies. The unrealized net capital loss of $14.4 million at December 31, 2009 on our RMBS portfolio was the result of wider credit spreads than at initial purchase on non-U.S. Agency securities, which is largely due to the macroeconomic conditions and credit market deterioration, including the impact of real estate valuations, that persisted throughout 2009. The following table shows our RMBS portfolio at December 31, 2009 based upon vintage year.
U.S. AGENCY PRIME ALT-A SUBPRIME TOTAL RMBS ($ IN THOUSANDS) ------------------- ------------------ ------------------ ------------------ ------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) -------- ----------- ------- ----------- ------- ----------- ------- ----------- -------- ----------- 2008.......... 93,883 453 -- -- -- -- -- -- 93,883 453 2007.......... 25,657 200 -- -- -- -- 17,657 (9,436) 43,314 (9,236) 2006.......... 28,311 (108) -- -- -- -- 10,827 (7,202) 39,138 (7,310) 2005.......... 72,259 669 -- -- -- -- 74 (66) 72,333 603 Pre-2005...... 282,619 9,428 45,425 (2,094) 23,845 (5,598) 4,440 (1,113) 356,329 623 -------- ------- ------- ------- ------- ------- ------- -------- -------- -------- Total......... $549,404 $11,063 $45,425 $(2,094) $23,845 $(5,598) $32,998 $(17,817) $651,672 $(14,446) ======== ======= ======= ======= ======= ======= ======= ======== ======== ========
Prime are collateralized by residential mortgage loans issued to prime borrowers. As of December 31, 2009, all of the Prime were fixed rate. Alt-A includes securities collateralized by residential mortgage loans issued to borrowers with stronger credit profiles than subprime borrowers, but who do not qualify for prime financing terms due to high loan-to-value ratios or limited supporting documentation. As of December 31, 2009, all of the Alt-A were fixed rate. Subprime includes securities that are collateralized by mortgage loans issued to borrowers that cannot qualify for Prime or Alt-A financing terms due in part to weak or limited credit history. It also includes securities that are collateralized by certain second lien mortgages regardless of the borrower's credit history. The Subprime portfolio consisted of $23.7 million and $9.3 million of first lien and second lien securities, respectively. Subprime included $21.7 million of fixed rate and $11.3 million of variable rate securities. At December 31, 2009, $6.6 million or 20.1% of the total Subprime securities are insured by four bond insurers. CMBS totaled $346.7 million, with 97.1% rated investment grade, at December 31, 2009. The CMBS portfolio is subject to credit risk, but unlike certain other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgages whereby borrowers are effectively restricted from prepaying their mortgages due to changes in interest rates. Of the CMBS investments, 81 96.8% are traditional conduit transactions collateralized by pools of commercial mortgages, broadly diversified across property types and geographical area. The remainder consists of non-traditional CMBS such as small balance transactions, large loan pools and single borrower transactions. The following table shows our CMBS portfolio at December 31, 2009 based upon vintage year.
UNREALIZED FAIR VALUE GAIN/(LOSS) ($ IN THOUSANDS) ---------- ----------- 2007............ $ 68,573 $ (9,979) 2006............ 111,290 (91,452) 2005............ 54,252 (18,199) Pre-2005........ 112,626 (6,464) -------- --------- Total CMBS.... $346,741 $(126,094) ======== =========
The unrealized net capital loss of $126.1 million at December 31, 2009 on our CMBS portfolio was a result of wider credit spreads than at initial purchase, which is largely due to the macroeconomic conditions and credit market deterioration, including the impact of real estate valuations, that persisted throughout 2009. While CMBS spreads tightened during 2009, credit spreads in most rating classes remain wider than at initial purchase, which is particularly evident in our 2005-2007 vintage year subordinated senior Aaa and non-traditional CMBS, as well as our 2005-2007 vintage year Aa and lower rated securities. These holdings accounted for $107.6 million, or 85.3%, of the unrealized net capital loss. ABS, including CDO and Consumer and other ABS, totaled $40.0 million, with 100.0% rated investment grade, at December 31, 2009. Credit risk is managed by monitoring the performance of the collateral. In addition, many of the securities in the ABS portfolio are credit enhanced with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance. A portion of the ABS portfolio is also subject to interest rate risk since price volatility and the ultimate realized yields are affected by the rate of prepayment of the underlying assets. The unrealized net capital loss of $6.5 million at December 31, 2009 on our ABS portfolio was the result of wider credit spreads than at initial purchase. CDO totaled $17.8 million, with 100.0% rated investment grade, at December 31, 2009. CDO consist primarily of obligations secured by high yield and investment grade corporate credits including $5.7 million of project finance CDO with unrealized losses of $4.3 million. The remaining $12.1 million of securities consisted of trust preferred CDO and cash flow collateralized loan obligations with unrealized losses of $2.1 million. Consumer and other ABS totaled $22.3 million, with 100.0% rated investment grade, at December 31, 2009. Consumer and other ABS consists entirely of auto securities with unrealized losses of $101 thousand. At December 31, 2009, $9.9 million or 44.5% of Consumer and other ABS securities are insured by three bond insurers. MORTGAGE LOANS Our mortgage loan portfolio totaled $543.0 million at December 31, 2009, compared to $700.3 million at December 31, 2008, and primarily comprised loans secured by first mortgages on developed commercial real estate. Key considerations used to manage our exposure include property type and geographic diversification. Our exposure to any metropolitan area is also highly diversified, with the largest exposure not exceeding 13.8% of the portfolio. The portfolio is diversified across several property types, with the largest concentrations of 39.8% in warehouse and 31.4% in office buildings. Debt service coverage ratio represents the amount of cash flows from the property available to the borrower to meet principal and interest payment obligations. The average debt service coverage ratio of the portfolio as of December 31, 2009 was 1.7, and 7.5% of the mortgage loan portfolio had a debt service coverage ratio under 1.0. Mortgage loans with debt service coverage ratios below 1.0 generally have a higher level of risk, with 7.8% of these loans having valuation allowances totaling $870 thousand. Mortgage loans with debt service coverage below 1.0 for which valuation 82 allowances have not been established primarily relate to instances where the borrower has the financial capacity to fund the revenue shortfalls from the properties for the foreseeable term, the decrease in occupancy is considered temporary, or there are other risk mitigating circumstances such as additional collateral, escrow balances or borrower guarantees. In 2009, $39.2 million of commercial mortgage loans were contractually due. Of these, 86.7% were paid as due and 13.3% were extended generally for less than one year. In addition, $89.0 million that were not contractually due in 2009 were paid in full. We are aggressively pursuing workout solutions for all delinquent loans that are not in the process of foreclosure, which total $4.8 million, including refinancing, extensions and sales. We closely monitor our 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 risks, are reviewed at least quarterly for purposes of establishing valuation allowances and placing loans on non-accrual status as necessary. Accrual of income is suspended for mortgage loans that are in default or when full and timely collection of principal and interest payments is not probable. The underlying collateral values are based upon either discounted property cash flow projections or a commonly used valuation method that utilizes a one-year projection of expected annual income divided by a market based expected rate of return. The net carrying value of impaired loans at December 31, 2009 and 2008 was $24.0 million and $3.4 million, respectively. Total valuation allowances of $4.3 million and $449 thousand were held on impaired loans at December 31, 2009 and 2008, respectively. We recognized $5.3 million of realized capital losses related to increases in the valuation allowances on impaired loans for the year ended December 31, 2009 primarily due to deteriorating debt service coverage resulting from a decrease in occupancy and the risk associated with refinancing near-term maturities due to declining collateral valuations. We recognized $449 thousand of realized capital losses related to valuation allowances on impaired loans for the year ended December 31, 2008. Realized capital losses recognized on mortgage loans held for sale totaled $686 thousand and $2.0 million for the years ended December 31, 2009 and 2008, respectively. For further detail, see Note 5 to the financial statements. EQUITY SECURITIES Equity securities include index-based securities. The equity securities portfolio was $123.3 million at December 31, 2009. We did not hold any equity securities at December 31, 2008. Net unrealized gains totaled $23.1 million at December 31, 2009. SHORT-TERM INVESTMENTS Our short-term investment portfolio was $348.5 million and $409.8 million at December 31, 2009 and 2008, respectively. The decrease in short-term investments was primarily due to funding reductions in contractholder obligations and purchases of fixed income and equity securities. POLICY LOANS Our policy loan balance was $40.6 million and $39.7 million at December 31, 2009 and 2008, respectively. Policy loans are carried at the unpaid principal balances. OTHER INVESTMENTS Our other investments as of December 31, 2009 are comprised of a note due from a related party and certain derivative financial instruments. 83 UNREALIZED NET CAPITAL GAINS AND LOSSES See Note 5 of the financial statements for further disclosures regarding unrealized gains and losses on fixed income and equity securities and factors considered in determining whether securities are other-than-temporarily impaired. Unrealized net capital gains totaled $24.0 million as of December 31, 2009, compared to unrealized net capital losses of $278.3 million at December 31, 2008. The improvement since December 31, 2008 for fixed income securities was primarily a result of tightening credit spreads on certain fixed income securities during 2009 that more than offset the rise in risk-free interest rates. The following table presents unrealized net capital gains and losses, pre-tax and after-tax at December 31.
2009 2008 ($ IN THOUSANDS) --------- --------- U.S. government and agencies....................... $ 51,612 $ 241,076 Municipal.......................................... (51,278) (77,283) Corporate.......................................... 98,172 (271,451) Foreign government................................. 49,715 109,235 RMBS............................................... (14,446) (16,407) CMBS............................................... (126,094) (252,839) ABS................................................ (6,544) (8,586) Redeemable preferred stock......................... (607) (3,831) --------- --------- Fixed income securities/(1)/....................... 530 (280,086) Equity securities.................................. 23,143 -- Short-term investments............................. (3) 65 Derivatives........................................ 309 1,749 --------- --------- Unrealized net capital gains and losses, pre-tax... 23,979 (278,272) Amounts recognized for: Insurance reserves/(2)/......................... (40,551) (155,935) DAC and DSI/(3)/................................ 53,572 266,647 --------- --------- Total....................................... 13,021 110,712 Deferred income taxes.............................. (12,950) 58,646 --------- --------- Unrealized net capital gains and losses, after-tax. $ 24,050 $(108,914) ========= =========
- -------- (1)Unrealized net capital gains and losses for fixed income securities as of December 31, 2009 comprises $(3.8) million related to unrealized net capital losses on fixed income securities with other-than-temporary impairment and $4.3 million related to other unrealized net capital gains and losses. (2)The insurance reserves adjustment represents the amount by which the reserve balance would increase if the net unrealized gains in the applicable product portfolios were realized and reinvested at current lower interest rates, resulting in a premium deficiency. Although we evaluate premium deficiencies on the combined performance of our life insurance and immediate annuities with life contingencies, the adjustment primarily relates to structured settlement annuities with life contingencies, in addition to certain payout annuities with life contingencies. (3)The DAC and DSI adjustment balance represents the amount by which the amortization of DAC and DSI would increase or decrease if the unrealized gains or losses in the respective product portfolios were realized. Only the unrealized net capital gains and losses on fixed annuity and interest-sensitive life product portfolios are used in this calculation. The DAC and DSI adjustment balance, subject to limitations, is determined by applying the DAC and DSI amortization rate to unrealized net capital gains or losses. Recapitalization of the DAC and DSI balances is limited to the originally deferred costs plus interest. The DAC and DSI adjustment balance was limited as of December 31, 2008 because the calculated amount, when added to the DAC and DSI balance before the impact of unrealized capital gains and losses, was greater than originally deferred costs plus interest. The DAC and DSI adjustment balance is below the limitation as of December 31, 2009. The limitation amount changes from period to period based on changes in the DAC and DSI balance before the impact of unrealized capital gains and losses, as well as new deferrals and interest. The net unrealized gain for the fixed income portfolio totaled $530 thousand, comprised of $287.2 million of gross unrealized gains and $286.7 million of gross unrealized losses at December 31, 2009. This is compared to a net unrealized loss for the fixed income portfolio totaling $280.1 million, comprised of $420.1 million of gross unrealized gains and $700.2 million of gross unrealized losses at December 31, 2008. The net unrealized gain for the equity portfolio totaled $23.1 million, comprised entirely of unrealized gains at December 31, 2009. We held no equity securities at December 31, 2008. 84 Gross unrealized gains and losses as of December 31, 2009 on fixed income securities by type and sector are provided in the table below.
GROSS UNREALIZED AMORTIZED FAIR VALUE ($ IN THOUSANDS) ------------------ COST AS A AS A PERCENT PAR AMORTIZED FAIR PERCENT OF OF VALUE/(1)/ COST GAINS LOSSES VALUE PAR VALUE/(2)/ PAR VALUE/(2)/ ---------- ---------- -------- --------- ---------- ------------- ------------- Corporate: Banking............................. $ 367,525 $ 350,997 $ 7,852 $ (27,890) $ 330,959 95.5% 90.1% Utilities........................... 690,462 683,334 46,735 (8,361) 721,708 99.0 104.5 Transportation...................... 182,280 185,064 9,831 (5,572) 189,323 101.5 103.9 Financial services.................. 295,206 292,162 10,067 (5,539) 296,690 99.0 100.5 Consumer goods (cyclical and non-cyclical)...................... 500,196 502,174 25,932 (4,834) 523,272 100.4 104.6 Capital goods....................... 347,550 346,589 14,338 (3,697) 357,230 99.7 102.8 Basic industry...................... 124,781 124,926 6,254 (925) 130,255 100.1 104.4 Energy.............................. 235,327 236,722 11,362 (592) 247,492 100.6 105.2 Communications...................... 166,248 166,130 10,922 (264) 176,788 99.9 106.3 FDIC guaranteed..................... 25,000 25,193 -- (88) 25,105 100.8 100.4 Technology.......................... 106,996 109,588 5,954 (50) 115,492 102.4 107.9 Other............................... 228,855 150,151 9,332 (2,595) 156,888 65.6 68.6 ---------- ---------- -------- --------- ---------- Total corporate fixed income portfolio. 3,270,426 3,173,030 158,579 (60,407) 3,271,202 97.0 100.0 ---------- ---------- -------- --------- ---------- U.S. government and agencies........... 662,633 534,590 51,977 (365) 586,202 80.7 88.5 Municipal.............................. 1,164,370 929,688 12,502 (63,780) 878,410 79.8 75.4 Foreign government..................... 385,903 241,141 50,715 (1,000) 290,856 62.5 75.4 RMBS................................... 659,520 666,118 11,539 (25,985) 651,672 101.0 98.8 CMBS................................... 493,330 472,835 1,884 (127,978) 346,741 95.8 70.3 ABS.................................... 45,696 46,588 5 (6,549) 40,044 102.0 87.6 Redeemable preferred stock............. 8,500 9,245 -- (607) 8,638 108.8 101.6 ---------- ---------- -------- --------- ---------- ----- ----- Total fixed income securities.......... $6,690,378 $6,073,235 $287,201 $(286,671) $6,073,765 90.8 90.8 ========== ========== ======== ========= ========== ===== =====
- -------- (1)Included in par value are zero-coupon securities that are generally purchased at a deep discount to the par value that is received at maturity. These primarily included corporate, municipal, foreign government and U.S. government and agencies zero-coupon securities with par value of $170.7 million, $391.0 million, $338.9 million and $288.2 million, respectively. (2)Excluding the impact of zero-coupon securities, the percentage of amortized cost to par value would be 99.4% for corporates, 100.0% for municipals, 106.6% for foreign governments and 100.5% for U.S. government and agencies. Similarly, excluding the impact of zero-coupon securities, the percentage of fair value to par value would be 102.3% for corporates, 97.8% for municipals, 108.7% for foreign governments and 102.2% for U.S. government and agencies. The banking, utilities, transportation, financial services, consumer goods and capital goods sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio at December 31, 2009. While credit spreads have tightened in the last three quarters of 2009 from the historically high levels observed in the fourth quarter of 2008 and the first quarter of 2009, they remain wider than at initial purchase for certain securities in the portfolio. 85 The scheduled maturity dates for fixed income securities in a gross unrealized loss position at December 31, 2009 are shown below. Actual maturities may differ from those scheduled as a result of prepayments by the issuers.
UNREALIZED PERCENT FAIR PERCENT LOSS TO TOTAL VALUE TO TOTAL ($ IN THOUSANDS) ---------- -------- ---------- -------- Due after one year through five years.. $ (6,273) 2.2% $ 420,913 21.6% Due after five years through ten years. (20,333) 7.1 205,594 10.5 Due after ten years.................... (227,531) 79.4 1,136,589 58.3 RMBS and ABS/(1)/...................... (32,534) 11.3 187,711 9.6 --------- ----- ---------- ----- Total.................................. $(286,671) 100.0% $1,950,807 100.0% ========= ===== ========== =====
- -------- (1)Because of the potential for prepayment, these securities are not categorized based on their contractual maturities. OTHER-THAN-TEMPORARY IMPAIRMENT EVALUATION We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income and equity security whose carrying value may be other-than-temporarily impaired. The process includes a quarterly review of all securities through a screening process which identifies instances where the fair value compared to amortized cost for fixed income securities and cost for equity securities is below established thresholds, and also includes the monitoring of other criteria such as ratings, ratings downgrades or payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated based on facts and circumstances for inclusion on our watch-list. All investments in an unrealized loss position at December 31, 2009 were included in our portfolio monitoring process for determining whether declines in value were other than temporary. Due to recent market conditions and liquidity concerns, as well as wider credit spreads than at initial purchase which persist in certain markets, particularly related to structured assets, the extent and duration of a decline in fair value have become less indicative of when the market may believe there has been credit deterioration with respect to an issue or issuer. While we continue to use declines in fair value and the length of time a security is in an unrealized loss position as indicators of potential credit deterioration, our determination of whether a security's decline in fair value is other than temporary has placed greater emphasis on our analysis of the underlying credit and collateral. 86 The following table summarizes fixed income securities in a gross unrealized loss position according to significance, aging and investment grade classification. There were no equity securities in a gross unrealized loss position at December 31, 2009 or 2008.
DECEMBER 31, 2009 DECEMBER 31, 2008 ($ IN THOUSANDS, EXCEPT NUMBER OF ISSUES) --------------------------------- --------------------------------- BELOW BELOW INVESTMENT INVESTMENT INVESTMENT INVESTMENT GRADE GRADE TOTAL GRADE GRADE TOTAL ---------- ---------- ---------- ---------- ---------- ---------- Category (I): Unrealized loss less than 20% of amortized cost/(1)/ Number of issues.................... 251 34 285 448 38 486 Fair value...................... $1,598,422 $ 74,615 $1,673,037 $2,105,319 $ 70,192 $2,175,511 Unrealized...................... $ (76,037) $ (4,717) $ (80,754) $ (187,983) $ (8,707) $ (196,690) Category (II): Unrealized loss greater than or equal to 20% of amortized cost for a period of less than 6 consecutive months/(1)/ Number of issues.................... 6 4 10 150 30 180 Fair value...................... $ 36,613 $ 12,501 $ 49,114 $ 557,986 $ 46,428 $ 604,414 Unrealized...................... $ (10,289) $ (3,916) $ (14,205) $ (431,954) $(26,145) $ (458,099) Category (III): Unrealized loss greater than or equal to 20% of amortized cost for a period of 6 or more consecutive months, but less than 12 consecutive months/(1)/ Number of issues.................... 3 5 8 13 2 15 Fair value...................... $ 13,549 $ 2,500 $ 16,049 $ 23,013 $ 612 $ 23,625 Unrealized...................... $ (10,184) $ (2,311) $ (12,495) $ (41,789) $ (757) $ (42,546) Category (IV): Unrealized loss greater than or equal to 20% of amortized cost for 12 or more consecutive months/(1)/ Number of issues.................... 41 17 58 -- 1 1 Fair value...................... $ 185,204 $ 27,403 $ 212,607 $ -- $ 2,562 $ 2,562 Unrealized...................... $ (150,099) $(29,118) $ (179,217) $ -- $ (2,884) $ (2,884) ---------- -------- ---------- ---------- -------- ---------- Total number of issues.............. 301 60 361 611 71 682 ========== ======== ========== ========== ======== ========== Total fair value................ $1,833,788 $117,019 $1,950,807 $2,686,318 $119,794 $2,806,112 ========== ======== ========== ========== ======== ========== Total unrealized losses............. $ (246,609) $(40,062) $ (286,671) $ (661,726) $(38,493) $ (700,219) ========== ======== ========== ========== ======== ==========
- -------- (1)At December 31, 2009, gross unrealized losses resulting from factors other than credit on fixed income securities with other-than-temporary impairments for which we have recorded a credit loss in earnings are included as follows: Category (III) $1.6 million, and Category (IV) $5.0 million. Categories (I) and (II) have generally been adversely affected by overall economic conditions including interest rate increases and the market's evaluation of certain sectors. The degree to which and/or length of time that the securities have been in an unrealized loss position does not suggest that these securities pose a high risk of being other-than-temporarily impaired. The largest individual unrealized loss was $3.7 million for Category (I) and $2.4 million for Category (II) as of December 31, 2009. 87 Gross unrealized losses on fixed income securities in Category (II) decreased $443.9 million since December 31, 2008. This change was primarily the result of improved market conditions resulting in higher valuations, which either caused a shift to Category (I) or created an overall gross unrealized gain position. The remainder of the reduction in Category (II) is a result of losses shifting into Category (III) and (IV) due to continued aging of losses in a continuous unrealized loss position of greater than or equal to 20% of amortized cost and the resetting of unrealized losses to the historical point of impairment for securities impacted by the adoption of new OTTI accounting guidance on April 1, 2009. Categories (III) and (IV) are affected by macroeconomic and credit pressures upon real estate valuations and borrowers, and issue, issuer or industry specific conditions. The degree to which and/or length of time these securities have been in an unrealized loss position subject them to increased scrutiny through our portfolio monitoring process. The largest individual unrealized loss was $5.5 million for Category (III) and $11.8 million for Category (IV) as of December 31, 2009. Category (III) and (IV) fixed income securities at December 31, 2009 are listed in the following table by fixed income security type and investment quality classification.
INVESTMENT GRADE ($ IN THOUSANDS) --------------------------------------------------------- CATEGORY (III) CATEGORY (IV) TOTAL ----------------- ------------------ ------------------ FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------- ---------- -------- ---------- -------- ---------- Municipal..... $ 5,601 $ (3,132) $ 59,148 $ (35,166) $ 64,749 $ (38,298) Corporate..... 7,948 (7,052) 13,262 (4,449) 21,210 (11,501) RMBS.......... -- -- 1,130 (2,513) 1,130 (2,513) CMBS.......... -- -- 99,181 (101,975) 99,181 (101,975) ABS........... -- -- 12,483 (5,996) 12,483 (5,996) ------- -------- -------- --------- -------- --------- $13,549 $(10,184) $185,204 $(150,099) $198,753 $(160,283) ======= ======== ======== ========= ======== ========= BELOW INVESTMENT GRADE --------------------------------------------------------- CATEGORY (III) CATEGORY (IV) TOTAL ----------------- ------------------ ------------------ FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE LOSSES VALUE LOSSES VALUE LOSSES ------- ---------- -------- ---------- -------- ---------- Corporate..... $ 339 $ (161) $ 17,180 $ (6,329) $ 17,519 $ (6,490) RMBS.......... 2,161 (2,150) 7,968 (10,544) 10,129 (12,694) CMBS.......... -- -- 2,255 (12,245) 2,255 (12,245) ------- -------- -------- --------- -------- --------- $ 2,500 $ (2,311) $ 27,403 $ (29,118) $ 29,903 $ (31,429) ------- -------- -------- --------- -------- --------- Total......... $16,049 $(12,495) $212,607 $(179,217) $228,656 $(191,712) ======= ======== ======== ========= ======== =========
As of December 31, 2009, our gross unrealized losses in Category (III) and (IV) were primarily concentrated in structured securities, as we have experienced declines in fair value since the time of initial purchase. As of December 31, 2009, RMBS, CMBS and ABS comprised $112.8 million and $12.4 million of investment grade and below investment grade securities in Category (III) and (IV), respectively. Consistent with their rating, our portfolio monitoring indicates that the investment grade securities have a relatively low risk of default. Securities rated below investment grade, whether at issue or upon subsequent downgrade, have a higher level of risk and can be more volatile. A key consideration in the determination of other-than-temporary impairment for structured securities is whether the present value of loss adjusted cash flows from the underlying collateral will be sufficient to recover our amortized cost basis. This evaluation focuses on the adequacy of credit enhancement relative to the performance of the underlying collateral, adjusted for projected defaults and prepayments. Credit enhancement includes, but is not limited to, structural subordination, guarantees and reserves. Key future collateral performance considerations include historical default/prepayment trends, as well as projected macroeconomic variables such as unemployment rates and interest rates. In general, securities with credit enhancement in excess 88 of projected loss-adjusted collateral performance are deemed not other-than-temporarily impaired. Securities with deficient credit enhancement are deemed other-than-temporarily impaired and the difference between the estimated recovery value and amortized cost is recorded in earnings as a credit loss. A description of the other-than-temporary impairment assessment for our RMBS and CMBS, which comprise a majority of our Category (III) and (IV) unrealized losses, follows: . The credit loss evaluation for non-agency RMBS securities, including Prime, Alt-A and Subprime securities, primarily relies on projections of losses based on future collateral performance, taking into account security specific delinquency and loss severity trends on the underlying mortgage collateral to date. The expected performance of each transaction considers projected collateral losses and credit enhancement levels, as well as an assessment of the origination practices of the transaction sponsor, geographic diversification, overall transaction structure, collateral type and quality, transaction vintage year and other considerations that may be of concern. Our default estimates on the underlying mortgage collateral are forward looking and generally based upon security specific performance trends to date as well as our overall economic outlook, with a focus on housing, unemployment and GDP expectations, and consider other factors that may influence future borrower behaviors. Our loss severity estimates are forward looking and incorporate estimates of future house price appreciation/depreciation expectations and estimates of foreclosure timing and expenses. . The credit loss evaluation for CMBS primarily relies on model-driven projections of future collateral performance, taking into account all reasonably available information specific to the underlying commercial mortgage loans including estimates of current and future property value, current and projected rental income and the credit enhancement levels. Estimates of future property value and rental income consider specific property-type and metro area economic trends such as property vacancy rates and rental rates, employment indicators and building industry fundamentals. Other considerations include borrower payment history, the origination practices of the transaction sponsor, overall collateral quality and diversification, transaction vintage year, maturity date, overall structure of the transaction and other factors that may influence performance. Actual realized losses in the CMBS market have historically been low, therefore our projection of collateral performance is informed by credit opinions obtained from third parties, such as nationally recognized credit rating agencies, industry analysts and a CMBS loss modeling advisory service. For structured securities deemed other-than-temporarily impaired, we recognized the estimated credit loss in earnings, while $6.6 million of unrealized losses related to factors other than credit remains classified in OCI. Structured securities deemed not other-than-temporarily impaired are current on contractual or expected payments and our detailed analysis of the underlying credit and related cash flows has concluded that our amortized cost basis is recoverable or the securities are reliably insured. The declines in fair value are primarily due to credit spread widening in the structured security marketplace and increased liquidity discounts. We believe that the unrealized losses on our fixed income securities are not predictive of their ultimate performance and the unrealized losses should reverse over the remaining lives of the securities. We anticipate that these securities will recover in line with our best estimate of the expected cash flows which are used for other-than-temporary impairment evaluations as well as managing the portfolio. As of December 31, 2009, we do not have the intent to sell and it is not more likely than not we will be required to sell these securities before the recovery of their amortized cost basis. Our evaluation of whether it is more likely than not we will be required to sell a security before recovery of its amortized cost basis is supported by our liquidity position, which cushions us from the need to liquidate securities with significant unrealized losses to meet cash obligations. Additionally, whenever our initial analysis indicates that a fixed income security's unrealized loss of 20% or more for at least 36 months or any equity security's unrealized loss of 20% or more for at least 12 months is temporary, additional evaluations and management approvals are required to substantiate that the unrealized loss 89 is related to other factors and recognition of a credit loss write-down is not appropriate. As of December 31, 2009, no securities met these criteria. We also monitor the quality of our fixed income portfolio by categorizing certain investments as "problem," "restructured," or "potential problem." Problem fixed income securities are in default with respect to principal or interest and/or are investments issued by companies that have gone into bankruptcy subsequent to our acquisition. Fixed income securities are categorized as restructured when the debtor is in financial difficulty and we grant a concession. Potential problem fixed income securities are current with respect to contractual principal and/or interest, but because of other facts and circumstances, we have concerns regarding the borrower's ability to pay future principal and interest according to the original terms, which causes us to believe these investments may be classified as problem or restructured in the future. The following table summarizes problem, restructured and potential problem fixed income securities at December 31.
2009 --------------------------------------------------------------- AMORTIZED PERCENT OF COST AS A FAIR VALUE AS TOTAL FIXED PAR AMORTIZED PERCENT OF FAIR A PERCENT OF INCOME VALUE/(1)/ COST/(1)/ PAR VALUE VALUE PAR VALUE PORTFOLIO ($ IN THOUSANDS) --------- --------- ---------- ------- ------------- ----------- Problem................................ $15,052 $10,118 67.2% $10,176 67.6% 0.2% Potential problem...................... 80,594 47,484 58.9 38,348 47.6 0.6 ------- ------- ------- --- Total net carrying value............... $95,646 $57,602 $48,524 0.8% ======= ======= ======= === Cumulative write-downs recognized/(2)/. $25,493 ======= 2008 --------------------------------------------------------------- AMORTIZED PERCENT OF COST AS A FAIR VALUE AS TOTAL FIXED PAR AMORTIZED PERCENT OF FAIR A PERCENT OF INCOME VALUE/(1)/ COST/(1)/ PAR VALUE VALUE PAR VALUE PORTFOLIO --------- --------- ---------- ------- ------------- ----------- Problem................................ $30,000 $18,824 62.7% $13,593 45.3% 0.2% Potential problem...................... 56,942 22,118 38.8 22,080 38.8 0.4 ------- ------- ------- --- Total net carrying value............... $86,942 $40,942 47.1 $35,673 41.0 0.6% ======= ======= ======= === Cumulative write-downs recognized/(2)/. $41,423 =======
- -------- (1)The difference between par value and amortized cost of $38.0 million at December 31, 2009 and $46.0 million at December 31, 2008 is primarily attributable to write-downs. Par value has been reduced by principal payments. (2)Cumulative write-downs recognized only reflects impairment write-downs related to investments within the problem, potential problem and restructured categories. At December 31, 2009, amortized cost for the problem category was $10.1 million and was comprised of $9.6 million of corporates (privately placed) and $518 thousand of Subprime. The decrease of $8.7 million from December 31, 2008 is primarily attributable to a reduction in corporates. The amortized cost of problem investments with a fair value less than 80% of amortized cost totaled $519 thousand with unrealized losses of $417 thousand and fair value of $102 thousand. At December 31, 2009, amortized cost for the potential problem category was $47.5 million and was comprised of $30.0 million of corporates (public and privately placed), $9.6 million of Subprime and $7.9 million of CMBS. The increase of $25.4 million from December 31, 2008 is primarily attributable to additional corporates. The amortized cost of potential problem investments with a fair value less than 80% of amortized cost totaled $19.6 million with unrealized losses of $11.7 million and fair value of $7.9 million. 90 NET INVESTMENT INCOME The following table presents net investment income for the years ended December 31.
2009 2008 2007 ($ IN THOUSANDS) -------- -------- -------- Fixed income securities........... $338,563 $362,671 $358,547 Mortgage loans.................... 36,658 41,949 40,916 Equity securities................. 1,751 -- -- Short-term and other.............. 5,038 12,949 14,487 -------- -------- -------- Investment income, before expense. 382,010 417,569 413,950 Investment expense................ (9,615) (14,638) (27,212) -------- -------- -------- Net investment income............. $372,395 $402,931 $386,738 ======== ======== ========
Net investment income decreased 7.6% or $30.5 million to $372.4 million in 2009 from $402.9 million in 2008. The decline was primarily due to lower yields. Net investment income increased 4.2% in 2008 compared to 2007 due primarily to higher average portfolio balances resulting from the investment of cash flows from operating and financing activities related primarily to deposits on fixed annuities and interest-sensitive life policies. Total investment expenses decreased $12.6 million in 2008 compared to 2007. The decrease was primarily due to lower expenses associated with a lower amount of collateral received in connection with securities lending transactions. NET REALIZED CAPITAL GAINS AND LOSSES The following table presents the components of realized capital gains and losses and the related tax effect for the years ended December 31.
2009 2008 2007 ($ IN THOUSANDS) -------- --------- ------- Impairment write-downs.......................... $(30,255) $ (38,528) $ -- Change in intent write-downs.................... (20,821) (79,262) (6,793) -------- --------- ------- Net other-than-temporary impairment losses recognized in earnings..................... (51,076) (117,790) (6,793) Sales........................................... 160,294 59,966 10,321 Valuation of derivative instruments............. 29,831 (29,525) (8,166) Settlements of derivative instruments........... 6,419 10,144 3,807 -------- --------- ------- Realized capital gains and losses, pre-tax...... 145,468 (77,205) (831) Income tax (expense) benefit.................... (52,474) 25,708 308 -------- --------- ------- Realized capital gains and losses, after-tax. $ 92,994 $ (51,497) $ (523) ======== ========= =======
Impairment write-downs totaled $30.3 million in 2009 and included write-downs on fixed income securities and mortgage loans of $25.0 million and $5.3 million, respectively. In 2008, impairment write-downs totaled $38.5 million and included write-downs on fixed income securities and mortgage loans of $38.1 million and $449 thousand, respectively. No impairment write-downs were recognized in 2007. Impairment write-downs in 2009 were primarily the result of recovery assessments related to investments with commercial real estate exposure, including CMBS and mortgage loans; RMBS which experienced deterioration in expected cash flows; ABS; and hybrid corporate fixed income securities. $5.8 million of the fixed income security write-downs in 2009 related to securities that were subsequently disposed. Of the remaining, $19.2 million or 76.9% of the fixed income security write-downs in 2009 related to impaired securities that were performing in line with anticipated or contractual cash flows but were written down primarily because of expected deterioration in the performance of the underlying collateral or our assessment of the probability of future default. For these securities, as of December 31, 2009, there have either been no defaults or defaults have only impacted classes lower than our position in the capital structure. $237 thousand of the fixed 91 income security write-downs in 2009 related to securities experiencing a significant departure from anticipated cash flows; however, we believe they retain economic value. $45 thousand in 2009 related to fixed income securities for which future cash flows are very uncertain. Hybrid corporate fixed income securities are assessed for other-than-temporary impairment as fixed income securities when they are expected to perform like a fixed income security. However, when credit-related reasons increase the risk of deferred payment, they may be assessed for other-than-temporary impairment in a manner similar to equity securities. In 2009, hybrid securities issued primarily by European financial institutions were assessed as equity securities and written down for other-than-temporary impairment resulting in $16.8 million of realized capital losses. These hybrid securities that were still held as of December 31, 2009 had a fair value of $22.5 million. Change in intent write-downs totaling $20.8 million in 2009 included $20.1 million for fixed income securities, $686 thousand for mortgage loans and $14 thousand for equity securities. In 2008, change in intent write-downs totaled $79.3 million and included $77.3 million for fixed income securities and $2.0 million for mortgage loans. Beginning April 1, 2009, change in intent write-downs for fixed income securities reflect instances where we have made the decision to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis. For periods prior to April 1, 2009 for fixed income securities and all periods for equity securities, change in intent write-downs reflect instances where we could not assert a positive intent to hold until recovery. Change in intent write-downs for mortgage loans reflect instances where the loans have been classified as held for sale. The change in intent write-downs in 2009 were a result of ongoing comprehensive reviews of our portfolio resulting in write-downs of individually identified investments. The change in intent write-downs in 2008 were a result of our risk mitigation and return optimization programs and ongoing comprehensive reviews of our portfolios. Sales generated $160.3 million of net realized gains in 2009 primarily due to $150.3 million of gains on sales of U.S. and foreign government fixed income securities. Net realized gains from sales in 2008 were due to net realized gains on fixed income securities of $59.6 million comprised of gross gains of $75.6 million and gross losses of $16.0 million. Valuation and settlement of derivative instruments recorded as net realized capital gains totaling $36.2 million for the year ended December 31, 2009 included $29.8 million of gains on the valuation of derivative instruments and $6.4 million of gains on the settlement of derivative instruments. Net realized capital gains on the valuation of derivative instruments in 2009 were primarily due to the impact of changing interest rates on the value of expected future settlements. For the year ended December 31, 2008, net realized capital losses on the valuation and settlement of derivative instruments totaled 19.4 million. A changing interest rate environment will drive changes in our portfolio duration targets at a tactical level. A duration target and range is established with an economic view of liabilities relative to a long-term investment portfolio view. Tactical duration management is accomplished through both cash market transactions, sales and new purchases and derivative activities that generate realized gains and losses. As a component of our approach to managing portfolio duration, realized gains and losses on certain derivative instruments are most appropriately considered in conjunction with the unrealized gains and losses on the fixed income portfolio. This approach mitigates the impacts of general interest rate changes to our overall financial condition. 92 FAIR VALUE OF ASSETS AND LIABILITIES We have two types of situations where we have classified investments as Level 3 in the fair value hierarchy disclosures in Note 6 of the financial statements. The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. Among the indicators we consider in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the following: . Level of new issuances in the primary market; . Trading volume in the secondary market; . Level of credit spreads over historical levels; . Bid-ask spread; and . Price consensus among market participants and sources. The second situation where we have classified securities in Level 3 is where specific inputs to our fair value estimation models which are considered significant are not market observable. This has occurred in two principal categories. The first is for broker quotes. The second is our ARS backed by student loans for which a principal assumption, the anticipated date liquidity will return to this market, is not market observable. During 2009, certain Alt-A RMBS were transferred into Level 2 from Level 3 as a result of increased liquidity in these markets (see Level 3 rollforward in Note 6 of the financial statements). This was evidenced by increased trading volume and the narrowing of bid-ask spreads for our specific holdings. Additionally, privately placed corporate fixed income securities that are valued using internal pricing models were transferred into Level 2 from Level 3 as a result of enhancements to the valuation methodology, refinements to model inputs and corroboration of our internal credit rating process by comparison to available external ratings. We have also implemented price validation procedures such as back-testing of actual sales, which corroborates the various model inputs to market observable data. When transferring these securities into Level 2, we do not change the source of fair value estimates or modify the estimates received from independent third-party valuation service providers or the internal valuation approach. Accordingly, for securities included within this group, there was no change in fair value resulting in a realized or unrealized gain or loss. During 2009, certain CMBS were transferred into Level 3 from Level 2 as a result of decreased liquidity in these markets. This was evidenced by decreased trading volume and the widening of bid-ask spreads for these holdings. Transfers into Level 3 during 2009 also included situations where a fair value quote is not provided by our independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote resulting in the security being classified as Level 3. Transfers out of Level 3 during 2009 also included situations where a broker quote was used in the prior period and a fair value quote is now available from our independent third-party valuation service provider. A quote utilizing the new pricing source is not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities are not significant. MARKET RISK Market risk is the risk that we will incur losses due to adverse changes in interest rates, credit spreads or equity prices. Adverse changes to these rates and prices may occur due to changes in the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants or changes in market perceptions of credit worthiness and/or risk tolerance. The active management of market risk is integral to our results of operations. We may use the following approaches to manage exposure to market risk within defined tolerance ranges: 1) rebalancing existing asset or 93 liability portfolios, 2) changing the character of investments purchased in the future and 3) using derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased. For a more detailed discussion of our use of derivative financial instruments, see Note 7 of the financial statements. OVERVIEW In formulating and implementing guidelines for investing funds, we seek to earn returns that enhance our ability to offer competitive rates and prices to customers while contributing to attractive and stable profits and long-term capital growth. Accordingly, our investment decisions and objectives are a function of our underlying risks and our product profiles. Investment policies define the overall framework for managing market and other investment risks, including accountability and controls over risk management activities. These investment policies, which have been approved by our board of directors, specify the investment limits and strategies that are appropriate given our liquidity, surplus, product profile and regulatory requirements. Executive oversight of investment activities is conducted primarily through our board of directors and investment committee. Asset-liability management ("ALM") policies further define the overall framework for managing market and investment risks. ALM focuses on strategies to enhance yields, mitigate market risks and optimize capital to improve profitability and returns. ALM activities follow asset-liability policies that have been approved by our board of directors. These ALM policies specify limits, ranges and/or targets for investments that best meet our business objectives in light of our product liabilities. We manage our exposure to market risk through the use of asset allocation, duration, simulation, and as appropriate, through the use of stress tests. We have asset allocation limits that place restrictions on the total funds that may be invested within an asset class. We have duration limits on our investment portfolio and, as appropriate, on individual components of the portfolio. These duration limits place restrictions on the amount of interest rate risk that may be taken. Comprehensive 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 investment policies. This day-to-day management is integrated with and informed by the activities of the ALM organization. This integration is intended to result in a prudent, methodical and effective adjudication of market risk and return, conditioned by the unique demands and dynamics of our product liabilities and supported by the continuous application of advanced risk technology and analytics. INTEREST RATE RISK is the risk that we will incur loss due to adverse changes in interest rates relative to the interest rate characteristics of interest bearing assets and liabilities. This risk arises from many of our primary activities, as we invest substantial funds in interest-sensitive assets and issue interest-sensitive liabilities. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. We manage the interest rate risk in our assets relative to the interest rate risk in our liabilities. One of the measures used to quantify this exposure is duration. Duration measures the price sensitivity of the assets and liabilities to changes in interest rates. For example, if interest rates increase 100 basis points, the fair value of an asset with a duration of 5 is expected to decrease in value by approximately 5%. At December 31, 2009, the difference between our asset and liability duration was (0.36), compared to a 0.56 gap at December 31, 2008. A negative duration gap indicates that the fair value of our liabilities is more sensitive to interest rate movements than the fair value of our assets. We seek to invest premiums, contract charges and deposits to generate future cash flows that will fund future claims, benefits and expenses, and that will earn stable spreads across a wide variety of interest rate and economic scenarios. To achieve this objective and limit interest rate risk, we adhere to a philosophy of managing the duration of assets and related liabilities within predetermined tolerance levels. This philosophy is executed using duration targets for fixed income investments in addition to interest rate swaps and caps to reduce the interest rate risk resulting from mismatches between existing assets and liabilities. 94 To calculate the duration gap between assets and liabilities, we project asset and liability cash flows and calculate their net present value using a risk-free market interest rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at alternative interest rates and determining the percentage change in aggregate fair value. The cash flows used in this calculation include the expected maturity and repricing characteristics of our derivative financial instruments, all other financial instruments, and certain other items including annuity liabilities and interest-sensitive liabilities. The projections include assumptions (based upon historical market experience and our experience) that reflect the effect of changing interest rates on the prepayment, lapse, leverage and/or option features of instruments, where applicable. The preceding assumptions relate primarily to mortgage-backed securities, collateralized mortgage obligations, municipal housing bonds, callable municipal and corporate obligations, and fixed rate single and flexible premium deferred annuities. Based upon the information and assumptions used in this duration calculation, and interest rates in effect at December 31, 2009, we estimate that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would increase the net fair value of the assets and liabilities by $172 thousand, compared to a decrease of $59.0 million at December 31, 2008. The selection of a 100 basis point immediate parallel change in interest rates should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. There are $471.9 million of assets supporting life insurance products such as traditional and interest-sensitive life that are not financial instruments. These assets and the associated liabilities have not been included in the above estimate. The $471.9 million of assets excluded from the calculation has increased from $375.5 million reported at December 31, 2008 as fixed income valuations have improved as a result of significant tightening of credit spreads. Based on assumptions described above, in the event of a 100 basis point immediate increase in interest rates, the assets supporting life insurance products would decrease in value by $28.6 million, compared to a decrease of $26.8 million at December 31, 2008. To the extent that conditions differ from the assumptions we used in these calculations, duration and rate shock measures could be significantly impacted. Additionally, our calculations assume 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 effect of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. CREDIT SPREAD RISK is the risk that we will incur a loss due to adverse changes in credit spreads ("spreads"). This risk arises from many of our primary activities, as we invest substantial funds in spread-sensitive fixed income assets. We manage the spread risk in our assets. One of the measures used to quantify this exposure is spread duration. Spread duration measures the price sensitivity of the assets to changes in spreads. For example, if spreads increase 100 basis points, the fair value of an asset exhibiting a spread duration of 5 is expected to decrease in value by approximately 5%. Spread duration is calculated similarly to interest rate duration. At December 31, 2009, the spread duration of assets was 5.24, compared to 4.96 at December 31, 2008. Based upon the information and assumptions we use in this spread duration calculation, and spreads in effect at December 31, 2009, we estimate that a 100 basis point immediate, parallel increase in spreads across all asset classes, industry sectors and credit ratings ("spread shock") would decrease the net fair value of the assets by $343.5 million, compared to $320.3 million at December 31, 2008. The selection of a 100 basis point immediate parallel change in spreads should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. EQUITY PRICE RISK is the risk that we will incur losses due to adverse changes in general levels of the equity markets. At December 31, 2009, we held $123.3 million in equity securities. We did not hold equity securities at December 31, 2008. 95 At December 31, 2009, our equity securities had a cash market portfolio beta of 1.00. Beta represents a widely used methodology to describe, quantitatively, an investment's market risk characteristics relative to an index such as the S&P 500. Based on the beta analysis, we estimate that if the S&P 500 increases or decreases by 10%, the fair value of our equity securities will increase or decrease by 10%, respectively. Based upon the information and assumptions we used to calculate beta at December 31, 2009, we estimate that an immediate decrease in the S&P 500 of 10% would decrease the net fair value of our equity securities by $12.3 million, and an immediate increase in the S&P 500 of 10% would increase the net fair value by $12.3 million. The selection of a 10% immediate decrease or increase in the S&P 500 should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event. The beta of our equity securities was determined using Barra's predictive beta. This beta is based on a company's fundamental data. The illustrations noted above may not reflect our actual experience if the future composition of the portfolio (hence its beta) and correlation relationships differ from the historical relationships. At December 31, 2009 and 2008, we had separate accounts assets related to variable annuity and variable life contracts with account values totaling $587.0 million and $533.8 million, respectively. Equity risk exists for contract charges based on separate account balances and guarantees for death and/or income benefits provided by our variable products. In 2006, we disposed of all of the variable annuity business through a reinsurance agreement with Prudential and therefore mitigated this aspect of our risk. Equity risk of our variable life business relates to contract charges and policyholder benefits. Total variable life contract charges for 2009 and 2008 were $860 thousand and $1.4 million, respectively. Separate account liabilities related to variable life contracts were $5.8 million and $3.6 million in December 31, 2009 and 2008, respectively. DEFERRED TAXES We evaluate whether a valuation allowance for our deferred tax assets is required each reporting period. A valuation allowance is established if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. In determining whether a valuation allowance is needed, all available evidence is considered. This includes the potential for capital and ordinary loss carryback, future reversals of existing taxable temporary differences, tax planning strategies that we may employ to avoid a tax benefit from expiring unused and future taxable income exclusive of reversing temporary differences. With respect to our evaluation of the need for a valuation allowance related to the deferred tax asset on capital losses that have been realized but have not yet been recognized for tax purposes, we utilize prudent and feasible tax planning strategies that optimize the ability to carry back capital losses as well as the ability to offset future capital losses with unrealized capital gains that could be recognized for tax purposes. With respect to our evaluation of the need for a valuation allowance related to the deferred tax asset on unrealized capital losses on fixed income and equity securities, our tax planning strategies first consider the availability of unrealized capital gains to offset future capital losses and then we rely on our assertion that we have the intent and ability to hold certain securities with unrealized losses to recovery. As a result, the unrealized losses on these securities would not be expected to materialize and no valuation allowance on the associated deferred tax asset is needed. No valuation allowance was needed at December 31, 2009 or 2008. 96 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES consist of shareholder's equity. The following table summarizes our capital resources at December 31.
2009 2008 2007 ($ IN THOUSANDS) -------- --------- -------- Common stock, retained income and additional capital paid-in. $682,834 $ 625,482 $615,684 Accumulated other comprehensive loss......................... 24,050 (108,914) 65,188 -------- --------- -------- Total shareholder's equity................................ $706,884 $ 516,568 $680,872 ======== ========= ========
Shareholder's equity increased in 2009 due primarily to unrealized net capital gains as of December 31, 2009 compared to unrealized net capital losses as of December 31, 2008 and net income. Shareholder's equity decreased in 2008 due primarily to unrealized net capital losses on fixed income securities, partially offset by net income. FINANCIAL RATINGS AND STRENGTH The following table summarizes our financial strength ratings at December 31, 2009.
RATING AGENCY RATING ------------- ------ A.M. Best Company, Inc. A+ ("Superior") Standard & Poor's Ratings Services AA- ("Very Strong") Moody's Investors Service, Inc. A1 ("Good")
Our ratings are influenced by many factors including our operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), exposure to risks, the current level of operating leverage, ALIC's ratings and AIC's ratings. On November 20, 2009, A.M. Best affirmed our A+ financial strength rating. Our outlook was revised to negative from stable. On November 23, 2009, S&P affirmed our AA- financial strength rating. The outlook for the S&P rating remained negative. On January 29, 2009, S&P downgraded our financial strength rating to AA- from AA. On November 5, 2009, Moody's affirmed our financial strength rating of A1. The outlook for the Moody's rating remained stable. On January 29, 2009, Moody's downgraded our financial strength rating to A1 from Aa3. State laws specify regulatory actions if an insurer's risk-based capital ("RBC"), a measure of an insurer's solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for life companies takes into account factors relating to insurance, business, asset and interest rate risks. At December 31, 2009, our RBC was within the range that we target. The NAIC has also developed a set of financial relationships or tests known as the Insurance Regulatory Information System to assist state regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or actions by insurance regulatory authorities. The NAIC analyzes financial data provided by insurance companies using prescribed ratios, each with defined "usual ranges." Generally, regulators will begin to monitor an insurance company if its ratios fall outside the usual ranges for four or more of the ratios. If an insurance company has insufficient capital, regulators may act to reduce the amount of insurance it can issue. Our ratios are within these ranges. LIQUIDITY SOURCES AND USES Our potential sources of funds principally include the activities as follows. . Receipt of insurance premiums . Contractholder fund deposits 97 . Reinsurance recoveries . Receipts of principal, interest and dividends on investments . Sales of investments . Funds from securities lending . Intercompany loans . Capital contributions from parent Our potential uses of funds principally include the activities as follows. . Payment of contract benefits, surrenders and withdrawals . Reinsurance cessions and payments . Operating costs and expenses . Purchase of investments . Repayment of securities lending . Payment or repayment of intercompany loans . Dividends to parent . Tax payments/settlements Cash Flows As reflected in our Statements of Cash Flows, lower operating cash flows in 2009 compared to 2008 were due primarily to higher income tax payments, lower premiums and decreased net investment income, partially offset by lower expenses. Higher operating cash flows in 2008 compared to 2007 primarily related to the settlement of an intercompany obligation in the 2007 and lower income tax payments in 2008, partially offset by higher contract benefit payments and lower premiums received. Cash flows provided by investing activities in 2009 compared to cash flows used in investing activities in 2008 were primarily due to net reductions in investments to fund reductions in contractholder fund liabilities. Increased cash flows used in investing activities in 2008 compared to 2007 were due to the investment of higher cash flows from financing and operating activities. Cash flows used in financing activities in 2009 compared to cash flows provided by financing activities in 2008 were due to lower contractholder fund deposits, partially offset by lower contractholder fund withdrawals. Cash flows from financing activities increased in 2008 compared to 2007 as a result of higher contractholder fund deposits, partially offset by higher contractholder fund withdrawals. For quantification of the changes in contractholder funds, see the Operations section of MD&A. A portion of our product portfolio, including fixed annuities and interest-sensitive life insurance, is subject to surrender and withdrawal at the discretion of contractholders. As of December 31, 2009, contractholder funds totaling $599.0 million were not subject to discretionary withdrawal, $3.13 billion were subject to discretionary withdrawal with adjustments, and $1.26 billion were subject to discretionary withdrawal without adjustment. Of the contractholder funds subject to discretionary withdrawal with adjustments, $1.54 billion had a contractual surrender charge of less than 5% of the account balance. We have an intercompany loan agreement with the Corporation. The amount of intercompany loans available to us is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. We had no amounts outstanding under the intercompany loan agreement at December 31, 2009 or 2008. The Corporation may use commercial paper borrowings and bank lines of credit to fund intercompany borrowings. 98 Certain remote events and circumstances could constrain our or the Corporation's liquidity. Those events and circumstances include, for example, a catastrophe resulting in extraordinary losses, a downgrade in the Corporation's long-term debt rating of A3, A- and a- (from Moody's, S&P and A.M. Best, respectively) to non-investment grade status of below Baa3/BBB-/bb, a downgrade in AIC's financial strength rating from Aa3, AA- and A+ (from Moody's, S&P and A.M. Best, respectively) to below Baa2/BBB/A-, or a downgrade in our financial strength ratings from A1, AA- and A+ (from Moody's, S&P and A.M. Best, respectively) to below A1/AA-/A-. The rating agencies also consider the interdependence of the Corporation's individually rated entities, therefore, a rating change in one entity could potentially affect the ratings of other related entities. CONTRACTUAL OBLIGATIONS AND COMMITMENTS Our contractual obligations as of December 31, 2009 and the payments due by period are shown in the following table.
LESS THAN OVER 5 TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS ($ IN THOUSANDS) ----------- --------- ---------- ---------- ---------- Securities lending/(1)/............................ $ 149,362 $149,362 $ -- $ -- $ -- Contractholder funds/(2)/.......................... 5,940,702 606,589 1,329,317 1,135,794 2,869,002 Reserve for life-contingent contract benefits/(2)/. 7,409,666 138,499 283,552 292,423 6,695,192 Reinsurance payable to parent...................... 3,266 3,266 -- -- -- Payable to affiliates, net......................... 6,591 6,591 -- -- -- Other liabilities and accrued expenses/(3)(4)/..... 25,068 21,705 1,665 879 819 ----------- -------- ---------- ---------- ---------- Total contractual cash obligations................. $13,534,655 $926,012 $1,614,534 $1,429,096 $9,565,013 =========== ======== ========== ========== ==========
- -------- (1)Liabilities for securities lending are typically fully secured with cash. We manage our short-term liquidity position to ensure the availability of a sufficient amount of liquid assets to extinguish short-term liabilities as they come due in the normal course of business, including utilizing potential sources of liquidity as disclosed previously. (2)Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life and fixed annuities, including immediate annuities without life contingencies. The reserve for life-contingent contract benefits relates primarily to traditional life and immediate annuities with life contingencies. These amounts reflect the present value of estimated cash payments to be made to contractholders and policyholders. Certain of these contracts, such as immediate annuities without life contingencies, involve payment obligations where the amount and timing of the payment is essentially fixed and determinable. These amounts relate to (i) policies or contracts where we are currently making payments and will continue to do so and (ii) contracts where the timing of a portion or all of the payments has been determined by the contract. Other contracts, such as interest-sensitive life, fixed deferred annuities, traditional life and immediate annuities with life contingencies and voluntary accident and health insurance, involve payment obligations where a portion or all of the amount and timing of future payments is uncertain. For these contracts, we are not currently making payments and will not make payments until (i) the occurrence of an insurable event such as death or illness or (ii) the occurrence of a payment triggering event such as the surrender or partial withdrawal on a policy or deposit contract, which is outside of our control. We have estimated the timing of payments related to these contracts based on historical experience and our expectation of future payment patterns. Uncertainties relating to these liabilities include mortality, morbidity, expenses, customer lapse and withdrawal activity, estimated additional deposits for interest-sensitive life contracts, and renewal premium for life policies, which may significantly impact both the timing and amount of future payments. Such cash outflows reflect adjustments for the estimated timing of mortality, retirement, and other appropriate factors, but are undiscounted with respect to interest. As a result, the sum of the cash outflows shown for all years in the table exceeds the corresponding liabilities of $4.99 billion for contractholder funds and $1.88 billion for reserve for life-contingent contract benefits as included in the Statements of Financial Position as of December 31, 2009. The liability amount in the Statements of Financial Position reflects the discounting for interest as well as adjustments for the timing of other factors as described above. (3)Other liabilities primarily include accrued expenses, claim payments and other checks outstanding. (4)Balance sheet liabilities not included in the table above include unearned and advanced premiums of $956 thousand and gross deferred tax liabilities of $56.4 million. These items were excluded as they do not meet the definition of a contractual liability as we are not contractually obligated to pay these amounts to third parties. Rather, they represent an accounting mechanism that allows us to present our financial statements on an accrual basis. In addition, other liabilities of $6.8 million were not included in the table above because they did not represent a contractual obligation or the amount and timing of their eventual payment was sufficiently uncertain. 99 REGULATION AND LEGAL PROCEEDINGS We are subject to extensive regulation and we are involved in various legal and regulatory actions, all of which have an effect on specific aspects of our business. For a detailed discussion of the legal and regulatory actions in which we are involved, see Note 11 of the financial statements. PENDING ACCOUNTING STANDARDS There are several pending accounting standards that we have not implemented either because the standard has not been finalized or the implementation date has not yet occurred. For a discussion of these pending standards, see Note 2 of the financial statements. The effect of implementing certain accounting standards on our financial results and financial condition is often based in part on market conditions at the time of implementation of the standard and other factors we are unable to determine prior to implementation. For this reason, we are sometimes unable to estimate the effect of certain pending accounting standards until the relevant authoritative body finalizes these standards or until we implement them. ITEM 11(I).CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 11(J).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required for Item 11(j) is incorporated by reference to the material under the caption "Market Risk" in Item 11(h) of this report. ITEM 11(K).DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS: Directors are elected at each annual meeting of shareholders, for a term of one year. The biographies of each of the directors below contains information regarding the person's service as a director, business experience, director positions held currently or at any time during the last five years, and the experiences, qualifications, attributes or skills that caused the company management to determine that a director should serve as such for Allstate New York. MARCIA D. ALAZRAKI, 68, has been a director since December 1993. She is a partner at the law firm Manatt, Phelps & Phillips, LLP and co-chair of the firm's insurance practice group. Prior to joining this firm in 2003, Ms. Alazraki headed the insurance regulatory practices at Shea & Gould and then at Simpson Thacher & Bartlett. For each of the last four years, Ms. Alazraki has been selected for inclusion in The Best Lawyers in America. She also currently holds director positions with Protective Life Insurance Company of New York and First Great-West Life & Annuity Insurance Company. Ms. Alazraki possesses a thorough understanding of insurance laws and regulations, including those governing the financing, acquisition and licensing of insurance companies, insurance product design, reinsurance transactions and market conduct and financial examination. ROBERT K. BECKER, 54, became director and Vice President on March 16, 2010. Mr. Becker is also the Chairman of the Board, Chief Executive Officer and Manager of Allstate Financial Services, LLC ("AFS, LLC") and Vice President of Allstate Life Insurance Company. Mr. Becker is responsible for Allstate's broker dealer operations as well as recruiting, training and product strategy for registered representatives of AFS, LLC and third party relationships. At Allstate since 2000, Mr. Becker has progressed through various roles, including Regional Financial Services Manager, Regional Distribution Leader and Assistant Field Vice President. Prior to joining Allstate, Mr. Becker spent over 20 years with MetLife Insurance Company, where he held various 100 leadership positions. Mr. Becker's professional designations include LUTCF, CLU, ChFC, CFP, and CLTC. Currently, Mr. Becker also serves as a director for ALFS, Inc. and Intramerica Life Insurance Company, each of which is affiliated with Allstate New York. Mr. Becker has proven leadership experience with using excellent customer service to grow business in a competitive environment. MICHAEL B. BOYLE, 51, has been a director since March 2007 and a Vice President since April 2004. Mr. Boyle also is a Senior Vice President with Allstate Life Insurance Company. Mr. Boyle is responsible for Customer Service and Technology within the Allstate Financial group of companies. Prior to joining Allstate, Mr. Boyle was employed at Robertson Stephens, Inc., an investment bank, where he served as Chief Information Officer and head of back office operations, technology and electronic trading platforms on a global basis. Prior to Robertson Stephens, he spent 15 years with Merrill Lynch in New York and London, including several years as Director of Technology for Europe/Africa/Middle East. Currently, Mr. Boyle serves as a director for MIB, Inc, a fraud protection services corporation. In addition, he holds director positions with Allstate Life Insurance Company, Allstate Northern Ireland Ltd, Charter National Life Insurance Company and Intramerica Life Insurance Company, each of which is affiliated with Allstate New York. Mr. Boyle has in-depth knowledge of operations personnel management and many aspects of technology, including infrastructure, applications, and e-commerce. MATTHEW S. EASLEY, 54, has been a director since March 2009 and Vice President since December 2005. Mr. Easley is also a Vice President for Allstate Life Insurance Company. Mr. Easley is responsible for Product Management, Underwriting, and Asset Liability Management within the Allstate Financial group of companies. Prior to joining Allstate, Mr. Easley spent 23 years at Nationwide Financial including 11 years as the head of Annuity and Pension Actuarial, where he started a 401(k) business with a new-to-the-world business model, created a synthetic asset segmentation method, co-invented a patented retirement planning software and led a team to create a new strategic plan as part of the initial public offering of Nationwide Financial Services stock. Currently, Mr. Easley also serves as a director for ALFS, Inc., ALIC Reinsurance Company, Allstate Assignment Company, Allstate Assurance Company, Allstate Life Insurance Company, Allstate Settlement Corporation, American Heritage Life Insurance Company, Charter National Life Insurance Company, Intramerica Life Insurance Company, Lincoln Benefit Life Company and Surety Life Insurance Company, each of which is affiliated with Allstate New York. Mr. Easley possesses extensive insurance business, product and liability management experience. MARK A. GREEN, 42, became director and Vice President on March 16, 2010. Mr. Green is also the Vice President of National Sales for Allstate Life Insurance Company. Prior to his current role, Mr. Green was the Assistant Field Vice President for Allstate Insurance Company in the Capital Region, where he had geographic responsibility for West Virginia, Delaware and Washington D.C. Before joining Allstate, Mr. Green was a founding equity partner and chief risk officer for AIX Group in Connecticut, where he was responsible for corporate development and overall risk and investment management. He has worked for Wells Fargo, Chubb Group and Swiss Reinsurance. Currently, Mr. Green also serves as a director for Intramerica Life Insurance Company, an affiliate of Allstate New York. Mr. Green has experience in optimizing insurance company operations to drive profitable growth. JUDITH P. GREFFIN, 49, has been a Vice President of Allstate New York since April 2004. Ms. Greffin is also a Senior Vice President and the Chief Investment Officer of Allstate Insurance Company, where she oversees Allstate's $100 billion-plus investment portfolio. Since joining Allstate in 1990, Ms. Greffin has served in a series of key investment positions, including responsibility for Allstate's fixed-income portfolio and the Portfolio Management Group. She began her financial career as an analyst with the Huntington National Bank, and served as a senior portfolio manager with Flagship Financial before joining Allstate. Ms. Greffin has also served on the Allstate Foundation Grant Committee. ROBERT J. HOLDEN, 53, has been a director, Vice President and Chief Operations Officer since November 2008. Mr. Holden began his Allstate career as a claims representative in 1980. After holding a number of claims 101 positions, he joined the Allstate Sales group. There, he held several leadership roles, including territorial manager and senior independent agency manager for the Northeast Region, before becoming Regional Distribution Leader for Allstate's New York Marketing Operating Committee and, then Field Vice President of the New York Market Operating Committee. In addition to the successful implementation of the Market Operating Committee plan, Mr. Holden led the New York region's leadership development initiative, and assumed responsibility for driving Life and Property Casualty Business growth. Currently, Mr. Holden also serves as a director for Intramerica Life Insurance Company, an affiliate of Allstate New York. With nearly 30 years of experience in various positions throughout the organization, Mr. Holden possesses extensive knowledge of Allstate, the insurance industry and insurance company operations. CLEVELAND JOHNSON, JR., 75, has been a director since December 1983. Mr. Johnson has worked in public service for thirty-five years, including positions of responsibility in city, town, county, state and federal government. He has also owned and operated a number of successful businesses. Mr. Johnson is currently the President of Johnson Consulting Associates, a business development firm. In addition, he serves as Executive Vice President of ValuCare, Inc, a home health care company, and Executive Vice President of Strategic Fundraising, Inc., a consulting firm. In addition, Mr. Johnson currently serves as a director of Intramerica Life Insurance Company, an affiliate of Allstate New York. Mr. Johnson has strong business administration skills and experience in crafting multi-disciplinary approaches to the development of social policy. SUSAN L. LEES, 52, has been director and Vice President, General Counsel and Secretary since August 2008. Ms. Lees is also Senior Vice President, General Counsel and Secretary of Allstate Life Insurance Company. At Allstate for over 20 years, Ms. Lees progressed through various counsel positions throughout Allstate before become an assistant vice president in 1999. As the leader of the Corporate Law division of Allstate Law and Regulation, Ms. Lees gained extensive experience working with a number of the business areas throughout the enterprise, including Allstate Life Insurance Company. Currently, Ms. Lees serves as a director for Life Insurance Council of New York. She also serves as a director for ALIC Reinsurance Company, Allstate Assignment Company, Allstate Assurance Company, Allstate Financial Corporation, Allstate Life Insurance Company, Allstate Settlement Corporation, American Heritage Life Insurance Company, Charter National Life Insurance Company, Intramerica Life Insurance Company, Lincoln Benefit Life Company, and Surety Life Insurance Company, each of which is affiliated with Allstate New York. Ms. Lees has a deep understanding of insurance business generally, as well as applicable laws and regulations, including corporate and securities laws and corporate governance matters. In addition, Ms. Lees has extensive knowledge regarding Allstate New York's business, including its employees, products, agencies and customers. KENNETH R. O'BRIEN, 72, has served as director since July 1998. Mr. O'Brien was the President and Chief Executive Officer of O'Brien Asset Management, an investment advisory firm, from 1996 until his retirement in 2006. Prior to that role, Mr. O'Brien was Chief Executive Officer for Aurora National Life Insurance Company and Executive Vice President for New York Life Insurance Company. Mr. O'Brien has significant knowledge of insurance company operations and executive experience in the life insurance and financial services industries. JOHN C. PINTOZZI, 44, has been director since September 2004 and Vice President and Chief Financial Officer since March 2005. Mr. Pintozzi also is Senior Vice President and Chief Financial Officer for Allstate Life Insurance Company. In these positions, Mr. Pintozzi is responsible for the planning and analysis, capital allocation, valuation and compliance functions as well as Allstate Federal Savings Bank. Prior to Allstate, Mr. Pintozzi was an audit partner with Deloitte & Touche, specializing in the insurance and financial services industries. He is a Certified Public Accountant and holds memberships with the American Institute of Certified Public Accountants and the Illinois CPA Society. In addition, Mr. Pintozzi currently serves as a director for ALIC Reinsurance Company, Allstate Assignment Company, Allstate Assurance Company, Allstate Bank, Allstate Life Insurance Company, Allstate Settlement Corporation, American Heritage Life Insurance Company, Charter National Life Insurance Company, Intramerica Life Insurance Company, Lincoln Benefit Life Company, and Surety Life Insurance, each of which is affiliated with Allstate New York. Mr. Pintozzi has extensive experience in corporate and insurance company finance and accounting. 102 JOHN R. RABEN, JR., 64, has served as director since 1988. Mr. Raben was a Managing Director of JP Morgan Chase from 2004 until his retirement in 2008, where he worked with the commercial and investment banking groups. Prior to that, he was also a Manager Director of Banc One Securities. Mr. Raben is active in his local organizations as Chairman of the Greenwich Republican Town Committee, Vice Chairman of the Greenwich Emergency Medical Service (GEMS) Board of Directors, and a member of the Coastal Resources Advisory Committee. In addition, Mr. Raben is a Treasurer and Board Member of both the Yellowstone Park Foundation and the Cornelia Rossi Foundation, each of which are charitable organizations. In addition, Mr. Raben currently serves as a director of Intramerica Life Insurance Company, an affiliate of Allstate New York. Mr. Raben has extensive experience in the financial services industry. PHYLLIS HILL SLATER, 65, has been a director since 2002. Ms. Slater is the founder and president of Hill Slater, Inc, a successful engineering and architectural support firm. Hill Slater Inc. specializes in construction management, inspection services, design drafting, and CAD services. Ms. Slater served as national president of the National Association of Women Business Owners from 1997 to 1998, and presently serves on many corporate and non-profit boards. Ms. Slater is also a director for Intramerica Life Insurance Company, an affiliate of Allstate New York. Ms. Slater has deep knowledge of general business operations and corporate governance. MATTHEW E. WINTER, 53, has been a director since December 2009, and President, Chief Executive Officer and Chairman of the Board since March 2010. Mr. Winter is also the President and Chief Executive Officer of Allstate Life Insurance Company and Senior Vice President of Allstate Insurance Company, each a parent organization of Allstate New York. Prior to Allstate, Mr. Winter was the Vice Chairman of American International Group, President and Chief Executive Officer of American General Life Companies, and Executive Vice President for MassMutual Financial Group. For a brief period in 2009, Mr. Winter served as a director of EP Global Communications, a magazine publication and distribution company. Currently, Mr. Winter also serves as a director for Allstate Insurance Company, Allstate Life Insurance Company, American Heritage Life Insurance Company, American Heritage Life Investment Corporation, Intramerica Life Insurance Company and Lincoln Benefit Life Company, each of which is affiliated with Allstate New York. Mr. Winter was also a former Chairman of the Houston Food Bank Board of Directors. Mr. Winter has extensive experience leading major life insurance and financial services providers, working with financial and estate planning products and overseeing the operations of insurance companies. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. No directors or executive officers have been involved in any legal proceedings that are material to an evaluation of the ability or integrity of any director or executive officer of Allstate New York. ITEM 11(L).EXECUTIVE COMPENSATION COMPENSATION DISCUSSION AND ANALYSIS ("CD&A") OVERVIEW . Executive officers of Allstate New York also serve as officers of other subsidiaries of The Allstate Corporation ("Allstate") and receive no compensation directly from Allstate New York. They are employees of an Allstate subsidiary. Allocations have been made for each named executive based on the amount of the named executive's compensation allocated to Allstate New York under the Amended and Restated Service and Expense Agreement among Allstate Insurance Company, Allstate and certain affiliates, as amended effective January 1, 2009, to which Allstate New York is a party (the "Service and Expense Agreement"). Those allocations are reflected in the Summary Compensation Table set forth below and in this disclosure, except where noted. The named executives may have received additional compensation for services rendered to other Allstate subsidiaries, and those amounts are not reported. 103 . Allstate provides its executive officers with the following core compensation elements: annual salary, annual cash incentive awards, and equity awards. In 2009, Allstate discontinued future cycles of its long-term cash incentive plan in favor of placing greater emphasis on long-term equity awards, consistent with its compensation philosophy, and to a lesser extent, annual cash incentive awards. . Allstate embraces a pay-for-performance philosophy for its executives in which variable compensation represents a large portion of potential compensation and is tied to appreciation of Allstate's stock and Allstate's performance in achieving short-term and long-term business goals. . Allstate uses equity-based compensation to align the interests of its executives with long-term stockholder value and as a tool for retaining executive talent. Once granted, the value of these awards rises and falls with the price of Allstate stock. Equity awards granted in 2010, including stock options and restricted stock units, will vest in three installments of 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates. Restricted stock units granted in 2010 will no longer receive dividend equivalents on a quarterly schedule; instead dividend equivalents will be paid when the underlying restricted stock unit vests. . In 2009 the executive compensation program was simplified by reducing the number of performance measures under the Annual Executive Incentive Compensation Plan. Consistent with current market trends, the maximum corporate multiplier for the 2010 performance year for an executive officer's Annual Executive Incentive Plan award will be 250% of target. In addition, the minimum payout, upon achieving the performance threshold, will be 50% of target. . Allstate offers its executives limited perquisites. NAMED EXECUTIVES This CD&A, on pages 103 to 112, describes the executive compensation program for Allstate and specifically describes total 2009 compensation for the following named executives of Allstate New York: . Frederick F. Cripe--Chairman, President and Chief Executive Officer until March 16, 2010. . John C. Pintozzi--Vice President and Chief Financial Officer COMPENSATION PHILOSOPHY Allstate's compensation philosophy is based on these central beliefs: . Executive compensation should be aligned with performance and stockholder value. Accordingly, a significant amount of executive compensation should be in the form of equity. . The compensation of executives should vary both with appreciation in the price of Allstate stock and with Allstate's performance in achieving strategic short and long-term business goals designed to drive stock price appreciation. . Allstate's compensation program should inspire executives to strive for performance that is better than the industry average. . A greater percentage of compensation should be at risk for executives who bear higher levels of responsibility for Allstate's performance. . Allstate should provide competitive levels of compensation for competitive levels of performance and superior levels of compensation for superior levels of performance. Allstate's executive compensation program has been designed around these beliefs. They serve Allstate's goal of attracting, motivating, and retaining highly talented executives to compete in the complex and highly regulated insurance and financial services industry. 104 COMPENSATION PRACTICES Allstate reviews the design of its executive compensation program and executive pay levels on an annual basis and performance and goal attainment within this design throughout the year. As part of that review, Allstate considers available data regarding compensation paid to similarly-situated executives at companies against which it competes for executive talent. With respect to the compensation program for 2009 for Allstate executives, including the named executives of Allstate New York, Allstate management considered compensation surveys, as well as compensation data for the peer companies listed on page 110, that provided information on companies of broadly similar size and business mix as Allstate, as well as companies with a broader market context. The compensation surveys considered include the Mercer Property & Casualty Insurance Company Survey, the 2008 Towers Perrin Diversified Insurance Survey, and the Towers Perrin Compensation Data Bank. The weight given to information obtained from these sources varied depending on the position being evaluated. The Diversified Insurance Survey includes 29 insurance organizations with assets ranging from $20 billion to $1 trillion, with a median asset size of $131 billion. The Towers Perrin Compensation Data Bank provides compensation data on 80 of the Fortune 100 companies. The Mercer Property & Casualty Insurance Company Survey includes compensation data for 45 property and casualty insurance companies with at least $1 billion in annual premiums. In addition, in its executive pay and performance discussions, Allstate management considered information regarding other companies in the financial services industries. CORE ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM The following table lists the core elements of Allstate's executive compensation program for 2009.
CORE ELEMENT PURPOSE - ------------ ---------------------------------------------------------------------------- Annual salary Provides a base level of competitive cash compensation for executive talent Annual cash incentive awards Reward performance on key strategic, operational, and financial measures over the year Equity awards Align the interests of executives with long-term Allstate shareholder value and retain executive talent
These core elements are designed to balance individual, business unit, and overall corporate performance. The goals for incentive awards are aligned with Allstate's strategic vision and 2009 operating priorities of keeping Allstate financially strong, improving customer loyalty, and reinventing protection and retirement for the consumer. Allstate's compensation design balances annual and long-term incentive awards with short and long-term business goals. At the target level of performance, annual and long-term incentive awards are designed to constitute a significant percentage of an executive's total core compensation. The target incentive-based core compensation for Mr. Cripe, who had the greatest level of responsibility for Allstate's performance, was 77% of his total core compensation (19% annual cash incentive award, 38% stock options, and 20% restricted stock units). Mr. Pintozzi's incentive-based core compensation was targeted at 64% of his total core compensation (21% annual cash incentive award, 28% stock options, and 15% restricted stock units). SALARY . Mr. Cripe's salary was set by the Allstate Board of Directors based on the recommendations of its Compensation and Succession Committee (the "Committee"). Mr. Pintozzi's salary was set by Allstate management. . In recommending executive base salary levels, Allstate uses the 50/th/ percentile of comparable companies as a guideline to align with Allstate's pay philosophy for competitive positioning in the market for executive talent. 105 . The average enterprise-wide merit and promotional increases are based on a combination of U.S. general and the insurance industry market data and are set at levels intended to be competitive. . Annual merit increases for the named executives are based on evaluations of their performance by Allstate's management, using the average enterprise-wide merit increase as a guideline. . Promotional increases are based on the increased responsibilities of the new position and the skills and experience of the executive being promoted. ANNUAL CASH INCENTIVE COMPENSATION In 2009 Allstate maintained the Annual Executive Incentive Compensation Plan, an Allstate stockholder-approved plan under which executive officers had the opportunity to earn an annual cash incentive award based on the achievement of a combination of Allstate corporate and business unit performance measures for Allstate's main business units including Allstate Financial. Allstate New York is part of the Allstate Financial business unit. The Committee approves performance measures and goals for annual cash incentive awards under the Annual Executive Incentive Compensation Plan during the first quarter of the year. The performance measures and goals are aligned with Allstate's objectives and tied to Allstate's strategic vision and operating priorities. They are designed to reward executives for actual performance, to reflect objectives that will require significant effort and skill to achieve, and to drive stockholder value. After the end of the year, the Committee reviews the extent to which Allstate has achieved the various performance measures and approves the actual amount of the annual cash incentive award. The Committee may adjust the amount of an annual cash incentive award. Allstate pays the annual cash incentive awards in March, after the end of the year. For 2009, the Committee adopted corporate and Allstate Financial business unit annual performance measures and weighted them as applied to each of the named executives, in accordance with their responsibilities for Allstate's overall corporate performance and the performance of Allstate Financial. Each measure is assigned a weight expressed as a percentage of the total annual cash incentive award opportunity, with all weights for any particular named executive adding to 100%. The following table lists the performance measures and related target goals for 2009, as well as the weighting factors and actual results, applicable to the named executives. The performance measures were designed to focus executive attention on key strategic, operational, and financial measures including top line growth and profitability. For each performance measure, the Committee approved a threshold, target, and maximum goal. The target goals for the performance measures were based on evaluations of Allstate's historical performance and plans to drive projected performance. A description of each performance measure is provided under the "Performance Measures" caption on page 127. 106 ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN PERFORMANCE MEASURES, TARGETS, AND WEIGHTING
ACHIEVEMENT RELATIVE TO THRESHOLD, TARGET, PERFORMANCE MEASURE/(1)/ WEIGHTING TARGET ACTUAL/(2)/ MAXIMUM GOALS - ----------------------- --------- ------------ ------------ ------------------ CORPORATE-LEVEL PERFORMANCE MEASURE.......... 20% Adjusted Operating Income Per Diluted Share.. $5.10 $3.55 Below threshold ALLSTATE FINANCIAL PERFORMANCE MEASURES...... 80% Adjusted Operating Income.................... $300 million $279 million Between threshold and target Financial Product Sales (Production Credits). $285 million $255 million Below threshold Allstate Financial Total Return.............. 4.50% 14.84% Exceeded maximum
- -------- (1)Information regarding Allstate's performance measures is disclosed in the limited context of the annual cash incentive awards and should not be understood to be statements of management's expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts. (2)Stated as a percentage of target goals with a range from 0% to 300%, the actual performance comprises 0% for Adjusted Operating Income Per Diluted Share performance and 99% for Allstate Financial performance. Target award opportunities approved by the Committee are stated as a percentage of annual base salary. Annual cash incentive awards are calculated using base salary, as adjusted by any merit and promotional increases granted during the year on a prorated basis. One of the central beliefs on which Allstate's compensation philosophy is based is that a greater percentage of compensation should be at risk for executives who bear higher levels of responsibility for Allstate's performance. In setting target incentive levels for named executive officers, the Committee gives the most consideration to market data primarily focusing on pay levels at peer group companies with which it directly competes for executive talent and stockholder investment. In calculating the annual cash incentive awards, Allstate's achievement with respect to each performance measure is expressed as a percentage of the target goal, with interpolation applied between the threshold and target goals and between the target and maximum goals. Unless otherwise adjusted by the Committee for Mr. Cripe or by management for Mr. Pintozzi, the amount of the annual cash incentive award is the sum of the amounts calculated using the calculation below for all of the performance measures. Actual performance interpolated X Weighting X Target award opportunity as a X Salary* relative to threshold and target percentage of salary* on a range of 0% to 100% and relative to target and maximum on a range of 100% to 300%
- -------- * Base salary, as adjusted by any merit and promotional increases granted during the year on a prorated basis. Annual cash incentive awards based on the achievement of the performance measures for 2009 are included in the amounts reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table on page 113 and broken out separately from long-term cash incentive awards in a footnote to that table. In addition, the threshold, target, and maximum annual award opportunities for 2009 are included in the Estimated Future Payouts Under Non-Equity Incentive Plan Awards column in the Grants of Plan-Based Awards table on page 114. LONG-TERM INCENTIVE AWARDS--CASH AND EQUITY As part of total core compensation, Allstate historically has provided three forms of long-term incentive awards: stock options, restricted stock units, and long-term cash incentive awards. In 2009, Allstate discontinued 107 future cycles of the long-term cash incentive plan. The relative mix of various forms of these awards is driven by Allstate's objectives in providing the specific form of award, as described below. LONG-TERM INCENTIVE AWARDS--EQUITY As stated in its compensation philosophy, Allstate believes that a significant amount of executive compensation should be in the form of equity and that a greater percentage of compensation should be at risk for executives who bear higher levels of responsibility for Allstate's performance. Consistent with that philosophy, the size of stock option and restricted stock unit awards granted by the Committee is usually larger for executives with the broadest scope of responsibility. However, from time to time, larger equity awards are granted to attract new executives. STOCK OPTIONS Stock options represent the opportunity to buy shares of Allstate stock at a fixed exercise price at a future date. They are utilized to align the interests of executives with long-term value of Allstate stockholders. Key elements: . Under the Allstate stockholder-approved equity incentive plan, the exercise price cannot be less than the fair market value of a share on the date of grant. . Stock option repricing is not permitted. In other words, absent an event such as a stock split, if the Committee cancels an award and substitutes a new award in its place, the exercise price of the new award cannot be less than the exercise price of the cancelled award. . All stock option awards have been made in the form of nonqualified stock options. . Allstate stock options vest over stated vesting periods measured from the date of grant. . The options granted to the named executives in 2009 become exercisable in four installments of 25% on the first four anniversaries of the grant date and expire in ten years, except in certain change-in-control situations or under other special circumstances approved by the Committee. RESTRICTED STOCK UNITS Each restricted stock unit represents Allstate's promise to transfer one fully vested share of Allstate stock in the future if and when the restrictions expire (when the unit "vests"). Because restricted stock units are based on and payable in stock, they serve to reinforce the alignment of interests of executives and Allstate stockholders. In addition, because restricted stock units have a real, current value that is forfeited, except in some circumstances, if an executive terminates employment before the restricted stock units vest, they provide a significant retention incentive. Under the terms of the restricted stock unit awards, the executives have only the rights of general unsecured creditors of Allstate and no rights as stockholders until delivery of the underlying shares. Key elements: . The restricted stock units granted to the named executives in 2009 vest in one installment on the fourth anniversary of the date of grant, except in certain change-in-control situations or under other special circumstances approved by the Committee. . Allstate restricted stock units granted to the named executives in 2009 and prior years include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Allstate common stockholders. 108 TIMING OF EQUITY AWARDS AND GRANT PRACTICES The Committee grants existing employee equity incentive awards on an annual basis normally during a meeting in the first fiscal quarter, after the issuance of Allstate's prior fiscal year-end earnings release. Throughout the year, the Committee grants equity incentive awards in connection with new hires and promotions and in recognition of achievements. The Committee approved a one-time recognition award of non-qualified stock options and restricted stock units to Mr. Cripe in November 2009. This award was granted in recognition of his leadership of Allstate Financial. Pursuant to authority delegated by the Allstate Board and the Committee, equity incentive awards also may be granted by a subcommittee consisting of the Committee chair or by an equity award committee which currently consists of Allstate's CEO. The subcommittee may grant restricted stock or restricted stock units to new hires. The equity award committee may grant restricted stock units and stock options in connection with new hires and promotions and in recognition of achievements. STOCK OWNERSHIP GUIDELINES Because Allstate believes strongly in linking the interests of management with those of its stockholders, it instituted stock ownership guidelines in 1996 that require each of the named executives to own, as of March 1 following the fifth year after assuming a senior management position, common stock, including restricted stock units, worth a multiple of base salary. Unexercised stock options do not count towards meeting the stock ownership guidelines. Messrs. Cripe and Pintozzi have met their respective goals. For Mr. Cripe, the goal is four times salary. For Mr. Pintozzi, the goal is two times salary. After a named executive meets the guideline for the position, if the value of his shares does not equal the specified multiple of base salary solely due to the fact that the value of the shares has declined, the executive is still deemed to be in compliance with the guideline. However, any executive in that situation may not sell any shares acquired upon the exercise of an option or conversion of any equity award except to satisfy tax withholding obligations, until the value of his shares again equals the specified multiple of base salary. In accordance with Allstate's policy on insider trading, all officers, directors, and employees are prohibited from engaging in transactions with respect to any securities issued by Allstate or any of its subsidiaries that might be considered speculative or regarded as hedging, such as selling short or buying or selling options. LONG-TERM INCENTIVE AWARDS--CASH After the end of the three-year cycle for long-term cash incentive awards, the Committee reviews the extent to which Allstate has achieved the various performance measures and approves the actual amount of the long-term cash incentive awards. Allstate pays long-term cash incentive awards after the end of the three-year cycle. Long-term cash incentive awards were designed to reward executives for collective results attained over a three-year performance cycle. The Committee approved performance measures and threshold, target, and maximum goals for long-term cash incentive awards at the beginning of each three-year cycle and a new cycle started every year. However, the Committee discontinued future long-term incentive plan awards in 2009, making the 2008-2010 cycle the final cycle under the Long-Term Executive Incentive Compensation Plan. The final award under this plan was made in February 2008 and will be paid out in March 2011. For the 2007-2009 cycle, there were three performance measures. The target goals for each performance measure, the actual results, and the relative weight of each measure are shown in the following table. The selection and weighting of these measures was intended to focus executive attention on the collective achievement of Allstate's long-term financial goals across its various product lines. A description of each performance measure is provided under the "Performance Measures" caption on page 127. 109 LONG-TERM CASH INCENTIVE AWARDS, 2007-2009 CYCLE PERFORMANCE MEASURES, WEIGHTING, AND TARGET GOALS/(1)/
PERCENTAGE WEIGHT OF THE TOTAL ACHIEVEMENT RELATIVE TO POTENTIAL THRESHOLD, TARGET, PERFORMANCE MEASURES AWARD/(2)/ TARGET ACTUAL MAXIMUM GOALS/(3)/ - -------------------- ------------- ------------ ------------ ----------------------- Average adjusted return on equity.................... 50% 5/th/ 5/th/ Target position position relative to relative to peers peers Allstate Protection growth in policies in force over the 3-year cycle................................... 25% 5.0% (3.8)% Below threshold Allstate Financial return on total capital over the 3-year cycle....................................... 25% 9.5% 7.9% Below threshold
- -------- (1)Information regarding performance measures is disclosed in the limited context of long-term cash incentive awards and should not be understood to be statements of management's expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts. (2)Same weight applied for all eligible named executives. (3)Stated as a percentage of target goals with a range from 0% to 300%, the actual performance comprises 50% for the average adjusted return on equity measure, 0% for the Allstate Protection measure, and 0% for the Allstate Financial measure. The weighted results for all three measures stated as a percentage of the target goals for all the named executives was 50%. The target goal for the average adjusted return on equity was set at a level representing average projected industry performance. The target goals for Allstate Protection growth in policies in force over the three-year cycle and Allstate Financial return on total capital over the three-year cycle were based on evaluations of Allstate's historical performance and plans to drive projected performance. The average adjusted return on equity measure compares Allstate's performance to the following peer insurance companies: The Chubb Corporation MetLife Inc. CNA Financial Corporation The Progressive Corporation The Hartford Financial Services Group, Inc. Prudential Financial, Inc. Lincoln National Corporation The Travelers Companies, Inc.
Allstate's ranked position relative to this peer group determines the percentage of the total target award for this performance measure to be paid, as indicated in the following table. However no payment is made unless the average adjusted return on equity exceeds the average risk free rate of return on three-year Treasury notes over the three-year cycle, plus 200 basis points, regardless of Allstate's standing compared to the peer group. For the 2007-2009 cycle, Allstate achieved the 5/th/ position and met the target level of performance. The average adjusted return on equity exceeded the average risk free rate of return by 375 basis points. 110 AVERAGE ADJUSTED RETURN ON EQUITY RELATIVE TO PEER GROUP, 2007-2009 CYCLE
PEER POSITION % OF TARGET AWARD ------------- ----------------- Threshold. 9 0% 8 40% 7 60% 6 80% Target.... 5 100% 4 150% 3 200% 2 250% Maximum... 1 300%
Target award opportunities approved by the Committee are stated as a percentage of annual base salary. Award opportunities for the named executives are capped at 300% of the target awards. Awards for each cycle are calculated using base salary in effect at the beginning of the cycle, as adjusted by any promotional increases granted during the course of the cycle on a prorated basis. Mr. Cripe had a target award opportunity of 70%. Mr. Pintozzi had a target award opportunity of 40%. The size of these target awards is based on each executive's level of responsibility for contributing to Allstate's long-term performance and overall market competitiveness. Unless otherwise adjusted by the Committee, in calculating the long-term cash incentive awards, Allstate's achievement with respect to each performance measure for a particular cycle is expressed as a percentage of the target goal with interpolation applied between threshold and target goals and between target and maximum goals. The amount of each named executive's award is the sum of the amounts calculated using the following calculation for all of the long-term cash incentive performance measures. Actual performance interpolated X Weighting X Target award opportunity as a X Salary* relative to threshold and target percentage of salary* on a range of 0% to 100% and relative to target and maximum on a range of 100% to 300%
- -------- * Base salary in effect at the beginning of the cycle, as adjusted by any promotional increases granted during the course of the cycle on a prorated basis. Long-term cash incentive awards based on the achievement of the performance measures for the 2007-2009 cycle were paid in March 2010 and are included in the amounts reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table and broken out separately from annual cash incentive awards in a footnote to that table. 111 OTHER ELEMENTS OF COMPENSATION To remain competitive with other employers and to attract, retain, and motivate highly talented executives and other employees, we provide the benefits listed in the following table.
MR. PINTOZZI, ALL FULL-TIME OTHER OFFICERS AND REGULAR AND CERTAIN PART-TIME BENEFIT OR PERQUISITE MR. CRIPE MANAGERS EMPLOYEES - --------------------- --------------- --------------- ------------- 401(k)/(1)/ and defined benefit pension.......................... (check mark) (check mark) (check mark) Supplemental retirement benefit.................................. (check mark) (check mark) Health and welfare benefits/(2)/................................. (check mark) (check mark) (check mark) Supplemental long-term disability and executive physical program. (check mark) (check mark)/(3)/ Deferred compensation............................................ (check mark) (check mark) Tax preparation services......................................... (check mark) (check mark) Financial planning services...................................... (check mark) Cell phones and ground transportation............................ (check mark)/(4)/
- -------- (1)Allstate contributed $1.00 for every dollar of basic pre-tax deposits made in 2009 on the first 3 percent of eligible pay and $.50 for every dollar of basic pre-tax deposits made in 2009 on the next 2 percent of eligible pay for eligible participants, including the named executive officers. (2)Including medical, dental, vision, life, accidental death and dismemberment, long-term disability, and group legal insurance. (3)An executive physical program is available to all officers. (4)Ground transportation is available to Mr. Cripe. Cell phones are available to members of Allstate's senior management team, other officers and certain managers, and certain employees depending on their job responsibilities. RETIREMENT BENEFITS Each named executive officer participates in two different defined benefit pension plans. The Allstate Retirement Plan (ARP) is a tax qualified defined benefit pension plan available to all of Allstate's regular full-time and regular part-time employees who meet certain age and service requirements. The ARP provides an assured retirement income related to an employee's level of compensation and length of service at no cost to the employee. As the ARP is a tax qualified plan, federal tax law places limits on (1) the amount of an individual's compensation that can be used to calculate plan benefits and (2) the total amount of benefits payable to a participant under the plan on an annual basis. These limits may result in a lower benefit under the ARP than would have been payable if the limits did not exist for certain Allstate employees. Therefore, the Allstate Insurance Company Supplemental Retirement Income Plan (SRIP) was created for the purpose of providing ARP-eligible employees whose compensation or benefit amount exceeds the federal limits with an additional defined benefit in an amount equal to what would have been payable under the ARP if the federal limits described above did not exist. CHANGE-IN-CONTROL AND POST-TERMINATION BENEFITS Allstate does not view the change-in-control benefits or post-termination benefits as additional elements of compensation due to the fact that a change-in-control or other triggering event may never occur. However, the use and structure of Allstate's change-in-control and post-termination plans are consistent with Allstate's compensation objectives to attract, motivate, and retain highly talented executives. A change-in-control of Allstate could have a disruptive impact on both Allstate and its executives. Allstate's change-in-control benefits and post-termination benefits are designed to mitigate that impact and to maintain the connection between the interests of executives and Allstate's stockholders. As part of these benefits, executives receive equity awards that might otherwise be eliminated by new directors of Allstate elected in connection with a change-in-control. Allstate also provides certain protections for cash incentive awards, previously deferred compensation, and benefits if the named executive's employment is terminated within a two-year period after a change-in-control. The arrangements which are described in the "Potential Payments as a Result of Termination or Change-in-Control" section are not provided exclusively to the named executives. Certain cash severance benefits are provided to all regular full-time and regular part-time Allstate employees. For example, Allstate replaced its vacation policy with a paid time off bank effective January 1, 2001. Eligible employees could elect to receive their vacation days accrued but not yet taken between their annual anniversary date in 2000 and December 31, 2000 as either paid time off or in the form of a lump sum severance payment at termination. 112 SUMMARY COMPENSATION TABLE FOR 2009 AND GRANTS OF PLAN-BASED AWARDS TABLE FOR 2009 SUMMARY COMPENSATION TABLE The following table sets forth information concerning the compensation of the named executives for all services rendered to Allstate New York in 2009, allocated to Allstate New York in a manner consistent with the allocation of compensation expenses under the Service and Expense Agreement.
CHANGE IN PENSION VALUE AND NON-EQUITY NONQUALIFIED INCENTIVE DEFERRED STOCK OPTION PLAN COMPENSATION ALL OTHER SALARY BONUS AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL NAME/(1)/ YEAR ($) $/(2)/ ($)/(3)/ ($)/(4)/ ($)/(5)/ ($)/(6)/ ($)/(7)/ ($) - -------- ---- ------ ----- ------- ------- ------------ ------------- ------------ ------- Frederick F. Cripe (Chairman, President and Chief Executive Officer) 2009 21,881 0 30,725 56,445 20,915 19,448/(8)/ 1,572 144,632 John C. Pintozzi (Vice President and Chief Financial Officer) 2009 25,193 1,558 11,650 22,304 15,812 2,237/(9)/ 1,897 82,209
- -------- (1)Mr. Cripe was Chairman, President and Chief Executive Officer of Allstate New York until March 16, 2010. (2)Mr. Pintozzi received a bonus as a result of his outstanding individual performance in 2009. (3)The aggregate grant date fair value of restricted stock unit awards computed in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718 ("ASC 718"). The number of restricted stock units granted in 2009 to each named executive is provided in the Grants of Plan-Based Awards table on page 114. The fair value of restricted stock unit awards is based on the final closing price of Allstate's stock as of the date of grant. The final closing price in part reflects the payment of future dividends expected. (4)The aggregate grant date fair value of option awards computed in accordance with FASB ASC 718. The fair value of each option award is estimated on the date of grant using a binomial lattice model. The fair value of each option award is estimated on the date of grant using the assumptions as set forth in the following table: Weighted average expected term. 8.1 years Expected volatility............ 26.3-79.2% Weighted average volatility.... 38.3% Expected dividends............. 2.6% Risk-free rate................. 0.0-3.7%
The number of options granted in 2009 to each named executive is provided in the Grants of Plan-Based Awards table on page 114. (5)Amounts earned under the Annual Executive Incentive Compensation Plan are paid in the year following performance. Amounts earned under the Long-Term Executive Incentive Compensation Plan are paid in the year following the performance cycle. The amounts shown in the table above include amounts earned in 2009 and payable under these plans in 2010. The break-down for each component is as follows:
ANNUAL CASH LONG-TERM INCENTIVE CASH INCENTIVE NAME YEAR AWARD AMOUNT CYCLE AWARD AMOUNT ---- ---- ------------ --------- -------------- Mr. Cripe.... 2009 $14,177 2007-2009 $6,738 Mr. Pintozzi. 2009 $11,519 2007-2009 $4,293
(6)Amounts reflect the aggregate increase in actuarial value of the pension benefits as set forth in the Pension Benefits table, accrued during 2009. These are benefits under the Allstate Retirement Plan (ARP) and the Allstate Insurance Company Supplemental Retirement Income Plan (SRIP). Non-qualified deferred compensation earnings are not reflected since Allstate's Deferred Compensation Plan does not provide above-market earnings. For 2009, the pension plan measurement date used for financial statement reporting purposes, December 31, as well as the methodology employed for purposes of Allstate's financial statements, were used in the calculation of the change in present value. (See note 16 to Allstate's audited financial statements for 2009.) One component of the change in pension value from 2008 to 2009 displayed in this column relates to the change in the discount rate used to calculate the value of pension benefits. The discount rate decreased from 7.5% in 2008 to 6.25% at year-end 2009, which resulted in an increase in the present value of accrued benefits at year-end 2009. For Mr Cripe, approximately 50% of the change in pension value relates to the change in the discount rate. (7)The "All Other Compensation for 2009--Supplemental Table" provides details regarding the amounts for 2009 for this column. (8)Reflects increases in the actuarial value of the benefits provided to Mr. Cripe pursuant to the ARP and SRIP of $7,927 and $11,521 respectively. (9)Reflects increases in the actuarial value of the benefits provided to Mr. Pintozzi pursuant to the ARP and SRIP of $1,162 and $1,075 respectively. 113 ALL OTHER COMPENSATION FOR 2009--SUPPLEMENTAL TABLE (In dollars) The following table describes the incremental cost of other benefits provided in 2009 that are included in the "All Other Compensation" column.
TOTAL 401(K) ALL OTHER NAME MATCH/(1)/ OTHER/(2)/ COMPENSATION ---- --------- --------- ------------ Mr. Cripe.... 2009 539 1,033 1,572 Mr. Pintozzi. 2009 774 1,123 1,897
- -------- (1)Each of the named executives participated in Allstate's 401(k) plan during 2009. The amount shown is the amount allocated to their accounts as employer matching contributions, allocated to Allstate New York in a manner consistent with the allocation of compensation expenses under the Service and Expense Agreement. (2)"Other" consists of premiums for group life insurance and personal benefits and perquisites consisting of cell phones, tax preparation services, financial planning, executive physicals, ground transportation, and supplemental long-term disability coverage. None of the personal benefits and perquisites individually exceeded the greater of $25,000 or 10% of the total amount of these benefits for the named executives. Allstate provides supplemental long-term disability coverage to regular full-time and regular part-time employees whose annual earnings exceed the level which produces the maximum monthly benefit provided by the Group Long Term Disability Insurance Plan. This coverage is self-insured (funded and paid for by Allstate when obligations are incurred). No obligations for the named executives were incurred in 2009 and so no incremental cost is reflected in the table. GRANTS OF PLAN-BASED AWARDS AT FISCAL YEAR-END 2009/(1)/ The following table provides information about non-equity incentive plan awards and equity awards granted to our named executives during the fiscal year 2009 to the extent the expense for such awards was allocated to Allstate New York under the Service and Expense Agreement.
ESTIMATED FUTURE PAYOUTS UNDER NON-EQUITY INCENTIVE GRANT DATE PLAN AWARDS/(2)/ FAIR VALUE ($)/(4)/ ------------------------ ------------------- ALL OTHER STOCK ALL OTHER AWARDS: OPTION NUMBER AWARDS: EXERCISE OF NUMBER OF OR BASE SHARES SECURITIES PRICE OF OF STOCK UNDERLYING OPTION THRESHOLD TARGET MAXIMUM OR UNITS OPTIONS AWARDS STOCK OPTION NAME GRANT DATE PLAN NAME ($) ($) ($) (#) (#) ($/SHR)/(3)/ AWARDS AWARDS - ---- ------------- ---------------------- --------- ------ ------- -------- ---------- ----------- ------ ------ Mr. Cripe -- Annual cash incentive 0 17,923 53,770 Feb. 27, 2009 Restricted stock units 1,254 21,100 Feb. 27, 2009 Stock options 7,125 16.83 40,396 Nov. 02, 2009 Restricted stock units 325 9,625 Nov. 02, 2009 Stock options 1,845 29.64 16,049 Mr. Pintozzi -- Annual cash incentive 0 14,562 43,687 Feb. 27, 2009 Restricted stock units 692 11,650 Feb. 27, 2009 Stock options 3,934 16.83 22,304
- -------- (1)Awards under the Annual Executive Incentive Compensation Plan and the 2001 Equity Incentive Plan. (2)The amounts in these columns consist of the threshold, target, and maximum annual cash incentive awards for the named executives. The threshold amount for each named executive is zero, as the minimum amount payable if no performance measures are achieved. The target amount is based upon achievement of certain performance measures set forth in the "Annual Cash Incentive Compensation" section of the CD&A. (3)The exercise price of each option is equal to the fair market value of Allstate's common stock on the date of grant. Fair market value is equal to the closing sale price on the date of grant or, if there was no such sale on the date of grant, then on the last previous day on which there was a sale. (4)As computed in accordance with FASB ASC 718, the aggregate grant date fair value of restricted stock units and stock option awards was $16.83 and $5.67, respectively, for awards granted on February 27, 2009, and $29.64 and $8.70, respectively, for awards granted on November 2, 2009. The assumptions used in the valuation are discussed in footnotes 3 and 4 to the Summary Compensation Table on page 113. 114 The following discussion of incentive compensation for 2009 elaborates on the more general information provided above in the CD&A. NON-EQUITY INCENTIVE COMPENSATION The Non-Equity Incentive Plan Compensation column of the Summary Compensation Table includes each named executive's annual cash incentive award for 2009 and long-term cash incentive award for the 2007-2009 cycle, allocated to Allstate New York under the Service and Expense Agreement. The amount attributable to annual and long-term, respectively, is provided in a footnote to the Summary Compensation Table. The Estimated Future Payouts Under Non-Equity Incentive Plan Awards column of the Grants of Plan-Based Awards at Fiscal Year-End 2009 table includes the threshold, target, and maximum award opportunities for 2009 annual cash incentive compensation, allocated in a manner consistent with the allocation of compensation expenses to Allstate New York under the Service and Expense Agreement. EQUITY COMPENSATION The Committee granted both restricted stock units and options in 2009. The restricted stock units granted in 2009 vest in one installment four years after the date of grant, except in certain change-in-control situations or under other special circumstances approved by the Committee. Normally, the named executive must be employed in order for the restricted stock units to vest. However, restricted stock units continue to vest following retirement on or after the normal retirement date specified in the award. If the named executive dies, then as of the date of death, all unvested restricted stock units granted in 2009 will vest and become nonforfeitable. The restricted stock units granted in 2009 and prior years include the right to receive dividend equivalents in the same amount and at the same time as dividends paid to all Allstate common stockholders. The stock options granted in 2009 become exercisable in four annual installments of 25% on the first four anniversaries of the grant date and expire in ten years, except in certain change-in-control situations or under other special circumstances approved by the Committee. Normally, the named executive must be employed at the time of vesting in order for the options to vest. If the named executive terminates on or after the normal retirement date under the stock option award agreements, stock options not vested will continue to vest as scheduled. When the options become vested, they may be exercised by the named executive at any time on or before the earlier to occur of (i) the expiration date of the option and (ii) the fifth anniversary of the date of the named executive's termination of employment. If the named executive dies or becomes disabled, unvested stock options will vest and may be exercised by the named executive officer (or personal representative, estate or transferee, as the case may be) at any time on or before the earlier to occur of (i) the expiration date of the option and (ii) the second anniversary of the date of the named executive's termination of employment. If the named executive terminates for any other reason, any portion of the option not vested will be forfeited. Vested options may be exercised at any time on or before the earlier to occur of (i) the expiration date of the option and (ii) three months after the date of the named executive's termination of employment. The options were granted with an exercise price equal to the closing sale price on the date of grant or, if there was no sale on the date of grant, then on the last previous day on which there was a sale. Each option is a nonqualified stock option. Each option includes tax withholding rights that permit the holder to elect to have shares withheld to satisfy minimum federal, state, and local tax withholding requirements. Option holders may exchange shares previously owned to satisfy all or part of the exercise price. The vested portions of all the options may be transferred during the holder's lifetime to, or for the benefit of, family members. Any taxes payable upon a transferee's subsequent exercise of the option remain the obligation of the original option holder. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2009 The following table summarizes the outstanding equity awards of the named executives as of December 31, 2009, allocated in a manner consistent with the allocation of compensation expenses to Allstate New York under the Service and Expense Agreement for 2009. The percentage of each equity award actually allocated to Allstate 115 New York has varied over the years during which these awards were granted depending on the extent of services rendered by such executive to Allstate New York and the arrangements in place at the time of such equity awards between Allstate New York and the executive's Allstate-affiliated employer. Because the aggregate amount of such equity awards attributable to services rendered to Allstate New York by each named executive cannot be calculated without unreasonable effort, the allocated amount of each equity award provided for each named executive in the following table is the amount determined by multiplying each named executive's equity award for services rendered to Allstate and all of its affiliates by the percentage used for allocating such named executive's compensation to Allstate New York in 2009 under the Service and Expense Agreement. 116 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2009
OPTION AWARDS/(1)/ STOCK AWARDS ---------------------------------------------------------------------- ----------------------------- NUMBER OF NUMBER OF NUMBER OF SECURITIES SECURITIES SHARES OR UNDERLYING UNDERLYING UNITS OF UNEXERCISED UNEXERCISED OPTION OPTION STOCK STOCK THAT OPTION GRANT OPTIONS (#) OPTIONS (#) EXERCISE EXPIRATION AWARD HAVE NOT NAME DATE EXERCISABLE/(2)/ UNEXERCISABLE/(3)/ PRICE DATE GRANT DATE VESTED (#)/(4)/ - ---- ------------- --------------- ----------------- -------- ------------- ------------- -------------- Mr. Cripe Feb. 7, 2003 316 0 31.78 Feb. 7, 2013 Feb. 6, 2004 1,138 0 45.96 Feb. 6, 2014 Feb. 22, 2005 794 0 52.57 Feb. 22, 2015 Feb. 21, 2006 631 210 53.84 Feb. 21, 2016 Feb. 21, 2006 127 Feb. 21, 2006 371 124 53.84 Feb. 21, 2016 Feb. 21, 2006 33* Feb. 20, 2007 795 795 62.24 Feb. 20, 2017 Feb. 20, 2007 220 Feb. 26, 2008 660 1,980 48.82 Feb. 26, 2018 Feb. 26, 2008 286 Feb. 27, 2009 0 7,125 16.83 Feb. 27, 2019 Feb. 27, 2009 1,254 Nov. 2, 2009 0 1,845 29.64 Nov. 2, 2019 Nov. 2, 2009 325 Mr. Pintozzi Sep. 30, 2002 99 0 35.17 Feb. 7, 2003 277 0 31.78 Feb. 7, 2013 Feb. 6, 2004 393 0 45.96 Feb. 6, 2014 Feb. 22, 2005 1,082 0 52.57 Feb. 22, 2015 Feb. 21, 2006 533 178 53.84 Feb. 21, 2016 Feb. 21, 2006 162 Feb. 21, 2006 804 268 53.84 Feb. 21, 2016 Feb. 21, 2006 47* Feb. 20, 2007 526 526 62.24 Feb. 20, 2017 Feb. 20, 2007 145 Feb. 26, 2008 469 1,408 48.82 Feb. 26, 2018 Feb. 26, 2008 204 Feb. 27, 2009 0 3,934 16.83 Feb. 27, 2019 Feb. 27, 2009 692
-------------- MARKET VALUE OF SHARES OR UNITS OF STOCK THAT HAVE NOT NAME VESTED/(5)/ - ---- -------------- Mr. Cripe 3,817 991 6,609 8,591 37,662 9,755 AGGREGATE MARKET VALUE -------------- 67,425 Mr. Pintozzi 4,865 1,424 4,357 6,120 20,794 AGGREGATE MARKET VALUE -------------- 37,560
- -------- (1)Options vest in four installments on the first four anniversaries of the grant date. The exercise price of each option is equal to the fair market value of Allstate's common stock on the date of grant. For options granted prior to 2007, fair market value is equal to the average of high and low sale prices on the date of grant, and for options granted in 2007 and thereafter, fair market value is equal to the closing sale price on the date of grant or in each case, if there was no sale on the date of grant, then on the last previous day on which there was a sale. (2)The allocated aggregate value and aggregate number of exercisable in-the-money options as of December 31, 2009, for each of the named executives is $0 (0 aggregate number exercisable). (3)The allocated aggregate value and aggregate number of unexercisable in-the-money options as of December 31, 2009, for each of the named executives is as follows: Mr. Cripe $94,854 (8,969 aggregate number unexercisable), and Mr. Pintozzi $51,965 (3,934 aggregate number unexcercisable). (4)Except as otherwise noted, each restricted stock unit award vests in one installment on the fourth anniversary of the grant date. An asterisk (*) denotes restricted stock units that vest in four equal installments on the first four anniversaries of the grant date. (5)Amount is based on the closing price of Allstate common stock of $30.04 on December 31, 2009. OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2009 The following table summarizes the options exercised by the named executives during 2009 and the restricted stock and restricted stock unit awards that vested during 2009, allocated in a manner consistent with the allocation of compensation expenses to Allstate New York under the Service and Expense Agreement for 2009. 117 OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2009
OPTION AWARDS (AS OF 12/31/09) STOCK AWARDS -------------------------------- ------------------------------- NUMBER OF SHARES NUMBER OF SHARES ACQUIRED ON VALUE REALIZED ACQUIRED ON VALUE REALIZED NAME EXERCISE (#) ON EXERCISE ($) VESTING (#) ON VESTING ($) ---- ---------------- --------------- ---------------- -------------- Mr. Cripe.... 0 0 209 $3,857 Mr. Pintozzi. 0 0 213 $3,919
RETIREMENT BENEFITS Each named executive participates in two different defined benefit pension plans. Pension expense for each named executive under these plans has been accrued annually over the course of the executive's career with Allstate. The aggregate amount of the annual accrual specifically allocated to Allstate New York over that period of time has varied depending on the extent of services rendered by such executive to Allstate New York and the arrangements in place at the time of accrual between Allstate New York and the executive's Allstate-affiliated employer. Because the aggregate amount of such annual accruals earned prior to 2009 attributable to services rendered to Allstate New York by each named executive cannot be calculated without unreasonable effort, the present value of accumulated benefit provided for each named executive in the following table is the amount determined by multiplying the present value of such named executive's accumulated pension benefit for services rendered to Allstate and all of its affiliates over the course of such named executive's career with Allstate by the percentage used for allocating such named executive's compensation to Allstate New York under the Service and Expense Agreement in 2009. PENSION BENEFITS
NUMBER OF PRESENT YEARS VALUE OF PAYMENTS CREDITED ACCUMULATED DURING LAST NAME PLAN NAME SERVICE (#) BENEFIT/(1)/ ($) FISCAL YEAR ($) - ---- ------------------------------------ ----------- -------------- --------------- Mr. Cripe Allstate Retirement Plan 28.0 32,707 0 Supplemental Retirement Income Plan 28.0 62,588 0 Mr. Pintozzi Allstate Retirement Plan 7.3 2,995 0 Supplemental Retirement Income Plan 7.3 3,124 0
- -------- (1)These amounts are estimates and do not necessarily reflect the actual amounts that will be paid to the named executives, which will only be known at the time they become eligible for payment. Accrued benefits were calculated as of December 31, 2009, and used to calculate the Present Value of Accumulated Benefits at December 31, 2009, and the applicable percentages were applied based on the Service and Expense Agreement. December 31 is the pension plan measurement date used for financial statement reporting purposes. The benefits and value of benefits shown in the Pension Benefits table are based on the following material factors: ALLSTATE RETIREMENT PLAN ("ARP") The ARP has two different types of benefit formulas (final average pay and cash balance) which apply to participants based on their date of hire or individual choice made prior to the January 1, 2003 introduction of a cash balance design. Of the named executives, Mr. Pintozzi is eligible to earn cash balance benefits. Benefits under the final average pay formula are earned and stated in the form of a straight life annuity payable at the normal retirement date (age 65). Participants who earn final average pay benefits may do so under one or more benefit formulas based on when they become members of the ARP and their years of service. 118 Mr. Cripe has earned ARP benefits under the post-1988 final average pay formula which is the sum of the Base Benefit and the Additional Benefit, as defined as follows: . Base Benefit =1.55% of the participant's average annual compensation, multiplied by credited service after 1988 (limited to 28 years of credited service) . Additional Benefit =0.65% of the amount, if any, of the participant's average annual compensation that exceeds the participant's covered compensation (the average of the maximum annual salary taxable for Social Security over the 35-year period ending the year the participant would reach Social Security retirement age) multiplied by credited service after 1988 (limited to 28 years of credited service) Since Mr. Cripe earned benefits between January 1, 1978, and December 31, 1988, one component of Mr. Cripe's ARP benefit will be based on the following benefit formula: 1. Multiply years of credited service from 1978 through 1988 by 2 1/8%. 2. Then, multiply the percentage from step (1) by a. Average annual compensation (five-year average) at December 31, 1988, and by b. Estimated Social Security at December 31, 1988. 3. Then, subtract 2(b) from 2(a). The result is the normal retirement allowance for service from January 1, 1978, through December 31, 1988. 4. The normal retirement allowance is indexed for final average pay. In addition, there is an adjustment of 18% of the normal retirement allowance as of December 31, 1988, to reflect a conversion to a single life annuity. For participants eligible to earn cash balance benefits, pay credits are added to the cash balance account on a quarterly basis as a percent of compensation and based on the participant's years of vesting service as follows: Cash Balance Plan Pay Credits
VESTING SERVICE PAY CREDIT % --------------- ------------ Less than 1 year................. 0% 1 year, but less than 5 years.... 2.5% 5 years, but less than 10 years.. 3% 10 years, but less than 15 years. 4% 15 years, but less than 20 years. 5% 20 years, but less than 25 years. 6% 25 years or more................. 7%
The earliest retirement age that a named executive may retire with unreduced retirement benefits under the ARP and Supplemental Retirement Income Plan is age 65. However, a participant earning final average pay benefits is entitled to an early retirement benefit on or after age 55 if he or she terminates employment after the completion of 20 or more years of service. A participant earning cash balance benefits who terminates employment with at least three years of vesting service is entitled to a lump sum benefit equal to his or her cash balance account balance. Currently, none of the executive officers is eligible for an early retirement benefit. The benefit reduction for early payment of final average pay benefits earned after 1988 is as follows: The Base Benefit as described above is reduced by 0.4% for each full month the benefit is paid prior to the participant's normal retirement date (or benefit retirement age if member prior to 1989). Mr. Cripe was a member prior to 1989 and his benefit retirement age under the ARP is age 65. The Additional Benefit is reduced by 2/3 of 1% for each of the first 36 full months and by 1/3 of 1% for each of the next 84 full months by which the benefit commencement date precedes the participant's normal retirement date (age 65). The benefit reduction for early payment of final average pay benefits earned prior to 1989 is 0.4% for each full month prior to age 60. 119 SUPPLEMENTAL RETIREMENT INCOME PLAN ("SRIP") SRIP benefits are generally determined using a two-step process: (1) determine the amount that would be payable under the ARP formula specified above if the federal limits described above did not apply, then (2) reduce the amount described in (1) by the amount actually payable under the ARP formula. The normal retirement date under the SRIP is age 65. If eligible for early retirement under the ARP, an eligible employee is also eligible for early retirement under the SRIP. OTHER ASPECTS OF THE PENSION PLANS Eligible employees are vested in the normal retirement benefit under the ARP and the SRIP on the earlier of the completion of five years of service or upon reaching age 65 for participants with final average pay benefits or the completion of three years of service or upon reaching age 65 for participants whose benefits are calculated under the cash balance formula. For the ARP and SRIP, eligible compensation consists of salary, annual cash incentive awards, pre-tax employee deposits made to Allstate's 401(k) plan and Allstate's cafeteria plan, holiday pay, and vacation pay. Eligible compensation also includes overtime pay, payment for temporary military service, and payments for short term disability, but does not include long-term cash incentive awards or income related to the exercise of stock options and the vesting of restricted stock and restricted stock units. Compensation used to determine benefits under the ARP is limited in accordance with the Internal Revenue Code. Average annual compensation is the average compensation of the five highest consecutive calendar years within the last ten consecutive calendar years preceding the actual retirement or termination date. Payment options under the ARP include a lump sum, straight life annuity, and various survivor annuity options. The lump sum under the final average pay benefit is calculated in accordance with the applicable interest rate and mortality as required under the Internal Revenue Code. The lump sum payment under the cash balance benefit is generally equal to a participant's cash balance account balance. The amounts listed in the Present Value of Accumulated Benefit column of the Pension Benefits table and the amounts listed in the footnotes to the Change in Pension Value column of the Summary Compensation Table are based on the following assumptions: . Discount rate of 6.25%, payment form assuming 80% paid as a lump sum and 20% paid as an annuity, lump-sum/annuity conversion segmented interest rates of 5.0% for the first five years, 6.5% for the next 15 years, and 7% for all years after 20 and the 2010 combined static Pension Protection Act funding mortality table with a blend of 50% males and 50% females (as required under the Internal Revenue Code), and post-retirement mortality for annuitants using the 2010 IRS-mandated annuitant table; these are the same as those used for financial reporting year-end disclosure as described in the notes to Allstate's consolidated financial statements. (See note 16 to Allstate's audited financial statements for 2009). . Retirement age: normal retirement age under the ARP and SRIP (65). Based on guidance provided by the Securities and Exchange Commission, we have assumed normal retirement age regardless of any announced or anticipated retirements. . Expected terminations, disability, and pre-retirement mortality: none assumed. . The percentages used under the Service and Expense Agreement for allocating compensation expense to Allstate New York in 2009. EXTRA SERVICE AND PENSION BENEFIT ENHANCEMENT No additional service is granted under the ARP or the SRIP. Generally, Allstate has not granted additional service credit outside of the actual service used to calculate ARP and SRIP benefits. 120 NON-QUALIFIED DEFERRED COMPENSATION The following table summarizes the non-qualified deferred compensation contributions, earnings, and account balances of Allstate New York's named executives in 2009. All amounts relate to the Deferred Compensation Plan. NON-QUALIFIED DEFERRED COMPENSATION AT FISCAL YEAR-END 2009
EXECUTIVE REGISTRANT AGGREGATE CONTRIBUTIONS CONTRIBUTIONS IN AGGREGATE EARNINGS WITHDRAWALS/ AGGREGATE BALANCE IN LAST FY LAST FY IN LAST FY DISTRIBUTIONS AT LAST FYE NAME ($) ($) ($)/(1)/ ($) ($)/(2)/ - ---- ------------- ---------------- ------------------ ------------- ----------------- Mr. Cripe.... 0 0 0 0 0 Mr. Pintozzi. 0 0 0 0 0
- -------- (1)Aggregate earnings were not included in the named executive's compensation as reported in the 2009 Summary Compensation Table. (2)There are no amounts reported in the Aggregate Balance at Last FYE column that were reported in the 2009 Summary Compensation Table. In order to remain competitive with other employers, Allstate allows employees, including the named executives, whose annual compensation exceeds the amount specified in the Internal Revenue Code (e.g., $245,000 in 2009), to defer up to 80% of their salary and/or up to 100% of their annual cash incentive award that exceeds that amount under the Deferred Compensation Plan. Allstate does not match participant deferrals and does not guarantee a stated rate of return. Deferrals under the Deferred Compensation Plan are credited with earnings, or are subject to losses, based on the results of the investment option or options selected by the participants. The investment options available under the Deferred Compensation Plan are Stable Value, S&P 500, International Equity, Russell 2000, and Bond Funds--options currently available under Allstate's 401(k) plan. Under the Deferred Compensation Plan, deferrals are not actually invested in these funds, but instead are credited with earnings or losses based on the funds' investment experience, which are net of administration and investment expenses. Because the rate of return is based on actual investment measures in Alllstate's 401(k) plan, no above-market earnings are paid. Similar to Allstate's 401(k) plan, participants can change their investment elections daily. Investment changes are effective the next business day. The Deferred Compensation Plan is unfunded; participants have only the rights of general unsecured creditors. Deferrals under the Deferred Compensation Plan are segregated into pre-2005 balances and post-2004 balances. A named executive may elect to begin receiving a distribution of a pre-2005 balance upon separation from service or in one of the first through fifth years after separation from service. In either event, the named executive may elect to receive payment of a pre-2005 balance in a lump sum or in annual cash installment payments over a period of two to ten years. An irrevocable distribution election is required before making any post-2004 deferrals into the plan. The distribution options available to the post-2004 balances are similar to those available to the pre-2005 balances, except the earliest distribution date is six months following separation from service. Upon a showing of unforeseeable emergency, a plan participant may be allowed to access certain funds in a deferred compensation account earlier than the dates specified above. POTENTIAL PAYMENTS AS A RESULT OF TERMINATION OR CHANGE-IN-CONTROL TERMINATION OF EMPLOYMENT The named executives may become eligible for severance benefits that all regular full-time and regular part-time employees are eligible to receive if their employment is terminated due to lack of work, rearrangement of work, reduction in workforce, or inability to satisfactorily perform the responsibilities of their position. The 121 length of severance benefits depends on the named executive's years of service, up to the maximum provided in the plans. Allstate has entered into certain agreements or provides certain plans that will require Allstate Insurance Company or Allstate to provide compensation or benefits to the named executives in the event of a termination of employment--other than compensation and benefits generally available to all salaried employees. The amount of compensation payable to each named executive or the value of benefits provided to the named executives that exceed the compensation or benefits generally available to all salaried employees in each situation is listed in the tables below. The amounts provided in the tables below, including amounts earned by each named executive over the course of his career with Allstate and its affiliates, have been calculated in a manner consistent with the allocation of compensation expenses to Allstate New York under the Service and Expense Agreement for 2009. The payment of the 2009 annual cash incentive award, the 2007-2009 long-term cash incentive award, and any 2009 salary earned but not paid in 2009 due to Allstate's payroll cycle are not included in these tables because these amounts are payable to the named executives regardless of termination, death, or disability. Benefits and payments are calculated assuming a December 31, 2009, employment termination date. 122 POTENTIAL PAYMENTS UPON TERMINATION/(1)/ (NO CHANGE-IN-CONTROL)
RESTRICTED LONG-TERM STOCK OPTIONS-- STOCK UNITS-- NON-QUALIFIED CASH INCENTIVE UNVESTED AND UNVESTED AND PENSION WELFARE AWARDS/(2)/ ACCELERATED/(3)/ ACCELERATED BENEFITS/(4)/ BENEFITS/(5)/ SEVERANCE/(6)/ TOTAL NAME ($) ($) ($) ($) ($) ($) ($) - ---- -------------- --------------- ------------- ------------- ------------ ------------- ------- MR. CRIPE Involuntary Termination/(7)/...... 0 0 0 95,925 0 22,013 117,938 Voluntary Termination/ Retirement/(8)/....... 0 0 0 95,925 0 0 95,925 Death.................. 3,387 94,854/(9)/ 67,425/(10)/ 95,925 0 0 261,591 Disability............. 3,387 94,854/(9)/ 0 95,925 70,141 0 264,307 MR. PINTOZZI Involuntary Termination/(7)/...... 0 0 0 3,610 0 6,561 10,171 Voluntary Termination/ Retirement/(8)/....... 0 0 0 3,610 0 0 3,610 Death.................. 2,255 51,965/(9)/ 37,560/(10)/ 3,610 0 0 95,390 Disability............. 2,255 51,965/(9)/ 0 3,610 107,167 0 164,997
- -------- (1)A "0" indicates that either there is no amount payable to the named executive or no amount payable to the named executive that is not made available to all salaried employees. (2)If a participant dies, retires or is disabled during a performance cycle, the participant's award will be prorated based on the number of half months in which the participant was eligible to participate during the long-term cash incentive performance cycle. The amount reflected is calculated at target for purposes of this disclosure. The actual payment would be made at the time all awards are paid for that particular performance cycle and calculated based on actual results. (3)If the named executive's termination of employment is for any reason other than death, disability, or retirement, unvested stock options will be forfeited, and stock options, to the extent they are vested on the date of termination, may be exercised at any time on or before the earlier to occur of (a) the expiration date of the stock option and (b) three months after the date of termination. (4)The present value of the non-qualified pension benefits for each named executive earned through December 31, 2009, based on a 6.25% discount rate is disclosed in the Pension Benefits table. The value in this column represents the present value of each named executive's non-qualified pension benefits (SRIP) earned through December 31, 2009, after applying the applicable allocation percentage in a manner consistent with the Service and Expense Agreement and is based on the lump sum methodology (i.e., interest rate and mortality table) used by the Allstate pension plans in 2010, as required under the Pension Protection Act. Specifically, the interest rate for 2010 is based on 40% of the average August 30-year Treasury Bond rate from the prior year, and 60% of the average corporate bond segmented yield curve from August of the prior year. The mortality table for 2010 is the 2010 combined static Pension Protection Act funding mortality table with a blend of 50% males and 50% females, as published by the IRS. SRIP benefits earned through December 31, 2004 (Pre 409A SRIP Benefits), are generally payable at age 65, the normal retirement date under the ARP. Pre 409A SRIP Benefits may be payable earlier upon certain terminations in accordance with the terms of the SRIP. For example, Pre 409A SRIP Benefits may become payable upon reaching age 50 if disabled, following early retirement at age 55 or older with 20 years of service, or upon death. SRIP benefits earned after December 31, 2004 (Post 409A SRIP Benefits), are paid on the January 1 following termination of employment after reaching age 55 (a minimum six month deferral period applies), or immediately upon death. . Mr. Cripe's Pre 409A SRIP Benefit would become payable as early as January 1, 2013, but is immediately payable upon death or disability. Mr. Cripe's Post 409A Benefit would be paid on January 1, 2013, or immediately upon death. Mr. Cripe will turn 65 on September 15, 2022. . Mr. Pintozzi's Pre 409A SRIP Benefit would become payable as early as January 1, 2011, but is immediately payable upon death. Mr. Pintozzi's Post 409A Benefit would be paid on January 1, 2021, or immediately upon death. Mr. Pintozzi will turn 65 on May 18, 2030. (5)The named executives are eligible to participate in Allstate's supplemental long-term disability plan for employees whose annual earnings exceed the level which produces the maximum monthly benefit provided by the Allstate Long Term Disability Plan (Basic Plan). The benefit is equal to 50% of the named executive's qualified annual earnings divided by twelve and rounded to the nearest one hundred dollars, reduced by $7,500, which is the maximum monthly benefit payment that can be received under the Basic Plan. The amount reflected assumes the named executive remains totally disabled until age 65 and represents the present value of the monthly benefit payable until age 65. 123 (6)The "Severance" amount is the lump sum payment that named executives would be eligible to receive in the event of employment termination resulting from a lack of work, rearrangement of work, or reduction in workforce plus an amount of vacation accrual severance benefit, if applicable. The lump sum severance benefit is equal to two weeks of pay for each complete year of service, up to a maximum of 52 weeks of pay, and is the same benefit available to all regular full-time and regular part-time employees. The vacation accrual severance benefit is equal to the value at December 31, 2009, of the vacation days accrued but not yet taken between the executive's anniversary date in 2000 and December 31, 2000. This same benefit was made available to all eligible regular full-time and regular part-time employees following a change to the company vacation policy. Mr. Cripe has a vacation accrual severance benefit amount included in the Severance column of $791. (7)Examples of "Involuntary Termination" independent of a change-in-control include performance-related terminations, reorganization, and terminations for employee dishonesty and violation of Allstate rules, regulations, or policies. (8)As of December 31, 2009, neither of the named executives were eligible to retire in accordance with Allstate's policy or the terms of any of the Allstate compensation and benefit plans including the long-term cash incentive and equity incentive plans. If Mr. Cripe or Mr. Pintozzi had voluntarily terminated employment on December 31, 2009, the non-qualified pension benefit would have become payable as described in footnote (4) above. (9)If the named executive's termination of employment is on account of death or disability, then stock options, to the extent not vested, will vest and may be exercised at any time on or before the earlier to occur of (1) the expiration date of the option and (2) the second anniversary of the date of termination of employment. Stock option values are based on a December 31, 2009, market close price of $30.04 per share of Allstate stock. (10)If the named executive's termination of employment is a result of death, restricted stock units immediately become nonforfeitable and the restrictions expire. The December 31, 2009, market close price of $30.04 per share of Allstate stock was used to value the unvested and nonforfeitable awards. CHANGE-IN-CONTROL Allstate and Allstate Insurance Company have entered into agreements with the named executives to provide certain benefits and compensation in the event of a change-in-control. In general, a change-in-control is one or more of the following events: (1) any person acquires 30% or more of the combined voting power of Allstate common stock within a 12-month period; (2) any person acquires more than 50% of the combined voting power of Allstate common stock; (3) certain changes are made to the composition of the Allstate Board; or (4) the consummation of a merger, reorganization, or similar transaction. These triggers were selected because, in a widely held company the size of Allstate, they could each result in a substantial change in management. There are no agreements in place with the named executives to provide benefits or compensation in the event of a change-in-control of Allstate New York that does not also involve a change-in-control of Allstate. During the two-year period following a change-in-control, the change-in-control agreements provide for a minimum salary, annual cash incentive awards, long-term cash incentive awards, and other benefits. In addition, they provide that the named executives' positions, authority, duties, and responsibilities will be at least commensurate in all material respects with those held prior to the change-in-control. Under the change-in-control agreements, severance benefits would be payable if a named executive's employment is terminated either by Allstate without "cause" or by the executive for "good reason" as defined in the agreements during the two-year period following the change-in-control. Cause means the named executive has been convicted of a felony or other crime involving fraud or dishonesty, has willfully or intentionally breached the change-in-control agreement, has habitually neglected his or her duties, or has engaged in willful or reckless material misconduct in the performance of his or her duties. Good reason includes a material diminution in a named executive's base compensation, authority, duties, or responsibilities, a material change in the geographic location where the named executive performs services, or a material breach of the change-in-control agreement by Allstate. The principal severance benefits payable on post-change-in-control terminations include: pro-rated annual cash incentive awards and long-term cash incentive awards (all at target); a payment equal to three times the sum of the executive's base salary and target annual cash incentive award; the continuation of certain welfare benefits for the continuation coverage period at a cost not to exceed the amount paid by the named executive prior to termination; outplacement services; an enhanced retirement benefit consisting of an additional three years of service, age, and compensation; and reimbursement (on an after-tax basis) of any resulting excise taxes. 124 If a named executive's employment is terminated by reason of death or disability during the two-year period commencing on the date of a change-in-control, Allstate will pay the named executive or the named executive's estate a lump-sum cash amount equal to all amounts earned but unpaid, including any annual and long-term cash incentive awards, as of the termination date. In addition, in the event of death, the named executive's estate or beneficiary will be entitled to survivor and other benefits, including retiree medical coverage, if eligible, that are not less favorable than the most favorable benefits available to the estates or surviving families of peer executives of Allstate. In the event of disability, Allstate will pay disability and other benefits, including supplemental long-term disability benefits and retiree medical coverage, if eligible, that are not less favorable than the most favorable benefits available to disabled peer executives. If Allstate terminates a named executive's employment for cause, Allstate's sole obligation is to pay the named executive a lump-sum cash amount equal to all amounts earned and due to be paid, but unpaid, as of the termination date. If a named executive incurs legal fees or other expenses in an effort to enforce the change-in-control agreement, Allstate will reimburse the named executive for these expenses unless it is established by a court that the named executive had no reasonable basis for the claim or acted in bad faith. Effective upon a change-in-control, the named executives become subject to covenants prohibiting competition and solicitation of employees, customers, and suppliers at any time until one year after termination of employment. The following table describes the estimated compensation or benefits that would be provided by Allstate Insurance Company or Allstate to the named executives in the event of a change-in-control that exceed the compensation or benefits generally available to all salaried employees in each situation. The payment of the 2009 annual cash incentive award, the 2007-2009 long-term cash incentive award and any 2009 salary earned but not paid in 2009 due to Allstate's payroll cycle are not included in these tables because these amounts are payable to the named executives regardless of termination, death, or disability. Benefits and payments are calculated assuming a December 31, 2009, employment termination date or change-in-control. 125 POTENTIAL PAYMENTS UPON CHANGE-IN-CONTROL/(1)/
STOCK RESTRICTED NON-QUALIFIED WELFARE EXCISE TAX CHANGE-IN- OPTIONS-- STOCK UNITS-- PENSION AND BENEFITS AND REIMBURSEMENT CONTROL UNVESTED AND UNVESTED AND DEFERRED OUTPLACEMENT AND TAX SEVERANCE ACCELERATED/(3)/ ACCELERATED/(5)/ COMPENSATION SERVICES GROSS-UP/(9)/ NAME ($) ($) ($) ($) ($) ($) - ---- ---------- --------------- --------------- -------------- ------------ ------------- MR. CRIPE Immediately Payable Upon Change-in-Control......... 0 94,854 67,425 95,925/(6)/ 0 0 Involuntary or Good Reason Termination............... 121,170/(2)/ See footnote 4 See footnote 4 See footnote 7 1,861/(8)/ 0 Death/Disability/For Cause Termination............... 0 0 0 0 0 0 MR. PINTOZZI Immediately Payable Upon Change-in-Control......... 0 51,965 37,560 3,610/(6)/ 0 0 Involuntary or Good Reason Termination............... 80,238/(2)/ See footnote 4 See footnote 4 See footnote 7 1,629/(8)/ 0 Death/Disability/For Cause Termination............... 0 0 0 0 0 0
TOTAL NAME ($) - ---- ------- MR. CRIPE Immediately Payable Upon Change-in-Control......... 258,204 Involuntary or Good Reason Termination............... 123,031 Death/Disability/For Cause Termination............... 0 MR. PINTOZZI Immediately Payable Upon Change-in-Control......... 93,135 Involuntary or Good Reason Termination............... 81,867 Death/Disability/For Cause Termination............... 0
- -------- (1)A "0" indicates that either there is no amount payable to the named executive or no amount payable to the named executive that is not made available to all salaried employees. (2)Change-in-control severance benefits upon an involuntary termination or termination for good reason contain the following elements: . two times the named executive's base salary for Mr. Pintozzi (three times for Mr. Cripe); . two times the named executive's annual cash incentive award calculated at target for Mr. Pintozzi (three times for Mr. Cripe); . the named executive's pro-rata long-term cash incentive award for the 2008-2010 performance cycle calculated at target; and . a lump sum payment equal to the positive difference, if any, between: (a) the sum of the lump-sum values of each maximum annuity that would be payable to the named executive under any defined benefit plan (whether or not qualified under Section 401(a) of the Internal Revenue Code) if the named executive had: (i) become fully vested in all such benefits, (ii) attained as of the named executive's termination date an age that is three years greater than named executive's actual age, (iii) accrued a number of years of service that is three years greater than the number of years of service actually accrued by the named executive as of the named executive's termination date, and (iv) received a lump-sum severance benefit consisting of three times base salary, three times annual incentive cash compensation calculated at target, plus the 2009 annual incentive cash award as covered compensation in equal monthly installments during the three-year period following the named executive's termination date; and (b) the lump-sum values of the maximum annuity benefits vested and payable to the named executive under each defined benefit plan that is qualified under Section 401(a) of the Internal Revenue Code plus the aggregate amounts simultaneously or previously paid to the named executive under the defined benefit plans (whether or not qualified under Section 401(a)). The calculation of the lump sum amounts payable under this formula does not impact the benefits payable under the ARP or the SRIP. The change-in-control agreements provide that if the after-tax benefits of all change of control payments are less than 110% of the after-tax benefit of the safe harbor benefit amount, then the change-in-control benefits are to be reduced to the safe harbor benefit amount. The safe harbor benefit amount is the highest level of benefits that can be paid before which an excise tax under section 4999 of the Internal Revenue Code would apply. (3)Stock option values are based on a December 31, 2009, market close price of $30.04 per share of Allstate stock. (4)For purposes of this table, unvested stock options and restricted stock units, which would have been immediately payable upon a change-in-control regardless of termination of employment, were assumed to have been paid immediately prior to termination and are reflected in the "Immediately Payable Upon Change-in-Control" row. (5)The December 31, 2009, market close price of $30.04 per share of Allstate stock was used to value the unvested and nonforfeitable restricted stock unit and restricted stock awards. (6)Within five business days after the effective date of a change-in-control, the named executives will receive a lump sum payment equal to the present value of the named executive's SRIP benefit and deferred compensation account balance. The present value of SRIP benefits earned through December 31, 2009, is calculated in a manner consistent with the allocation of compensation expenses to Allstate New York under the Service and Expense Agreement and is based on the lump sum methodology (i.e., interest rate and mortality table) used by the Allstate pension plans in 2010, as required under the Pension Protection Act. Specifically, the interest rate for 2010 is based on 40% of the average August 30-year Treasury Bond rate from the prior year, and 60% of the average corporate bond segmented yield curve from August of the prior year. The mortality table for 2010 is the 2010 combined static Pension Protection Act funding mortality table with a blend of 50% males and 50% females, as published by the IRS. Refer to the Retirement Benefits section beginning on page 118 for a discussion of the SRIP benefit. See the Non-Qualified Deferred Compensation at Fiscal Year-End 2009 table on page 121 for additional information on the Deferred Compensation Plan and information regarding the named executives' account balances as of December 31, 2009. 126 (7)For purposes of this table, the present value of non-qualified pension benefits earned through December 31, 2009, and the named executive's Deferred Compensation Plan account balance, if any, which would have been immediately payable upon a change-in-control regardless of termination of employment were assumed to have been paid immediately prior to termination upon the effective date of a change of control and are reflected in the "Immediately Payable Upon Change-in-Control" row. (8)The Welfare Benefits and Outplacement Services amount includes the cost to provide certain welfare benefits to the named executive and family during the period which the named executive is eligible for continuation coverage under applicable law. The amount shown reflects Allstate's costs for these benefits or programs assuming an 18-month continuation period. The value of outplacement services is $20,000 for Mr. Cripe and $15,000 for Mr. Pintozzi. (9)Certain payments made as a result of a change in control are subject to a 20% excise tax imposed on the named executive by Section 4999 of the Code. The Excise Tax Reimbursement and Tax Gross-up is the amount Allstate would pay to the named executive as reimbursement for the 20% excise tax plus a tax gross-up for any taxes incurred by the named executive resulting from the reimbursement of such excise tax, allocated in a manner consistent with the allocation of compensation expenses to Allstate New York under the Service and Expense Agreement. The estimated amounts of reimbursement of any resulting excise taxes were determined without regard to the effect that restrictive covenants and any other facts and circumstances may have on the amount of excise taxes, if any, that ultimately might be payable in the event these payments were made to a named executive which is not subject to reliable advance prediction or a reasonable estimate. COMPENSATION POLICIES AND PRACTICES RISK ANALYSIS Allstate management has reviewed its compensation policies and practices and believes that they are appropriately structured, that they are consistent with its key operating priority of keeping the Allstate financially strong, and that they avoid providing incentives for employees to engage in unnecessary and excessive risk taking. The Allstate Board and its Audit Committee both play an important role in risk management oversight, including reviewing how management measures, evaluates, and manages the corporation's exposure to risks posed by a wide variety of events and conditions. In addition, the Compensation and Succession Committee employs an independent executive consultant each year to assess Allstate's executive pay levels, practices, and overall program design. Allstate's compensation programs provide a balanced mix of cash and equity through annual and long-term incentives to align with short-term and long-term business goals. Allstate utilizes a full range of performance measures that it believes correlate to long-term shareholder value creation. Cash incentive awards are paid only after a review of executive and corporate performance. Allstate's calculation of corporate income includes a quarterly re-estimation of property-liability reserves. As a result, to a significant extent, if Allstate under-estimates or over-estimates losses in a given year, income and annual cash incentives will be impacted in the following year. Furthermore, to ensure its compensation programs do not motivate imprudent risk taking, awards made after May 19, 2009, under the 2009 Equity Incentive Plan and awards made beginning in 2010 under the Annual Executive Incentive Plan are subject to clawback in the event of certain financial restatements. PERFORMANCE MEASURES Information regarding performance measures is disclosed in the limited context of annual and long-term cash incentive awards and should not be understood to be statements of management's expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts. The following are descriptions of the performance measures used for Allstate's annual cash incentive awards for 2009 and its long-term cash incentive awards for the 2007-2009 cycle which may be applied to compensation of Allstate New York's named executives. These measures are not GAAP measures. They were developed uniquely for incentive compensation purposes and are not reported items in Allstate's financial statements. Some of these measures use non-GAAP measures and operating measures. The Committee has approved the use of non-GAAP and operating measures when appropriate to drive executive focus on particular strategic, operational, or financial factors or to exclude factors over which Allstate's executives have little influence or control, such as capital market conditions. 127 ANNUAL CASH INCENTIVE AWARDS FOR 2009 Corporate Measures Adjusted Operating Income Per Diluted Share: This measure is used to assess financial performance. The measure is equal to net income adjusted to exclude the after-tax effects of the items listed below, divided by the weighted average shares outstanding on a diluted basis: . Realized capital gains and losses (which includes the related effect on the amortization of deferred acquisition and deferred sales inducement costs) except for periodic settlements and accruals on certain non-hedge derivative instruments, which are reported with realized capital gains and losses but included in Operating Income, and equity method of accounting income from limited partnership interests to be consistent with the incentive goals. . Gains and losses on disposed operations. . Adjustments for other significant non-recurring, infrequent, or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years or (b) there has been no similar charge or gain within the prior two years. . Restructuring and related charges. . Effects of acquiring businesses. . Negative operating results of sold businesses. . Underwriting results of the Discontinued Lines and Coverages segment. . Any settlement, awards, or claims paid as a result of lawsuits and other proceedings brought against Allstate subsidiaries regarding the scope and nature of coverage provided under insurance policies issued by such companies. . Identifiable effects of the adopted accounting standard for other-than-temporary impairments to be consistent with incentive goals. Allstate Financial Measures Adjusted Operating Income: This is a measure Allstate management uses to assess the profitability of the business. The Allstate Financial segment measure, operating income, is adjusted to include equity method of accounting income from limited partnership interests to be consistent with the incentive goals, and to exclude the after tax effects of restructuring and related charges, the potential amount by which 2009 guaranty fund assessments related to insured solvencies exceed $6 million, and the identifiable effects of the adopted accounting standard for other than temporary impairments which were not used to develop plan measures. For disclosure of the Allstate Financial segment measure, see footnote 18 to Allstate's audited financial statements. Financial Product Sales ("Production Credits"): This measure of sales and related profitability of proprietary and non-proprietary financial products sold through the Allstate Exclusive Agency channel is used by management to assess the execution of Allstate's financial services strategy. This measure is calculated as the total amount of production credits for current year transactions. Production credits are an internal sales statistic calculated as a percent of premium or deposits to life insurance, annuities, or mutual funds which vary based on the expected profitability of the specific financial product. Total Return: Total return is principally determined using industry standards and the same sources used in preparing the financial statements to determine fair value. (See footnotes to Allstate's audited financial statements for methodologies for estimating the fair value of investments.) In general, total return represents the increase or decrease, expressed as a percentage, in the value of the portfolio over a one-year period. Time weighted returns are used. 128 . Allstate Financial Total Return: Total return for Allstate Financial investments, including those held in certain subsidiaries, such as Allstate New York. Allstate Financial Total Return includes derivatives and excludes the identifiable effects of the adopted accounting standard for other-than-temporary impairments which were not used to develop plan measures. LONG-TERM CASH INCENTIVE AWARDS Average Adjusted Return on Equity Relative to Peers: This measure is used to assess Allstate's financial performance against its peers. It is calculated as Allstate's ranked position relative to the insurance company peer group based upon three-year average adjusted return on equity, calculated on the same basis for Allstate and each of the peer insurance companies used for long-term cash incentive awards. Three-year average adjusted return on equity is the sum of the annual adjusted return on equity for each of the three years in the cycle divided by three. The annual adjusted return on equity is calculated as the ratio of net income divided by the average of Allstate's shareholders' equity at the beginning and at the end of the year after excluding the component of accumulated other comprehensive income for unrealized net capital gains and losses. Allstate Financial Return on Total Capital: This is a measure management uses to measure the efficiency of capital utilized in the business. Three-year Allstate Financial return on total capital is the sum of the annual adjusted return on Allstate subsidiaries' shareholder's equity for each of the three years divided by three. The annual adjusted return on subsidiaries' shareholder's equity is the Allstate Financial measure, operating income, divided by the average subsidiaries' shareholder's equity at the beginning and at the end of the year. The subsidiaries' shareholder's equity is the sum of the subsidiaries' shareholder's equity for Allstate Life Insurance Company, Allstate Bank, American Heritage Life Investment Corporation, and certain other minor entities, adjusted to exclude the loan protection business and excluding the component of accumulated other comprehensive income for unrealized net capital gains. (See note 18 to Allstate's audited financial statements for Allstate Financial net income.) Allstate Protection Growth in Policies in Force Over Three-Year Cycle: This is a measure used by management to assess growth in the number of policies in force, which is a driver of premiums written. The measure is calculated as the sum of the percent increase in each of the three years in the total number of policies in force at the end of the year over the beginning of the year. The measure excludes property insurance, Allstate Motor Club, and the loan protection business and includes Allstate Canada. DIRECTOR COMPENSATION The following table summarizes the compensation of each of Allstate New York's non-employee directors during 2009 for his or her services as a member of the Allstate New York Board and its committees. Our non-employee directors each received an annual retainer of $13,500 and the chair of the Operations Review Committee received an additional annual retainer of $1,500. Additionally, they each received a fee of $1,500 for each Board meeting attended throughout the year and a fee of $750 for each meeting they attended as members of the Board's Operations Review Committee, Investment Committee, or Audit Committee. All other Allstate New York directors are employees of Allstate or its subsidiaries. These directors receive no compensation for their service as directors in addition to their compensation as employees of Allstate New York, Allstate, or their subsidiaries. 129
FEES EARNED OR PAID IN CASH TOTAL NAME OF NON-EMPLOYEE DIRECTOR ($)/(1)/ ($) ----------------------------- --------------- ------ Ms. Alazraki.......... 22,500 22,500 Mr. Johnson........... 24,000/(2)/ 24,000 Mr. O'Brien........... 24,750/(3)/ 24,750 Mr. Raben............. 25,500/(4)/ 25,500 Ms. Slater............ 22,500 22,500
- -------- (1)Each of these directors is a member of the Operations Review Committee. (2)Chair of the Operations Review Committee (3)Audit Committee member (4)Investment Committee member ITEM 11(M).SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following table shows the number of Allstate New York shares owned by any beneficial owner who owns more than five percent of any class of Allstate New York's voting securities.
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS (A) BENEFICIAL OWNER (B) BENEFICIAL OWNERSHIP (C) CLASS (D) - --------- ---------------------------------------- ------------------------------------- ---------- Capital Stock. Allstate Life Insurance Company 3100 Sanders Road, Northbrook, IL 60062 100,000 100% N/A Allstate Insurance Company Indirect voting and investment power N/A 2775 Sanders Road, Northbrook, IL 60062 of shares owned by Allstate Life Insurance Company N/A The Allstate Corporation Indirect voting and investment power N/A 2775 Sanders Road, Northbrook, IL 60062 of shares owned by Allstate Life Insurance Company
130 SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS. The following table shows the number of shares of Allstate common stock beneficially owned by each director and named executive officer of Allstate New York individually, and by all executive officers and directors of Allstate New York as a group. Shares reported as beneficially owned include shares held indirectly through the Allstate 401(k) Savings Plan and other shares held indirectly, as well as shares subject to stock options exercisable on or prior to April 16, 2010 and restricted stock units for which restrictions expire on or prior to April 16, 2010. The percentage of Allstate shares of common stock beneficially owned by any Allstate New York director, named executive officer or by all directors and executive officers of Allstate New York as a group does not exceed 1%. The following share amounts are as of February 15, 2010. As of February 15, 2010, none of these shares were pledged as security.
COMMON STOCK SUBJECT TO OPTIONS EXERCISABLE AND RESTRICTED STOCK UNITS FOR WHICH AMOUNT AND NATURE OF RESTRICTIONS EXPIRE ON OR BENEFICIAL OWNERSHIP OF PRIOR TO APRIL 16, 2010-- NAME OF BENEFICIAL OWNER ALLSTATE COMMON STOCK (A) INCLUDED IN COLUMN (A)(B) - ------------------------ ------------------------- ------------------------- Marcia D. Alazraki...................... 200 0 Robert K. Becker........................ 13,638 9,075 Michael B. Boyle........................ 101,271 86,420 Frederick F. Cripe...................... 169,161 146,131 Matthew S. Easley....................... 72,624 70,729 Mark A. Green........................... 242 0 Robert J. Holden........................ 23,880 19,556 Cleveland Johnson, Jr................... 2,048 0 Susie Lees.............................. 31,379 20,205 Kenneth R. O'Brien...................... 900 0 John C. Pintozzi........................ 90,036 82,956 John R. Raben, Jr....................... 1,850 0 Phyllis Hill Slater..................... 0 0 J. Eric Smith........................... 2,182 0 Matthew E. Winter....................... 0 0 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP............................... 745,637 663,772
131 ITEM 11(N).TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS. This table describes certain intercompany agreements involving Allstate Life of New York and the following companies: . Allstate Life Insurance Company ("ALIC"), the direct parent of Allstate Life of New York; . Allstate Insurance Company ("AIC"), an indirect parent of Allstate Life of New York; and . The Allstate Corporation ("AllCorp"), the ultimate indirect parent of Allstate Life of New York.
APPROXIMATE DOLLAR VALUE OF THE AMOUNT RELATED PERSON(S) INVOLVED IN THE TRANSACTION/1/ INVOLVED IN THE AND THE APPROXIMATE DOLLAR VALUE OF THE AMOUNT TRANSACTION, PER FISCAL OF THE RELATED PERSON'S INTEREST TRANSACTION DESCRIPTION YEAR IN THE TRANSACTION - ----------------------- -------------------- ------------------------------------------- ALIC AIC ALLCORP ------------ ------------- ---------- Tax Sharing Agreement among The 2007 1,889,110,117/2/ 35,968,879 1,912,198,568 (126,810,136) Allstate Corporation and certain affiliates dated as of November 12, 2008 465,439,826/2/ (109,322,083) 633,316,282 (121,960,368) 1996. 2009 1,173,212,154/2/ (534,572,879) (467,570,173) (121,813,486) Cash Management Services Master 2007 1,242,569/3/ 315,281/4/ 617,385/4/ N/A Agreement between Allstate Insurance Company, Allstate Bank (aka Allstate 2008 1,338,376/3/ 198,098/4/ 816,143/4/ Federal Savings Bank), and certain affiliates dated March 16, 1999, as 2009 1,527,072/3/ 158,312/4/ 1,052,781/4/ amended by Amendment No.1 effective January 5, 2001, and Amendment No. 2 entered into November 8, 2002, between Allstate Insurance Company, Allstate Bank and Allstate Motor Club, Inc., and as supplemented by the Premium Depository Service Supplement dated as of September 30, 2005, the Variable Annuity Service Supplement dated November 10, 2005, and the Sweep Agreement Service Supplement dated as of October 11, 2006. Amended and Restated Service and 2007 3,270,782,494 224,729,858/5/ 2,392,512,051/5/ 24,957,633/5/ Expense Agreement between Allstate Insurance Company, The Allstate 2008 3,295,180,640 215,640,945/5/ 2,186,281,461/5/ 5,351,262/5/ Corporation and certain affiliates effective January 1, 2004, as amended 2009 3,451,765,246 180,154,068/5/ 1,937,571,496/5/ 2,510,800/5/ by Amendment No. 1 effective January 1, 2009, and as supplemented by New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and Intramerica Life Insurance Company, effective March 5, 2005.
132
APPROXIMATE DOLLAR VALUE OF THE AMOUNT RELATED PERSON(S) INVOLVED IN THE TRANSACTION/1/ INVOLVED IN THE AND THE APPROXIMATE DOLLAR VALUE OF THE AMOUNT TRANSACTION, PER FISCAL OF THE RELATED PERSON'S INTEREST TRANSACTION DESCRIPTION YEAR IN THE TRANSACTION - ----------------------- ------------------ ---------------------------------------------- ALIC AIC ALLCORP ------------- ----------- ------------- Intercompany Loan Agreement among 2007 7,370,022,084 7,012,969,748/6/ 357,052,336/6/ 7,370,022,084 The Allstate Corporation, Allstate Life Insurance Company, Lincoln Benefit 2008 400,040,660 50,014,792/6/ 1,732,73/6/ 400,040,660 Life Company and other certain subsidiaries of The Allstate Corporation 2009 86,111,674 0/7/ 86,111,674/6/ 86,111,674 dated February 1, 1996. Agreement for the Settlement of State 2007 14,196,008 374,100/8/ 3,463,000/8/ N/A and Local Tax Credits among Allstate Insurance Company and certain 2008 2,089,067 356,331/8/ 1,732,736/8/ affiliates effective January 1, 2007. 2009 941,379 193,504/8/ 441,024/8/ Reinsurance Agreements between 2007 (3,156,703)/9/ (3,156,703)/9/ N/A N/A Allstate Life Insurance Company and Allstate Life Insurance Company of 2008 (14,905,073)/9/ (14,905,073)/9/ New York: Reinsurance Agreement effective January 1, 1984, as amended 2009 (26,652,961)/9/ (26,652,961)/9/ by Amendment No. 1 effective September 1, 1984, Amendment No.2 effective January 1, 1987, Amendment No.3 effective October 1, 1988, Amendment No.4 effective January 1, 1994, Amendment No.5 effective December 31, 1995, Amendment No. 6 effective December 1, 2007, and Amendment No. 7; Assumption Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective July 1, 1984; Reinsurance Agreement effective January 1, 1986, as amended by Amendment No. 1 effective December 31, 1995 and Amendment No. 2 effective December 1, 1995; Reinsurance Agreement effective January 1, 1991, as amended by Amendment No. 1 effective December 31, 1995; Stop Loss Reinsurance Agreement effective December 31.
- -------- 1 Each identified Related Person is a Party to the transaction. 2 Total amounts paid to Internal Revenue Service. 3 Total fees collected for all bank accounts covered under the transaction. 4 Fees paid under the transaction. 5 Gross amount of expense received under the transaction. 6 Amounts loaned and repaid. 7 No loans outstanding at year end. 8 Value of transfer transactions. 9 Net reinsurance expense. 133 POLICIES AND PROCEDURES FOR REVIEW AND APPROVAL OF RELATED PERSON TRANSACTIONS: All intercompany agreements to which Allstate New York is a party are approved by Allstate New York's Board of Directors as well as by the board of any other affiliate of The Allstate Corporation which is a party to the agreement. Intercompany agreements are also submitted for approval to the New York State Insurance Department, Allstate New York's domestic regulator pursuant to the applicable state's insurance holding company systems act. This process is documented in an internal procedure that captures the review and approval process of all intercompany agreements. All approvals are maintained in Allstate New York's corporate records. While there is no formal process for the review and approval of related person transactions between unaffiliated entities specific to Allstate New York, all directors and executive officers of Allstate New York are subject to the Allstate Code of Ethics ("Code"). The Code includes a written conflict of interest policy that was adopted by the Board of Directors of the Allstate Corporation, the ultimate parent company of Allstate New York. Any potential relationship or activity that could impair independent thinking and judgment, including holding a financial interest in a business venture that is similar to Allstate, or in a business that has a relationship with Allstate, must be disclosed to Human Resources. Human Resources will work with representatives from the Law Department, including Enterprise Business Conduct, to determine whether an actual conflict of interest exists. Each director and executive officer must sign a Code of Ethics certification annually. INDEPENDENCE STANDARDS FOR DIRECTORS Outside directors of Allstate New York are subject to independence standards based on New York insurance law. Generally, these independence standards require that an independent director cannot be an employee or a beneficial owner of a controlling interest in Allstate New York or any other affiliate of The Allstate Corporation. Applying these independence standards, Ms. Alazraki, Mr. Johnson, Mr. O'Brien, Mr. Raben, and Ms. Slater are independent. Although not subject to the independence standards of the New York Stock Exchange, for purposes of this S-1 registration statement, Allstate New York has applied the independence standards required for listed companies of the New York Stock Exchange to the Board of Directors. Applying these standards, Allstate New York has been determined that Ms. Alazraki, Mr. Johnson, Mr. O'Brien, Mr. Raben, and Ms. Slater are considered to be independent. OTHER INFORMATION The section in your prospectus entitled "Incorporation of Certain Documents By Reference" is deleted and replaced with the following: FILING OF REPORTS Rule 12h-7 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") exempts an insurance company from filing reports under the Exchange Act when the insurance company issues certain types of insurance products that are registered under the Securities Act of 1933 and such products are regulated under state law. Your variable annuity issued by Allstate Life Insurance Company of New York falls within the exemption provided under rule 12h-7. We rely on the exemption provided under rule 12h-7 and do not file reports under the Exchange Act. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted in directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for 134 indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The sections in your prospectus entitled "Experts" and "Financial Statements" are deleted and replaced with the following: EXPERTS The financial statements and related financial statement schedules included herein have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, 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. 135 Supplement Dated December 31, 2009 To the Prospectus for Your Variable Annuity Issued By Allstate Life Insurance Company Allstate Life Insurance Company of New York Lincoln Benefit Life Company This supplement amends the prospectus for your variable annuity contract issued by Allstate Life Insurance Company, Allstate Life Insurance Company of New York, or Lincoln Benefit Life Company. The following provision is added to your prospectus: WRITTEN REQUESTS AND FORMS IN GOOD ORDER. Written requests must include sufficient information and/or documentation, and be sufficiently clear, to enable us to complete your request without the need to exercise discretion on our part to carry it out. You may contact our Customer Service Center to learn what information we require for your particular request to be in "good order." Additionally, we may require that you submit your request on our form. We reserve the right to determine whether any particular request is in good order, and to change or waive any good order requirements at any time. If you have any questions, please contact your financial representative or call our Customer Service Center at 1-800-457-7617. If you own a Putnam contract, please call 1-800-390-1277. For future reference, please keep this supplement together with your prospectus. ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK Supplement dated August 14, 2009 To the following Prospectuses, as supplemented: Allstate Provider, Prospectus Dated May 1, 2002 SelectDirections, Prospectus Dated April 30, 2005 AIM Lifetime Plus, Prospectus Dated April 30, 2005 AIM Lifetime Plus II, Prospectus Dated April 30, 2005 Custom Portfolio, Prospectus Dated April 30, 2005 This prospectus supplement amends certain disclosure contained in the prospectuses referenced above for your variable annuity contract issued by Allstate Life Insurance Company of New York ("Allstate New York"). The "Annual Reports and Other Documents" Section is deleted and replaced with the following: INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Securities and Exchange Commission ("SEC") recently adopted rule 12h-7 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule 12h- 7 exempts an insurance company from filing reports under the Exchange Act when the insurance company issues certain types of insurance products that are registered under the Securities Act of 1933 and such products are regulated under state law. Each of the variable annuities described in the prospectuses referenced above fall within the exemption provided under rule 12h-7. Allstate New York is hereby providing notice that it is electing to rely on the exemption provided under rule 12h-7 effective as of the date of this prospectus supplement or as soon as possible thereafter, and will be suspending filing reports under the Exchange Act. The SEC allows us to "incorporate by reference" information that we file with the SEC into this prospectus supplement which means that incorporated documents are considered part of this prospectus supplement. We can disclose important information to you by referring you to those documents. This prospectus supplement incorporates by reference our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 18, 2009, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 12, 2009. Allstate New York will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference into the prospectus but not delivered with the prospectus. Such information will be provided upon written or oral request at no cost to the requester by writing to Allstate New York, P.O. Box 758565, Topeka, KS 66675-8565 or by calling 1-800-457-8207. The public may read and copy any materials that Allstate New York files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC (see http://www.sec.gov). Allstate Life Insurance Company of New York AIM Lifetime Plus AIM Lifetime Plus II Allstate Provider Variable Annuity Custom Portfolio Select Directions Supplement, dated May 1, 2009 This supplement amends certain disclosure contained in the prospectus for certain annuity contracts issued by Allstate Life Insurance Company of New York. Under the "More Information" section, the subsection entitled "Legal Matters" is deleted and replaced with the following: LEGAL MATTERS Certain matters of state law pertaining to the Contracts, including the validity of the Contracts and Allstate New York's right to issue such Contracts under applicable state insurance law, have been passed upon by Susan L. Lees, General Counsel of Allstate New York. The "Annual Reports and Other Documents" section is deleted and replaced with the following: ANNUAL REPORTS AND OTHER DOCUMENTS Allstate Life Insurance Company of New York ("Allstate New York") incorporates by reference into the prospectus its latest annual report on Form 10-K filed pursuant to Section 13(a) or Section 15(d) of the Exchange Act since the end of the fiscal year covered by its latest annual report, including filings made on Form 10-Q and Form 8-K. In addition, all documents subsequently filed by Allstate New York pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act also are incorporated into the prospectus by reference. Allstate New York will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference into the prospectus but not delivered with the prospectus. Such information will be provided upon written or oral request at no cost to the requester by writing to Allstate New York, P.O. Box 70178, Philadelphia, PA 19176 or by calling 1-877-234-8688. Allstate New York files periodic reports as required under the Securities Exchange Act of 1934. The public may read and copy any materials that Allstate New York files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC (see http://www.sec.gov). EXPERTS In the prospectus for Allstate Provider Variable Annuity, the section entitled "Experts" is deleted. AIM LIFETIME PLUS(SM) VARIABLE ANNUITY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STREET ADDRESS: 2940 S. 84TH STREET, LINCOLN, NE 68506-4142 MAILING ADDRESS: P.O. BOX 82656, LINCOLN, NE 68501-2656 TELEPHONE NUMBER: 1-800-692-4682 PROSPECTUS DATED APRIL 30, 2005 Allstate Life Insurance Company of New York ("Allstate New York") has issued the AIM Lifetime Plus(SM) Variable Annuity, a group flexible premium deferred variable annuity contract ("CONTRACT"). This prospectus contains information about the Contract that you should know before investing. Please keep it for future reference. The Contract currently offers 19 investment alternatives ("INVESTMENT ALTERNATIVES"). The investment alternatives include the fixed account ("FIXED ACCOUNT") and 18 variable sub-accounts ("VARIABLE SUB-ACCOUNTS") of the Allstate Life of New York Separate Account A ("VARIABLE ACCOUNT"). Each Variable Sub-Account invests exclusively in shares of one of the following funds ("FUNDS") of AIM Variable Insurance Funds (Series I shares): AIM V.I. AGGRESSIVE GROWTH FUND - SERIES I AIM V.I. GOVERNMENT SECURITIES FUND - AIM V.I. BALANCED FUND - SERIES I* SERIES I AIM V.I. BASIC VALUE FUND - SERIES I AIM V.I. GROWTH FUND - SERIES I AIM V.I. BLUE CHIP FUND - SERIES I AIM V.I. HIGH YIELD FUND - SERIES I AIM V.I. CAPITAL APPRECIATION FUND - SERIES I AIM V.I. INTERNATIONAL GROWTH FUND - AIM V.I. CAPITAL DEVELOPMENT FUND - SERIES I SERIES I AIM V.I. CORE EQUITY FUND - SERIES I AIM V.I. MID CAP CORE EQUITY FUND - AIM V.I. DENT DEMOGRAPHIC TRENDS FUND - SERIES I** SERIES I AIM V.I. DIVERSIFIED INCOME FUND - SERIES I AIM V.I. MONEY MARKET FUND - SERIES I AIM V.I. PREMIER EQUITY FUND - SERIES I AIM V.I. TECHNOLOGY FUND - SERIES I AIM V.I. UTILITIES FUND - SERIES I
* Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. ** Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS IMPORTANT THAT HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL NOTICES INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS. HOWEVER, THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT FDIC INSURED. THE CONTRACTS WERE ONLY AVAILABLE IN NEW YORK, BUT ARE NO LONGER AVAILABLE FOR SALE. WE (Allstate New York) have filed a Statement of Additional Information, dated April 30, 2005, with the Securities and Exchange Commission ("SEC"). It contains more information about the Contract and is incorporated herein by reference, which means it is legally a part of this prospectus. Its table of contents appears on page 40 of this prospectus. For a free copy, please write or call us at the address or telephone number above, or go to the SEC's Web site (http:// www.sec.gov) You can find other information and documents about us, including documents that are legally part of this prospectus, at the SEC's Web site. 1 PROSPECTUS TABLE OF CONTENTS PAGE ---- OVERVIEW Important Terms 3 The Contract at a Glance 4 How the Contract Works 6 Expense Table 7 Financial Information 9 CONTRACT FEATURES The Contract 9 Purchases 10 Contract Value 11 Investment Alternatives 12 The Variable Sub-Accounts 12 The Fixed Account 13 Transfers 15 Expenses 17 Other Expenses 19 Access To Your Money 19 PAGE ---- Income Payments 20 Death Benefits 22 OTHER INFORMATION More Information: 24 Allstate New York 24 The Variable Account 24 The Funds 24 The Contract 25 Non-Qualified Annuities Held Within a Qualified Plan 25 Legal Matters 26 Taxes 27 Annual Reports and Other Documents 34 APPENDIX A-ACCUMULATION UNIT VALUES AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED 35 APPENDIX B-MARKET VALUE ADJUSTMENT 39 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 40 2 PROSPECTUS IMPORTANT TERMS - -------------------------------------------------------------------------------- This prospectus uses a number of important terms that you may not be familiar with. The index below identifies the page that describes each term. The first use of each term in this prospectus appears in highlights. PAGE ---- Accumulation Phase 6 Accumulation Unit 11 Accumulation Unit Value 11 Allstate New York ("We" and/or "us") 1, 24 Anniversary Values 22 Annuitant 9 Automatic Additions Program 10 Automatic Fund Rebalancing Program 17 Beneficiary 9 *Contract 9 Contract Anniversary 5 Contract Owner ("You") 6 Contract Value 5 Contract Year 5 Death Benefit Anniversary 22 Dollar Cost Averaging Program 17 Due Proof of Death 22 Fixed Account 13 PAGE ---- Funds 24 Guarantee Periods 13 Income Plans 20 Investment Alternatives 12 Issue Date 6 Market Value Adjustment 5, 14 Payout Phase 6 Payout Start Date 20 Preferred Withdrawal Amount 18 SEC 1 Settlement Value 22 Systematic Withdrawal Program 20 Tax Qualified Contracts 30 Treasury Rate 15 Valuation Date 10 Variable Account 24 Variable Sub-Account 12 * The AIM Lifetime Plus(SM) Variable Annuity is a group contract, and your ownership is represented by certificates. References to "Contract" in this prospectus include certificates, unless the context requires otherwise. 3 PROSPECTUS THE CONTRACT AT A GLANCE The following is a snapshot of the Contract. Please read the remainder of this prospectus for more information. FLEXIBLE PAYMENTS You can purchase a Contract with as little as $5,000 ($2,000 for "QUALIFIED CONTRACTS", which are Contracts issued with qualified plans). You can add to your Contract as often and as much as you like, but each payment must be at least $500 ($100 for automatic purchase payments to the variable investment options). You must maintain a minimum account size of $1,000. - ------------------------------------------------------------------------------- RIGHT TO CANCEL You may cancel your Contract by returning it to us within 10 days after receipt ("CANCELLATION PERIOD"). Upon cancellation, as permitted by federal or state law, we will return your purchase payments adjusted to reflect the investment experience of any amounts allocated to the Variable Account. The adjustment will reflect the deduction of mortality and expense risk charges and administrative expense charges. - ------------------------------------------------------------------------------- EXPENSES You will bear the following expenses: . Total Variable Account annual fees equal to 1.45% of average daily net assets . Annual contract maintenance charge of $35 (with certain exceptions) . Withdrawal charges ranging from 0% to 7% of payment withdrawn (with certain exceptions) . Transfer fee of $10 after 12th transfer in any CONTRACT YEAR (fee currently waived) . State premium tax (New York currently does not impose one). In addition, each Fund pays expenses that you will bear indirectly if you invest in a Variable Sub-Account. - ------------------------------------------------------------------------------- INVESTMENT The Contract offers 19 investment alternatives ALTERNATIVES including: . the Fixed Account (which credits interest at rates we guarantee), and . 18 Variable Sub-Accounts investing in Funds offering professional money management by A I M Advisors, Inc. To find out current rates being paid on the Fixed Account, or to find out how the Variable Sub-Accounts have performed, please call us at 1-800-692-4682. - ------------------------------------------------------------------------------- SPECIAL SERVICES For your convenience, we offer these special services: . AUTOMATIC FUND REBALANCING PROGRAM . AUTOMATIC ADDITIONS PROGRAM . DOLLAR COST AVERAGING PROGRAM . SYSTEMATIC WITHDRAWAL PROGRAM - ------------------------------------------------------------------------------- INCOME PAYMENTS You can choose fixed income payments, variable income payments, or a combination of the two. You can receive your income payments in one of the following ways: . life income with guaranteed payments . a joint and survivor life income with guaranteed payments . guaranteed payments for a specified period (5 to 30 years). - ------------------------------------------------------------------------------- DEATH BENEFITS If you or the Annuitant (if the Contract is owned by a non-living person) die before the PAYOUT START DATE, we will pay the death benefit described in the Contract. - ------------------------------------------------------------------------------- 4 PROSPECTUS TRANSFERS Before the Payout Start Date, you may transfer your Contract value ("CONTRACT VALUE") among the investment alternatives, with certain restrictions. Transfers to the Fixed Account must be at least $500. We do not currently impose a fee upon transfers. However, we reserve the right to charge $10 per transfer after the 12th transfer in each "CONTRACT YEAR," which we measure from the date we issue your contract or a Contract anniversary ("CONTRACT ANNIVERSARY"). - ------------------------------------------------------------------------------- WITHDRAWALS You may withdraw some or all of your Contract Value at anytime during the Accumulation Phase. Full or partial withdrawals are available under limited circumstances on or after the Payout Start Date. In general, you must withdraw at least $50 at a time. ($1,000 for withdrawals made during the Payout Phase.) Withdrawals taken prior to annuitization (referred to in this prospectus as the Payout Phase) are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. A withdrawal charge and MARKET VALUE ADJUSTMENT also may apply. - ------------------------------------------------------------------------------- 5 PROSPECTUS HOW THE CONTRACT WORKS The Contract basically works in two ways. First, the Contract can help you (we assume you are the CONTRACT OWNER) save for retirement because you can invest in up to 19 investment alternatives and generally pay no federal income taxes on any earnings until you withdraw them. You do this during what we call the "ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date we issue your Contract (we call that date the "ISSUE DATE") and continues until the Payout Start Date, which is the date we apply your money to provide income payments. During the Accumulation Phase, you may allocate your purchase payments to any combination of the Variable Sub-Accounts and/or the Fixed Account. If you invest in the Fixed Account, you will earn a fixed rate of interest that we declare periodically. If you invest in any of the Variable Sub-Accounts, your investment return will vary up or down depending on the performance of the corresponding Funds. Second, the Contract can help you plan for retirement because you can use it to receive retirement income for life and/ or for a pre-set number of years, by selecting one of the income payment options (we call these "INCOME PLANS") described on page 20. You receive income payments during what we call the "PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and continues until we make the last payment required by the Income Plan you select. During the Payout Phase, if you select a fixed income payment option, we guarantee the amount of your payments, which will remain fixed. If you select a variable income payment option, based on one or more of the Variable Sub-Accounts, the amount of your payments will vary up or down depending on the performance of the corresponding Funds. The amount of money you accumulate under your Contract during the Accumulation Phase and apply to an Income Plan will determine the amount of your income payments during the Payout Phase. The timeline below illustrates how you might use your Contract.
Issue Payout Start Date Accumulation Phase Date Payout Phase - --------------------------------------------------------------------------------------------------- You buy You save for retirement You elect to receive You can receive Or you can receive a Contract income payments or income payments income payments receive a lump sum for a set period for life payment
As the Contract owner, you exercise all of the rights and privileges provided by the Contract. If you die, any surviving Contract owner, or if there is none, the BENEFICIARY will exercise the rights and privileges provided by the Contract. See "The Contract." In addition, if you die before the Payout Start Date, we will pay a death benefit to any surviving Contract owner or, if none, to your Beneficiary. See "Death Benefits." Please call us at 1-800-692-4682 if you have any questions about how the Contract works. 6 PROSPECTUS EXPENSE TABLE The table below lists the expenses that you will bear directly or indirectly when you buy a Contract. The table and the examples that follow do not reflect premium taxes because New York currently does not impose premium taxes on annuities. For more information about Variable Account expenses, see "Expenses," below. For more information about Fund expenses, please refer to the accompanying prospectus for the Funds. CONTRACT OWNER TRANSACTION EXPENSES Withdrawal Charge (as a percentage of purchase payments withdrawn)* Number of Complete Years Since We Received the Purchase Payment 0 1 2 3 4 5 6 7+ Being Withdrawn - ----------------------------------------------------------------------------------------------------------- Applicable Charge 7% 6% 5% 4% 3% 2% 1% 0% - ----------------------------------------------------------------------------------------------------------- Annual Contract Maintenance Charge $35.00** - ----------------------------------------------------------------------------------------------------------- Transfer Fee $10.00*** - -----------------------------------------------------------------------------------------------------------
* Each Contract Year, you may withdraw up to 10% of purchase payments without incurring a withdrawal charge or a Market Value Adjustment. ** We will waive this charge in certain cases. See "Expenses." *** Applies solely to the thirteenth and subsequent transfers within a Contract Year excluding transfers due to dollar cost averaging or automatic fund rebalancing. We are currently waiving the transfer fee. VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE SUB-ACCOUNT) Mortality and Expense Risk Charge 1.35% - ------------------------------------------------------------------------------- Administrative Expense Charge 0.10% - ------------------------------------------------------------------------------- Total Variable Account Annual Expense 1.45% - ------------------------------------------------------------------------------- FUND ANNUAL EXPENSES (as a percentage of Fund average daily net assets) (1) The next table shows the minimum and maximum total operating expenses charged by the Funds that you may pay periodically during the time that you own the Contract. Advisers and/or other service providers of certain Funds may have agreed to waive their fees and/or reimburse Fund expenses in order to keep the Funds' expenses below specified limits. The range of expenses shown in this table does not show the effect of any such fee waiver or expense reimbursement. More detail concerning each Fund's fees and expenses appears in the prospectus for each Fund. ANNUAL FUND EXPENSES Minimum Maximum - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses/(1)/ (expenses that are deducted from Fund assets, which may include management fees, distribution and/or services (12b-1) fees, and other expenses) 0.75% 1.16% - -------------------------------------------------------------------------------- (1) Expenses are shown as a percentage of Fund average daily net assets (before any waiver or reimbursement) as of December 31, 2004. 7 PROSPECTUS EXAMPLE 1 This Example is intended to help you compare the cost of investing in the Contracts with the cost of investing in other variable annuity contracts. These costs include Contract owner transaction expenses, Contract fees, Variable Account annual expenses, and Fund fees and expenses. The example below shows the dollar amount of expenses that you would bear directly or indirectly if you: .. invested $10,000 in the Contract for the time periods indicated, .. earned a 5% annual return on your investment, and .. surrendered your Contract, or you began receiving income payments for a specified period of less than 120 months, at the end of each time period. The first line of the example assumes that the maximum fees and expenses of any of the Funds are charged. The second line of the example assumes that the minimum fees and expenses of any of the Funds are charged. Your actual expenses may be higher or lower than those shown below. THE EXAMPLE DOES NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO PAY IF YOU SURRENDER YOUR CONTRACT. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------ Costs Based on Maximum Annual Fund Expenses $842 $1,283 $1,746 $3,278 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Fund Expenses $800 $1,158 $1,538 $2,866 - ------------------------------------------------------------------------ EXAMPLE 2 This Example uses the same assumptions as Example 1 above, except that it assumes you decided not to surrender your Contract, or you began receiving income payments for a specified period of at least 120 months, at the end of each time period. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------- Costs Based on Maximum Annual Fund Expenses $302 $923 $1,566 $3,278 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Fund Expenses $260 $798 $1,358 $2,866 - ------------------------------------------------------------------------ PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES. YOUR ACTUAL EXPENSES MAY BE LOWER OR GREATER THAN THOSE SHOWN ABOVE. SIMILARLY, YOUR RATE OF RETURN MAY BE LOWER OR GREATER THAN 5%, WHICH IS NOT GUARANTEED. THE EXAMPLES DO NOT ASSUME THAT ANY FUND EXPENSE WAIVERS OR REIMBURSEMENT ARRANGEMENTS ARE IN EFFECT FOR THE PERIODS PRESENTED. THE ABOVE EXAMPLES ASSUME A MORTALITY AND EXPENSE RISK CHARGE OF 1.35%, AN ADMINISTRATIVE EXPENSE CHARGE OF 0.10% AND AN ANNUAL CONTRACT CHARGE OF $35. THE ABOVE EXAMPLES ASSUME TOTAL ANNUAL FUND EXPENSES LISTED IN THE EXPENSE TABLE WILL CONTINUE THROUGHOUT THE PERIODS SHOWN. 8 PROSPECTUS FINANCIAL INFORMATION To measure the value of your investment in the Variable Sub-Accounts during the Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT." Each Variable Sub-Account has a separate value for its Accumulation Units we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but not the same as, the share price of a mutual fund. Attached as Appendix A to this prospectus are tables showing the Accumulation Unit Values of each Variable Sub-Account since the date we first offered the Contracts. To obtain a fuller picture of each Variable Sub-Account's finances, please refer to the Variable Account's financial statements contained in the Statement of Additional Information. The financial statements of Allstate New York also appear in the Statement of Additional Information. THE CONTRACT CONTRACT OWNER The AIM Lifetime Plus(SM) Variable Annuity is a contract between you, the Contract owner, and Allstate New York, a life insurance company. As the Contract Owner, you may exercise all of the rights and privileges provided to you by the Contract. That means it is up to you to select or change (to the extent permitted): .. the investment alternatives during the Accumulation and Payout Phases, .. the amount and timing of your purchase payments and withdrawals, .. the programs you want to use to invest or withdraw money, .. the income payment plan you want to use to receive retirement income, .. the Annuitant (either yourself or someone else) on whose life the income payments will be based, .. the Beneficiary or Beneficiaries who will receive the benefits that the Contract provides when the last surviving Contract Owner or Annuitant dies, and .. any other rights that the Contract provides. If you die, any surviving Contract Owner or, if none, the Beneficiary may exercise the rights and privileges provided to them by the Contract. The Contract cannot be jointly owned by both a non-living person and a living person. If the Contract Owner is a Grantor Trust, the Owner will be considered a non-living person for purpose of this section and the Death Benefit section. The maximum issue age of a Contract owner is age 90 as of the date we receive the completed application to purchase the Contract. Changing ownership of this Contract may cause adverse tax consequences and may not be allowed under qualified plans. Please consult with a competent tax advisor prior to making a request for a change of Contract Owner. The Contract can also be purchased as an IRA or TSA (also known as a 403(b)). The endorsements required to qualify these annuities under the Internal Revenue Code of 1986, as amended, ("Code") may limit or modify your rights and privileges under the Contract. ANNUITANT The Annuitant is the individual whose life determines the amount and duration of income payments (other than under Income Plans with guaranteed payments for a specified period). You initially designate an Annuitant in your application. If the Contract Owner is a living person you may change the Annuitant prior to the Payout Start Date. In our discretion, we may permit you to designate a joint Annuitant, who is a second person on whose life income payments depend, on the Payout Start Date. The maximum issue age of an Annuitant cannot exceed age 80 as of the date we receive the completed application to purchase the Contract. If the Annuitant dies prior to the Payout Start Date, the new Annuitant will be: .. the youngest Contract Owner if living, otherwise .. the youngest Beneficiary. BENEFICIARY The Beneficiary is the person who may elect to receive the Death Benefit or become the new Contract Owner, subject to the Death of Owner provisions, if the sole surviving Contract Owner dies before the Payout Start Date. (See section titled "Death Benefits" for more details.) If the sole surviving Contract Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed Income Payments scheduled to continue. You may name one or more Beneficiaries when you apply for a Contract. You may also name one or more contingent Beneficiaries who will receive any Death Benefit or guaranteed income benefit if there are no surviving primary Beneficiaries upon the death of the sole surviving Contract Owner. You may change or add Beneficiaries at any time by writing to us, unless you have designated an irrevocable Beneficiary. We will provide a change of Beneficiary form to be signed and filed with us. Any change will be effective at the time you sign the written notice, whether or not the Annuitant is living when we receive the notice. Until we receive your written 9 PROSPECTUS notice to change a Beneficiary, we are entitled to rely on the most recent Beneficiary information in our files. We will not be liable as to any payment or settlement made prior to receiving the written notice. Accordingly, if you wish to change your Beneficiary, you should deliver your written notice to us promptly. If you did not name a Beneficiary or if the named Beneficiary is no longer living and there are no other surviving Beneficiaries, the new Beneficiary will be: .. your spouse or, if he or she is no longer alive, .. your surviving children equally, or if you have no surviving children, .. your estate. If more than one Beneficiary survives you, we will divide the Death Benefit among your Beneficiaries according to your most recent written instructions. If you have not given us written instructions, we will pay the Death Benefit in equal amounts to the surviving Beneficiaries. You may restrict income payments to Beneficiaries by providing us a written request. Once we accept the written request, the change or restriction will take effect as of the date you signed the request. Any change is subject to any payment we make or other action we take before we accept the change. MODIFICATION OF THE CONTRACT Only an Allstate New York officer may approve a change in or waive any provision of the Contract. Any change or waiver must be in writing. None of our agents has the authority to change or waive the provisions of the Contract. We may not change the terms of the Contract without your consent, except to conform the Contract to applicable law or changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law. ASSIGNMENT No Owner has a right to assign any interest in a Contract as collateral or security for a loan. However, you may assign periodic income payments under the Contract prior to the Payout Start Date. No Beneficiary may assign benefits under the Contract until they are due. We will not be bound by any assignment until the assignor signs it and files it with us. We are not responsible for the validity of any assignment. Federal law prohibits or restricts the assignment of benefits under many types of retirement plans and the terms of such plans may themselves contain restrictions on assignments. An assignment may also result in taxes or tax penalties. YOU SHOULD CONSULT WITH AN ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT. PURCHASES MINIMUM PURCHASE PAYMENTS Your initial Purchase Payment must be at least $5,000 ($2,000 for a Qualified Contract). All subsequent Purchase Payments must be $500 or more. The maximum Purchase Payment is $2,000,000 without prior approval. We reserve the right to change the minimum Purchase Payment and to change the maximum Purchase Payment. You may make Purchase Payments of at least $500 at any time prior to the Payout Start Date. We also reserve the right to reject any application. AUTOMATIC ADDITIONS PROGRAM You may make additional purchase payments of at least $100 ($500 for allocation to the Fixed Account) by automatically transferring amounts from your bank account. Please consult with your sales representative for detailed information. ALLOCATION OF PURCHASE PAYMENTS At the time you apply for a Contract, you must decide how to allocate your Purchase Payments among the Investment Alternatives. The allocation you specify on your application will be effective immediately. All allocations must be in whole percents that total 100% or in whole dollars. You can change your allocations by notifying us in writing. We reserve the right to limit the availability of the Investment Alternatives. We will allocate your additional purchase payments to the investment alternatives according to your most recent instructions on file with us. Unless you notify us in writing otherwise, we will allocate subsequent purchase payments according to the allocation for the previous purchase payment. We will effect any change in allocation instructions at the time we receive written notice of the change in good order. We will credit the initial purchase payment that accompanies your completed application to your Contract within 2 business days after we receive the payment at our service center. If your application is incomplete, we will ask you to complete your application within 5 business days. If you do so, we will credit your initial purchase payment to your Contract within that 5 business day period. If you do not, we will return your purchase payment at the end of the 5 business day period unless you expressly allow us to hold it until you complete the application. We will credit additional Purchase Payments to the Contract at the close of the business day on which we receive the purchase payment at our service center located in Vernon Hills, Illinois (mailing address: P.O. BOX 82656, LINCOLN, NE 68501-2656). We are open for business each day Monday through Friday that the New York Stock Exchange is open for business. We also refer to these days as "VALUATION DATES." Our business day closes when the New York Stock Exchange closes, usually 4:00 p.m. Eastern Time 10 PROSPECTUS (3:00 p.m. Central Time). If we receive your purchase payment after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date, we will credit your purchase payment using the Accumulation Unit Values computed on the next Valuation Date. RIGHT TO CANCEL You may cancel the Contract by returning it to us within the Cancellation Period, which is the 10 day period after you receive the Contract (60 days if you are exchanging another contract for the Contract described in this prospectus.) You may return it by delivering it or mailing it to us. If you exercise this "RIGHT TO CANCEL," the Contract terminates and we will pay you the full amount of your purchase payments allocated to the Fixed Account Options. Upon cancellation, as permitted by federal or state law, we will return your purchase payments allocated to the Variable Account after an adjustment to reflect investment gain or loss and any applicable charges that occurred from the date of allocation through the date of cancellation. If your Contract is qualified under Code Section 408(b), we will refund the greater of any purchase payment or the Contract Value, CONTRACT VALUE Your Contract Value at any time during the Accumulation Phase is equal to the sum of the value of your Accumulation Units in the Variable Sub-Accounts you have selected, plus the sum of Sub-Account values in the Fixed Account. ACCUMULATION UNITS To determine the number of Accumulation Units of each Variable Sub-Account to credit to your Contract, we divide (i) the amount of the purchase payment or transfer you have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value of that Variable Sub-Account next computed after we receive your payment or transfer. For example, if we receive a $10,000 purchase payment allocated to a Variable Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we would credit 1,000 Accumulation Units of that Variable Sub-Account to your Contract. Withdrawals and transfers from a Variable Sub-Account would, of course, reduce the number of Accumulation Units of that Sub-Account allocated to your Contract. ACCUMULATION UNIT VALUE As a general matter, the Accumulation Unit Value for each Variable Sub-Account will rise or fall to reflect: .. changes in the share price of the Fund in which the Variable Sub-Account invests, and .. the deduction of amounts reflecting the mortality and expense risk charge, administrative expense charge, and any provision for taxes that have accrued since we last calculated the Accumulation Unit Value. We determine contract maintenance charges, withdrawal charges, and transfer fees (currently waived) separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units. For details on how we calculate Accumulation Unit Value, please refer to the Statement of Additional Information. We determine a separate Accumulation Unit Value for each Variable Sub-Account on each Valuation Date. YOU SHOULD REFER TO THE PROSPECTUS FOR THE FUNDS THAT ACCOMPANIES THIS PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH FUND ARE VALUED, SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE CORRESPONDING VARIABLE SUB-ACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE. 11 PROSPECTUS INVESTMENT ALTERNATIVES: THE VARIABLE SUB-ACCOUNTS You may allocate your purchase payments to up to 18 Variable Sub-Accounts. Each Variable Sub-Account invests in the shares of a corresponding Fund. Each Fund has its own investment objective(s) and policies. We briefly describe the Funds below. For more complete information about each Fund, including expenses and risks associated with the Fund, please refer to the accompanying prospectus for the Fund. You should carefully review the Fund prospectus before allocating amounts to the Variable Sub-Accounts. A I M Advisors, Inc. serves as the investment advisor to each Fund. SERIES I SHARES: EACH FUND SEEKS*: INVESTMENT ADVISOR - ------------------------------------------------------------------------------- AIM V.I. Aggressive Long-term growth of capital Growth Fund - Series I** - ------------------------------------------------------------------------------- AIM V.I. Balanced Fund As high a total return as - Series I*** possible, consistent with preservation of capital - ------------------------------------------------------------------------------- AIM V.I. Basic Value Long-term growth of capital Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Blue Chip Long-term growth of capital Fund - Series I with a secondary objective of current income - ------------------------------------------------------------------------------- AIM V.I. Capital Growth of capital Appreciation Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Capital Long-term growth of capital Development Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Core Equity Growth of capital Fund - Series I A I M ADVISORS, INC.. - ------------------------------------------------------------------------------- AIM V.I. Dent Long-term growth of capital Demographic Trends Fund - Series I**** - ------------------------------------------------------------------------------- AIM V.I. Diversified High level of current income Income Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Government High level of current income Securities Fund - consistent with reasonable Series I concern for safety of principal - ------------------------------------------------------------------------------- AIM V.I. Growth Fund - Growth of capital Series I - ------------------------------------------------------------------------------- AIM V.I. High Yield High level of current income Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. International Long-term growth of capital Growth Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Mid Cap Core Long-term growth of capital Equity Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Money Market As high a level of current Fund - Series I income as is consistent with the preservation of capital and liquidity - ------------------------------------------------------------------------------- AIM V.I. Premier Long-term growth of capital Equity Fund - Series with income as a secondary I objective - ------------------------------------------------------------------------------- AIM V.I. Technology Capital growth Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Utilities Capital growth and current Fund - Series I income - ------------------------------------------------------------------------------- * A Fund's investment objective(s) may be changed by the Fund's Board of Trustees without shareholder approval. ** Due to the sometime limited availability of common stocks of small-cap companies that meet the investment criteria for AIM V.I. Aggressive Growth Fund - Series I, the Fund may periodically suspend or limit the offering of its shares and it will be closed to new participants when Fund assets reach $200 million. During the closed periods the Fund will accept additional investments from existing Contract owners maintaining an allocation in the Fund. *** Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. In addition, the Fund's objective will change to long-term growth of capital and current income. **** The AIM V.I. Dent Demographic Trends Fund - Series I is sub-advised by H.S. Dent Advisors, Inc. Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. In addition, H.S. Dent Advisors, Inc. will no longer be the sub-advisor to the Fund effective June 30, 2005. AMOUNTS YOU ALLOCATE TO VARIABLE SUB-ACCOUNTS MAY GROW IN VALUE, DECLINE IN VALUE, OR GROW LESS THAN YOU EXPECT, DEPENDING ON THE INVESTMENT PERFORMANCE OF THE FUNDS IN WHICH THOSE VARIABLE SUB-ACCOUNTS INVEST. YOU BEAR THE INVESTMENT RISK THAT THE FUNDS MIGHT NOT MEET THEIR INVESTMENT OBJECTIVES. SHARES OF THE FUNDS 12 PROSPECTUS ARE NOT DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT You may allocate all or a portion of your purchase payments to the Fixed Account. The Fixed Account supports our insurance and annuity obligations. The Fixed Account consists of our general assets other than those in segregated asset accounts. We have sole discretion to invest the assets of the Fixed Account, subject to applicable law. Any money you allocate to the Fixed Account does not entitle you to share in the investment experience of the Fixed Account. GUARANTEE PERIODS Each payment or transfer allocated to a Guarantee Period earns interest at a specified rate that we guarantee for a period of years. Guarantee Periods may range from 1 to 10 years. In the future, we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods. You select the Guarantee Period for each payment or transfer. If you do not select a Guarantee Period, we will assign the same period(s) you selected for your most recent purchase payment(s), if available. Each purchase payment or transfer allocated to a Guarantee Period must be at least $500. We reserve the right to limit the number of additional purchase payments that you may allocate to the Fixed Account. Please consult with your sales representative for more information. INTEREST RATES. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We may declare different interest rates for Guarantee Periods of the same length that begin at different times. We will not change the interest rate that we credit to a particular allocation until the end of the relevant Guarantee Period. We have no specific formula for determining the rate of interest that we will declare initially or in the future. We will set those interest rates based on investment returns available at the time of the determination. In addition, we may consider various other factors in determining interest rates including regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. WE DETERMINE THE INTEREST RATES TO BE DECLARED IN OUR SOLE DISCRETION. WE CAN NEITHER PREDICT NOR GUARANTEE WHAT THOSE RATES WILL BE IN THE FUTURE. For current interest rate information, please contact your sales representative or Allstate New York at 1-800-692-4682. The interest rate will never be less than the minimum guaranteed amount stated in the Contract. 13 PROSPECTUS HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated to a Guarantee Period at a rate that compounds to the effective annual interest rate that we declared at the beginning of the applicable Guarantee Period. The following example illustrates how a purchase payment allocated to the Fixed Account would grow, given an assumed Guarantee Period and effective annual interest rate: Purchase Payment.................................................... $10,000 Guarantee Period.................................................... 5 years Annual Interest Rate................................................ 4.50%
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ------------ Beginning Contract Value................ $10,000.00 X (1 + Annual Interest Rate) 1.045 ---------- $10,450.00 Contract Value at end of Contract Year..... $10,450.00 X (1 + Annual Interest Rate) 1.045 ---------- $10,920.25 Contract Value at end of Contract Year..... $10,920.25 X (1 + Annual Interest Rate) 1.045 ---------- $11,411.66 Contract Value at end of Contract Year..... $11,411.66 X (1 + Annual Interest Rate) 1.045 ---------- $11,925.19 Contract Value at end of Contract Year..... $11,925.19 X (1 + Annual Interest Rate) 1.045 ----------- $12,461.82
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,461.82 ($12,461.82-$10,000) This example assumes no withdrawals during the entire 5 year Guarantee Period. If you were to make a withdrawal, you may be required to pay a withdrawal charge. In addition, the amount withdrawn may be increased or decreased by a Market Value Adjustment that reflects changes in interest rates since the time you invested the amount withdrawn. The hypothetical interest rate is for illustrative purposes only and is not intended to predict current or future interest rates to be declared under the Contract. Actual interest rates declared for any given Guarantee Period may be more or less than shown above but will never be less than the guaranteed minimum rate stated in the Contract. RENEWALS. Prior to the end of each Guarantee Period, we will mail you a notice asking you what to do with your money, including the accrued interest. At the end of the Guarantee Period, we will automatically renew the Guarantee Period value to a new Guarantee Period of the shortest duration available, to be established on the day the previous Guarantee Period expired, or to the Money Market Variable Sub-account if no Guarantee Periods are available at the time of expiration of the previous Guarantee Period. Please consult with your representative. During the 30-day period after the end of the Guarantee Period, you may: 1) Take no action. We will automatically apply your money to a Guarantee Period of the shortest duration available or the Money Market Variable Sub-account. The new Guarantee Period will begin on the day the previous Guarantee Period ends. Please consult with your representative. The new interest rate will be the rate in effect on the 1/ST/ day of the New Period; or 2) Instruct us to apply your money to one or more new Guarantee Periods of your choice. The new Guarantee Period(s) will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for those Guarantee Periods; or 3) Instruct us to transfer all or a portion of your money to one or more Variable Sub-Accounts. We will effect the transfer on the day we receive your instructions. We will not adjust the amount transferred to include a Market Value Adjustment; or 4) Withdraw all or a portion of your money. You may be required to pay a withdrawal charge, but we will not adjust the amount withdrawn to include a Market Value Adjustment. You may also be required to pay premium taxes and withholding (if applicable). The amount withdrawn will be deemed to have been withdrawn on the day the previous Guarantee Period ends. Unless you specify otherwise, amounts not withdrawn will be applied to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. MARKET VALUE ADJUSTMENT. All withdrawals in excess of the Preferred Withdrawal Amount, transfers, and amounts applied to an Income Plan from a Guarantee Period, other than those taken or applied during the 30 day period after such Guarantee Period expires, are 14 PROSPECTUS subject to a Market Value Adjustment. A Market Value Adjustment also will apply when you apply amounts currently invested in a Guarantee Period to an Income Plan (unless applied during the 30 day period after such Guarantee Period expires). A Market Value Adjustment may apply in the calculation of the Settlement Value described below in the "Death Benefit Amount" section below. We will not apply a Market Value Adjustment to a transfer you make as part of a Dollar Cost Averaging Program. We also will not apply a Market Value Adjustment to a withdrawal you make: .. within the Preferred Withdrawal Amount as described on page 18; or .. to satisfy the IRS minimum distribution rules. We apply the Market Value Adjustment to reflect changes in interest rates from the time you first allocate money to a Guarantee Period to the time it is removed from that Guarantee Period. We calculate the Market Value Adjustment by comparing the Treasury Rate for a period equal to the Guarantee Period at its inception to the Treasury Rate for a period equal to the time remaining in the Guarantee Period when you remove your money. "TREASURY RATE" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment may be positive or negative, depending on changes in interest rates. As such, you bear the investment risk associated with changes in interest rates. If interest rates increase significantly, the Market Value Adjustment and any withdrawal charge, premium taxes, and income tax withholding (if applicable) could reduce the amount you receive upon full withdrawal of your Contract Value to an amount that is less than the purchase payment plus interest at the minimum guaranteed interest rate under the Contract. Generally, if the Treasury Rate at the time you allocate money to a Guarantee Period is higher than the applicable current Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a higher amount payable to you, transferred, or applied to an Income Plan. Conversely, if the Treasury Rate at the time you allocate money to a Guarantee Period is lower than the applicable Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a lower amount payable to you, transferred, or applied to an Income Plan. For example, assume that you purchase a Contract and you select an initial Guarantee Period of 5 years and the 5 year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at that later time, the current 2 year Treasury Rate is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to you. Conversely, if the current 2 year Treasury Rate is 4.80%, then the Market Value Adjustment will be negative, which will result in a decrease in the amount payable to you. The formula for calculating Market Value Adjustments is set forth in Appendix B to this prospectus, which also contains additional examples of the application of the Market Value Adjustment. INVESTMENT ALTERNATIVES: TRANSFERS TRANSFERS DURING THE ACCUMULATION PHASE During the Accumulation Phase, you may transfer Contract Value among the investment alternatives. You may request in writing on a form that we provide or by telephone according to the procedure described below. The minimum amount that you may transfer into a Guarantee Period is $500. We currently do not assess, but reserve the right to assess, a $10 charge on each transfer in excess of 12 per Contract Year. We treat transfers to or from more than one Fund on the same day as one transfer. We will process transfer requests that we receive before 4:00 p.m. Eastern Time on any Valuation Date using the Accumulation Unit Values for that Date. We will process requests completed after 4:00 p.m. on any Valuation Date using the Accumulation Unit Values for the next Valuation Date. The Contract permits us to defer transfers from the Fixed Account for up to 6 months from the date we receive your request. If we decide to postpone transfers from any Guarantee Period for 10 days or more, we will pay interest as required by applicable law. Any interest would be payable from the date we receive the transfer request to the date we make the transfer. If you transfer an amount from a Guarantee Period other than during the 30 day period after such Guarantee Period expires, we will increase or decrease the amount by a Market Value Adjustment. TRANSFERS DURING THE PAYOUT PHASE During the Payout Phase, you may make transfers among the Variable Sub-Accounts to change the relative weighting of the Variable Sub-Accounts on which your variable income payments will be based. In addition, you will have a limited ability to make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. You may not make any transfers for the first 6 months after the Payout Start Date. Thereafter, you may make transfers among the Variable Sub-Accounts or make transfers from the Variable Sub-Accounts to increase the 15 PROSPECTUS proportion of your income payments consisting of fixed income payments. Your transfers must be at least 6 months apart. TELEPHONE TRANSFERS You may make transfers by telephone by calling 1-800-692-4682, if you first send us a completed authorization form. The cut off time for telephone transfer requests is 4:00 p.m. Eastern Time. In the event that the New York Stock Exchange closes early, i.e., before 4:00 p.m. Eastern Time, or in the event that the Exchange closes early for a period of time but then reopens for trading on the same day, we will process telephone transfer requests as of the close of the Exchange on that particular day. We will not accept telephone requests received at any telephone number other than the number that appears in this paragraph or received after the close of trading on the Exchange. We may suspend, modify or terminate the telephone transfer privilege, as well as any other electronic or automated means we previously approved, at any time without notice. We use procedures that we believe provide reasonable assurance that the telephone transfers are genuine. For example, we tape telephone conversations with persons purporting to authorize transfers and request identifying information. Accordingly, we disclaim any liability for losses resulting from allegedly unauthorized telephone transfers. However, if we do not take reasonable steps to help ensure that a telephone authorization is valid, we may be liable for such losses. MARKET TIMING & EXCESSIVE TRADING The Contracts are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of Variable Sub-Accounts and can disrupt management of a Fund and raise its expenses, which can impair Fund performance and adversely affect your Contract Value. Our policy is not to accept knowingly any money intended for the purpose of market timing or excessive trading. Accordingly, you should not invest in the Contract if your purpose is to engage in market timing or excessive trading, and you should refrain from such practices if you currently own a Contract. We seek to detect market timing or excessive trading activity by reviewing trading activities. Funds also may report suspected market-timing or excessive trading activity to us. If, in our judgment, we determine that the transfers are part of a market timing strategy or are otherwise harmful to the underlying Fund, we will impose the trading limitations as described below under "Trading Limitations." Because there is no universally accepted definition of what constitutes market timing or excessive trading, we will use our reasonable judgment based on all of the circumstances. While we seek to deter market timing and excessive trading in Variable Sub-Accounts, because our procedures involve the exercise of reasonable judgment, we may not identify or prevent some market timing or excessive trading. Moreover, imposition of trading limitations is triggered by the detection of market timing or excessive trading activity, and the trading limitations are not applied prior to detection of such trading activity. Therefore, our policies and procedures do not prevent such trading activity before it is detected. As a result, some investors may be able to engage in market timing and excessive trading, while others are prohibited, and the portfolio may experience the adverse effects of market timing and excessive trading described above. TRADING LIMITATIONS We reserve the right to limit transfers among the investment alternatives in any Contract Year, or to refuse any transfer request, if: .. we believe, in our sole discretion, that certain trading practices, such as excessive trading, by, or on behalf of, one or more Contract Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Sub-Account or on the share prices of the corresponding Fund or otherwise would be to the disadvantage of other Contract Owners; or .. we are informed by one or more of the Funds that they intend to restrict the purchase, exchange, or redemption of Fund shares because of excessive trading or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Fund shares. In making the determination that trading activity constitutes market timing or excessive trading, we will consider, among other things: .. the total dollar amount being transferred, both in the aggregate and in the transfer request; .. the number of transfers you make over a period of time and/or the period of time between transfers (note: one set of transfers to and from a Variable Sub-Account in a short period of time can constitute market timing); .. whether your transfers follow a pattern that appears designed to take advantage of short term market fluctuations, particularly within certain Variable Sub-Account underlying Funds that we have identified as being susceptible to market timing activities; .. whether the manager of the underlying Fund has indicated that the transfers interfere with Fund management or otherwise adversely impact the Fund; and .. the investment objectives and/or size of the Variable Sub-Account underlying Fund. We seek to apply these trading limitations uniformly. However, because these determinations involve the exercise of discretion, it is possible that we may not detect some market timing or excessive trading activity. As a 16 PROSPECTUS result, it is possible that some investors may be able to engage in market timing or excessive trading activity, while others are prohibited, and the Fund may experience the adverse effects of market timing and excessive trading described above. If we determine that a Contract Owner has engaged in a pattern of market timing or excessive trading activity involving multiple Variable Sub-Accounts, we will require that all future transfer requests be submitted through regular U.S. mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery. In addition, for Contracts issued on or after May 1, 2000, if we determine that a Contract Owner has engaged in market timing or excessive trading activity, we will also restrict that Contract Owner from making future additions or transfers into the impacted Variable Sub-Account(s). In our sole discretion, we may revise our Trading Limitations at any time as necessary to better deter or minimize market timing and excessive trading or to comply with regulatory requirements. DOLLAR COST AVERAGING PROGRAM Through the Dollar Cost Averaging Program, you may automatically transfer a set amount at regular intervals during the Accumulation Phase from any Variable Sub-Account, or the 1 year Guarantee Period of the Fixed Account, to any other Variable Sub-Account. The interval between transfers may be monthly, quarterly, semi-annually, or annually. You may not use dollar cost averaging to transfer amounts to the Fixed Account. We will not charge a transfer fee for transfers made under this Program, nor will such transfers count against the 12 transfers you can make each Contract Year without paying a transfer fee. In addition, we will not apply the Market Value Adjustment to these transfers. The theory of dollar cost averaging is that if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same purchase dates. However, participation in this program does not assure you of a greater profit from your purchases under the Program nor will it prevent or necessarily reduce losses in a declining market. Call or write us for instructions on how to enroll. AUTOMATIC FUND REBALANCING PROGRAM Once you have allocated your money among the Variable Sub-Accounts, the performance of each Sub-Account may cause a shift in the percentage you allocated to each Sub-Account. If you select our Automatic Fund Rebalancing Program, we will automatically rebalance the Contract Value in each Variable Sub-Account and return it to the desired percentage allocations. Money you allocate to the Fixed Account will not be included in the rebalancing. We will rebalance your account each quarter according to your instructions. We will transfer amounts among the Variable Sub-Accounts to achieve the percentage allocations you specify. You can change your allocations at any time by contacting us in writing or by telephone. The new allocation will be effective with the first rebalancing that occurs after we receive your request. We are not responsible for rebalancing that occurs prior to receipt of your request. Example: Assume that you want your initial purchase payment split among 2 Variable Sub-Accounts. You want 40% to be in the AIM V.I. Diversified Income Variable Sub-Account and 60% to be in the AIM V.I. Growth Variable Sub-Account. Over the next 2 months the bond market does very well while the stock market performs poorly. At the end of the first quarter, the AIM V.I. Diversified Income Variable Sub-Account now represents 50% of your holdings because of its increase in value. If you choose to have your holdings rebalanced quarterly, on the first day of the next quarter we would sell some of your units in the AIM V.I. Diversified Income Variable Sub-Account and use the money to buy more units in the AIM V.I. Growth Variable Sub-Account so that the percentage allocations would again be 40% and 60% respectively. The Automatic Fund Rebalancing Program is available only during the Accumulation Phase. The transfers made under the Program do not count towards the 12 transfers you can make without paying a transfer fee, and are not subject to a transfer fee. Fund rebalancing is consistent with maintaining your allocation of investments among market segments, although it is accomplished by reducing your Contract Value allocated to the better performing segments. EXPENSES As a Contract owner, you will bear, directly or indirectly, the charges and expenses described below. CONTRACT MAINTENANCE CHARGE During the Accumulation Phase, on each Contract Anniversary, we will deduct a $35 contract maintenance charge from your Contract Value invested in each 17 PROSPECTUS Variable Sub-Account in proportion to the amount invested. We also will deduct a full contract maintenance charge if you withdraw your entire Contract Value, unless your Contract qualifies for a waiver, described below. During the Payout Phase, we will deduct the charge proportionately from each income payment. The charge is for the cost of maintaining each Contract and the Variable Account. Maintenance costs include expenses we incur in billing and collecting purchase payments; keeping records; processing death claims, cash withdrawals, and policy changes; proxy statements; calculating Accumulation Unit Values and income payments; and issuing reports to Contract owners and regulatory agencies. We cannot increase the charge. We will waive this charge if: .. total purchase payments equal $50,000 or more, or .. all money is allocated to the Fixed Account on a Contract Anniversary. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense risk charge daily at an annual rate of 1.35% of the average daily net assets you have invested in the Variable Sub-Accounts. The mortality and expense risk charge is for all the insurance benefits available with your Contract (including our guarantee of annuity rates and the death benefits), for certain expenses of the Contract, and for assuming the risk (expense risk) that the current charges will not be sufficient in the future to cover the cost of administering the Contract. If the charges under the Contract are not sufficient, then we will bear the loss. We guarantee the mortality and expense risk charge and we cannot increase it. We assess the mortality and expense risk charge during both the Accumulation Phase and the Payout Phase. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge daily at an annual rate of 0.10% of the average daily net assets you have invested in the Variable Sub-Accounts. We intend this charge to cover actual administrative expenses that exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributed to that Contract. We assess this charge each day during the Accumulation Phase and the Payout Phase. We guarantee that we will not raise this charge. TRANSFER FEE We do not currently impose a fee upon transfers among the investment alternatives. However, we reserve the right to charge $10 per transfer after the 12th transfer in each Contract Year. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging Program or Automatic Fund Rebalancing Program. WITHDRAWAL CHARGE We may assess a withdrawal charge of up to 7% of the purchase payment(s) you withdraw in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. The charge declines annually to 0% after 7 complete years from the day we receive the purchase payment being withdrawn. A schedule showing how the charge declines appears on page 7. During each Contract Year, you can withdraw up to 10% of purchase payments without paying the charge. Unused portions of this 10% "PREFERRED WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We determine the withdrawal charge by; .. multiplying the percentage corresponding to the number of complete years since we received the purchase payment being withdrawn by .. the part of each purchase payment withdrawal that is in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. We will deduct withdrawal charges, if applicable, from the amount paid. For purposes of the withdrawal charge, we will treat withdrawals as coming from the oldest purchase payments first. However, for federal income tax purposes, please note that withdrawals are considered to have come first from earnings in the Contract. Thus, for tax purposes, earnings are considered to come out first, which means you pay taxes on the earnings portion of your withdrawal. If you make a withdrawal before the Payout Start Date, we will apply the withdrawal charge percentage in effect on the date of the withdrawal, or the withdrawal charge percentage in effect on the following day, whichever is lower.We do not apply a withdrawal charge in the following situations: .. on the Payout Start Date (a withdrawal charge may apply if you elect to receive income payments for a specified period of less than 120 months); .. the death of the Contract owner or Annuitant (unless the Settlement Value is used); .. withdrawals taken to satisfy IRS minimum distribution rules for the Contract; or .. withdrawals made after all purchase payments have been withdrawn. We use the amounts obtained from the withdrawal charge to pay sales commissions and other promotional or distribution expenses associated with marketing the Contracts. To the extent that the withdrawal charge does not cover all sales commissions and other promotional or distribution expenses, we may use any of our corporate assets, including potential profit which may arise from the mortality and expense risk charge or any other charges or fee described above, to make up any difference. Withdrawals may be subject to tax penalties or income tax and a Market Value Adjustment. You should consult your 18 PROSPECTUS own tax counsel or other tax advisers regarding any withdrawals. We reserve the right to waive the withdrawal charge with respect to Contracts issued to employees and registered representatives of any broker-dealer that has entered into a sales agreement with ALFS, Inc. ("ALFS") to sell the Contracts and all wholesalers and their employees that are under agreement with ALFS to wholesale the Contract. PREMIUM TAXES Currently, we do not make deductions for premium taxes under the Contract because New York does not charge premium taxes on annuities. We may deduct taxes that may be imposed in the future from purchase payments or the Contract Value when the tax is incurred or at a later time. DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES We are not currently making a provision for taxes. In the future, however, we may make a provision for taxes if we determine, in our sole discretion, that we will incur a tax as a result of the operation of the Variable Account. We will deduct for any taxes we incur as a result of the operation of the Variable Account, whether or not we previously made a provision for taxes and whether or not it was sufficient. Our status under the Internal Revenue Code is briefly described in the Taxes section. OTHER EXPENSES Each Fund deducts advisory fees and other expenses from its assets. You indirectly bear the charges and expenses of the Fund whose shares are held by the Variable Sub-Accounts. These fees and expenses are described in the accompanying prospectus for the Funds. For a summary of current estimates of those charges and expenses, see pages 7-8 above. We may receive compensation from A I M Advisors, Inc., for administrative services we provide to the Funds. ACCESS TO YOUR MONEY You can withdraw some or all of your Contract Value at any time prior to the Payout Start Date. Withdrawals also are available under limited circumstances on or after the Payout Start Date. See "Income Plans" on page 20. The amount payable upon withdrawal is the Contract Value next computed after we receive the request for a withdrawal at our service center, adjusted by any Market Value Adjustment, less any withdrawal charges, contract maintenance charges, income tax withholding, and any premium taxes. We will pay withdrawals from the Variable Account within 7 days of receipt of the request, subject to postponement in certain circumstances. You can withdraw money from the Variable Account or the Fixed Account. To complete a partial withdrawal from the Variable Account, we will cancel Accumulation Units in an amount equal to the withdrawal and any applicable withdrawal charge and premium taxes. You have the opportunity to name the investment alternative(s) from which you are taking the withdrawal. If none is specified, we will deduct your withdrawal pro-rata from the investment alternatives according to the value of your investments therein. In general, you must withdraw at least $50 at a time. You also may withdraw a lesser amount if you are withdrawing your entire interest in a Variable Sub- Account. If you request a total withdrawal, we may require that you return your Contract to us. We also will deduct a Contract Maintenance Charge of $35, unless we have waived the Contract Maintenance Charge on your Contract. Withdrawals taken prior to annuitization (referred to in this prospectus as the Payout Phase) are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. POSTPONEMENT OF PAYMENTS We may postpone the payment of any amounts due from the Variable Account under the Contract if: 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the SEC; or 3. The SEC permits delay for your protection. In addition, we may delay payments or transfers from the Fixed Account for up to 6 months or shorter period if required by law. If we delay payment or transfer for 10 days or more, we will pay interest as required by law. Any interest would be payable from the date we receive the withdrawal request to the date we make the payment or transfer. 19 PROSPECTUS SYSTEMATIC WITHDRAWAL PROGRAM You may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis at any time prior to the Payout Start Date. The minimum amount of each systematic withdrawal is $50. At our discretion, systematic withdrawals may not be offered in conjunction with the Dollar Cost Averaging or the Automatic Fund Rebalancing Programs. Depending on fluctuations in the accumulation unit value of the Variable Sub-Accounts and the value of the Fixed Account, systematic withdrawals may reduce or even exhaust the Contract Value. We will make systematic withdrawal payments to you or your designated payee. We may modify or suspend the Systematic Withdrawal Program and charge a processing fee for the service. If we modify or suspend the Systematic Withdrawal Program, existing systematic withdrawal payments will not be affected. MINIMUM CONTRACT VALUE If your request for a partial withdrawal would reduce the amount in any Guarantee Period to less than $500, we will treat it as a request to withdraw the entire amount invested in such Guarantee Period. In addition, if your request for a partial withdrawal would reduce the Contract Value to less than $1,000, we may treat it as a request to withdraw your entire Contract Value. Before terminating any Contract whose value has been reduced by withdrawals to less than $1,000, we would inform you in writing of our intention to terminate your Contract and give you at least 30 days in which to make an additional Purchase Payment to restore your Contract's value to the contractual minimum of $1,000. Your Contract will terminate if you withdraw all of your Contract Value. We will, however, ask you to confirm your withdrawal request before terminating your Contract. If we terminate your Contract, we will distribute to you its Contract Value, adjusted by any applicable Market Value Adjustment, less withdrawal and other charges, and applicable taxes. Your Contract will terminate if you withdraw all of your Contract Value. INCOME PAYMENTS PAYOUT START DATE The Payout Start Date is the day that we apply your Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, to an Income Plan. The Payout Start Date must be no later than the Annuitant's 90th birthday. You may change the Payout Start Date at any time by notifying us in writing of the change at least 30 days before the scheduled Payout Start Date. Absent a change, we will use the Payout Start Date stated in your Contract. INCOME PLANS An "Income Plan" is a series of payments on a scheduled basis to you or to another person designated by you. You may choose and change your choice of Income Plan until 30 days before the Payout Start Date. If you do not select an Income Plan, we will make income payments in accordance with Income Plan 1 with guaranteed payments for 10 years. After the Payout Start Date, you may not make withdrawals (except as described below) or change your choice of Income Plan. Three Income Plans are available under the Contract. Each is available to provide: .. fixed income payments; .. variable income payments; or .. a combination of the two. A portion of each payment will be considered taxable and the remaining portion will be a non-taxable return of your investment in the Contract, which is also called the "basis". Once the basis in the Contract is depleted, all remaining payments will be fully taxable. If the Contract is tax-qualified, generally, all payments will be fully taxable. Taxable payments taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. The three Income Plans are: INCOME PLAN 1 - LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as the Annuitant lives. If the Annuitant dies before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 2 - JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as either the Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint Annuitant die before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 3 - GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD (5 YEARS TO 30 YEARS). Under this plan, we make periodic income payments for the period you have chosen. These payments do not depend on the Annuitant's life. Income payments for less than 120 months may be subject to a withdrawal charge. We will deduct the mortality and expense risk charge from the Variable Sub-Account assets that support the variable income payments even though we may not bear any mortality risk. The length of any guaranteed payment period under your selected Income Plan generally will affect the dollar amounts of each income payment. As a general rule, 20 PROSPECTUS longer guarantee periods result in lower income payments, all other things being equal. For example, if you choose an Income Plan with payments that depend on the life of the Annuitant but with no minimum specified period for guaranteed payments, the income payments generally will be greater than the income payments made under the same Income Plan with a minimum specified period for guaranteed payments. If you choose Income Plan 1 or 2, or, if available, another Income Plan with payments that continue for the life of the Annuitant or joint Annuitant, we may require proof of age and sex of the Annuitant or joint Annuitant before starting income payments, and proof that the Annuitant or joint Annuitant is alive before we make each payment. Please note that under such Income Plans, if you elect to take no minimum guaranteed payments, it is possible that the payee could receive only 1 income payment if the Annuitant and any joint Annuitant both die before the second income payment, or only 2 income payments if they die before the third income payment, and so on. Generally, you may not make withdrawals after the Payout Start Date. One exception to this rule applies if you are receiving variable income payments that do not depend on the life of the Annuitant (such as under Income Plan 3). In that case you may terminate all or part of the Variable Account portion of the income payments at any time and receive a lump sum equal to the present value of the remaining variable payments associated with the amount withdrawn. To determine the present value of any remaining variable income payments being withdrawn, we use a discount rate equal to the assumed annual investment rate that we use to compute such variable income payments. The minimum amount you may withdraw under this feature is $1,000. A withdrawal charge may apply. We deduct applicable premium taxes from the Contract Value at the Payout Start Date. We may make other Income Plans available. You may obtain information about them by writing or calling us. You must apply at least the Contract Value in the Fixed Account on the Payout Start Date to fixed income payments. If you wish to apply any portion of your Fixed Account balance to provide variable income payments, you should plan ahead and transfer that amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do not tell us how to allocate your Contract Value among fixed and variable income payments, we will apply your Contract Value in the Variable Account to variable income payments and your Contract Value in the Fixed Account to fixed income payments. We will apply your Contract Value, adjusted by any applicable Market Value Adjustment, less applicable taxes to your Income Plan on the Payout Start Date. If the amount available to apply under an Income Plan is less than $2,000 or not enough to provide an initial payment of at least $20, and state law permits, we may: .. pay you the Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, in a lump sum instead of the periodic payments you have chosen; or .. reduce the frequency of your payments so that each payment will be at least $20. VARIABLE INCOME PAYMENTS The amount of your variable income payments depends upon the investment results of the Variable Sub-Accounts you select, the premium taxes you pay, the age and sex of the Annuitant, and the Income Plan you choose. We guarantee that the payments will not be affected by (a) actual mortality experience and (b) the amount of our administration expenses. We cannot predict the total amount of your variable income payments. Your variable income payments may be more or less than your total purchase payments because (a) variable income payments vary with the investment results of the underlying Funds and (b) the Annuitant could live longer or shorter than we expect based on the tables we use. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3%. If the actual net investment return of the Variable Sub-Accounts you choose is less than this assumed investment rate, then the dollar amount of your variable income payments will decrease. The dollar amount of your variable income payments will increase, however, if the actual net investment return exceeds the assumed investment rate. The dollar amount of the variable income payments stays level if the net investment return equals the assumed investment rate. Please refer to the Statement of Additional Information for more detailed information as to how we determine variable income payments. FIXED INCOME PAYMENTS We guarantee income payment amounts derived from the Fixed Account for the duration of the Income Plan. We calculate the fixed income payments by: 1) adjusting the portion of the Contract Value in the Fixed Account on the Payout Start Date by any applicable Market Value Adjustment; 2) deducting any applicable premium tax; and 3) applying the resulting amount to the greater of (a) the appropriate value from the income payment table in your Contract or (b) such other value as we are offering at that time. We may defer making fixed income payments for a period of up to 6 months or such shorter time as state law may require. If we defer payments for 10 business days or more, we will pay interest as required by law from the date we receive the withdrawal request to the date we make payment. 21 PROSPECTUS CERTAIN EMPLOYEE BENEFIT PLANS The Contracts offered by this prospectus contain income payment tables that provide for different payments to men and women of the same age. However, we reserve the right to use income payment tables that do not distinguish on the basis of sex to the extent permitted by law. In certain employment-related situations, employers are required by law to use the same income payment tables for men and women. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan, you should consult with legal counsel as to whether the purchase of a Contract is appropriate. For qualified plans, where it is appropriate, we may use income payment tables that do not distinguish on the basis of sex. DEATH BENEFITS We will pay a death benefit if, prior to the Payout Start Date: 1. any Contract owner dies; or 2. the Annuitant dies, if the Contract owner is not a living person. We will pay the death benefit to the new Contract owner who is determined immediately after the death. The new Contract owner would be a surviving Contract owner or, if none, the Beneficiary(ies). In the case of a Contract owned by a non-living owner, upon death of an Annuitant, we will pay the death benefit to the current Contract owner. We will not settle any death claim until we receive DUE PROOF OF DEATH. We will accept the following documentation as Due Proof of Death: .. a certified copy of a death certificate; or .. a certified copy of a decree of a court of competent jurisdiction as to a finding of death; or any other proof acceptable to us. Where there are multiple beneficiaries, we will only value the death benefit at the time the first beneficiary submits the necessary documentation in good order. Any death benefit amounts attributable to any beneficiary which remain in the investment divisions are subject to investment risk. DEATH BENEFIT AMOUNT Prior to the Payout Start Date, the death benefit is equal to the greatest of: 1. the Contract Value as of the date we determine the death benefit; or 2. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of Contract Value) on the date we determine the death benefit; or 3. the Contract Value on the DEATH BENEFIT ANNIVERSARY immediately preceding the date we determine the death benefit, adjusted by any purchase payments, partial withdrawals and charges made since that Death Benefit Anniversary. A "Death Benefit Anniversary" is every seventh Contract Anniversary beginning with the Issue Date. For example, the Issue Date, 7th and 14th Contract Anniversaries are the first three Death Benefit Anniversaries; or 4. the greatest of the ANNIVERSARY VALUES as of the date we determine the death benefit. An "Anniversary Value" is equal to the Contract Value on a Contract Anniversary, increased by purchase payments made since that Anniversary and reduced by the amount of any partial withdrawals since that anniversary. Anniversary Values will be calculated for each Contract Anniversary prior to the earlier of: (i) the date we determine the death benefit; or (ii) the deceased's 75th birthday or 5 years after the Issue Date, if later. In calculating the Settlement Value, the amount in each individual Guarantee Period may be subject to a Market Value Adjustment. A Market Value Adjustment will apply to amounts in a Guarantee Period, unless we calculate the Settlement Value during the 30-day period after the expiration of the Guarantee Period. Also, the Settlement Value will reflect deduction of any applicable withdrawal charges, contract maintenance charges, and premium taxes. We will determine the value of the death benefit as of the end of the Valuation Date on which we receive a complete request for payment of the death benefit, which includes Due Proof of Death. If we receive a request after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on a Valuation Date, we will process the request as of the end of the following Valuation Date. DEATH BENEFIT PAYMENTS If the new Owner is your spouse, the new Owner may: 1. elect to receive the Death Benefit in a lump sum, or 2. elect to apply the Death Benefit to an Income Plan. Payments from the Income Plan must begin within 1 year of the date of death and must be payable throughout: .. The life of the new Owner; or .. for a guaranteed number of payments from 5 to 50 years, but not to exceed the life expectancy of the new Owner; or .. over the life of the new Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Owner. If your spouse does not elect one of the above options above, the Contract will continue in the Accumulation 22 PROSPECTUS Phase as if the death had not occurred. If the Contract is continued in the Accumulation Phase, the following restrictions apply: .. On the date the Contract is continued, the Contract Value will equal the amount of the Death Benefit as determined as of the Valuation Date on which we received the completed request for settlement of the Death Benefit (the next Valuation Date, if we receive the completed request for settlement of the Death Benefit after 3 p.m. Central Time). Unless otherwise instructed by the continuing spouse, the excess, if any, of the Death Benefit over the Contract Value will be allocated to the Sub-Accounts of the Variable Account. This excess will be allocated in proportion to your Contract Value in those Sub-accounts as of the end of the Valuation Period during which we receive the completed request for settlement of the Death Benefit, except that any portion of this excess attributable to the Fixed Account Options will be allocated to the Money Market Sub-account. Within 30 days of the date the Contract is continued, your surviving spouse may choose one of the following transfer alternatives without incurring a transfer fee: .. transfer all or a portion of the excess among the Variable Sub-Accounts; .. transfer all or a portion of the excess into the Guaranteed Maturity Fixed Account and begin a new Guarantee Period; or .. transfer all or a portion of the excess into a combination of Variable Sub-Accounts and the Guaranteed Maturity Fixed Account. Any such transfer does not count as one of the free transfers allowed each Contract Year and is subject to any minimum allocation amount specified in your Contract. The surviving spouse may make a single withdrawal of any amount within one year of the date of death without incurring a Withdrawal Charge. Only one spousal continuation is allowed under this Contract. If the new Owner is not your spouse but is a living person, the new Owner may: 1) elect to receive the Death Benefit in a lump sum, or 2) elect to apply the Death Benefit to an Income Plan. Payments from the Income Plan must begin within 1 year of the date of death and must be payable throughout: .. the life of the new Owner; or .. for a guaranteed number of payments from 5 to 50 years, but not to exceed the life expectancy of the new Owner; or .. over the life of the new Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Owner. If the new Owner does not elect one of the above options above, then the new Owner must receive the Contract Value payable within 5 years of your date of death. The Contract Value will equal the amount of the Death Benefit as determined as of the Valuation Date on which we received the completed request for settlement of the Death Benefit (the next Valuation Date, if we receive the completed request for settlement of the Death Benefit after 3 p.m. Central Time). Unless otherwise instructed by the new Owner, the excess, if any, of the Death Benefit over the Contract Value will be allocated to the Money Market Variable Sub-Account. The new Owner may exercise all rights as set forth in the TRANSFERS section during this 5 year period. No additional Purchase Payments may be added to the Contract under this election. Withdrawal Charges will be waived for any withdrawals made during this 5 year period. If the new Owner dies prior to the receiving all of the Contract Value, then the new Owner's named Beneficiary(ies) will receive the greater of the Settlement Value or the remaining Contract Value. This amount must be received as a lump sum within 5 years of the date of the original Owner's death. We reserve the right to offer additional options upon Death of Owner. If the new Owner is a corporation, trust, or other non-living person: (a) The new Owner may elect, within 180 days of the date of death, to receive the Death Benefit in a lump sum; or (b) If the new Owner does not elect the option above, then the new Owner must receive the Contract Value payable within 5 years of your date of death. On the date we receive the complete request for settlement of the Death Benefit, the Contract Value under this option will be the Death Benefit. Unless otherwise instructed by the new Owner, the excess, if any of the Death Benefit over the Contract Value will be allocated to the Money Market Variable Sub-Account. The new Owner may exercise all rights set forth in the Transfers provision during this 5 year period. We reserve the right to offer additional options upon Death of Owner. If any new Owner is a non-living person, all new Owners will be considered to be non-living persons for the above purposes. Under any of these options, all ownership rights, subject to any restrictions previously placed upon the Beneficiary, are available to the new Owner from the date of your death to the date on which the death proceeds are paid. DEATH OF ANNUITANT If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date and the Contract Owner is 23 PROSPECTUS a living person, then the Contract will continue with a new Annuitant as designated by the Contract Owner. If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date and the Contract Owner is a non-living person, the following apply: (a) The Contract Owner may elect to receive the Death Benefit in a lump sum; or (b) If the new Owner does not elect the option above, then the Owner must receive the Contract Value payable within 5 years of the Annuitant's date of death. On the date we receive the complete request for settlement of the Death Benefit, the Contract Value under this option will be the Death Benefit. Unless otherwise instructed by the Contract Owner, the excess, if any, of the Death Benefit over the Contract Value will be allocated to the Money Market Variable Sub-Account. The Contract Owner may then exercise all rights set forth in the Transfers provision during this 5 year period. We reserve the right to offer additional options upon Death of Annuitant. MORE INFORMATION ALLSTATE NEW YORK Allstate New York is the issuer of the Contract. Allstate New York is a stock life insurance company organized under the laws of the State of New York. Allstate New York was incorporated in 1967 and was known as "Financial Life Insurance Company" from 1967 to 1978. From 1978 to 1984, Allstate New York was known as "PM Life Insurance Company." Since 1984 the company has been known as "Allstate Life Insurance Company of New York." Allstate New York is currently licensed to operate in New York. Our home office is located at 100 Motor Parkway, Hauppauge, NY 11788-5107. Our service center is located in Vernon Hills, Illinois. Allstate New York is a wholly owned subsidiary of Allstate Life Insurance Company ("Allstate Life"), a stock life insurance company incorporated under the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company, a stock property-liability insurance company incorporated under the laws of Illinois. With the exception of the directors qualifying shares, all of the outstanding capital stock of Allstate Insurance Company is owned by The Allstate Corporation. THE VARIABLE ACCOUNT Allstate New York established the Allstate Life of New York Separate Account A on December 15, 1995. We have registered the Variable Account with the SEC as a unit investment trust. The SEC does not supervise the management of the Variable Account or Allstate New York. We own the assets of the Variable Account. The Variable Account is a segregated asset account under New York law. That means we account for the Variable Account's income, gains and losses separately from the results of our other operations. It also means that only the assets of the Variable Account that are in excess of the reserves and other Contract liabilities with respect to the Variable Account are subject to liabilities relating to our other operations. Our obligations arising under the Contracts are general corporate obligations of Allstate New York. The Variable Account consists of multiple Variable Sub-Accounts, 18 of which are available through the Contracts. Each Variable Sub-Account invests in a corresponding Fund. We may add new Variable Sub-Accounts or eliminate one or more of them, if we believe marketing, tax, or investment conditions so warrant. We do not guarantee the investment performance of the Variable Account, its Sub-Accounts or the Funds. We may use the Variable Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Variable Account. THE FUNDS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all dividends and capital gains distributions from the Funds in shares of the distributing Fund at their net asset value. VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote the shares of the Funds held by the Variable Sub-Accounts to which you have allocated your Contract Value. Under current law, however, you are entitled to give us instructions on how to vote those shares on certain matters. Based on our present view of the law, we will vote the shares of the Funds that we hold directly or indirectly through the Variable Account in accordance with instructions that we receive from Contract owners entitled to give such instructions. As a general rule, before the Payout Start Date, the Contract owner or anyone with a voting interest is the person entitled to give voting instructions. The number of shares that a person has a right to instruct will be determined by dividing the Contract Value allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Fund as of the record date of the meeting. After the Payout Start Date, the person receiving income payments has the voting interest. The payee's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Fund. The votes decrease as income payments are made and as the reserves for the Contract decrease. 24 PROSPECTUS We will vote shares attributable to Contracts for which we have not received instructions, as well as shares attributable to us, in the same proportion as we vote shares for which we have received instructions, unless we determine that we may vote such shares in our own discretion. We will apply voting instructions to abstain on any item to be voted on a pro-rata basis to reduce the votes eligible to be cast. We reserve the right to vote Fund shares as we see fit without regard to voting instructions to the extent permitted by law. If we disregard voting instructions, we will include a summary of that action and our reasons for that action in the next semi-annual financial report we send to you. CHANGES IN FUNDS. If the shares of any of the Funds are no longer available for investment by the Variable Account or if, in our judgment, further investment in such shares is no longer desirable in view of the purposes of the Contract, we may eliminate that Fund and substitute shares of another eligible investment fund. Any substitution of securities will comply with the requirements of the 1940 Act. We also may add new Variable Sub-Accounts that invest in underlying Funds. We will notify you in advance of any changes. CONFLICTS OF INTEREST. Certain of the Funds sell their shares to Variable Accounts underlying both variable life insurance and variable annuity contracts. It is conceivable that in the future it may be unfavorable for variable life insurance Variable Accounts and variable annuity Variable Accounts to invest in the same Fund. The boards of trustees of these Funds monitor for possible conflicts among Variable Accounts buying shares of the Funds. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a Variable Account to comply with such laws could cause a conflict. To eliminate a conflict, a Fund's board of trustees may require a Variable Account to withdraw its participation in a Fund. A Fund's net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a Variable Account withdrawing because of a conflict. THE CONTRACT DISTRIBUTION. ALFS, Inc. ("ALFS"), located at 3100 Sanders Road, Northbrook, Illinois 60062, serves as principal underwriter of the Contracts. ALFS is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a registered broker dealer under the Securities and Exchange Act of 1934, as amended ("EXCHANGE ACT"), and is a member of the NASD. We will pay commissions to broker-dealers who sell the Contracts. Commissions paid may vary, but we estimate that the total commissions paid on all Contract sales will not exceed 8 1/2% of any purchase payments. Sometimes, we also pay the broker-dealer a persistency bonus in addition to the standard commissions. A persistency bonus is not expected to exceed .56%, on an annual basis, of the purchase payments considered in connection with the bonus. These commissions are intended to cover distribution expenses. Allstate New York does not pay ALFS a commission for distribution of the Contracts. The underwriting agreement with ALFS provides that we will reimburse ALFS for any liability to Contract owners arising out of services rendered or Contracts issued. ADMINISTRATION. We have primary responsibility for all administration of the Contracts and the Variable Account. We provide the following administrative services, among others: .. issuance of the Contracts; .. maintenance of Contract owner records; .. Contract owner services; .. calculation of unit values; .. maintenance of the Variable Account; and .. preparation of Contract owner reports. We will send you Contract statements and transaction confirmations at least annually. The annual statement details values and specific Contract data for each particular Contract. You should notify us promptly in writing of any address change. You should read your statements and confirmations carefully and verify their accuracy. You should contact us promptly if you have a question about a periodic statement. We will investigate all complaints and make any necessary adjustments retroactively, but you must notify us of a potential error within a reasonable time after the date of the questioned statement. If you wait too long, we will make the adjustment as of the date that we receive notice of the potential error. We also will provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws. NON-QUALIFIED ANNUITIES HELD WITHIN A QUALIFIED PLAN If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waivers of withdrawal charges, death benefits, Payout Start Dates, income payments and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. Allstate Life Insurance Company of New York no longer issues deferred annuities to employer sponsored qualified retirement plans. 25 PROSPECTUS LEGAL MATTERS All matters of New York law pertaining to the Contracts, including the validity of the Contracts and Allstate New York's right to issue such Contracts under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of Allstate New York. 26 PROSPECTUS TAXES THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. ALLSTATE NEW YORK 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 your individual circumstances. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK Allstate New York is taxed as a life insurance company under Part I of Subchapter L of the Code. Since the Variable Account is not an entity separate from Allstate New York, and its operations form a part of Allstate New York, it will not be taxed separately. Investment income and realized capital gains of the Variable Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, Allstate New York believes that the Variable Account investment income and capital gains will not be taxed to the extent that such income and gains are applied to increase the reserves under the Contract. Accordingly, Allstate New York does not anticipate that it will incur any federal income tax liability attributable to the Variable Account, and therefore Allstate New York does not intend to make provisions for any such taxes. If Allstate New York is taxed on investment income or capital gains of the Variable Account, then Allstate New York may impose a charge against the Variable Account in order to make provision for such taxes. TAXATION OF VARIABLE ANNUITIES IN GENERAL TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value until a distribution occurs. This rule applies only where: .. the Contract Owner is a natural person, .. the investments of the Variable Account are "adequately diversified" according to Treasury Department regulations, and .. Allstate New York is considered the owner of the Variable Account assets for federal income tax purposes. NON-NATURAL OWNERS. Non-natural owners are also referred to as Non Living Owners in this prospectus. As a general rule, annuity contracts owned by non-natural persons such as corporations, trusts, or other entities are not treated as annuity contracts for federal income tax purposes. The income on such contracts does not enjoy tax deferral and is taxed as ordinary income received or accrued by the non-natural owner during the taxable year. EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the general rule that annuity contracts held by a non-natural owner are not treated as annuity contracts for federal income tax purposes. Contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the contract as agent for a natural person. However, this special exception will not apply in the case of an employer who is the nominal owner of an annuity contract under a non-Qualified deferred compensation arrangement for its employees. Other exceptions to the non-natural owner rule are: (1) contracts acquired by an estate of a decedent by reason of the death of the decedent; (2) certain qualified contracts; (3) contracts purchased by employers upon the termination of certain qualified plans; (4) certain contracts used in connection with structured settlement agreements; and (5) immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. GRANTOR TRUST OWNED ANNUITY. Contracts owned by a grantor trust are considered owned by a non-natural owner. Grantor trust owned contracts receive tax deferral as described in the Exceptions to the Non-Natural Owner Rule section. In accordance with the Code, upon the death of the annuitant, the death benefit must be paid. According to your Contract, the Death Benefit is paid to the surviving Contract Owner. Since the trust will be the surviving Contract Owner in all cases, the Death Benefit will be payable to the trust notwithstanding any beneficiary designation on the annuity contract. A trust, including a grantor trust, has two options for receiving any death benefits: 1) a lump sum payment; or 2) payment deferred up to five years from date of death. DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for federal income tax purposes, the investments in the Variable Account must be "adequately diversified" consistent with standards under Treasury Department regulations. If the investments in the Variable Account are not adequately diversified, the Contract will not be treated as an annuity contract for federal income tax purposes. As a result, the income on the Contract will be taxed as ordinary income received or accrued by the Contract owner during the taxable year. Although Allstate New York does not have control over the Portfolios or their investments, we expect the Portfolios to meet the diversification requirements. OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered the owner of separate account assets if he possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. At the time the diversification regulations were issued, the Treasury Department 27 PROSPECTUS announced that the regulations do not provide guidance concerning circumstances in which investor control of the separate account investments may cause a Contract owner to be treated as the owner of the separate account. The Treasury Department also stated that future guidance would be issued regarding the extent that owners could direct sub-account investments without being treated as owners of the underlying assets of the separate account. Your rights under the Contract are different than those described by the IRS in private and published rulings in which it found that Contract owners were not owners of separate account assets. For example, if your contract offers more than twenty (20) investment alternatives you have the choice to allocate premiums and contract values among a broader selection of investment alternatives than described in such rulings. You may be able to transfer among investment alternatives more frequently than in such rulings. These differences could result in you being treated as the owner of the Variable Account. If this occurs, income and gain from the Variable Account assets would be includible in your gross income. Allstate New York does not know what standards will be set forth in any regulations or rulings which the Treasury Department may issue. It is possible that future standards announced by the Treasury Department could adversely affect the tax treatment of your Contract. We reserve the right to modify the Contract as necessary to attempt to prevent you from being considered the federal tax owner of the assets of the Variable Account. However, we make no guarantee that such modification to the Contract will be successful. TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under a Non-Qualified Contract, amounts received are taxable to the extent the Contract Value, without regard to surrender charges, exceeds the investment in the Contract. The investment in the Contract is the gross premium paid for the contract minus any amounts previously received from the Contract if such amounts were properly excluded from your gross income. If you make a full withdrawal under a Non-Qualified Contract, the amount received will be taxable only to the extent it exceeds the investment in the Contract. TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity payments received from a Non-Qualified Contract provides for the return of your investment in the Contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. For 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. If you elect variable annuity payments, the amount excluded from taxable income is determined by dividing the investment in the Contract by the total number of expected payments. The annuity payments will be fully taxable after the total amount of the investment in the Contract is excluded using these ratios. If any variable payment is less than the excludable amount you should contact a competent tax advisor to determine how to report any unrecovered investment. The federal tax treatment of annuity payments is unclear in some respects. As a result, if the IRS should provide further guidance, it is possible that the amount we calculate and report to the IRS as taxable could be different. If you die, and annuity payments cease before the total amount of the investment in the Contract is recovered, the unrecovered amount will be allowed as a deduction for your last taxable year. WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding the taxation of any additional withdrawal received after the Payout Start Date. It is possible that a greater or lesser portion of such a payment could be taxable than the amount we determine. DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for federal income tax purposes, the Contract must provide: .. if any Contract Owner dies on or after the Payout 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 Contract Owner's death; .. if any Contract Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within 5 years after the date of the Contract Owner's death. These requirements are satisfied if any portion of the Contract Owner's interest that 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 1 year of the Contract Owner's death. If the Contract Owner's designated Beneficiary is the surviving spouse of the Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner; .. if the Contract Owner is a non-natural person, then the Annuitant will be treated as the Contract Owner for purposes of applying the distribution at death rules. In addition, a change in the Annuitant on a Contract owned by a non-natural person will be treated as the death of the Contract Owner. TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income as follows: .. if distributed in a lump sum, the amounts are taxed in the same manner as a total withdrawal, or .. if distributed under an Income Plan, the amounts are taxed in the same manner as annuity payments. PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable amount of any 28 PROSPECTUS premature distribution from a non-Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or becoming totally disabled, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made under an immediate annuity, or .. attributable to investment in the Contract before August 14, 1982. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts using substantially equal periodic payments or immediate annuity payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the Contract Owner's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is a tax-free exchange of a non-qualified life insurance contract, endowment contract or annuity contract into a non-Qualified annuity contract. The contract owner(s) must be the same on the old and new contract. Basis from the old contract carries over to the new contract so long as we receive that information from the relinquishing company. If basis information is never received, we will assume that all exchanged funds represent earnings and will allocate no cost basis to them. PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of annuity contracts. Under this ruling, if you take a withdrawal from a receiving or relinquishing annuity contract within 24 months of the partial exchange, then special aggregation rules apply for purposes of determining the taxable amount of a distribution. The IRS has issued limited guidance on how to aggregate and report these distributions. The IRS is expected to provide further guidance; as a result, it is possible that the amount we calculate and report to the IRS as taxable could be different. Your Contract may not permit partial exchanges. TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without full and adequate consideration to a person other than your spouse (or to a former spouse incident to a divorce), you will be taxed on the difference between the Contract Value and the investment in the Contract at the time of transfer. Any assignment or pledge (or agreement to assign or pledge) of the Contract Value is taxed as a withdrawal of such amount or portion and may also incur the 10% penalty tax. AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified deferred annuity contracts issued by Allstate New York (or its affiliates) to the same Contract Owner during any calendar year be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. INCOME TAX WITHHOLDING Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% of the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax using the wage withholding rates for all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with 29 PROSPECTUS all countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. TAX QUALIFIED CONTRACTS The income on tax sheltered annuity (TSA) and IRA investments is tax deferred, and the income from annuities held by such plans does not receive any additional tax deferral. You should review the annuity features, including all benefits and expenses, prior to purchasing an annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as or in connection with: .. Individual Retirement Annuities (IRAs) under Code Section 408(b); .. Roth IRAs under Code Section 408A; .. Simplified Employee Pension (SEP IRA) under Code Section 408(k); .. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Code Section 408(p); .. Tax Sheltered Annuities under Code Section 403(b); .. Corporate and Self Employed Pension and Profit Sharing Plans under Code Section 401; and .. State and Local Government and Tax-Exempt Organization Deferred Compensation Plans under Code Section 457. Allstate New York reserves the right to limit the availability of the Contract for use with any of the retirement plans listed above or to modify the Contract to conform with tax requirements. If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waiver of charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. Allstate New York no longer issues deferred annuities to employer sponsored qualified retirement plans. The tax rules applicable to participants with tax qualified annuities vary according to the type of contract and the terms and conditions of the endorsement. Adverse tax consequences may result from certain transactions such as excess contributions, premature distributions, and, distributions that do not conform to specified commencement and minimum distribution rules. Allstate New York can issue an individual retirement annuity on a rollover or transfer of proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under which the decedent's surviving spouse is the beneficiary. Allstate New York does not offer an individual retirement annuity that can accept a transfer of funds for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer sponsored qualified retirement plan. Please refer to your Endorsement for IRAs or 403(b) plans, if applicable, for additional information on your death settlement options. In the case of certain qualified plans, the terms of the Qualified Plan Endorsement and the plans may govern the right to benefits, regardless of the terms of the Contract. TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If you make a partial withdrawal under a Tax Qualified Contract other than a Roth IRA, the portion of the payment that bears the same ratio to the total payment that the investment in the Contract (i.e., nondeductible IRA contributions) bears to the Contract Value, is excluded from your income. We do not keep track of nondeductible contributions, and generally all tax reporting of distributions from Tax Qualified Contracts other than Roth IRAs will indicate that the distribution is fully taxable. "Qualified distributions" from Roth IRAs are not included in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to any Roth IRA and which are: .. made on or after the date the Contract Owner attains age 59 1/2, .. made to a beneficiary after the Contract Owner's death, .. attributable to the Contract Owner being disabled, or .. made for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" from Roth IRAs are treated as made from contributions first and are included in gross income only to the extent that distributions exceed contributions. REQUIRED MINIMUM DISTRIBUTIONS. Generally, Tax Qualified Contracts (excluding Roth IRAs) require minimum distributions upon reaching age 70 1/2. Failure to withdraw the required minimum distribution will result in a 50% tax penalty on the shortfall not withdrawn from the Contract. Not all income plans offered under the Contract satisfy the requirements for minimum distributions. Because these distributions are required under the Code and the method of calculation is complex, please see a competent tax advisor. THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA) may not invest in life insurance contracts. However, an IRA may provide a death benefit that equals the greater of the purchase payments or the Contract Value. The Contract offers a death benefit that in certain circumstances may exceed the greater of the purchase payments or the Contract Value. We believe that the Death Benefits offered by your Contract do not constitute life insurance under these regulations. 30 PROSPECTUS It is also possible that certain death benefits that offer enhanced earnings could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in current taxable income to a Contract Owner. In addition, there are limitations on the amount of incidental death benefits that may be provided under qualified plans, such as in connection with a TSA or employer sponsored qualified retirement plan. Allstate New York reserves the right to limit the availability of the Contract for use with any of the qualified plans listed above. PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM TAX QUALIFIED CONTRACTS. A 10% penalty tax applies to the taxable amount of any premature distribution from a Tax Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or total disability, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made after separation from service after age 55 (does not apply to IRAs), .. made pursuant to an IRS levy, .. made for certain medical expenses, .. made to pay for health insurance premiums while unemployed (applies only for IRAs), .. made for qualified higher education expenses (applies only for IRAs), and .. made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs). During the first 2 years of the individual's participation in a SIMPLE IRA, distributions that are otherwise subject to the premature distribution penalty, will be subject to a 25% penalty tax. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect to Tax Qualified Contracts using substantially equal periodic payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions that are not considered "eligible rollover distributions." The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% from the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless you elect to make a "direct rollover" of such amounts to an IRA or eligible retirement plan. Eligible rollover distributions generally include all distributions from Tax Qualified Contracts, including TSAs but excluding IRAs, with the exception of: .. required minimum distributions, or, .. a series of substantially equal periodic payments made over a period of at least 10 years, or, .. a series of substantially equal periodic payments made over the life (joint lives) of the participant (and beneficiary), or, .. hardship distributions. For all annuitized distributions that are not subject to the 20% withholding requirement, Allstate New York is required to withhold federal income tax using the wage withholding rates. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien or to certain other 'foreign persons'. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer 31 PROSPECTUS identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408(b) permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity (IRA). 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 retirement plans may be "rolled over" on a tax-deferred basis into an Individual Retirement Annuity. ROTH INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408A 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. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL IRAS). Code Section 408 permits a custodian or trustee of an Individual Retirement Account to purchase an annuity as an investment of the Individual Retirement Account. If an annuity is purchased inside of an Individual Retirement Account, then the Annuitant must be the same person as the beneficial owner of the Individual Retirement Account. Generally, the death benefit of an annuity held in an Individual Retirement Account must be paid upon the death of the Annuitant. However, in most states, the Contract permits the custodian or trustee of the Individual Retirement Account to continue the Contract in the accumulation phase, with the Annuitant's surviving spouse as the new Annuitant, if the following conditions are met: 1) The custodian or trustee of the Individual Retirement Account is the owner of the annuity and has the right to the death proceeds otherwise payable under the Contract; 2) The deceased Annuitant was the beneficial owner of the Individual Retirement Account; 3) We receive a complete request for settlement for the death of the Annuitant; and 4) The custodian or trustee of the Individual Retirement Account provides us with a signed certification of the following: (a) The Annuitant's surviving spouse is the sole beneficiary of the Individual Retirement Account; (b) The Annuitant's surviving spouse has elected to continue the Individual Retirement Account as his or her own Individual Retirement Account; and (c) The custodian or trustee of the Individual Retirement Account has continued the Individual Retirement Account pursuant to the surviving spouse's election. SIMPLIFIED EMPLOYEE PENSION IRA. Code Section 408(k) allows eligible employers to establish simplified employee pension plans for their employees using individual retirement annuities. These employers may, within specified limits, make deductible contributions on behalf of the employees to the individual retirement annuities. Employers intending to use the Contract in connection with such plans should seek competent tax advice. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Code Section 408(p) allows eligible employers with 100 or fewer employees to establish SIMPLE retirement plans for their employees using individual retirement annuities. In general, a SIMPLE IRA consists of a salary deferral program for eligible employees and matching or nonelective contributions made by employers. Employers intending to purchase the Contract as a SIMPLE IRA should seek competent tax and legal advice. TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS (TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND YOUR COMPETENT TAX ADVISOR. TAX SHELTERED ANNUITIES. Code Section 403(b) provides tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. Under Section 403(b), any contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee: .. attains age 59 1/2, .. severs employment, .. dies, .. becomes disabled, or .. incurs a hardship (earnings on salary reduction contributions may not be distributed on account of hardship). These limitations do not apply to withdrawals where Allstate New York is directed to transfer some or all of the Contract Value to another 403(b) plan. Generally, we do 32 PROSPECTUS not accept funds in 403(b) contracts that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits corporate employers to establish various types of tax favored retirement plans for employees. Self-employed individuals may establish tax favored retirement plans for themselves and their employees (commonly referred to as "H.R.10" or "Keogh"). Such retirement plans may permit the purchase of annuity contracts. Allstate New York no longer issues annuity contracts to employer sponsored qualified retirement plans. There are two owner types for contracts intended to qualify under Section 401(a): a qualified plan fiduciary or an annuitant owner. .. A qualified plan fiduciary exists when a qualified plan trust that is intended to qualify under Section 401(a) of the Code is the owner. The qualified plan trust must have its own tax identification number and a named trustee acting as a fiduciary on behalf of the plan. The annuitant should be the person for whose benefit the contract was purchased. .. An annuitant owner exists when the tax identification number of the owner and annuitant are the same, or the annuity contract is not owner by a qualified plan trust. The annuitant should be the person for whose benefit the contract was purchased. If a qualified plan fiduciary is the owner of the contract, the qualified plan must be the beneficiary so that death benefits from the annuity are distributed in accordance with the terms of the qualified plan. Annuitant owned contracts require that the beneficiary be the annuitant's spouse (if applicable), which is consistent with the required IRS language for qualified plans under Section 401(a). A completed Annuitant Owned Qualified Plan Designation of Beneficiary form is required in order to change the beneficiary of an annuitant owned Qualified Plan contract. 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. In eligible governmental plans, all assets and income must be held in a trust/ custodial account/annuity contract for the exclusive benefit of the participants and their beneficiaries. To the extent the Contracts are used in connection with a non-governmental 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. Under eligible 457 plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan. Allstate New York no longer issues annuity contracts to employer sponsored qualified retirement plans. Contracts that have been previously sold to State and Local government and Tax-Exempt organization Deferred Compensation Plans will be administered consistent with the rules for contracts intended to qualify under Section 401(a). 33 PROSPECTUS ANNUAL REPORTS AND OTHER DOCUMENTS Allstate New York's annual report on Form 10-K for the year ended December 31, 2004 is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. Accordingly, only the statement that is changed or replaced will legally be a part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR" system using the identifying number CIK No. 0000839759. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at: Customer Service, 2940 S. 84TH STREET, LINCOLN, NE 68506-4142 (telephone: 1-800-692-4682). 34 PROSPECTUS APPENDIX A ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED* BASIC POLICY
For the period beginning January 1 and ending December 31, 1996 1997 1998 1999 2000 - -------------------------------------------------------------------------------------------------------------- AIM V.I. AGGRESSIVE GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 $ 13.988 Accumulation Unit Value, End of Period -- -- -- $ 13.988 $ 14.15 Number of Units Outstanding, End of Period -- -- -- 12,661 53,890 AIM V.I. BALANCED - SERIES I SUB-ACCOUNT ** Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 $ 13.162 Accumulation Unit Value, End of Period -- -- -- $ 13.162 $ 12.43 Number of Units Outstanding, End of Period -- -- -- 6,382 24,499 AIM V.I. BASIC VALUE - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- -- Accumulation Unit Value, End of Period -- -- -- -- -- Number of Units Outstanding, End of Period -- -- -- -- -- AIM V.I. BLUE CHIP - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- -- $ 8.82 Number of Units Outstanding, End of Period -- -- -- -- 11,309 AIM V.I. CAPITAL APPRECIATION - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 9.855 $ 11.387 $ 12.739 $ 14.979 $ 21.350 Accumulation Unit Value, End of Period $11.387 $ 12.739 $ 14.979 $ 21.350 $ 18.75 Number of Units Outstanding, End of Period 7,681 161,013 287,336 425,748 456,761 AIM V.I. CAPITAL DEVELOPMENT - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 $ 11.655 Accumulation Unit Value, End of Period -- -- -- $ 11.655 $ 12.55 Number of Units Outstanding, End of Period -- -- -- 3,948 18,297 AIM V.I. CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 9.926 $ 11.699 $ 14.496 $ 18.243 $ 24.138 Accumulation Unit Value, End of Period $11.699 $ 14.496 $ 18.243 $ 24.138 $ 20.33 Number of Units Outstanding, End of Period 5,371 167,625 361,890 645,133 674,689 AIM V.I. DENT DEMOGRAPHIC TRENDS - SERIES I SUB-ACCOUNT *** Accumulation Unit Value, Beginning of Period -- -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- -- $ 7.89 Number of Units Outstanding, End of Period -- -- -- -- 32,307 AIM V.I. DIVERSIFIED INCOME - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.086 $ 10.934 $ 11.789 $ 12.035 $ 12.002 Accumulation Unit Value, End of Period $10.934 $ 11.789 $ 12.035 $ 12.002 $ 11.55 Number of Units Outstanding, End of Period 4,618 58,958 146,644 227,201 204,561 AIM V.I. GOVERNMENT SECURITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.080 $ 10.164 $ 10.834 $ 11.829 $ 11.189 Accumulation Unit Value, End of Period $10.164 $ 10.834 $ 11.829 $ 11.189 $ 12.15 Number of Units Outstanding, End of Period 0 39,009 301,983 108,494 99,531 AIM V.I. GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 9.892 $ 11.466 $ 14.338 $ 18.954 $ 25.263 Accumulation Unit Value, End of Period $11.466 $ 14.338 $ 18.954 $ 25.263 $ 19.80 Number of Units Outstanding, End of Period 2,384 97,039 220,831 383,214 403,785 AIM V.I. HIGH YIELD - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 $ 9.957 Accumulation Unit Value, End of Period -- -- -- $ 9.957 $ 7.95 Number of Units Outstanding, End of Period -- -- -- 1,751 834
35 PROSPECTUS AIM V.I. INTERNATIONAL GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.168 $ 11.953 $ 12.598 $ 14.340 $ 21.914 Accumulation Unit Value, End of Period $11.953 $ 12.598 $ 14.340 $ 21.914 $ 15.90 Number of Units Outstanding, End of Period 5,404 85,934 136,898 220,690 245,480 AIM V.I. MID CAP CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- -- Accumulation Unit Value, End of Period -- -- -- -- -- Number of Units Outstanding, End of Period -- -- -- -- -- AIM V.I. MONEY MARKET - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.023 $ 10.369 $ 10.745 $ 11.126 $ 11.479 Accumulation Unit Value, End of Period $10.369 $ 10.745 $ 11.126 $ 11.479 $ 11.98 Number of Units Outstanding, End of Period 4,373 42,128 87,010 137,433 95,879 AIM V.I. PREMIER EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 9.800 $ 11.090 $ 13.520 $ 17.644 $ 22.589 Accumulation Unit Value, End of Period $11.090 $ 13.520 $ 17.644 $ 22.589 $ 19.00 Number of Units Outstanding, End of Period 5,921 180,440 405,246 987,076 1,000,356 AIM V.I. TECHNOLOGY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- -- Accumulation Unit Value, End of Period -- -- -- -- -- Number of Units Outstanding, End of Period -- -- -- -- -- AIM V.I. UTILITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- -- Accumulation Unit Value, End of Period -- -- -- -- -- Number of Units Outstanding, End of Period -- -- -- -- --
For the period beginning January 1 and ending December 31, 2001 2002 2003 2004 - -------------------------------------------------------------------------------------------------- AIM V.I. AGGRESSIVE GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 14.15 $ 10.308 $ 7.856 $ 9.809 Accumulation Unit Value, End of Period $ 10.308 $ 7.856 $ 9.809 $ 10.809 Number of Units Outstanding, End of Period 51,176 37,549 30,613 28,619 AIM V.I. BALANCED - SERIES I SUB-ACCOUNT ** Accumulation Unit Value, Beginning of Period $ 12.43 $ 10.849 $ 8.865 $ 10.167 Accumulation Unit Value, End of Period $ 10.849 $ 8.865 $ 10.167 $ 10.774 Number of Units Outstanding, End of Period 29,494 29,105 30,281 23,748 AIM V.I. BASIC VALUE - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 11.200 $ 8.594 $ 11.319 Accumulation Unit Value, End of Period $ 11.200 $ 8.594 $ 11.319 $ 12.390 Number of Units Outstanding, End of Period 6,325 22,360 26,204 45,919 AIM V.I. BLUE CHIP - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 8.82 $ 6.736 $ 4.902 $ 6.046 Accumulation Unit Value, End of Period $ 6.736 $ 4.902 $ 6.046 $ 6.238 Number of Units Outstanding, End of Period 8,408 33,025 34,736 36,134 AIM V.I. CAPITAL APPRECIATION - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 18.75 $ 14.176 $ 10.569 $ 13.491 Accumulation Unit Value, End of Period $ 14.176 $ 10.569 $ 13.491 $ 14.178 Number of Units Outstanding, End of Period 393,890 342,465 300,657 272,332 AIM V.I. CAPITAL DEVELOPMENT - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 12.55 $ 11.369 $ 8.812 $ 11.757 Accumulation Unit Value, End of Period $ 11.369 $ 8.812 $ 11.757 $ 13.383 Number of Units Outstanding, End of Period 15,528 17,080 14,370 15,343 AIM V.I. CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 20.33 $ 15.460 $ 12.863 $ 15.774 Accumulation Unit Value, End of Period $ 15.460 $ 12.863 $ 15.774 $ 16.941 Number of Units Outstanding, End of Period 590,855 490,936 436,022 385,401
36 PROSPECTUS AIM V.I. DENT DEMOGRAPHIC TRENDS - SERIES I SUB-ACCOUNT *** Accumulation Unit Value, Beginning of Period $ 7.89 $ 5.294 $ 3.537 $ 4.793 Accumulation Unit Value, End of Period $ 5.294 $ 3.537 $ 4.793 $ 5.114 Number of Units Outstanding, End of Period 23,934 21,406 21,473 20,823 AIM V.I. DIVERSIFIED INCOME - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 11.55 $ 11.788 $ 11.886 $ 12.797 Accumulation Unit Value, End of Period $ 11.788 $ 11.886 $ 12.797 $ 13.248 Number of Units Outstanding, End of Period 179,226 153,878 158,069 118,523 AIM V.I. GOVERNMENT SECURITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 12.15 $ 12.738 $ 13.759 $ 13.706 Accumulation Unit Value, End of Period $ 12.738 $ 13.759 $ 13.706 $ 13.855 Number of Units Outstanding, End of Period 110,454 147,016 91,728 73,112 AIM V.I. GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 19.80 $ 12.901 $ 8.777 $ 11.353 Accumulation Unit Value, End of Period $ 12.901 $ 8.777 $ 11.353 $ 12.110 Number of Units Outstanding, End of Period 338,025 291,782 263,392 237,475 AIM V.I. HIGH YIELD - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 7.95 $ 7.443 $ 6.908 $ 8.717 Accumulation Unit Value, End of Period $ 7.443 $ 6.908 $ 8.717 $ 9.558 Number of Units Outstanding, End of Period 4,833 5,236 4,236 4,779 AIM V.I. INTERNATIONAL GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 15.90 $ 11.980 $ 9.957 $ 12.665 Accumulation Unit Value, End of Period $ 11.980 $ 9.957 $ 12.665 $ 15.480 Number of Units Outstanding, End of Period 213,691 190,512 160,288 141,698 AIM V.I. MID CAP CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 11.357 $ 9.950 $ 12.486 Accumulation Unit Value, End of Period $ 11.357 $ 9.950 $ 12.486 $ 14.007 Number of Units Outstanding, End of Period 2,829 13,588 15,110 19,232 AIM V.I. MONEY MARKET - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 11.98 $ 12.231 $ 12.198 $ 12.092 Accumulation Unit Value, End of Period $ 12.231 $ 12.198 $ 12.092 $ 12.000 Number of Units Outstanding, End of Period 151,830 129,079 84,943 46,009 AIM V.I. PREMIER EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 19.00 $ 16.376 $ 11.256 $ 13.877 Accumulation Unit Value, End of Period $ 16.376 $ 11.256 $ 13.877 $ 14.466 Number of Units Outstanding, End of Period 881,690 685,598 606,188 538,069 AIM V.I. TECHNOLOGY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- $ 11.090 Number of Units Outstanding, End of Period -- -- -- 4,500 AIM V.I. UTILITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- $ 12.230 Number of Units Outstanding, End of Period -- -- -- 61,438
* The Contracts were first offered on October 14, 1996. The inception date of the following Variable Sub-Accounts is October 14, 1996: AIM V.I. Capital Appreciation - Series I Sub-Account, AIM V.I. Diversified Income - Series I Sub-Account, AIM V.I. Government Securities - Series I Sub-Account, AIM V.I. Growth - Series I Sub-Account, AIM V.I. Core Equity - Series I Sub-Account, AIM V.I. International Growth - Series I Sub-Account, AIM V.I. Money Market - Series I Sub-Account, AIM V.I. Premier Equity - Series I Sub-Account. The inception date of the AIM V.I. Aggressive Growth - Series I Sub-Account, AIM V.I. Balanced - Series I Sub-Account, AIM V.I. Capital Development - Series I Sub-Account, and AIM V.I. High Yield - Series I Sub-Account is October 25, 1999. The inception date of the AIM V.I. Blue Chip - Series I Sub-Account and AIM V.I. Dent Demographic Trends - Series I Sub-Account is January 3, 2000. The inception date of the AIM V.I. Basic Value - Series I Sub-Account and AIM V.I. Mid Cap Core Equity - Series I Sub-Account is October 1, 2001. The inception date of the AIM V.I. Technology - Series I Sub-Account and the AIM V.I. Utilities - Series I Sub-Account is October 15, 2004.The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.35% and an administrative charge of 0.10%. ** Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-Account that invests in that Fund will be made. *** Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-Account that invests in that Fund will be made. 37 PROSPECTUS APPENDIX B MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the applicable Guarantee Period for the week preceding the establishment of the Guarantee Period. N = the number of whole and partial years from the date we receive the withdrawal, transfer, or death benefit request, or from the Payout Start Date, to the end of the Guarantee Period. J = the Treasury Rate for a maturity equal to the Guarantee Period for the week preceding the receipt of the withdrawal, transfer, death benefit, or income payment request. If a note for a maturity of length N is not available, a weighted average will be used. If N is one year or less, J will be the 1-year Treasury Rate. "Treasury Rate" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment factor is determined from the following formula: ..9 X (I - J) X N To determine the Market Value Adjustment, we will multiply the Market Value Adjustment factor by the amount transferred (in excess of the Free Withdrawal Amount) paid as a death benefit, or applied to an Income Plan, from a Guarantee Period at any time other than during the 30 day period after such Guarantee Period expires. 38 PROSPECTUS EXAMPLES OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 Guarantee Period: 5 years Treasury Rate (at the time the Guarantee Period was established): 4.50% Assumed Net Annual Earnings Rate in Money Market Variable Sub-Account: 4.50% Full Surrender: End of Contract Year 3 NOTE: These examples assume that premium taxes are not applicable. Step 1. Calculate Contract $10,000.00 X (1.045)/3/ = $11,411.66 Value at End of Contract Year 3: Step 2. Calculate the .10 X $10,000.00 = $1,000.00 Preferred Withdrawal Amount: Step 3. Calculate the I = 4.50% Market Value Adjustment: J = 4.20% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .042) X (2) = .0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: = .0054 X ($11,411.66 - $1,000.00) = $56.22 Step 4. Calculate the .05 X ($10,000.00 - $1,000.00 + $56.22) = $452.81 Withdrawal Charge: Step 5. Calculate the $11,411.66 - $452.81 + $56.22 = $11,015.07 amount received by a Contract owner as a result of full withdrawal at the end of Contract Year 3:
EXAMPLE 1 (ASSUME DECLINING INTEREST RATES) EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1. Calculate Contract Value at End $10,000.00 X (1.045)/3/ = $11,411.66 of Contract Year 3: Step 2. Calculate the Preferred .10 X $10,000.00 = $1,000.00 Withdrawal Amount: Step 3. Calculate the Market Value I = 4.50% Adjustment: J = 4.80% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .048) X (2) = - .0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: -.0054 X ($11,411.66 - $1,000.00) = $-56.22 Step 4. Calculate the Withdrawal Charge: .05 X ($10,000.00 - $1,000.00 - $56.22) = $447.19 Step 5. Calculate the amount received by a Contract owner as a result of full withdrawal at the end of Contract Year 3: $11,411.66 - $447.19 - $56.22 = $10,908.25
39 PROSPECTUS STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS THE CONTRACT Purchase of Contracts CALCULATION OF ACCUMULATION UNIT VALUES NET INVESTMENT FACTOR CALCULATION OF VARIABLE INCOME PAYMENTS CALCULATION OF ANNUITY UNIT VALUES GENERAL MATTERS Incontestability Settlements Safekeeping of the Variable Account's Assets Premium Taxes Tax Reserves EXPERTS FINANCIAL STATEMENTS THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS. 40 PROSPECTUS AIM LIFETIME PLUS(SM) II VARIABLE ANNUITY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STREET ADDRESS: 2940 S. 84TH STREET, LINCOLN, NE 68506-4142 MAILING ADDRESS: P.O. BOX 82656, LINCOLN, NE 68501-2656 TELEPHONE NUMBER: 1-800-692-4682 PROSPECTUS DATED APRIL 30, 2005 Allstate Life Insurance Company of New York ("ALLSTATE NEW YORK") is offering the AIM Lifetime Plus(SM) II Variable Annuity, a group flexible premium deferred variable annuity contract ("CONTRACT"). This prospectus contains information about the Contract that you should know before investing. Please keep it for future reference. The Contract currently offers 21 investment alternatives ("INVESTMENT ALTERNATIVES"). The investment alternatives include 3 fixed account options ("FIXED ACCOUNT OPTIONS") and 18 variable sub-accounts ("VARIABLE SUB-ACCOUNTS") of the Allstate Life of New York Separate Account A ("VARIABLE ACCOUNT"). Each Variable Sub-Account invests exclusively in shares of one of the following funds ("FUNDS") of AIM Variable Insurance Funds, Inc. (SERIES I SHARES): AIM V.I. AGGRESSIVE GROWTH FUND - SERIES I AIM V.I. GOVERNMENT SECURITIES FUND - AIM V.I. BALANCED FUND - SERIES I* SERIES I AIM V.I. BASIC VALUE FUND - SERIES I AIM V.I. GROWTH FUND - SERIES I AIM V.I. BLUE CHIP FUND - SERIES I AIM V.I. HIGH YIELD FUND - SERIES I AIM V.I. CAPITAL APPRECIATION FUND - SERIES I AIM V.I. INTERNATIONAL GROWTH FUND - AIM V.I. CAPITAL DEVELOPMENT FUND - SERIES I SERIES I AIM V.I. CORE EQUITY FUND - SERIES I AIM V.I. MID CAP CORE EQUITY FUND - AIM V.I. DENT DEMOGRAPHIC TRENDS FUND - SERIES I** SERIES I AIM V.I. DIVERSIFIED INCOME FUND - SERIES I AIM V.I. MONEY MARKET FUND - SERIES I AIM V.I. PREMIER EQUITY FUND - SERIES I AIM V.I. TECHNOLOGY FUND - SERIES I AIM V.I. UTILITIES FUND - SERIES I
* Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. ** Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. WE (Allstate New York) have filed a Statement of Additional Information, dated April 30, 2005, with the Securities and Exchange Commission ("SEC"). It contains more information about the Contract and is incorporated herein by reference, which means it is legally a part of this prospectus. Its table of contents appears on page 41 of this prospectus. For a free copy, please write or call us at the address or telephone number above, or go to the SEC's Web site (http:www.sec.gov). You can find other information and documents about us, including documents that are legally part of this prospectus, at the SEC's Web site (http:\\www.sec.gov). THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. IMPORTANT NOTICES THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS THAT HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS. HOWEVER, THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT FDIC INSURED. THE CONTRACTS WERE ONLY AVAILABLE IN NEW YORK, BUT ARE NO LONGER AVAILABLE FOR SALE. 1 PROSPECTUS TABLE OF CONTENTS PAGE ---- OVERVIEW Important Terms 3 The Contract at a Glance 4 How the Contract Works 6 Expense Table 7 Financial Information 9 CONTRACT FEATURES The Contract 9 Purchases 10 Contract Value 11 Investment Alternatives 12 The Variable Sub-Accounts 12 The Fixed Account Options 13 Transfers 15 Expenses 18 Other Expenses 19 Access To Your Money 19 PAGE ---- Income Payments 20 Death Benefits 22 OTHER INFORMATION More Information: Allstate New York 25 The Variable Account 25 The Funds 25 The Contract 26 Non-Qualified Annuities Held Within a Qualified Plan 26 Legal Matters 26 Taxes 27 Annual Reports and Other Documents 34 APPENDIX A-ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED 35 APPENDIX B-MARKET VALUE ADJUSTMENT 39 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 41 - -------------------------------------------------------------------------------- 2 PROSPECTUS IMPORTANT TERMS - -------------------------------------------------------------------------------- This prospectus uses a number of important terms that you may not be familiar with. The index below identifies the page that describes each term. The first use of each term in this prospectus appears in highlights. PAGE ---- Accumulation Phase 6 Accumulation Unit 11 Accumulation Unit Value 11 Allstate New York ("We and/or "Us") 1, 25 Anniversary Values 23 Annuitant 9 Automatic Additions Program 10 Automatic Fund Rebalancing Program 17 Beneficiary 9 Cancellation Period 4 Contract* 26 Contract Anniversary 5 Contract Owner ("You") 9 Contract Value 5 Contract Year 5 Death Benefit Anniversary 22 Dollar Cost Averaging Option 13 Dollar Cost Averaging Program 17 Due Proof of Death 22 Enhanced Death Benefit Option 23 PAGE ---- Fixed Account Options 13 Funds 25 Guarantee Periods 13 Income Plans 20 Investment Alternatives 4 Issue Date 6 Market Value Adjustment 14 Payout Phase 6 Payout Start Date 20 Preferred Withdrawal Amount 18 Right to Cancel 10 SEC 1 Settlement Value 22 Systematic Withdrawal Program 20 Tax Qualified Contracts 30 Treasury Rate 15 Valuation Date 10 Variable Account 25 Variable Sub-Account 12 * The AIM Lifetime Plus(SM) II Variable Annuity is a group contract and your ownership is represented by certificates. References to "Contract" in this prospectus include certificates, unless the context requires otherwise. 3 PROSPECTUS THE CONTRACT AT A GLANCE The following is a snapshot of the Contract. Please read the remainder of this prospectus for more information. FLEXIBLE PAYMENTS You can purchase a Contract with an initial purchase payment of $5,000 ($2,000 for "QUALIFIED CONTRACTS," which are Contracts issued with QUALIFIED PLANS). You can add to your Contract as often and as much as you like, but each payment must be at least $500 ($100 for automatic purchase payments to the variable investment options). You must maintain a minimum account size of $1,000. - ------------------------------------------------------------------------------- RIGHT TO CANCEL You may cancel your Contract within 10 days after receipt ("CANCELLATION PERIOD"). Upon cancellation, as permitted by federal or state law, we will return your purchase payments adjusted to reflect the investment experience of any amounts allocated to the Variable Account. The adjustment will reflect the deduction of mortality and expense risk charges and administrative expense charges. - ------------------------------------------------------------------------------- EXPENSES You will bear the following expenses: . Total Variable Account annual fees equal to 1.10% of average daily net Assets (1.30% if you select the ENHANCED DEATH BENEFIT OPTION) . Annual contract maintenance charge of $35 (with certain exceptions) . Withdrawal charges ranging from 0% to 7% of payment withdrawn (with certain exceptions) . Transfer fee of $10 after 12th transfer in any CONTRACT YEAR (fee currently waived) . State premium tax (New York currently does not impose one). In addition, each Fund pays expenses that you will bear indirectly if you invest in a Variable Sub-Account. - ------------------------------------------------------------------------------- INVESTMENT The Contract offers 21 investment alternatives ALTERNATIVES including: . 3 Fixed Account Options (which credit interest at rates we guarantee), and . 18 Variable Sub-Accounts investing in Funds offering professional money management by A I M Advisors, Inc. To find out current rates being paid on the Fixed Account Options, or to find out how the Variable Sub-Accounts have performed, please call us at 1-800-692-4682. - ------------------------------------------------------------------------------- SPECIAL SERVICES For your convenience, we offer these special services: . AUTOMATIC FUND REBALANCING PROGRAM . AUTOMATIC ADDITIONS PROGRAM . DOLLAR COST AVERAGING PROGRAM . SYSTEMATIC WITHDRAWAL PROGRAM - ------------------------------------------------------------------------------- INCOME PAYMENTS You can choose fixed income payments, variable income payments, or a combination of the two. You can receive your income payments in one of the following ways: . life income with guaranteed payments . a joint and survivor life income with guaranteed payments . guaranteed payments for a specified period (5 to 30 years) - ------------------------------------------------------------------------------- 4 PROSPECTUS DEATH BENEFITS If you or the Annuitant (if the Contract is owned by a non-living person) die before the PAYOUT START DATE, we will pay the death benefit described in the Contract. We also offer an Enhanced Death Benefit Option. - ------------------------------------------------------------------------------- TRANSFERS Before the Payout Start Date, you may transfer your Contract value ("CONTRACT VALUE") among the investment alternatives, with certain restrictions. We do not currently impose a fee upon transfers. However, we reserve the right to charge $10 per transfer after the 12th transfer in each "CONTRACT YEAR," which we measure from the date we issue your contract or a Contract anniversary ("CONTRACT ANNIVERSARY"). - ------------------------------------------------------------------------------- WITHDRAWALS You may withdraw some or all of your Contract Value at any time during the Accumulation Phase. Full or partial withdrawals are available under limited circumstances on or after the Payout Start Date. In general, you must withdraw at least $50 at a time ($1,000 for withdrawals made during the Payout Phase.) Withdrawals in the Payout Phase are only available if the Payout Option is a Variable Income Payment using Guaranteed Payments for a Specified Period. Withdrawals taken prior to annuitization (referred to in this prospectus as the Payout Phase) are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. A withdrawal charge and MARKET VALUE ADJUSTMENT also may apply. - ------------------------------------------------------------------------------- 5 PROSPECTUS HOW THE CONTRACT WORKS The Contract basically works in two ways. First, the Contract can help you (we assume you are the CONTRACT OWNER) save for retirement because you can invest in up to 21 investment alternatives and generally pay no federal income taxes on any earnings until you withdraw them. You do this during what we call the "ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date we issue your Contract (we call that date the "ISSUE DATE") and continues until the Payout Start Date, which is the date we apply your money to provide income payments. During the Accumulation Phase, you may allocate your purchase payments to any combination of the Variable Sub-Accounts and/or Fixed Account Options. If you invest in the Fixed Account Options, you will earn a fixed rate of interest that we declare periodically. If you invest in any of the Variable Sub-Accounts, your investment return will vary up or down depending on the performance of the corresponding Funds. Second, the Contract can help you plan for retirement because you can use it to receive retirement income for life and/ or for a pre-set number of years, by selecting one of the income payment options (we call these "INCOME PLANS") described on page 20. You receive income payments during what we call the "PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and continues until we make the last payment required by the Income Plan you select. During the Payout Phase, if you select a fixed income payment option, we guarantee the amount of your payments, which will remain fixed. If you select a variable income payment option, based on one or more of the Variable Sub-Accounts, the amount of your payments will vary up or down depending on the performance of the corresponding Funds. The amount of money you accumulate under your Contract during the Accumulation Phase and apply to an Income Plan will determine the amount of your income payments during the Payout Phase. The timeline below illustrates how you might use your Contract.
Issue Payout Start Date Accumulation Phase Date Payout Phase - ---------------------------------------------------------------------------------------------------> You buy You save for retirement You elect to receive You can receive Or you can receive a Contract income payments or income payments income payments receive a lump sum for a set period for life payment
As the Contract owner, you exercise all of the rights and privileges provided by the Contract. If you die, any surviving Contract owner, or if there is none, the BENEFICIARY will exercise the rights and privileges provided by the Contract. See "The Contract." In addition, if you die before the Payout Start Date, we will pay a death benefit to any surviving Contract owner or, if none, to your Beneficiary. See "Death Benefits." Please call us at 1-800-692-4682 if you have any questions about how the Contract works. 6 PROSPECTUS EXPENSE TABLE The table below lists the expenses that you will bear directly or indirectly when you buy a Contract. The table and the examples that follow do not reflect premium taxes because New York currently does not impose premium taxes on annuities. For more information about Variable Account expenses, see "Expenses," below. For more information about Fund expenses, please refer to the accompanying prospectuses for the Funds. CONTRACT OWNER TRANSACTION EXPENSES Withdrawal Charge (as a percentage of purchase payments)*
Number of Complete Years Since We Received the Purchase 0 1 2 3 4 5 6 7+ Payment Being Withdrawn - ------------------------------------------------------------------------------------------------- Applicable Charge 7% 6% 5% 4% 3% 2% 1% 0% - ------------------------------------------------------------------------------------------------- Annual Contract Maintenance Charge $35.00** - ------------------------------------------------------------------------------------------------- Transfer Fee $10.00*** - -------------------------------------------------------------------------------------------------
* Each Contract Year, you may withdraw up to 15% of the Contract Value as of the beginning of the Contract Year without incurring a withdrawal charge or Market Value Adjustment. ** We will waive this charge in certain cases. See "Expenses." *** Applies solely to the thirteenth and subsequent transfers within a Contract Year excluding transfers due to dollar cost averaging or automatic fund rebalancing. We are currently waiving the transfer fee. VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE SUB-ACCOUNT) WITHOUT ENHANCED DEATH BENEFIT OPTION 1.00% Mortality and Expense Risk Charge - -------------------------------------------------------------------------------- Administrative Expense Charge 0.10% - -------------------------------------------------------------------------------- Total Variable Account Annual Expense 1.10% - -------------------------------------------------------------------------------- WITH ENHANCED DEATH BENEFIT OPTION 1.20% Mortality and Expense Risk Charge - -------------------------------------------------------------------------------- Administrative Expense Charge 0.10% - -------------------------------------------------------------------------------- Total Variable Account Annual Expense 1.30% - -------------------------------------------------------------------------------- FUND ANNUAL EXPENSES (as a percentage of Fund average daily net assets) (1) The next table shows the minimum and maximum total operating expenses charged by the Funds that you may pay periodically during the time that you own the Contract. Advisers and/or other service providers of certain Funds may have agreed to waive their fees and/or reimburse Fund expenses in order to keep the Funds' expenses below specified limits. The range of expenses shown in this table does not show the effect of any such fee waiver or expense reimbursement. More detail concerning each Fund's fees and expenses appears in the prospectus for each Fund. ANNUAL FUND EXPENSES Minimum Maximum - -------------------------------------------------------------------------------- Total Annual Fund Operating Expenses/(1)/ (expenses that are deducted from Fund assets, which may include management fees, distribution and/or services (12b-1) fees, and other expenses) 0.75% 1.16% - -------------------------------------------------------------------------------- (1) Expenses are shown as a percentage of Fund average daily net assets (before any waiver or reimbursement) as of December 31, 2004. 7 PROSPECTUS EXAMPLE 1 This Example is intended to help you compare the cost of investing in the Contracts with the cost of investing in other variable annuity contracts. These costs include Contract owner transaction expenses, Contract fees, Variable Account annual expenses, and Fund fees and expenses. The example below shows the dollar amount of expenses that you would bear directly or indirectly if you: .. invested $10,000 in the Contract for the time periods indicated, .. earned a 5% annual return on your investment, and .. surrendered your Contract, or you began receiving income payments for a specified period of less than 120 months, at the end of each time period, and .. elected the Enhanced Death Benefit Option. The first line of the example assumes that the maximum fees and expenses of any of the Funds are charged. The second line of the example assumes that the minimum fees and expenses of any of the Funds are charged. Your actual expenses may be higher or lower than those shown below. THE EXAMPLE DOES NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO PAY IF YOU SURRENDER YOUR CONTRACT. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------ Costs Based on Maximum Annual Fund Expenses $797 $1,215 $1,658 $3,129 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Fund Expenses $755 $1,088 $1,447 $2,711 - ------------------------------------------------------------------------ EXAMPLE 2 This Example uses the same assumptions as Example 1 above, except that it assumes you decided not to surrender your Contract, or you began receiving income payments for a specified period of at least 120 months, at the end of each time period. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------ Costs Based on Maximum Annual Fund Expenses $287 $877 $1,490 $3,129 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Fund Expenses $245 $751 $1,280 $2,711 - ------------------------------------------------------------------------ PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES. YOUR ACTUAL EXPENSES MAY BE LOWER OR GREATER THAN THOSE SHOWN ABOVE. SIMILARLY, YOUR RATE OF RETURN MAY BE LOWER OR GREATER THAN 5%, WHICH IS NOT GUARANTEED. THE EXAMPLES DO NOT ASSUME THAT ANY FUND EXPENSE WAIVERS OR REIMBURSEMENT ARRANGEMENTS ARE IN EFFECT FOR THE PERIODS PRESENTED. THE ABOVE EXAMPLES ASSUME THE ELECTION OF THE ENHANCED DEATH BENEFIT OPTION, WITH A MORTALITY AND EXPENSE RISK CHARGE OF 1.20%, AN ADMINISTRATIVE EXPENSE CHARGE OF 0.10% AND AN ANNUAL CONTRACT MAINTENANCE CHARGE OF $35. IF THE ENHANCED DEATH BENEFIT HAS NOT ELECTED, THE EXPENSE FIGURES SHOWN ABOVE WOULD BE SLIGHTLY LOWER. THE ABOVE EXAMPLES ASSUME TOTAL ANNUAL FUND EXPENSES LISTED IN THE EXPENSE TABLE WILL CONTINUE THROUGHOUT THE PERIODS SHOWN. 8 PROSPECTUS FINANCIAL INFORMATION To measure the value of your investment in the Variable Sub-Accounts during the Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT." Each Variable Sub-Account has a separate value for its Accumulation Units we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but not the same as, the share price of a mutual fund. Attached as Appendix A to this prospectus are tables showing the Accumulation Unit Values of each Variable Sub-Account since the date we first offered the Contracts. To obtain a fuller picture of each Variable Sub-Account's finances, please refer to the Variable Account's financial statements contained in the Statement of Additional Information. The financial statements of Allstate New York also appear in the Statement of Additional Information. THE CONTRACT CONTRACT OWNER The AIM Lifetime Plus(SM) II Variable Annuity is a contract between you, the Contract Owner, and Allstate New York, a life insurance company. As the Contract owner, you may exercise all of the rights and privileges provided to you by the Contract. That means it is up to you to select or change (to the extent permitted): .. the investment alternatives during the Accumulation and Payout Phases, .. the amount and timing of your purchase payments and withdrawals, .. the programs you want to use to invest or withdraw money, .. the income payment plan you want to use to receive retirement income, .. the Annuitant (either yourself or someone else) on whose life the income payments will be based, .. the Beneficiary or Beneficiaries who will receive the benefits that the Contract provides when the last surviving Contract Owner or Annuitant dies, and .. any other rights that the Contract provides. If you die, any surviving Contract owner or, if none, the Beneficiary may exercise the rights and privileges provided to them by the Contract. The Contract cannot be jointly owned by both a non-living person and a living person. If the Contract Owner is a Grantor Trust, the Contract Owner will be considered a non-living person for purposes of this section and the Death Benefit section. The maximum age of the oldest Contract owner cannot exceed age 90 as of the date we receive the completed application to purchase the Contract. Changing ownership of this Contract may cause adverse tax consequences and may not be allowed under qualified plans. Please consult with a competent tax advisor prior to making a request for a change of Contract Owner. The Contract can also be purchased as an IRA or TSA (also known as a 403(b)). The endorsements required to qualify these annuities under the Internal Revenue Code of 1986, as amended, ("Code") may limit or modify your rights and privileges under the Contract. ANNUITANT The Annuitant is the individual whose life determines the amount and duration of income payments (other than under Income Plans with guaranteed payments for a specified period). You initially designate an Annuitant in your application. The maximum age of the Annuitant cannot exceed age 90 as of the date we receive the completed application to purchase the Contract. If the Contract Owner is a living person you may change the Annuitant prior to the Payout Start Date. In our discretion, we may permit you to designate a joint Annuitant, who is a second person on whose life income payments depend, on the Payout Start Date. If the Annuitant dies prior to the Payout Start Date, the new Annuitant will be: .. the youngest Contract Owner, if living, otherwise .. the youngest Beneficiary. BENEFICIARY The Beneficiary is the person who may elect to receive the Death Benefit or become the new Contract Owner, subject to the Death of Owner provision, if the sole surviving Contract Owner dies before the Payout Start Date (See section titled "Death Benefits" for details.) If the sole surviving Contract owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed income payments scheduled to continue. You may name one or more Beneficiaries when you apply for a Contract. You may change or add Beneficiaries at any time by writing to us, unless you have designated an irrevocable Beneficiary. We will provide a change of Beneficiary form to be signed and filed with us. Any change will be effective at the time you sign the written notice, whether or not the Annuitant is living when we receive the notice. Until we receive your written notice to change a Beneficiary, we are entitled to rely on the most recent Beneficiary information in our files. We will not be liable as to any payment or settlement made prior to receiving the written notice. Accordingly, if you wish to 9 PROSPECTUS change your Beneficiary, you should deliver your written notice to us promptly. If you do not name a Beneficiary or if the named Beneficiary is no longer living and there are no other surviving Beneficiaries, the new Beneficiary will be: .. your spouse or, if he or she is no longer alive, .. your surviving children equally, or if you have no surviving children, .. your estate. If more than one Beneficiary survives you, we will divide the death benefit among your Beneficiaries according to your most recent written instructions. If you have not given us written instructions, we will pay the death benefit in equal amounts to the surviving Beneficiaries MODIFICATION OF THE CONTRACT Only an Allstate New York officer may approve a change in or waive any provision of the Contract. Any change or waiver must be in writing. None of our agents has the authority to change or waive the provisions of the Contract. We may not change the terms of the Contract without your consent, except to conform the Contract to applicable law or changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law. ASSIGNMENT No Owner has the right to assign any interest in a Contract as collateral or security for a loan. However, you may assign periodic income payments under the Contract prior to the Payout Start Date. No Beneficiary may assign benefits under the Contract until they are due. We will not be bound by any assignment until the assignor signs it and files it with us. We are not responsible for the validity of any assignment. Federal law prohibits or restricts the assignment of benefits under many types of retirement plans and the terms of such plans may themselves contain restrictions on assignments. An assignment may also result in taxes or tax penalties. YOU SHOULD CONSULT WITH AN ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT. PURCHASES MINIMUM PURCHASE PAYMENTS Your initial Purchase Payment must be at least $5,000 ($2,000 for a Qualified Contract). All subsequent Purchase Payments must be $500 or more. The maximum Purchase Payment is $2,000,000 without prior approval. We reserve the right to change the minimum Purchase Payment and to change the maximum Purchase Payment. You may make Purchase Payments of at least $500 at any time prior to the Payout Start Date. We also reserve the right to reject any application. AUTOMATIC ADDITIONS PROGRAM You may make subsequent purchase payments of at least $100 ($500 for allocation to the Fixed Account Options) by automatically transferring amounts from your bank account. Please consult with your sales representative for detailed information. ALLOCATION OF PURCHASE PAYMENTS At the time you apply for a Contract, you must decide how to allocate your purchase payments among the investment alternatives. The allocation you specify on your application will be effective immediately. All allocations must be in whole percents that total 100% or in whole dollars. You can change your allocations by notifying us in writing. We reserve the right to limit the availability of the investment alternatives. We will allocate your purchase payments to the investment alternatives according to your most recent instructions on file with us. Unless you notify us in writing otherwise, we will allocate subsequent purchase payments according to the allocation for the previous purchase payment. We will effect any change in allocation instructions at the time we receive written notice of the change in good order. We will credit the initial purchase payment that accompanies your completed application to your Contract within 2 business days after we receive the payment at our servicing center. If your application is incomplete, we will ask you to complete your application within 5 business days. If you do so, we will credit your initial purchase payment to your Contract within that 5 business day period. If you do not, we will return your purchase payment at the end of the 5 business day period unless you expressly allow us to hold it until you complete the application. We will credit subsequent purchase payments to the Contract at the close of the business day on which we receive the purchase payment at our service center located in Vernon Hills, Illinois (mailing address: 2940 S. 84TH STREET, LINCOLN, NE 68506-4142). We are open for business each day Monday through Friday that the New York Stock Exchange is open for business. We also refer to these days as "VALUATION DATES." Our business day closes when the New York Stock Exchange closes, usually 4:00 p.m. Eastern Time (3:00 p.m. Central Time). If we receive your purchase payment after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date, we will credit your purchase payment using the Accumulation Unit Values computed on the next Valuation Date. RIGHT TO CANCEL You may cancel the Contract by returning it to us within the Cancellation Period, which is the 10 day period after you receive the Contract (60 days if you are exchanging another contract for the Contract described in this prospectus.) You may return it by delivering it or mailing 10 PROSPECTUS it to us. If you exercise this "RIGHT TO CANCEL," the Contract terminates and we will pay you the full amount of your purchase payments allocated to the Fixed Account Options. Upon cancellation, as permitted by federal or state law, we will return your purchase payments allocated to the Variable Account after an adjustment to reflect investment gain or loss and applicable charges that occurred from the date of allocation through the date of cancellation. If your Contract is qualified under ode Section 408(b), we will refund the greater of any purchase payment or the Contract Value. CONTRACT VALUE On the issue date, the Contract Value is equal to the initial purchase payment. Thereafter, your Contract Value at any time during the Accumulation Phase is equal to the sum of the value of your Accumulation Units in the Variable Sub-Accounts you have selected, plus the value of your investment in the Fixed Account Options. ACCUMULATION UNITS To determine the number of Accumulation Units of each Variable Sub-Account to allocate to your Contract, we divide (i) the amount of the purchase payment or transfer you have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value of that Variable Sub-Account next computed after we receive your payment or transfer. For example, if we receive a $10,000 purchase payment allocated to a Variable Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we would credit 1,000 Accumulation Units of that Variable Sub-Account to your Contract. Withdrawals and transfers from a Variable Sub-Account would, of course, reduce the number of Accumulation Units of that Sub-Account allocated to your Contract. ACCUMULATION UNIT VALUE As a general matter, the Accumulation Unit Value for each Variable Sub-Account will rise or fall to reflect: .. changes in the share price of the Fund in which the Variable Sub-Account invests, and .. the deduction of amounts reflecting the mortality and expense risk charge, administrative expense charge, and any provision for taxes that have accrued since we last calculated the Accumulation Unit Value. We determine contract maintenance charges, withdrawal charges, and transfer fees (currently waived) separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units. For details on how we calculate Accumulation Unit Value, please refer to the Statement of Additional Information. We determine a separate Accumulation Unit Value for each Variable Sub-Account on each Valuation Date. We also determine a separate set of Accumulation Unit Values reflecting the cost of the Enhanced Death Benefit Option described on page 23. YOU SHOULD REFER TO THE PROSPECTUS FOR THE FUNDS THAT ACCOMPANIES THIS PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH FUND ARE VALUED, SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE CORRESPONDING VARIABLE SUB-ACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE. 11 PROSPECTUS INVESTMENT ALTERNATIVES: THE VARIABLE SUB-ACCOUNTS You may allocate your purchase payments to up to 18 Variable Sub-Accounts. Each Variable Sub-Account invests in the shares of a corresponding Fund. Each Fund has its own investment objective(s) and policies. We briefly describe the Funds below. For more complete information about each Fund, including expenses and risks associated with the Fund, please refer to the accompanying prospectus for the Fund. You should carefully review the Fund prospectuses before allocating amounts to the Variable Sub-Accounts. A I M Advisors, Inc. serves as the investment advisor to each Fund. SERIES I SHARES: EACH FUND SEEKS*: INVESTMENT ADVISOR - ------------------------------------------------------------------------------- AIM V.I. Aggressive Long-term growth of capital Growth Fund - Series I** - ------------------------------------------------------------------------------- AIM V.I. Balanced Fund As high a total return as - Series I*** possible, consistent with preservation of capital - ------------------------------------------------------------------------------- AIM V.I. Basic Value Long-term growth of capital Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Blue Chip Long-term growth of capital Fund - Series I with a secondary objective of current income - ------------------------------------------------------------------------------- AIM V.I. Capital Growth of capital Appreciation Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Capital Long-term growth of capital Development Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Core Equity Growth of capital A I M ADVISORS, INC.. Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Dent Long-term growth of capital Demographic Trends Fund - Series I**** - ------------------------------------------------------------------------------- AIM V.I. Diversified High level of current income Income Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Government High level of current income Securities Fund - consistent with reasonable Series I concern for safety of principal - ------------------------------------------------------------------------------- AIM V.I. Growth Fund - Growth of capital Series I - ------------------------------------------------------------------------------- AIM V.I. High Yield High level of current income Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. International Long-term growth of capital Growth Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Mid Cap Core Long-term growth of capital Equity Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Money Market As high a level of current Fund - Series I income as is consistent with the preservation of capital and liquidity - ------------------------------------------------------------------------------- AIM V.I. Premier Long-term growth of capital Equity Fund - Series with income as a secondary I objective - ------------------------------------------------------------------------------- AIM V.I. Technology Capital growth Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Utilities Capital growth and current Fund - Series I income - ------------------------------------------------------------------------------- * A Fund's investment objective(s) may be changed by the Fund's Board of Trustees without shareholder approval. ** Due to the sometime limited availability of common stocks of small-cap companies that meet the investment criteria for AIM V.I. Aggressive Growth Fund - Series I, the Fund may periodically suspend or limit the offering of its shares and it will be closed to new participants when Fund assets reach $200 million. During closed periods the Fund will accept additional investments from existing Contract owners maintaining an allocation in the Fund. *** Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. In addition, the Fund's objective will cahnge to long-term growth of capital and current income. *** The AIM V.I. Dent Demographic Trends Fund - Series I is sub-advised by H.S. Dent Advisors, Inc. Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. In addition, H.S. Dent Advisors, Inc. will no longer be the sub-advisor to the Fund effective June 30, 2005. AMOUNTS YOU ALLOCATE TO VARIABLE SUB-ACCOUNTS MAY GROW IN VALUE, DECLINE IN VALUE, OR GROW LESS THAN YOU EXPECT, DEPENDING ON THE INVESTMENT PERFORMANCE OF THE FUNDS IN WHICH THOSE VARIABLE SUB-ACCOUNTS INVEST. YOU BEAR THE INVESTMENT RISK THAT THE FUNDS MIGHT NOT MEET THEIR INVESTMENT OBJECTIVES. SHARES OF THE FUNDS 12 PROSPECTUS ARE NOT DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT OPTIONS You may allocate all or a portion of your purchase payments to the Fixed Account. You may choose from among 3 Fixed Account Options, including 2 DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS ("DOLLAR COST AVERAGING OPTION"), and the option to invest in one or more GUARANTEE PERIODS. The Fixed Account Options may not be available in all states. Please consult with your sales representative for current information. The Fixed Account supports our insurance and annuity obligations. The Fixed Account consists of our general assets other than those in segregated asset accounts. We have sole discretion to invest the assets of the Fixed Account, subject to applicable law. Any money you allocate to a Fixed Account Option does not entitle you to share in the investment experience of the Fixed Account. DOLLAR COST AVERAGING OPTION. You may establish a Dollar Cost Averaging Program, as described on page 17, by allocating purchase payments to the Dollar Cost Averaging Option either for 6 months (the "6 Month Dollar Cost Averaging Option") or for 12 months (the "12 Month Dollar Cost Averaging Option"). Your purchase payments that you allocate to the Dollar Cost Averaging Option will earn interest for the period you select at the current rate in effect at the time of allocation. Rates may differ from those available for the Guarantee Periods described below. We will credit interest daily at a rate that will compound over the 6 or 12 month period to the annual interest rate we guaranteed at the time of allocation. You must transfer all of your money out of the 6 or 12 Month Dollar Cost Averaging Options to other investment alternatives in equal monthly installments beginning within 30 days of allocation. The number of monthly installments must be no more than 6 for the 6 Month Dollar Cost Averaging Option, and no more than 12 for the 12 Month Dollar Cost Averaging Option. If we do not receive allocation instructions from you within one month of the date of the payment, the payment plus associated interest will be transferred to the Money Market Variable Sub-Account in equal monthly installments using the longest transfer period being offered at the time the Purchase Payment is made. At the end of the applicable transfer period, any nominal amounts remaining in the Dollar Cost Averaging Option will be allocated to the Money Market Variable Sub-Account. You may not transfer funds from other investment alternatives to the Dollar Cost Averaging Option. Transfers out of the Dollar Cost Averaging Option do not count towards the 12 transfers you can make without paying a transfer fee. We may declare different interest rates for different amounts allocated to the Dollar Cost Averaging Option depending on when they were allocated. For current interest rate information, please contact your Financial Advisor or our Customer Service unit at 1-800-692-4682. GUARANTEE PERIODS Each payment or transfer allocated to a Guarantee Period earns interest at a specified rate that we guarantee for a period of years. Guarantee Periods may range from 1 to 10 years. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods. You select one or more Guarantee Periods for each purchase payment or transfer. If you do not select the Guarantee Period for a purchase payment or transfer, we will assign the shortest Guarantee Period available under the Contract for such payment or transfer. We reserve the right to limit the number of additional purchase payments that you may allocate to this Option. Please consult with your sales representative for more information. Each Purchase Payment or transfer allocated to a Guarantee Period must be at least $500. INTEREST RATES. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We may declare different interest rates for Guarantee Periods of the same length that begin at different times. We will not change the interest rate that we credit to a particular allocation until the end of the relevant Guarantee Period. We have no specific formula for determining the rate of interest that we will declare initially or in the future. We will set those interest rates based on investment returns available at the time of the determination. In addition, we may consider various other factors in determining interest rates including regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. WE DETERMINE THE INTEREST RATES TO BE DECLARED IN OUR SOLE DISCRETION. WE CAN NEITHER PREDICT NOR GUARANTEE WHAT THOSE RATES WILL BE IN THE FUTURE. For current interest rate information, please contact your sales representative or Allstate New York at 1-800-692-4682. The interest rates we credit for the Dollar Cost Averaging Option will never be less than 3% annually. HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated to a Guarantee Period at a rate that compounds to the effective annual interest rate that we declared at the beginning of the applicable Guarantee Period. 13 PROSPECTUS The following example illustrates how a purchase payment allocated to a Guarantee Period would grow, given an assumed Guarantee Period and effective annual interest rate: Purchase Payment.................................................... $10,000 Guarantee Period.................................................... 5 years Annual Interest Rate................................................ 4.50% END OF CONTRACT YEAR
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ------------ Beginning Contract Value................ $10,000.00 X (1 + Annual Interest Rate) 1.045 ---------- $10,450.00 Contract Value at end of Contract Year..... $10,450.00 X (1 + Annual Interest Rate) 1.045 ---------- $10,920.25 Contract Value at end of Contract Year..... $10,920.25 X (1 + Annual Interest Rate) 1.045 ---------- $11,411.66 Contract Value at end of Contract Year..... $11,411.66 X (1 + Annual Interest Rate) 1.045 ---------- $11,925.19 Contract Value at end of Contract Year..... $11,925.19 X (1 + Annual Interest Rate) 1.045 ----------- $12,461.82
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,461.82 ($12,461.82-$10,000) This example assumes no withdrawals during the entire 5 year Guarantee Period. If you were to make a withdrawal, you may be required to pay a withdrawal charge. In addition, the amount withdrawn may be increased or decreased by a Market Value Adjustment that reflects changes in interest rates since the time you invested the amount withdrawn. The hypothetical interest rate is for illustrative purposes only and is not intended to predict current or future interest rates to be declared under the Contract. Actual interest rates declared for any given Guarantee Period may be more or less than shown above but will never be less than the guaranteed minimum rate stated in the Contract, if any. RENEWALS. At least 15 but not more than 45 days prior to the end of each Guarantee Period, we will mail you a notice asking you what to do with your money, including the accrued interest. During the 30-day period after the end of the Guarantee Period, you may: 1) Take no action. We will automatically apply your money to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for a Guarantee Period of that length; or 2) Instruct us to apply your money to one or more new Guarantee Periods of your choice. The new Guarantee Period(s) will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for those Guarantee Periods; or 3) Instruct us to transfer all or a portion of your money to one or more Variable Sub-Accounts. We will effect the transfer on the day we receive your instructions. We will not adjust the amount transferred to include a Market Value Adjustment; or 4) Withdraw all or a portion of your money. You may be required to pay a withdrawal charge, but we will not adjust the amount withdrawn to include a Market Value Adjustment. You may also be required to pay premium taxes and withholding (if applicable). The amount withdrawn will be deemed to have been withdrawn on the day the previous Guarantee Period ends. Unless you specify otherwise, amounts not withdrawn will be applied to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. MARKET VALUE ADJUSTMENT. All withdrawals in excess of the Preferred Withdrawal Amount, transfers, and amounts applied to an Income Plan from a Guarantee Period, other than those taken or applied during the 30 day period after such Guarantee Period expires, are subject to a Market Value Adjustment. A Market Value Adjustment also will apply when you apply amounts currently invested in a Guarantee Period to an Income Plan (unless applied during the 30 day period after such Guarantee Period expires). A Market Value Adjustment may apply in the calculation of the Settlement Value described below in the "Death Benefit Amount" section below. We will not apply a Market Value Adjustment to a transfer you make as part of a Dollar Cost Averaging Program. We also will not apply a Market Value Adjustment to a withdrawal you make: 14 PROSPECTUS .. within the Preferred Withdrawal Amount as described on page 18, or .. to satisfy the IRS minimum distribution rules for the Contract. We apply the Market Value Adjustment to reflect changes in interest rates from the time you first allocate money to a Guarantee Period to the time it is removed from that Guarantee Period. We calculate the Market Value Adjustment by comparing the Treasury Rate for a period equal to the Guarantee Period at its inception to the Treasury Rate for a period equal to the time remaining in the Guarantee Period when you remove your money. "TREASURY RATE" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment may be positive or negative, depending on changes in interest rates. As such, you bear the investment risk associated with changes in interest rates. If interest rates increase significantly, the Market Value Adjustment and any withdrawal charge, premium taxes, and income tax withholding (if applicable) could reduce the amount you receive upon full withdrawal of your Contract Value to an amount that is less than the purchase payment plus interest at the minimum guaranteed interest rate under the Contract. Death benefits will not be subject to a negative Market Value Adjustment. Generally, if the Treasury Rate at the time you allocate money to a Guarantee Period is higher than the applicable current Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a higher amount payable to you, transferred, or applied to an Income Plan. Conversely, if the Treasury Rate at the time you allocate money to a Guarantee Period is lower than the applicable Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a lower amount payable to you, transferred, or applied to an Income Plan. For example, assume that you purchase a Contract and you select an initial Guarantee Period of 5 years and the 5 year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at that later time, the current 2 year Treasury Rate is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to you. Conversely, if the current 2 year Treasury Rate is 4.80%, then the Market Value Adjustment will be negative, which will result in a decrease in the amount payable to you. The formula for calculating Market Value Adjustments is set forth in Appendix A to this prospectus, which also contains additional examples of the application of the Market Value Adjustment. INVESTMENT ALTERNATIVES: TRANSFERS TRANSFERS DURING THE ACCUMULATION PHASE During the Accumulation Phase, you may transfer Contract Value among the investment alternatives. You may not transfer Contract Value into the Dollar Cost Averaging Option. You may request transfers in writing on a form that we provided or by telephone according to the procedure described below. The minimum amount that you may transfer into a Guarantee Period is $500. We currently do not assess, but reserve the right to assess, a $10 charge on each transfer in excess of 12 per Contract Year. We treat transfers to or from more than one Fund on the same day as one transfer. Transfers you make as part of a Dollar Cost Averaging Program or Automatic Fund Rebalancing Program do not count against the 12 free transfers per Contract Year. We will process transfer requests that we receive before 4:00 p.m. Eastern Time on any Valuation Date using the Accumulation Unit Values for that Date. We will process requests completed after 4:00 p.m. Eastern Time on any Valuation Date using the Accumulation Unit Values for the next Valuation Date. The Contract permits us to defer transfers from the Fixed Account for up to 6 months from the date we receive your request. If we decide to postpone transfers from the Fixed Account Options for 10 days or more, we will pay interest as required by applicable law. Any interest would be payable from the date we receive the transfer request to the date we make the transfer. If you transfer an amount from a Guarantee Period other than during the 30 day period after such Guarantee Period expires, we will increase or decrease the amount by a Market Value Adjustment. We reserve the right to waive any transfer restrictions. TRANSFERS DURING THE PAYOUT PHASE During the Payout Phase, you may make transfers among the Variable Sub-Accounts to change the relative weighting of the Variable Sub-Accounts on which your variable income payments will be based. In addition, you will have a limited ability to make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. You may not make any transfers for the first 6 months after the Payout Start Date. Thereafter, you may make transfers among the Variable Sub-Accounts or make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. Your transfers must be at least 6 months apart. 15 PROSPECTUS TELEPHONE TRANSFERS You may make transfers by telephone by calling 1-800-692-4682, if you first send us a completed authorization form. The cut off time for telephone transfer requests is 4:00 p.m. Eastern Time. In the event that the New York Stock Exchange closes early, i.e., before 4:00 p.m. Eastern Time, or in the event that the Exchange closes early for a period of time but then reopens for trading on the same day, we will process telephone transfer requests as of the close of the Exchange on that particular day. We will not accept telephone requests received at any telephone number other than the number that appears in this paragraph or received after the close of trading on the Exchange. We may suspend, modify or terminate the telephone transfer privilege at any time without notice. We use procedures that we believe provide reasonable assurance that the telephone transfers are genuine. For example, we tape telephone conversations with persons purporting to authorize transfers and request identifying information. Accordingly, we disclaim any liability for losses resulting from allegedly unauthorized telephone transfers. However, if we do not take reasonable steps to help ensure that a telephone authorization is valid, we may be liable for such losses. MARKET TIMING & EXCESSIVE TRADING The Contracts are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of Variable Sub-Accounts and can disrupt management of a Fund and raise its expenses, which can impair Fund performance and adversely affect your Contract Value. Our policy is not to accept knowingly any money intended for the purpose of market timing or excessive trading. Accordingly, you should not invest in the Contract if your purpose is to engage in market timing or excessive trading, and you should refrain from such practices if you currently own a Contract. We seek to detect market timing or excessive trading activity by reviewing trading activities. Funds also may report suspected market-timing or excessive trading activity to us. If, in our judgment, we determine that the transfers are part of a market timing strategy or are otherwise harmful to the underlying Fund, we will impose the trading limitations as described below under "Trading Limitations." Because there is no universally accepted definition of what constitutes market timing or excessive trading, we will use our reasonable judgment based on all of the circumstances. While we seek to deter market timing and excessive trading in Variable Sub-Accounts, because our procedures involve the exercise of reasonable judgment, we may not identify or prevent some market timing or excessive trading. Moreover, imposition of trading limitations is triggered by the detection of market timing or excessive trading activity, and the trading limitations are not applied prior to detection of such trading activity. Therefore, our policies and procedures do not prevent such trading activity before it is detected. As a result, some investors may be able to engage in market timing and excessive trading, while others are prohibited, and the Fund may experience the adverse effects of market timing and excessive trading described above. TRADING LIMITATIONS We reserve the right to limit transfers among the investment alternatives in any Contract Year, or to refuse any transfer request, if: .. we believe, in our sole discretion, that certain trading practices, such as excessive trading, by, or on behalf of, one or more Contract Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Sub-Account or on the share prices of the corresponding Fund or otherwise would be to the disadvantage of other Contract Owners; or .. we are informed by one or more of the Funds that they intend to restrict the purchase, exchange, or redemption of Fund shares because of excessive trading or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Fund shares. In making the determination that trading activity constitutes market timing or excessive trading, we will consider, among other things: .. the total dollar amount being transferred, both in the aggregate and in the transfer request; .. the number of transfers you make over a period of time and/or the period of time between transfers (note: one set of transfers to and from a Variable Sub-Account in a short period of time can constitute market timing); .. whether your transfers follow a pattern that appears designed to take advantage of short term market fluctuations, particularly within certain Variable Sub-Account underlying Funds that we have identified as being susceptible to market timing activities; .. whether the manager of the underlying Fund has indicated that the transfers interfere with Fund management or otherwise adversely impact the Fund; and .. the investment objectives and/or size of the Variable Sub-Account underlying Fund. We seek to apply these trading limitations uniformly. However, because these determinations involve the exercise of discretion, it is possible that we may not detect some market timing or excessive trading activity. As a result, it is possible that some investors may be able to engage in market timing or excessive trading activity, while others are prohibited, and the Fund may experience the adverse effects of market timing and excessive trading described above. 16 PROSPECTUS If we determine that a Contract Owner has engaged in market timing or excessive trading activity, we will restrict that Contract Owner from making future additions or transfers into the impacted Variable Sub-Account(s). If we determine that a Contract Owner has engaged in a pattern of market timing or excessive trading activity involving multiple Variable Sub-Accounts, we will also require that all future transfer requests be submitted through regular U.S. mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery. In our sole discretion, we may revise our Trading Limitations at any time as necessary to better deter or minimize market timing and excessive trading or to comply with regulatory requirements. DOLLAR COST AVERAGING PROGRAM Through the Dollar Cost Averaging Program, you may automatically transfer a set amount at regular intervals during the Accumulation Phase from any Variable Sub-Account, the Dollar Cost Averaging Option, or interest credited from the 3, 5, 7 or 10 year Guarantee Periods, to any Variable Sub-Account. The interval between transfers may be monthly, quarterly, semi-annually, or annually. Transfers made through dollar cost averaging must be $50 or more. You may not use dollar cost averaging to transfer amounts into the Dollar Cost Averaging Option. We will not charge a transfer fee for transfers made under this Program, nor will such transfers count against the 12 transfers you can make each Contract Year without paying a transfer fee. In addition, we will not apply the Market Value Adjustment to these transfers. The theory of dollar cost averaging is that if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same purchase dates. However, participation in this program does not assure you of a greater profit from your purchases under the Program nor will it prevent or necessarily reduce losses in a declining market. Call or write us for instructions on how to enroll. AUTOMATIC FUND REBALANCING PROGRAM Once you have allocated your money among the Variable Sub-Accounts, the performance of each Sub-Account may cause a shift in the percentage you allocated to each Sub-Account. If you select our Automatic Fund Rebalancing Program, we will automatically rebalance the Contract Value in each Variable Sub-Account and return it to the desired percentage allocations. Money you allocate to the Fixed Account Options will not be included in the rebalancing. We will rebalance your account each quarter according to your instructions. We will transfer amounts among the Variable Sub-Accounts to achieve the percentage allocations you specify. You can change your allocations at any time by contacting us in writing or by telephone. The new allocation will be effective with the first rebalancing that occurs after we receive your request. We are not responsible for rebalancing that occurs prior to receipt of your request. Example: Assume that you want your initial purchase payment split among 2 Variable Sub-Accounts. You want 40% to be in the AIM V.I. Diversified Income Variable Sub-Account and 60% to be in the AIM V.I. Growth Variable Sub-Account. Over the next 2 months the bond market does very well while the stock market performs poorly. At the end of the first quarter, the AIM V.I. Diversified Income Variable Sub-Account now represents 50% of your holdings because of its increase in value. If you choose to have your holdings rebalanced quarterly, on the first day of the next quarter we would sell some of your units in the AIM V.I. Diversified Income Variable Sub-Account and use the money to buy more units in the AIM V.I. Growth Variable Sub-Account so that the percentage allocations would again be 40% and 60% respectively. The Automatic Fund Rebalancing Program is available only during the Accumulation Phase. The transfers made under the Program do not count towards the 12 transfers you can make without paying a transfer fee, and are not subject to a transfer fee. Fund rebalancing is consistent with maintaining your allocation of investments among market segments, although it is accomplished by reducing your Contract Value allocated to the better performing segments. 17 PROSPECTUS EXPENSES As a Contract owner, you will bear, directly or indirectly, the charges and expenses described below. CONTRACT MAINTENANCE CHARGE During the Accumulation Phase, on each Contract Anniversary, we will deduct a $35 contract maintenance charge from your Contract Value invested in each Variable Sub-Account in proportion to the amount invested. We also will deduct a full contract maintenance charge if you withdraw your entire Contract Value, unless your Contract qualifies for a waiver, described below. During the Payout Phase, we will deduct the charge proportionately from each income payment. The charge is for the cost of maintaining each Contract and the Variable Account. Maintenance costs include expenses we incur in billing and collecting purchase payments; keeping records; processing death claims, cash withdrawals, and policy changes; proxy statements; calculating Accumulation Unit Values and income payments; and issuing reports to Contract owners and regulatory agencies. We cannot increase the charge. We will waive this charge if: .. total purchase payments equal $50,000 or more, or .. all money is allocated to the Fixed Account Options, as of the Contract Anniversary. After the Payout Start Date, we will waive this charge if: .. as of the Payout Start Date, the Contract Value is $50,000 or more, or .. all income payments are fixed amount income payments. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense risk charge daily at an annual rate of 1.00% of the average daily net assets you have invested in the Variable Sub-Accounts (1.20% if you select the Enhanced Death Benefit Option). The mortality and expense risk charge is for all the insurance benefits available with your Contract (including our guarantee of annuity rates and the death benefits), for certain expenses of the Contract, and for assuming the risk (expense risk) that the current charges will not be sufficient in the future to cover the cost of administering the Contract. If the charges under the Contract are not sufficient, then we will bear the loss. We charge an additional .20% for the Enhanced Death Benefit Option to compensate us for the additional risk that we accept by providing the rider. We guarantee the mortality and expense risk charge and we cannot increase it. We assess the mortality and expense risk charge during both the Accumulation Phase and the Payout Phase. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge daily at an annual rate of 0.10% of the average daily net assets you have invested in the Variable Sub-Accounts. We intend this charge to cover actual administrative expenses that exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributed to that Contract. We assess this charge each day during the Accumulation Phase and the Payout Phase. We guarantee that we will not raise this charge. TRANSFER FEE We do not currently impose a fee upon transfers among the investment alternatives. However, we reserve the right to charge $10 per transfer after the 12th transfer in each Contract Year. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging or Automatic Fund Rebalancing Program. WITHDRAWAL CHARGE We may assess a withdrawal charge of up to 7% of the purchase payment(s) you withdraw in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. The charge declines annually to 0% after 7 complete years from the day we receive the purchase payment being withdrawn. A schedule showing how the charge declines appears on page 7. During each Contract Year, you can withdraw up to 15% of the Contract Value as of the beginning of that Contract Year without paying the charge. Unused portions of this 15% "PREFERRED WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We determine the withdrawal charge by: .. multiplying the percentage corresponding to the number of complete years since we received the purchase payment being withdrawn, times .. the part of each purchase payment withdrawal that is in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. We will deduct withdrawal charges, if applicable, from the amount paid. For purposes of the withdrawal charge, we will treat withdrawals as coming from the oldest purchase payments first. However, for federal income tax purposes, please note that withdrawals are considered to have come first from earnings in the Contract. Thus, for tax purposes, earnings are considered to come out first, which means you pay taxes on the earnings portion of your withdrawal. If you make a withdrawal before the Payout Start Date, we will apply the withdrawal charge percentage in effect on the date of the withdrawal, or the withdrawal charge percentage in effect on the following day, whichever is 18 PROSPECTUS lower.We do not apply a withdrawal charge in the following situations: .. on the Payout Start Date (a withdrawal charge may apply if you elect to receive income payments for a specified period of less than 120 months); .. the death of the Contract owner or Annuitant (unless the Settlement Value is used); .. withdrawals taken to satisfy IRS minimum distribution rules for the Contract; and .. withdrawals made after all purchase payments have been withdrawn. We use the amounts obtained from the withdrawal charge to pay sales commissions and other promotional or distribution expenses associated with marketing the Contracts. To the extent that the withdrawal charge does not cover all sales commissions and other promotional or distribution expenses, we may use any of our corporate assets, including potential profit which may arise from the mortality and expense risk charge or any other charges or fee described above, to make up any difference. Withdrawals may be subject to tax penalties or income tax and a Market Value Adjustment. You should consult your own tax counsel or other tax advisers regarding any withdrawals. PREMIUM TAXES Currently, we do not make deductions for premium taxes under the Contract because New York does not charge premium taxes on annuities. We may deduct taxes that may be imposed in the future from purchase payments or the Contract Value when the tax is incurred or at a later time. DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES We are not currently making a provision for taxes. In the future, however, we may make a provision for taxes if we determine, in our sole discretion, that we will incur a tax as a result of the operation of the Variable Account. We will deduct for any taxes we incur as a result of the operation of the Variable Account, whether or not we previously made a provision for taxes and whether or not it was sufficient. Our status under the Internal Revenue Code is briefly described in the Taxes section. OTHER EXPENSES Each Fund deducts advisory fees and other expenses from its assets. You indirectly bear the charges and expenses of the Fund whose shares are held by the Variable Sub-Accounts. These fees and expenses are described in the accompanying prospectus for the Funds. For a summary of current estimates of those charges and expenses, see pages 7-8. We may receive compensation from A I M Advisors, Inc., for administrative services we provide to the Funds. ACCESS TO YOUR MONEY You can withdraw some or all of your Contract Value at any time prior to the Payout Start Date. Withdrawals also are available under limited circumstances on or after the Payout Start Date. See "Income Plans" on page 20. The amount payable upon withdrawal is the Contract Value next computed after we receive the request for a withdrawal at our service center, adjusted by any Market Value Adjustment, less any withdrawal charges, contract maintenance charges, income tax withholding, and any premium taxes. We will pay withdrawals from the Variable Account within 7 days of receipt of the request, subject to postponement in certain circumstances. You can withdraw money from the Variable Account or the Fixed Account Options. To complete a partial withdrawal from the Variable Account, we will cancel Accumulation Units in an amount equal to the withdrawal and any applicable withdrawal charge and premium taxes. You have the opportunity to name the investment alternative(s) from which you are taking the withdrawal. If none is specified, we will deduct your withdrawal pro-rata from the investment alternatives according to the value of your investments therein. In general, you must withdraw at least $50 at a time. You also may withdraw a lesser amount if you are withdrawing your entire interest in a Variable Sub-Account. If you request a total withdrawal, we may request that you return your Contract to us. We also will deduct a Contract Maintenance Charge of $35, unless we have waived the Contract Maintenance Charge on your Contract. Withdrawals taken prior to annuitization (referred to in this prospectus as the Payout Phase) are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. POSTPONEMENT OF PAYMENTS We may postpone the payment of any amounts due from the Variable Account under the Contract if: 19 PROSPECTUS 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the SEC; or 3. The SEC permits delay for your protection. In addition, we may delay payments or transfers from the Fixed Account Options for up to 6 months or shorter period if required by law. If we delay payment or transfer for 10 days or more, we will pay interest as required by law. Any interest would be payable from the date we receive the withdrawal request to the date we make the payment or transfer. SYSTEMATIC WITHDRAWAL PROGRAM You may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis at any time prior to the Payout Start Date. The minimum amount of each systematic withdrawal is $50. Systematic Withdrawals are not available from the Dollar Cost Averaging Option. At our discretion, systematic withdrawals may not be offered in conjunction with the Dollar Cost Averaging Program or the Automatic Fund Rebalancing Program. Depending on fluctuations in the accumulation unit value of the Variable Sub-Accounts and the value of the Fixed Account Options, systematic withdrawals may reduce or even exhaust the Contract Value. Please consult your tax advisor before taking any withdrawal. We will make systematic withdrawal payments to you or your designated payee. We may modify or suspend the Systematic Withdrawal Program and charge a processing fee for the service. If we modify or suspend the Systematic Withdrawal Program, existing systematic withdrawal payments will not be affected. MINIMUM CONTRACT VALUE If your request for a partial withdrawal would reduce the amount in any Guarantee Period to less than $500, we may treat it as a request to withdraw the entire amount invested in such Guarantee Period. If your request for a partial withdrawal would reduce the Contract Value to less than $1,000, we may treat it as a request to withdraw your entire Contract Value. Your Contract will terminate if you withdraw all of your Contract Value. We will, however, ask you to confirm your withdrawal request before terminating your Contract. Before terminating any Contract value whose value has been reduced by withdrawals to less than $1,000, we would inform you in writing of our intention to terminate your Contact and give you at least 30 days in which to make an additional Purchase Payment to restore your Contract's value to the contractual minimum of $1,000. If we terminate your Contract, we will distribute to you its Contract Value, adjusted by any applicable Market Value Adjustment, less withdrawal and other charges, and applicable taxes. INCOME PAYMENTS PAYOUT START DATE The Payout Start Date is the day that we apply your Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, to an Income Plan. The Payout Start Date must be no later than the Annuitant's 90th birthday. You may change the Payout Start Date at any time by notifying us in writing of the change at least 30 days before the scheduled Payout Start Date. Absent a change, we will use the Payout Start Date stated in your Contract. INCOME PLANS An "Income Plan" is a series of payments on a scheduled basis to you or to another person designated by you. You may choose and change your choice of Income Plan until 30 days before the Payout Start Date. If you do not select an Income Plan, we will make income payments in accordance with Income Plan 1 with guaranteed payments for 10 years. After the Payout Start Date, you may not make withdrawals (except as described below) or change your choice of Income Plan. Three Income Plans are available under the Contract. Each is available to provide: .. fixed income payments; .. variable income payments; or .. a combination of the two. A portion of each payment will be considered taxable and the remaining portion will be a non-taxable return of your investment in the Contract, which is also called the "basis". Once the basis in the Contract is depleted, all remaining payments will be fully taxable. If the Contract is tax-qualified, generally, all payments will be fully taxable. Taxable payments taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. The three Income Plans are: INCOME PLAN 1 - LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as the Annuitant lives. If the Annuitant dies before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 2 - JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as either the Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint Annuitant die before we have made all of the guaranteed income payments, we will 20 PROSPECTUS continue to pay the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 3 - GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD (5 YEARS TO 30 YEARS). Under this plan, we make periodic income payments for the period you have chosen. These payments do not depend on the Annuitant's life. Income payments for less than 120 months may be subject to a withdrawal charge. We will deduct the mortality and expense risk charge from the Variable Sub-Account assets that support variable income payments even though we may not bear any mortality risk. The length of any guaranteed payment period under your selected Income Plan generally will affect the dollar amounts of each income payment. As a general rule, longer guarantee periods result in lower income payments, all other things being equal. For example, if you choose an Income Plan with payments that depend on the life of the Annuitant but with no minimum specified period for guaranteed payments, the income payments generally will be greater than the income payments made under the same Income Plan with a minimum specified period for guaranteed payments. If you choose Income Plan 1 or 2, or, if available, another Income Plan with payments that continue for the life of the Annuitant or joint Annuitant, we may require proof of age and sex of the Annuitant or joint Annuitant before starting income payments, and proof that the Annuitant or joint Annuitant is alive before we make each payment. Please note that under such Income Plans, if you elect to take no minimum guaranteed payments, it is possible that the payee could receive only 1 income payment if the Annuitant and any joint Annuitant both die before the second income payment, or only 2 income payments if they die before the third income payment, and so on. Generally, you may not make withdrawals after the Payout Start Date. One exception to this rule applies if you are receiving variable income payments that do not depend on the life of the Annuitant (such as under Income Plan 3). In that case you may terminate all or a portion of the Variable Account portion of the income payments at any time and receive a lump sum equal to the present value of the remaining variable payments associated with the amount withdrawn. To determine the present value of any remaining variable income payments being withdrawn, we use a discount rate equal to the assumed annual investment rate that we use to compute such variable income payments. The minimum amount you may withdraw under this feature is $1,000. A withdrawal charge may apply. We deduct applicable premium taxes from the Contract Value at the Payout Start Date. We may make other Income Plans available. You may obtain information about them by writing or calling us. You must apply at least the Contract Value in the Fixed Account Options on the Payout Start Date to fixed income payments. If you wish to apply any portion of your Fixed Account Option balance to provide variable income payments, you should plan ahead and transfer that amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do not tell us how to allocate your Contract Value among fixed and variable income payments, we will apply your Contract Value in the Variable Account to variable income payments and your Contract Value in the Fixed Account Options to fixed income payments. We will apply your Contract Value, adjusted by any applicable Market Value Adjustment, less applicable taxes to your Income Plan on the Payout Start Date. If the Contract owner has not made any purchase payments for at least 3 years preceding the Payout Start Date, and either the Contract Value is less than $2,000 or not enough to provide an initial payment of at least $20, and state law permits, we may: .. terminate the Contract and pay you the Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, in a lump sum instead of the periodic payments you have chosen, or .. reduce the frequency of your payments so that each payment will be at least $20. VARIABLE INCOME PAYMENTS The amount of your variable income payments depends upon the investment results of the Variable Sub-Accounts you select, the premium taxes you pay, the age and sex of the Annuitant, and the Income Plan you choose. We guarantee that the payments will not be affected by (a) actual mortality experience and (b) the amount of our administration expenses. We cannot predict the total amount of your variable income payments. Your variable income payments may be more or less than your total purchase payments because (a) variable income payments vary with the investment results of the underlying Funds and (b) the Annuitant could live longer or shorter than we expect based on the tables we use. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3%. If the actual net investment return of the Variable Sub-Accounts you choose is less than this assumed investment rate, then the dollar amount of your variable income payments will decrease. The dollar amount of your variable income payments will increase, however, if the actual net investment return exceeds the assumed investment rate. The dollar amount of the variable income payments stays level if the net investment return equals the assumed investment rate. Please refer to the Statement of Additional Information for more detailed information as to how we determine variable income payments. 21 PROSPECTUS FIXED INCOME PAYMENTS We guarantee income payment amounts derived from any Fixed Account Option for the duration of the Income Plan. We calculate the fixed income payments by: 1) adjusting the portion of the Contract Value in any Fixed Account Option on the Payout Start Date by any applicable Market Value Adjustment; 2) deducting any applicable premium tax; and 3) applying the resulting amount to the greater of (a) the appropriate value from the income payment table in your Contract or (b) such other value as we are offering at that time. We may defer making fixed income payments for a period of up to 6 months or such shorter time as state law may require. If we defer payments for 10 business days or more, we will pay interest as required by law from the date we receive the withdrawal request to the date we make payment. CERTAIN EMPLOYEE BENEFIT PLANS The Contracts offered by this prospectus contain income payment tables that provide for different payments to men and women of the same age. However, we reserve the right to use income payment tables that do not distinguish on the basis of sex to the extent permitted by law. In certain employment-related situations, employers are required by law to use the same income payment tables for men and women. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan, you should consult with legal counsel as to whether the purchase of a Contract is appropriate. For qualified plans, where it is appropriate, we may use income payment tables that do not distinguish on the basis of sex. DEATH BENEFITS We will pay a death benefit if, prior to the Payout Start Date: 1. any Contract owner dies or, 2. the Annuitant dies, if the Contract owner is not a living person. We will pay the death benefit to the new Contract owner who is determined immediately after the death. The new Contract owner would be a surviving Contract owner or, if none, the Beneficiary(ies). In the case of the death of an Annuitant, we will pay the death benefit to the current Contract owner. A request for payment of the death benefit must include "DUE PROOF OF DEATH." We will accept the following documentation as Due Proof of Death: .. a certified copy of a death certificate, .. a certified copy of a decree of a court of competent jurisdiction as to the finding of death, or .. any other proof acceptable to us. Where there are multiple beneficiaries, we will only value the death benefit at the time the first beneficiary submits the necessary documentation in good order. Any death benefit amounts attributable to any beneficiary which remain in the investment divisions are subject to investment risk. DEATH BENEFIT AMOUNT Prior to the Payout Start Date, the death benefit is equal to the greatest of: 1. the Contract Value as of the date we determine the death benefit, or 2. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of Contract Value) on the date we determine the death benefit, or 3. the sum of all purchase payments reduced by a withdrawal adjustment, as defined below, or 4. the greatest of the Contract Value on each DEATH BENEFIT ANNIVERSARY prior to the date we determine the death benefit, increased by purchase payments made since that Death Benefit Anniversary and reduced by a withdrawal adjustment as defined below. In calculating the Settlement Value, the amount in each individual Guarantee Period may be subject to a Market Value Adjustment. A Market Value Adjustment will apply to amounts in a Guarantee Period, unless we calculate the Settlement Value during the 30-day period after the expiration of the Guarantee Period. Also, the Settlement Value will reflect deduction of any applicable withdrawal charges, contract maintenance charges, and premium taxes. A "Death Benefit Anniversary" is every seventh Contract Anniversary during the Accumulation Phase. For example, the 7th, 14th, and 21st Contract Anniversaries are the first three Death Benefit Anniversaries. The "withdrawal adjustment" is equal to (a) divided by (b), with the result multiplied by (c), where: (a) is the withdrawal amount; (b) is the Contract Value immediately prior to the withdrawal; and (c) is the value of the applicable death benefit alternative immediately prior to the withdrawal. Please see Appendix B to this prospectus, which contains examples of the application of the withdrawal adjustment. We will determine the value of the death benefit as of the end of the Valuation Date on which we receive a complete request for payment of the death benefit. If we receive a request after 4:00 p.m. Eastern Time on a Valuation Date, 22 PROSPECTUS we will process the request as of the end of the following Valuation Date. ENHANCED DEATH BENEFIT OPTION If the oldest Contract owner and Annuitant is less than or equal to age 80 as of the date we receive the completed application, the Enhanced Death Benefit Option, is an optional benefit that you may select. If the Contract owner is a living individual, the Enhanced Death Benefit applies only for the death of the Contract owner. If the Contract owner is not a living individual, the enhanced death benefit applies only for the death of the Annuitant. For Contracts with the Enhanced Death Benefit Rider, the death benefit will be the greatest of (1) through (4) above, or (5) the Enhanced Death Benefit, described below. The Enhanced Death Benefit will never be greater than the maximum death benefit allowed by any state nonforfeiture laws which govern the Contract. ENHANCED DEATH BENEFIT. The Enhanced Death Benefit on the Issue Date is equal to the initial purchase payment. On each Contract Anniversary, we will recalculate your Enhanced Death Benefit to equal the greater of your Contract Value on that date, or the most recently calculated Enhanced Death Benefit. We also will recalculate your Enhanced Death Benefit whenever you make an additional purchase payment or a partial withdrawal. Additional purchase payments will increase the Enhanced Death Benefit dollar-for-dollar. Withdrawals will reduce the Enhanced Death Benefit by an amount equal to a withdrawal adjustment computed in the manner described above under "Death Benefit Amount." In the absence of any withdrawals or purchase payments, the Enhanced Death Benefit will be the greatest of all Contract Anniversary Contract Values on or before the date we calculate the death benefit. We will calculate ANNIVERSARY VALUES for each Contract Anniversary prior to the oldest Contract owner's or the oldest Annuitant's, if the Contract owner is not a living person, 85th birthday. After age 85, we will recalculate the Enhanced Death Benefit only for purchase payments and withdrawals. The Enhanced Death Benefit will never be greater than the maximum death benefit allowed by any non-forfeiture laws which govern the Contract. DEATH BENEFIT PAYMENTS IF THE NEW OWNER IS YOUR SPOUSE, THE NEW OWNER MAY: 1. elect to receive the death benefit in a lump sum, or 2. elect to apply the death benefit to an Income Plan. Payments from the Income Plan must begin within 1 year of the date of death and must be payable throughout: .. the life of the new Owner; or .. for a guaranteed number of payments from 5 to 50 years, but not to exceed the life expectancy of the new Owner; or .. over the life of the new Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Owner. If your spouse does not elect one of the above options, the Contract will continue in the Accumulation Phase as if the death had not occurred. If the Contract is continued in the Accumulation Phase, the following restrictions apply: .. On the date the Contract is continued, the Contract Value will equal the amount of the Death Benefit as determined as of the Valuation Date on which we received the completed request for settlement of the death benefit (the next Valuation Date, if we receive the completed request for settlement of the death benefit after 3 p.m. Central Time). Unless otherwise instructed by the continuing spouse, the excess, if any, of the death benefit over the Contract Value will be allocated to the Sub-Accounts of the Variable Account. This excess will be allocated in proportion to your Contract Value in those Sub-accounts as of the end of the Valuation Period during which we receive the completed request for settlement of the death benefit, except that any portion of this excess attributable to the Fixed Account Options will be allocated to the Money Market Sub-account. Within 30 days of the date the Contract is continued, your surviving spouse may choose one of the following transfer alternatives without incurring a transfer fee: .. transfer all or a portion of the excess among the Variable Sub-Accounts; .. transfer all or a portion of the excess into the Guaranteed Maturity Fixed Account and begin a new Guarantee Period; or .. transfer all or a portion of the excess into a combination of Variable Sub-Accounts and the Guaranteed Maturity Fixed Account. Any such transfer does not count as one of the free transfers allowed each Contract Year and is subject to any minimum allocation amount specified in your Contract. The surviving spouse may make a single withdrawal of any amount within one year of the date of death without incurring a Withdrawal Charge. Only one spousal continuation is allowed under this Contract. IF THE NEW OWNER IS NOT YOUR SPOUSE BUT IS A LIVING PERSON, THE NEW OWNER MAY: 1) elect to receive the death benefit in a lump sum, or 2) elect to apply the death benefit to an Income Plan. Payments from the Income Plan must begin within 1 year of the date of death and must be payable throughout: .. the life of the new Owner; or 23 PROSPECTUS .. for a guaranteed number of payments from 5 to 50 years, but not to exceed the life expectancy of the new Owner; or .. over the life of the new Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Owner. If the new Owner does not elect one of the above options then the new Owner must receive the Contract Value payable within 5 years of your date of death. The Contract Value will equal the amount of the death benefit as determined as of the Valuation Date on which we received a completed request for settlement of the death benefit (the next Valuation Date, if we receive a completed request for settlement of the death benefit after 3 p.m. Central Time). Unless otherwise instructed by the new Owner, the excess, if any, of the death benefit over the Contract Value will be allocated to the Money Market Variable Sub-Account. The new Owner may exercise all rights as set forth in the TRANSFERS section during this 5 year period. No additional Purchase Payments may be added to the Contract under this election. Withdrawal Charges will be waived for any withdrawals made during this 5 year period. If the new Owner dies prior to the receiving all of the Contract Value, then the new Owner's named Beneficiary(ies) will receive the greater of the Settlement Value or the remaining Contract Value. This amount must be received as a lump sum within 5 years of the date of the original Owner's death. We reserve the right to offer additional options upon Death of Owner. IF THE NEW OWNER IS A CORPORATION, TRUST, OR OTHER NON-LIVING PERSON: (a) The new Owner may elect to receive the death benefit in a lump sum; or (b) If the new Owner does not elect the option above, then the new Owner must receive the Contract Value payable within 5 years of your date of death. On the date we receive the complete request for settlement of the Death Benefit, the Contract Value under this option will be the death benefit. Unless otherwise instructed by the new Owner, the excess, if any of the death benefit over the Contract Value will be allocated to the Money Market Variable Sub-Account. The new Owner may exercise all rights set forth in the TRANSFERS provision during this 5 year period. No additional Purchase Payments may be added to the Contract under this election. Withdrawal Charges will be waived during this 5 year period. We reserve the right to offer additional options upon Death of Owner. If any new Owner is a non-living person, all new Owners will be considered to be non-living persons for the above purposes. Under any of these options, all ownership rights, subject to any restrictions previously placed upon the Beneficiary, are available to the new Owner from the date of your death to the date on which the death proceeds are paid. DEATH OF ANNUITANT If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date and the Contract Owner is a living person, then the Contract will continue with a new Annuitant as designated by the Contract Owner. If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date and the Contract Owner is a non-living person, the following apply: (a) The Contract Owner may elect to receive the death benefit in a lump sum; or (b) If the new Owner does not elect the option above, then the Owner must receive the Contract Value payable within 5 years of the Annuitant's date of death. On the date we receive the complete request for settlement of the death benefit, the Contract Value under this option will be the death benefit. Unless otherwise instructed by the Contract Owner, the excess, if any, of the death benefit over the Contract Value will be allocated to the Money Market Variable Sub-Account. The Contract Owner may then exercise all rights set forth in the TRANSFERS provision during this 5 year period. No additional Purchase Payments may be added to the Contract under this election. Withdrawal Charges will be waived during this 5 year period. We reserve the right to offer additional options upon Death of Owner. 24 PROSPECTUS MORE INFORMATION ALLSTATE NEW YORK Allstate New York is the issuer of the Contract. Allstate New York is a stock life insurance company organized under the laws of the State of New York. Allstate New York was incorporated in 1967 and was known as "Financial Life Insurance Company" from 1967 to 1978. From 1978 to 1984, Allstate New York was known as "PM Life Insurance Company." Since 1984 the company has been known as "Allstate Life Insurance Company of New York." Allstate New York is currently licensed to operate in New York. Our home office is located at 100 Motor Parkway, Hauppauge, NY 11788-5107. Our service center located in Northbrook, Illinois. Allstate New York is a wholly owned subsidiary of Allstate Life Insurance Company ("ALLSTATE LIFE"), a stock life insurance company incorporated under the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company, a stock property-liability insurance company incorporated under the laws of Illinois. With the exception of the directors qualifying shares, all of the outstanding capital stock of Allstate Insurance Company is owned by The Allstate Corporation. THE VARIABLE ACCOUNT Allstate New York established the Allstate Life of New York Separate Account A on December 15, 1995. We have registered the Variable Account with the SEC as a unit investment trust. The SEC does not supervise the management of the Variable Account or Allstate New York. We own the assets of the Variable Account. The Variable Account is a segregated asset account under New York law. That means we account for the Variable Account's income, gains and losses separately from the results of our other operations. It also means that only the assets of the Variable Account that are in excess of the reserves and other Contract liabilities with respect to the Variable Account are subject to liabilities relating to our other operations. Our obligations arising under the Contracts are general corporate obligations of Allstate New York. The Variable Account consists of multiple Variable Sub-Accounts, 18 of which are available through the Contracts. Each Variable Sub-Account invests in a corresponding Fund. We may add new Variable Sub-Accounts or eliminate one or more of them, if we believe marketing, tax, or investment conditions so warrant. We do not guarantee the investment performance of the Variable Account, its Sub-Accounts or the Funds. We may use the Variable Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Variable Account. THE FUNDS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all dividends and capital gains distributions from the Funds in shares of the distributing Fund at their net asset value. VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote the shares of the Funds held by the Variable Sub-Accounts to which you have allocated your Contract Value. Under current law, however, you are entitled to give us instructions on how to vote those shares on certain matters. Based on our present view of the law, we will vote the shares of the Funds that we hold directly or indirectly through the Variable Account in accordance with instructions that we receive from Contract owners entitled to give such instructions. As a general rule, before the Payout Start Date, the Contract owner or anyone with a voting interest is the person entitled to give voting instructions. The number of shares that a person has a right to instruct will be determined by dividing the Contract Value allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Fund as of the record date of the meeting. After the Payout Start Date, the person receiving income payments has the voting interest. The payee's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Fund. The votes decrease as income payments are made and as the reserves for the Contract decrease. We will vote shares attributable to Contracts for which we have not received instructions, as well as shares attributable to us, in the same proportion as we vote shares for which we have received instructions, unless we determine that we may vote such shares in our own discretion. We will apply voting instructions to abstain on any item to be voted on a pro-rata basis to reduce the votes eligible to be cast. We reserve the right to vote Fund shares as we see fit without regard to voting instructions to the extent permitted by law. If we disregard voting instructions, we will include a summary of that action and our reasons for that action in the next semi-annual financial report we send to you. CHANGES IN FUNDS. If the shares of any of the Funds are no longer available for investment by the Variable Account or if, in our judgment, further investment in such shares is no longer desirable in view of the purposes of the Contract, we may eliminate that Fund and substitute shares of another eligible investment fund. Any substitution of securities will comply with the requirements of the 1940 Act. We also may add new Variable Sub-Accounts that invest in underlying Funds. We will notify you in advance of any changes. 25 PROSPECTUS CONFLICTS OF INTEREST. Certain of the Funds sell their shares to Variable Accounts underlying both variable life insurance and variable annuity contracts. It is conceivable that in the future it may be unfavorable for variable life insurance Variable Accounts and variable annuity Variable Accounts to invest in the same Fund. The boards of trustees of these Funds monitor for possible conflicts among Variable Accounts buying shares of the Funds. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a Variable Account to comply with such laws could cause a conflict. To eliminate a conflict, a Fund's board of trustees may require a Variable Account to withdraw its participation in a Fund. A Fund's net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a Variable Account withdrawing because of a conflict. THE CONTRACT DISTRIBUTION. ALFS, Inc.* ("ALFS"), located at 3100 Sanders Road, Northbrook, IL 60062-7154, serves as principal underwriter of the Contracts. ALFS is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a registered broker dealer under the Securities and Exchange Act of 1934, as amended ("EXCHANGE ACT"), and is a member of the NASD. We will pay commissions to broker-dealers who sell the Contracts. Commissions paid may vary, but we estimate that the total commissions paid on all Contract sales will not exceed 8 1/2% of any purchase payments. Sometimes, we also pay the broker-dealer a persistency bonus in addition to the standard commissions. A persistency bonus is not expected to exceed 1.2%, on an annual basis, of the purchase payments considered in connection with the bonus. These commissions are intended to cover distribution expenses. Contracts may be sold by representatives or employees of banks which may be acting as broker-dealers without separate registration under the Exchange Act, pursuant to legal and regulatory exceptions. Allstate New York does not pay ALFS a commission for distribution of the Contracts. The underwriting agreement with ALFS provides that we will reimburse ALFS for any liability to Contract owners arising out of services rendered or Contracts issued. ADMINISTRATION. We have primary responsibility for all administration of the Contracts and the Variable Account. We provide the following administrative services, among others: .. issuance of the Contracts; .. maintenance of Contract owner records; .. Contract owner services; .. calculation of unit values; .. maintenance of the Variable Account; and .. preparation of Contract owner reports. We will send you Contract statements and transaction confirmations at least annually. The annual statement details values and specific Contract data for each particular Contract. You should notify us promptly in writing of any address change. You should read your statements and confirmations carefully and verify their accuracy. You should contact us promptly if you have a question about a periodic statement. We will investigate all complaints and make any necessary adjustments retroactively, but you must notify us of a potential error within a reasonable time after the date of the questioned statement. If you wait too long, we will make the adjustment as of the date that we receive notice of the potential error. We also will provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws. NON-QUALIFIED ANNUITIES HELD WITHIN A QUALIFIED PLAN If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waivers of withdrawal charges, death benefits, Payout Start Dates, income payments and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator fr more information. Allstate Life Insurance Company of New York no longer issues deferred annuities to employer sponsored qualified retirement plans. LEGAL MATTERS All matters of New York law pertaining to the Contracts, including the validity of the Contracts and Allstate New York's right to issue such Contracts under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of Allstate New York. 26 PROSPECTUS TAXES THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. ALLSTATE NEW YORK 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 your individual circumstances. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK Allstate New York is taxed as a life insurance company under Part I of Subchapter L of the Code. Since the Variable Account is not an entity separate from Allstate New York, and its operations form a part of Allstate New York, it will not be taxed separately. Investment income and realized capital gains of the Variable Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, Allstate New York believes that the Variable Account investment income and capital gains will not be taxed to the extent that such income and gains are applied to increase the reserves under the Contract. Accordingly, Allstate New York does not anticipate that it will incur any federal income tax liability attributable to the Variable Account, and therefore Allstate New York does not intend to make provisions for any such taxes. If Allstate New York is taxed on investment income or capital gains of the Variable Account, then Allstate New York may impose a charge against the Variable Account in order to make provision for such taxes. TAXATION OF VARIABLE ANNUITIES IN GENERAL TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value until a distribution occurs. This rule applies only where: .. the Contract Owner is a natural person, .. the investments of the Variable Account are "adequately diversified" according to Treasury Department regulations, and .. Allstate New York is considered the owner of the Variable Account assets for federal income tax purposes. NON-NATURAL OWNERS. Non-natural owners are also referred to as Non Living Owners in this prospectus. As a general rule, annuity contracts owned by non-natural persons such as corporations, trusts, or other entities are not treated as annuity contracts for federal income tax purposes. The income on such contracts does not enjoy tax deferral and is taxed as ordinary income received or accrued by the non-natural owner during the taxable year. EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the general rule that annuity contracts held by a non-natural owner are not treated as annuity contracts for federal income tax purposes. Contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the contract as agent for a natural person. However, this special exception will not apply in the case of an employer who is the nominal owner of an annuity contract under a non-Qualified deferred compensation arrangement for its employees. Other exceptions to the non-natural owner rule are: (1) contracts acquired by an estate of a decedent by reason of the death of the decedent; (2) certain qualified contracts; (3) contracts purchased by employers upon the termination of certain qualified plans; (4) certain contracts used in connection with structured settlement agreements; and (5) immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. GRANTOR TRUST OWNED ANNUITY. Contracts owned by a grantor trust are considered owned by a non-natural owner. Grantor trust owned contracts receive tax deferral as described in the Exceptions to the Non-Natural Owner Rule section. In accordance with the Code, upon the death of the annuitant, the death benefit must be paid. According to your Contract, the Death Benefit is paid to the surviving Contract Owner. Since the trust will be the surviving Contract Owner in all cases, the Death Benefit will be payable to the trust notwithstanding any beneficiary designation on the annuity contract. A trust, including a grantor trust, has two options for receiving any death benefits: 1) a lump sum payment; or 2) payment deferred up to five years from date of death. DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for federal income tax purposes, the investments in the Variable Account must be "adequately diversified" consistent with standards under Treasury Department regulations. If the investments in the Variable Account are not adequately diversified, the Contract will not be treated as an annuity contract for federal income tax purposes. As a result, the income on the Contract will be taxed as ordinary income received or accrued by the Contract owner during the taxable year. Although Allstate New York does not have control over the Portfolios or their investments, we expect the Portfolios to meet the diversification requirements. OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered the owner of separate account assets if he possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. At the time the diversification regulations were issued, the Treasury Department 27 PROSPECTUS announced that the regulations do not provide guidance concerning circumstances in which investor control of the separate account investments may cause a Contract owner to be treated as the owner of the separate account. The Treasury Department also stated that future guidance would be issued regarding the extent that owners could direct sub-account investments without being treated as owners of the underlying assets of the separate account. Your rights under the Contract are different than those described by the IRS in private and published rulings in which it found that Contract owners were not owners of separate account assets. For example, if your contract offers more than twenty (20) investment alternatives you have the choice to allocate premiums and contract values among a broader selection of investment alternatives than described in such rulings. You may be able to transfer among investment alternatives more frequently than in such rulings. These differences could result in you being treated as the owner of the Variable Account. If this occurs, income and gain from the Variable Account assets would be includible in your gross income. Allstate New York does not know what standards will be set forth in any regulations or rulings which the Treasury Department may issue. It is possible that future standards announced by the Treasury Department could adversely affect the tax treatment of your Contract. We reserve the right to modify the Contract as necessary to attempt to prevent you from being considered the federal tax owner of the assets of the Variable Account. However, we make no guarantee that such modification to the Contract will be successful. TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under a Non-Qualified Contract, amounts received are taxable to the extent the Contract Value, without regard to surrender charges, exceeds the investment in the Contract. The investment in the Contract is the gross premium paid for the contract minus any amounts previously received from the Contract if such amounts were properly excluded from your gross income. If you make a full withdrawal under a Non-Qualified Contract, the amount received will be taxable only to the extent it exceeds the investment in the Contract. TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity payments received from a Non-Qualified Contract provides for the return of your investment in the Contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. For 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. If you elect variable annuity payments, the amount excluded from taxable income is determined by dividing the investment in the Contract by the total number of expected payments. The annuity payments will be fully taxable after the total amount of the investment in the Contract is excluded using these ratios. If any variable payment is less than the excludable amount you should contact a competent tax advisor to determine how to report any unrecovered investment. The federal tax treatment of annuity payments is unclear in some respects. As a result, if the IRS should provide further guidance, it is possible that the amount we calculate and report to the IRS as taxable could be different. If you die, and annuity payments cease before the total amount of the investment in the Contract is recovered, the unrecovered amount will be allowed as a deduction for your last taxable year. WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding the taxation of any additional withdrawal received after the Payout Start Date. It is possible that a greater or lesser portion of such a payment could be taxable than the amount we determine. DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for federal income tax purposes, the Contract must provide: .. if any Contract Owner dies on or after the Payout 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 Contract Owner's death; .. if any Contract Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within 5 years after the date of the Contract Owner's death. These requirements are satisfied if any portion of the Contract Owner's interest that 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 1 year of the Contract Owner's death. If the Contract Owner's designated Beneficiary is the surviving spouse of the Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner; .. if the Contract Owner is a non-natural person, then the Annuitant will be treated as the Contract Owner for purposes of applying the distribution at death rules. In addition, a change in the Annuitant on a Contract owned by a non-natural person will be treated as the death of the Contract Owner. TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income as follows: .. if distributed in a lump sum, the amounts are taxed in the same manner as a total withdrawal, or .. if distributed under an Income Plan, the amounts are taxed in the same manner as annuity payments. PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable amount of any 28 PROSPECTUS premature distribution from a non-Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or becoming totally disabled, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made under an immediate annuity, or .. attributable to investment in the Contract before August 14, 1982. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts using substantially equal periodic payments or immediate annuity payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the Contract Owner's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is a tax-free exchange of a non-qualified life insurance contract, endowment contract or annuity contract into a non-Qualified annuity contract. The contract owner(s) must be the same on the old and new contract. Basis from the old contract carries over to the new contract so long as we receive that information from the relinquishing company. If basis information is never received, we will assume that all exchanged funds represent earnings and will allocate no cost basis to them. PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of annuity contracts. Under this ruling, if you take a withdrawal from a receiving or relinquishing annuity contract within 24 months of the partial exchange, then special aggregation rules apply for purposes of determining the taxable amount of a distribution. The IRS has issued limited guidance on how to aggregate and report these distributions. The IRS is expected to provide further guidance; as a result, it is possible that the amount we calculate and report to the IRS as taxable could be different. Your Contract may not permit partial exchanges. TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without full and adequate consideration to a person other than your spouse (or to a former spouse incident to a divorce), you will be taxed on the difference between the Contract Value and the investment in the Contract at the time of transfer. Any assignment or pledge (or agreement to assign or pledge) of the Contract Value is taxed as a withdrawal of such amount or portion and may also incur the 10% penalty tax. AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified deferred annuity contracts issued by Allstate New York (or its affiliates) to the same Contract Owner during any calendar year be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. INCOME TAX WITHHOLDING Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% of the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax using the wage withholding rates for all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all 29 PROSPECTUS countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. TAX QUALIFIED CONTRACTS The income on tax sheltered annuity (TSA) and IRA investments is tax deferred, and the income from annuities held by such plans does not receive any additional tax deferral. You should review the annuity features, including all benefits and expenses, prior to purchasing an annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as or in connection with: .. Individual Retirement Annuities (IRAs) under Code Section 408(b); .. Roth IRAs under Code Section 408A; .. Simplified Employee Pension (SEP IRA) under Code Section 408(k); .. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Code Section 408(p); .. Tax Sheltered Annuities under Code Section 403(b); .. Corporate and Self Employed Pension and Profit Sharing Plans under Code Section 401; and .. State and Local Government and Tax-Exempt Organization Deferred Compensation Plans under Code Section 457. Allstate New York reserves the right to limit the availability of the Contract for use with any of the retirement plans listed above or to modify the Contract to conform with tax requirements. If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waiver of charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. Allstate New York no longer issues deferred annuities to employer sponsored qualified retirement plans. The tax rules applicable to participants with tax qualified annuities vary according to the type of contract and the terms and conditions of the endorsement. Adverse tax consequences may result from certain transactions such as excess contributions, premature distributions, and, distributions that do not conform to specified commencement and minimum distribution rules. Allstate New York can issue an individual retirement annuity on a rollover or transfer of proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under which the decedent's surviving spouse is the beneficiary. Allstate New York does not offer an individual retirement annuity that can accept a transfer of funds for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer sponsored qualified retirement plan. Please refer to your Endorsement for IRAs or 403(b) plans, if applicable, for additional information on your death settlement options. In the case of certain qualified plans, the terms of the Qualified Plan Endorsement and the plans may govern the right to benefits, regardless of the terms of the Contract. TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If you make a partial withdrawal under a Tax Qualified Contract other than a Roth IRA, the portion of the payment that bears the same ratio to the total payment that the investment in the Contract (i.e., nondeductible IRA contributions) bears to the Contract Value, is excluded from your income. We do not keep track of nondeductible contributions, and generally all tax reporting of distributions from Tax Qualified Contracts other than Roth IRAs will indicate that the distribution is fully taxable. "Qualified distributions" from Roth IRAs are not included in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to any Roth IRA and which are: .. made on or after the date the Contract Owner attains age 59 1/2, .. made to a beneficiary after the Contract Owner's death, .. attributable to the Contract Owner being disabled, or .. made for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" from Roth IRAs are treated as made from contributions first and are included in gross income only to the extent that distributions exceed contributions. REQUIRED MINIMUM DISTRIBUTIONS. Generally, Tax Qualified Contracts (excluding Roth IRAs) require minimum distributions upon reaching age 70 1/2. Failure to withdraw the required minimum distribution will result in a 50% tax penalty on the shortfall not withdrawn from the Contract. Not all income plans offered under the Contract satisfy the requirements for minimum distributions. Because these distributions are required under the Code and the method of calculation is complex, please see a competent tax advisor. THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA) may not invest in life insurance contracts. However, an IRA may provide a death benefit that equals the greater of the purchase payments or the Contract Value. The Contract offers a death benefit that in certain circumstances may exceed the greater of the purchase payments or the Contract Value. We believe that the Death Benefits offered by your Contract do not constitute life insurance under these regulations. 30 PROSPECTUS It is also possible that certain death benefits that offer enhanced earnings could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in current taxable income to a Contract Owner. In addition, there are limitations on the amount of incidental death benefits that may be provided under qualified plans, such as in connection with a TSA or employer sponsored qualified retirement plan. Allstate New York reserves the right to limit the availability of the Contract for use with any of the qualified plans listed above. PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM TAX QUALIFIED CONTRACTS. A 10% penalty tax applies to the taxable amount of any premature distribution from a Tax Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or total disability, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made after separation from service after age 55 (does not apply to IRAs), .. made pursuant to an IRS levy, .. made for certain medical expenses, .. made to pay for health insurance premiums while unemployed (applies only for IRAs), .. made for qualified higher education expenses (applies only for IRAs), and .. made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs). During the first 2 years of the individual's participation in a SIMPLE IRA, distributions that are otherwise subject to the premature distribution penalty, will be subject to a 25% penalty tax. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect to Tax Qualified Contracts using substantially equal periodic payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions that are not considered "eligible rollover distributions." The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% from the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless you elect to make a "direct rollover" of such amounts to an IRA or eligible retirement plan. Eligible rollover distributions generally include all distributions from Tax Qualified Contracts, including TSAs but excluding IRAs, with the exception of: .. required minimum distributions, or, .. a series of substantially equal periodic payments made over a period of at least 10 years, or, .. a series of substantially equal periodic payments made over the life (joint lives) of the participant (and beneficiary), or, .. hardship distributions. For all annuitized distributions that are not subject to the 20% withholding requirement, Allstate New York is required to withhold federal income tax using the wage withholding rates. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien or to certain other 'foreign persons'. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer 31 PROSPECTUS identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408(b) permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity (IRA). 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 retirement plans may be "rolled over" on a tax-deferred basis into an Individual Retirement Annuity. ROTH INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408A 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. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL IRAS). Code Section 408 permits a custodian or trustee of an Individual Retirement Account to purchase an annuity as an investment of the Individual Retirement Account. If an annuity is purchased inside of an Individual Retirement Account, then the Annuitant must be the same person as the beneficial owner of the Individual Retirement Account. Generally, the death benefit of an annuity held in an Individual Retirement Account must be paid upon the death of the Annuitant. However, in most states, the Contract permits the custodian or trustee of the Individual Retirement Account to continue the Contract in the accumulation phase, with the Annuitant's surviving spouse as the new Annuitant, if the following conditions are met: 1) The custodian or trustee of the Individual Retirement Account is the owner of the annuity and has the right to the death proceeds otherwise payable under the Contract; 2) The deceased Annuitant was the beneficial owner of the Individual Retirement Account; 3) We receive a complete request for settlement for the death of the Annuitant; and 4) The custodian or trustee of the Individual Retirement Account provides us with a signed certification of the following: (a) The Annuitant's surviving spouse is the sole beneficiary of the Individual Retirement Account; (b) The Annuitant's surviving spouse has elected to continue the Individual Retirement Account as his or her own Individual Retirement Account; and (c) The custodian or trustee of the Individual Retirement Account has continued the Individual Retirement Account pursuant to the surviving spouse's election. SIMPLIFIED EMPLOYEE PENSION IRA. Code Section 408(k) allows eligible employers to establish simplified employee pension plans for their employees using individual retirement annuities. These employers may, within specified limits, make deductible contributions on behalf of the employees to the individual retirement annuities. Employers intending to use the Contract in connection with such plans should seek competent tax advice. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Code Section 408(p) allows eligible employers with 100 or fewer employees to establish SIMPLE retirement plans for their employees using individual retirement annuities. In general, a SIMPLE IRA consists of a salary deferral program for eligible employees and matching or nonelective contributions made by employers. Employers intending to purchase the Contract as a SIMPLE IRA should seek competent tax and legal advice. TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS (TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND YOUR COMPETENT TAX ADVISOR. TAX SHELTERED ANNUITIES. Code Section 403(b) provides tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. Under Section 403(b), any contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee: .. attains age 59 1/2, .. severs employment, .. dies, .. becomes disabled, or .. incurs a hardship (earnings on salary reduction contributions may not be distributed on account of hardship). These limitations do not apply to withdrawals where Allstate New York is directed to transfer some or all of the Contract Value to another 403(b) plan. Generally, we do 32 PROSPECTUS not accept funds in 403(b) contracts that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits corporate employers to establish various types of tax favored retirement plans for employees. Self-employed individuals may establish tax favored retirement plans for themselves and their employees (commonly referred to as "H.R.10" or "Keogh"). Such retirement plans may permit the purchase of annuity contracts. Allstate New York no longer issues annuity contracts to employer sponsored qualified retirement plans. There are two owner types for contracts intended to qualify under Section 401(a): a qualified plan fiduciary or an annuitant owner. .. A qualified plan fiduciary exists when a qualified plan trust that is intended to qualify under Section 401(a) of the Code is the owner. The qualified plan trust must have its own tax identification number and a named trustee acting as a fiduciary on behalf of the plan. The annuitant should be the person for whose benefit the contract was purchased. .. An annuitant owner exists when the tax identification number of the owner and annuitant are the same, or the annuity contract is not owner by a qualified plan trust. The annuitant should be the person for whose benefit the contract was purchased. If a qualified plan fiduciary is the owner of the contract, the qualified plan must be the beneficiary so that death benefits from the annuity are distributed in accordance with the terms of the qualified plan. Annuitant owned contracts require that the beneficiary be the annuitant's spouse (if applicable), which is consistent with the required IRS language for qualified plans under Section 401(a). A completed Annuitant Owned Qualified Plan Designation of Beneficiary form is required in order to change the beneficiary of an annuitant owned Qualified Plan contract. 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. In eligible governmental plans, all assets and income must be held in a trust/ custodial account/annuity contract for the exclusive benefit of the participants and their beneficiaries. To the extent the Contracts are used in connection with a non-governmental 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. Under eligible 457 plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan. Allstate New York no longer issues annuity contracts to employer sponsored qualified retirement plans. Contracts that have been previously sold to State and Local government and Tax-Exempt organization Deferred Compensation Plans will be administered consistent with the rules for contracts intended to qualify under Section 401(a). 33 PROSPECTUS ANNUAL REPORTS AND OTHER DOCUMENTS Allstate New York's annual report on Form 10-K for the year ended December 31, 2004 is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. Accordingly, only the statement that is changed or replaced will legally be a part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR" system using the identifying number CIK No. 0000839759. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at Customer Service, 2940 S. 84TH STREET, LINCOLN, NE 68506-4142 (telephone: 1-800-692-4682). 34 PROSPECTUS APPENDIX A ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED* WITHOUT THE ENHANCED DEATH BENEFIT OPTION
For the period beginning January 1 and ending December 31, 2000 2001 2002 2003 2004 - ----------------------------------------------------------------------------------------------------------------- AIM V.I. AGGRESSIVE GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 13.988 $ 14.15 $ 8.049 $ 6.157 $ 7.714 Accumulation Unit Value, End of Period $ 14.15 $ 8.049 $ 6.157 $ 7.714 $ 8.530 Number of Units Outstanding, End of Period 53,890 238,485 200,136 197,069 198,533 AIM V.I. BALANCED - SERIES I SUB-ACCOUNT ** Accumulation Unit Value, Beginning of Period $ 13.162 $ 12.43 $ 8.541 $ 7.003 $ 8.060 Accumulation Unit Value, End of Period $ 12.43 $ 8.541 $ 7.003 $ 8.060 $ 8.571 Number of Units Outstanding, End of Period 24,499 329,610 320,917 290,941 274,548 AIM V.I. BASIC VALUE - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- $ 10.000 $ 11.210 $ 8.632 $ 11.408 Accumulation Unit Value, End of Period -- $ 11.210 $ 8.632 $ 11.408 $ 12.532 Number of Units Outstanding, End of Period -- 38,643 120,510 141,541 146,383 AIM V.I. BLUE CHIP - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 8.82 $ 6.784 $ 4.955 $ 6.133 Accumulation Unit Value, End of Period $ 8.82 $ 6.784 $ 4.955 $ 6.133 $ 6.349 Number of Units Outstanding, End of Period 11,309 507,018 549,430 546,965 519,012 AIM V.I. CAPITAL APPRECIATION - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 21.350 $ 18.75 $ 7.233 $ 5.411 $ 6.932 Accumulation Unit Value, End of Period $ 18.75 $ 7.233 $ 5.411 $ 6.932 $ 7.311 Number of Units Outstanding, End of Period 456,761 284,137 242,299 241,264 226,743 AIM V.I. CAPITAL DEVELOPMENT - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 11.655 $ 12.55 $ 10.536 $ 8.195 $ 10.971 Accumulation Unit Value, End of Period $ 12.55 $ 10.536 $ 8.195 $ 10.971 $ 12.533 Number of Units Outstanding, End of Period 18,297 67,296 63,097 59,597 39,783 AIM V.I. CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 24.138 $ 20.33 $ 6.944 $ 5.798 $ 7.134 Accumulation Unit Value, End of Period $ 20.33 $ 6.944 $ 5.798 $ 7.134 $ 7.689 Number of Units Outstanding, End of Period 674,689 426,488 397,515 369,211 378,980 AIM V.I. DENT DEMOGRAPHIC TRENDS - SERIES I SUB-ACCOUNT *** Accumulation Unit Value, Beginning of Period $ 10.000 $ 7.89 $ 5.332 $ 3.575 $ 4.861 Accumulation Unit Value, End of Period $ 7.89 $ 5.332 $ 3.575 $ 4.861 $ 5.205 Number of Units Outstanding, End of Period 32,307 191,409 143,535 156,869 137,352 AIM V.I. DIVERSIFIED INCOME - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 12.002 $ 11.55 $ 10.095 $ 10.214 $ 11.036 Accumulation Unit Value, End of Period $ 11.55 $ 10.095 $ 10.214 $ 11.036 $ 11.464 Number of Units Outstanding, End of Period 204,561 76,653 85,995 84,651 83,355 AIM V.I. GOVERNMENT SECURITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 11.189 $ 12.15 $ 11.357 $ 12.311 $ 12.306 Accumulation Unit Value, End of Period $ 12.15 $ 11.357 $ 12.311 $ 12.306 $ 12.484 Number of Units Outstanding, End of Period 99,531 187,943 248,521 167,459 152,610 AIM V.I. GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 25.263 $ 19.80 $ 5.446 $ 3.718 $ 4.826 Accumulation Unit Value, End of Period $ 19.80 $ 5.446 $ 3.718 $ 4.826 $ 5.166 Number of Units Outstanding, End of Period 403,785 302,438 270,471 271,832 265,169 AIM V.I. HIGH YIELD - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 9.957 $ 7.95 $ 7.547 $ 7.028 $ 8.900 Accumulation Unit Value, End of Period $ 7.95 $ 7.547 $ 7.028 $ 8.900 $ 9.793 Number of Units Outstanding, End of Period 834 35,116 36,928 103,920 49,255
35 PROSPECTUS AIM V.I. INTERNATIONAL GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 21.914 $ 15.90 $ 6.136 $ 5.117 $ 6.532 Accumulation Unit Value, End of Period $ 15.90 $ 6.136 $ 5.117 $ 6.532 $ 8.012 Number of Units Outstanding, End of Period 245,480 141,910 129,999 152,651 206,187 AIM V.I. MID CAP CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- $ 10.000 $ 11.367 $ 9.994 $ 12.585 Accumulation Unit Value, End of Period -- $ 11.367 $ 9.994 $ 12.585 $ 14.167 Number of Units Outstanding, End of Period -- 3,984 21,093 31,766 29,472 AIM V.I. MONEY MARKET - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 11.479 $ 11.98 $ 10.751 $ 10.759 $ 10.703 Accumulation Unit Value, End of Period $ 11.98 $ 10.751 $ 10.759 $ 10.703 $ 10.659 Number of Units Outstanding, End of Period 95,879 186,834 148,120 104,438 97,730 AIM V.I. PREMIER EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 22.589 $ 19.00 $ 7.602 $ 5.243 $ 6.487 Accumulation Unit Value, End of Period $ 19.00 $ 7.602 $ 5.243 $ 6.487 $ 6.786 Number of Units Outstanding, End of Period 1,000,356 623,432 589,373 560,684 523,477 AIM V.I. TECHNOLOGY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- -- $ 11.117 Number of Units Outstanding, End of Period -- -- -- -- 36,911 AIM V.I. UTILITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- -- $ 12.259 Number of Units Outstanding, End of Period -- -- -- -- 53,862
* The Contracts were first offered on January 17, 2000. All Variable Sub-Accounts were first offered under the Contracts on January 17, 2000, except the AIM V.I. Basic Value Fund - Series I and AIM V.I. Mid Cap Core Equity Fund - Series I, which commenced operations on October 1, 2001, and the AIM V.I. Technology Fund - Series I and the AIM V.I. Utilities Fund - Series I, which were first offered on October 15, 2004. The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.00% and an administrative charge of 0.10%. ** Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-Account that invests in that Fund will be made. *** Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-account that invests in that Portfolio will be made. 36 PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED* WITH THE ENHANCED DEATH BENEFIT OPTION
For the period beginning January 1 and ending December 31, 2000 2001 2002 2003 2004 - -------------------------------------------------------------------------------------------------------------- AIM V.I. AGGRESSIVE GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 10.985 $ 8.016 $ 6.119 $ 7.651 Accumulation Unit Value, End of Period $ 10.985 $ 8.016 $ 6.119 $ 7.651 $ 8.444 Number of Units Outstanding, End of Period 102,502 198,010 219,455 202,257 178,359 AIM V.I. BALANCED - SERIES I SUB-ACCOUNT ** Accumulation Unit Value, Beginning of Period $ 10.000 $ 9.729 $ 8.506 $ 6.960 $ 7.995 Accumulation Unit Value, End of Period $ 9.729 $ 8.506 $ 6.960 $ 7.995 $ 8.485 Number of Units Outstanding, End of Period 75,164 345,629 371,207 354,606 328,989 AIM V.I. BASIC VALUE - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- $ 10.000 $ 11.204 $ 8.610 $ 11.357 Accumulation Unit Value, End of Period -- $ 11.204 $ 8.610 $ 11.357 $ 12.451 Number of Units Outstanding, End of Period -- 17,531 51,089 59,320 55,305 AIM V.I. BLUE CHIP - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 8.837 $ 6.757 $ 4.924 $ 6.083 Accumulation Unit Value, End of Period $ 8.837 $ 6.757 $ 4.924 $ 6.083 $ 6.285 Number of Units Outstanding, End of Period 177,304 474,975 497,574 476,681 449,033 AIM V.I. CAPITAL APPRECIATION - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 9.513 $ 7.203 $ 5.378 $ 6.876 Accumulation Unit Value, End of Period $ 9.513 $ 7.203 $ 5.378 $ 6.876 $ 7.237 Number of Units Outstanding, End of Period 131,409 235,836 252,981 236,372 215,174 AIM V.I. CAPITAL DEVELOPMENT - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 11.566 $ 10.493 $ 8.145 $ 10.883 Accumulation Unit Value, End of Period $ 11.566 $ 10.493 $ 8.145 $ 10.883 $ 12.407 Number of Units Outstanding, End of Period 7,338 19,877 20,402 17,651 16,020 AIM V.I. CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 9.080 $ 6.915 $ 5.762 $ 7.077 Accumulation Unit Value, End of Period $ 9.080 $ 6.915 $ 5.762 $ 7.077 $ 7.612 Number of Units Outstanding, End of Period 136,401 356,510 352,466 321,497 297,145 AIM V.I. DENT DEMOGRAPHIC TRENDS - SERIES I SUB-ACCOUNT *** Accumulation Unit Value, Beginning of Period $ 10.000 $ 7.902 $ 5.310 $ 3.554 $ 4.822 Accumulation Unit Value, End of Period $ 7.902 $ 5.310 $ 3.554 $ 4.822 $ 5.153 Number of Units Outstanding, End of Period 78,274 164,204 168,918 142,509 127,214 AIM V.I. DIVERSIFIED INCOME - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 9.833 $ 10.054 $ 10.152 $ 10.947 Accumulation Unit Value, End of Period $ 9.833 $ 10.054 $ 10.152 $ 10.947 $ 11.349 Number of Units Outstanding, End of Period 6,486 40,016 55,291 54,298 46,642 AIM V.I. GOVERNMENT SECURITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 10.770 $ 11.311 $ 12.236 $ 12.207 Accumulation Unit Value, End of Period $ 10.770 $ 11.311 $ 12.236 $ 12.207 $ 12.358 Number of Units Outstanding, End of Period 15,884 96,743 129,085 105,262 88,690 AIM V.I. GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 8.312 $ 5.424 $ 3.696 $ 4.788 Accumulation Unit Value, End of Period $ 8.312 $ 5.424 $ 3.696 $ 4.788 $ 5.114 Number of Units Outstanding, End of Period 122,705 241,384 245,046 206,466 194,304 AIM V.I. HIGH YIELD - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 8.015 $ 7.516 $ 6.985 $ 8.829 Accumulation Unit Value, End of Period $ 8.015 $ 7.516 $ 6.985 $ 8.829 $ 9.695 Number of Units Outstanding, End of Period 15,188 36,553 32,747 35,695 36,742
37 PROSPECTUS AIM V.I. INTERNATIONAL GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 8.096 $ 6.110 $ 5.086 $ 6.479 Accumulation Unit Value, End of Period $ 8.096 $ 6.110 $ 5.086 $ 6.479 $ 7.931 Number of Units Outstanding, End of Period 108,706 96,654 102,940 94,381 87,589 AIM V.I. MID CAP CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- $ 10.000 $ 11.361 $ 9.969 $ 12.528 Accumulation Unit Value, End of Period -- $ 11.361 $ 9.969 $ 12.528 $ 14.075 Number of Units Outstanding, End of Period -- 3,675 19,816 26,343 26,487 AIM V.I. MONEY MARKET - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 10.468 $ 10.707 $ 10.694 $ 10.617 Accumulation Unit Value, End of Period $ 10.468 $ 10.707 $ 10.694 $ 10.617 $ 10.552 Number of Units Outstanding, End of Period 15,332 121,447 140,442 81,551 72,126 AIM V.I. PREMIER EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.000 $ 8.772 $ 7.570 $ 5.211 $ 6.434 Accumulation Unit Value, End of Period $ 8.772 $ 7.570 $ 5.211 $ 6.434 $ 6.718 Number of Units Outstanding, End of Period 212,887 470,018 497,394 460,643 410,137 AIM V.I. TECHNOLOGY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- -- $ 11.102 Number of Units Outstanding, End of Period -- -- -- -- 42,692 AIM V.I. UTILITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- -- $ 10.000 Accumulation Unit Value, End of Period -- -- -- -- $ 12.242 Number of Units Outstanding, End of Period -- -- -- -- 32,969
* The Contracts were first offered on January 17, 2000. All Variable Sub-Accounts were first offered under the Contracts on January 17, 2000, except the AIM V.I. Basic Value Fund - Series I and AIM V.I. Mid Cap Core Equity Fund - Series I, which commenced operations on October 1, 2001, and the AIM V.I. Technology Fund - Series I and the AIM V.I. Utilities Fund - Series I, which were first offered on October 15, 2004. The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.20% and an administrative charge of 0.10%. ** Effective July 1, 2005, the AIM V.I. Balanced Fund-Series I will change its name to AIM V.I. Basic Balanced Fund-Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-Account that invests in that Fund will be made. *** Effective July 1, 2005, the AIM V.I. Dent Demographic Trends Fund - Series I will change its name to AIM V.I. Demographic Trends Fund - Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-Account that invests in that Fund will be made. 38 PROSPECTUS APPENDIX B MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the applicable Guarantee Period for the week preceding the establishment of the Guarantee Period. N = the number of whole and partial years from the date we receive the withdrawal, transfer, or death benefit request, or from the Payout Start Date, to the end of the Guarantee Period. J = the Treasury Rate for a maturity equal to the Guarantee Period for the week preceding the receipt of the withdrawal, transfer, death benefit, or income payment request. If a note for a maturity of length N is not available, a weighted average will be used. If N is one year or less, J will be the 1-year Treasury Rate. "Treasury Rate" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment factor is determined from the following formula: ..9 X (I - J) X N To determine the Market Value Adjustment, we will multiply the Market Value Adjustment factor by the amount transferred (in excess of the Free Withdrawal Amount) paid as a death benefit, or applied to an Income Plan, from a Guarantee Period at any time other than during the 30 day period after such Guarantee Period expires. 39 PROSPECTUS EXAMPLES OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 Guarantee Period: 5 years Treasury Rate (at the time the Guarantee Period was established): 4.50% Assumed Net Annual Earnings Rate in Money Market Variable Sub-Account: 4.50% Full Surrender: End of Contract Year 3 NOTE: These examples assume that premium taxes are not applicable. Step 1. Calculate Contract Value at $10,000.00 X (1.045)/3/ = $11,411.66 End of Contract Year 3: Step 2. Calculate the Free Withdrawal 15% X $10,000.00 X (1.045)/2/ = $1,638.04 Amount: Step 3. Calculate the Market Value I = 4.50% Adjustment: J = 4.20% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .042) X (730/365) = .0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment = .0054 X ($11,411.66 - $1,638.04) = $52.78 Step 4. Calculate the Withdrawal .05 X ($10,000.00 - $1,638.04 + Charge: $52.78) = $420.74 Step 5. Calculate the amount received $11,411.66 - $420.74 + $52.78 = by a Contract owner as a result of $11,043.70 full withdrawal at the end of Contract Year 3: EXAMPLE 1 (ASSUME DECLINING INTEREST RATES) EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1. Calculate Contract Value at $10,000.00 X (1.045)/3/ = $11,411.66 End of Contract Year 3: Step 2. Calculate the Preferred .15 X $10,000.00 X (1.045)/2/ = $1,638.04 Withdrawal Amount: Step 3. Calculate the Market Value I = 4.5% Adjustment: J = 4.8% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .048) X (730/365) = - .0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: = -.0054 X ($11,411.66 - $1,638.04) = -$52.78 Step 4. Calculate the Withdrawal .05 X ($10,000.00 - $1,638.04 - Charge: $52.78) = $415.46 Step 5. Calculate the amount received $11,411.66 - $415.46 - $52.78 = by a Contract owner as a result of $10,943.42 full withdrawal at the end of Contract Year 3: 40 PROSPECTUS STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS THE CONTRACT Purchase of Contracts CALCULATION OF ACCUMULATION UNIT VALUES NET INVESTMENT FACTOR CALCULATION OF VARIABLE INCOME PAYMENTS CALCULATION OF ANNUITY UNIT VALUES GENERAL MATTERS Incontestability Settlements Safekeeping of the Variable Account's Assets Premium Taxes Tax Reserves EXPERTS FINANCIAL STATEMENTS THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS. 41 PROSPECTUS ALLSTATE PROVIDER VARIABLE ANNUITY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK 300 N. MILWAUKEE AVE. VERNON HILLS, IL 60061 TELEPHONE NUMBER: 1-800-692-4682 PROSPECTUS DATED MAY 1, 2002 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK ("ALLSTATE NEW YORK") is offering the Allstate Provider Variable Annuity, a group flexible premium deferred variable annuity contract ("CONTRACT"). This prospectus contains information about the Contract that you should know before investing. Please keep it for future reference. The Contract currently offers 42 investment alternatives ("INVESTMENT ALTERNATIVES"). The investment alternatives including 3 fixed account options ("FIXED ACCOUNT") and 39 variable sub-accounts ("VARIABLE SUB-ACCOUNTS") of the Allstate Life of New York Separate Account A ("VARIABLE ACCOUNT"). Each Variable Sub-Account invests exclusively in shares of one of the following mutual fund portfolios ("Portfolios"): AIM Variable Insurance Funds Franklin Templeton Variable Insurance The Dreyfus Socially Responsible Growth Products Trust (VIP) Products Trust Fund, Inc. Goldman Sachs Variable Insurance Trust Dreyfus Stock Index Fund (VIT) Dreyfus Variable Investment Fund (VIF) MFS Variable Insurance Trust Fidelity Variable Insurance Products The Universal Institutional Funds, Inc. Fund (VIP) WE (ALLSTATE NEW YORK) have filed a Statement of Additional Information, May 1, 2002, with the Securities and Exchange Commission ("SEC"). It contains more information about the Contract and is incorporated herein by reference, which means it is legally a part of this prospectus. Its table of contents appears on page D-1 of this prospectus. For a free copy, please write or call us at the address or telephone number above, or go to the SEC's Web site (http:// www.sec.gov). You can find other information and documents about us, including documents that are legally part of this prospectus, at the SEC's Web site. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS THAT HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY IMPORTANT EMPLOYEES OF SUCH BANKS. HOWEVER, THE CONTRACTS ARE NOT DEPOSITS OR NOTICES OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT FDIC INSURED. THE CONTRACTS ARE ONLY AVAILABLE IN NEW YORK. 1 PROSPECTUS TABLE OF CONTENTS PAGE OVERVIEW Important Terms 3 The Contract at a Glance 4 How the Contract Works 6 Expense Table 7 Financial Information 13 CONTRACT FEATURES The Contract 13 Purchases 14 Contract Value 15 Investment Alternatives 16 The Variable Sub-Accounts 16 The Fixed Account 19 Transfers 22 Expenses 23 Access To Your Money 25 Income Payments 26 Death Benefits 27 OTHER INFORMATION More Information: 29 ALLSTATE NEW YORK 29 The Variable Account 29 The Portfolios 30 The Contract 29 Tax Qualified Plans 30 Legal Matters 30 Taxes 31 Annual Reports and Other Documents 36 Performance Information 36 Experts 36 APPENDIX A - MARKET VALUE ADJUSTMENT 37 APPENDIX B - WITHDRAWAL ADJUSTMENT EXAMPLES 39 2 PROSPECTUS IMPORTANT TERMS This prospectus uses a number of important terms that you may not be familiar with. The index below identifies the page that describes each term. The first use of each term in this prospectus appears in highlights. PAGE Accumulation Phase 6 Accumulation Unit 15 Accumulation Unit Value 15 ALLSTATE NEW YORK ("We" or "Us") 29 Anniversary Values 28 Annuitant 13 Automatic Additions Program 14 Automatic Portfolio Rebalancing Program 23 Beneficiary 13 Cancellation Period 14 Contract* 29 Contract Anniversary 5 Contract Owner ("You") 13 Contract Value 15 Contract Year 4 Death Benefit Anniversary 27 Dollar Cost Averaging Program 23 Due Proof of Death 28 Fixed Accounts 19 Guarantee Periods 19 Income Plan 26 Investment Alternatives 16 Issue Date 6 Market Value Adjustment 21 Payout Phase 6 Payout Start Date 6 Portfolios 30 Preferred Withdrawal Amount 24 Qualified Contracts 33 Right to Cancel 14 SEC 1 Settlement Value 27 Systematic Withdrawal Program 25 Treasury Rate 21 Valuation Date 14 Variable Account 29 Variable Sub-Account 16 * The Allstate Provider Variable Annuity is a group contract and your ownership is represented by certificates. References to "Contract" in this prospectus include certificates, unless the context requires otherwise. 3 PROSPECTUS THE CONTRACT AT A GLANCE The following is a snapshot of the Contract. Please read the remainder of this prospectus for more information. FLEXIBLE PAYMENTS You can purchase a Contract with as little as $3,000 ($2,000 for a "QUALIFIED CONTRACT," which is a Contract issued with a qualified plan). You can add to your Contract as often and as much as you like, but each payment must be at least $100, $500 for allocations to the Fixed Account. You must maintain a minimum account size of $1,000. RIGHT TO CANCEL You may cancel your Contract within 10 days after receipt (60 days if you are exchanging another contract for the Contract described in this prospectus) ("CANCELLATION PERIOD"). Upon cancellation we will return your purchase payments adjusted to the extent federal or state law permits to reflect the investment experience of any amounts allocated to the Variable Account. EXPENSES You will bear the following expenses: . Total Variable Account annual fees equal to 1.25% of average daily net assets . Annual contract maintenance charge of $30 (with certain exceptions) . Withdrawal charges ranging from 0% to 7% of payment withdrawn (with certain exceptions) . Transfer fee of $10 after 12th transfer in any CONTRACT YEAR (fee currently waived) . State premium tax (New York currently does not impose one). In addition, each Portfolio pays expenses that you will bear indirectly if you invest in a Variable Sub-Account. INVESTMENT The Contract offers 42 investment alternatives including: ALTERNATIVES . 3 Fixed Account Options (which credit interest at rates we guarantee), and . 39 Variable Sub-Accounts investing in portfolios ("Portfolios") offering professional money management by: . A I M Advisors, Inc. . The Dreyfus Corporation . Fidelity Management & Research Company . Franklin Advisers, Inc. . Franklin Mutual Advisers, LLC . Goldman Sachs Asset Management . Goldman Sachs Asset Management International . MFS Investment Management/(R)/ . Miller Anderson & Sherrerd, LLP . Morgan Stanley Asset Management . Oppenheimer Funds, Inc. . Templeton Global Advisors Limited . Templeton Investment Counsel, LLC . Templeton Asset Management LTD. To find out current rates being paid on the Fixed Account, or to find out how the Variable Sub-Accounts have performed, please call us at 1-800-692-4682. 4 PROSPECTUS SPECIAL SERVICES For your convenience, we offer these special services: . AUTOMATIC PORTFOLIO REBALANCING PROGRAM . AUTOMATIC ADDITIONS PROGRAM . DOLLAR COST AVERAGING PROGRAM . SYSTEMATIC WITHDRAWAL PROGRAM INCOME PAYMENTS You can choose fixed income payments, variable income payments, or a combination of the two. You can receive your income payments in one of the following ways: . life income with guaranteed payments . a joint and survivor life income with guaranteed payments . guaranteed payments for a specified period (5 to 30 years) DEATH BENEFITS If you die before the PAYOUT START DATE, we will pay the death benefit described in the Contract. TRANSFERS Before the Payout Start Date, you may transfer your Contract value ("CONTRACT VALUE") among the investment alternatives, with certain restrictions. Transfers to the Fixed Account must be at least $500. We do not currently impose a fee upon transfers. However, we reserve the right to charge $10 per transfer after the 12th transfer in each "CONTRACT YEAR," which we measure from the date we issue your Contract or a Contract anniversary ("CONTRACT ANNIVERSARY"). WITHDRAWALS You may withdraw some or all of your Contract Value at any time during the Accumulation Phase. Full or partial withdrawals also are available under limited circumstances on or after the Payout Start Date. In general, you must withdraw at least $50 at a time ($1,000 for withdrawals made during the Payout Phase). Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. A withdrawal charge and MARKET VALUE ADJUSTMENT also may apply. 5 PROSPECTUS HOW THE CONTRACT WORKS The Contract basically works in two ways. First, the Contract can help you (we assume you are the CONTRACT OWNER) save for retirement because you can invest in up to 40 investment alternatives and generally pay no federal income taxes on any earnings until you withdraw them. You do this during what we call the "ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date we issue your Contract (we call that date the "ISSUE DATE") and continues until the Payout Start Date, which is the date we apply your money to provide income payments. During the Accumulation Phase, you may allocate your purchase payments to any combination of the Variable Sub-Accounts and/or Fixed Accounts. If you invest in the Fixed Accounts, you will earn a fixed rate of interest that we declare periodically. If you invest in any of the Variable Sub-Accounts, your investment return will vary up or down depending on the performance of the corresponding Portfolios. Second, the Contract can help you plan for retirement because you can use it to receive retirement income for life and/ or for a pre-set number of years, by selecting one of the income payment options (we call these "INCOME PLANS") described on page 26. You receive income payments during what we call the "PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and continues until we make the last payment required by the Income Plan you select. During the Payout Phase, if you select a fixed income payment option, we guarantee the amount of your payments, which will remain fixed. If you select a variable income payment option, based on one or more of the Variable Sub-Accounts, the amount of your payments will vary up or down depending on the performance of the corresponding Portfolios. The amount of money you accumulate under your Contract during the Accumulation Phase and apply to an Income Plan will determine the amount of your income payments during the Payout Phase. The timeline below illustrates how you might use your Contract.
Issue Payout Start Date Accumulation Phase Date Payout Phase - ---------- ----------------------- -------------------- ---------------- You buy You save for retirement You elect to receive You can receive Or you can receive a Contract income payments or income payments income payments receive a lump sum for a set period for life payment
As the Contract Owner, you exercise all of the rights and privileges provided by the Contract. If you die, any surviving Contract Owner, or if there is none, the BENEFICIARY will exercise the rights and privileges provided by the Contract. See "The Contract." In addition, if you die before the Payout Start Date, we will pay a death benefit to any surviving Contract Owner or, if none, to your Beneficiary. See "Death Benefits." Please call us at 1-800-692-4682 if you have any questions about how the Contract works. 6 PROSPECTUS EXPENSE TABLE The table below lists the expenses that you will bear directly or indirectly when you buy a Contract. The table and the examples that follow do not reflect premium taxes because New York currently does not impose premium taxes on annuities. For more information about Variable Account expenses, see "Expenses," below. For more information about Portfolio expenses, please refer to the accompanying prospectuses for the Portfolios. CONTRACT OWNER TRANSACTION EXPENSES Withdrawal Charge (as a percentage of purchase payments)* Number of Complete Years Since We Received the Purchase Payment Being Withdrawn 0 1 2 3 4 5 6 7+ - ---------------------------------- --- --- --- --- --- --- --- --- Applicable Charge 7% 6% 5% 4% 3% 2% 1% 0% Annual Contract Maintenance Charge $30.00** Transfer Fee $10.00*** * Each Contract Year, you may withdraw up to 15% of purchase payments without incurring a withdrawal charge or a Market Value Adjustment. ** We will waive this charge in certain cases. See "Expenses." *** Applies solely to the thirteenth and subsequent transfers within a Contract Year excluding transfers due to dollar cost averaging or automatic portfolio rebalancing. We are currently waiving the transfer fee. VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE SUB-ACCOUNT) Mortality and Expense Risk Charge 1.15%* Administrative Expense Charge 0.10% Total Variable Account Annual Expense 1.25% 7 PROSPECTUS PORTFOLIO ANNUAL EXPENSES (as a percentage of Portfolio average daily net assets)/1/ (After contractual Reductions and Reimbursements) (1)
Total Management 12b-1 Other Portfolio Portfolio Fees Fees Expenses Annual Expenses - ---------------------------------------------------------- ---------- ----- -------- --------------- AIM V.I. Balanced Fund - Series I 0.75% N/A 0.37% 1.12% AIM V.I. Core Equity Fund - Series I (2) 0.61% N/A 0.21% .82% AIM V.I. Diversified Income Fund - Series I 0.60% N/A 0.33% 0.93% AIM V.I. Government Securities Fund - Series I 0.50% N/A 0.58% 1.08% AIM V.I. Growth Fund - Series I 0.62% N/A 0.26% 0.88% AIM V.I. International Growth Fund - Sereis I (2) 0.73% N/A 0.32% 1.05% AIM V.I. Premier Equity Fund - Series I (2) 0.60% N/A 0.25% 0.85% The Dreyfus Socially Responsible Growth Fund, Inc.: Initial Shares 0.75% N/A 0.03% 0.78% Dreyfus Stock Index Fund: Initial Shares 0.25% N/A 0.01% 0.26% Dreyfus VIF - Growth & Income Portfolio: Initial Shares 0.75% N/A 0.05% 0.80% Dreyfus VIF - Money Market Portfolio 0.50% N/A 0.08% 0.58% Fidelity VIP Contrafund Portfolio - Initial Class (3) 0.58% N/A 0.10% 0.68% Fidelity VIP Equity-Income Portfolio - Initial Class (3) 0.48% N/A 0.10% 0.58% Fidelity VIP Growth Portfolio - Initial Class (3) 0.58% N/A 0.10% 0.68% Fidelity VIP High Income Portfolio - Initial Class (3) 0.58% N/A 0.13% 0.71% Franklin Small Cap Fund-Class 2 (4,5) 0.45% 0.25% 0.31% 1.01% Mutual Shares Securities Fund - Class 2 (4) 0.60% 0.25% 0.19% 1.04% Templeton Developing Markets Securities Fund - Class 2 (4) 1.25% 0.25% 0.32% 1.82% Templeton Foreign Securities Fund - Class 2 (4,6,7) 0.68% 0.25% 0.22% 1.15% Templeton Growth Securities Fund - Class 2 (4,8) 0.80% 0.25% 0.05% 1.10% Goldman Sachs VIT Capital Growth Fund (9) 0.75% N/A 0.94% 1.69% Goldman Sachs VIT CORE(SM) Small Cap Equity Fund (9) 0.75% N/A 0.47% 1.22% Goldman Sachs VIT CORE(SM) U.S. Equity Fund (9) 0.70% N/A 0.12% 0.82% Goldman Sachs VIT International Equity Fund (9) 1.00% N/A 1.05% 2.05% MFS Emerging Growth Series - Initial Class (10) 0.75% N/A 0.12% 0.87% MFS Investors Trust Series - Initial Class (10) 0.75% N/A 0.15% 0.90% MFS New Discovery Series (10,11) 0.90% N/A 0.16% 1.06% MFS Research Series - Initial Class (10) 0.75% N/A 0.15% 0.90% Oppenheimer Aggressive Growth Fund/VA 0.64% N/A 0.04% 0.68% Oppenheimer Capital Appreciation Fund/VA 0.64% N/A 0.04% 0.68% Oppenheimer Global Securities Fund/VA 0.64% N/A 0.06% 0.70% Oppenheimer Main Street Growth & Income Fund/VA 0.68% N/A 0.05% 0.73% Oppenheimer Strategic Bond Fund/VA(12) 0.74% N/A 0.05% 0.79% Van Kampen UIF Core Plus Fixed Income Portfolio (13,14) 0.40% N/A 0.31% 0.71% Van Kampen UIF Equity Growth Portfolio (13,14) 0.55% N/A 0.36% 0.91% Van Kampen UIF Global Equity Portfolio (13,14) 0.80% N/A 0.48% 1.28% Van Kampen UIF Mid Cap Value Portfolio (13,14) 0.75% N/A 0.35% 1.10% Van Kampen UIF Value Portfolio (13,14) 0.55% N/A 0.38% 0.93%
(1) Figures shown in the Table are for the year ended December 31, 2001(except as otherwise noted). (2) Effective May 1, 2002 the AIM V.I. Growth and Income Fund, AIM V.I. International Equity Fund and AIM V.I. Value Fund changed their names to the AIM V.I. Core Equity Fund, AIM V.I. International Growth Fund and AIM V.I. Premier Equity Fund, respectively. (3) Actual "Total Portfolio Annual Expenses" were lower because a portion of 8 PROSPECTUS the brokerage commissions that the Portfolios paid was used to reduce the Portfolios' expenses. In addition, through arrangements with the Portfolios' custodian, credits realized as a result of uninvested cash balances are used to reduce a portion of the Portfolios' custodian expenses. These offsets may be discontinued at any time. Had these offsets been taken into account, "Total Portfolio Annual Expenses" would have been 0.64% for Contrafund Portfolio, 0.57% for Equity-Income Portfolio, 0.65% for Growth Portfolio and 0.70% for High Income Portfolio. (4) The Portfolio's Class 2 distribution plan or "rule 12b-1 plan" is described in the Portfolio's prospectus. (5) The manager had agreed in advance to make an estimated reduction of 0.08% to its management fee to reflect reduced services resulting from the Portfolio's investment in a Franklin Templeton money fund. This reduction is required by the Portfolio's Board of Trustees and an order of the Securities and Exchange Commission. Without this reduction, "Total Portfolio Annual Expenses" would have been 1.09%. (6) Effective May 1, 2002 the Templeton International Securities Fund - Class 2 changed its name to the Templeton Foreign Securities Fund - Class 2. (7) The manager had agreed in advance to make an estimated reduction of 0.01% to its management fee to reflect reduced services resulting from the Portfolio's investment in a Franklin Templeton money fund. This reduction is required by the Portfolio's Board of Trustees and an order of the Securities and Exchange Commission. Without this reduction, "Total Portfolio Annual Expenses" would have been 1.16%. (8) The Portfolio administration fee is paid indirectly through the management fee. (9) "Total Portfolio Annual Expenses" listed in the table above reflect gross ratios prior to any voluntary waivers/ reimbursements of expenses. Goldman Sachs Asset Management and Goldman Sachs Asset Management International, the investment advisers, have voluntarily agreed to reduce or limit certain other expenses (excluding management fees, taxes, interest, brokerage fees, litigation, indemnification and other extraordinary expenses) to the extent "Total Portfolio Annual Expenses" exceed 1.00% for Capital Growth Fund, 1.00% for CORESM Small Cap Equity Fund, 0.90% for CORESM U.S. Equity Fund and 1.35% for International Equity Fund. With these limitations taken into consideration, "Management Fees", "Rule 12b-1 Fees", "Other Expenses" and "Total Portfolio Annual Expenses" were as follows:
Total Management 12b-1 Other Portfolio Portfolio Fees Fees Expenses Annual Expenses - ------------------------------------------------ ---------- ----- -------- --------------- Goldman Sachs VIT Capital Growth Fund 0.75% N/A 0.25% 1.00% Goldman Sachs VIT CORE(SM) Small Cap Equity Fund 0.75% N/A 0.25% 1.00% Goldman Sachs VIT CORE(SM) U.S. Equity Fund 0.70% N/A 0.11% 0.81% Goldman Sachs VIT International Equity Fund 1.00% N/A 0.35% 1.35%
(10) Each Portfolio has an expense offset arrangement which reduces the Portfolios' custodian fee based upon the amount of cash maintained by the Portfolio with its custodian and dividend disbursing agent. Each Portfolio may enter into other such arrangements and directed brokerage arrangements, which would also have the effect of reducing the Portfolios' expenses. "Other Expenses" do not take these expense reductions into account, and are therefore higher than the actual expenses of the Portfolios. Had these fee reductions been taken into account, "Total Portfolio Annual Expenses" would have been lower and would equal 0.86% for Emerging Growth Series, 0.89% for Investors Trust Series, 1.05% for New Discovery Series and 0.89 for Research Series. (11) MFS has contractually agreed, subject to reimbursement, to bear expenses for the Portfolio such that "Other Expenses" (after taking into account the expense offset arrangement described in note 10 above), do not exceed 0.15% of the average daily net assets of the Portfolios during the current fiscal year. Without these fee arrangements "Total Portfolio Annual Expenses" would have been 1.09%. These contractual fee arrangements will continue at least until May 1, 2003, unless changed with the consent of the board of trustees which oversee the Portfolios. (12) Oppenheimer Funds, Inc. (OFI) will reduce the management fee by 0.10% as long as the fund's trailing 12-month performance at the end of the quarter is in the fifth Lipper peer-group quintile; and by 0.05% as long as it is in the fourth quintile. If the fund emerges from a "penalty box" position for a quarter but then slips back in the next quarter, OFI will reinstate the waiver. The waiver is voluntary and may be terminated by the Manager at any time. (13) "Total Portfolio Annual Expenses" listed in the table above reflect gross ratios prior to any voluntary waivers/ reimbursements of expenses by the adviser. For the year ended December 31, 2001, the management fee was reduced to reflect the voluntary waiver of a portion or all of the 9 PROSPECTUS management fee and the reimbursement by the Portfolios' adviser to the extent "Total Portfolio Annual Expenses" exceed the following percentages: Van Kampen UIF Core Plus Fixed Income Portfolio 0.70%; Van Kampen UIF Equity Growth Portfolio 0.85%; Van Kampen UIF Global Value Equity Portfolio 1.15%; Van Kampen UIF Mid Cap Value Portfolio 1.05%; Van Kampen UIF Value Portfolio 0.85%. The adviser may terminate this voluntary waiver at any time at its sole discretion. After such reductions, the "Management Fees", "Rule 12b-1 Fees", "Other Expenses" and "Total Portfolio Annual Expenses" were as follows:
Total Management 12b-1 Other Portfolio Portfolio Fees Fees Expenses Annual Expenses - ----------------------------------------------- ---------- ----- -------- --------------- Van Kampen UIF Core Plus Fixed Income Portfolio 0.39% N/A 0.31% 0.70% Van Kampen UIF Equity Growth Portfolio 0.49% N/A 0.36% 0.85% Van Kampen UIF Global Equity Portfolio 0.67% N/A 0.48% 1.15% Van Kampen UIF Mid Cap Value Portfolio 0.70% N/A 0.35% 1.05% Van Kampen UIF Value Portfolio 0.47% N/A 0.38% 0.85%
(14) Effective May 1, 2002 the Portfolios have been re-branded and have changed names from Morgan Stanley UIF Fixed Income Portfolio to Van Kampen UIF Core Plus Fixed Income Portfolio, Morgan Stanley UIF Equity Growth Portfolio to Van Kampen UIF Equity Growth Portfolio, Morgan Stanley UIF Global Value Equity Portfolio to Van Kampen UIF Global Value Equity Portfolio, Morgan Stanley UIF Mid Cap Value Portfolio to Van Kampen UIF Mid Cap Value Portfolio and Morgan Stanley UIF Value Portfolio to Van Kampen UIF Value Portfolio. 10 PROSPECTUS EXAMPLE 1 The example below shows the dollar amount of expenses that you would bear directly or indirectly if you: .. invested $1,000 in a Variable Sub-Account, .. earned a 5% annual return on your investment, and .. earned a 5% annual return on your investment, surrendered your Contract, or began receiving income payments for a specified period of less than 120 months, at the end of each time period. THE EXAMPLE DOES NOT INCLUDE ANY TAXES YOU MAY BE REQUIRED TO PAY IF YOU SURRENDER YOUR CONTRACT OR RECEIVE INCOME PAYMENTS. THE EXAMPLE DOES NOT INCLUDE DEDUCTIONS FOR PREMIUM TAXES BECAUSE NEW YORK DOES NOT CHARGE PREMIUM TAXES ON ANNUITIES. Variable Sub-Account 1 Year 3 Years 5 Years 10 Years - --------------------------------------------- ------ ------- ------- -------- AIM V.I. Balanced $76 $111 $148 $279 AIM V.I. Core Equity $73 $101 $133 $248 AIM V.I. Diversified Income $74 $105 $138 $259 AIM V.I. Government Securities $76 $109 $146 $275 AIM V.I. Growth $73 $103 $136 $254 AIM V.I. International Growth $75 $109 $144 $272 AIM V.I. Premier Equity $73 $102 $134 $251 The Dreyfus Socially Responsible Growth, Inc. $72 $100 $130 $244 Dreyfus Stock Index $67 $ 84 $103 $187 Dreyfus VIF - Growth & Income $73 $101 $131 $246 Dreyfus VIF - Money Market $70 $ 94 $120 $222 Fidelity VIP Contrafund $71 $ 97 $125 $233 Fidelity VIP Equity-Income $70 $ 94 $120 $222 Fidelity VIP Growth $71 $ 97 $125 $233 Fidelity VIP High Income $72 $ 98 $127 $236 Franklin Small Cap $75 $107 $142 $268 Mutual Shares Securities $75 $108 $144 $271 Templeton Developing Markets $75 $108 $144 $271 Templeton Foreign Securities $76 $112 $150 $282 Templeton Growthl Securitie $76 $110 $147 $277 Goldman Sachs VIT Capital Growth $82 $128 $177 $335 Goldman Sachs VIT CORE(SM) Small Cap Equity $77 $114 $153 $289 Goldman Sachs VIT CORE(SM) U.S. Equity $73 $101 $133 $248 Goldman Sachs VIT International Equity $85 $139 $195 $369 MFS Emerging Growth $73 $103 $135 $253 MFS Investors Trust $74 $104 $137 $256 MFS New Discovery $75 $109 $145 $273 MFS Research $74 $104 $137 $256 Oppenheimer Aggressive Growth/VA $71 $ 97 $125 $233 Oppenheimer Capital AppreciationVA $71 $ 97 $125 $233 Oppenheimer Global Securities/VA $64 $ 76 $ 89 $158 Oppenheimer Main Street Growth & Income/VA $72 $ 99 $128 $238 Oppenheimer Strategic Bond/VA $73 $101 $131 $245 Van Kampen UIF Core Plus Fixed Income $72 $ 98 $127 $236 Van Kampen UIF Equity Growth $74 $104 $137 $257 Van Kampen UIF Global Equity $74 $105 $138 $259 Van Kampen UIF Mid Cap Value $78 $110 $156 $277 Van Kampen UIF Value $78 $116 $156 $295 11 PROSPECTUS EXAMPLE 2 Same assumptions as Example 1 above, except that you decided not to surrender your Contract, or you began receiving income payments (for at least 120 months if under an Income Plan with a specified period), at the end of each period. Variable Sub-Account 1 Year 3 Years 5 Years 10 Years - --------------------------------------------- ------ ------- ------- -------- AIM V.I. Balanced $25 $ 77 $131 $279 AIM V.I. Core Equity $22 $ 67 $116 $248 AIM V.I. Diversified Income $23 $ 71 $121 $259 AIM V.I. Government Securities $25 $ 75 $129 $275 AIM V.I. Growth $22 $ 69 $119 $254 AIM V.I. International Growth $24 $ 75 $127 $272 AIM V.I. Premier Equity $22 $ 68 $117 $251 The Dreyfus Socially Responsible Growth, Inc. $21 $ 66 $113 $244 Dreyfus Stock Index $16 $ 50 $ 86 $187 Dreyfus VIF - Growth & Income $22 $ 67 $114 $246 Dreyfus VIF - Money Market $19 $ 60 $103 $222 Fidelity VIP Contrafund $20 $ 63 $108 $233 Fidelity VIP Equity-Income $19 $ 60 $103 $222 Fidelity VIP Growth $20 $ 63 $108 $233 Fidelity VIP High Income $24 $ 64 $110 $236 Franklin Small Cap $24 $ 73 $125 $268 Mutual Shares Securities $24 $ 74 $127 $271 Templeton Developing Markets $25 $ 74 $127 $271 Templeton Foreign Securities $25 $ 78 $133 $282 Templeton Growthl Securitie $25 $ 76 $130 $277 Goldman Sachs VIT Capital Growth $31 $ 94 $160 $335 Goldman Sachs VIT CORE(SM) Small Cap Equity $26 $ 80 $136 $289 Goldman Sachs VIT CORE(SM) U.S. Equity $22 $ 67 $116 $248 Goldman Sachs VIT International Equity $34 $105 $178 $369 MFS Emerging Growth $22 $ 69 $118 $253 MFS Investors Trust $23 $ 70 $120 $256 MFS New Discovery $24 $ 75 $128 $273 MFS Research $23 $ 70 $120 $256 Oppenheimer Aggressive Growth/VA $20 $ 63 $108 $233 Oppenheimer Capital AppreciationVA $20 $ 63 $108 $233 Oppenheimer Global Securities/VA $13 $ 42 $ 72 $158 Oppenheimer Main Street Growth & Income/VA $21 $ 65 $111 $238 Oppenheimer Strategic Bond/VA $22 $ 67 $114 $245 Van Kampen UIF Core Plus Fixed Income $21 $ 64 $110 $236 Van Kampen UIF Equity Growth $23 $ 70 $120 $257 Van Kampen UIF Global Equity $23 $ 71 $121 $259 Van Kampen UIF Mid Cap Value $25 $ 76 $130 $277 Van Kampen UIF Value $27 $ 82 $139 $295 PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES. THE EXAMPLES ASSUME THAT ANY PORTFOLIO EXPENSE WAIVERS OR REIMBURSEMENT ARRANGEMENTS DESCRIBED IN THE FOOTNOTES ON PAGE 8-9 ARE IN EFFECT FOR THE TIME PERIODS PRESENTED ABOVE. YOUR ACTUAL EXPENSES MAY BE LESSER OR GREATER THAN THOSE SHOWN ABOVE. SIMILARLY, YOUR RATE OF RETURN MAY BE LESSER OR GREATER THAN 5%, WHICH IS NOT GUARANTEED. TO REFLECT THE CONTRACT MAINTENANCE CHARGE IN THE EXAMPLES, WE ESTIMATED AN EQUIVALENT PERCENTAGE CHARGE, BASED ON AN ASSUMED AVERAGE CONTRACT SIZE OF $45,000. 12 PROSPECTUS FINANCIAL INFORMATION To measure the value of your investment in the Variable Sub-Accounts during the Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT." Each Variable Sub-Account has a separate value for its Accumulation Units we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but not the same as, the share price of a mutual fund. No Accumulation Unit Values are reported because as of the date of this prospectus, no sales of the Contract had occurred. To obtain more information on each Variable Sub-Account's finances, please refer to the Variable Account's financial statements contained in the Statement of Additional Information. The financial statements of ALLSTATE NEW YORK also appear in the Statement of Additional Information. The Variable Account Financial Statements do not reflect any assets attributed to the Contracts offered by this prospectus because no sales of the Contract have occurred as of the date of this prospectus. THE CONTRACT CONTRACT OWNER The Allstate Provider Variable Annuity is a contract between you, the Contract Owner, and Allstate New York, a life insurance company. As the Contract Owner, you may exercise all of the rights and privileges provided to you by the Contract. That means it is up to you to select or change (to the extent permitted): .. the investment alternatives during the Accumulation and Payout Phases, .. the amount and timing of your purchase payments and withdrawals, .. the programs you want to use to invest or withdraw money, .. the income payment plan you want to use to receive retirement income, .. the Annuitant (either yourself or someone else) on whose life the income payments will be based, .. the Beneficiary or Beneficiaries who will receive the benefits that the Contract provides when the last surviving Contract Owner dies, and .. any other rights that the Contract provides. If you die, any surviving Contract Owner or, if none, the Beneficiary may exercise the rights and privileges provided to them by the Contract. The Contract cannot be jointly owned by both a non-natural person and a natural person. The maximum age of the oldest Contract Owner cannot exceed 85 as of the date we receive the completed application. Changing ownership of this Contract may cause adverse tax consequences and may not be allowed under qualified plans. Please consult with a competent tax advisor prior to making a request for a change of Contract Owner. You can use the Contract with or without a qualified plan. A qualified plan is a retirement savings plan, such as an IRA or tax-sheltered annuity, that meets the requirements of the Internal Revenue Code. Qualified plans may limit or modify your rights and privileges under the Contract. We use the term "QUALIFIED CONTRACT" to refer to a Contract issued with a qualified plan. See "Qualified Contracts" on page 33. ANNUITANT The Annuitant is the individual whose life determines the amount and duration of income payments (other than under Income Plans with guaranteed payments for a specified period). You initially designate an Annuitant in your application. The maximum age of the oldest Annuitant cannot exceed 85 as of the date we receive the completed application. If the Contract Owner is a natural person you may change the Annuitant prior to the Payout Start Date. In our discretion, we may permit you to designate a joint Annuitant, who is a second person on whose life income payments depend, on the Payout Start Date. If the Annuitant dies prior to the Payout Start Date, the new Annuitant will be: .. the youngest Contract Owner, if living, otherwise .. the youngest Beneficiary. BENEFICIARY The Beneficiary is the person who may elect to receive the death benefit or become the new Contract Owner subject to the Death of Owner provision if the sole surviving Contract Owner dies before the Payout Start Date. See "Death Benefits" on page 27. If the sole surviving Contract Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed income payments scheduled to continue. You may name one or more Beneficiaries when you apply for a Contract. You may change or add Beneficiaries at any time by writing to us, unless you have designated an irrevocable Beneficiary. We will provide a change of Beneficiary form to be signed and filed with us. Any change will be effective at the time you sign the written notice, whether or not the Annuitant is living when we receive the notice. Until we receive your written notice to change a Beneficiary, we are entitled to rely on the most recent Beneficiary information in our files. We will not be liable as to any payment or settlement made prior to 13 PROSPECTUS receiving the written notice. Accordingly, if you wish to change your Beneficiary, you should deliver your written notice to us promptly. If you do not name a Beneficiary or, if the named Beneficiary is no longer living and there are no other surviving Beneficiaries, the new Beneficiary will be: .. your spouse or, if he or she is no longer alive, .. your surviving children equally, or if you have no surviving children, .. your estate. If more than one Beneficiary survives you (or the Annuitant if the Contract Owner is not a natural person), we will divide the death benefit among your Beneficiaries according to your most recent written instructions. If you have not given us written instructions, we will pay the death benefit in equal amounts to the surviving Beneficiaries. MODIFICATION OF THE CONTRACT Only an Allstate New York officer may approve a change in or waive any provision of the Contract. Any change or waiver must be in writing. None of our agents has the authority to change or waive the provisions of the Contract. We may not change the terms of the Contract without your consent, except to conform the Contract to applicable law or changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law. ASSIGNMENT You may not assign any interest in a Contract as collateral or security for a loan. However, you may assign periodic income payments under the Contract prior to the Payout Start Date. No Beneficiary may assign benefits under the Contract until they are due. We will not be bound by any assignment until the assignor signs it and files it with us. We are not responsible for the validity of any assignment. Federal law prohibits or restricts the assignment of benefits under many types of retirement plans and the terms of such plans may themselves contain restrictions on assignments. An assignment may also result in taxes and tax penalties. YOU SHOULD CONSULT WITH YOUR ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT. PURCHASES MINIMUM PURCHASE PAYMENTS Your initial purchase payment must be at least $3,000 ($2,000 for a Qualified Contract). All subsequent purchase payments must be $100 ($500 for allocations to the Fixed Account) or more. You may make purchase payments at any time prior to the Payout Start Date. We reserve the right to limit the maximum amount of purchase payments, or reduce the minimum purchase payment we will accept. We reserve the right to reject any application. AUTOMATIC ADDITIONS PROGRAM You may make subsequent purchase payments of at least $100 ($500 for allocation to the Fixed Account) by automatically transferring amounts from your bank account. Please consult with your representative for detailed information. ALLOCATION OF PURCHASE PAYMENTS At the time you apply for a Contract, you must decide how to allocate your purchase payments among the investment alternatives. The allocation you specify on your application will be effective immediately. All allocations must be in whole percents that total 100% or in whole dollars. You can change your allocations by notifying us in writing. We reserve the right to limit the availability of the investment alternatives. We will allocate your purchase payments to the investment alternatives according to your most recent instructions on file with us. Unless you notify us in writing otherwise, we will allocate subsequent purchase payments according to the allocation for the previous purchase payment. We will effect any change in allocation instructions at the time we receive written notice of the change in good order. We will credit the initial purchase payment that accompanies your completed application to your Contract within 2 business days after we receive the payment at our service center. If your application is incomplete, we will ask you to complete your application within 5 business days. If you do so, we will credit your initial purchase payment to your Contract within that 5 business day period. If you do not, we will return your purchase payment at the end of the 5 business day period unless you expressly allow us to hold it until you complete the application. We will credit subsequent purchase payments to the Contract at the close of the business day on which we receive the purchase payment at our service center located in Vernon Hills, Illinois (mailing address: 300 N. Milwaukee Ave., Vernon Hills, IL 60061. We are open for business each day Monday through Friday that the New York Stock Exchange is open for business. We also refer to these days as "VALUATION DATES." Our business day closes when the New York Stock Exchange closes, usually 4:00 p.m. Eastern Time (3:00 p.m. Central Time). If we receive your purchase payment after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date, we will credit your purchase payment using the Accumulation Unit Values computed on the next Valuation Date. RIGHT TO CANCEL You may cancel the Contract by returning it to us within the Cancellation Period, which is the 10 day period after 14 PROSPECTUS you receive the Contract (60 days if you are exchanging another contract for the Contract described in this prospectus). You may return it by delivering it or mailing it to us. If you exercise this "RIGHT TO CANCEL," the Contract terminates and we will pay you the full amount of your purchase payments allocated to the Fixed Account. Upon cancellation, as permitted by federal or state law, we will return your purchase payments allocated to the Variable Account after an adjustment to the extent federal or state law permits to reflect investment gain or loss that occurred from the date of allocation through the date of cancellation. If your Contract is qualified under Section 408 of the Internal Revenue Code, we will refund the greater of any purchase payments or the Contract Value. CONTRACT VALUE On the Issue Date, the Contract Value is equal to the initial purchase payment. Your Contract Value at any other time during the Accumulation Phase is equal to the sum of the value as of the most recent Valuation Date of your Accumulation Units in the Variable Sub-Accounts you have selected, plus the value of your investment in the Fixed Account. ACCUMULATION UNITS To determine the number of Accumulation Units of each Variable Sub-Account to credit to your Contract, we divide (i) the amount of the purchase payment or transfer you have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value of that Variable Sub-Account next computed after we receive your payment or transfer. For example, if we receive a $10,000 purchase payment allocated to a Variable Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we would credit 1,000 Accumulation Units of that Variable Sub-Account to your Contract. Withdrawals and transfers from a Variable Sub-Account would, of course, reduce the number of Accumulation Units of that Sub-Account allocated to your Contract. ACCUMULATION UNIT VALUE As a general matter, the Accumulation Unit Value for each Variable Sub-Account will rise or fall to reflect: .. changes in the share price of the Portfolio in which the Variable Sub-Account invests, and .. the deduction of amounts reflecting the mortality and expense risk charge, administrative expense charge, and any provision for taxes that have accrued since we last calculated the Accumulation Unit Value. We determine contract maintenance charges, withdrawal charges, and transfer fees (currently waived) separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units. For details on how we calculate Accumulation Unit Value, please refer to the Statement of Additional Information. We determine a separate Accumulation Unit Value for each Variable Sub-Account on each Valuation Date. YOU SHOULD REFER TO THE PROSPECTUSES FOR THE PORTFOLIOS THAT ACCOMPANY THIS PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH PORTFOLIO ARE VALUED, SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE CORRESPONDING VARIABLE SUB-ACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE. 15 PROSPECTUS INVESTMENT ALTERNATIVES: THE VARIABLE SUB-ACCOUNTS You may allocate your purchase payments to up to 39 Variable Sub-Accounts. Each Variable Sub-Account invests in the shares of a corresponding Portfolio. Each Portfolio has its own investment objective(s) and policies. We briefly describe the Portfolios below. For more complete information about each Portfolio, including expenses and risks associated with the Portfolio, please refer to the accompanying prospectuses for the Portfolios. You should carefully review the Portfolio prospectuses before allocating amounts to the Variable Sub-Accounts. PORTFOLIO: EACH PORTFOLIO SEEKS: - ---------------------- ----------------------------- AIM VARIABLE INSURANCE FUNDS AIM V.I. Balanced Achieve as high a total Fund* return as possible, consistent with preservation of capital. AIM V.I. Core Equity Growth of capital with a Fund*** secondary objective of current income AIM ADVISORS, INC. AIM V.I. Diversified A high level of current Income Fund* income AIM V.I. Government A high level of current Securities Fund* income consistent with a reasonable concern for safety of principal AIM V.I. Growth Fund* Growth of capital AIM V.I. International Long-term growth of capital Growth Fund**** AIM V.I. Premier Long-term growth of capital. Equity Fund***** Income is a secondary objective. THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.; THE DREYFUS STOCK INDEX FUND; AND THE DREYFUS VARIABLE INVESTMENT FUND (VIF) (COLLECTIVELY, THE DREYFUS FUNDS) The Dreyfus Socially Capital growth and, Responsible Growth secondarily, current income Fund, Inc. Dreyfus Stock Index To match the total return Fund Stock Price Index of the Standard & Poor's(C) 500 Composite THE DREYFUS CORPORATION Dreyfus VIF Growth & Long-term capital growth, Income Portfolio income current and growth of income, consistent with reasonable investment risk Dreyfus VIF Money A high level of current Market Portfolio income as is consistent with the preservation of capital and the maintenance of liquidity FIDELITY VARIABLE INSURANCE PRODUCTS FUND Fidelity VIP Reasonable income Equity-Income Portfolio FIDELITY MANAGEMENT & Fidelity VIP Growth Capital appreciation RESEARCH COMPANY Portfolio Fidelity VIP High High level of current income Income Portfolio while also considering growth of capital Fidelity VIP Portfolio Long-term capital Contrafund(R) appreciation 16 PROSPECTUS FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (VIP) -- CLASS 2 Franklin Small Cap Long-term capital growth FRANKLIN ADVISERS, INC. Fund Mutual Shares Capital appreciation. FRANKLIN MUTUAL Securities Fund Secondary goal is income. ADVISORS, LLC. Templeton Developing Long-term capital TEMPLETON ASSET Markets Securities Appreciation MANAGEMENT LTD. Fund Templeton Growth Long-term capital growth TEMPLETON GLOBAL Securities Fund ADVISORS LIMITED Templeton Long-term capital growth TEMPLETON INVESTMENT International COUNSEL, LLC. Securities Fund GOLDMAN SACHS VARIABLE INSURANCE TRUST (VIT) Goldman Sachs VIT Long-term growth of capital Capital Growth Fund GOLDMAN SACHS ASSET Goldman Sachs VIT Long-term growth of capital MANAGEMENT Core(SM)Small Cap Equity Fund Goldman Sachs VIT Long-term growth of capital Core(SM)U.S. Equity and dividend income Fund Goldman Sachs VIT Long-term capital GOLDMAN SACHS ASSET International Equity appreciation MANAGEMENT INTERNATIONAL Fund MFS(R) VARIABLE INSURANCE TRUST(SM) MFS Emerging Growth Long-term growth of capital Series MFS Investors Trust Long-term growth of capital MFS INVESTMENT Series** with a secondary objective to MANAGEMENT(R) seek reasonable current income MFS New Discovery Capital appreciation Series MFS Research Series Long-term growth of capital and future income THE UNIVERSAL INSTITUTIONAL FUNDS, INC. Van Kampen UIF Equity Long-term capital Growth****** appreciation Van Kampen UIF Core Above-average total return MORGAN STANLEY ASSET Plus Fixed over a market cycle of three MANAGEMENT Income****** to five years Van Kampen UIF Global Long-term capital Equity****** appreciation Van Kampen UIF Mid Cap Above-average total return Value****** over a market cycle of three to five years Van Kampen UIF Above-average total return MILLER ANDERSON & Value****** over a market cycle of three SHERRERD, LLP to five years OPPENHEIMER VARIABLE ACCOUNT FUNDS Oppenheimer Aggressive Capital appreciation Growth Fund/VA Oppenheimer Capital Capital appreciation Appreciation Fund/VA OPPENHEIMER FUNDS, INC. Oppenheimer Global Long-term capital Securities Fund/VA appreciation Oppenheimer Main High total return, which Street Growth & Income includes growth in the value Fund/VA of its shares as well as current income, from equity and debt securities Oppenheimer Strategic High level of current income Bond Fund/VA 17 PROSPECTUS * The Portfolio's investment objectives may be changed by the Portfolio's Board of Trustees without shareholder approval. ** Effective May 1, 2001, the MFS Growth with Income Series changed its name to MFS Investors Trust Series, and changed its investment policies. *** Effective May 1, 2002, the Portfolio changed its name from AIM V.I. Growth and Income Fund to AIM V.I. Core Equity Fund. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. **** Effective May 1, 2002, the Portfolio changed its name from AIM V.I. International Equity Fund to AIM V.I. International Growth Fund. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. ***** Effective May 1, 2002, the Portfolio changed its name from AIM V.I. Value Fund to AIM V.I. Premier Equity Fund. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. ****** Effective May 1, 2002, the Portfolio changed its name from Morgan Stanley to Van Kampen. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. AMOUNTS YOU ALLOCATE TO VARIABLE SUB-ACCOUNTS MAY GROW IN VALUE, DECLINE IN VALUE, OR GROW LESS THAN YOU EXPECT, DEPENDING ON THE INVESTMENT PERFORMANCE OF THE PORTFOLIOS IN WHICH THOSE VARIABLE SUB-ACCOUNTS INVEST. YOU BEAR THE INVESTMENT RISK THAT THE PORTFOLIOS MIGHT NOT MEET THEIR INVESTMENT OBJECTIVES. SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. VARIABLE INSURANCE PORTFOLIOS MIGHT NOT BE MANAGED BY THE SAME PORTFOLIO MANAGERS WHO MANAGE RETAIL MUTUAL FUNDS WTH SIMILAR NAMES. THESE PORTFOLIOS ARE LIKELY TO DIFFER FROM SIMILARLY NAMED RETAIL FUNDS IN ASSETS, CASH FLOW, AND TAX MATTERS. ACCORDINGLY, THE HOLDINGS ARE RESULT OF VARIABLE INSURANCE PORTFOLIO CAN BE EXPECTED TO BE HIGHER AS LEVELS THAN THE INVESTMENT RESULTS OF A SIMILARLY NAMED RETAIL MUTUAL FUND. 18 PROSPECTUS INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT OPTIONS You may allocate all or a portion of your purchase payments to the Fixed Account Options. We will credit a minimum annual interest rate of 3% to money you allocate to any of the Fixed Account Options. Please consult with your representative for current information. The Fixed Account consists of our general account assets other than those in segregated asset accounts. We have sole discretion to invest the assets of the Fixed Account, subject to applicable law. Any money you allocate to the Fixed Account Option does not entitle you to share in the investment experience of the Fixed Account. DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS SIX MONTH DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. Under this Option, you may establish a Dollar Cost Averaging Program by allocating purchase payments to The Six Month Dollar Cost Averaging Fixed Account Option ("Six Month DCA Fixed Account Option"). We will credit interest to purchase payments you allocate to this Option for six months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Six Month DCA Fixed Account Option. You must transfer all of your money out of the Six Month DCA Fixed Account Option to the Variable Sub-Accounts in six equal monthly installments. If you discontinue the Six Month Dollar Cost Averaging Option before the end of the transfer period, we will transfer the remaining balance in this Option to the Dreyfus VIF Money Market Variable Sub-Account unless you request a different investment alternative. No transfers are permitted into the Six Month DCA Fixed Account. For each purchase payment allocated to this Option, your first monthly transfer will occur at the end of the first month following such purchase payment. If we do not receive an allocation from you within one month of the date of payment, we will transfer the payment plus associated interest to the Dreyfus VIF Money Market Variable Sub-Account in equal monthly installments. Transfering Account Value to the Money Market Variable Sub-Account in this manner may not be consistent with the theory of Dollar Cost Averaging described on page 23. TWELVE MONTH DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. Under this Option, you may establish a Dollar Cost Averaging Program by allocating purchase payments to The Twelve Month Dollar Cost Averaging Fixed Account Option ("Twelve Month DCA Fixed Account Option"). We will credit interest to purchase payments you allocate to this Option for twelve months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Twelve Month DCA Fixed Account Option. You must transfer all of your money out of the Twelve Month DCA Fixed Account Option to the Variable Sub-Accounts in twelve equal monthly installments. If you discontinue the Twelve Month Dollar Cost Averaging Option before the end of the transfer period, we will transfer the remaining balance in this Option to the Dreyfus VIF Money Market Variable Sub-Account unless you request a different investment alternative. No transfers are permitted into the Twelve Month DCA Fixed Account. For each purchase payment allocated to this Option, your first monthly transfer will occur at the end of the first month following such purchase payment. If we do not receive an allocation from you within one month of the date of payment, we will transfer the payment plus associated interest to the Dreyfus VIF Money Market Variable Sub-Account in equal monthly installments. Transferring Account Value to the Money Market Variable Sub-Account in this manner may not be consistent with the theory of dollar cost averaging described on page 23. At the end of the transfer period, any nominal amounts remaining in the Six Month Dollar Cost Averaging Fixed Account or the Twelve Month Dollar Cost Averaging Fixed Account will be allocated to the Dreyfus VIF Money Market Variable Sub-Account. Transfers out of the Dollar Cost Averaging Fixed Account Options do not count towards the 12 transfers you can make without paying a transfer fee. INVESTMENT RISK. We bear the investment risk for all amounts allocated to the Six Month DCA Fixed Account Option and the Twelve Month DCA Fixed Account Option. That is because we guarantee the current interest rates we credit to the amounts you allocate to either of these Options, which will never be less than the minimum guaranteed rate in the Contract. Currently, we determine, in our sole discretion, the amount of interest credited in excess of the guaranteed rate. We may declare more than one interest rate for different monies based upon the date of allocation to the Six Month DCA Fixed Account Option and the Twelve Month DCA Fixed Account Option. For current interest rate information, please contact your representative or our customer support unit at 1-800-692-4682. GUARANTEE PERIODS Under this option, each payment or transfer allocated to the Fixed Account earns interest at a specified rate that we guarantee for a period of years we call a GUARANTEE PERIOD. Guarantee Periods may range from 1 to 10 years. We are 19 PROSPECTUS currently offering Guarantee Periods of 1, 3, 5, 7, and 10 years in length. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods. You select one or more Guarantee Periods for each purchase payment or transfer. If you do not select the Guarantee Period for a purchase payment or transfer, we will assign the shortest Guarantee Period available under the Contract for such payment or transfer. Each payment or transfer allocated to a Guarantee Period must be at least $500. We reserve the right to limit the number of additional purchase payments that you may allocate to the Fixed Account. Please consult with your sales representative for more information. INTEREST RATES. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We may declare different interest rates for Guarantee Periods of the same length that begin at different times. We will not change the interest rate that we credit to a particular allocation until the end of the relevant Guarantee Period. We have no specific formula for determining the rate of interest that we will declare initially or in the future. We will set those interest rates based on investment returns available at the time of the determination. In addition, we may consider various other factors in determining interest rates including regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. We determine the interest rates to be declared in our sole discretion. We can neither predict nor guarantee what those rates will be in the future. For current interest rate information, please contact your sales representative or ALLSTATE NEW YORK at 1-800-692-4682. The interest rate will never be less than the minimum guaranteed amount stated in the Contract. HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated to a Guarantee Period at a rate that compounds to the effective annual interest rate that we declared at the beginning of the applicable Guarantee Period. The following example illustrates how a purchase payment allocated to the Fixed Account would grow, given an assumed Guarantee Period and effective annual interest rate: Purchase Payment ......... ......................................... $10,000 Guarantee Period.................................................... 5 years Annual Interest Rate................................................ 4.50%
END OF CONTRACT YEAR -------------------------------------------------------------- YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ---------- Beginning Contract Value................... $10,000.00 X (1 + Annual Interest Rate) x 1.045 ---------- $10,450.00 Contract Value at end of Contract Year..... $10,450.00 X (1 + Annual Interest x 1.045 ---------- $10,920.25 Contract Value at end of Contract Year..... $10,920.25 X (1 + Annual Interest Rate) 1.045 ---------- $11,411.66 Contract Value at end of Contract Year..... $11,411.66 X (1 + Annual Interest Rate) x 1.045 ---------- $11,925.19 Contract Value at end of Contract Year..... $11,925.19 X (1 + Annual Interest Rate) 1.045 ---------- $12,461.82
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,461.82 ($12,461.82-$10,000) This example assumes no withdrawals during the entire 5 year Guarantee Period. If you were to make a withdrawal, you may be required to pay a withdrawal charge. In addition, the amount withdrawn may be increased or decreased by a Market Value Adjustment that reflects changes in interest rates since the time you invested the amount withdrawn. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. 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 shown above but will never be less than the guaranteed minimum rate stated in the Contract. 20 PROSPECTUS RENEWALS. At least 15 but not more than 45 days prior to the end of each Guarantee Period, we will mail you a notice asking you what to do with your money, including the accrued interest. During the 30-day period after the end of the Guarantee Period, you may: 1) take no action. We will automatically apply your money to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for a Guarantee Period of that length; or 2) Instruct us to apply your money to one or more new Guarantee Periods of your choice. The new Guarantee Period(s) will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for those Guarantee Periods; or 3) Instruct us to transfer all or a portion of your money to one or more Variable Sub-Accounts. We will effect the transfer on the day we receive your instructions. We will not adjust the amount transferred to include a Market Value Adjustment. We will pay interest from the day the Guarantee Period expired until the date of the transfer. The interest will be the rate for the Shortest Guarantee Period then being offered; or 4) Withdraw all or a portion of your money. You may be required to pay a withdrawal charge, but we will not adjust the amount withdrawn to include a Market Value Adjustment. You may also be required to pay premium taxes and withholding (if applicable). The amount withdrawn will be deemed to have been withdrawn on the day the previous Guarantee Period ends. Unless you specify otherwise, amounts not withdrawn will be applied to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. Under our automatic laddering program ("Automatic Laddering Program"), you may choose, in advance, to use Guarantee Periods of the same length for all renewals. You can select this Program at any time during the Accumulation Phase, including on the Issue Date. We will apply renewals to Guarantee Periods of the selected length until you direct us in writing to stop. We may stop offering this Program at any time. For additional information on the Automatic Laddering Program, please call our customer service center at 1-800-692-4682. MARKET VALUE ADJUSTMENT. All withdrawals in excess of the PREFERRED WITHDRAWAL AMOUNT, and transfers from a Guarantee Period, other than those taken during the 30 day period after such Guarantee Period expires, are subject to a Market Value Adjustment. A Market Value Adjustment also applies when you apply amounts currently invested in a Guarantee Period to an Income Plan (unless paid or applied during the 30 day period after such Guarantee Period expires). A positive Market Value Adjustment will apply to amounts currently invested in a Guarantee Period that are paid out as death benefits. We will not apply a Market Value Adjustment to a transfer you make as part of a Dollar Cost Averaging Program. We also will not apply a Market Value Adjustment to a withdrawal you make: .. within the Preferred Withdrawal Amount as described on page 24, or .. to satisfy the IRS minimum distribution rules for the Contract. We apply the Market Value Adjustment to reflect changes in interest rates from the time you first allocate money to a Guarantee Period to the time it is removed from that Guarantee Period. We calculate the Market Value Adjustment by comparing the Treasury Rate for a period equal to the Guarantee Period at its inception to the Treasury Rate for a period equal to the time remaining in the Guarantee Period when you remove your money. "TREASURY RATE" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Bulletin Release H.15. The Market Value Adjustment may be positive or negative, depending on changes in interest rates. As such, you bear the investment risk associated with changes in interest rates. If interest rates increase significantly, the Market Value Adjustment and any withdrawal charge, premium taxes, and income tax withholding (if applicable) could reduce the amount you receive upon full withdrawal of your Contract Value to an amount that is less than the purchase payment plus interest at the minimum guaranteed interest rate under the Contract. Generally, if the Treasury Rate at the time you allocate money to a Guarantee Period is higher than the applicable current Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a higher amount payable to you or transferred. Conversely, if the Treasury Rate at the time you allocate money to a Guarantee Period is lower than the applicable Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a lower amount payable to you or transferred. For example, assume that you purchase a Contract and you select an initial Guarantee Period of 5 years and the 5 year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at that later time, the current 2 year Treasury Rate is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to you. Conversely, if the current 2 year Treasury 21 PROSPECTUS Rate is 4.80%, then the Market Value Adjustment will be negative, which will result in a decrease in the amount payable to you. The formula for calculating Market Value Adjustments is set forth in Appendix A to this prospectus, which also contains additional examples of the application of the Market Value Adjustment. INVESTMENT ALTERNATIVES: TRANSFERS TRANSFERS DURING THE ACCUMULATION PHASE During the Accumulation Phase, you may transfer Contract Value among the investment alternatives at any time. The minimum amount that you may transfer into a Guarantee Period is $500. You may request transfers in writing on a form that we provided or by telephone according to the procedure described below. We currently do not assess, but reserve the right to assess, a $10 charge on each transfer in excess of 12 per Contract Year. We treat transfers to or from more than one Portfolio on the same day as one transfer. Transfers you make as part of a Dollar Cost Averaging Program or Automatic Portfolio Rebalancing Program do not count against the 12 free transfers per Contract Year. We will process transfer requests that we receive before 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date using the Accumulation Unit Values for that Date. We will process requests completed after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date using the Accumulation Unit Values for the next Valuation Date. The Contract permits us to defer transfers from the Fixed Account for up to 6 months from the date we receive your request. If we decide to postpone transfers from the Fixed Account for 10 days or more, we will pay interest as required by applicable law. Any interest would be payable from the date we receive the transfer request to the date we make the transfer. If you transfer an amount from a Guarantee Period other than during the 30 day period after such Guarantee Period expires, we will increase or decrease the amount by a Market Value Adjustment. If any transfer reduces your value in such Guarantee Period to less than $500, we will treat the request as a transfer of the entire value in such Guarantee Period. We reserve the right to waive any transfer fees and restrictions. TRANSFERS DURING THE PAYOUT PHASE During the Payout Phase, you may make transfers among the Variable Sub-Accounts to change the relative weighting of the Variable Sub-Accounts on which your variable income payments will be based. In addition, you will have a limited ability to make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. You may not make any transfers for the first 6 months after the Payout Start Date. Thereafter, you may make transfers among the Variable Sub-Accounts or make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. Your transfers must be at least 6 months apart. TELEPHONE TRANSFERS You may make transfers by telephone by calling 1-800-692-4682, if you first send us a completed authorization form. The cut off time for telephone transfer requests is 4:00 p.m. Eastern Time (3:00 p.m. Central Time). In the event that the New York Stock Exchange closes early, i.e., before 4:00 p.m. Eastern Time (3:00 p.m. Central Time), or in the event that the Exchange closes early for a period of time but then reopens for trading on the same day, we will process telephone transfer requests as of the close of the Exchange on that particular day. We will not accept telephone requests received at any telephone number other than the number that appears in this paragraph or received after the close of trading on the Exchange. We may suspend, modify or terminate the telephone transfer privilege at any time without notice. We use procedures that we believe provide reasonable assurance that the telephone transfers are genuine. For example, we tape telephone conversations with persons purporting to authorize transfers and request identifying information. Accordingly, we disclaim any liability for losses resulting from allegedly unauthorized telephone transfers. However, if we do not take reasonable steps to help ensure that a telephone authorization is valid, we may be liable for such losses. EXCESSIVE TRADING LIMITS We reserve the right to limit transfers among the Variable Sub-Accounts in any Contract year, or to refuse any Variable Sub-Account transfer request, if: .. we believe, in our sole discretion, that excessive trading by such Contract Owner or Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Sub-Account or the share prices of the corresponding Portfolio or would be to the disadvantage of other Contract owners; or .. we are informed by one or more of the Portfolios that they intend to restrict the purchase or redemption of Portfolio shares because of excessive trading or because they believe that a specific transfer or groups of transfers would have a detrimental effect on the prices of Portfolio shares. We may apply the restrictions in any manner reasonably designed to prevent transfers that we consider disadvantageous to other Contract Owners. 22 PROSPECTUS DOLLAR COST AVERAGING PROGRAM Through the Dollar Cost Averaging Program, you may automatically transfer a set amount every month during the Accumulation Phase from any Variable Sub-Account, or the the Six Month DCA Fixed Account, or the Twelve Month DCA Fixed Account Option, to any other Variable Sub-Account. You may not use dollar cost averaging to transfer amounts to the Fixed Account. We will not charge a transfer fee for transfers made under this Program, nor will such transfers count against the 12 transfers you can make each Contract Year without paying a transfer fee. In addition, we will not apply the Market Value Adjustment to these transfers. The theory of dollar cost averaging is that if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same purchase dates. However, participation in this Program does not assure you of a greater profit from your purchases under the Program nor will it prevent or necessarily reduce losses in a declining market. Call or write us for instructions on how to enroll. AUTOMATIC PORTFOLIO REBALANCING PROGRAM Once you have allocated your money among the Variable Sub-Accounts, the performance of each Sub-Account may cause a shift in the percentage you allocated to each Sub-Account. If you select our Automatic Portfolio Rebalancing Program, we will automatically rebalance the Contract Value in each Variable Sub-Account and return it to the desired percentage allocations. Money you allocate to the Fixed Account will not be included in the rebalancing. We will rebalance your account each quarter according to your instructions. We will transfer amounts among the Variable Sub-Accounts to achieve the percentage allocations you specify. You can change your allocations at any time by contacting us in writing or by telephone. The new allocation will be effective with the first rebalancing that occurs after we receive your request. We are not responsible for rebalancing that occurs prior to receipt of your request. Example: Assume that you want your initial purchase payment split among 2 Variable Sub-Accounts. You want 40% to be in the AIM V.I. Balanced Variable Sub-Account and 60% to be in the Fidelity VIP Growth Variable Sub-Account. Over the next 2 months the bond market does very well while the stock market performs poorly. At the end of the first quarter, the AIM V.I. Balanced Variable Sub-Account now represents 50% of your holdings because of its increase in value. If you choose to have your holdings rebalanced quarterly, on the first day of the next quarter we would sell some of your units in the AIM V.I. Balanced Variable Sub-Account and use the money to buy more units in the Fidelity VIP Growth Variable Sub-Account so that the percentage allocations would again be 40% and 60% respectively. The Automatic Portfolio Rebalancing Program is available only during the Accumulation Phase. The transfers made under the Program do not count towards the 12 transfers you can make without paying a transfer fee, and are not subject to a transfer fee. Portfolio rebalancing is consistent with maintaining your allocation of investments among market segments, although it is accomplished by reducing your Contract Value allocated to the better performing segments. You may not use the Dollar Cost Averaging and Automatic Portfolio Rebalancing programs at the same time. EXPENSES As a Contract Owner, you will bear, directly or indirectly, the charges and expenses described below. CONTRACT MAINTENANCE CHARGE During the Accumulation Phase, on each Contract Anniversary, we will deduct a $30 contract maintenance charge from your Contract Value invested in each Variable Sub-Account in proportion to the amount invested. We also will deduct a full contract maintenance charge if you withdraw your entire Contract Value, unless your Contract qualifies for a waiver, described below. During the Payout Phase, we will deduct the charge proportionately from each income payment. The charge is for the cost of maintaining each Contract and the Variable Account. Maintenance costs include expenses we incur in billing and collecting purchase payments; keeping records; processing death claims, cash withdrawals, and policy changes; proxy statements; calculating Accumulation Unit Values and income payments; and issuing reports to Contract Owners and regulatory agencies. We cannot increase the charge. We will waive this charge if: .. total purchase payments equal $50,000 or more, or .. all of your money is allocated to the Fixed Account on a Contract Anniversary. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense risk charge daily at an 23 PROSPECTUS annual rate of 1.15% of the average daily net assets you have invested in the Variable Sub-Accounts. The mortality and expense risk charge is for all the insurance benefits available with your Contract (including our guarantee of annuity rates and the death benefits), for certain expenses of the Contract, and for assuming the risk (expense risk) that the current charges will be sufficient in the future to cover the cost of administering the Contract. If the charges under the Contract are not sufficient, then we will bear the loss. We guarantee the mortality and expense risk charge and we cannot increase it. We assess the mortality and expense risk charge during both the Accumulation Phase and the Payout Phase. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge daily at an annual rate of 0.10% of the average daily net assets you have invested in the Variable Sub-Accounts. We intend this charge to cover actual administrative expenses that exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributed to that Contract. We assess this charge each day during the Accumulation Phase and the Payout Phase. We guarantee that we will not raise this charge. TRANSFER FEE We do not currently impose a fee upon transfers among the investment alternatives. However, we reserve the right to charge $10 per transfer after the 12th transfer in each Contract Year. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging or Automatic Portfolio Rebalancing Program. WITHDRAWAL CHARGE We may assess a withdrawal charge of up to 7% of the purchase payment(s) you withdraw in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. The charge declines by 1% annually to 0% after 7 complete years from the day we receive the purchase payment being withdrawn. A schedule showing how the charge declines appears on page 6. During each Contract Year, you can withdraw up to 15% of purchase payments without paying the charge. Unused portions of this 15% "PREFERRED WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We determine the withdrawal charge by: .. multiplying the percentage corresponding to the number of complete years since we received the purchase payment being withdrawn, times .. the part of each purchase payment withdrawal that is in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. We will deduct withdrawal charges, if applicable, from the amount paid. For purposes of the withdrawal charge, we will treat withdrawals as coming from the oldest purchase payments first. However, for federal income tax purposes, please note that withdrawals are considered to have come first from earnings in the Contract, which means you pay taxes on the earnings portion of your withdrawal. We do not apply a withdrawal charge in the following situations: .. on the Payout Start Date (a withdrawal charge may apply if you elect to receive income payments for a specified period of less than 120 months); .. the death of the Contract Owner or Annuitant (unless the Settlement Value is used); .. withdrawals taken to satisfy IRS minimum distribution rules for the Contract; or .. withdrawals made after all purchase payments have been withdrawn. We use the amounts obtained from the withdrawal charge to pay sales commissions and other promotional or distribution expenses associated with marketing the Contracts. To the extent that the withdrawal charge does not cover all sales commissions and other promotional or distribution expenses, we may use any of our corporate assets, including potential profit which may arise from the mortality and expense risk charge or any other charges or fee described above, to make up any difference. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. Withdrawals may also be subject to a Market Value Adjustment. You should consult your own tax counsel or other tax advisers regarding any withdrawals. PREMIUM TAXES Currently, we do not make deductions for premium taxes under the Contract because New York does not charge premium taxes on annuities. We may deduct taxes that may be imposed in the future from purchase payments or the Contract Value when the tax is incurred or at a later time. DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES We are not currently making a provision for such taxes. In the future, however, we may make a provision for taxes if we determine, in our sole discretion, that we will incur a tax as a result of the operation of the Variable Account. We will deduct for any taxes we incur as a result of the operation of the Variable Account, whether or not we previously made a provision for taxes and whether or not it was sufficient. Our status under the Internal Revenue Code is briefly described in the Taxes section. OTHER EXPENSES Each Portfolio deducts advisory fees and other expenses from its assets. You indirectly bear the charges and expenses of the Portfolios whose shares are held by the 24 PROSPECTUS Variable Sub-Accounts. These fees and expenses are described in the accompanying prospectuses for the Portfolios. For a summary of these charges and expenses, see pages 8-10. We may receive compensation from the investment advisers or administrators of the Portfolios for administrative services we provide to the Portfolios. ACCESS TO YOUR MONEY You can withdraw some or all of your Contract Value at any time prior to the Payout Start Date. Full or partial withdrawals also are available under limited circumstances on or after the Payout Start Date. See "Income Plans" on page 25. The amount payable upon withdrawal is the Contract Value next computed after we receive the request for a withdrawal at our customer service center, adjusted by any Market Value Adjustment, less any withdrawal charges, contract maintenance charges, income tax withholding, and any premium taxes. We will pay withdrawals from the Variable Account within 7 days of receipt of the request, subject to postponement in certain circumstances. You can withdraw money from the Variable Account or the Fixed Account. To complete a partial withdrawal from the Variable Account, we will cancel Accumulation Units in an amount equal to the withdrawal and any applicable withdrawal charge and premium taxes. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. You must name the investment alternative from which you are taking the withdrawal. If none is named, then the withdrawal request is incomplete and cannot be honored. In general, you must withdraw at least $50 at a time. You also may withdraw a lesser amount if you are withdrawing your entire interest in a Variable Sub-Account. If you request a total withdrawal, you must return your Contract to us. POSTPONEMENT OF PAYMENTS We may postpone the payment of any amounts due from the Variable Account under the Contract if: 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the SEC; or 3. The SEC permits delay for your protection. In addition, we may delay payments or transfers from the Fixed Account for up to 6 months or a shorter period if required by law. If we delay payment or transfer for 10 business days or more, we will pay interest as required by law. Any interest would be payable from the date we receive the withdrawal request to the date we make the payment or transfer. SYSTEMATIC WITHDRAWAL PROGRAM You may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis at any time prior to the Payout Start Date. The minimum amount of each systematic withdrawal is $50. At our discretion, systematic withdrawals may not be offered in conjunction with the Dollar Cost Averaging Program or the Automatic Portfolio Rebalancing Program. Depending on fluctuations in the net asset value of the Variable Sub-Accounts and the value of the Fixed Account, systematic withdrawals may reduce or even exhaust the Contract Value. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. Please consult your tax advisor before taking any withdrawal. We will make systematic withdrawal payments to you or your designated payee. We may modify or suspend the Systematic Withdrawal Program and charge a processing fee for the service. If we modify or suspend the Systematic Withdrawal Program, existing systematic withdrawal payments will not be affected. MINIMUM CONTRACT VALUE If your request for a partial withdrawal would reduce the amount in any Guarantee Period to less than $500, we will treat it as a request to withdraw the entire amount invested in such Guarantee Period. If your request for a partial withdrawal would reduce your Contract Value to less than $1,000, we may treat it as a request to withdraw your entire Contract Value. Your Contract will terminate if you withdraw all of your Contract Value. We will, however, ask you to confirm your withdrawal request before terminating your Contract. Before terminating any Contract whose value has been reduced by withdrawals to less than $1,000, we will inform you in writing of our intention to terminate your Contract and give you ast least 30 days in which to make an additional purchase payment to restore your Contract's value to the contractual minimum of $1,000. If we terminate your Contract, we will distribute to you its Contract Value, adjusted by any applicable Market Value Adjustment, less withdrawal and other charges and applicable taxes. 25 PROSPECTUS INCOME PAYMENTS PAYOUT START DATE The Payout Start Date is the day that we apply your money to an Income Plan. The Payout Start Date must be no later than the day the Annuitant reaches age 90, or the 10th Contract Anniversary, if later. You may change the Payout Start Date at any time by notifying us in writing of the change at least 30 days before the scheduled Payout Start Date. Absent a change, we will use the Payout Start Date stated in your Contract. INCOME PLANS An "Income Plan" is a series of payments on a scheduled basis to you or to another person designated by you. You may choose and change your choice of Income Plan until 30 days before the Payout Start Date. If you do not select an Income Plan, we will make income payments in accordance with Income Plan 1 with guaranteed payments for 10 years if you have designated only one Annuitant or Income Plan 2 with guaranteed payments for 10 years if you have desginated joint Annuitants. After the Payout Start Date, you may not make withdrawals (except as described below) or change your choice of Income Plan. Three Income Plans are available under the Contract. Each is available to provide: .. fixed income payments; .. variable income payments; or .. a combination of the two. The three Income Plans are: INCOME PLAN 1 - LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as the Annuitant lives. If the Annuitant dies before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 2 - JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as either the Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint Annuitant die before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 3 - GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD (5 YEARS TO 30 YEARS). Under this plan, we make periodic income payments for the period you have chosen. These payments do not depend on the Annuitant's life. Income payments for less than 120 months may be subject to a withdrawal charge. We will deduct the mortality and expense risk charge from the Variable Sub-Account assets that support variable income payments even though we may not bear any mortality risk. The length of any guaranteed payment period under your selected Income Plan generally will affect the dollar amounts of each income payment. As a general rule, longer guarantee periods result in lower income payments, all other things being equal. For example, if you choose an Income Plan with payments that depend on the life of the Annuitant but with no minimum specified period for guaranteed payments, the income payments generally will be greater than the income payments made under the same Income Plan with a minimum specified period for guaranteed payments. If you choose Income Plan 1 or 2, or, if available, another Income Plan with payments that continue for the life of the Annuitant or joint Annuitant, we may require proof of age and sex of the Annuitant or joint Annuitant before starting income payments, and proof that the Annuitant or joint Annuitant is alive before we make each payment. Please note that under such Income Plans, if you elect to take no minimum guaranteed payments, it is possible that the payee could receive only 1 income payment if the Annuitant and any joint Annuitant both die before the second income payment, or only 2 income payments if they die before the third income payment, and so on. Generally, you may not make withdrawals after the Payout Start Date. One exception to this rule applies if you are receiving variable income payments that do not depend on the life of the Annuitant (such as under Income Plan 3). In that case you may terminate all or part of the Variable Account portion of the income payments at any time and receive a lump sum equal to the present value of the remaining variable income payments associated with the amount withdrawn. To determine the present value of any remaining variable income payments being withdrawn, we use a discount rate equal to the assumed annual investment rate that we use to compute such variable income payments. The minimum amount you may withdraw under this feature is $1,000. A withdrawal charge may apply. You will also have a limited ability to make transfers from the Variable Account portion of the income payments to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. We deduct applicable premium taxes, if any, from the Contract Value at the Payout Start Date. New York does not currently impose a premium tax. We may make other Income Plans available. You may obtain information about them by writing or calling us. You must apply at least the Contract Value in the Fixed Account on the Payout Start Date to fixed income payments. If you wish to apply any portion of your Fixed 26 PROSPECTUS Account balance to provide variable income payments, you should plan ahead and transfer that amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do not tell us how to allocate your Contract Value among fixed and variable income payments, we will apply your Contract Value in the Variable Account to variable income payments and your Contract Value in the Fixed Account to fixed income payments. We will apply your Contract Value, adjusted by a Market Value Adjustment, less applicable taxes to your Income Plan on the Payout Start Date. If the Contract Value is less than $2,000 or not enough to provide an initial payment of at least $20, and state law permits, we may: .. terminate the Contract and pay you the Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, in a lump sum instead of the periodic payments you have chosen, or .. reduce the frequency of your payments so that each payment will be at least $20. VARIABLE INCOME PAYMENTS The amount of your variable income payments depends upon the investment results of the Variable Sub-Accounts you select, the premium taxes you pay, the age and sex of the Annuitant, and the Income Plan you choose. We guarantee that the payments will not be affected by (a) actual mortality experience and (b) the amount of our administration expenses. We cannot predict the total amount of your variable income payments. Your variable income payments may be more or less than your total purchase payments because (a) variable income payments vary with the investment results of the underlying Portfolio and (b) the Annuitant could live longer or shorter than we expect based on the tables we use. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3%. If the actual net investment return of the Variable Sub-Accounts you choose is less than this assumed investment rate, then the dollar amount of your variable income payments will decrease. The dollar amount of your variable income payments will increase, however, if the actual net investment return exceeds the assumed investment rate. The dollar amount of the variable income payments stays level if the net investment return equals the assumed investment rate. Please refer to the Statement of Additional Information for more detailed information as to how we determine variable income payments. FIXED INCOME PAYMENTS We guarantee income payment amounts derived from the Fixed Account for the duration of the Income Plan. We calculate the fixed income payments by: 1. adjusting the portion of the Contract Value in the Fixed Account on the Payout Start Date by any applicable Market Value Adjustment; 2. deducting any applicable premium tax; and 3. applying the resulting amount to the greater of (a) the appropriate value from the income payment table in your Contract or (b) such other value as we are offering at that time. We may defer making fixed income payments for a period of up to 6 months or such shorter time as state law may require. If we defer payments for 10 business days or more, we will pay interest as required by law from the date we receive the withdrawal request to the date we make payment. CERTAIN EMPLOYEE BENEFIT PLANS The Contracts offered by this prospectus contain income payment tables that provide for different payments to men and women of the same age. However, we reserve the right to use income payment tables that do not distinguish on the basis of sex to the extent permitted by law. In certain employment-related situations, employers are required by law to use the same income payment tables for men and women. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan, you should consult with legal counsel as to whether the purchase of a Contract is appropriate. For qualified plans, where it is appropriate, we may use income payment tables that do not distinguish on the basis of sex. DEATH BENEFITS We will pay a death benefit if, prior to the Payout Start Date: 1. any Contract owner dies or, 2. the Annuitant dies, if the Contract Owner is not a natural person. We will pay the death benefit to the new Contract Owner who is determined immediately after the death. The new Contract Owner would be a surviving Contract Owner or, if none, the Beneficiary(ies). DEATH BENEFIT AMOUNT Prior to the Payout Start Date, the death benefit is equal to the greatest of: 1. the Contract Value as of the date we determine the death benefit, or 2. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of Contract Value) on the date we determine the death benefit, or 3. the Contract Value on the DEATH BENEFIT 27 PROSPECTUS ANNIVERSARY immediately preceding the date we determine the death benefit, adjusted by any purchase payments, withdrawal adjustment as defined below, and charges made since that Death Benefit Anniversary. A "Death Benefit Anniversary" is every seventh Contract Anniversary beginning with the Issue Date. For example, the Issue Date, 7th and 14th Contract Anniversaries are the first three Death Benefit Anniversaries, or 4. the greatest of the Anniversary Values as of the date we determine the death benefit. An "Anniversary Value" is equal to the Contract Value on a Contract Anniversary, increased by purchase payments made since that anniversary and reduced by the amount of any withdrawal adjustment, as defined below, since that anniversary. Anniversary Values will be calculated for each Contract Anniversary prior to the earlier of: (i) the date we determine the death benefit, or (ii) the deceased's 75th birthday or 5 years after the Issue Date, if later. A positive Market Value Adjustment will apply to amounts currently invested in a Guarantee Period that are paid out as death benefits. The value of the death benefit will be determined at the end of the Valuation Date on which we receive a complete request for payment of the death benefit, which includes Due Proof of Death. The withdrawal adjustment is equal to (a) divided by (b), with the result multiplied by (c), where: (a) = the withdrawal amount, (b) = the Contract Value immediately prior to the withdrawal, and (c) = the value of the applicable death benefit alternative immediately prior to the withdrawal. See Appendix C for an example representative of how the withdrawal adjustment applies. We will not settle any death claim until we receive Due Proof of Death. We will accept the following documentation as Due Proof of Death: .. a certified copy of a death certificate; or .. a certified copy of a decree of a court of competent jurisdiction as to a finding of death; or .. any other proof acceptable to us. DEATH BENEFIT PAYMENTS A death benefit will be paid: 1. if the new Contract Owner elects to receive the death benefit distributed in a single payment within 180 days of the date of death, and 2. if the death benefit is paid as of the day the value of the death benefit is determined. Otherwise, the Settlement Value will be paid. The new Contract Owner may make a single withdrawal of any amount within one year of the date of death without incurring a withdrawal charge. However, any applicable Market Value Adjustment, determined as of the date of the withdrawal, will apply. We reserve the right to waive the 180 day limit on a non-discriminatory basis. The Settlement Value paid will be the Settlement Value next computed on or after the requested distribution date for payment, or on the mandatory distribution date of 5 years after the date of death. In any event, the entire value of the Contract must be distributed within 5 years after the date of death unless an Income Plan is elected or a surviving spouse continues the Contract in accordance with the provisions described below. If the Contract Owner eligible to receive the death benefit is not a natural person, the Contract Owner may elect to receive the distribution upon death in one or more distributions. However, the entire value of the Contract must be distributed within five years after the date of death. If the Contract Owner is a natural person, the Contract Owner may elect to receive the distribution upon death either in one or more distributions, or by periodic payments through an Income Plan. Payments from the Income Plan must begin within one year of the date of death and must be payable throughout: .. the life of the Contract Owner; or .. a period not to exceed the life expectancy of the Contract Owner; or .. the life of the Contract Owner with payments guaranteed for a period not to exceed the life expectancy of the Contract Owner. If the surviving spouse of the deceased Contract Owner is the sole new Contract Owner, then the spouse may elect one of the options listed above or may continue the Contract in the Accumulation Phase as if the death had not occurred. The Contract may only be continued once. If the Contract is continued in the Accumulation Phase, the surviving spouse may make a single withdrawal of any amount within one year of the date of death without incurring a withdrawal charge. However, any applicable Market Value Adjustment, determined as of the date of the withdrawal, will apply. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. 28 PROSPECTUS MORE INFORMATION ALLSTATE NEW YORK Allstate New York is the issuer of the Contract. Allstate New York is a stock life insurance company organized under the laws of the State of New York. Allstate New York was incorporated in 1967 and was known as "Financial Life Insurance Company" from 1967 to 1978. From 1978 to 1984, Allstate New York was known as "PM Life Insurance Company." Since 1984 the company has been known as "Allstate Life Insurance Company of New York." Allstate New York is currently licensed to operate in New York. Our home office is One Allstate Drive, Farmingville, New York 11738. Our service center is located in Vernon Hills, Illinois. Allstate New York is a wholly owned subsidiary of Allstate Life Insurance Company ("Allstate Life"), a stock life insurance company incorporated under the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company, a stock property-liability insurance company incorporated under the laws of the State of Illinois. With the exception of the directors qualifying shares, all of the outstanding capital stock of Allstate Insurance Company is owned by The Allstate Corporation. Independent rating agencies regularly evaluate life insurers' claims-paying ability, quality of investments, and overall stability. A.M. Best Company assigns an A+ (Superior) financial strength rating to Allstate Life, which results in A+g rating to Allstate New York due to its group affiliation with Allstate Life. Standard & Poor's Insurance Rating Service assigns an AA+ (Very Strong) financial strength rating and Moody's Investors Service assigns an Aa2 (Excellent) financial strength rating to Allstate New York, sharing the same ratings of its parents, Allstate Life. These ratings do not reflect the performance of the Variable Account.We may from time to time advertise these ratings in our sales literature. THE VARIABLE ACCOUNT Allstate New York established the Allstate Life of New York Separate Account A on December 15, 1995. We have registered the Variable Account with the SEC as a unit investment trust. The SEC does not supervise the management of the Variable Account or Allstate New York. We own the assets of the Variable Account. The Variable Account is a segregated asset account under New York law. That means we account for the Variable Account's income, gains and losses separately from the results of our other operations. It also means that only the assets of the Variable Account that are in excess of the reserves and other Contract liabilities with respect to the Variable Account are subject to liabilities relating to our other operations. Our obligations arising under the Contracts are general corporate obligations of Allstate New York. The Variable Account consists of multiple Variable Sub-Accounts, 39 of which are available through the Contracts. Each Variable Sub-Account invests in a corresponding Portfolio. We may add new Variable Sub-Accounts or eliminate one or more of them, if we believe marketing, tax, or investment conditions so warrant. We do not guarantee the investment performance of the Variable Account, its Sub-Accounts or the Portfolios. We may use the Variable Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Variable Account. THE CONTRACT DISTRIBUTION. ALFS, Inc. ("ALFS"), located at 3100 Sanders Road, Northbrook, Illinois 60062, serves as principal underwriter of the Contracts. ALFS is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a registered broker-dealer under the Securities and Exchange Act of 1934, as amended ("Exchange Act"), and is a member of the National Association of Securities Dealers, Inc. The Contracts described in this prospectus are sold by registered representatives of broker-dealers who are our licensed insurance agents, either individually or through an incorporated insurance agency. Commission paid to broker-dealers may vary, but we estimate that the total commissions paid on all Contract sales to broker-dealers will not exceed 6.25% of any purchase payments. These commissions are intended to cover distribution expenses. From time to time, we may offer additional sales incentives of up to 1% of purchase payments to broker-dealers who maintain certain sales volume levels. Allstate New York does not pay ALFS a commission for distribution of the Contracts. The underwriting agreement with ALFS provides that we will reimburse ALFS for any liability to Contract Owners arising out of services rendered or Contracts issued. ADMINISTRATION. We have primary responsibility for all administration of the Contracts and the Variable Account. We provide the following administrative services, among others: .. issuance of the Contracts; .. maintenance of Contract Owner records; .. Contract Owner services; .. calculation of unit values; .. maintenance of the Variable Account; and .. preparation of Contract Owner reports. We will send you Contract statements and transaction confirmations at least annually. The annual statement details values and specific Contract data for each 29 PROSPECTUS particular Contract. You should notify us promptly in writing of any address change. You should read your statements and confirmations carefully and verify their accuracy. You should contact us promptly if you have a question about a periodic statement. We will investigate all complaints and make any necessary adjustments retroactively, but you must notify us of a potential error within a reasonable time after the date of the questioned statement. If you wait too long, we will make the adjustment as of the date that we receive notice of the potential error. We also will provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws. TAX QUALIFIED PLANS If you use the Contract with a qualified plan, the plan may impose different or additional conditions or limitations on withdrawals, waivers of withdrawal charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. THE PORTFOLIOS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all dividends and capital gains distributions from the Portfolios in shares of the distributing Portfolio at their net asset value. VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote the shares of the Portfolios held by the Variable Sub-Accounts to which you have allocated your Contract Value. Under current law, however, you are entitled to give us instructions on how to vote those shares on certain matters. Based on our present view of the law, we will vote the shares of the Portfolios that we hold directly or indirectly through the Variable Account in accordance with instructions that we receive from Contract owners entitled to give such instructions. As a general rule, before the Payout Start Date, the Contract Owner or anyone with a voting interest is the person entitled to give voting instructions. The number of shares that a person has a right to instruct will be determined by dividing the Contract Value allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Portfolio as of the record date of the meeting. After the Payout Start Date, the person receiving income payments has the voting interest. The payee's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Portfolio. The votes decrease as income payments are made and as the reserves for the Contract decrease. We will vote shares attributable to Contracts for which we have not received instructions, as well as shares attributable to us, in the same proportion as we vote shares for which we have received instructions, unless we determine that we may vote such shares in our own discretion. We will apply voting instructions to abstain on any item to be voted on a pro-rata basis to reduce the votes eligible to be cast. We reserve the right to vote Portfolio shares as we see fit without regard to voting instructions to the extent permitted by law. If we disregard voting instructions, we will include a summary of that action and our reasons for that action in the next semi-annual financial report we send to you. CHANGES IN PORTFOLIOS. If the shares of any of the Portfolios are no longer available for investment by the Variable Account or if, in our judgment, further investment in such shares is no longer desirable in view of the purposes of the Contract, we may eliminate that Portfolio and substitute shares of another eligible investment portfolio. Any substitution of securities will comply with the requirements of the 1940 Act. We also may add new Variable Sub-Accounts that invest in additional mutual funds. We will notify you in advance of any changes. CONFLICTS OF INTEREST. Certain of the Portfolios sell their shares to Variable Accounts underlying both variable life insurance and variable annuity contracts. It is conceivable that in the future it may be unfavorable for variable life insurance Variable Accounts and variable annuity Variable Accounts to invest in the same Portfolio. The boards of directors of these Portfolios monitor for possible conflicts among Variable Accounts buying shares of the Portfolios. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a Variable Account to comply with such laws could cause a conflict. To eliminate a conflict, a Portfolio's board of directors may require a Variable Account to withdraw its participation in a Portfolio. A Portfolio's net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a Variable Account withdrawing because of a conflict. LEGAL MATTERS JordenBurt LLP, Washington, D.C., has advised ALLSTATE NEW YORK on certain federal securities law matters. All matters of New York law pertaining to the Contracts, including the validity of the Contracts and ALLSTATE NEW YORK's right to issue such Contracts under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of Allstate New York. 30 PROSPECTUS TAXES THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. ALLSTATE NEW YORK 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 your individual circumstances. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK ALLSTATE NEW YORK is taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code. Since the Variable Account is not an entity separate from ALLSTATE NEW YORK, and its operations form a part of ALLSTATE NEW YORK, it will not be taxed separately. Investment income and realized capital gains of the Variable Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, ALLSTATE NEW YORK believes that the Variable Account investment income and capital gains will not be taxed to the extent that such income and gains are applied to increase the reserves under the Contract. Accordingly, ALLSTATE NEW YORK does not anticipate that it will incur any federal income tax liability attributable to the Variable Account, and therefore ALLSTATE NEW YORK does not intend to make provisions for any such taxes. If ALLSTATE NEW YORK is taxed on investment income or capital gains of the Variable Account, then ALLSTATE NEW YORK may impose a charge against the Variable Account in order to make provision for such taxes. TAXATION OF ANNUITIES IN GENERAL TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value until a distribution occurs. This rule applies only where: 1. the Contract Owner is a natural person, 2. the investments of the Variable Account are "adequately diversified" according to Treasury Department regulations, and 3. ALLSTATE NEW YORK is considered the owner of the Variable Account assets for federal income tax purposes. NON-NATURAL OWNERS. As a general rule, annuity contracts owned by non-natural persons such as corporations, trusts, or other entities are not treated as annuity contracts for federal income tax purposes. The income on such contracts does not enjoy tax deferral and is taxed as ordinary income received or accrued by the owner during the taxable year. EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the general rule that annuity contracts held by a non-natural owner are not treated as annuity contracts for federal income tax purposes. contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the contract as agent for a natural person. However, this special exception will not apply in the case of an employer who is the nominal owner of an annuity contract under a non-qualified deferred compensation arrangement for its employees. Other exceptions to the non-natural owner rule are: (1) contracts acquired by an estate of a decedent by reason of the death of the decedent; (2) certain qualified contracts; (3) contracts purchased by employers upon the termination of certain qualified plans; (4) certain contracts used in connection with structured settlement agreements, and (5) immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for federal income tax purposes, the investments in the Variable Account must be "ADEQUATELY DIVERSIFIED" consistent with standards under Treasury Department regulations. If the investments in the Variable Account are not adequately diversified, the Contract will not be treated as an annuity contract for federal income tax purposes. As a result, the income on the Contract will be taxed as ordinary income received or accrued by the Contract Owner during the taxable year. Although ALLSTATE NEW YORK does not have control over the Funds or their investments, we expect the Funds to meet the diversification requirements. OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered the owner of separate account assets if he possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. At the time the diversification regulations were issued, the Treasury Department announced that the regulations do not provide guidance concerning circumstances in which investor control of the separate account investments may cause a contract owner to be treated as the owner of the separate account. The Treasury Department also stated that future guidance would be issued regarding the extent that owners could direct sub-account investments without being treated as owners of the underlying assets of the separate account. Your rights under the Contract are different than those described by the IRS in rulings in which it found that contract owners were not owners of separate account assets. For example, you have the choice to allocate premiums and Contract Values among a broader selection of investment alternatives. Also, you may be able to transfer among investment alternatives more frequently than in such rulings. These differences could result in you 31 PROSPECTUS being treated as the owner of the Variable Account. If this occurs, income and gain from the Variable Account assets would be includible in your gross income. ALLSTATE NEW YORK does not know what standards will be set forth in any regulations or rulings which the Treasury Department may issue. It is possible that future standards announced by the Treasury Department could adversely affect the tax treatment of your Contract. We reserve the right to modify the Contract as necessary to attempt to prevent you from being considered the federal tax owner of the assets of the Variable Account. However, we make no guarantee that such modification to the Contract will be successful. TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under a non-qualified Contract, amounts received are taxable to the extent the Contract Value, without regard to surrender charges, exceeds the investment in the Contract. The investment in the Contract is the gross premium paid for the contract minus any amounts previously received from the Contract if such amounts were properly excluded from your gross income. If you make a full withdrawal under a non-Qualified Contract, the amount received will be taxable only to the extent it exceeds the investment in the Contract. TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity payments received from a nonqualified contract provides for the return of your investment in the Contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. For 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. If you elect variable annuity payments, the amount excluded from taxable income is determined by dividing the investment in the Contract by the total number of expected payments. The annuity payments will be fully taxable after the total amount of the investment in the Contract is excluded using these ratios. The Federal tax treatment of annuity payments is unclear in some respects. As a result, if the IRS should provide further guidance, it is possible that the amount we calculate and report to the IRS as taxable could be different. If you die, and annuity payments cease before the total amount of the investment in the Contract is recovered, the unrecovered amount will be allowed as a deduction for your last taxable year. WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding the taxation of any additional withdrawal received after the Payout Start Date. It is possible that a greater or lesser portion of such a payment could be taxable than the amount we determine. DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for federal income tax purposes, the Contract must provide: 1. if any Contract Owner dies on or after the Payout 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 Contract Owner's death; 2. if any Contract Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within 5 years after the date of the Contract Owner's death. These requirements are satisfied if any portion of the Contract Owner's interest that 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 1 year of the Contract Owner's death. If the Contract Owner's designated Beneficiary is the surviving spouse of the Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner. 3. if the Contract Owner is a non-natural person, then the Annuitant will be treated as the Contract Owner for purposes of applying the distribution at death rules. In addition, a change in the Annuitant on a Contract owned by a non-natural person will be treated as the death of the Contract Owner. TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included 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 Income Plan, the amounts are taxed in the same manner as annuity payments. PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable amount of any premature distribution from a non-Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: 1. made on or after the date the Contract Owner attains age 59 1/2, 2. made as a result of the Contract Owner's death or becoming totally disabled, 3. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, 4. made under an immediate annuity, or 5. attributable to investment in the Contract before August 14, 1982. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts using substantially equal periodic payments or immediate annuity payments as an exception to the penalty tax on premature distributions, 32 PROSPECTUS any additional withdrawal or other modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the Contract Owner's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. You should consult a competent tax advisor prior to taking a withdrawal. TAX FREE EXCHANGES UNDER IRC SECTION 1035. A 1035 exchange is a tax-free exchange of a non-qualified life insurance contract, endowment contract or annuity contract for a new non-qualified annuity contract. The Contract Owner(s) must be the same on the old and new contract. Basis from the old contract carries over to the new contract so long as we receive that information from the relinquishing company. If basis information is never received, we will assume that all exchanged funds represent earnings and will allocate no cost basis to them. TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without full and adequate consideration to a person other than your spouse (or to a former spouse incident to a divorce), you will be taxed on the difference between the Contract Value and the investment in the Contract at the time of transfer. Except for certain Qualified Contracts, any amount you receive as a loan under a Contract, and any assignment or pledge (or agreement to assign or pledge) of the Contract Value is taxed as a withdrawal of such amount or portion and may also incur the 10% penalty tax. Currently we do not allow assignments. AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-qualified deferred annuity contracts issued by ALLSTATE NEW YORK (or its affiliates) to the same Contract Owner during any calendar year be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. INCOME TAX WITHHOLDING Generally, ALLSTATE NEW YORK is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% of the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. ALLSTATE NEW YORK is required to withhold federal income tax using the wage withholding rates for all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. QUALIFIED CONTRACTS The income on qualified plan and IRA investments is tax deferred, and the income on variable annuities held by such plans does not receive any additional tax deferral. You should review the annuity features, including all benefits and expenses, prior to purchasing a variable annuity in a qualified plan or IRA. Contracts may be used as investments with certain qualified plans such as: .. Individual Retirement Annuities or Accounts (IRAs) under Section 408 of the Code; .. Roth IRAs under Section 408A of the Code; .. Simplified Employee Pension Plans under Section 408(k) of the Code; .. Savings Incentive Match Plans for Employees (SIMPLE) Plans under Section 408(p) of the Code; .. Tax Sheltered Annuities under Section 403(b) of the Code; .. Corporate and Self Employed Pension and Profit Sharing Plans under Sections 401 and 403; and .. State and Local Government and Tax-Exempt Organization Deferred Compensation Plans under Section 457. ALLSTATE NEW YORK reserves the right to limit the availability of the Contract for use with any of the Qualified Plans listed above or to modify the Contract to conform with tax requirements. 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 certain transactions such as excess contributions, premature distributions, and distributions that do not conform to specified commencement and minimum distribution rules. In the case of certain qualified plans, the terms of the plans may govern the right to benefits, regardless of the terms of the Contract. TAXATION OF WITHDRAWALS FROM A QUALIFIED CONTRACT. If you make a partial withdrawal under a Qualified Contract other than a Roth IRA, the portion of the payment that bears the same ratio to the total payment that the investment in the Contract (i.e., nondeductible IRA contributions, after tax contributions to qualified plans) bears to the Contract Value, is excluded from your income. We do not keep track of nondeductible contributions, and all tax reporting of distributions from Qualified Contracts other than Roth IRAs will indicate that the distribution is fully taxable. "QUALIFIED DISTRIBUTIONS" from Roth IRAs are not included in gross income. "Qualified distributions" are 33 PROSPECTUS any distributions made more than five taxable years after the taxable year of the first contribution to any Roth IRA and which are: .. made on or after the date the Contract Owner attains age 59 1/2, .. made to a beneficiary after the Contract Owner's death, .. attributable to the Contract Owner being disabled, or .. made for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "NONQUALIFIED DISTRIBUTIONS" from Roth IRAs are treated as made from contributions first and are included in gross income only to the extent that distributions exceed contributions. All tax reporting of distributions from Roth IRAs will indicate that the taxable amount is not determined. REQUIRED MINIMUM DISTRIBUTIONS. Generally, qualified plans require minimum distributions upon reaching age 70 1/2. Failure to withdraw the required minimum distribution will result in a 50% tax penalty on the shortfall not withdrawn from the contract. Not all income plans offered under this annuity contract satisfy the requirements for minimum distributions. Because these distributions are required under the code and the method of calculation is complex, please see a competent tax advisor. THE DEATH BENEFIT AND QUALIFIED CONTRACTS. Pursuant to the Code and IRS regulations, an IRA may not invest in life insurance contracts. However, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA) may provide a death benefit that equals the greater of the purchase payments or the Contract Value. The Contract offers a death benefit that in certain circumstances may exceed the greater of the purchase payments or the Contract Value. It is possible that the Death Benefit could be viewed as violating the prohibition on investment in life insurance contracts, with the result that the Contract would not satisfy the requirements of an IRA. We believe that these regulations do not prohibit all forms of optional death benefits; however, at this time we are not allowing the Enhanced Earnings Death Benefit Plus Option to be sold with an IRA. It is also possible that the certain death benefits that offer enhanced earnings could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in current taxable income to a Contract Owner. In addition, there are limitations on the amount of incidental death benefits that may be provided under qualified plans, such as in connection with a 403(b) plan. ALLSTATE NEW YORK reserves the right to limit the availability of the Contract for use with any of the qualified plans listed above. PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM QUALIFIED CONTRACTS. A 10% penalty tax applies to the taxable amount of any premature distribution from a Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: 1. made on or after the date the Contract Owner attains age 59 1/2, 2. made as a result of the Contract Owner's death or total disability, 3. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Contract Beneficiary, 4. made pursuant to an IRS levy, 5. made for certain medical expenses, 6. made to pay for health insurance premiums while unemployed (only applies for IRAs), 7. made for qualified higher education expenses (only applies for IRAs), and 8. made for a first time home purchase (up to a $10,000 lifetime limit and only applies for IRAs). During the first 2 years of the individual's participation in a SIMPLE IRA, distributions that are otherwise subject to the premature distribution penalty, will be subject to a 25% penalty tax. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON QUALIFIED CONTRACTS. With respect to Qualified Contracts using substantially equal periodic payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. You should consult a competent tax advisor prior to taking a withdrawal. INCOME TAX WITHHOLDING ON QUALIFIED CONTRACTS. Generally, ALLSTATE NEW YORK is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions that are not considered "ELIGIBLE ROLLOVER DISTRIBUTIONS." The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% from the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. ALLSTATE NEW YORK is required to withhold federal income 34 PROSPECTUS tax at a rate of 20% on all "ELIGIBLE ROLLOVER DISTRIBUTIONS" unless you elect to make a "DIRECT ROLLOVER" of such amounts to an IRA or eligible retirement plan. 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, 3. a series of substantially equal periodic payments made over the life (joint lives) of the participant (and beneficiary), or, 4. hardship distributions. For all annuitized distributions that are not subject to the 20% withholding requirement, ALLSTATE NEW YORK is required to withhold federal income tax using the wage withholding rates from all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity (IRA). 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. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "ROLLED OVER" to a Roth Individual Retirement Annuity. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. SIMPLIFIED EMPLOYEE PENSION PLANS. Section 408(k) of the Code allows eligible employers to establish simplified employee pension plans for their employees using individual retirement annuities. Under these plans the employer may, within specified limits, make deductible contributions on behalf of the employees to the individual retirement annuities. Employers intending to use the Contract in connection with such plans should seek competent tax advice. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS). Sections 408(p) and 401(k) of the Code allow eligible 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 IRA 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 or nonelective contributions made by employers. Employers intending to use the Contract in conjunction with SIMPLE plans should seek competent tax and legal advice. TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS (TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND YOUR COMPETENT TAX ADVISOR. TAX SHELTERED ANNUITIES. Section 403(b) of the Tax Code provides tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. Under Section 403(b), any contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee: .. attains age 59 1/2, .. separates from service, .. dies, .. becomes disabled, or .. incurs a hardship (earnings on salary reduction contributions may not be distributed on account of hardship). These limitations do not apply to withdrawals where ALLSTATE NEW YORK is directed to transfer some or all of the Contract Value to another 403(b) plan. 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. Self-employed individuals may establish tax favored retirement plans for themselves and their employees. Such retirement plans (commonly referred to as "H.R.10" or "KEOGH") may permit the purchase of annuity contracts. 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. In eligible governmental plans, all assets and income must be held in a trust/ custodial account/annuity contract for the exclusive 35 PROSPECTUS benefit of the participants and their beneficiaries. To the extent the Contracts are used in connection with a non-governmental 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. Under eligible 457 plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan. ANNUAL REPORTS AND OTHER DOCUMENTS ALLSTATE NEW YORK's annual report on Form 10-K for the year ended December 31, 2001 is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. Accordingly, only the statement that is changed or replaced will legally be a part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR" system using the identifying number CIK No. 0000948255. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http:// www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at: Customer Service, P.O. Box 94038, Palatine, Illinois 60094-4038 (telephone: 1-800-692-4682). PERFORMANCE INFORMATION We may advertise the performance of the Variable Sub-Accounts, including yield and total return information. Yield refers to the income generated by an investment in a Variable Sub-Account over a specified period. Total return represents the change, over a specified period of time, in the value of an investment in a Variable Sub-Account after reinvesting all income distributions. All performance advertisements will include, as applicable, standardized yield and total return figures that reflect the deduction of insurance charges, the contract maintenance charge, and withdrawal charge. Performance advertisements also may include total return figures that reflect the deduction of insurance charges, but not the contract maintenance or withdrawal charges. The deduction of such charges would reduce the performance shown. In addition, performance advertisements may include aggregate, average, year-by-year, or other types of total return figures. Performance information for periods prior to the inception date of the Variable Sub-Accounts will be based on the historical performance of the corresponding Portfolios for the periods beginning with the inception dates of the Portfolios and adjusted to reflect current Contract expenses. You should not interpret these figures to reflect actual historical performance of the Variable Account. We may include in advertising and sales materials tax deferred compounding charts and other hypothetical illustrations that compare currently taxable and tax deferred investment programs based on selected tax brackets. Our advertisements also may compare the performance of our Variable Sub-Accounts with: (a) certain unmanaged market indices, including but not limited to the Dow Jones Industrial Average, the Standard & Poor's 500, and the Shearson Lehman Bond Index; and/or (b) other management investment companies with investment objectives similar to the underlying funds being compared. In addition, our advertisements may include the performance ranking assigned by various publications, including the Wall Street Journal, Forbes, Fortune, Money, Barron's, Business Week, USA Today, and statistical services, including Lipper Analytical Services Mutual Fund Survey, Lipper Annuity and Closed End Survey, the Variable Annuity Research Data Survey, and SEI. EXPERTS The financial statements of Allstate New York as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and related financial statement schedules incorporated herein by reference from the Annual Report on Form 10-K of Allstate New York and from the STatement of Additional Information, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon the authority as experts in accounting and auditing. The financial statements of the Variable Accounts as of December 31, 2001 and for each of the periods in the two years then ended incorporated herein by reference from the Statement of Additional Information, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 36 PROSPECTUS APPENDIX A MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the applicable Guarantee Period for the week preceding the establishment of the Guarantee Period. N = the number of whole and partial years from the date we receive the withdrawal, transfer, or death benefit request, or from the Payout Start Date, to the end of the Guarantee Period; and J = the Treasury Rate for a maturity equal to the Guarantee Period for the week preceding the receipt of the withdrawal, transfer, death benefit, or income payment request. If a note for a maturity of length N is not available, a weighted average will be used. "Treasury Rate" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Bulletin Release H.15. The Market Value Adjustment factor is determined from the following formula: ..9 x (I - J) x N To determine the Market Value Adjustment, we will multiply the Market Value Adjustment factor by the amount transefered (in excess of the Free Withdrawal Amount) paid as a death benefit, or applied to an Income Plan, from a Guarantee Period at any time other than during the 30 day period after such Guarentee Period expires. EXAMPLES OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 allocated to a Guarantee Period Guarantee Period: 5 years Guaranteed Interest Rate: 4.50% 5 Year Treasury Rate at the time the Guarantee Period is established: 4.50% Full Surrender: End of Contract Year 3 NOTE: These examples assume that premium taxes are not applicable. EXAMPLE 1 (ASSUME DECLINING INTEREST RATES) Step 1. Calculate Contract Value at End of Contract Year 3: $10,000.00 X (1.045)/3/ = $11,411.66 Step 2. Calculate the Preferred Withdrawal Amount: .15 X 10,000.000 = $1,500.00 Step 3. Calculate the I = 4.5% Market Value Adjustment: J = 4.2% N = 730 days ------------ = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .042) X (730/365) = .0054 Market Value Adjustment = Market Value Adjustment Factor x Amount Subject to Market Value Adjustment: = .0054 X ($11,411.66 - $1,500.00) = $53.32 Step 4. Calculate the Withdrawal Charge: = .05 X (10,000.00 - 1,500.00 + 53.52) = $427.68 Step 5. Calculate the amount received by a Contract Owner as a result of full withdrawal at the end of Contract Year 3: 11,411.66 - 427.68 + 53.52 = $11,037.50 37 PROSPECTUS EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1. Calculate Contract Value at End of Contract Year 3: 10,000.00 X (1.045)/3/ = $11,411.66 Step 2. Calculate the Preferred Withdrawal Amount: .15 X 10,000.00 = $1,500.00 Step 3. Calculate the Market Value Adjustment: I = 4.5% J = 4.8% N = 730 days -------- = 2 365 days Market Value Adjustment Factor: .9 X (I-J) X N = .9 X (.045 - .048) X (730/365) = -.0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: -.0054 X (11,411.66 - 1,500.00) = -$53.52 Step 4. Calculate the Withdrawal Charge: .05 X (10,000.00 - 1,500.00 - 53.52) = $422.32 Step 5. Calculate the amount received by a Contract Owner as a result of full withdrawal at the end of Contract Year 3: 11,411.66 - 422.32 - 53.52 = $10,935.82 38 PROSPECTUS APPENDIX B WITHDRAWAL ADJUSTMENT EXAMPLE Issue Date: January 1, 2002 Initial Purchase Payment: $50,000 Death Benefit Amount
Death Benefit Contract Value Contract Value Transaction After Greatest Date Type of Occurence Before Occurrence Amount Occurence Anniversary Value Anniversary Value - ------ ------------------ ----------------- ----------- ------------- ----------------- ----------------- 1/1/01 Issue Date -- $50,000 $50,000 $50,000 $50,000 1/1/02 Contract Anniversary $55,000 -- $55,000 $50,000 $55,000 7/1/02 Partial Withdrawal $60,000 $15,000 $45,000 $37,500 $41,250
Withdrawal adjustment equals the partial withdrawal amount divided by the Contract Value immediately prior to the partial withdrawal multiplied by the value of the applicable death benefit amount alternative immediately prior to the partial withdrawal. DEATH BENEFIT ANNIVERSARY VALUE DEATH BENEFIT PARTIAL WITHDRAWAL AMOUNT (w) $15,000 Contract Value Immediately Prior to Partial Withdrawal (a) $60,000 Value of Applicable Death Benefit Amount Immediately Prior to Partial Withdrawal (d) $50,000 Withdrawal Adjustment [(w)/(a)]x(d) $12,500 Adjusted Death Benefit $37,500 GREATEST ANNIVERSARY VALUE DEATH BENEFIT PARTIAL WITHDRAWAL AMOUNT (w) $15,000 Contract Value Immediately Prior to Partial Withdrawal (a) $60,000 Value of Applicable Death Benefit Amount Immediately Prior to Partial Withdrawal (d) $55,000 Withdrawal Adjustment [(w)/(a)]x(d) $13,750 Adjusted Death Benefit $41,250 Please remember that you are looking at a hypothetical example, and that your investment performance may be greater or less than the figures shown. 39 PROSPECTUS CUSTOM PORTFOLIO VARIABLE ANNUITY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STREET ADDRESS: 2940 S. 84TH STREET, LINCOLN, NE 68506-4142 MAILING ADDRESS: P.O. BOX 82656, LINCOLN, NE 68501-2656 TELEPHONE NUMBER: 1-800-692-4682 PROSPECTUS DATED APRIL 30, 2005 Allstate Life Insurance Company of New York ("ALLSTATE NEW YORK") is offering the Custom Portfolio Variable Annuity, a group flexible premium deferred variable annuity contract ("CONTRACT"). This prospectus contains information about the Contract that you should know before investing. Please keep it for future reference. The Contract currently offers 29 investment alternatives ("INVESTMENT ALTERNATIVES"). The investment alternatives include 3 fixed account options ("FIXED ACCOUNT") and 26 variable sub-accounts ("VARIABLE SUB-ACCOUNTS") of the Allstate Life of New York Separate Account A ("VARIABLE ACCOUNT"). Each Variable Sub-Account invests exclusively in shares of one of the following underlying fund portfolios ("PORTFOLIOS"): AIM VARIABLE INSURANCE FUNDS DREYFUS STOCK INDEX FUND FIDELITY(R) VARIABLE INSURANCE PRODUCTS DREYFUS VARIABLE INVESTMENT FUND (VIF) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST WELLS FARGO VARIABLE TRUST FUNDS OPPENHEIMER VARIABLE ACCOUNT FUNDS DELAWARE VIP TRUST THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. WE (Allstate New York) have filed a Statement of Additional Information, dated April 30, 2005, with the Securities and Exchange Commission ("SEC"). It contains more information about the Contract and is incorporated herein by reference, which means it is legally a part of this prospectus. Its table of contents appears on page 40 of this prospectus. For a free copy, please write or call us at the address or telephone number above, or go to the SEC's Web site (http:// www.sec.gov). You can find other information and documents about us, including documents that are legally part of this prospectus, at the SEC's Web site. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS THAT IMPORTANT HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS. HOWEVER, THE CONTRACTS ARE NOT NOTICES DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT FDIC INSURED. THE CONTRACTS ARE ONLY AVAILABLE IN NEW YORK. 1 PROSPECTUS TABLE OF CONTENTS PAGE ---- OVERVIEW Important Terms 3 The Contract at a Glance 4 How the Contract Works 6 Expense Table 7 Financial Information 9 CONTRACT FEATURES The Contract 9 Purchases 10 Contract Value 11 Investment Alternatives 11 The Variable Sub-Accounts 11 The Fixed Account 13 Transfers 17 Expenses 19 Access To Your Money 20 Income Payments 21 PAGE ---- Death Benefits 23 OTHER INFORMATION More Information: 26 Allstate New York 26 The Variable Account 26 The Portfolios 27 The Contract 27 Non-Qualified Annuities Held Within a Qualified Plan 28 Legal Matters 28 Taxes 29 Annual Reports and Other Documents 35 APPENDIX A-ACCUMULATION UNIT VALUE 34 APPENDIX B-MARKET VALUE ADJUSTMENT 37 APPENDIX C-WITHDRAWAL ADJUSTMENT EXAMPLE 39 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 40 2 PROSPECTUS IMPORTANT TERMS This prospectus uses a number of important terms that you may not be familiar with. The index below identifies the page that describes each term. The first use of each term in this prospectus appears in highlights. PAGE ---- Accumulation Phase 6 Accumulation Unit 11 Accumulation Unit Value 11 Allstate New York ("We" or "Us") 1 Anniversary Values 23 Annuitant 9 Automatic Additions Program 10 Automatic Portfolio Rebalancing Program 18 Beneficiary 9 Cancellation Period 11 Contract* 9 Contract Anniversary 5 Contract Owner ("You") 9 Contract Value 5 Contract Year 5 Death Benefit Anniversary 24 Dollar Cost Averaging Program 18 Due Proof of Death 24 Fixed Account 13 PAGE ---- Guarantee Periods 14 Income Payments 21 Investment Alternatives 11 Issue Date 6 Market Value Adjustment 16 Payout Phase 6 Payout Start Date 21 Portfolios 27 Preferred Withdrawal Amount 20 Tax Qualified Contracts 32 Right to Cancel 11 SEC 1 Settlement Value 24 Systematic Withdrawal Program 21 Treasury Rate 16 Valuation Dates 11 Variable Account 26 Variable Sub-Account 11 * The Allstate Custom Portfolio Variable Annuity is a group contract and your ownership is represented by certificates. References to "Contract" in this prospectus include certificates, unless the context requires otherwise. 3 PROSPECTUS THE CONTRACT AT A GLANCE The following is a snapshot of the Contract. Please read the remainder of this prospectus for more information. FLEXIBLE PAYMENTS You can purchase a Contract with as little as $3,000 ($2,000 for a "QUALIFIED CONTRACT" which is a Contract issued with a qualified endorsement). You can add to your Contract as often and as much as you like, but each payment must be at least $100. For allocations to the Fixed Account the minimum payment must be at least $500. You must maintain a minimum account size of $1,000. - -------------------------------------------------------------------------------- RIGHT TO CANCEL You may cancel your Contract within 10 days after receipt (60 days if you are exchanging another contract for the Contract described in this prospectus) ("CANCELLATION PERIOD"). Upon cancellation we will return your purchase payments adjusted to the extent federal or state law permits to reflect the investment experience of any amounts allocated to the Variable Account. - -------------------------------------------------------------------------------- EXPENSES You will bear the following expenses: . Total Variable Account annual fees equal to 1.25% of average daily net assets . Annual contract maintenance charge of $30 (with certain exceptions) . Withdrawal charges ranging from 0% to 7% of payment withdrawn (with certain exceptions) . Transfer fee of $10 after 12th transfer in any CONTRACT YEAR (fee currently waived) . State premium tax (New York currently does not impose one). In addition, each Portfolio pays expenses that you will bear indirectly if you invest in a Variable Sub-Account. - ------------------------------------------------------------------------------- INVESTMENT The Contract offers 29 investment alternatives ALTERNATIVES including: . 3 Fixed Account Options (which credits interest at rates we guarantee), and . 26 Variable Sub-Accounts investing in Portfolios offering professional money management by: . A I M Advisors, Inc. . Fidelity Management & Research Company . Templeton Investment Counsel, LLC . OppenheimerFunds, Inc. . The Dreyfus Corporation . Wells Fargo Funds Management, LLC . Delaware Management Company To find out current rates being paid on the Fixed Account, or to find out how the Variable Sub-Accounts have performed, please call us at 1-800-692- 4682. - -------------------------------------------------------------------------------- SPECIAL SERVICES For your convenience, we offer these special services: . AUTOMATIC PORTFOLIO REBALANCING PROGRAM . AUTOMATIC ADDITIONS PROGRAM . DOLLAR COST AVERAGING PROGRAM . SYSTEMATIC WITHDRAWAL PROGRAM 4 PROSPECTUS - -------------------------------------------------------------------------------- INCOME PAYMENTS You can choose fixed income payments, variable income payments, or a combination of the two. You can receive your income payments in one of the following ways: . life income with guaranteed payments . a joint and survivor life income with guaranteed payments . guaranteed payments for a specified period (5 to 30 years) - -------------------------------------------------------------------------------- DEATH BENEFITS If you die before the PAYOUT START DATE, we will pay the death benefit described in the Contract. - -------------------------------------------------------------------------------- TRANSFERS Before the Payout Start Date, you may transfer your Contract value ("CONTRACT VALUE") among the investment alternatives, with certain restrictions. Transfers to the Fixed Account must be at least $500. We do not currently impose a fee upon transfers. However, we reserve the right to charge $10 per transfer after the 12th transfer in each Contract Year, which we measure from the date we issue your Contract or a Contract anniversary ("CONTRACT ANNIVERSARY"). - -------------------------------------------------------------------------------- WITHDRAWALS You may withdraw some or all of your Contract Value at any time during the Accumulation Phase. Full or partial withdrawals also are available under limited circumstances on or after the Payout Start Date. In general, you must withdraw at least $50 at a time ($1,000 for withdrawals made during the Payout Phase). Withdrawals taken during the Accumulation Phase are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. A withdrawal charge and MARKET VALUE ADJUSTMENT also may apply. - -------------------------------------------------------------------------------- 5 PROSPECTUS HOW THE CONTRACT WORKS The Contract basically works in two ways. First, the Contract can help you (we assume you are the CONTRACT OWNER) save for retirement because you can invest in up to 29 investment alternatives and generally pay no federal income taxes on any earnings until you withdraw them. You do this during what we call the "ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date we issue your Contract (we call that date the "ISSUE DATE") and continues until the Payout Start Date, which is the date we apply your money to provide income payments. During the Accumulation Phase, you may allocate your purchase payments to any combination of the Variable Sub-Accounts and/or Fixed Account. If you invest in the Fixed Account, you will earn a fixed rate of interest that we declare periodically. If you invest in any of the Variable Sub-Accounts, your investment return will vary up or down depending on the performance of the corresponding Portfolios. Second, the Contract can help you plan for retirement because you can use it to receive retirement income for life and/ or for a pre-set number of years, by selecting one of the income payment options (we call these "INCOME PLANS") described on page 22. You receive income payments during what we call the "PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and continues until we make the last payment required by the Income Plan you select. During the Payout Phase, if you select a fixed income payment option, we guarantee the amount of your payments, which will remain fixed. If you select a variable income payment option, based on one or more of the Variable Sub-Accounts, the amount of your payments will vary up or down depending on the performance of the corresponding Portfolios. The amount of money you accumulate under your Contract during the Accumulation Phase and apply to an Income Plan will determine the amount of your income payments during the Payout Phase. The timeline below illustrates how you might use your Contract.
Issue Payout Start Date Accumulation Phase Date Payout Phase - --------------------------------------------------------------------------------------------------> You buy You save for retirement You elect to receive You can receive Or you can receive a Contract income payments or income payments income payments receive a lump sum for a set period for life payment
As the Contract Owner, you exercise all of the rights and privileges provided by the Contract. If you die, any surviving Contract Owner, or if there is none, the BENEFICIARY will exercise the rights and privileges provided by the Contract. See "The Contract." In addition, if you die before the Payout Start Date, we will pay a death benefit to any surviving Contract Owner or, if none, to your Beneficiary. See "Death Benefits." Please call us at 1-800-692-4682 if you have any question about how the Contract works. 6 PROSPECTUS EXPENSE TABLE The following tables show the fees and expenses that you will pay when buying, owning, making withdrawals or surrendering the Contract. The first table describes the fees and expenses that you will pay when you make a withdrawal, surrender the Contract, or transfer Contract Value among the investment alternatives. Premium taxes are not reflected in the tables because New York currently does not impose premium taxes on annuities. CONTRACT OWNER TRANSACTION EXPENSES Withdrawal Charge (as a percentage of purchase payments)* Number of Complete Years Since We Received the Purchase Payment Being Withdrawn 0 1 2 3 4 5 6 7 - ------------------------------------------------------------------------------------------------- Applicable Charge 7% 6% 5% 4% 3% 2% 1% 0% - ------------------------------------------------------------------------------------------------- Transfer Fee $10.00** - -------------------------------------------------------------------------------------------------
* Each Contract Year, you may withdraw up to 15% of purchase payments without incurring a Withdrawal Charge or a Market Value Adjustment. ** Applies solely to the thirteenth and subsequent transfers within a Contract Year excluding transfers due to dollar cost averaging or automatic portfolio rebalancing. We are currently waiving the transfer fee. The next tables describe the fees and expenses that you will pay periodically during the time you own the Contract, not including Portfolio fees and expenses. Annual Contract Maintenance Charge $30.00/(1)/ - -------------------------------------------------------------------------------- (1) We will waive this charge in certain cases. VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE SUB-ACCOUNT) Mortality and Expense Risk Charge 1.15% - -------------------------------------------------------------------------------- Administrative Expense Charge 0.10% - -------------------------------------------------------------------------------- Total Variable Account Annual Expense 1.25% - -------------------------------------------------------------------------------- PORTFOLIO ANNUAL EXPENSES (as a percentage of Portfolio average daily net assets)/(1)/ The next table shows the minimum and maximum total operating expenses charged by the Portfolios that you may pay periodically during the time that you own the Contract. Advisers and/or other service providers of certain Portfolios may have agreed to waive their fees and/or reimburse Portfolio expenses in order to keep the Portfolios' expenses below specified limits. The range of expenses shown in this table does not show the effect of any such fee waiver or expense reimbursement. More detail concerning each Portfolio's fees and expenses appears in the prospectus for each Portfolio. ANNUAL PORTFOLIO EXPENSES Minimum Maximum - -------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets, which may include management fees, and other expenses) 0.26% 1.14% - -------------------------------------------------------------------------------- (1) Expenses are shown as a percentage of Portfolio average daily net assets (before any waiver or reimbursement) as of December 31, 2004. 7 PROSPECTUS EXAMPLES Example 1 This Example is intended to help you compare the cost of investing in the Contracts with the cost of investing in other variable annuity contracts. These costs include Contract owner transaction expenses, Contract fees, Variable Account annual expenses, and Portfolio fees and expenses. The example shows the dollar amount of expenses that you would bear directly or indirectly if you: .. invested $10,000 in the Contract for the time periods indicated, .. earned a 5% annual return on your investment, and .. surrendered your Contract, or you began receiving income payments for a specified period of less than 120 months, at the end of each time period. THE EXAMPLE DOES NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO PAY IF YOU SURRENDER YOUR CONTRACT. The first line of the example assumes that the maximum fees and expenses of any of the Portfolios are charged. The second line of the example assumes that the minimum fees and expenses of any of the Portfolios are charged. Your actual expenses may be higher or lower than those shown below because of variations in a Portfolio's expense ratio from year to year. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------- Costs Based on Maximum Annual Portfolio Expenses $785 $1,181 $1,601 $3,015 - ------------------------------------------------------------------------- Costs Based on Minimum Annual Portfolio Expenses $695 $ 909 $1,144 $2,088 - ------------------------------------------------------------------------- EXAMPLE 2 This Example uses the same assumptions as Example 1 above, except that it assumes you decided not to surrender your Contract, or you began receiving income payments for a specified period of at least 120 months, at the end of each time period. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------ Costs Based on Maximum Annual Portfolio Expenses $275 $841 $1,431 $3,015 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Portfolio Expenses $185 $569 $ 974 $2,088 - ------------------------------------------------------------------------ PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES. YOUR RATE OF RETURN MAY BE HIGHER OR LOWER THAN 5%, WHICH IS NOT GUARANTEED. THE EXAMPLES DO NOT ASSUME THAT ANY PORTFOLIO EXPENSE WAIVERS OR REIMBURSEMENT ARRANGEMENTS ARE IN EFFECT FOR THE PERIODS PRESENTED. THE EXAMPLES REFLECT THE FREE WITHDRAWAL AMOUNTS, IF APPLICABLE, AND THE DEDUCTION OF THE ANNUAL CONTRACT MAINTANENCE CHARGE OF $30 EACH YEAR. 8 PROSPECTUS FINANCIAL INFORMATION To measure the value of your investment in the Variable Sub-Accounts during the Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT." Each Variable Sub-Account has a separate value for its Accumulation Units we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but not the same as, the share price of a mutual fund. Attached as Appendix A to this prospectus are tables showing the Accumulation Unit Values for each Variable Sub-Account since the date the Contracts were first offered. To obtain a fuller picture of each Variable Sub-Account's finances, please refer to the Variable Account's financial statements contained in the Statement of Additional Information. The financial statements of Allstate New York also appear in the Statement of Additional Information. THE CONTRACT CONTRACT OWNER The Custom Portfolio Variable Annuity is a contract between you, the Contract Owner, and Allstate New York, a life insurance company. As the Contract Owner, you may exercise all of the rights and privileges provided to you by the Contract. That means it is up to you to select or change (to the extent permitted): .. the investment alternatives during the Accumulation and Payout Phases, .. the amount and timing of your purchase payments and withdrawals, .. the programs you want to use to invest or withdraw money, .. the income payment plan you want to use to receive retirement income, .. the Annuitant (either yourself or someone else) on whose life the income payments will be based, .. the Beneficiary or Beneficiaries who will receive the benefits that the Contract provides when the last surviving Contract Owner dies, and .. any other rights that the Contract provides. If you die prior to the Payout Start Date, the new Contract Owner will be the surviving Owner. If there is no surviving Owner, the new Contract Owner will be the Beneficiary(ies) as described in the Beneficiary provision. The new Contract Owner may exercise the rights and privileges provided by the Contract, except that if the new Contract Owner took ownership as the Beneficiary, the new Contract Owner's rights will be subject to any restrictions previously placed upon the Beneficiary. The Contract cannot be jointly owned by both a non-living person and a living person. If the Owner is a Grantor Trust, the Contract Owner will be considered a non-living person for purposes of the Death of Owner and Death of Annuitant provisions of your Contract. The maximum age of the oldest Contract Owner cannot exceed 85 as of the date we receive the completed application. Changing ownership of this Contract may cause adverse tax consequences and may not be allowed under qualified plans. Please consult with a competent tax advisor prior to making a request for a change of Contract Owner. The Contract can also be purchased as an IRA or TSA (also known as a 403(b)). The endorsements required to qualify these annuities under the Internal Revenue Code of 1986, as amended, ("Code") may limit or modify your rights and privileges under the Contract. ANNUITANT The Annuitant is the individual whose life determines the amount and duration of income payments (other than under Income Plans with guaranteed payments for a specified period). You initially designate an Annuitant in your application. The maximum age of the oldest Annuitant cannot exceed 85 as of the date we receive the completed application. If the Contract Owner is a living person you may change the Annuitant prior to the Payout Start Date. In our discretion, we may permit you to designate a joint Annuitant, who is a second person on whose life income payments depend, on the Payout Start Date. If the Annuitant dies prior to the Payout Start Date, the new Annuitant will be: .. the youngest Contract Owner, if living, otherwise .. the youngest Beneficiary. BENEFICIARY The Beneficiary is the person who may elect to receive the death benefit or become the new Contract Owner subject to the Death of Owner provision if the sole surviving Contract Owner dies before the Payout Start Date. See "Death Benefits" on page 23. If the sole surviving Contract Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed income payments scheduled to continue. You may name one or more primary and contingent Beneficiaries when you apply for a Contract. The primary Beneficiary is the Beneficiary(ies) who is first entitled to receive benefits under the Contract upon the death of the sole surviving Contract Owner. The contingent Beneficiary is the Beneficiary(ies) entitled to receive 9 PROSPECTUS benefits under the Contract when all primary Beneficiaries predecease the sole surviving Contract Owner. You may restrict income payments to Beneficiaries by providing us a written request. Once we accept the written request, the change or restriction will take effect as of the date you signed the request. Any change is subject to any payment we make or other action we take before we accept the change. You may change or add Beneficiaries at any time by writing to us, unless you have designated an irrevocable Beneficiary. We will provide a change of Beneficiary form to be signed and filed with us. After we accept the form, the change of Beneficiary will be effective as of the date you signed the form, whether or not the Annuitant is living when we receive the notice. Each change is subject to any payment made by us or any other action we take before we accept the change. Accordingly, if you wish to change your Beneficiary, you should deliver your written notice to us promptly. If you do not name a Beneficiary or, if the named Beneficiary is no longer living and there are no other surviving Beneficiaries, the new Beneficiary will be: .. your spouse or, if he or she is no longer alive, .. your surviving children equally, or if you have no surviving children, .. your estate. If more than one Beneficiary survives you, we will divide the death benefit among your Beneficiaries according to your most recent written instructions. If you have not given us written instructions, we will pay the death benefit in equal amounts to the surviving Beneficiaries. MODIFICATION OF THE CONTRACT Only an Allstate New York officer may approve a change in or waive any provision of the Contract. Any change or waiver must be in writing. None of our agents has the authority to change or waive the provisions of the Contract. We may not change the terms of the Contract without your consent, except to conform the Contract to applicable law or changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law. ASSIGNMENT No owner has a right to assign any interest in a Contract as collateral or security for a loan. However, you may assign periodic income payments under the Contract prior to the Payout Start Date. No Beneficiary may assign benefits under the Contract until they are due. We will not be bound by any assignment until the assignor signs it and files it with us. We are not responsible for the validity of any assignment. Federal law prohibits or restricts the assignment of benefits under many types of qualified plans and the terms of such plans may themselves contain restrictions on assignments. An assignment may also result in taxes and tax penalties. YOU SHOULD CONSULT WITH YOUR ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT. PURCHASES MINIMUM PURCHASE PAYMENTS Your initial purchase payment must be at least $3,000 ($2,000 for a Qualified Contract). All subsequent purchase payments must be $100 ($500 for an allocation to the Fixed Account) or more. You may make purchase payments at any time prior to the Payout Start Date. We reserve the right to limit the maximum amount of purchase payments we will accept. We also reserve the right to reject any application. AUTOMATIC ADDITIONS PROGRAM You may make subsequent purchase payments of at least $100 ($500 for allocation to the Fixed Account) by automatically transferring amounts from your bank account. Please consult with your representative for detailed information. ALLOCATION OF PURCHASE PAYMENTS At the time you apply for a Contract, you must decide how to allocate your purchase payments among the investment alternatives. The allocation you specify on your application will be effective immediately. All allocations must be in whole percents that total 100% or in whole dollars. You can change your allocations by notifying us in writing. We reserve the right to limit the availability of the investment alternatives. We will allocate your purchase payments to the investment alternatives according to your most recent instructions on file with us. Unless you notify us in writing otherwise, we will allocate subsequent purchase payments according to the allocation for the previous purchase payment. We will effect any change in allocation instructions at the time we receive written notice, in good order, of the change. We will credit the initial purchase payment that accompanies your completed application to your Contract within 2 business days after we receive the payment at our service center. If your application is incomplete, we will ask you to complete your application within 5 business days. If you do so, we will credit your initial purchase payment to your Contract within that 5 business day period. If you do not, we will return your purchase payment at the end of the 5 business day period unless you expressly allow us to hold it until you complete the application. We will credit subsequent purchase payments to the Contract at the close of the business day on which we receive the purchase payment at our service 10 PROSPECTUS center located in Vernon Hills, Illinois (mailing address: 300 N. Milwaukee Ave, Vernon Hills, Illinois 60061). We are open for business each day Monday through Friday that the New York Stock Exchange is open for business. We also refer to these days as "VALUATION DATES." Our business day closes when the New York Stock Exchange closes, usually 4:00 p.m. Eastern Time (3:00 p.m. Central Time). If we receive your purchase payment after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date, we will credit your purchase payment using the Accumulation Unit Values computed on the next Valuation Date. RIGHT TO CANCEL You may cancel the Contract by returning it to us within the Cancellation Period, which is the 10 day period after you receive the Contract (60 days if you are exchanging another contract for the Contract described in this prospectus). You may return it by delivering it or mailing it to us. If you exercise this "RIGHT TO CANCEL," the Contract terminates and we will pay you the full amount of your purchase payments allocated to the Fixed Account. Upon cancellation, as permitted by federal or state law, we will return your purchase payments allocated to the Variable Account after an adjustment to the extent federal or state law permits to reflect investment gain or loss that occurred from the date of allocation through the date of cancellation. If your Contract is qualified under Code Section 408(b), we will refund the greater of any purchase payment or the Contract Value. CONTRACT VALUE On the Issue Date, the Contract Value is equal to the initial purchase payment. Your Contract Value at any other time during the Accumulation Phase is equal to the sum of the value as of the most recent Valuation Date of your Accumulation Units in the Variable Sub-Accounts you have selected, plus the value of your investment in the Fixed Account. ACCUMULATION UNITS To determine the number of Accumulation Units of each Variable Sub-Account to credit to your Contract, we divide (i) the amount of the purchase payment or transfer you have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value of that Variable Sub-Account next computed after we receive your payment or transfer. For example, if we receive a $10,000 purchase payment allocated to a Variable Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we would credit 1,000 Accumulation Units of that Variable Sub-Account to your Contract. Withdrawals and transfers from a Variable Sub-Account would, of course, reduce the number of Accumulation Units of that Sub-Account allocated to your Contract. ACCUMULATION UNIT VALUE As a general matter, the Accumulation Unit Value for each Variable Sub-Account will rise or fall to reflect: .. changes in the share price of the Portfolio in which the Variable Sub-Account invests, and .. the deduction of amounts reflecting the mortality and expense risk charge, administrative expense charge, and any provision for taxes that have accrued since we last calculated the Accumulation Unit Value. We determine contract maintenance charges, withdrawal charges, and transfer fees (currently waived) separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units. For details on how we calculate Accumulation Unit Value, please refer to the Statement of Additional Information. We determine a separate Accumulation Unit Value for each Variable Sub-Account on each Valuation Date. YOU SHOULD REFER TO THE PROSPECTUSES FOR THE PORTFOLIOS THAT ACCOMPANY THIS PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH PORTFOLIO ARE VALUED, SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE CORRESPONDING VARIABLE SUB-ACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE. INVESTMENT ALTERNATIVES: THE VARIABLE SUB-ACCOUNTS You may allocate your purchase payments to up to 26 Variable Sub-Accounts. Each Variable Sub-Account invests in the shares of a corresponding Portfolio. Each Portfolio has its own investment objective(s) and policies. We briefly describe the Portfolios below. For more complete information about each Portfolio, including expenses and risks associated with the Portfolio, please refer to the accompanying prospectus for the Portfolio. You should carefully review the Portfolio prospectuses before allocating amounts to the Variable Sub-Accounts. 11 PROSPECTUS PORTFOLIO: EACH PORTFOLIO SEEKS INVESTMENT ADVISER: - ------------------------------------------------------------------------------- AIM VARIABLE INSURANCE FUNDS - SERIES I SHARES: (*) - ------------------------------------------------------------------------------- AIM V.I. Balanced Fund - As high a total return as Series I /1/ possible, consistent with preservation of capital - ------------------------------------------------------------------------------- AIM V.I. Capital Growth of capital Appreciation Fund - Series I - ------------------------------------------------------------------------------- AIM V.I. Government High level of current A I M ADVISORS, INC. Securities Fund - Series income consistent with I reasonable concern for safety of principal - ------------------------------------------------------------------------------- AIM V.I. Growth Fund - Growth of capital Series I - ------------------------------------------------------------------------------- AIM V.I. High Yield Fund High level of current - Series I income - ------------------------------------------------------------------------------- AIM V.I. International Long-term growth of Growth Fund - Series I capital - ------------------------------------------------------------------------------- AIM V.I. Premier Equity Long-term growth of Fund - Series I capital with income as a secondary objective - ------------------------------------------------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS - ------------------------------------------------------------------------------- Fidelity VIP Long-term capital Contrafund(R) Portfolio appreciation. - Initial Class - ------------------------------------------------------------------------------- Fidelity VIP Reasonable income by Equity-Income Portfolio investing primarily in - Initial Class income-producing equity securities. In choosing these securities, the fund will also consider the potential for capital appreciation. The FIDELITY MANAGEMENT fund's & goal RESEARCH COMPANY is to achieve a yield which exceeds the composite yield on the securities comprising the S&P 500. - ------------------------------------------------------------------------------- Fidelity VIP Growth To achieve capital Portfolio - Initial appreciation. Class - ------------------------------------------------------------------------------- Fidelity VIP Growth To provide capital growth Opportunities Portfolio - Initial Class - ------------------------------------------------------------------------------- Fidelity VIP Overseas Long-term growth of Portfolio - Initial capital. Class - ------------------------------------------------------------------------------- DELAWARE VIP TRUST - ------------------------------------------------------------------------------- Delaware VIP Small Cap Capital appreciation Value Series - Standard DELAWARE MANAGEMENT Class COMPANY - ------------------------------------------------------------------------------- Delaware VIP Trend Series Long-term capital - Standard Class appreciation - ------------------------------------------------------------------------------- THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.; DREYFUS STOCK INDEX FUND; AND DREYFUS VARIABLE INVESTMENT FUND (VIF) - ------------------------------------------------------------------------------- The Dreyfus Socially Capital growth and, Responsible Growth Fund, secondarily, current Inc.: Initial Shares income - ------------------------------------------------------------------------------- Dreyfus Stock Index Fund, To match the total return Inc.: Initial Shares of the Standard & Poor's THE DREYFUS CORPORATION 500 Composite Stock Price Index - ------------------------------------------------------------------------------- Dreyfus VIF - Long-term capital growth Appreciation Portfolio: consistent with the Initial Shares /(2)/ preservation of capital. Its secondary goal is current income. - ------------------------------------------------------------------------------- Dreyfus VIF - Money A high level of current Market Portfolio income as is consistent with the preservation of capital and the maintenance of liquidity - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST - ------------------------------------------------------------------------------- FTVIP Templeton Global High total return Asset Allocation Fund - TEMPLETON INVESTMENT Class 2 COUNSEL, LLC - ------------------------------------------------------------------------------- FTVIP Templeton Foreign Long-term capital growth. Securities Fund - Class 2 - ------------------------------------------------------------------------------- 12 PROSPECTUS OPPENHEIMER VARIABLE ACCOUNT FUNDS - ------------------------------------------------------------------------------- Oppenheimer Aggressive Capital appreciation by Growth Fund/VA investing in "growth type" companies. - ------------------------------------------------------------------------------- Oppenheimer Main Street High total return (which Fund/VA includes growth in the OPPENHEIMERFUNDS, INC. value of its shares as well as current income) from equity and debt securities. - ------------------------------------------------------------------------------- Oppenheimer Strategic A high level of current Bond Fund/VA income principally derived from interest on debt securities. - ------------------------------------------------------------------------------- WELLS FARGO VARIABLE TRUST FUNDS - ------------------------------------------------------------------------------- Wells Fargo Advantage Long-term total return, Asset Allocation Fund consistent with /(3)/ reasonable risk - ------------------------------------------------------------------------------- Wells Fargo Advantage Long-term capital WELLS FARGO FUNDS Equity Income Fund/(4)/ appreciation and MANAGEMENT, LLC above-average dividend income - ------------------------------------------------------------------------------- Wells Fargo Advantage Total return comprised of Large Company Core Fund long-term capital /(5)/ appreciation and current income - ------------------------------------------------------------------------------- * The Portfolio's investment objective(s) may be changed by the Portfolio's Board of Trustees without shareholder approval. (1) Effective July 1, 2005, the AIM V.I. Balanced Fund- Series I will change its name to AIM V.I Basic Balanced Fund-Series I. In addition, the Portfolio's objective will change to long-term growth of capital and current income. (2) Sub-Advised by Fayez Sarofim & Co. (3) Effective April 11, 2005 the Wells Fargo VT Asset Allocation Fund changed its name toWells Fargo Advantage Asset Allocation Fund. The Portfolio's objective has not changed. (4) Effective April 11, 2005 the Wells Fargo VT Equity Income Fund changed its name to Wells Fargo Advantage Equity Income Fund. The Portfolio's objective has not changed. (5) Effective April 11, 2005 the Wells Fargo VT Growth Fund changed its name to Wells Fargo Advantage Large Company Core Fund. In addition, the Portfolio's objective has changed. AMOUNTS YOU ALLOCATE TO VARIABLE SUB-ACCOUNTS MAY GROW IN VALUE, DECLINE IN VALUE, OR GROW LESS THAN YOU EXPECT, DEPENDING ON THE INVESTMENT PERFORMANCE OF THE PORTFOLIOS IN WHICH THOSE VARIABLE SUB-ACCOUNTS INVEST. YOU BEAR THE INVESTMENT RISK THAT THE PORTFOLIOS MIGHT NOT MEET THEIR INVESTMENT OBJECTIVES. SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. VARIABLE INSURANCE PORTFOLIOS MIGHT NOT BE MANAGED BY THE SAME PORTFOLIO MANAGERS WHO MANAGE RETAIL MUTUAL FUNDS WITH SIMILAR NAMES. THESE PORTFOLIOS ARE LIKELY TO DIFFER FROM SIMILARLY NAMED RETAIL FUNDS IN ASSETS, CASH FLOW, AND TAX MATTERS. ACCORDINGLY, THE HOLDINGS AND RESULTS OF A VARIABLE INSURANCE PORTFOLIO CAN BE EXPECTED TO BE HIGHER OR LOWER THAN THE INVESTMENT RESULTS OF A SIMILARLY NAMED RETAIL MUTUAL FUND. INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT You may allocate all or a portion of your purchase payments to the Fixed Account Options. We will credit a minimum annual interest rate of 3% to money you allocate to any of the Fixed Account Options. Please consult with your representative for current information. The Fixed Account supports our insurance and annuity obligations. The Fixed Account consists of our general account assets other than those in segregated asset accounts. We have sole discretion to invest the assets of the Fixed Account, subject to applicable law. Any money you allocate to a Fixed Account Option does not entitle you to share in the investment experience of the Fixed Account. DOLLAR COST AVERAGING FIXED ACCOUNT OPTION SIX MONTH DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. Under this Option, you may establish a Dollar Cost Averaging Program by allocating purchase payments to the Six Month Dollar Cost Averaging Fixed Account Option ("Six Month DCA Fixed Account Option"). We will credit interest to purchase payments you allocate to this Option for six months at the current rate in effect at 13 PROSPECTUS the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Six Month DCA Fixed Account Option. You must transfer all of your money out of the Six Month DCA Fixed Account Option to the Variable Sub-Accounts in six equal monthly installments. If you discontinue the Dollar Cost Averaging Option before the end of the transfer period, we will transfer the remaining balance in this Option to the Dreyfus VIF Money Market Variable Sub-Account unless you request a different investment alternative. No transfers are permitted into the Six Month DCA Fixed Account. For each purchase payment allocated to this Option, your first monthly transfer will occur at the end of the first month following such purchase payment. If we do not receive an allocation from you within one month of the date of payment, we will transfer the payment plus associated interest to the Dreyfus VIF Money Market Variable Sub-Account in equal monthly installments. Transferring Account Value to the Dreyfus Money Market Variable Sub-Account in this manner may not be consistent with the theory of Dollar Cost Averaging described on page 18. TWELVE MONTH DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. Under this Option, you may establish a Dollar Cost Averaging Program by allocating purchase payments to the Twelve Month Dollar Cost Averaging Fixed Account Option ("Twelve Month DCA Fixed Account Option"). We will credit interest to purchase payments you allocate to this Option for twelve months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Twelve Month DCA Fixed Account Option. You must transfer all of your money out of the Twelve Month DCA Fixed Account Option to the Variable Sub-Accounts in twelve equal monthly installments. If you discontinue the Dollar Cost Averaging Option before the end of the transfer period, we will transfer the remaining balance in this Option to the Dreyfus VIF Money Market Variable Sub-Account unless you request a different investment alternative. No transfers are permitted into the Twelve Month DCA Fixed Account. For each purchase payment allocated to this Option, your first monthly transfer will occur at the end of the first month following such purchase payment. If we do not receive an allocation from you within one month of the date of payment, we will transfer the payment plus associated interest to the Dreyfus VIF Money Market Variable Sub-Account in equal monthly installments. Transferring Account Value to the Money Market Variable Sub-Account in this manner may not be consistent with the theory of dollar cost averaging described on page 18. At the end of the transfer period, any nominal amounts remaining in the Six Month Dollar Cost Averaging Fixed Account or the Twelve Month Dollar Cost Averaging Fixed Account will be allocated to the Dreyfus VIF Money Market Variable Sub-Account. Transfers out of the Dollar Cost Averaging Fixed Account Options do not count towards the 12 transfers you can make without paying a transfer fee. INVESTMENT RISK. We bear the investment risk for all amounts allocated to the Six Month DCA Fixed Account Option and the Twelve Month DCA Fixed Account Option. That is because we guarantee the current interest rates we credit to the amounts you allocate to either of these Options, which will never be less than the minimum guaranteed rate in the Contract. Currently, we determine, in our sole discretion, the amount of interest credited in excess of the guaranteed rate. We may declare more than one interest rate for different monies based upon the date of allocation to the Six Month DCA Fixed Account Option and the Twelve Month DCA Fixed Account Option. For current interest rate information, please contact your representative or our customer support unit at 1-800-692-4682. GUARANTEE PERIODS Under this option, each payment or transfer allocated to the Fixed Account earns interest at a specified rate that we guarantee for a period of years we call a Guarantee Period. Guarantee Periods may range from 1 to 10 years. We are currently offering Guarantee Periods of 1, 3, 5, 7, and 10 years in length. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods. You select one or more Guarantee Periods for each purchase payment or transfer. If you do not select the Guarantee Period for a purchase payment or transfer, we will assign the shortest Guarantee Period available under the Contract for such payment or transfer. Each payment or transfer allocated to a Guarantee Period must be at least $500. We reserve the right to limit the number of additional purchase payments that you may allocate to the Fixed Account. Please consult with your representative for more information. INTEREST RATES. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We may declare different interest rates for Guarantee Periods of the same length that begin at different times. We will not change the interest rate that we credit to a particular allocation until the end of the relevant Guarantee Period. We have no specific formula for determining the rate of interest that we will declare initially or in the future. We 14 PROSPECTUS will set those interest rates based on investment returns available at the time of the determination. In addition, we may consider various other factors in determining interest rates including regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. We determine the interest rates to be declared in our sole discretion. We can neither predict nor guarantee what those rates will be in the future. For current interest rate information, please contact your representative or Allstate New York at 1-800-692-4682. The interest rate will never be less than the minimum guaranteed amount stated in the Contract. HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated to a Guarantee Period at a rate that compounds to the effective annual interest rate that we declared at the beginning of the applicable Guarantee Period. The following example illustrates how a purchase payment allocated to the Fixed Account would grow, given an assumed Guarantee Period and effective annual interest rate: Purchase Payment.................................................... $10,000 Guarantee Period.................................................... 5 years Annual Interest Rate................................................ 4.50% END OF CONTRACT YEAR
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ------------ Beginning Contract Value................ $10,000.00 X (1 +Annual Interest Rate) X 1.045 ---------- $10,450.00 Contract Value at end of Contract Year..... $10,450.00 X (1 + Annual Interest Rate) X 1.045 ---------- $10,920.25 Contract Value at end of Contract Year..... $10,920.25 X (1 + Annual Interest Rate) X 1.045 ---------- $11,411.66 Contract Value at end of Contract Year..... $11,411.66 X (1 + Annual Interest Rate) X 1.045 ---------- $11,925.19 Contract Value at end of Contract Year..... $11,925.19 X (1 + Annual Interest Rate) X 1.045 ---------- $12,461.82
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,461.82 ($12,461.82-$10,000) This example assumes no withdrawals during the entire 5 year Guarantee Period. If you were to make a withdrawal, you may be required to pay a Withdrawal Charge. In addition, the amount withdrawn may be increased or decreased by a Market Value Adjustment that reflects changes in interest rates since the time you invested the amount withdrawn. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. 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 shown above but will never be less than the guaranteed minimum rate stated in the Contract. RENEWALS. At least 15 but not more than 45 days prior to the end of each Guarantee Period, we will mail you a notice asking you what to do with your money, including the accrued interest. During the 30-day period after the end of the Guarantee Period, you may: 1) Take no action. We will automatically apply your money to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for a Guarantee Period of that length; or 2) Instruct us to apply your money to one or more new Guarantee Periods of your choice. The new Guarantee Period(s) will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for those Guarantee Periods; or 3) Instruct us to transfer all or a portion of your money to one or more Variable Sub-Accounts. We will effect the transfer on the day we receive your instructions. We will not adjust the amount transferred to include a Market Value Adjustment. We will pay interest from the day the Guarantee Period expired until the date of the transfer. The interest will be the rate for the shortest Guarantee Period then being offered; or 4) Withdraw all or a portion of your money. You may be required to pay a withdrawal charge, but we will not 15 PROSPECTUS adjust the amount withdrawn to include a Market Value Adjustment. You may also be required to pay premium taxes and withholding (if applicable). The amount withdrawn will be deemed to have been withdrawn on the day the previous Guarantee Period ends. Unless you specify otherwise, amounts not withdrawn will be applied to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. Withdrawal of earnings are taxed as ordinary income, and, if taken prior to age 59 1/2, may be subject to an additional tax penalty Under our automatic laddering program ("Automatic Laddering Program"), you may choose, in advance, to use Guarantee Periods of the same length for all renewals. You can select the Automatic Laddering Program at any time during the Accumulation Phase, including on the Issue Date. We will apply renewals to Guarantee Periods of the selected length until you direct us in writing to stop. We may stop offering the Automatic Laddering Program at any time. For additional information on the Automatic Laddering Program, please call our customer service center at 1-800-692-4682. MARKET VALUE ADJUSTMENT. All withdrawals in excess of the PREFERRED WITHDRAWAL AMOUNT, and transfers from a Guarantee Period, other than those taken during the 30 day period after such Guarantee Period expires, are subject to a Market Value Adjustment. A Market Value Adjustment also applies when you apply amounts currently invested in a Guarantee Period to an Income Plan (unless paid or applied during the 30 day period after such Guarantee Period expires). A positive Market Value Adjustment will apply to amounts currently invested in a Guarantee Period that are paid out as death benefits. We will not apply a Market Value Adjustment to a transfer you make as part of a Dollar Cost Averaging Program. We also will not apply a Market Value Adjustment to a withdrawal you make: .. within the Preferred Withdrawal Amount as described on page 19, or .. to satisfy the IRS minimum distribution rules for the Contract. We apply the Market Value Adjustment to reflect changes in interest rates from the time you first allocate money to a Guarantee Period to the time it is removed from that Guarantee Period. We calculate the Market Value Adjustment by comparing the Treasury Rate for a period equal to the Guarantee Period at its inception to the Treasury Rate for a period equal to the time remaining in the Guarantee Period when you remove your money. "TREASURY RATE" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment may be positive or negative, depending on changes in interest rates. As such, you bear the investment risk associated with changes in interest rates. If interest rates increase significantly, the Market Value Adjustment and any withdrawal charge, premium taxes, and income tax withholding (if applicable) could reduce the amount you receive upon full withdrawal of your Contract Value to an amount that is less than the purchase payment plus interest at the minimum guaranteed interest rate under the Contract. Generally, if the Treasury Rate at the time you allocate money to a Guarantee Period is higher than the applicable current Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a higher amount payable to you or transferred. Conversely, if the Treasury Rate at the time you allocate money to a Guarantee Period is lower than the applicable Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a lower amount payable to you or transferred. For example, assume that you purchase a Contract and you select an initial Guarantee Period of 5 years and the 5 year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at that later time, the current 2 year Treasury Rate is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to you. Conversely, if the current 2 year Treasury Rate is 4.80%, then the Market Value Adjustment will be negative, which will result in a decrease in the amount payable to you. The formula for calculating Market Value Adjustments is set forth in Appendix B to this prospectus, which also contains additional examples of the application of the Market Value Adjustment. 16 PROSPECTUS INVESTMENT ALTERNATIVES: TRANSFERS TRANSFERS DURING THE ACCUMULATION PHASE During the Accumulation Phase, you may transfer Contract Value among the investment alternatives. The minimum amount that you may transfer into a Guarantee Period is $500. You may request transfers in writing on a form that we provided or by telephone according to the procedure described below. We currently do not assess, but reserve the right to assess, a $10 charge on each transfer in excess of 12 per Contract Year. We treat transfers to or from more than one Portfolio on the same day as one transfer. Transfers you make as part of a Dollar Cost Averaging Program or Automatic Portfolio Rebalancing Program do not count against the 12 free transfers per Contract Year. We will process transfer requests that we receive before 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date using the Accumulation Unit Values for that Date. We will process requests completed after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date using the Accumulation Unit Values for the next Valuation Date. The Contract permits us to defer transfers from the Fixed Account for up to 6 months from the date we receive your request. If we decide to postpone transfers from the Fixed Account for 10 days or more, we will pay interest as required by applicable law. Any interest would be payable from the date we receive the transfer request to the date we make the transfer. If you transfer an amount from a Guarantee Period other than during the 30 day period after such Guarantee Period expires, we will increase or decrease the amount by a Market Value Adjustment. If any transfer reduces your value in such Guarantee Period to less than $500, we will treat the request as a transfer of the entire value in such Guarantee Period. We reserve the right to waive any transfer fees and restrictions. TRANSFERS DURING THE PAYOUT PHASE During the Payout Phase, you may make transfers among the Variable Sub-Accounts to change the relative weighting of the Variable Sub-Accounts on which your variable income payments will be based. In addition, you will have a limited ability to make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. You may not make any transfers for the first 6 months after the Payout Start Date. Thereafter, you may make transfers among the Variable Sub-Accounts or make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. Your transfers must be at least 6 months apart. TELEPHONE TRANSFERS You may make transfers by telephone by calling 1-800-692-4682, if you first send us a completed authorization form. The cut off time for telephone transfer requests is 4:00 p.m. Eastern Time (3:00 p.m. Central Time). In the event that the New York Stock Exchange closes early, i.e., before 4:00 p.m. Eastern Time (3:00 p.m. Central Time), or in the event that the Exchange closes early for a period of time but then reopens for trading on the same day, we will process telephone transfer requests as of the close of the Exchange on that particular day. We will not accept telephone requests received at any telephone number other than the number that appears in this paragraph or received after the close of trading on the Exchange. We may suspend, modify or terminate the telephone transfer privilege, as well as any other electronic or automated means we previously approved, at any time without notice. We use procedures that we believe provide reasonable assurance that the telephone transfers are genuine. For example, we tape telephone conversations with persons purporting to authorize transfers and request identifying information. Accordingly, we disclaim any liability for losses resulting from allegedly unauthorized telephone transfers. However, if we do not take reasonable steps to help ensure that a telephone authorization is valid, we may be liable for such losses. MARKET TIMING & EXCESSIVE TRADING The Contracts are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of Variable Sub-Accounts and can disrupt management of a Portfolio and raise its expenses, which can impair Portfolio performance and adversely affect your Contract Value. Our policy is not to accept knowingly any money intended for the purpose of market timing or excessive trading. Accordingly, you should not invest in the Contract if your purpose is to engage in market timing or excessive trading, and you should refrain from such practices if you currently own a Contract. We seek to detect market timing or excessive trading activity by reviewing trading activities. Portfolios also may report suspected market-timing or excessive trading activity to us. If, in our judgment, we determine that the transfers are part of a market timing strategy or are otherwise harmful to the underlying Portfolio, we will impose the trading limitations as described below under "Trading Limitations." Because there is no universally accepted definition of what constitutes market timing or 17 PROSPECTUS excessive trading, we will use our reasonable judgment based on all of the circumstances. While we seek to deter market timing and excessive trading in Variable Sub-Accounts, because our procedures involve the exercise of reasonable judgment, we may not identify or prevent some market timing or excessive trading. Moreover, imposition of trading limitations is triggered by the detection of market timing or excessive trading activity, and the trading limitations are not applied prior to detection of such trading activity. Therefore, our policies and procedures do not prevent such trading activity before it is detected. As a result, some investors may be able to engage in market timing and excessive trading, while others are prohibited, and the portfolio may experience the adverse effects of market timing and excessive trading described above. TRADING LIMITATIONS We reserve the right to limit transfers among the investment alternatives in any Contract year, or to refuse any transfer request, if: .. we believe, in our sole discretion, that certain trading practices, such as excessive trading, by, or on behalf of, one or more Contract Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Sub-Account or on the share prices of the corresponding Portfolio or otherwise would be to the disadvantage of other Contract Owners; or .. we are informed by one or more of the Portfolios that they intend to restrict the purchase, exchange, or redemption of Portfolio shares because of excessive trading or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Portfolio shares. In making the determination that trading activity constitutes market timing or excessive trading, we will consider, among other things: .. the total dollar amount being transferred, both in the aggregate and in the transfer request; .. the number of transfers you make over a period of time and/or the period of time between transfers (note: one set of transfers to and from a Variable Sub-Account in a short period of time can constitute market timing); .. whether your transfers follow a pattern that appears designed to take advantage of short term market fluctuations, particularly within certain Variable Sub-Account underlying Portfolios that we have identified as being susceptible to market timing activities; .. whether the manager of the underlying Portfolio has indicated that the transfers interfere with Portfolio management or otherwise adversely impact the Portfolio; and .. the investment objectives and/or size of the Variable Sub-Account underlying Portfolio. We seek to apply these trading limitations uniformly. However, because these determinations involve the exercise of discretion, it is possible that we may not detect some market timing or excessive trading activity. As a result, it is possible that some investors may be able to engage in market timing or excessive trading activity, while others are prohibited, and the Portfolio may experience the adverse effects of market timing and excessive trading described above. If we determine that a Contract Owner has engaged in market timing or excessive trading activity, we will restrict that Contract Owner from making future additions or transfers into the impacted Variable Sub-Account(s). If we determine that a Contract Owner has engaged in a pattern of market timing or excessive trading activity involving multiple Variable Sub-Accounts, we will also require that all future transfer requests be submitted through regular U.S. mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery. In our sole discretion, we may revise our Trading Limitations at any time as necessary to better deter or minimize market timing and excessive trading or to comply with regulatory requirements. DOLLAR COST AVERAGING PROGRAM Through the Dollar Cost Averaging Program, you may automatically transfer a set amount every month during the Accumulation Phase from any Variable Sub-Account, the Six Month Dollar Cost Averaging Fixed Account, or the Twelve Month Dollar Cost Averaging Fixed Account, to any other Variable Sub-Account. You may not use dollar cost averaging to transfer amounts to the Fixed Account. We will not charge a transfer fee for transfers made under this Program, nor will such transfers count against the 12 transfers you can make each Contract Year without paying a transfer fee. The theory of dollar cost averaging is that if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same purchase dates. However, participation in this Program does not assure you of a greater profit from your purchases under the Program nor will it prevent or necessarily reduce losses in a declining market. Call or write us for instructions on how to enroll. AUTOMATIC PORTFOLIO REBALANCING PROGRAM Once you have allocated your money among the Variable Sub-Accounts, the performance of each Variable Sub-Account may cause a shift in the percentage you allocated to each Variable Sub-Account. If you select our Automatic Portfolio Rebalancing Program, we will 18 PROSPECTUS automatically rebalance the Contract Value in each Variable Sub-Account and return it to the desired percentage allocations. Money you allocate to the Fixed Account will not be included in the rebalancing. We will rebalance your account each quarter according to your instructions. We will transfer amounts among the Variable Sub-Accounts to achieve the percentage allocations you specify. You can change your allocations at any time by contacting us in writing or by telephone. The new allocation will be effective with the first rebalancing that occurs after we receive your request. We are not responsible for rebalancing that occurs prior to receipt of your request. Example: Assume that you want your initial purchase payment split among 2 Variable Sub-Accounts. You want 40% to be in the AIM V.I. Balanced - Series I Sub-Account Variable Sub-Account and 60% to be in the Fidelity VIP Growth - Initial Class Sub-Account Variable Sub-Account. Over the next 2 months the bond market does very well while the stock market performs poorly. At the end of the first quarter, the AIM V.I. Balanced - Series I Sub-Account Variable Sub-Account now represents 50% of your holdings because of its increase in value. If you choose to have your holdings rebalanced quarterly, on the first day of the next quarter we would sell some of your units in the AIM V.I. Balanced - Series I Sub-Account Variable Sub-Account and use the money to buy more units in the Fidelity VIP Growth - Initial Class Sub-Account Variable Sub-Account so that the percentage allocations would again be 40% and 60% respectively. The Automatic Portfolio Rebalancing Program is available only during the Accumulation Phase. The transfers made under the Program do not count towards the 12 transfers you can make without paying a transfer fee, and are not subject to a transfer fee. Portfolio rebalancing is consistent with maintaining your allocation of investments among market segments, although it is accomplished by reducing your Contract Value allocated to the better performing segments. You may not use the Dollar Cost Averaging and automatic Portfolio Rebalancing programs at the same time. EXPENSES As a Contract Owner, you will bear, directly or indirectly, the charges and expenses described below. CONTRACT MAINTENANCE CHARGE During the Accumulation Phase, on each Contract Anniversary, we will deduct a $30 contract maintenance charge from your Contract Value invested in each Variable Sub-Account in proportion to the amount invested. We also will deduct a full contract maintenance charge if you withdraw your entire Contract Value, unless your Contract qualifies for a waiver, described below. During the Payout Phase, we will deduct the charge proportionately from each income payment. The charge is for the cost of maintaining each Contract and the Variable Account. Maintenance costs include expenses we incur in billing and collecting purchase payments; keeping records; processing death claims, cash withdrawals, and policy changes; proxy statements; calculating Accumulation Unit Values and income payments; and issuing reports to Contract Owners and regulatory agencies. We cannot increase the charge. We will waive this charge if: .. total purchase payments equal $50,000 or more, or .. all of your money is allocated to the Fixed Account on a Contract Anniversary. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense risk charge daily at an annual rate of 1.15% of the average daily net assets you have invested in the Variable Sub-Accounts. The mortality and expense risk charge is for all the insurance benefits available with your Contract (including our guarantee of annuity rates and the death benefits), for certain expenses of the Contract, and for assuming the risk (expense risk) that the current charges will not be sufficient in the future to cover the cost of administering the Contract. If the charges under the Contract are not sufficient, then we will bear the loss. We guarantee the mortality and expense risk charge and we cannot increase it. We assess the mortality and expense risk charge during both the Accumulation Phase and the Payout Phase. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge daily at an annual rate of 0.10% of the average daily net assets you have invested in the Variable Sub-Accounts. We intend this charge to cover actual administrative expenses that exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributed to that Contract. We assess this charge each day during the Accumulation Phase and the Payout Phase. We guarantee that we will not raise this charge. 19 PROSPECTUS TRANSFER FEE We do not currently impose a fee upon transfers among the investment alternatives. However, we reserve the right to charge $10 per transfer after the 12th transfer in each Contract Year. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging or Automatic Portfolio Rebalancing Program. WITHDRAWAL CHARGE We may assess a Withdrawal Charge of up to 7% of the purchase payment(s) you withdraw in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. The charge declines by 1% annually to 0% after 7 complete years from the day we receive the purchase payment being withdrawn. Beginning on January 1, 2004, if you make a withdrawal before the Payout Start Date, we will apply the Withdrawal Charge percentage in effect on the date of the withdrawal, or the Withdrawal Charge percentage in effect on the following day, whichever is lower. A schedule showing how the Withdrawal Charge declines appears on page 7. During each Contract Year, you can withdraw up to 15% of purchase payments without paying the Withdrawal Charge. Unused portions of this 15% "PREFERRED WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We determine the Withdrawal Charge by: .. multiplying the percentage corresponding to the number of complete years since we received the purchase payment being withdrawn, times .. the part of each purchase payment withdrawal that is in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. We will deduct Withdrawal Charges, if applicable, from the amount paid. For purposes of the Withdrawal Charge, we will treat withdrawals as coming from the oldest purchase payments first. However, for federal income tax purposes, please note that withdrawals are considered to have come first from earnings in the Contract, which means you pay taxes on the earnings portion of your withdrawal. We do not apply a Withdrawal Charge in the following situations: .. on the Payout Start Date (a Withdrawal Charge may apply if you elect to receive income payments for a specified period of less than 120 months); .. the death of the Contract Owner or Annuitant (unless the Settlement Value is used); .. withdrawals taken to satisfy IRS required minimum distribution rules for the Contract; or .. withdrawals made after all purchase payments have been withdrawn. We use the amounts obtained from the Withdrawal Charge to pay sales commissions and other promotional or distribution expenses associated with marketing the Contracts. To the extent that the Withdrawal Charge does not cover all sales commissions and other promotional or distribution expenses, we may use any of our corporate assets, including potential profit which may arise from the mortality and expense risk charge or any other charges or fee described above, to make up any difference. Withdrawals taken during the Accumulation Phase are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. Withdrawals may also be subject to a Market Value Adjustment. You should consult your own tax counsel or other tax advisers regarding any withdrawals. PREMIUM TAXES Currently, we do not make deductions for premium taxes under the Contract because New York does not charge premium taxes on annuities. We may deduct taxes that may be imposed in the future from purchase payments or the Contract Value when the tax is incurred or at a later time. DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES We are not currently making a provision for such taxes. In the future, however, we may make a provision for taxes if we determine, in our sole discretion, that we will incur a tax as a result of the operation of the Variable Account. We will deduct for any taxes we incur as a result of the operation of the Variable Account, whether or not we previously made a provision for taxes and whether or not it was sufficient. Our status under the Internal Revenue Code is briefly described in the Taxes section. OTHER EXPENSES Each Portfolio deducts advisory fees and other expenses from its assets. You indirectly bear the charges and expenses of the Portfolios whose shares are held by the Variable Sub-Accounts. These fees and expenses are described in the accompanying prospectus for the Portfolios. For a summary of the maximum and minimum amounts for these charges and expenses, see pages 7-8. We may receive compensation from the investment advisers or administrators of the Portfolios for administrative services we provide to the Portfolios. 20 PROSPECTUS ACCESS TO YOUR MONEY You can withdraw some or all of your Contract Value at any time prior to the Payout Start Date. Full or partial withdrawals also are available under limited circumstances on or after the Payout Start Date. See "Income Plans" on page 22. The amount payable upon withdrawal is the Contract Value next computed after we receive the request for a withdrawal at our customer service center, adjusted by any Market Value Adjustment, less any Withdrawal Charges, contract maintenance charges, income tax withholding, and any premium taxes. We will pay withdrawals from the Variable Account within 7 days of receipt of the request, subject to postponement in certain circumstances. You can withdraw money from the Variable Account or the Fixed Account. To complete a partial withdrawal from the Variable Account, we will cancel Accumulation Units in an amount equal to the withdrawal and any applicable Withdrawal Charge and premium taxes. Withdrawals taken during the Accumulation Phase are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. You have the opportunity to name the investment alternative(s) from which you are taking the withdrawal. If none is specified, we will deduct your withdrawal pro-rata from the investment alternatives according to the value of your investments therein. In general, you must withdraw at least $50 at a time. You also may withdraw a lesser amount if you are withdrawing your entire interest in a Variable Sub- Account. If you request a total withdrawal, you must return your Contract to us. POSTPONEMENT OF PAYMENTS We may postpone the payment of any amounts due from the Variable Account under the Contract if: 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the SEC; or 3. The SEC permits delay for your protection. In addition, we may delay payments or transfers from the Fixed Account for up to 6 months or a shorter period if required by law. If we delay payment or transfer for 10 business days or more, we will pay interest as required by law. Any interest would be payable from the date we receive the withdrawal request to the date we make the payment or transfer. SYSTEMATIC WITHDRAWAL PROGRAM You may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis at any time prior to the Payout Start Date. The minimum amount of each systematic withdrawal is $50. At our discretion, systematic withdrawals may not be offered in conjunction with the Dollar Cost Averaging Program or the Automatic Portfolio Rebalancing Program. Depending on fluctuations in the net asset value of the Variable Sub-Accounts and the value of the Fixed Account, systematic withdrawals may reduce or even exhaust the Contract Value. Please consult your tax advisor before taking any withdrawal. We will make systematic withdrawal payments to you or your designated payee. We may modify or suspend the Systematic Withdrawal Program and charge a processing fee for the service. If we modify or suspend the Systematic Withdrawal Program, existing systematic withdrawal payments will not be affected. MINIMUM CONTRACT VALUE If your request for a partial withdrawal would reduce the amount in any Guarantee Period to less than $500, we will treat it as a request to withdraw the entire amount invested in such Guarantee Period. If your request for a partial withdrawal would reduce your Contract Value to less than $1,000, we may treat it as a request to withdraw your entire Contract Value. Your Contract will terminate if you withdraw all of your Contract Value. We will, however, ask you to confirm your withdrawal request before terminating your Contract. Before terminating any Contract whose value has been reduced by withdrawals to less than $1,000, we will inform you in writing of our intention to terminate your Contract and give you at least 30 days in which to make an additional purchase payment to restore your Contract's value to the contractual minimum of $1,000. If we terminate your Contract, we will distribute to you its Contract Value, adjusted by any applicable Market Value Adjustment, less withdrawal and other charges and applicable taxes. INCOME PAYMENTS PAYOUT START DATE The Payout Start Date is the day that we apply your money to an Income Plan. The Payout Start Date must be no later than the day the Annuitant reaches age 90, or the 10th Contract Anniversary, if later. You may change the Payout Start Date at any time by notifying us in 21 PROSPECTUS writing of the change at least 30 days before the scheduled Payout Start Date. Absent a change, we will use the Payout Start Date stated in your Contract. INCOME PLANS An "Income Plan" is a series of payments on a scheduled basis to you or to another person designated by you. You may choose and change your choice of Income Plan until 30 days before the Payout Start Date. If you do not select an Income Plan, we will make income payments in accordance with Income Plan 1 with guaranteed payments for 10 years if you have designated only one annuitant or Income Plan 2 with guaranteed payments for 10 years if you have designated a joint Annuitant. After the Payout Start Date, you may not make withdrawals (except as described below) or change your choice of Income Plan. Three Income Plans are available under the Contract. Each is available to provide: .. fixed income payments; .. variable income payments; or .. a combination of the two. A portion of each payment will be considered taxable and the remaining portion will be a non-taxable return of your investment in the Contract, which is also called the "basis". Once the investment in the Contract is depleted, all remaining payments will be fully taxable. If the Contract is tax-qualified, generally, all payments will be fully taxable. Taxable payments taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. The three Income Plans are: INCOME PLAN 1 - LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as the Annuitant lives. If the Annuitant dies before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. The number of months guaranteed may be 0 months, or range from 60 to 360 months. INCOME PLAN 2 - JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as either the Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint Annuitant die before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. The number of months guaranteed may be 0 months, or range from 60 to 360 months. INCOME PLAN 3 - GUARANTEED PAYMENT FOR A SPECIFIED PERIOD (5 YEARS TO 30 YEARS). Under this plan, we make periodic income payments for the period you have chosen. These payments do not depend on the Annuitant's life. Income payments for less than 120 months may be subject to a withdrawal charge. We will deduct the mortality and expense risk charge from the Variable Sub-Account assets that support variable income payments even though we may not bear any mortality risk. The length of any guaranteed payment period under your selected Income Plan generally will affect the dollar amounts of each income payment. As a general rule, longer guarantee periods result in lower income payments, all other things being equal. For example, if you choose an Income Plan with payments that depend on the life of the Annuitant but with no minimum specified period for guaranteed payments, the income payments generally will be greater than the income payments made under the same Income Plan with a minimum specified period for guaranteed payments. If you choose Income Plan 1 or 2, or, if available, another Income Plan with payments that continue for the life of the Annuitant or joint Annuitant, we may require proof of age and sex of the Annuitant or joint Annuitant before starting income payments, and proof that the Annuitant or joint Annuitant is alive before we make each payment. Please note that under such Income Plans, if you elect to take no minimum guaranteed payments, it is possible that the payee could receive only 1 income payment if the Annuitant and any joint Annuitant both die before the second income payment, or only 2 income payments if they die before the third income payment, and so on. Generally, you may not make withdrawals after the Payout Start Date. One exception to this rule applies if you are receiving variable income payments that do not depend on the life of the Annuitant (such as under Income Plan 3). In that case you may terminate all or part of the Variable Account portion of the income payments at any time and receive a lump sum equal to the present value of the remaining variable income payments associated with the amount withdrawn. To determine the present value of any remaining variable income payments being withdrawn, we use a discount rate equal to the assumed annual investment rate that we use to compute such variable income payments. The minimum amount you may withdraw under this feature is $1,000. A withdrawal charge may apply. You will also have a limited ability to make transfers from the Variable Account portion of the income payments to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. We deduct applicable premium taxes, if any, from the Contract Value at the Payout Start Date. New York does not currently impose a premium tax. We may make other Income Plans available. You may obtain information about them by writing or calling us. You must apply at least the Contract Value in the Fixed Account on the Payout Start Date to fixed income payments. If you wish to apply any portion of your Fixed 22 PROSPECTUS Account balance to provide variable income payments, you should plan ahead and transfer that amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do not tell us how to allocate your Contract Value among fixed and variable income payments, we will apply your Contract Value in the Variable Account to variable income payments and your Contract Value in the Fixed Account to fixed income payments. We will apply your Contract Value, adjusted by a Market Value Adjustment, less applicable taxes to your Income Plan on the Payout Start Date. If the Contract Value is less than $2,000 or not enough to provide an initial payment of at least $20, and state law permits, we may: .. terminate the Contract and pay you the Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, in a lump sum instead of the periodic payments you have chosen, or .. reduce the frequency of your payments so that each payment will be at least $20. VARIABLE INCOME PAYMENTS The amount of your variable income payments depends upon the investment results of the Variable Sub-Accounts you select, the premium taxes you pay, if any, the age and sex of the Annuitant, and the Income Plan you choose. We guarantee that the payments will not be affected by (a) actual mortality experience and (b) the amount of our administration expenses. We cannot predict the total amount of your variable income payments. Your variable income payments may be more or less than your total purchase payments because (a) variable income payments vary with the investment results of the underlying Portfolio and (b) the Annuitant could live longer or shorter than we expect based on the tables we use. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3%. If the actual net investment return of the Variable Sub-Accounts you choose is less than this assumed investment rate, then the dollar amount of your variable income payments will decrease. The dollar amount of your variable income payments will increase, however, if the actual net investment return exceeds the assumed investment rate. The dollar amount of the variable income payments stays level if the net investment return equals the assumed investment rate. Please refer to the Statement of Additional Information for more detailed information as to how we determine variable income payments. FIXED INCOME PAYMENTS We guarantee income payment amounts derived from the Fixed Account for the duration of the Income Plan. We calculate the fixed income payments by: 1. adjusting the portion of the Contract Value in the Fixed Account on the Payout Start Date by any applicable Market Value Adjustment; 2. deducting any applicable premium tax; and 3. applying the resulting amount to the greater of (a) the appropriate value from the income payment table in your Contract or (b) such other value as we are offering at that time. We may defer making fixed income payments for a period of up to 6 months or such shorter time as state law may require. If we defer payments for 10 business days or more, we will pay interest as required by law from the date we receive the withdrawal request to the date we make payment. CERTAIN EMPLOYEE BENEFIT PLANS The Contracts offered by this prospectus contain income payment tables that provide for different payments to men and women of the same age, except in states that require unisex tables. We reserve the right to use income payment tables that do not distinguish on the basis of sex to the extent permitted by law. In certain employment-related situations, employers are required by applicable law to use the same income payment tables for men and women. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan, and we do not offer unisex annuity tables in your state, you should consult with legal counsel as to whether the purchase of a Contract is appropriate. For qualified plans, where it is appropriate, we may use income payment tables that do not distinguish on the basis of sex. DEATH BENEFITS We will pay the death proceeds prior to the Payout Start Date on: (a) the death of any Contract Owner, or (b) the death of the Annuitant, if the Contract is owned by a non-living person. We will pay the death proceeds to the new Contract Owner as determined immediately after the death. The new Contract Owner would be a surviving Contract Owner or, if none, the Beneficiary(ies). In the case of a Contract owned by a non-living owner, upon the death of the Annuitant, we will pay the death proceeds to the current Contract Owner. We will determine the value of the death proceeds as of the end of the Valuation Date on which we receive a complete request for settlement of the death proceeds. If we receive a request after 3 p.m. Central Time on a Valuation Date, we will process the request as of the end of the following Valuation Date. 23 PROSPECTUS A complete request for settlement of the death proceeds must include DUE PROOF OF DEATH. We will accept the following documentation as "Due Proof of Death:" .. a certified copy of the death certificate, .. a certified copy of a decree of a court of competent jurisdiction as to the finding of death, or .. any other proof acceptable to us. DEATH PROCEEDS If we receive a complete request for settlement of the death proceeds within 180 days of the date of the death of any Contract Owner, or the death of the Annuitant, if the Contract is owned by a non-living owner, the death proceeds are equal to the Death Benefit described below. Otherwise, the death proceeds are equal to the greater of the Contract Value or the Settlement Value. We reserve the right to extend, on a non-discriminatory basis, the 180-day period in which the death proceeds will equal the Death Benefit as described below. This right applies only to the amount payable as death proceeds and in no way restricts when a claim may be filed. If we do not receive a complete request for settlement of the death proceeds within 180 days of the date of death, the death proceeds are equal to the greater of: 1) the Contract Value as of the date we determine the death proceeds; or 2) the Settlement Value as of the date we determine the death proceeds. DEATH BENEFIT AMOUNT Prior to the Payout Start Date, the Death Benefit is equal to the greatest of: 1. the Contract Value as of the date we receive a complete request for settlement of the death proceeds, or 2. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of Contract Value) on the date we determine the death proceeds, or 3. the Contract Value on the Death Benefit Anniversary immediately preceding the date we receive a complete request for settlement of the death proceeds, adjusted by any purchase payments, withdrawal adjustment as defined below, and charges made since that Death Benefit Anniversary. A "DEATH BENEFIT ANNIVERSARY" is every seventh Contract Anniversary beginning with the Issue Date. For example, the Issue Date, 7th and 14th Contract Anniversaries are the first three Death Benefit Anniversaries, or 4. the greatest of the Anniversary Values as of the date we receive a complete request for settlement of the death proceeds. An "ANNIVERSARY VALUE" is equal to the Contract Value on a Contract Anniversary, increased by purchase payments made since that Anniversary and reduced by the amount of any withdrawal adjustment, as defined below, since that anniversary. Anniversary Values will be calculated for each Contract Anniversary prior to the earlier of: (i) the date we determine the death benefit, or (ii) the deceased's 75th birthday or 5 years after the Issue Date, if later. The withdrawal adjustment is equal to (a) divided by (b), with the result multiplied by (c), where: (a) = the withdrawal amount, (b) = the Contract Value immediately prior to the withdrawal, and (c) = the value of the applicable death benefit alternative immediately prior to the withdrawal. See Appendix C for an example representative of how the withdrawal adjustment applies. In calculating the Settlement Value, the amount in each individual Guarantee Period may be subject to a Market Value Adjustment. A Market Value Adjustment will apply to amounts in a Guarantee Period, unless we calculate the Settlement Value during the 30-day period after the expiration of the Guarantee Period. Also, the Settlement Value will reflect the deduction of any applicable Withdrawal Charges, contract maintenance charges, and premium taxes. Contract maintenance charges will be pro rated for the part of the Contract Year elapsed as of the date we determine the Settlement Value, unless your Contract qualifies for a waiver of such charges described in the "Contract Maintenance Charge" section above. DEATH BENEFIT PAYMENTS DEATH OF OWNER 1. If your spouse is the sole surviving Contract Owner, or is the sole Beneficiary: a. Your spouse may elect to receive the Death Proceeds in a lump sum; or b. Your spouse may elect to receive the Death Proceeds paid out under one of the Income Plans (described in "Income Payments" above), subject to the following conditions: The Payout Start Date must be within one year of your date of death. Income payments must be payable: i. over the life of your spouse; or ii. for a guaranteed number of payments from 5 to 50 years but not to exceed the life expectancy of your spouse; or iii. over the life of your spouse with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of your spouse. c. If your spouse does not elect one of these options, the Contract will continue in the Accumulation 24 PROSPECTUS Phase as if the death had not occurred. If the Contract is continued in the Accumulation Phase, the following conditions apply: The Contract Value of the continued Contract will be the Death Proceeds. Unless otherwise instructed by the continuing spouse, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the Sub-Accounts of the Variable Account. This excess will be allocated in proportion to your Contract Value in those Variable Sub-Accounts as of the end of the Valuation Date on which we receive the complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time), except that any portion of this excess attributable to the Fixed Account Options will be allocated to the money market Variable Sub-Account. Within 30 days of the date the Contract is continued, your surviving spouse may choose one of the following transfer alternatives without incurring a transfer fee: i. transfer all or a portion of the excess among the Variable Sub-accounts; ii. transfer all or a portion of the excess into the Fixed Account and begin a new Guarantee Period; or iii. transfer all or a portion of the excess into a combination of Variable Sub-Accounts and the Fixed Account. Any such transfer does not count as one of the free transfers allowed each Contract Year and is subject to any minimum allocation amount specified in the Contract. The surviving spouse may make a single withdrawal of any amount within one year of the date of your death without incurring a Withdrawal Charge or Market Value Adjustment. Prior to the Payout Start Date, the Death Proceeds of the continued Contract will be described under "Death Benefit Amount." Only one spousal continuation is allowed under the Contract. 2. If the new Contract Owner is not your spouse but is a living person or if there are multiple living-person new Contract Owners: a. The new Contract Owner may elect to receive the Death Proceeds in a lump sum; or b. The new Contract Owner may elect to receive the Death Proceeds paid out under one of the Income Plans (described in "Income Payments" on page 21), subject to the following conditions: The Payout Start Date must be within one year of your date of death. Income payments must be payable: i. over the life of the new Contract Owner; or ii. for a guaranteed number of payments from 5 to 50 years but not to exceed the life expectancy of the new Contract Owner; or iii. over the life of the new Contract Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Contract Owner. c. If the new Contract Owner does not elect one of the options above, then the new Contract Owner must receive the Contract Value payable within 5 years of your date of death. The Contract Value will equal the amount of the Death Proceeds as determined as of the end of the Valuation Date on which we receive a complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time). Unless otherwise instructed by the new Contract Owner, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the money market Variable Sub-Account. Henceforth, the new Contract Owner may make transfers (as described in "Transfers During the Payout Phase" on page 18) during this 5 year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived for any withdrawals made during this 5 year period. We reserve the right to offer additional options upon the death of the Contract Owner. If the new Contract Owner dies prior to the omplete liquidation of the Contract Value, then the new Contract Owner's named Beneficiary(ies) will receive the greater of the Settlement Value or the remaining Contract Value. This amount must be liquidated as a lump sum within 5 years of the date of the original Contract Owner's death. 3. If the new Contract Owner is a corporation or other type of non-living person: a. The new Contract Owner may elect to receive the Death Proceeds in a lump sum; or b. If the new Contract Owner does not elect the option above, then the new Contract Owner must receive the Contract Value payable within 5 years of your date of death. The Contract Value will equal the amount of the Death Proceeds as determined as of the end of the Valuation Date on which we receive a complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time). Unless otherwise instructed by the new Contract Owner, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the money market Variable Sub-Account. Henceforth, the new Contract Owner may make transfers (as described in "Transfers During the Payout Phase" on page 18) during this 5 year period. No additional purchase payments may be added to the Contract under this election. Withdrawal charges will be waived during this 5 year period. We reserve the right to make additional options available to the new Contract Owner upon the death of the Contract Owner. If any new Contract Owner is a non-living person, all new Contract Owners will be considered to be non-living persons for the above purposes. Under any of these options, all ownership rights, subject to any restrictions previously placed upon the Beneficiary, are available to the new Contract Owner from the date of your death to the date on which the Death Proceeds is paid. DEATH OF ANNUITANT If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date, the following apply: 1. If the Contract Owner is a living person, then the Contract will continue with a new Annuitant, who will be: a. the youngest Contract Owner; otherwise b. the youngest Beneficiary. You may change the Annuitant before the Payout Start Date. 2. If the Contract Owner is a non-living person: a. The Contract Owner may elect to receive the Death Proceeds in a lump sum; or b. If the Contract Owner does not elect the option above, then the Contract Owner must receive the Contract Value payable within 5 years of the Annuitant's date of death. The Contract Value will equal the amount of the Death Proceeds as determined as of the end of the Valuation Date on which we receive a complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time). Unless otherwise instructed by the Contract Owner, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the money market Variable Sub-Account. Henceforth, the Contract Owner may make transfers (as described in "Transfers During the Payout Phase" on page 18) during this 5 year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived during this 5 year period. 25 PROSPECTUS We reserve the right to make additional options available to the Contract Owner upon the death of the Annuitant. Under any of these options, all ownership rights are available to the non-living Contract Owner from the date of the Annuitant's death to the date on which the Death Proceeds is paid. MORE INFORMATION ALLSTATE NEW YORK Allstate New York is the issuer of the Contract. Allstate New York is a stock life insurance company organized under the laws of the State of New York. Allstate New York was incorporated in 1967 and was known as "Financial Life Insurance Company" from 1967 to 1978. From 1978 to 1984, Allstate New York was known as "PM Life Insurance Company." Since 1984 the company has been known as "Allstate Life Insurance Company of New York." Allstate New York is currently licensed to operate in New York. Our home office is located 100 Motor Parkway, Hauppauge, New York 11788-5107. Our service center is located in Vernon Hills, Illinois. Allstate New York is a wholly owned subsidiary of Allstate Life Insurance Company ("Allstate Life") , a stock life insurance company incorporated under the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company, a stock property-liability insurance company incorporated under the laws of the State of Illinois. With the exception of the directors qualifying shares, all of the outstanding capital stock of Allstate Insurance Company is owned by The Allstate Corporation. THE VARIABLE ACCOUNT Allstate New York established the Allstate Life of New York Separate Account A on December 15, 1995. We have registered the Variable Account with the SEC as a unit investment trust. The SEC does not supervise the management of the Variable Account or Allstate New York. We own the assets of the Variable Account. The Variable Account is a segregated asset account under New York law. That means we account for the Variable Account's income, gains and losses separately from the results of our other operations. It also means that only the assets of the Variable Account that are in excess of the reserves and other Contract liabilities with respect to the Variable Account are subject to liabilities relating to our other operations. Our obligations arising under the Contracts are general corporate obligations of Allstate New York. The Variable Account consists of multiple Variable Sub-Accounts, 26 of which are available through the Contracts. Each Variable Sub-Account invests in a corresponding Portfolio. We may add new Variable Sub-Accounts or eliminate one or more of them, if we believe marketing, tax, or investment conditions so warrant. We do not guarantee the investment performance of the Variable Account, its Sub-Accounts or the Portfolios. We 26 PROSPECTUS may use the Variable Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Variable Account. THE PORTFOLIOS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all dividends and capital gains distributions from the Portfolios in shares of the distributing Portfolio at their net asset value. VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote the shares of the Portfolios held by the Variable Sub-Accounts to which you have allocated your Contract Value. Under current law, however, you are entitled to give us instructions on how to vote those shares on certain matters. Based on our present view of the law, we will vote the shares of the Portfolios that we hold directly or indirectly through the Variable Account in accordance with instructions that we receive from Contract owners entitled to give such instructions. As a general rule, before the Payout Start Date, the Contract Owner or anyone with a voting interest is the person entitled to give voting instructions. The number of shares that a person has a right to instruct will be determined by dividing the Contract Value allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Portfolio as of the record date of the meeting. After the Payout Start Date, the person receiving income payments has the voting interest. The payee's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Portfolio. The votes decrease as income payments are made and as the reserves for the Contract decrease. We will vote shares attributable to Contracts for which we have not received instructions, as well as shares attributable to us, in the same proportion as we vote shares for which we have received instructions, unless we determine that we may vote such shares in our own discretion. We will apply voting instructions to abstain on any item to be voted on a pro-rata basis to reduce the votes eligible to be cast. We reserve the right to vote Portfolio shares as we see fit without regard to voting instructions to the extent permitted by law. If we disregard voting instructions, we will include a summary of that action and our reasons for that action in the next semi-annual financial report we send to you. CHANGES IN PORTFOLIOS. If the shares of any of the Portfolios are no longer available for investment by the Variable Account or if, in our judgment, further investment in such shares is no longer desirable in view of the purposes of the Contract, we may eliminate that Portfolio and substitute shares of another eligible investment portfolio. Any substitution of securities will comply with the requirements of the Investment Company Act of 1940. We also may add new Variable Sub-Accounts that invest in additional portfolios. We will notify you in advance of any changes. CONFLICTS OF INTEREST. Certain of the Portfolios sell their shares to Variable Accounts underlying both variable life insurance and variable annuity contracts. It is conceivable that in the future it may be unfavorable for variable life insurance Variable Accounts and variable annuity Variable Accounts to invest in the same Portfolio. The boards of directors of these Portfolios monitor for possible conflicts among Variable Accounts buying shares of the Portfolios. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a Variable Account to comply with such laws could cause a conflict. To eliminate a conflict, a Portfolio's board of directors may require a Variable Account to withdraw its participation in a Portfolio. A Portfolio's net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a Variable Account withdrawing because of a conflict. THE CONTRACT DISTRIBUTION. ALFS, Inc. ("ALFS"), located at 3100 Sanders Road, Northbrook, Illinois 60062, serves as principal underwriter of the Contracts. ALFS is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a registered broker-dealer under the Securities and Exchange Act of 1934, as amended ("Exchange Act"), and is a member of the NASD. Contracts described in this prospectus are sold by registered representatives of broker-dealers who are our licensed insurance agents, either individually or through an incorporated insurance agency. Commissions paid to broker-dealers may vary, but we estimate that the total commissions paid on all Contract sales to broker-dealers will not exceed 8.5% of any purchase payments. These commissions are intended to cover distribution expenses. From time to time, we may offer additional sales incentives of up to 1% of purchase payments to broker-dealers who maintain certain sales volume levels. Allstate New York does not pay ALFS a commission for distribution of the Contracts. The underwriting agreement with ALFS provides that we will reimburse ALFS for any liability to Contract Owners arising out of services rendered or Contracts issued. ADMINISTRATION. We have primary responsibility for all administration of the Contracts and the Variable Account. We provide the following administrative services, among others: .. issuance of the Contracts; .. maintenance of Contract Owner records; .. Contract Owner services; .. calculation of unit values; .. maintenance of the Variable Account; and 27 PROSPECTUS .. preparation of Contract Owner reports. We will send you Contract statements and transaction confirmations at least annually. The annual statement details values and specific Contract data for each particular Contract. You should notify us promptly in writing of any address change. You should read your statements and confirmations carefully and verify their accuracy. You should contact us promptly if you have a question about a periodic statement. We will investigate all complaints and make any necessary adjustments retroactively, but you must notify us of a potential error within a reasonable time after the date of the questioned statement. If you wait too long, we will make the adjustment as of the date that we receive notice of the potential error. We also will provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws. NON-QUALIFIED ANNUITIES HELD WITHIN A QUALIFIED PLAN If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waivers of withdrawal charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. We no longer issue deferred annuities to employer sponsored qualified retirement plans. LEGAL MATTERS All matters of New York law pertaining to the Contracts, including the validity of the Contracts and Allstate New York's right to issue such Contracts under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of Allstate New York. 28 PROSPECTUS TAXES THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. ALLSTATE NEW YORK 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 your individual circumstances. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK Allstate New York is taxed as a life insurance company under Part I of Subchapter L of the Code. Since the Variable Account is not an entity separate from Allstate New York, and its operations form a part of Allstate New York, it will not be taxed separately. Investment income and realized capital gains of the Variable Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, Allstate New York believes that the Variable Account investment income and capital gains will not be taxed to the extent that such income and gains are applied to increase the reserves under the Contract. Accordingly, Allstate New York does not anticipate that it will incur any federal income tax liability attributable to the Variable Account, and therefore Allstate New York does not intend to make provisions for any such taxes. If Allstate New York is taxed on investment income or capital gains of the Variable Account, then Allstate New York may impose a charge against the Variable Account in order to make provision for such taxes. TAXATION OF VARIABLE ANNUITIES IN GENERAL TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value until a distribution occurs. This rule applies only where: .. the Contract Owner is a natural person, .. the investments of the Variable Account are "adequately diversified" according to Treasury Department regulations, and .. Allstate New York is considered the owner of the Variable Account assets for federal income tax purposes. NON-NATURAL OWNERS. Non-natural owners are also referred to as Non Living Owners in this prospectus. As a general rule, annuity contracts owned by non-natural persons such as corporations, trusts, or other entities are not treated as annuity contracts for federal income tax purposes. The income on such contracts does not enjoy tax deferral and is taxed as ordinary income received or accrued by the non-natural owner during the taxable year. EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the general rule that annuity contracts held by a non-natural owner are not treated as annuity contracts for federal income tax purposes. Contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the contract as agent for a natural person. However, this special exception will not apply in the case of an employer who is the nominal owner of an annuity contract under a non-Qualified deferred compensation arrangement for its employees. Other exceptions to the non-natural owner rule are: (1) contracts acquired by an estate of a decedent by reason of the death of the decedent; (2) certain qualified contracts; (3) contracts purchased by employers upon the termination of certain qualified plans; (4) certain contracts used in connection with structured settlement agreements; and (5) immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. GRANTOR TRUST OWNED ANNUITY. Contracts owned by a grantor trust are considered owned by a non-natural owner. Grantor trust owned contracts receive tax deferral as described in the Exceptions to the Non-Natural Owner Rule section. In accordance with the Code, upon the death of the annuitant, the death benefit must be paid. According to your Contract, the Death Benefit is paid to the surviving Contract Owner. Since the trust will be the surviving Contract Owner in all cases, the Death Benefit will be payable to the trust notwithstanding any beneficiary designation on the annuity contract. A trust, including a grantor trust, has two options for receiving any death benefits: 1) a lump sum payment; or 2) payment deferred up to five years from date of death. DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for federal income tax purposes, the investments in the Variable Account must be "adequately diversified" consistent with standards under Treasury Department regulations. If the investments in the Variable Account are not adequately diversified, the Contract will not be treated as an annuity contract for federal income tax purposes. As a result, the income on the Contract will be taxed as ordinary income received or accrued by the Contract owner during the taxable year. Although Allstate New York does not have control over the Portfolios or their investments, we expect the Portfolios to meet the diversification requirements. OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered the owner of separate account assets if he possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. At the time the diversification regulations were issued, the Treasury Department 29 PROSPECTUS announced that the regulations do not provide guidance concerning circumstances in which investor control of the separate account investments may cause a Contract owner to be treated as the owner of the separate account. The Treasury Department also stated that future guidance would be issued regarding the extent that owners could direct sub-account investments without being treated as owners of the underlying assets of the separate account. Your rights under the Contract are different than those described by the IRS in private and published rulings in which it found that Contract owners were not owners of separate account assets. For example, if your contract offers more than twenty (20) investment alternatives you have the choice to allocate premiums and contract values among a broader selection of investment alternatives than described in such rulings. You may be able to transfer among investment alternatives more frequently than in such rulings. These differences could result in you being treated as the owner of the Variable Account. If this occurs, income and gain from the Variable Account assets would be includible in your gross income. Allstate New York does not know what standards will be set forth in any regulations or rulings which the Treasury Department may issue. It is possible that future standards announced by the Treasury Department could adversely affect the tax treatment of your Contract. We reserve the right to modify the Contract as necessary to attempt to prevent you from being considered the federal tax owner of the assets of the Variable Account. However, we make no guarantee that such modification to the Contract will be successful. TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under a Non-Qualified Contract, amounts received are taxable to the extent the Contract Value, without regard to surrender charges, exceeds the investment in the Contract. The investment in the Contract is the gross premium paid for the contract minus any amounts previously received from the Contract if such amounts were properly excluded from your gross income. If you make a full withdrawal under a Non-Qualified Contract, the amount received will be taxable only to the extent it exceeds the investment in the Contract. TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity payments received from a Non-Qualified Contract provides for the return of your investment in the Contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. For 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. If you elect variable annuity payments, the amount excluded from taxable income is determined by dividing the investment in the Contract by the total number of expected payments. The annuity payments will be fully taxable after the total amount of the investment in the Contract is excluded using these ratios. If any variable payment is less than the excludable amount you should contact a competent tax advisor to determine how to report any unrecovered investment. The federal tax treatment of annuity payments is unclear in some respects. As a result, if the IRS should provide further guidance, it is possible that the amount we calculate and report to the IRS as taxable could be different. If you die, and annuity payments cease before the total amount of the investment in the Contract is recovered, the unrecovered amount will be allowed as a deduction for your last taxable year. WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding the taxation of any additional withdrawal received after the Payout Start Date. It is possible that a greater or lesser portion of such a payment could be taxable than the amount we determine. DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for federal income tax purposes, the Contract must provide: .. if any Contract Owner dies on or after the Payout 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 Contract Owner's death; .. if any Contract Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within 5 years after the date of the Contract Owner's death. These requirements are satisfied if any portion of the Contract Owner's interest that 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 1 year of the Contract Owner's death. If the Contract Owner's designated Beneficiary is the surviving spouse of the Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner; .. if the Contract Owner is a non-natural person, then the Annuitant will be treated as the Contract Owner for purposes of applying the distribution at death rules. In addition, a change in the Annuitant on a Contract owned by a non-natural person will be treated as the death of the Contract Owner. TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income as follows: .. if distributed in a lump sum, the amounts are taxed in the same manner as a total withdrawal, or .. if distributed under an Income Plan, the amounts are taxed in the same manner as annuity payments. PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable amount of any 30 PROSPECTUS premature distribution from a non-Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or becoming totally disabled, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made under an immediate annuity, or .. attributable to investment in the Contract before August 14, 1982. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts using substantially equal periodic payments or immediate annuity payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the Contract Owner's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is a tax-free exchange of a non-qualified life insurance contract, endowment contract or annuity contract into a non-Qualified annuity contract. The contract owner(s) must be the same on the old and new contract. Basis from the old contract carries over to the new contract so long as we receive that information from the relinquishing company. If basis information is never received, we will assume that all exchanged funds represent earnings and will allocate no cost basis to them. PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of annuity contracts. Under this ruling, if you take a withdrawal from a receiving or relinquishing annuity contract within 24 months of the partial exchange, then special aggregation rules apply for purposes of determining the taxable amount of a distribution. The IRS has issued limited guidance on how to aggregate and report these distributions. The IRS is expected to provide further guidance; as a result, it is possible that the amount we calculate and report to the IRS as taxable could be different. Your Contract may not permit partial exchanges. TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without full and adequate consideration to a person other than your spouse (or to a former spouse incident to a divorce), you will be taxed on the difference between the Contract Value and the investment in the Contract at the time of transfer. Any assignment or pledge (or agreement to assign or pledge) of the Contract Value is taxed as a withdrawal of such amount or portion and may also incur the 10% penalty tax. AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified deferred annuity contracts issued by Allstate New York (or its affiliates) to the same Contract Owner during any calendar year be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. INCOME TAX WITHHOLDING Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% of the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax using the wage withholding rates for all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all 31 PROSPECTUS countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. TAX QUALIFIED CONTRACTS The income on tax sheltered annuity (TSA) and IRA investments is tax deferred, and the income from annuities held by such plans does not receive any additional tax deferral. You should review the annuity features, including all benefits and expenses, prior to purchasing an annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as or in connection with: .. Individual Retirement Annuities (IRAs) under Code Section 408(b); .. Roth IRAs under Code Section 408A; .. Simplified Employee Pension (SEP IRA) under Code Section 408(k); .. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Code Section 408(p); .. Tax Sheltered Annuities under Code Section 403(b); .. Corporate and Self Employed Pension and Profit Sharing Plans under Code Section 401; and .. State and Local Government and Tax-Exempt Organization Deferred Compensation Plans under Code Section 457. Allstate New York reserves the right to limit the availability of the Contract for use with any of the retirement plans listed above or to modify the Contract to conform with tax requirements. If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waiver of charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. Allstate New York no longer issues deferred annuities to employer sponsored qualified retirement plans. The tax rules applicable to participants with tax qualified annuities vary according to the type of contract and the terms and conditions of the endorsement. Adverse tax consequences may result from certain transactions such as excess contributions, premature distributions, and, distributions that do not conform to specified commencement and minimum distribution rules. Allstate New York can issue an individual retirement annuity on a rollover or transfer of proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under which the decedent's surviving spouse is the beneficiary. Allstate New York does not offer an individual retirement annuity that can accept a transfer of funds for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer sponsored qualified retirement plan. Please refer to your Endorsement for IRAs or 403(b) plans, if applicable, for additional information on your death settlement options. In the case of certain qualified plans, the terms of the Qualified Plan Endorsement and the plans may govern the right to benefits, regardless of the terms of the Contract. TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If you make a partial withdrawal under a Tax Qualified Contract other than a Roth IRA, the portion of the payment that bears the same ratio to the total payment that the investment in the Contract (i.e., nondeductible IRA contributions) bears to the Contract Value, is excluded from your income. We do not keep track of nondeductible contributions, and generally all tax reporting of distributions from Tax Qualified Contracts other than Roth IRAs will indicate that the distribution is fully taxable. "Qualified distributions" from Roth IRAs are not included in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to any Roth IRA and which are: .. made on or after the date the Contract Owner attains age 59 1/2, .. made to a beneficiary after the Contract Owner's death, .. attributable to the Contract Owner being disabled, or .. made for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" from Roth IRAs are treated as made from contributions first and are included in gross income only to the extent that distributions exceed contributions. REQUIRED MINIMUM DISTRIBUTIONS. Generally, Tax Qualified Contracts (excluding Roth IRAs) require minimum distributions upon reaching age 70 1/2. Failure to withdraw the required minimum distribution will result in a 50% tax penalty on the shortfall not withdrawn from the Contract. Not all income plans offered under the Contract satisfy the requirements for minimum distributions. Because these distributions are required under the Code and the method of calculation is complex, please see a competent tax advisor. THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA) may not invest in life insurance contracts. However, an IRA may provide a death benefit that equals the greater of the purchase payments or the Contract Value. The Contract offers a death benefit that in certain circumstances may exceed the greater of the purchase payments or the Contract Value. We believe that the Death Benefits offered by your Contract do not constitute life insurance under these regulations. 32 PROSPECTUS It is also possible that certain death benefits that offer enhanced earnings could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in current taxable income to a Contract Owner. In addition, there are limitations on the amount of incidental death benefits that may be provided under qualified plans, such as in connection with a TSA or employer sponsored qualified retirement plan. Allstate New York reserves the right to limit the availability of the Contract for use with any of the qualified plans listed above. PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM TAX QUALIFIED CONTRACTS. A 10% penalty tax applies to the taxable amount of any premature distribution from a Tax Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or total disability, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made after separation from service after age 55 (does not apply to IRAs), .. made pursuant to an IRS levy, .. made for certain medical expenses, .. made to pay for health insurance premiums while unemployed (applies only for IRAs), .. made for qualified higher education expenses (applies only for IRAs), and .. made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs). During the first 2 years of the individual's participation in a SIMPLE IRA, distributions that are otherwise subject to the premature distribution penalty, will be subject to a 25% penalty tax. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect to Tax Qualified Contracts using substantially equal periodic payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions that are not considered "eligible rollover distributions." The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% from the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless you elect to make a "direct rollover" of such amounts to an IRA or eligible retirement plan. Eligible rollover distributions generally include all distributions from Tax Qualified Contracts, including TSAs but excluding IRAs, with the exception of: .. required minimum distributions, or, .. a series of substantially equal periodic payments made over a period of at least 10 years, or, .. a series of substantially equal periodic payments made over the life (joint lives) of the participant (and beneficiary), or, .. hardship distributions. For all annuitized distributions that are not subject to the 20% withholding requirement, Allstate New York is required to withhold federal income tax using the wage withholding rates. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien or to certain other 'foreign persons'. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer 33 PROSPECTUS identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408(b) permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity (IRA). 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 retirement plans may be "rolled over" on a tax-deferred basis into an Individual Retirement Annuity. ROTH INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408A 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. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL IRAS). Code Section 408 permits a custodian or trustee of an Individual Retirement Account to purchase an annuity as an investment of the Individual Retirement Account. If an annuity is purchased inside of an Individual Retirement Account, then the Annuitant must be the same person as the beneficial owner of the Individual Retirement Account. Generally, the death benefit of an annuity held in an Individual Retirement Account must be paid upon the death of the Annuitant. However, in most states, the Contract permits the custodian or trustee of the Individual Retirement Account to continue the Contract in the accumulation phase, with the Annuitant's surviving spouse as the new Annuitant, if the following conditions are met: 1) The custodian or trustee of the Individual Retirement Account is the owner of the annuity and has the right to the death proceeds otherwise payable under the Contract; 2) The deceased Annuitant was the beneficial owner of the Individual Retirement Account; 3) We receive a complete request for settlement for the death of the Annuitant; and 4) The custodian or trustee of the Individual Retirement Account provides us with a signed certification of the following: (a) The Annuitant's surviving spouse is the sole beneficiary of the Individual Retirement Account; (b) The Annuitant's surviving spouse has elected to continue the Individual Retirement Account as his or her own Individual Retirement Account; and (c) The custodian or trustee of the Individual Retirement Account has continued the Individual Retirement Account pursuant to the surviving spouse's election. SIMPLIFIED EMPLOYEE PENSION IRA. Code Section 408(k) allows eligible employers to establish simplified employee pension plans for their employees using individual retirement annuities. These employers may, within specified limits, make deductible contributions on behalf of the employees to the individual retirement annuities. Employers intending to use the Contract in connection with such plans should seek competent tax advice. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Code Section 408(p) allows eligible employers with 100 or fewer employees to establish SIMPLE retirement plans for their employees using individual retirement annuities. In general, a SIMPLE IRA consists of a salary deferral program for eligible employees and matching or nonelective contributions made by employers. Employers intending to purchase the Contract as a SIMPLE IRA should seek competent tax and legal advice. TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS (TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND YOUR COMPETENT TAX ADVISOR. TAX SHELTERED ANNUITIES. Code Section 403(b) provides tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. Under Section 403(b), any contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee: .. attains age 59 1/2, .. severs employment, .. dies, .. becomes disabled, or .. incurs a hardship (earnings on salary reduction contributions may not be distributed on account of hardship). These limitations do not apply to withdrawals where Allstate New York is directed to transfer some or all of the Contract Value to another 403(b) plan. Generally, we do 34 PROSPECTUS not accept funds in 403(b) contracts that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits corporate employers to establish various types of tax favored retirement plans for employees. Self-employed individuals may establish tax favored retirement plans for themselves and their employees (commonly referred to as "H.R.10" or "Keogh"). Such retirement plans may permit the purchase of annuity contracts. Allstate New York no longer issues annuity contracts to employer sponsored qualified retirement plans. There are two owner types for contracts intended to qualify under Section 401(a): a qualified plan fiduciary or an annuitant owner. .. A qualified plan fiduciary exists when a qualified plan trust that is intended to qualify under Section 401(a) of the Code is the owner. The qualified plan trust must have its own tax identification number and a named trustee acting as a fiduciary on behalf of the plan. The annuitant should be the person for whose benefit the contract was purchased. .. An annuitant owner exists when the tax identification number of the owner and annuitant are the same, or the annuity contract is not owner by a qualified plan trust. The annuitant should be the person for whose benefit the contract was purchased. If a qualified plan fiduciary is the owner of the contract, the qualified plan must be the beneficiary so that death benefits from the annuity are distributed in accordance with the terms of the qualified plan. Annuitant owned contracts require that the beneficiary be the annuitant's spouse (if applicable), which is consistent with the required IRS language for qualified plans under Section 401(a). A completed Annuitant Owned Qualified Plan Designation of Beneficiary form is required in order to change the beneficiary of an annuitant owned Qualified Plan contract. 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. In eligible governmental plans, all assets and income must be held in a trust/ custodial account/annuity contract for the exclusive benefit of the participants and their beneficiaries. To the extent the Contracts are used in connection with a non-governmental 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. Under eligible 457 plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan. Allstate New York no longer issues annuity contracts to employer sponsored qualified retirement plans. Contracts that have been previously sold to State and Local government and Tax-Exempt organization Deferred Compensation Plans will be administered consistent with the rules for contracts intended to qualify under Section 401(a). ANNUAL REPORTS AND OTHER DOCUMENTS Allstate New York's annual report on Form 10-K for the year ended December 31, 2004, is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. Accordingly, only the statement that is changed or replaced will legally be a part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR" system using the identifying number CIK No. 0000839759. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at Customer Service, P.O. Box 82656, Lincoln, NE 68501-2656 (telephone: 1-800-692-4682). 35 PROSPECTUS APPENDIX A ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED*
For the period beginning January 1 and ending December 31, 2000 2001 2002 2003 2004 - --------------------------------------------------------------------------------------------------------------------------------- AIM V.I. BALANCED - SERIES I SUB-ACCOUNT ** Accumulation Unit Value, Beginning of Period $10.000 $ 10.154 $ 8.881 $ 7.270 $ 8.354 Accumulation Unit Value, End of Period $10.154 $ 8.881 $ 7.270 $ 8.354 $ 8.870 Number of Units Outstanding, End of Period 26,413 122,945 252,907 290,005 278,556 AIM V.I. CAPITAL APPRECIATION - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.242 $ 7.001 $ 5.230 $ 6.689 Accumulation Unit Value, End of Period $ 9.242 $ 7.001 $ 5.230 $ 6.689 $ 7.043 Number of Units Outstanding, End of Period 10,595 65,809 134,666 161,621 175,396 AIM V.I. GOVERNMENT SECURITIES - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 10.807 $ 11.356 $ 12.290 $ 12.226 Accumulation Unit Value, End of Period $10.807 $ 11.356 $ 12.290 $ 12.226 $ 12.423 Number of Units Outstanding, End of Period 12.496 51,574 205,419 280,241 227,477 AIM V.I. GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 8.338 $ 5.443 $ 3.710 $ 4.809 Accumulation Unit Value, End of Period $ 8.338 $ 5.443 $ 3.710 $ 4.809 $ 5.139 Number of Units Outstanding, End of Period 14,487 66,340 103,684 128,420 114,786 AIM V.I. HIGH YIELD - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 8.362 $ 7.845 $ 7.294 $ 9.223 Accumulation Unit Value, End of Period $ 8.362 $ 7.845 $ 7.294 $ 9.223 $ 10.132 Number of Units Outstanding, End of Period 7,031 27,476 54,243 74,581 106,724 AIM V.I. INTERNATIONAL GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 8.989 $ 6,787 $ 5.652 $ 7.203 Accumulation Unit Value, End of Period $ 8.989 $ 6.787 $ 5.652 $ 7.203 $ 8.820 Number of Units Outstanding, End of Period 6,197 51,835 95,690 96,516 92,690 AIM V.I. PREMIER EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 8.980 $ 7.754 $ 5.339 $ 6.595 Accumulation Unit Value, End of Period $ 8.980 $ 7.754 $ 5.339 $ 6.595 $ 6.889 Number of Units Outstanding, End of Period 29,890 132,390 194,292 196,079 182,257 FIDELITY VIP CONTRAFUND(R) - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.950 $ 8.621 $ 7.718 $ 9.791 Accumulation Unit Value, End of Period $ 9.950 $ 8.621 $ 7.718 $ 9.791 $ 11.165 Number of Units Outstanding, End of Period 16,726 54,431 130,889 142,815 143,910 FIDELITY VIP EQUITY-INCOME - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 10.810 $ 10.145 $ 8.320 $ 10.708 Accumulation Unit Value, End of Period $10.810 $ 10.145 $ 8.320 $ 10.708 $ 11.794 Number of Units Outstanding, End of Period 1,655 98,345 343,378 427,122 427,302 FIDELITY VIP GROWTH - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.389 $ 7.634 $ 5.269 $ 6.913 Accumulation Unit Value, End of Period $ 9.389 $ 7.634 $ 5.269 $ 6.913 $ 7.057 Number of Units Outstanding, End of Period 12,984 111,676 271,819 292,079 287,423 FIDELITY VIP GROWTH OPPORTUNITIES - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.350 $ 7.901 $ 6.098 $ 7.820 Accumulation Unit Value, End of Period $ 9.350 $ 7.901 $ 6.098 $ 7.820 $ 8.278 Number of Units Outstanding, End of Period 4,746 23,416 49,139 63,281 75,230 FIDELITY VIP OVERSEAS - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.314 $ 7.251 $ 5.707 $ 8.081 Accumulation Unit Value, End of Period $ 9.314 $ 7.251 $ 5.707 $ 8.081 $ 9.068 Number of Units Outstanding, End of Period 4,880 29,515 84,428 84,019 86,851
36 PROSPECTUS FTVIP TEMPLETON GLOBAL ASSET ALLOCATION - CLASS 2 SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 10.443 $ 9.286 $ 8.768 $ 11.425 Accumulation Unit Value, End of Period $10.443 $ 9.286 $ 8.768 $ 11.425 $ 13.055 Number of Units Outstanding, End of Period 632 13,934 25,836 37,170 38,129 FTVIP TEMPLETON FOREIGN SECURITIES - CLASS 2 SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 10.522 $ 8.728 $ 7.019 $ 9.164 Accumulation Unit Value, End of Period $10.522 $ 8.728 $ 7.019 $ 9.164 $ 10.276 Number of Units Outstanding, End of Period 7,881 44,999 110,201 121,630 115,042 OPPENHEIMER AGGRESSIVE GROWTH/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.162 $ 6.218 $ 4.434 $ 5.499 Accumulation Unit Value, End of Period $ 9.162 $ 6.218 $ 4.434 $ 5.499 $ 6.504 Number of Units Outstanding, End of Period 10,578 137,154 289,514 301,948 293,993 OPPENHEIMER MAIN STREET/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.274 $ 8.227 $ 6.597 $ 8.256 Accumulation Unit Value, End of Period $ 9.274 $ 8.227 $ 6.597 $ 8.256 $ 8.924 Number of Units Outstanding, End of Period 35,354 173,074 401,718 494,003 512,442 OPPENHEIMER STRATEGIC BOND/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 10.320 $ 10.685 $ 11.336 $ 13.218 Accumulation Unit Value, End of Period $10.320 $ 10.685 $ 11.336 $ 13.218 $ 14.185 Number of Units Outstanding, End of Period 8,730 96,313 220,809 276,973 263,324 THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.: INITIAL SHARES SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.249 $ 7.071 $ 4.962 $ 6.174 Accumulation Unit Value, End of Period $ 9.249 $ 7.071 $ 4.962 $ 6.174 $ 6.475 Number of Units Outstanding, End of Period 11.070 32,951 39,724 41,869 39,582 DREYFUS STOCK INDEX FUND, INC.: INITIAL SHARES SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.409 $ 8.159 $ 6.255 $ 7.929 Accumulation Unit Value, End of Period $ 9.409 $ 8.159 $ 6.255 $ 7.929 $ 8.663 Number of Units Outstanding, End of Period 28,181 185,335 611,361 703,922 677,882 DREYFUS VIF - APPRECIATION: INITIAL SHARES SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.931 $ 8.894 $ 7.314 $ 8.752 Accumulation Unit Value, End of Period $ 9.931 $ 8.894 $ 7.314 $ 8.752 $ 9.079 Number of Units Outstanding, End of Period 1,285 27,925 80,006 97,355 93,398 DREYFUS VIF - MONEY MARKET SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- -- $ 10.000 $ 8.752 Accumulation Unit Value, End of Period -- -- -- $ 9.957 $ 9.911 Number of Units Outstanding, End of Period -- -- -- 398,378 329,692 WELLS FARGO ADVANTAGE ASSET ALLOCATION SUB-ACCOUNT *** Accumulation Unit Value, Beginning of Period $10.000 $ 10.012 $ 9.198 $ 7.916 $ 9.544 Accumulation Unit Value, End of Period $10.012 $ 9.198 $ 7.916 $ 9.544 $ 10.306 Number of Units Outstanding, End of Period 667 13,021 54,392 66,680 59,351 WELLS FARGO ADVANTAGE EQUITY INCOME SUB-ACCOUNT **** Accumulation Unit Value, Beginning of Period $10.000 $ 10.429 $ 9.741 $ 7.766 $ 9.679 Accumulation Unit Value, End of Period $10.429 $ 9.741 $ 7.766 $ 9.679 $ 10.617 Number of Units Outstanding, End of Period 264 8,467 23,695 25,815 30,383 WELLS FARGO ADVANTAGE LARGE COMPANY CORE SUB-ACCOUNT ***** Accumulation Unit Value, Beginning of Period $10.000 $ 9.048 $ 7.218 $ 5.286 $ 6.451 Accumulation Unit Value, End of Period $ 9.048 $ 7.218 $ 5.286 $ 6.451 $ 6.904 Number of Units Outstanding, End of Period 390 4,893 20,443 40,250 55,986 DELAWARE VIP SMALL CAP VALUE - STANDARD CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 11.593 $ 12.802 $ 11.934 $ 16.732 Accumulation Unit Value, End of Period $11.593 $ 12.802 $ 11.934 $ 16.732 $ 20.073 Number of Units Outstanding, End of Period 7,204 45,515 133,174 157,546 161,967 DELAWARE VIP TREND - STANDARD CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $10.000 $ 9.265 $ 7.745 $ 6.124 $ 8.170 Accumulation Unit Value, End of Period $ 9.265 $ 7.745 $ 6.124 $ 8.170 $ 9.084 Number of Units Outstanding, End of Period 5,514 24,184 80,076 112,774 114,856
37 PROSPECTUS * The Contracts were first offered on June 1, 2000. The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.15% and an administrative charge of 0.10%. All of the Variable Sub-Accounts, with the exception of the Dreyfus VIF - Money Market Sub-Account which was first offered on April 30, 2003, were first offered under the Contracts on June 1, 2000. ** Effective July 1, 2005, the AIM V.I. Balanced Fund -Series I will change its name to AIM V.I Basic Balanced Fund-Series I. Effective July 1, 2005, a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio will be made. *** Effective April 11, 2005 the Wells Fargo VT Asset Allocation Fund changed its name to Wells Fargo Advantage Asset Allocation Fund. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. **** Effective April 11, 2005 the Wells Fargo VT Equity Income Fund changed its name to Wells Fargo Advantage Equity Income Fund. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. ***** Effective April 11, 2005 the Wells Fargo VT Growth Fund changed its name to Wells Fargo Advantage Large Company Core Fund. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. 38 PROSPECTUS APPENDIX B MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the applicable Guarantee Period for the week preceding the establishment of the Guarantee Period. N = the number of whole and partial years from the date we receive the withdrawal, transfer, or death benefit request, or from the Payout Start Date, to the end of the Guarantee Period; and J = the Treasury Rate for a maturity equal to N years for the week preceding the receipt of the withdrawal, transfer, death benefit, or income payment request. If a note for a maturity of length N is not available, a weighted average will be used. "Treasury Rate" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment factor is determined from the following formula: ..9 X (I - J) X N To determine the Market Value Adjustment, we will multiply the Market Value Adjustment factor by the amount transferred (in excess of the Free Withdrawal Amount) paid as a death benefit, or applied to an Income Plan, from a Guarantee Period at any time other than during the 30 day period after such Guarantee Period expires. 39 PROSPECTUS EXAMPLES OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 allocated to a Guarantee Period Guarantee Period: 5 years Guaranteed Interest Rate: 4.50% 5 Year Treasury Rate at the time the Guarantee Period is established: 4.50% Full Surrender: End of Contract Year 3 NOTE: These examples assume that premium taxes are not applicable. EXAMPLE 1 (ASSUME DECLINING INTEREST RATES) Step 1. Calculate Contract $10,000.00 X (1.045)/3/ = $11,411.66 Value at End of Contract Year 3: Step 2. Calculate the Preferred .15 X $10,000.00 = $1,500.00 Withdrawal Amount: Step 3. Calculate the Market I = 4.5% Value Adjustment: J = 4.2% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .042) X (730/365) = .0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: = .0054 X ($11,411.66 - $1,500.00) = $53.32 EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1. Calculate Contract $10,000.00 X (1.045)/3/ = $11,411.66 Value at End of Contract Year 3: Step 2. Calculate the Preferred .15 X $10,000.00 = $1,500.00 Withdrawal Amount: Step 3. Calculate the Market I = 4.5% Value Adjustment: J = 4.8% 730 days N = -------- = 2 365 days MARKET VALUE ADJUSTMENT FACTOR: .9 X (I - J) X N = .9 X (.045 - .048) X (730/365) = -.0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: = -.0054 X ($11,411.66 - $1,500.00) = -$53.52 40 PROSPECTUS APPENDIX C WITHDRAWAL ADJUSTMENT EXAMPLE Issue Date: January 1, 2005 Initial Purchase Payment: $50,000 Death Benefit Amount
Contract Contract Death Benefit Greatest Value Before Transaction Value After Anniversary Anniversary Date Type of Occurrence Occurrence Amount Occurrence Value Value - --------------------------------------------------------------------------------------------------------- 1/1/05 Issue Date -- $50,000 $50,000 $50,000 $50,000 - --------------------------------------------------------------------------------------------------------- 1/1/06 Contract Anniversary $55,000 -- $55,000 $50,000 $55,000 - --------------------------------------------------------------------------------------------------------- 7/1/06 Partial Withdrawal $60,000 $15,000 $45,000 $37,500 $41,250 - ---------------------------------------------------------------------------------------------------------
Withdrawal adjustment equals the partial withdrawal amount divided by the Contract Value immediately prior to the partial withdrawal multiplied by the value of the applicable death benefit amount alternative immediately prior to the partial withdrawal. DEATH BENEFIT ANNIVERSARY VALUE DEATH BENEFIT - -------------------------------------------------------------------------------------------------------------- Partial Withdrawal Amount (w) $15,000 - -------------------------------------------------------------------------------------------------------------- Contract Value Immediately Prior to Partial Withdrawal (a) $60,000 - -------------------------------------------------------------------------------------------------------------- Value of Applicable Death Benefit Amount Immediately Prior to Partial (d) $50,000 Withdrawal - -------------------------------------------------------------------------------------------------------------- Withdrawal Adjustment $12,500 [(w)/(a)] X (d) - -------------------------------------------------------------------------------------------------------------- Adjusted Death Benefit $37,500 - -------------------------------------------------------------------------------------------------------------- GREATEST ANNIVERSARY VALUE DEATH BENEFIT - -------------------------------------------------------------------------------------------------------------- Partial Withdrawal Amount (w) $15,000 - -------------------------------------------------------------------------------------------------------------- Contract Value Immediately Prior to Partial Withdrawal (a) $60,000 - -------------------------------------------------------------------------------------------------------------- Value of Applicable Death Benefit Amount Immediately Prior to Partial (d) $55,000 Withdrawal - -------------------------------------------------------------------------------------------------------------- Withdrawal Adjustment $13,750 [(w)/(a)] * (d) - -------------------------------------------------------------------------------------------------------------- Adjusted Death Benefit $41,250 - --------------------------------------------------------------------------------------------------------------
Please remember that you are looking at a hypothetical example, and that your investment performance may be greater or less than the figures shown. 41 PROSPECTUS STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Additions, Deletions or Substitutions of Investments The Contract Purchase of Contracts Calculation of Accumulation Unit Values Calculation of Variable Income Payments General Matters Incontestability Settlements Safekeeping of the Variable Account's Assets Experts Financial Statements THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS. 42 PROSPECTUS SELECTDIRECTIONS(SM) VARIABLE ANNUITY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK STREET ADDRESS: 2940 S. 84TH STREET, LINCOLN, NE 68506-4142 MAILING ADDRESS: P.O. BOX 82656, LINCOLN, NE 68501-2656 TELEPHONE NUMBER: 1-800-632-3492 PROSPECTUS DATED APRIL 30, 2005 Allstate Life Insurance Company of New York ("Allstate New York") is offering the SelectDirections(SM) Variable Annuity, a group flexible premium deferred variable annuity contract ("CONTRACT"). This prospectus contains information about the Contract that you should know before investing. Please keep it for future reference. The Contract currently offers 27 investment alternatives ("INVESTMENT ALTERNATIVES"). The investment alternatives including 3 fixed accounts ("FIXED ACCOUNT") and 24 variable sub-accounts ("VARIABLE SUB-ACCOUNTS") of the Allstate Life of New York Separate Account A ("VARIABLE ACCOUNT"). Each Variable Sub-Account invests exclusively in shares of one of the following underlying fund portfolios ("PORTFOLIOS"): AIM VARIABLE INSURANCE FUNDS: MFS(R) VARIABLE INSURANCE TRUST(SM): - ----------------------------- ------------------------------------ AIM V.I. Capital Appreciation Fund - MFS Research Bond Series - Initial Series I Class* AIM V.I. Core Equity Fund - Series I MFS High Income Series - Initial Class AIM V.I. Diversified Income Fund - MFS Investors Trust Series - Initial Series I Class AIM V.I. International Growth Fund - MFS New Discovery Series - Initial Series I Class AIM V.I. Premier Equity Fund - Series I FIDELITY(R) VARIABLE INSURANCE PRODUCTS: OPPENHEIMER VARIABLE ACCOUNT FUNDS: - ---------------------------------------- ----------------------------------- Fidelity VIP Contrafund(R) Portfolio - Oppenheimer Core Bond Fund/VA ** Initial Class Oppenheimer Capital Appreciation Fidelity VIP Growth Portfolio - Initial Fund/VA Class Oppenheimer Global Securities Fund/VA Fidelity VIP High Income Portfolio - Oppenheimer High Income Fund/VA Initial Class Oppenheimer Main Street Small Cap Fidelity VIP Index 500 Portfolio - Fund/VA Initial Class Fidelity VIP Investment Grade Bond VAN KAMPEN LIFE INVESTMENT TRUST: Portfolio - Initial Class --------------------------------- Fidelity VIP Overseas Portfolio - Van Kampen LIT Comstock Portfolio, Initial Class Class I Van Kampen LIT Emerging Growth Portfolio, Class I Van Kampen LIT Government Portfolio, Class I Van Kampen LIT Money Market Portfolio, Class I * Effective May 1, 2005, the MFS Bond Series - Initial Class will change its name to MFS Research Bond Series - Initial Class. ** Effective Apil 29, 2005, the Oppenheimer Bond Fund/VA changed its name to Oppenheimer Core Bond Fund/VA. WE (Allstate New York) have filed a Statement of Additional Information, dated April 30, 2005, with the Securities and Exchange Commission ("SEC"). It contains more information about the Contract and is incorporated herein by reference, which means it is legally a part of this prospectus. Its table of contents appears on page 41 of this prospectus. For a free copy, please write or call us at the address or telephone number above, or go to the SEC's Web site (http:// www.sec.gov). You can find other information and documents about us, including documents that are legally part of this prospectus, at the SEC's Web site. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS IMPORTANT THAT HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS. HOWEVER, THE NOTICES CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT FDIC INSURED. THE CONTRACTS ARE ONLY AVAILABLE IN NEW YORK. 1 PROSPECTUS TABLE OF CONTENTS PAGE ---- OVERVIEW Important Terms 3 The Contract at a Glance 4 How the Contract Works 6 Expense Table 7 Financial Information 9 CONTRACT FEATURES The Contract 9 Purchases 10 Contract Value 11 Investment Alternatives 12 The Variable Sub-Accounts 12 The Fixed Account 14 Transfers 17 Expenses 19 Access To Your Money 21 Income Payments 22 PAGE ---- Death Benefits 24 OTHER INFORMATION More Information: 26 Allstate New York 26 The Variable Account 26 The Portfolios 27 The Contract 27 Non-Qualified Annuities Held Within a Qualified Plan 28 Legal Matters 28 Federal Tax Matters 29 Annual Reports and Other Documents 35 APPENDIX A-ACCUMULATION UNIT VALUES AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED 38 APPENDIX B -MARKET VALUE ADJUSTMENT 38 APPENDIX C - WITHDRAWAL ADJUSTMENT EXAMPLE 40 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 41 2 PROSPECTUS IMPORTANT TERMS This prospectus uses a number of important terms that you may not be familiar with. The index below identifies the page that describes each term. The first use of each term in this prospectus appears in highlights. PAGE ---- Accumulation Phase 6 Accumulation Unit 11 Accumulation Unit Value 11 Allstate New York ("We" or "Us") 1 Anniversary Values 24 Annuitant 9 Automatic Additions Program 10 Automatic Portfolio Rebalancing Program 18 Beneficiary 9 Cancellation Period 4 Contract* 9 Contract Anniversary 5 Contract Owner ("You") 9 Contract Value 5 Contract Year 4 Death Benefit Anniversary 24 Dollar Cost Averaging Program 18 Due Proof of Death 24 Fixed Account 14 PAGE ---- Guarantee Periods 15 Income Plans 22 Investment Alternatives 12 Issue Date 6 Market Value Adjustment 16 Payout Phase 6 Payout Start Date 6 Portfolios 27 Preferred Withdrawal Amount 20 Right to Cancel 11 SEC 1 Settlement Value 24 Systematic Withdrawal Program 21 Tax Qualified Contracts 32 Treasury Rate 16 Valuation Dates 11 Variable Account 26 Variable Sub-Account 12 * The SelectDirections(SM) Variable Annuity is a group contract and your ownership is represented by certificates. References to "CONTRACT" in this prospectus include certificates, unless the context requires otherwise. 3 PROSPECTUS THE CONTRACT AT A GLANCE The following is a snapshot of the Contract. Please read the remainder of this prospectus for more information. FLEXIBLE PAYMENTS You can purchase a Contract with as little as $3,000 ($2,000 for a "QUALIFIED CONTRACT" which is a Contract issued with a qualified endorsement). You can add to your Contract as often and as much as you like, but each payment must be at least $100. You must maintain a minimum account size of $1,000. - ------------------------------------------------------------------------------- RIGHT TO CANCEL You may cancel your Contract within 10 days after receipt (60 days if you are exchanging another contract for the Contract described in this prospectus) ("CANCELLATION PERIOD"). Upon cancellation we will return your purchase payments adjusted, to the extent federal or state law permits, to reflect the investment experience of any amounts allocated to the Variable Account. - ------------------------------------------------------------------------------- EXPENSES You will bear the following expenses: . Total Variable Account annual fees equal to 1.25% of average daily net assets . Annual contract maintenance charge of $30 (with certain exceptions) . Withdrawal charges ranging from 0% to 7% of payment withdrawn (with certain exceptions) . Transfer fee of $10 after 12th transfer in any CONTRACT YEAR (fee currently waived) . State premium tax (New York currently does not impose one). In addition, each Portfolio pays expenses that you will bear indirectly if you invest in a Variable Sub-Account. - ------------------------------------------------------------------------------- INVESTMENT The Contract offers 27 investment alternatives ALTERNATIVES including: . 3 Fixed Account Options (which credits interest at rates we guarantee), and . 24 Variable Sub-Accounts investing in Portfolios offering professional money management by: . A I M Advisors, Inc. . Fidelity Management & Research Company . MFS(TM) Investment Management . OppenheimerFunds, Inc. . Van Kampen Asset Management To find out current rates being paid on the Fixed Account, or to find out how the Variable Sub-Accounts have performed, please call us at 1-800-632-3492. - ------------------------------------------------------------------------------- SPECIAL SERVICES For your convenience, we offer these special services: . AUTOMATIC PORTFOLIO REBALANCING PROGRAM . AUTOMATIC ADDITIONS PROGRAM . DOLLAR COST AVERAGING PROGRAM . SYSTEMATIC WITHDRAWAL PROGRAM - ------------------------------------------------------------------------------- INCOME PAYMENTS You can choose fixed income payments, variable income payments, or a combination of the two. You can receive your income payments in one of the following ways: . life income with guaranteed payments . joint and survivor life income with guaranteed payments . guaranteed payments for a specified period (5 to 30 years) - ------------------------------------------------------------------------------- 4 PROSPECTUS DEATH BENEFITS If you die before the PAYOUT START DATE, we will pay the death benefit described in the Contract. - ------------------------------------------------------------------------------- TRANSFERS Before the Payout Start Date, you may transfer your Contract value ("CONTRACT VALUE") among the investment alternatives, with certain restrictions. Transfers to the Fixed Account must be at least $500. We do not currently impose a fee upon transfers. However, we reserve the right to charge $10 per transfer after the 12th transfer in each "Contract Year," which we measure from the date we issue your Contract or a Contract anniversary ("CONTRACT ANNIVERSARY"). - ------------------------------------------------------------------------------- WITHDRAWALS You may withdraw some or all of your Contract Value at anytime during the Accumulation Phase. Full or partial withdrawals also are available under limited circumstances on or after the Payout Start Date. In general, you must withdraw at least $50 at a time ($1,000 for withdrawals made during the Payout Phase). Withdrawals taken during the Accumulation Phase are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. A withdrawal charge and MARKET VALUE ADJUSTMENT also may apply. - -------------------------------------------------------------------------------- 5 PROSPECTUS HOW THE CONTRACT WORKS The Contract basically works in two ways. First, the Contract can help you (we assume you are the CONTRACT OWNER) save for retirement because you can invest in up to 27 investment alternatives and generally pay no federal income taxes on any earnings until you withdraw them. You do this during what we call the "ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date we issue your Contract (we call that date the "ISSUE DATE") and continues until the Payout Start Date, which is the date we apply your money to provide income payments. During the Accumulation Phase, you may allocate your purchase payments to any combination of the Variable Sub-Accounts and/or the Fixed Account. If you invest in the Fixed Account, you will earn a fixed rate of interest that we declare periodically. If you invest in any of the Variable Sub-Accounts, your investment return will vary up or down depending on the performance of the corresponding Portfolios. Second, the Contract can help you plan for retirement because you can use it to receive retirement income for life and/ or for a pre-set number of years, by selecting one of the income payment options (we call these "INCOME PLANS") described on page 22. You receive income payments during what we call the "PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and continues until we make the last payment required by the Income Plan you select. During the Payout Phase, if you select a fixed income payment option, we guarantee the amount of your payments, which will remain fixed. If you select a variable income payment option, based on one or more of the Variable Sub-Accounts, the amount of your payments will vary up or down depending on the performance of the corresponding Portfolios. The amount of money you accumulate under your Contract during the Accumulation Phase and apply to an Income Plan will determine the amount of your income payments during the Payout Phase. The timeline below illustrates how you might use your Contract.
Issue Payout Start Date Accumulation Phase Date Payout Phase - -------------------------------------------------------------------------------------------------> You buy You save for retirement You elect to receive You can receive Or you can receive a Contract income payments or income payments income payments receive a lump sum for a set period for life payment
As the Contract Owner, you exercise all of the rights and privileges provided by the Contract. If you die, any surviving Contract Owner, or if there is none, the BENEFICIARY will exercise the rights and privileges provided by the Contract. See "The Contract." In addition, if you die before the Payout Start Date, we will pay a death benefit to any surviving Contract Owner or, if none, to your Beneficiary. See "Death Benefits." Please call us at 1-800-632-3492 if you have any question about how the Contract works. 6 PROSPECTUS EXPENSE TABLE The following tables describe the fees and expenses that you will pay when buying, owning, making withdrawals or surrendering the Contract. The first table describes the fees and expenses that you will pay when you make a withdrawal, surrender the Contract, or transfer Contract Value among the investment alternatives. Premium taxes are not reflected in the tables because New York currently does not impose premium taxes on annuities. CONTRACT OWNER TRANSACTION EXPENSES Withdrawal Charge (as a percentage of purchase payments)*
Number of Complete Years Since We Received the Purchase 0 1 2 3 4 5 6 7+ Payment Being Withdrawn - ------------------------------------------------------------------------------------------------- Applicable Charge 7% 6% 5% 4% 3% 2% 1% 0% - ------------------------------------------------------------------------------------------------- Transfer Fee $10.00** - -------------------------------------------------------------------------------------------------
* Each Contract Year, you may withdraw up to 15% of purchase payments without incurring a Withdrawal Charge or a Market Value Adjustment. ** Applies solely to the thirteenth and subsequent transfers within a Contract Year, excluding transfers due to dollar cost averaging or automatic portfolio rebalancing. We are currently waiving the transfer fee. The next tables describe the fees and expenses that you will pay periodically during the time you own the Contract, not including Portfolio fees and expenses. Annual Contract Maintenance Charge $30.00/(1)/ - -------------------------------------------------------------------------------- (1) We will waive this charge in certain cases. VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE SUB-ACCOUNT) Mortality and Expense Risk Charge 1.15% - ------------------------------------------------------------------------------- Administrative Expense Charge 0.10% - ------------------------------------------------------------------------------- Total Variable Account Annual Expense 1.25% - ------------------------------------------------------------------------------- PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE DAILY NET ASSETS)(1) The next table shows the minimum and maximum total operating expenses charged by the Portfolios that you may pay periodically during the time that you own the Contract. Advisers and/or other service providers of certain Portfolios may have agreed to waive their fees and/or reimburse Portfolio expenses in order to keep the Portfolios' expenses below specified limits. The range of expenses shown in this table does not show the effect of any such fee waiver or expense reimbursement. More detail concerning each Portfolio's fees and expenses appears in the prospectus for each Portfolio. ANNUAL PORTFOLIO EXPENSES Minimum Maximum - -------------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio assets, which may include management fees, and other expenses) 0.10% 1.14% - -------------------------------------------------------------------------------- (1) Expenses are shown as a percentage of Portfolio average daily net assets (before any waiver or reimbursement) as of December 31, 2004. 7 PROSPECTUS EXAMPLES EXAMPLE 1 This Example is intended to help you compare the cost of investing in the Contracts with the cost of investing in other variable annuity contracts. These costs include Contract owner transaction expenses, Contract fees, Variable Account annual expenses, and Portfolio fees and expenses. The example shows the dollar amount that you would bear directly or indirectly if you: .. invested $10,000 in the Contract for the time periods indicated, .. earned a 5% annual return on your investment, and .. surrendered your Contract, or you began receiving income payments for a specified period of less than 120 months, at the end of each time period. THE EXAMPLES DO NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO PAY IF YOU SURRENDER YOUR CONTRACT. The first line of the example assumes that the maximum fees and expenses of any of the Portfolios are charged. The second line of the example assumes that the minimum fees and expenses of any of the Portfolios are charged. Your actual expenses may be higher or lower than those shown below, because of variations in a Portfolio's expense ratio from year to year. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------------------ Costs Based on Maximum Annual Portfolio Expenses $785 $1,181 $1,601 $3,015 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Portfolio Expenses $678 $ 859 $1,059 $1,911 - ------------------------------------------------------------------------ EXAMPLE 2 This Example uses the same assumptions as Example 1 above, except that it assumes you decided not to surrender your Contract, or you began receiving income payments for a specified period of at least 120 months, at the end of each time period. 1Year 3Years 5Years 10Years - ------------------------------------------------------------------------ Costs Based on Maximum Annual Portfolio Expenses $275 $841 $1,431 $3,015 - ------------------------------------------------------------------------ Costs Based on Minimum Annual Portfolio Expenses $168 $519 $ 889 $1,911 - ------------------------------------------------------------------------ PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF PAST OR FUTURE EXPENSES. YOUR RATE OF RETURN MAY BE HIGHER OR LOWER THAN 5%, WHICH IS NOT GUARANTEED. THE EXAMPLES DO NOT ASSUME THAT ANY PORTFOLIO EXPENSE WAIVERS OR REIMBURSEMENT ARRANGEMENTS ARE IN EFFECT FOR THE PERIODS PRESENTED. THE EXAMPLES REFLECT THE FREE WITHDRAWAL AMOUNTS, IF APPLICABLE, AND THE DEDUCTION OF THE ANNUAL CONTRACT MAINTANENCE CHARGE OF $30 EACH YEAR. 8 PROSPECTUS FINANCIAL INFORMATION To measure the value of your investment in the Variable Sub-Accounts during the Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT." Each Variable Sub-Account has a separate value for its Accumulation Units we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but not the same as, the share price of a mutual fund. Attached as Appendix A to this prospectus are tables showing the Accumulation Unit Values of each Variable Sub-Account since the date the Contracts were first offered. To obtain a fuller picture of each Variable Sub-Account's finances, please refer to the Variable Account's financial statements contained in the Statement of Additional Information. The financial statements of Allstate New York also appear in the Statement of Additional Information. THE CONTRACT CONTRACT OWNER The SelectDirections(SM) Variable Annuity is a contract between you, the Contract Owner, and Allstate New York, a life insurance company. As the Contract Owner, you may exercise all of the rights and privileges provided to you by the Contract. That means it is up to you to select or change (to the extent permitted): .. the investment alternatives during the Accumulation and Payout Phases, .. the amount and timing of your purchase payments and withdrawals, .. the programs you want to use to invest or withdraw money, .. the income payment plan you want to use to receive retirement income, .. the Annuitant (either yourself or someone else) on whose life the income payments will be based, .. the Beneficiary or Beneficiaries who will receive the benefits that the Contract provides when the last surviving Contract Owner dies, and .. any other rights that the Contract provides. If you die prior to the Payout Start Date, the new Contract Owner will be the surviving Owner. If there is no surviving Owner, the new Contract Owner will be the Beneficiary(ies) as described in the Beneficiary provision. The new Contract Owner may exercise the rights and privileges provided by the Contract, except that if the new Contract Owner took ownership as the Beneficiary, the new Contract Owner's rights will be subject to any restrictions previously placed upon the Beneficiary. The Contract cannot be jointly owned by both a non-living person and a living person. If the Owner is a Grantor Trust, the Contract Owner will be considered a non-living person for purposes of the Death of Owner and Death of Annuitant provisions of your Contract. The maximum age of the oldest Contract Owner cannot exceed 85 as of the date we receive the completed application. Changing ownership of this Contract may cause adverse tax consequences and may not be allowed under qualified plans. Please consult with a competent tax advisor prior to making a request for a change of Contract Owner. The Contract can alo be purchased as an IRA or TSA (also known as 403(b)). The endorsements required to qualify these annuities under the Internal Revenue Code of 1986, as amended, ("Code") may limit or modify your rights and privileges under the Contract. ANNUITANT The Annuitant is the individual whose life determines the amount and duration of income payments (other than under Income Plans with guaranteed payments for a specified period). You initially designate an Annuitant in your application. The maximum age of the oldest Annuitant cannot exceed 85 as of the date we receive the completed application. If the Contract Owner is a living person you may change the Annuitant prior to the Payout Start Date. In our discretion, we may permit you to designate a joint Annuitant, who is a second person on whose life income payments depend, on the Payout Start Date. If the Annuitant dies prior to the Payout Start Date, the new Annuitant will be: .. the youngest Contract Owner, if living, otherwise .. the youngest Beneficiary. BENEFICIARY The Beneficiary is the person who may elect to receive the death benefit or become the new Contract Owner subject to the Death of Owner provision if the sole surviving Contract Owner dies before the Payout Start Date. See "Death Benefits" on page 24. If the sole surviving Contract Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed income payments scheduled to continue. You may name one or more primary and contingent Beneficiaries when you apply for a Contract. The primary Beneficiary is the Beneficiary(ies) who is first entitled to receive benefits under the Contract upon the death of the sole surviving Contract Owner. The contingent Beneficiary is the Beneficiary(ies) entitled to receive benefits under the Contract when all primary 9 PROSPECTUS Beneficiaries predecease the sole surviving Contract Owner. You may restrict income payments to Beneficiaries by providing us a written request. Once we accept the written request, the change or restriction will take effect as of the date you signed the request. Any change is subject to any payment we make or other action we take before we accept the change. You may change or add Beneficiaries at any time by writing to us, unless you have designated an irrevocable Beneficiary. We will provide a change of Beneficiary form to be signed and filed with us. After we accept the form, the change of Beneficiary will be effective as of the date you signed the form, whether or not the Annuitant is living when we receive the notice. Each change is subject to any payment made by us or any other action we take before we accept the change. Accordingly, if you wish to change your Beneficiary, you should deliver your written notice to us promptly. If you do not name a Beneficiary or, if the named Beneficiary is no longer living and there are no other surviving Beneficiaries, the new Beneficiary will be: .. your spouse or, if he or she is no longer alive, .. your surviving children equally, or if you have no surviving children, .. your estate. If more than one Beneficiary survives you, we will divide the death benefit among your Beneficiaries according to your most recent written instructions. If you have not given us written instructions, we will pay the death benefit in equal amounts to the surviving Beneficiaries. MODIFICATION OF THE CONTRACT Only an Allstate New York officer may approve a change in or waive any provision of the Contract. Any change or waiver must be in writing. None of our agents has the authority to change or waive the provisions of the Contract. We may not change the terms of the Contract without your consent, except to conform the Contract to applicable law or changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law. ASSIGNMENT You may not assign any interest in a Contract as collateral or security for a loan. However, you may assign periodic income payments under the Contract prior to the Payout Start Date. No Beneficiary may assign benefits under the Contract until they are due. We will not be bound by any assignment until the assignor signs it and files it with us. We are not responsible for the validity of any assignment. Federal law prohibits or restricts the assignment of benefits under many types of qualified plans and the terms of such plans may themselves contain restrictions on assignments. An assignment may also result in taxes or tax penalties. YOU SHOULD CONSULT WITH YOUR ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT. PURCHASES MINIMUM PURCHASE PAYMENTS Your initial purchase payment must be at least $3,000 ($2,000 for a Qualified Contract). All subsequent purchase payments must be $100 ($500 for allocation to the Fixed Account or the Dollar Cost Averaging Fixed Account) or more. You may make purchase payments at any time prior to the Payout Start Date. We reserve the right to limit the maximum amount of purchase payments, or reduce the minimum purchase payment we will accept. We reserve the right to reject any application. AUTOMATIC ADDITIONS PROGRAM You may make subsequent purchase payments of at least $100 ($500 for allocation to the Fixed Account) by automatically transferring amounts from your bank account. Please consult with your Personal Financial Representative for detailed information. ALLOCATION OF PURCHASE PAYMENTS At the time you apply for a Contract, you must decide how to allocate your purchase payments among the investment alternatives. The allocation you specify on your application will be effective immediately. All allocations must be in whole percents that total 100% or in whole dollars. You can change your allocations by notifying us in writing. We reserve the right to limit the availability of the investment alternatives. We will allocate your purchase payments to the investment alternatives according to your most recent instructions on file with us. Unless you notify us in writing otherwise, we will allocate subsequent purchase payments according to the allocation for the previous purchase payment. We will effect any change in allocation instructions at the time we receive, in good order, written notice of the change. We will credit the initial purchase payment that accompanies your completed application to your Contract within 2 business days after we receive the payment at our service center. If your application is incomplete, we will ask you to complete your application within 5 business days. If you do so, we will credit your initial purchase payment to your Contract within that 5 business day period. If you do not, we will return your purchase payment at the end of the 5 business day period unless you expressly allow us to hold it until you complete the application. We will credit subsequent purchase payments to the Contract at the close of the business day on which we receive the purchase payment at our service 10 PROSPECTUS center located in Lincoln, Nebraska (mailing address: P.O. Box 82656, Lincoln, NE 68501-2656). We are open for business each day Monday through Friday that the New York Stock Exchange is open for business. We also refer to these days as "VALUATION DATES." Our business day closes when the New York Stock Exchange closes, usually 4:00 p.m. Eastern Time (3:00 p.m. Central Time). If we receive your purchase payment after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date, we will credit your purchase payment using the Accumulation Unit Values computed on the next Valuation Date. RIGHT TO CANCEL You may cancel the Contract by returning it to us within the Cancellation Period, which is the 10 day period after you receive the Contract (60 days if you are exchanging another contract for the Contract described in this prospectus). You may return it by delivering it or mailing it to us. If you exercise this "RIGHT TO CANCEL," the Contract terminates and we will pay you the full amount of your purchase payments allocated to the Fixed Account. Upon cancellation, as permitted by federal or state law, we will return your purchase payments allocated to the Variable Account after an adjustment to the extent federal or state law permits to reflect investment gain or loss that occurred from the date of allocation through the date of cancellation. If your Contract is qualified under Code Section 408(b), we will refund the greater of any purchase payment or the Contract Value. CONTRACT VALUE On the Issue Date, the Contract Value is equal to the initial purchase payment. Your Contract Value at any other time during the Accumulation Phase is equal to the sum of the value as of the most recent Valuation Date of your Accumulation Units in the Variable Sub-Accounts you have selected, plus the value of your investment in the Fixed Account. ACCUMULATION UNITS To determine the number of Accumulation Units of each Variable Sub-Account to credit to your Contract, we divide (i) the amount of the purchase payment or transfer you have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value of that Variable Sub-Account next computed after we receive your payment or transfer. For example, if we receive a $10,000 purchase payment allocated to a Variable Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we would credit 1,000 Accumulation Units of that Variable Sub-Account to your Contract. Withdrawals and transfers from a Variable Sub-Account would, of course, reduce the number of Accumulation Units of that Sub-Account allocated to your Contract. ACCUMULATION UNIT VALUE As a general matter, the Accumulation Unit Value for each Variable Sub-Account will rise or fall to reflect: .. changes in the share price of the Portfolio in which the Variable Sub-Account invests, and .. the deduction of amounts reflecting the mortality and expense risk charge, administrative expense charge, and any provision for taxes that have accrued since we last calculated the Accumulation Unit Value. We determine contract maintenance charges, withdrawal charges, and transfer fees (currently waived) separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units. For details on how we calculate Accumulation Unit Value, please refer to the Statement of Additional Information. We determine a separate Accumulation Unit Value for each Variable Sub-Account on each Valuation Date. YOU SHOULD REFER TO THE PROSPECTUSES FOR THE PORTFOLIOS THAT ACCOMPANY THIS PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH PORTFOLIO ARE VALUED, SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE CORRESPONDING VARIABLE SUB-ACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE. 11 PROSPECTUS INVESTMENT ALTERNATIVES: THE VARIABLE SUB-ACCOUNTS You may allocate your purchase payments to up to 24 Variable Sub-Accounts. Each Variable Sub-Account invests in the shares of a corresponding Portfolio. Each Portfolio has its own investment objective(s) and policies. We briefly describe the Portfolios below. For more complete information about each Portfolio, including expenses and risks associated with the Portfolio, please refer to the accompanying prospectus for the Portfolio. You should carefully review the Portfolio prospectuses before allocating amounts to the Variable Sub-Accounts. PORTFOLIO: EACH PORTFOLIO SEEKS: INVESTMENT ADVISOR: - ------------------------------------------------------------------------------- AIM VARIABLE INSURANCE FUNDS - ------------------------------------------------------------------------------- AIM V.I. Capital Growth of capital Appreciation Fund - Series I* - ------------------------------------------------------------------------------- AIM V.I. Core Equity Growth of capital Fund - Series I* A I M ADVISORS, INC. - ------------------------------------------------------------------------------- AIM V.I. Diversified High level of current income Income Fund - Series I* - ------------------------------------------------------------------------------- AIM V.I. International Long-term growth of capital Growth Fund - Series I* - ------------------------------------------------------------------------------- AIM V.I. Premier Equity Long-term growth of capital Fund - Series I* with income as a secondary objective - ------------------------------------------------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS - ------------------------------------------------------------------------------- Fidelity VIP Long-term capital Contrafund(R) appreciation. Portfolio - Initial Class - ------------------------------------------------------------------------------- Fidelity VIP Growth To achieve capital Portfolio - Initial appreciation. Class - ------------------------------------------------------------------------------- Fidelity VIP High High level of current Income Portfolio - income, while also Initial Class considering growth of FIDELITY MANAGEMENT & capital. RESEARCH COMPANY - ------------------------------------------------------------------------------- Fidelity VIP Index 500 Investment results that Portfolio - Initial correspond to the total Class return of common stocks publicly traded in the United States, as represented by the Standard & Poor's 500(SM) Index (S&P 500(R)). - ------------------------------------------------------------------------------- Fidelity VIP Investment As high a level of current Grade Bond Portfolio - income as is consistent Initial Class with the preservation of capital. - ------------------------------------------------------------------------------- Fidelity VIP Overseas Long-term growth of capital. Portfolio - Initial Class - ------------------------------------------------------------------------------- MFS(R) VARIABLE INSURANCE TRUST(SM) - ------------------------------------------------------------------------------- MFS Research Bond To provide total return Series - Initial (high current income and Class** long-term growth of capital) - ------------------------------------------------------------------------------- MFS High Income Series High current income by - Initial Class investing primarily in a professionally managed MFS(TM) INVESTMENT diversified portfolio of MANAGEMENT fixed income securities, some of which may involve equity features - ------------------------------------------------------------------------------- MFS Investors Trust To provide long-term growth Series - Initial Class of capital and secondarily to provide reasonable current income - ------------------------------------------------------------------------------- MFS New Discovery Capital appreciation. Series - Initial Class - ------------------------------------------------------------------------------- 12 PROSPECTUS OPPENHEIMER VARIABLE ACCOUNT FUNDS - ------------------------------------------------------------------------------- Oppenheimer Core Bond High level of current Fund/VA*** income. As a secondary objective, the Portfolio seeks capital appreciation when consistent with its primary objective. - ------------------------------------------------------------------------------- Oppenheimer Capital Capital appreciation by Appreciation Fund/VA investing in securities of well-known, established companies. - ------------------------------------------------------------------------------- Oppenheimer Global Long-term capital OPPENHEIMERFUNDS, INC. Securities Fund/VA appreciation by investing a substantial portion of assets in securities of foreign issuers, growth-type companies, cyclical industries and special situations that are considered to have appreciation possibilities. - ------------------------------------------------------------------------------- Oppenheimer High Income A high level of current Fund/VA income from investment in high-yield fixed-income securities. - ------------------------------------------------------------------------------- Oppenheimer Main Street Capital appreciation. Small Cap Fund/VA - ------------------------------------------------------------------------------- VAN KAMPEN LIFE INVESTMENT TRUST - ------------------------------------------------------------------------------- Van Kampen LIT Comstock Capital growth and income VAN KAMPEN ASSET Portfolio, Class I through investments in MANAGEMENT equity securities, including common stocks, preferred stocks and securities convertible into common and preferred stocks. - ------------------------------------------------------------------------------- Van Kampen LIT Emerging Capital appreciation. Growth Portfolio, Class I - ------------------------------------------------------------------------------- Van Kampen LIT High current return Government Portfolio, consistent with Class I preservation of capital - ------------------------------------------------------------------------------- Van Kampen LIT Money Protection of capital and Market Portfolio, high current income through Class I investments in money market instruments. - ------------------------------------------------------------------------------- * The Portfolio's investment objective(s) may be changed by the Portfolio's Board of Trustees without shareholder approval ..** Effective May 1, 2005, the MFS Bond Series-Initial Class will change its name to MFS Research Bond Series-Initial Class. In addition, the Portfolio's objective will change as described above. *** Effective April 29, 2005, the Oppenheimer Bond Fund/VA changed its name to Oppenheimer Core Bond Fund/VA. The Portfolio's objective has not changed. AMOUNTS YOU ALLOCATE TO VARIABLE SUB-ACCOUNTS MAY GROW IN VALUE, DECLINE IN VALUE, OR GROW LESS THAN YOU EXPECT, DEPENDING ON THE INVESTMENT PERFORMANCE OF THE PORTFOLIOS IN WHICH THOSE VARIABLE SUB-ACCOUNTS INVEST. YOU BEAR THE INVESTMENT RISK THAT THE PORTFOLIOS MIGHT NOT MEET THEIR INVESTMENT OBJECTIVES. SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS, OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. VARIABLE INSURANCE PORTFOLIOS MIGHT NOT BE MANAGED BY THE SAME PORTFOLIO MANAGERS WHO MANAGE RETAIL MUTUAL FUNDS WITH SIMILAR NAMES. THESE PORTFOLIOS ARE LIKELY TO DIFFER FROM SIMILARLY NAMED RETAIL FUNDS IN ASSETS, CASH FLOW, AND TAX MATTERS. ACCORDINGLY, THE HOLDINGS AND RESULTS OF A VARIABLE INSURANCE PORTFOLIO CAN BE EXPECTED TO BE HIGHER OR LOWER THAN THE INVESTMENT RESULTS OF A SIMILARLY NAMED RETAIL MUTUAL FUND. 13 PROSPECTUS INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT You may allocate all or a portion of your purchase payments to the Fixed Account Options. We will credit a minimum annual interest rate of 3% to money you allocate to any of the Fixed Account Options. Please consult with your representative for current information. The Fixed Account supports our insurance and annuity obligations. The Fixed Account consists of our general assets other than those in segregated asset accounts. We have sole discretion to invest the assets of the Fixed Account, subject to applicable law. Any money you allocate to the Fixed Account Option does not entitle you to share in the investment experience of the Fixed Account. DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS SIX MONTH DOLLAR COST AVERAGING FIXED ACCOUNT OPTION Under this Option, you may establish a Dollar Cost Averaging Program allocating purchase payments to the Six Month Dollar Cost Averaging Fixed Account Option ("Six Month DCA Fixed Account Option"). We will credit interest to purchase payments you allocate to this Option for six months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Six Month DCA Fixed Account Option. You must transfer all of your money out of the Six Month DCA Fixed Account Option to the Variable Sub-Accounts in six equal monthly installments. If you discontinue the Six Month DCA Fixed Account Option before the end of the transfer period, we will transfer the remaining balance in this Option to the Van Kampen LIT Money Market Variable Sub-Account unless you request a different investment alternative. No transfers are permitted into the Six Month DCA Fixed Account. For each purchase payment allocated to this Option, your first monthly transfer will occur at the end of the first month following such purchase payment. If we do not receive an allocation from you within one month of the date of payment, we will transfer the payment plus associated interest to the Van Kampen LIT Money Market Variable Sub-Account in equal monthly installments. Transferring Account Value to the Van Kampen LIT Money Market Variable Sub-Account in this manner may not be consistent with the theory of dollar cost averaging described on page 19. TWELVE MONTH DOLLAR COST AVERAGING FIXED ACCOUNT OPTION Under this Option, you may establish a Dollar Cost Averaging Program by allocating purchase payments to the Twelve Month Dollar Cost Averaging Fixed Account Option ("Twelve Month DCA Fixed Account Option"). We will credit interest to purchase payments you allocate to this Option for twelve months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Twelve Month DCA Fixed Account Option. You must transfer all of your money out of the Twelve Month DCA Fixed Account Option to the Variable Sub-Accounts in twelve equal monthly installments. If you discontinue the Dollar Cost Averaging Option before the end of the transfer period, we will transfer the remaining balance in this Option to the Van Kampen LIT Money Market Variable Sub-Account unless you request a different investment alternative. No transfers are permitted into the Twelve Month DCA Fixed Account. For each purchase payment allocated to this Option, your first monthly transfer will occur at the end of the first month following such purchase payment. If we do not receive an allocation from you within one month of the date of payment, we will transfer the payment plus associated interest to the Van Kampen LIT Money Market Variable Sub-Account in equal monthly installments. Transferring Account Value to the Van Kampen LIT Money Market Variable Sub-Account in this manner may not be consistent with the theory of dollar cost averaging described on page 19. At the end of the transfer period, any nominal amounts remaining in the Six Month Dollar Cost Averaging Fixed Account or the Twelve Month Term Dollar Cost Averaging Fixed Account will be allocated to the Van Kampen LIT Money Market Variable Sub-Account. Transfers out of the Dollar Cost Averaging Fixed Account Options do not count towards the 12 transfers you can make without paying a transfer fee. INVESTMENT RISK We bear the investment risk for all amounts allocated to the Six Month DCA Fixed Account Option and the Twelve Month DCA Fixed Account Option. That is because we guarantee the current interest rates we credit to the amounts you allocate to either of these Options, which will never be less than the minimum guaranteed rate in the Contract. Currently, we determine, in our sole discretion, the amount of interest credited in excess of the guaranteed rate. We may declare more than one interest rate for different monies based upon the date of allocation to the Six Month DCA Fixed Account Option and the Twelve Month DCA Fixed Account Option. For current rate information, please contact your representative or our customer support unit at 1-800-632-3492. 14 PROSPECTUS GUARANTEE PERIODS Under this option, each payment or transfer allocated to the Fixed Account earns interest at a specified rate that we guarantee for a period of years we call a Guarantee Period. Guarantee Periods may range from 1 to 10 years. We are currently offering Guarantee Periods of 1, 3, 5, 7, and 10 years in length. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods. You select one or more Guarantee Periods for each purchase payment or transfer. If you do not select the Guarantee Period for a purchase payment or transfer, we will assign the shortest Guarantee Period available under the Contract for such payment or transfer. Each payment or transfer allocated to a Guarantee Period must be at least $500. We reserve the right to limit the number of additional purchase payments that you may allocate to the Fixed Account. Please consult with your Personal Financial Representative for more information. INTEREST RATES. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We may declare different interest rates for Guarantee Periods of the same length that begin at different times. We will not change the interest rate that we credit to a particular allocation until the end of the relevant Guarantee Period. We have no specific formula for determining the rate of interest that we will declare initially or in the future. We will set those interest rates based on investment returns available at the time of the determination. In addition, we may consider various other factors in determining interest rates including regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. We determine the interest rates to be declared in our sole discretion. We can neither predict nor guarantee what those rates will be in the future. For current interest rate information, please contact your Personal Financial Representative or Allstate New York at 1-800-632-3492. The interest rate will never be less than the minimum guaranteed amount stated in the Contract. HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated to a Guarantee Period at a rate that compounds to the effective annual interest rate that we declared at the beginning of the applicable Guarantee Period. The following example illustrates how a purchase payment allocated to the Fixed Account would grow, given an assumed Guarantee Period and effective annual interest rate: Purchase Payment.................................................... $10,000 Guarantee Period.................................................... 5 years Annual Interest Rate................................................ 4.50% Total Interest Credited During Guarantee Period = $2,461.82 ($12,461.82-$10,000) END OF CONTRACT YEAR
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ------------ Beginning Contract Value................. $10,000.00 X (1 + Annual Interest Rate) X 1.045 ---------- $10,450.00 Contract Value at end of Contract Year... $10,450.00 X (1 + Annual Interest X 1.045 ---------- $10,920.25 Contract Value at end of Contract Year... $10,920.25 X (1 + Annual Interest Rate) X 1.045 ---------- $11,411.66 Contract Value at end of Contract Year... $11,411.66 X (1 + Annual Interest Rate) X 1.045 ---------- $11,925.19 Contract Value at end of Contract Year... $11,925.19 X (1 + Annual Interest Rate) X 1.045 ----------- $12,461.82
This example assumes no withdrawals during the entire 5 year Guarantee Period. If you were to make a withdrawal, you may be required to pay a Withdrawal Charge. In addition, the amount withdrawn may be increased or decreased by a Market Value Adjustment that reflects changes in interest rates since the time you invested the amount withdrawn. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. 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 shown above but will never be less than the guaranteed minimum rate stated in the Contract. 15 PROSPECTUS RENEWALS. At least 15 but not more than 45 days prior to the end of each Guarantee Period, we will mail you a notice asking you what to do with your money, including the accrued interest. During the 30-day period after the end of the Guarantee Period, you may: 1) take no action. We will automatically apply your money to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for a Guarantee Period of that length; or 2) instruct us to apply your money to one or more new Guarantee Periods of your choice. The new Guarantee Period(s) will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for those Guarantee Periods; or 3) instruct us to transfer all or a portion of your money to one or more Variable Sub-Accounts. We will effect the transfer on the day we receive your instructions. We will not adjust the amount transferred to include a Market Value Adjustment. We will pay interest from the day the Guarantee Period expired until the date of the transfer. The interest will be the rate for the Shortest Guarantee Period then being offered; or 4) withdraw all or a portion of your money. You may be required to pay a withdrawal charge, but we will not adjust the amount withdrawn to include a Market Value Adjustment. You may also be required to pay premium taxes and withholding (if applicable). The amount withdrawn will be deemed to have been withdrawn on the day the previous Guarantee Period ends. Unless you specify otherwise, amounts not withdrawn will be applied to a new Guarantee Period of the shortest duration available. The new Guarantee Period will begin on the day the previous Guarantee Period ends. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. Under our automatic laddering program ("Automatic Laddering Program"), you may choose, in advance, to use Guarantee Periods of the same length for all renewals. You can select the Automatic Laddering Program at any time during the Accumulation Phase, including on the Issue Date. We will apply renewals to Guarantee Periods of the selected length until you direct us in writing to stop. We may stop offering the Automatic Laddering Program at any time. For additional information on the Automatic Laddering Program, please call our customer service center at 1-800-632-3492. MARKET VALUE ADJUSTMENT. All withdrawals in excess of the Preferred Withdrawal Amount, and transfers from a Guarantee Period, other than those taken during the 30 day period after such Guarantee Period expires, are subject to a Market Value Adjustment. A Market Value Adjustment also applies when you apply amounts currently invested in a Guarantee Period to an Income Plan (unless paid or applied during the 30 day period after such Guarantee Period expires). A positive Market Value Adjustment will apply to amounts currently invested in a Guarantee Period that are paid out as death benefits. We will not apply a Market Value Adjustment to a transfer you make as part of a Dollar Cost Averaging Program. We also will not apply a Market Value Adjustment to a withdrawal you make: .. within the Preferred Withdrawal Amount as described on page 20, or .. to satisfy the IRS minimum distribution rules for a qualified Contract. We apply the Market Value Adjustment to reflect changes in interest rates from the time you first allocate money to a Guarantee Period to the time it is removed from that Guarantee Period. We calculate the Market Value Adjustment by comparing the Treasury Rate for a period equal to the Guarantee Period at its inception to the Treasury Rate for a period equal to the time remaining in the Guarantee Period when you remove your money. "TREASURY RATE" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment may be positive or negative, depending on changes in interest rates. As such, you bear the investment risk associated with changes in interest rates. If interest rates increase significantly, the Market Value Adjustment and any withdrawal charge, premium taxes, and income tax withholding (if applicable) could reduce the amount you receive upon full withdrawal of your Contract Value to an amount that is less than the purchase payment plus interest at the minimum guaranteed interest rate under the Contract. Generally, if the Treasury Rate at the time you allocate money to a Guarantee Period is higher than the applicable current Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a higher amount payable to you or transferred. Conversely, if the Treasury Rate at the time you allocate money to a Guarantee Period is lower than the applicable Treasury Rate for a period equal to the time remaining in the Guarantee Period, then the Market Value Adjustment will result in a lower amount payable to you or transferred. For example, assume that you purchase a Contract and you select an initial Guarantee Period of 5 years and the 5 year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at that later time, the current 2 year Treasury Rate is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to you. Conversely, if the current 2 year Treasury Rate is 4.80%, then the Market Value Adjustment will be 16 PROSPECTUS negative, which will result in a decrease in the amount payable to you. The formula for calculating Market Value Adjustments is set forth in Appendix B to this prospectus, which also contains additional examples of the application of the Market Value Adjustment. INVESTMENT ALTERNATIVES: TRANSFERS TRANSFERS DURING THE ACCUMULATION PHASE During the Accumulation Phase, you may transfer Contract Value among the investment alternatives. The minimum amount that you may transfer into a Guarantee Period is $500. You may request transfers in writing on a form that we provided or by telephone according to the procedure described below. We currently do not assess, but reserve the right to assess, a $10 charge on each transfer in excess of 12 per Contract Year. We treat transfers to or from more than one Portfolio on the same day as one transfer. Transfers you make as part of a Dollar Cost Averaging Program or Automatic Portfolio Rebalancing Program do not count against the 12 free transfers per Contract Year. We will process transfer requests that we receive before 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date using the Accumulation Unit Values for that Date. We will process requests completed after 4:00 p.m. Eastern Time (3:00 p.m. Central Time) on any Valuation Date using the Accumulation Unit Values for the next Valuation Date. The Contract permits us to defer transfers from the Fixed Account for up to 6 months from the date we receive your request. If we decide to postpone transfers from the Fixed Account for 10 days or more, we will pay interest as required by applicable law. Any interest would be payable from the date we receive the transfer request to the date we make the transfer. If you transfer an amount from a Guarantee Period other than during the 30 day period after such Guarantee Period expires, we will increase or decrease the amount by a Market Value Adjustment. If any transfer reduces your value in such Guarantee Period to less than $500, we will treat the request as a transfer of the entire value in such Guarantee Period. We reserve the right to waive any transfer fees and restrictions. TRANSFERS DURING THE PAYOUT PHASE During the Payout Phase, you may make transfers among the Variable Sub-Accounts to change the relative weighting of the Variable Sub-Accounts on which your variable income payments will be based. In addition, you will have a limited ability to make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any portion of your right to receive fixed income payments into variable income payments. You may not make any transfers for the first 6 months after the Payout Start Date. Thereafter, you may make transfers among the Variable Sub-Accounts or make transfers from the Variable Sub-Accounts to increase the proportion of your income payments consisting of fixed income payments. Your transfers must be at least 6 months apart. TELEPHONE TRANSFERS You may make transfers by telephone by calling 1-800-632-3492, if you first send us a completed authorization form. The cut off-time for telephone transfer requests is 4:00 p.m. Eastern Time (3:00 p.m. Central Time). In the event that the New York Stock Exchange closes early, i.e., before 4:00 p.m. Eastern Time (3:00 p.m. Central Time), or in the event that the Exchange closes early for a period of time but then reopens for trading on the same day, we will process telephone transfer requests as of the close of the Exchange on that particular day. We will not accept telephone requests received at any telephone number other than the number that appears in this paragraph or received after the close of trading on the Exchange. We may suspend, modify or terminate the telephone transfer privilege, as well as any other electronic or automated means we previously approved, at any time without notice. We use procedures that we believe provide reasonable assurance that the telephone transfers are genuine. For example, we tape telephone conversations with persons purporting to authorize transfers and request identifying information. Accordingly, we disclaim any liability for losses resulting from allegedly unauthorized telephone transfers. However, if we do not take reasonable steps to help ensure that a telephone authorization is valid, we may be liable for such losses. MARKET TIMING & EXCESSIVE TRADING The Contracts are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of Variable Sub-Accounts and can disrupt management of a Portfolio and raise its expenses, which can impair Portfolio performance. Our policy is not to accept knowingly any money intended for the purpose of market timing or excessive trading. Accordingly, you should not invest in the Contract if your purpose is to engage in market timing or excessive trading, and you should refrain from such practices if you currently own a Contract. 17 PROSPECTUS We seek to detect market timing or excessive trading activity by reviewing trading activities. Portfolios also may report suspected market-timing or excessive trading activity to us. If, in our judgment, we determine that the transfers are part of a market timing strategy or are otherwise harmful to the underlying Portfolio, we will impose the trading limitations as described below under "Trading Limitations." Because there is no universally accepted definition of what constitutes market timing or excessive trading, we will use our reasonable judgment based on all of the circumstances. While we seek to deter market timing and excessive trading in Variable Sub-Accounts, not all market timing or excessive trading is identifiable or preventable. Imposition of trading limitations is triggered by the detection of market timing or excessive trading activity, and the trading limitations are not applied prior to detection of such trading activity. Therefore, our policies and procedures do not prevent such trading activity before it first occurs. To the extent that such trading activity occurs prior to detection and the imposition of trading restrictions, the portfolio may experience the adverse effects of market timing and excessive trading described above. TRADING LIMITATIONS We reserve the right to limit transfers among the investment alternatives in any Contract year, or to refuse any transfer request, if: .. we believe, in our sole discretion, that certain trading practices, such as excessive trading, by, or on behalf of, one or more Contract Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Sub-Account or on the share prices of the corresponding Portfolio or otherwise would be to the disadvantage of other Contract Owners; or .. we are informed by one or more of the Portfolios that they intend to restrict the purchase, exchange, or redemption of Portfolio shares because of excessive trading or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Portfolio shares. In making the determination that trading activity constitutes market timing or excessive trading, we will consider, among other things: .. the total dollar amount being transferred, both in the aggregate and in the transfer request; .. the number of transfers you make over a period of time and/or the period of time between transfers (note: one set of transfers to and from a sub-account in a short period of time can constitute market timing); .. whether your transfers follow a pattern that appears designed to take advantage of short term market fluctuations, particularly within certain Sub-account underlying portfolios that we have identified as being susceptible to market timing activities; .. whether the manager of the underlying portfolio has indicated that the transfers interfere with portfolio management or otherwise adversely impact the portfolio; and .. the investment objectives and/or size of the Sub-account underlying portfolio. If we determine that a contract owner has engaged in market timing or excessive trading activity, we will restrict that contract owner from making future additions or transfers into the impacted Sub-account(s). If we determine that a contract owner has engaged in a pattern of market timing or excessive trading activity involving multiple Sub-accounts, we will also require that all future transfer requests be submitted through regular U.S. mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery. Any Sub-account or transfer restrictions will be uniformly applied. In our sole discretion, we may revise our Trading Limitations at any time as necessary to better deter or minimize market timing and excessive trading or to comply with regulatory requirements. DOLLAR COST AVERAGING PROGRAM Through the Dollar Cost Averaging Program, you may automatically transfer a set amount every month during the Accumulation Phase from any Variable Sub-Account, the Six Month Dollar Cost Averaging Fixed Account, or the Twelve Month Dollar Cost Averaging Fixed Account, to any other Variable Sub-Account. You may not use dollar cost averaging to transfer amounts to the Fixed Account. We will not charge a transfer fee for transfers made under this Program, nor will such transfers count against the 12 transfers you can make each Contract Year without paying a transfer fee. The theory of dollar cost averaging is that if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same purchase dates. However, participation in this Program does not assure you of a greater profit from your purchases under the Program nor will it prevent or necessarily reduce losses in a declining market. Call or write us for instructions on how to enroll. AUTOMATIC PORTFOLIO REBALANCING PROGRAM Once you have allocated your money among the Variable Sub-Accounts, the performance of each Variable Sub-Account may cause a shift in the percentage you allocated to each Variable Sub-Account. If you select our Automatic Portfolio Rebalancing Program, we will 18 PROSPECTUS automatically rebalance the Contract Value in each Variable Sub-Account and return it to the desired percentage allocations. Money you allocate to the Fixed Account will not be included in the rebalancing. We will rebalance your account each quarter according to your instructions. We will transfer amounts among the Variable Sub-Accounts to achieve the percentage allocations you specify. You can change your allocations at any time by contacting us in writing or by telephone. The new allocation will be effective with the first rebalancing that occurs after we receive your request. We are not responsible for rebalancing that occurs prior to receipt of your request. Example: Assume that you want your initial purchase payment split among 2 Variable Sub-Accounts. You want 40% to be in the AIM V.I. Capital Appreciation Variable Sub-Account and 60% to be in the Fidelity VIP Growth Variable Sub-Account. Over the next 2 months the bond market does very well while the stock market performs poorly. At the end of the first quarter, the AIM V.I. Capital Appreciation Variable Sub-Account now represents 50% of your holdings because of its increase in value. If you choose to have your holdings rebalanced quarterly, on the first day of the next quarter we would sell some of your units in the AIM V.I. Capital Appreciation Variable Sub-Account and use the money to buy more units in the Fidelity VIP Growth Variable Sub-Account so that the percentage allocations would again be 40% and 60% respectively. The Automatic Portfolio Rebalancing Program is available only during the Accumulation Phase. The transfers made under the Program do not count towards the 12 transfers you can make without paying a transfer fee, and are not subject to a transfer fee. Portfolio rebalancing is consistent with maintaining your allocation of investments among market segments, although it is accomplished by reducing your Contract Value allocated to the better performing segments. You may not use the Dollar Cost Averaging and the Automatic Portfolio Rebalancing programs at the same time. EXPENSES As a Contract Owner, you will bear, directly or indirectly, the charges and expenses described below. CONTRACT MAINTENANCE CHARGE During the Accumulation Phase, on each Contract Anniversary, we will deduct a $30 contract maintenance charge from your Contract Value invested in each Variable Sub-Account in proportion to the amount invested. We also will deduct a full contract maintenance charge if you withdraw your entire Contract Value, unless your Contract qualifies for a waiver, described below. During the Payout Phase, we will deduct the charge proportionately from each income payment. The charge is for the cost of maintaining each Contract and the Variable Account. Maintenance costs include expenses we incur in billing and collecting purchase payments; keeping records; processing death claims, cash withdrawals, and policy changes; proxy statements; calculating Accumulation Unit Values and income payments; and issuing reports to Contract Owners and regulatory agencies. We cannot increase the charge. We will waive this charge if: .. total purchase payments equal $50,000 or more, or .. all of your money is allocated to the Fixed Account on a Contract Anniversary. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense risk charge daily at an annual rate of 1.15% of the average daily net assets you have invested in the Variable Sub-Accounts. The mortality and expense risk charge is for all the insurance benefits available with your Contract (including our guarantee of annuity rates and the death benefits), for certain expenses of the Contract, and for assuming the risk (expense risk) that the current charges will be sufficient in the future to cover the cost of administering the Contract. If the charges under the Contract are not sufficient, then we will bear the loss. We guarantee the mortality and expense risk charge and we cannot increase it. We assess the mortality and expense risk charge during both the Accumulation Phase and the Payout Phase. ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge daily at an annual rate of 0.10% of the average daily net assets you have invested in the Variable Sub-Accounts. We intend this charge to cover actual administrative expenses that exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributed to that Contract. We assess this charge each day during the Accumulation Phase and the Payout Phase. We guarantee that we will not raise this charge. TRANSFER FEE We do not currently impose a fee upon transfers among the investment alternatives. However, we reserve the right to charge $10 per transfer after the 12th transfer in each Contract Year. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging or Automatic Portfolio Rebalancing Program. 19 PROSPECTUS WITHDRAWAL CHARGE We may assess a Withdrawal Charge of up to 7% of the purchase payment(s) you withdraw in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. The charge declines by 1% annually to 0% after 7 complete years from the day we receive the purchase payment being withdrawn. Beginning on January 1, 2004, if you make a withdrawal before the Payout Start Date, we will apply the Withdrawal Charge percentage in effect on the date of the withdrawal, or the Withdrawal Charge percentage in effect on the following day, whichever is lower. A schedule showing how the Withdrawal Charge declines appears on page 7. During each Contract Year, you can withdraw up to 15% of purchase payments without paying the Withdrawal Charge. Unused portions of this 15% "PREFERRED WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We determine the Withdrawal Charge by: .. multiplying the percentage corresponding to the number of complete years since we received the purchase payment being withdrawn, times .. the part of each purchase payment withdrawal that is in excess of the Preferred Withdrawal Amount, adjusted by a Market Value Adjustment. We will deduct Withdrawal Charges, if applicable, from the amount paid. For purposes of the Withdrawal Charge, we will treat withdrawals as coming from the oldest purchase payments first. However, for federal income tax purposes, please note that withdrawals are considered to have come first from earnings in the Contract, which means you pay taxes on the earnings portion of your withdrawal. We do not apply a Withdrawal Charge in the following situations: .. on the Payout Start Date (a Withdrawal Charge may apply if you elect to receive income payments for a specified period of less than 120 months); .. the death of the Contract Owner or Annuitant (unless the Settlement Value is used); .. withdrawals taken to satisfy IRS required minimum distribution rules for the Contract; or .. withdrawals made after all purchase payments have been withdrawn. We use the amounts obtained from the Withdrawal Charge to pay sales commissions and other promotional or distribution expenses associated with marketing the Contracts. To the extent that the Withdrawal Charge does not cover all sales commissions and other promotional or distribution expenses, we may use any of our corporate assets, including potential profit which may arise from the mortality and expense risk charge or any other charges or fee described above, to make up any difference. Withdrawals taken during the Accumulation Phase are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. Withdrawals may also be subject to a Market Value Adjustment. You should consult your own tax counsel or other tax advisers regarding any withdrawals. PREMIUM TAXES Currently, we do not make deductions for premium taxes under the Contract because New York does not charge premium taxes on annuities. We may deduct taxes that may be imposed in the future from purchase payments or the Contract Value when the tax is incurred or at a later time. DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES We are not currently making a provision for such taxes. In the future, however, we may make a provision for taxes if we determine, in our sole discretion, that we will incur a tax as a result of the operation of the Variable Account. We will deduct for any taxes we incur as a result of the operation of the Variable Account, whether or not we previously made a provision for taxes and whether or not it was sufficient. Our status under the Internal Revenue Code is briefly described in the Federal Tax Matters section. OTHER EXPENSES Each Portfolio deducts advisory fees and other expenses from its assets. You indirectly bear the charges and expenses of the Portfolios whose shares are held by the Variable Sub-Accounts. These fees and expenses are described in the accompanying prospectuses for the Portfolios. For a summary of the maximum and minimum amounts for these charges and expenses, see pages 8-9. We may receive compensation from the investment advisers or administrators of the Portfolios for administrative services we provide to the Portfolios. 20 PROSPECTUS ACCESS TO YOUR MONEY You can withdraw some or all of your Contract Value at any time prior to the Payout Start Date. Full or partial withdrawals also are available under limited circumstances on or after the Payout Start Date. See "Income Plans" on page 22. The amount payable upon withdrawal is the Contract Value next computed after we receive the request for a withdrawal at our customer service center, adjusted by any Market Value Adjustment, less any Withdrawal Charges, contract maintenance charges, income tax withholding, and any premium taxes. We will pay withdrawals from the Variable Account within 7 days of receipt of the request, subject to postponement in certain circumstances. You can withdraw money from the Variable Account or the Fixed Account. To complete a partial withdrawal from the Variable Account, we will cancel Accumulation Units in an amount equal to the withdrawal and any applicable Withdrawal Charge and premium taxes. Withdrawals taken during the Accumulation Phase are generally considered to come from the earnings in the Contract first. If the Contract is tax-qualified, generally all withdrawals are treated as distributions of earnings. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. You have the opportunity to name the investment alternative(s) from which you are taking the withdrawal. If none is specified, we will deduct your withdrawal pro-rata from the investment alternatives according to the value of your investments therein. In general, you must withdraw at least $50 at a time. You also may withdraw a lesser amount if you are withdrawing your entire interest in a Variable Sub-Account. If you request a total withdrawal, you must return your Contract to us. POSTPONEMENT OF PAYMENTS We may postpone the payment of any amounts due from the Variable Account under the Contract if: 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the SEC; or 3. The SEC permits delay for your protection. In addition, we may delay payments or transfers from the Fixed Account for up to 6 months or a shorter period if required by law. If we delay payment or transfer for 10 business days or more, we will pay interest as required by law. Any interest would be payable from the date we receive the withdrawal request to the date we make the payment or transfer. SYSTEMATIC WITHDRAWAL PROGRAM You may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis at any time prior to the Payout Start Date. The minimum amount of each systematic withdrawal is $50. At our discretion, systematic withdrawals may not be offered in conjunction with the Dollar Cost Averaging Program or the Automatic Portfolio Rebalancing Program. Depending on fluctuations in the net asset value of the Variable Sub-Accounts and the value of the Fixed Account, systematic withdrawals may reduce or even exhaust the Contract Value. Please consult your tax advisor before taking any withdrawal. We will make systematic withdrawal payments to you or your designated payee. We may modify or suspend the Systematic Withdrawal Program and charge a processing fee for the service. If we modify or suspend the Systematic Withdrawal Program, existing systematic withdrawal payments will not be affected. MINIMUM CONTRACT VALUE If your request for a partial withdrawal would reduce the amount in any Guarantee Period to less than $500, we will treat it as a request to withdraw the entire amount invested in such Guarantee Period. If your request for a partial withdrawal would reduce your Contract Value to less than $1,000, we may treat it as a request to withdraw your entire Contract Value. Your Contract will terminate if you withdraw all of your Contract Value. We will, however, ask you to confirm your withdrawal request before terminating your Contract. Before terminating any Contract whose value has been reduced by withdrawals to less than $1,000, we will inform you in writing of our intention to terminate your Contract and give you at least 30 days in which to make an additional purchase payment to restore your Contract's value to the contractual minimum of $1,000. If we terminate your Contract, we will distribute to you its Contract Value, adjusted by any applicable Market Value Adjustment, less withdrawal and other charges and applicable taxes. 21 PROSPECTUS INCOME PAYMENTS PAYOUT START DATE The Payout Start Date is the day that we apply your money to an Income Plan. The Payout Start Date must be no later than the day the Annuitant reaches age 90, or the 10th Contract Anniversary, if later. You may change the Payout Start Date at any time by notifying us in writing of the change at least 30 days before the scheduled Payout Start Date. Absent a change, we will use the Payout Start Date stated in your Contract. INCOME PLANS An "Income Plan" is a series of payments on a scheduled basis to you or to another person designated by you. You may choose and change your choice of Income Plan until 30 days before the Payout Start Date. If you do not select an Income Plan, we will make income payments in accordance with Income Plan 1 with guaranteed payments for 10 years if you have designated only one Annuitant, or Income Plan 2 with guaranteed payments for 10 years if you have designated joint Annuitants. After the Payout Start Date, you may not make withdrawals (except as described below) or change your choice of Income Plan. Three Income Plans are available under the Contract. Each is available to provide: .. fixed income payments; .. variable income payments; or .. a combination of the two. A portion of each payment will be considered taxable and the remaining portion will be a non-taxable return of your investment in the Contract, which is also called the "basis". Once the basis in the Contract is depleted, all remaining payments will be fully taxable. If the Contract is tax-qualified, generally, all payments will be fully taxable. Taxable payments taken prior to age 59 1/2, may be subject to an additional 10% federal tax penalty. The three Income Plans are: INCOME PLAN 1 - LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as the Annuitant lives. If the Annuitant dies before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. The number of months guaranteed may be 0 months, or range from 60 to 360 months. INCOME PLAN 2 - JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as either the Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint Annuitant die before we have made all of the guaranteed income payments, we will continue to pay the remainder of the guaranteed income payments as required by the Contract. The number of months guaranteed may be 0 months, or range from 60 to 360 months. INCOME PLAN 3 - GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD (5 YEARS TO 30 YEARS). Under this plan, we make periodic income payments for the period you have chosen. These payments do not depend on the Annuitant's life. Income payments for less than 120 months may be subject to a withdrawal charge. We will deduct the mortality and expense risk charge from the Variable Sub-Account assets that support variable income payments even though we may not bear any mortality risk. The length of any guaranteed payment period under your selected Income Plan generally will affect the dollar amounts of each income payment. As a general rule, longer guarantee periods result in lower income payments, all other things being equal. For example, if you choose an Income Plan with payments that depend on the life of the Annuitant but with no minimum specified period for guaranteed payments, the income payments generally will be greater than the income payments made under the same Income Plan with a minimum specified period for guaranteed payments. If you choose Income Plan 1 or 2, or, if available, another Income Plan with payments that continue for the life of the Annuitant or joint Annuitant, we may require proof of age and sex of the Annuitant or joint Annuitant before starting income payments, and proof that the Annuitant or joint Annuitant is alive before we make each payment. Please note that under such Income Plans, if you elect to take no minimum guaranteed payments, it is possible that the payee could receive only 1 income payment if the Annuitant and any joint Annuitant both die before the second income payment, or only 2 income payments if they die before the third income payment, and so on. Generally, you may not make withdrawals after the Payout Start Date. One exception to this rule applies if you are receiving variable income payments that do not depend on the life of the Annuitant (such as under Income Plan 3). In that case you may terminate all or part of the Variable Account portion of the income payments at any time and receive a lump sum equal to the present value of the remaining variable income payments associated with the amount withdrawn. To determine the present value of any remaining variable income payments being withdrawn, we use a discount rate equal to the assumed annual investment rate that we use to compute such variable income payments. The minimum amount you may withdraw under this feature is $1,000. A withdrawal charge may apply. You will also have a limited ability to make transfers from the Variable Account portion of the income payments to increase the proportion of your income payments consisting of fixed income payments. You may not, however, convert any 22 PROSPECTUS portion of your right to receive fixed income payments into variable income payments. We deduct applicable premium taxes, if any, from the Contract Value at the Payout Start Date. New York does not currently impose a Premium Tax. We may make other Income Plans available. You may obtain information about them by writing or calling us. You must apply at least the Contract Value in the Fixed Account on the Payout Start Date to fixed income payments. If you wish to apply any portion of your Fixed Account balance to provide variable income payments, you should plan ahead and transfer that amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do not tell us how to allocate your Contract Value among fixed and variable income payments, we will apply your Contract Value in the Variable Account to variable income payments and your Contract Value in the Fixed Account to fixed income payments. We will apply your Contract Value, adjusted by a Market Value Adjustment, less applicable taxes to your Income Plan on the Payout Start Date. If the Contract Value is less than $2,000 or not enough to provide an initial payment of at least $20, and state law permits, we may: .. terminate the Contract and pay you the Contract Value, adjusted by any Market Value Adjustment and less any applicable taxes, in a lump sum instead of the periodic payments you have chosen, or .. reduce the frequency of your payments so that each payment will be at least $20. VARIABLE INCOME PAYMENTS The amount of your variable income payments depends upon the investment results of the Variable Sub-Accounts you select, the premium taxes you pay, the age and sex of the Annuitant, and the Income Plan you choose. We guarantee that the payments will not be affected by (a) actual mortality experience and (b) the amount of our administration expenses. We cannot predict the total amount of your variable income payments. Your variable income payments may be more or less than your total purchase payments because (a) variable income payments vary with the investment results of the underlying Portfolio and (b) the Annuitant could live longer or shorter than we expect based on the tables we use. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3%. If the actual net investment return of the Variable Sub-Accounts you choose is less than this assumed investment rate, then the dollar amount of your variable income payments will decrease. The dollar amount of your variable income payments will increase, however, if the actual net investment return exceeds the assumed investment rate. The dollar amount of the variable income payments stays level if the net investment return equals the assumed investment rate. Please refer to the Statement of Additional Information for more detailed information as to how we determine variable income payments. FIXED INCOME PAYMENTS We guarantee income payment amounts derived from the Fixed Account for the duration of the Income Plan. We calculate the fixed income payments by: 1. adjusting the portion of the Contract Value in the Fixed Account on the Payout Start Date by any applicable Market Value Adjustment; 2. deducting any applicable premium tax; and 3. applying the resulting amount to the greater of (a) the appropriate value from the income payment table in your Contract or (b) such other value as we are offering at that time. We may defer making fixed income payments for a period of up to 6 months or such shorter time as state law may require. If we defer payments for 10 business days or more, we will pay interest as required by law from the date we receive the withdrawal request to the date we make payment. CERTAIN EMPLOYEE BENEFIT PLANS The Contracts offered by this prospectus contain income payment tables that provide for different payments to men and women of the same age, except in states that require unisex tables. We reserve the right to use income payment tables that do not distinguish on the basis of sex to the extent permitted by applicable law. In certain employment-related situations, employers are required by law to use the same income payment tables for men and women. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan and we do not offer unisex annuity tables in your state, you should consult with legal counsel as to whether the purchase of a Contract is appropriate. 23 PROSPECTUS DEATH BENEFITS We will pay the death proceeds prior to the Payout Start Date on: (a) the death of any Contract Owner, or (b) the death of the Annuitant, if the Contract is owned by a non-living person. We will pay the death proceeds to the new Contract Owner as determined immediately after the death. The new Contract Owner would be a surviving Contract Owner or, if none, the Beneficiary(ies). In the case of a Contract owned by a non-living owner, upon the death of the Annuitant, we will pay the death proceeds to the current Contract Owner. We will determine the value of the death proceeds as of the end of the Valuation Date on which we receive a complete request for settlement of the death proceeds. If we receive a request after 3 p.m. Central Time on a Valuation Date, we will process the request as of the end of the following Valuation Date. A complete request for settlement of the death proceeds must include DUE PROOF OF DEATH. We will accept the following documentation as "Due Proof of Death:" .. a certified copy of the death certificate, .. a certified copy of a decree of a court of competent jurisdiction as to the finding of death, or .. any other proof acceptable to us. DEATH PROCEEDS If we receive a complete request for settlement of the death proceeds within 180 days of the date of the death of any Contract Owner, or the death of the Annuitant, if the Contract is owned by a non-living owner, the death proceeds are equal to the Death Benefit described below. Otherwise, the death proceeds are equal to the greater of the Contract Value or the Settlement Value. We reserve the right to extend, on a non-discriminatory basis, the 180-day period in which the death proceeds will equal the Death Benefit as described below. This right applies only to the amount payable as death proceeds and in no way restricts when a claim may be filed. If we do not receive a complete request for settlement of the death proceeds within 180 days of the date of death, the death proceeds are equal to the greater of: 1) the Contract Value as of the date we determine the death proceeds; or 2) the Settlement Value as of the date we determine the death proceeds. DEATH BENEFIT AMOUNT Prior to the Payout Start Date, the Death Benefit is equal to the greatest of: 1. the Contract Value as of the date we receive a complete request for settlement of the death proceeds, or 2. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of Contract Value) on the date we determine the death proceeds, or 3. the Contract Value on the Death Benefit Anniversary immediately preceding the date we receive a complete request for settlement of the death proceeds, adjusted by any purchase payments, withdrawal adjustment as defined below, and charges made since that Death Benefit Anniversary. A "DEATH BENEFIT ANNIVERSARY" is every seventh Contract Anniversary beginning with the Issue Date. For example, the Issue Date, 7th and 14th Contract Anniversaries are the first three Death Benefit Anniversaries, or 4. the greatest of the Anniversary Values as of the date we receive a complete request for settlement of the death proceeds. An "ANNIVERSARY VALUE" is equal to the Contract Value on a Contract Anniversary, increased by purchase payments made since that Anniversary and reduced by the amount of any withdrawal adjustment, as defined below, since that anniversary. Anniversary Values will be calculated for each Contract Anniversary prior to the earlier of: (i) the date we determine the death benefit, or (ii) the deceased's 75th birthday or 5 years after the Issue Date, if later. The withdrawal adjustment is equal to (a) divided by (b), with the result multiplied by (c), where: (a) = the withdrawal amount, (b) = the Contract Value immediately prior to the withdrawal, and (c) = the value of the applicable death benefit alternative immediately prior to the withdrawal. See Appendix C for an example representative of how the withdrawal adjustment applies. In calculating the Settlement Value, the amount in each individual Guarantee Period may be subject to a Market Value Adjustment. A Market Value Adjustment will apply to amounts in a Guarantee Period, unless we calculate the Settlement Value during the 30-day period after the expiration of the Guarantee Period. Also, the Settlement Value will reflect the deduction of any applicable Withdrawal Charges, contract maintenance charges, and premium taxes. Contract maintenance charges will be pro rated for the part of the Contract Year elapsed as of the date we determine the Settlement Value, unless your Contract qualifies for a waiver of such charges described in the "Contract Maintenance Charge" section above. DEATH BENEFIT PAYMENTS DEATH OF OWNER 24 PROSPECTUS 1. If your spouse is the sole surviving Contract Owner, or is the sole Beneficiary: a. Your spouse may elect to receive the Death Proceeds in a lump sum; or b. Your spouse may elect to receive the Death Proceeds paid out under one of the Income Plans (described in "Income Payments" above), subject to the following conditions: The Payout Start Date must be within one year of your date of death. Income payments must be payable: i. over the life of your spouse; or ii. for a guaranteed number of payments from 5 to 50 years but not to exceed the life expectancy of your spouse; or iii. over the life of your spouse with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of your spouse. c. If your spouse does not elect one of these options, the Contract will continue in the Accumulation Phase as if the death had not occurred. If the Contract is continued in the Accumulation Phase, the following conditions apply: The Contract Value of the continued Contract will be the Death Proceeds. Unless otherwise instructed by the continuing spouse, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the Sub-Accounts of the Variable Account. This excess will be allocated in proportion to your Contract Value in those Variable Sub-Accounts as of the end of the Valuation Date on which we receive the complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time), except that any portion of this excess attributable to the Fixed Account Options will be allocated to the money market Variable Sub-Account. Within 30 days of the date the Contract is continued, your surviving spouse may choose one of the following transfer alternatives without incurring a transfer fee: i. transfer all or a portion of the excess among the Variable Sub-accounts; ii. transfer all or a portion of the excess into the Fixed Account and begin a new Guarantee Period; or iii. transfer all or a portion of the excess into a combination of Variable Sub-Accounts and the Fixed Account. Any such transfer does not count as one of the free transfers allowed each Contract Year and is subject to any minimum allocation amount specified in the Contract. The surviving spouse may make a single withdrawal of any amount within one year of the date of your death without incurring a Withdrawal Charge or Market Value Adjustment. Prior to the Payout Start Date, the Death Proceeds of the continued Contract will be described under "Death Benefit Amount." Only one spousal continuation is allowed under the Contract. 2. If the new Contract Owner is not your spouse but is a living person or if there are multiple living-person new Contract Owners: a. The new Contract Owner may elect to receive the Death Proceeds in a lump sum; or b. The new Contract Owner may elect to receive the Death Proceeds paid out under one of the Income Plans (described in "Income Payments" on page 22), subject to the following conditions: The Payout Start Date must be within one year of your date of death. Income payments must be payable: i. over the life of the new Contract Owner; or ii. for a guaranteed number of payments from 5 to 50 years but not to exceed the life expectancy of the new Contract Owner; or iii. over the life of the new Contract Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Contract Owner. c. If the new Contract Owner does not elect one of the options above, then the new Contract Owner must receive the Contract Value payable within 5 years of your date of death. The Contract Value will equal the amount of the Death Proceeds as determined as of the end of the Valuation Date on which we receive a complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time). Unless otherwise instructed by the new Contract Owner, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the money market Variable Sub-Account. Henceforth, the new Contract Owner may make transfers (as described in "Transfers During the Payout Phase" on page 18) during this 5 year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived for any withdrawals made during this 5 year period. We reserve the right to offer additional options upon the death of the Contract Owner. If the new Contract Owner dies prior to the complete liquidation of the Contract Value, then the new Contract Owner's named Beneficiary(ies) will receive the greater of the Settlement Value or the remaining Contract Value. This amount must be liquidated as a lump sum within 5 years of the date of the original Contract Owner's death. 25 PROSPECTUS 3. If the new Contract Owner is a corporation or other type of non-living person: a. The new Contract Owner may elect to receive the Death Proceeds in a lump sum; or b. If the new Contract Owner does not elect the option above, then the new Contract Owner must receive the Contract Value payable within 5 years of your date of death. The Contract Value will equal the amount of the Death Proceeds as determined as of the end of the Valuation Date on which we receive a complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time). Unless otherwise instructed by the new Contract Owner, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the money market Variable Sub-Account. Henceforth, the new Contract Owner may make transfers (as described in "Transfers During the Payout Phase" on page 18) during this 5 year period. No additional purchase payments may be added to the Contract under this election. Withdrawal charges will be waived during this 5 year period. We reserve the right to make additional options available to the new Contract Owner upon the death of the Contract Owner. If any new Contract Owner is a non-living person, all new Contract Owners will be considered to be non-living persons for the above purposes. Under any of these options, all ownership rights, subject to any restrictions previously placed upon the Beneficiary, are available to the new Contract Owner from the date of your death to the date on which the Death Proceeds is paid. DEATH OF ANNUITANT If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date, the following apply: 1. If the Contract Owner is a living person, then the Contract will continue with a new Annuitant, who will be: a. the youngest Contract Owner; otherwise b. the youngest Beneficiary. You may change the Annuitant before the Payout Start Date. 2. If the Contract Owner is a non-living person: a. The Contract Owner may elect to receive the Death Proceeds in a lump sum; or b. If the Contract Owner does not elect the option above, then the Contract Owner must receive the Contract Value payable within 5 years of the Annuitant's date of death. The Contract Value will equal the amount of the Death Proceeds as determined as of the end of the Valuation Date on which we receive a complete request for settlement of the Death Proceeds (the next Valuation Date if we receive the request after 3:00 p.m. Central Time). Unless otherwise instructed by the Contract Owner, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the money market Variable Sub-Account. Henceforth, the Contract Owner may make transfers (as described in "Transfers During the Payout Phase" on page 18) during this 5 year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived during this 5 year period. We reserve the right to make additional options available to the Contract Owner upon the death of the Annuitant. Under any of these options, all ownership rights are available to the non-living Contract Owner from the date of the Annuitant's death to the date on which the Death Proceeds is paid. MORE INFORMATION ALLSTATE NEW YORK Allstate New York is the issuer of the Contract. Allstate New York is a stock life insurance company organized under the laws of the State of New York. Allstate New York was incorporated in 1967 and was known as "Financial Life Insurance Company" from 1967 to 1978. From 1978 to 1984, Allstate New York was known as "PM Life Insurance Company." Since 1984 the company has been known as "Allstate Life Insurance Company of New York." Allstate New York is currently licensed to operate in New York. Our home office is located at 100 Motor Parkway, Hauppauge, New York 11788-5107. Allstate New York is a wholly owned subsidiary of Allstate Life Insurance Company ("Allstate Life"), a stock life insurance company incorporated under the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company, a stock property-liability insurance company incorporated under the laws of the State of Illinois. With the exception of the directors' qualifying shares, all of the outstanding capital stock of Allstate Insurance Company is owned by The Allstate Corporation. THE VARIABLE ACCOUNT Allstate New York established the Allstate Life of New York Separate Account A on December 15, 1995. We have registered the Variable Account with the SEC as a unit investment trust. The SEC does not supervise the 26 PROSPECTUS management of the Variable Account or Allstate New York. We own the assets of the Variable Account. The Variable Account is a segregated asset account under New York law. That means we account for the Variable Account's income, gains and losses separately from the results of our other operations. It also means that only the assets of the Variable Account that are in excess of the reserves and other Contract liabilities with respect to the Variable Account are subject to liabilities relating to our other operations. Our obligations arising under the Contracts are general corporate obligations of Allstate New York. The Variable Account consists of multiple Variable Sub-Accounts, 24 of which are available through the Contracts. Each Variable Sub-Account invests in a corresponding Portfolio. We may add new Variable Sub-Accounts or eliminate one or more of them, if we believe marketing, tax, or investment conditions so warrant. We do not guarantee the investment performance of the Variable Account, its Sub-Accounts or the Portfolios. We may use the Variable Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Variable Account. THE PORTFOLIOS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all dividends and capital gains distributions from the Portfolios in shares of the distributing Portfolio at their net asset value. VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote the shares of the Portfolios held by the Variable Sub-Accounts to which you have allocated your Contract Value. Under current law, however, you are entitled to give us instructions on how to vote those shares on certain matters. Based on our present view of the law, we will vote the shares of the Portfolios that we hold directly or indirectly through the Variable Account in accordance with instructions that we receive from Contract owners entitled to give such instructions. As a general rule, before the Payout Start Date, the Contract Owner or anyone with a voting interest is the person entitled to give voting instructions. The number of shares that a person has a right to instruct will be determined by dividing the Contract Value allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Portfolio as of the record date of the meeting. After the Payout Start Date, the person receiving income payments has the voting interest. The payee's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Variable Sub-Account by the net asset value per share of the corresponding Portfolio. The votes decrease as income payments are made and as the reserves for the Contract decrease. We will vote shares attributable to Contracts for which we have not received instructions, as well as shares attributable to us, in the same proportion as we vote shares for which we have received instructions, unless we determine that we may vote such shares in our own discretion. We will apply voting instructions to abstain on any item to be voted on a pro-rata basis to reduce the votes eligible to be cast. We reserve the right to vote Portfolio shares as we see fit without regard to voting instructions to the extent permitted by law. If we disregard voting instructions, we will include a summary of that action and our reasons for that action in the next semi-annual financial report we send to you. CHANGES IN PORTFOLIOS. If the shares of any of the Portfolios are no longer available for investment by the Variable Account or if, in our judgment, further investment in such shares is no longer desirable in view of the purposes of the Contract, we may eliminate that Portfolio and substitute shares of another eligible investment portfolio. Any substitution of securities will comply with the requirements of the Investment Company Act of 1940. We also may add new Variable Sub-Accounts that invest in additional Portfolios. We will notify you in advance of any changes. CONFLICTS OF INTEREST. Certain of the Portfolios sell their shares to Variable Accounts underlying both variable life insurance and variable annuity contracts. It is conceivable that in the future it may be unfavorable for variable life insurance Variable Accounts and variable annuity Variable Accounts to invest in the same Portfolio. The boards of directors of these Portfolios monitor for possible conflicts among Variable Accounts buying shares of the Portfolios. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a Variable Account to comply with such laws could cause a conflict. To eliminate a conflict, a Portfolio's board of directors may require a Variable Account to withdraw its participation in a Portfolio. A Portfolio's net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a Variable Account withdrawing because of a conflict. THE CONTRACT DISTRIBUTION. ALFS, Inc. ("ALFS"), located at 3100 Sanders Road, Northbrook, Illinois 60062, serves as principal underwriter of the Contracts. ALFS is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a registered broker-dealer under the Securities and Exchange Act of 1934, as amended ("Exchange Act"), and is a member of the NASD, Inc. The Contracts described in this prospectus are sold by registered representatives of broker-dealers who are our licensed insurance agents, either individually or through an incorporated insurance agency. Commissions paid to 27 PROSPECTUS broker-dealers may vary, but we estimate that the total commissions paid on all Contract sales to broker-dealers will not exceed 8.5% of any purchase payments. These commissions are intended to cover distribution expenses. From time to time, we may offer additional sales incentives of up to 1% of purchase payments to broker-dealers who maintain certain sales volume levels. Allstate New York does not pay ALFS a commission for distribution of the Contracts. The underwriting agreement with ALFS provides that we will reimburse ALFS for any liability to Contract Owners arising out of services rendered or Contracts issued. ADMINISTRATION. We have primary responsibility for all administration of the Contracts and the Variable Account. We provide the following administrative services, among others: .. issuance of the Contracts; .. maintenance of Contract Owner records; .. Contract Owner services; .. calculation of unit values; .. maintenance of the Variable Account; and .. preparation of Contract Owner reports. We will send you Contract statements and transaction confirmations at least annually. The annual statement details values and specific Contract data for each particular Contract. You should notify us promptly in writing of any address change. You should read your statements and confirmations carefully and verify their accuracy. You should contact us promptly if you have a question about a periodic statement. We will investigate all complaints and make any necessary adjustments retroactively, but you must notify us of a potential error within a reasonable time after the date of the questioned statement. If you wait too long, we will make the adjustment as of the date that we receive notice of the potential error. We also will provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws. NON-QUALIFIED ANNUITIES HELD WITHIN A QUALIFIED PLAN If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitaitons on withdrawals, waivers of withdrawal charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. Allstate Life Insurance Company of New York no longer issues deferred annuities to employer spnsored qualified retirement plans. LEGAL MATTERS All matters of New York law pertaining to the Contracts, including the validity of the Contracts and Allstate New York's right to issue such Contracts under New York insurance law, have been passed upon by Michael J. Velotta, General Counsel of Allstate New York. 28 PROSPECTUS FEDERAL TAX MATTERS THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. ALLSTATE NEW YORK 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 your individual circumstances. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK Allstate New York is taxed as a life insurance company under Part I of Subchapter L of the Code. Since the Variable Account is not an entity separate from Allstate New York, and its operations form a part of Allstate New York, it will not be taxed separately. Investment income and realized capital gains of the Variable Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, Allstate New York believes that the Variable Account investment income and capital gains will not be taxed to the extent that such income and gains are applied to increase the reserves under the Contract. Accordingly, Allstate New York does not anticipate that it will incur any federal income tax liability attributable to the Variable Account, and therefore Allstate New York does not intend to make provisions for any such taxes. If Allstate New York is taxed on investment income or capital gains of the Variable Account, then Allstate New York may impose a charge against the Variable Account in order to make provision for such taxes. TAXATION OF VARIABLE ANNUITIES IN GENERAL TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value until a distribution occurs. This rule applies only where: .. the Contract Owner is a natural person, .. the investments of the Variable Account are "adequately diversified" according to Treasury Department regulations, and .. Allstate New York is considered the owner of the Variable Account assets for federal income tax purposes. NON-NATURAL OWNERS. Non-natural owners are also referred to as Non Living Owners in this prospectus. As a general rule, annuity contracts owned by non-natural persons such as corporations, trusts, or other entities are not treated as annuity contracts for federal income tax purposes. The income on such contracts does not enjoy tax deferral and is taxed as ordinary income received or accrued by the non-natural owner during the taxable year. EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the general rule that annuity contracts held by a non-natural owner are not treated as annuity contracts for federal income tax purposes. Contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the contract as agent for a natural person. However, this special exception will not apply in the case of an employer who is the nominal owner of an annuity contract under a non-Qualified deferred compensation arrangement for its employees. Other exceptions to the non-natural owner rule are: (1) contracts acquired by an estate of a decedent by reason of the death of the decedent; (2) certain qualified contracts; (3) contracts purchased by employers upon the termination of certain qualified plans; (4) certain contracts used in connection with structured settlement agreements; and (5) immediate annuity contracts, purchased with a single premium, when the annuity starting date is no later than a year from purchase of the annuity and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. GRANTOR TRUST OWNED ANNUITY. Contracts owned by a grantor trust are considered owned by a non-natural owner. Grantor trust owned contracts receive tax deferral as described in the Exceptions to the Non-Natural Owner Rule section. In accordance with the Code, upon the death of the annuitant, the death benefit must be paid. According to your Contract, the Death Benefit is paid to the surviving Contract Owner. Since the trust will be the surviving Contract Owner in all cases, the Death Benefit will be payable to the trust notwithstanding any beneficiary designation on the annuity contract. A trust, including a grantor trust, has two options for receiving any death benefits: 1) a lump sum payment; or 2) payment deferred up to five years from date of death. DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for federal income tax purposes, the investments in the Variable Account must be "adequately diversified" consistent with standards under Treasury Department regulations. If the investments in the Variable Account are not adequately diversified, the Contract will not be treated as an annuity contract for federal income tax purposes. As a result, the income on the Contract will be taxed as ordinary income received or accrued by the Contract owner during the taxable year. Although Allstate New York does not have control over the Portfolios or their investments, we expect the Portfolios to meet the diversification requirements. OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered the owner of separate account assets if he possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. At the time the diversification regulations were issued, the Treasury Department 29 PROSPECTUS announced that the regulations do not provide guidance concerning circumstances in which investor control of the separate account investments may cause a Contract owner to be treated as the owner of the separate account. The Treasury Department also stated that future guidance would be issued regarding the extent that owners could direct sub-account investments without being treated as owners of the underlying assets of the separate account. Your rights under the Contract are different than those described by the IRS in private and published rulings in which it found that Contract owners were not owners of separate account assets. For example, if your contract offers more than twenty (20) investment alternatives you have the choice to allocate premiums and contract values among a broader selection of investment alternatives than described in such rulings. You may be able to transfer among investment alternatives more frequently than in such rulings. These differences could result in you being treated as the owner of the Variable Account. If this occurs, income and gain from the Variable Account assets would be includible in your gross income. Allstate New York does not know what standards will be set forth in any regulations or rulings which the Treasury Department may issue. It is possible that future standards announced by the Treasury Department could adversely affect the tax treatment of your Contract. We reserve the right to modify the Contract as necessary to attempt to prevent you from being considered the federal tax owner of the assets of the Variable Account. However, we make no guarantee that such modification to the Contract will be successful. TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under a Non-Qualified Contract, amounts received are taxable to the extent the Contract Value, without regard to surrender charges, exceeds the investment in the Contract. The investment in the Contract is the gross premium paid for the contract minus any amounts previously received from the Contract if such amounts were properly excluded from your gross income. If you make a full withdrawal under a Non-Qualified Contract, the amount received will be taxable only to the extent it exceeds the investment in the Contract. TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity payments received from a Non-Qualified Contract provides for the return of your investment in the Contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. For 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. If you elect variable annuity payments, the amount excluded from taxable income is determined by dividing the investment in the Contract by the total number of expected payments. The annuity payments will be fully taxable after the total amount of the investment in the Contract is excluded using these ratios. If any variable payment is less than the excludable amount you should contact a competent tax advisor to determine how to report any unrecovered investment. The federal tax treatment of annuity payments is unclear in some respects. As a result, if the IRS should provide further guidance, it is possible that the amount we calculate and report to the IRS as taxable could be different. If you die, and annuity payments cease before the total amount of the investment in the Contract is recovered, the unrecovered amount will be allowed as a deduction for your last taxable year. WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding the taxation of any additional withdrawal received after the Payout Start Date. It is possible that a greater or lesser portion of such a payment could be taxable than the amount we determine. DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for federal income tax purposes, the Contract must provide: .. if any Contract Owner dies on or after the Payout 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 Contract Owner's death; .. if any Contract Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within 5 years after the date of the Contract Owner's death. These requirements are satisfied if any portion of the Contract Owner's interest that 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 1 year of the Contract Owner's death. If the Contract Owner's designated Beneficiary is the surviving spouse of the Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner; .. if the Contract Owner is a non-natural person, then the Annuitant will be treated as the Contract Owner for purposes of applying the distribution at death rules. In addition, a change in the Annuitant on a Contract owned by a non-natural person will be treated as the death of the Contract Owner. TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income as follows: .. if distributed in a lump sum, the amounts are taxed in the same manner as a total withdrawal, or .. if distributed under an Income Plan, the amounts are taxed in the same manner as annuity payments. PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable amount of any 30 PROSPECTUS premature distribution from a non-Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or becoming totally disabled, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made under an immediate annuity, or .. attributable to investment in the Contract before August 14, 1982. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts using substantially equal periodic payments or immediate annuity payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the Contract Owner's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is a tax-free exchange of a non-qualified life insurance contract, endowment contract or annuity contract into a non-Qualified annuity contract. The contract owner(s) must be the same on the old and new contract. Basis from the old contract carries over to the new contract so long as we receive that information from the relinquishing company. If basis information is never received, we will assume that all exchanged funds represent earnings and will allocate no cost basis to them. PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of annuity contracts. Under this ruling, if you take a withdrawal from a receiving or relinquishing annuity contract within 24 months of the partial exchange, then special aggregation rules apply for purposes of determining the taxable amount of a distribution. The IRS has issued limited guidance on how to aggregate and report these distributions. The IRS is expected to provide further guidance; as a result, it is possible that the amount we calculate and report to the IRS as taxable could be different. Your Contract may not permit partial exchanges. TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without full and adequate consideration to a person other than your spouse (or to a former spouse incident to a divorce), you will be taxed on the difference between the Contract Value and the investment in the Contract at the time of transfer. Any assignment or pledge (or agreement to assign or pledge) of the Contract Value is taxed as a withdrawal of such amount or portion and may also incur the 10% penalty tax. AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified deferred annuity contracts issued by Allstate New York (or its affiliates) to the same Contract Owner during any calendar year be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. INCOME TAX WITHHOLDING Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% of the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax using the wage withholding rates for all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all 31 PROSPECTUS countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. TAX QUALIFIED CONTRACTS The income on tax sheltered annuity (TSA) and IRA investments is tax deferred, and the income from annuities held by such plans does not receive any additional tax deferral. You should review the annuity features, including all benefits and expenses, prior to purchasing an annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as or in connection with: .. Individual Retirement Annuities (IRAs) under Code Section 408(b); .. Roth IRAs under Code Section 408A; .. Simplified Employee Pension (SEP IRA) under Code Section 408(k); .. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Code Section 408(p); .. Tax Sheltered Annuities under Code Section 403(b); .. Corporate and Self Employed Pension and Profit Sharing Plans under Code Section 401; and .. State and Local Government and Tax-Exempt Organization Deferred Compensation Plans under Code Section 457. Allstate New York reserves the right to limit the availability of the Contract for use with any of the retirement plans listed above or to modify the Contract to conform with tax requirements. If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waiver of charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if qualified plan limits on distributions and other conditions are not met. Please consult your qualified plan administrator for more information. Allstate New York no longer issues deferred annuities to employer sponsored qualified retirement plans. The tax rules applicable to participants with tax qualified annuities vary according to the type of contract and the terms and conditions of the endorsement. Adverse tax consequences may result from certain transactions such as excess contributions, premature distributions, and, distributions that do not conform to specified commencement and minimum distribution rules. Allstate New York can issue an individual retirement annuity on a rollover or transfer of proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under which the decedent's surviving spouse is the beneficiary. Allstate New York does not offer an individual retirement annuity that can accept a transfer of funds for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer sponsored qualified retirement plan. Please refer to your Endorsement for IRAs or 403(b) plans, if applicable, for additional information on your death settlement options. In the case of certain qualified plans, the terms of the Qualified Plan Endorsement and the plans may govern the right to benefits, regardless of the terms of the Contract. TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If you make a partial withdrawal under a Tax Qualified Contract other than a Roth IRA, the portion of the payment that bears the same ratio to the total payment that the investment in the Contract (i.e., nondeductible IRA contributions) bears to the Contract Value, is excluded from your income. We do not keep track of nondeductible contributions, and generally all tax reporting of distributions from Tax Qualified Contracts other than Roth IRAs will indicate that the distribution is fully taxable. "Qualified distributions" from Roth IRAs are not included in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to any Roth IRA and which are: .. made on or after the date the Contract Owner attains age 59 1/2, .. made to a beneficiary after the Contract Owner's death, .. attributable to the Contract Owner being disabled, or .. made for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" from Roth IRAs are treated as made from contributions first and are included in gross income only to the extent that distributions exceed contributions. REQUIRED MINIMUM DISTRIBUTIONS. Generally, Tax Qualified Contracts (excluding Roth IRAs) require minimum distributions upon reaching age 70 1/2. Failure to withdraw the required minimum distribution will result in a 50% tax penalty on the shortfall not withdrawn from the Contract. Not all income plans offered under the Contract satisfy the requirements for minimum distributions. Because these distributions are required under the Code and the method of calculation is complex, please see a competent tax advisor. THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA) may not invest in life insurance contracts. However, an IRA may provide a death benefit that equals the greater of the purchase payments or the Contract Value. The Contract offers a death benefit that in certain circumstances may exceed the greater of the purchase payments or the Contract Value. We believe that the Death Benefits offered by your Contract do not constitute life insurance under these regulations. 32 PROSPECTUS It is also possible that certain death benefits that offer enhanced earnings could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in current taxable income to a Contract Owner. In addition, there are limitations on the amount of incidental death benefits that may be provided under qualified plans, such as in connection with a TSA or employer sponsored qualified retirement plan. Allstate New York reserves the right to limit the availability of the Contract for use with any of the qualified plans listed above. PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM TAX QUALIFIED CONTRACTS. A 10% penalty tax applies to the taxable amount of any premature distribution from a Tax Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or total disability, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made after separation from service after age 55 (does not apply to IRAs), .. made pursuant to an IRS levy, .. made for certain medical expenses, .. made to pay for health insurance premiums while unemployed (applies only for IRAs), .. made for qualified higher education expenses (applies only for IRAs), and .. made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs). During the first 2 years of the individual's participation in a SIMPLE IRA, distributions that are otherwise subject to the premature distribution penalty, will be subject to a 25% penalty tax. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect to Tax Qualified Contracts using substantially equal periodic payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Allstate New York is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions that are not considered "eligible rollover distributions." The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% from the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Allstate New York is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless you elect to make a "direct rollover" of such amounts to an IRA or eligible retirement plan. Eligible rollover distributions generally include all distributions from Tax Qualified Contracts, including TSAs but excluding IRAs, with the exception of: .. required minimum distributions, or, .. a series of substantially equal periodic payments made over a period of at least 10 years, or, .. a series of substantially equal periodic payments made over the life (joint lives) of the participant (and beneficiary), or, .. hardship distributions. For all annuitized distributions that are not subject to the 20% withholding requirement, Allstate New York is required to withhold federal income tax using the wage withholding rates. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Code Section 1441 provides that Allstate New York as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien or to certain other 'foreign persons'. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a fully completed Form W-8BEN. A U.S. taxpayer 33 PROSPECTUS identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408(b) permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity (IRA). 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 retirement plans may be "rolled over" on a tax-deferred basis into an Individual Retirement Annuity. ROTH INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408A 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. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL IRAS). Code Section 408 permits a custodian or trustee of an Individual Retirement Account to purchase an annuity as an investment of the Individual Retirement Account. If an annuity is purchased inside of an Individual Retirement Account, then the Annuitant must be the same person as the beneficial owner of the Individual Retirement Account. Generally, the death benefit of an annuity held in an Individual Retirement Account must be paid upon the death of the Annuitant. However, in most states, the Contract permits the custodian or trustee of the Individual Retirement Account to continue the Contract in the accumulation phase, with the Annuitant's surviving spouse as the new Annuitant, if the following conditions are met: 1) The custodian or trustee of the Individual Retirement Account is the owner of the annuity and has the right to the death proceeds otherwise payable under the Contract; 2) The deceased Annuitant was the beneficial owner of the Individual Retirement Account; 3) We receive a complete request for settlement for the death of the Annuitant; and 4) The custodian or trustee of the Individual Retirement Account provides us with a signed certification of the following: (a) The Annuitant's surviving spouse is the sole beneficiary of the Individual Retirement Account; (b) The Annuitant's surviving spouse has elected to continue the Individual Retirement Account as his or her own Individual Retirement Account; and (c) The custodian or trustee of the Individual Retirement Account has continued the Individual Retirement Account pursuant to the surviving spouse's election. SIMPLIFIED EMPLOYEE PENSION IRA. Code Section 408(k) allows eligible employers to establish simplified employee pension plans for their employees using individual retirement annuities. These employers may, within specified limits, make deductible contributions on behalf of the employees to the individual retirement annuities. Employers intending to use the Contract in connection with such plans should seek competent tax advice. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Code Section 408(p) allows eligible employers with 100 or fewer employees to establish SIMPLE retirement plans for their employees using individual retirement annuities. In general, a SIMPLE IRA consists of a salary deferral program for eligible employees and matching or nonelective contributions made by employers. Employers intending to purchase the Contract as a SIMPLE IRA should seek competent tax and legal advice. TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS (TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND YOUR COMPETENT TAX ADVISOR. TAX SHELTERED ANNUITIES. Code Section 403(b) provides tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. Under Section 403(b), any contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee: .. attains age 59 1/2, .. severs employment, .. dies, .. becomes disabled, or .. incurs a hardship (earnings on salary reduction contributions may not be distributed on account of hardship). These limitations do not apply to withdrawals where Allstate New York is directed to transfer some or all of the Contract Value to another 403(b) plan. Generally, we do 34 PROSPECTUS not accept funds in 403(b) contracts that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). ANNUAL REPORTS AND OTHER DOCUMENTS Allstate New York's Annual Report on Form 10-K for the year ended December 31, 2004, is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. Accordingly, only the statement that is changed or replaced will legally be a part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR" system using the identifying number CIK No. 0000839759. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at Customer Service, P.O. Box 82656, Lincoln, NE 68501-2656 (telephone: 1-800-632-3492). 35 PROSPECTUS APPENDIX A ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT SINCE CONTRACTS WERE FIRST OFFERED*
For the period beginning January 1 and ending December 31, 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------------------------ AIM V.I. CAPITAL APPRECIATION - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 7.63 $ 5.779 $ 4.317 $ 5.521 Accumulation Unit Value, End of Period $ 7.63 $ 5.779 $ 4.317 $ 5.521 $ 5.813 Number of Units Outstanding, End of Period 1,991 35,576 91,317 117,184 160,308 AIM V.I. CORE EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.18 $ 6.231 $ 5.195 $ 6.382 Accumulation Unit Value, End of Period $ 8.18 $ 6.231 $ 5.195 $ 6.382 $ 6.868 Number of Units Outstanding, End of Period 1,488 34,966 62,419 79,425 94,314 AIM V.I. DIVERSIFIED INCOME - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.99 $ 10.223 $ 10.328 $ 11.141 Accumulation Unit Value, End of Period $ 9.99 $ 10.223 $ 10.328 $ 11.141 $ 11.555 Number of Units Outstanding, End of Period 364 5,443 24,375 33,509 47,763 AIM V.I. INTERNATIONAL GROWTH - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.66 $ 6.538 $ 5.444 $ 9.938 Accumulation Unit Value, End of Period $ 8.66 $ 6.538 $ 5.444 $ 9.938 $ 8.496 Number of Units Outstanding, End of Period 305 11,638 15,358 20,763 28,603 AIM V.I. PREMIER EQUITY - SERIES I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.67 $ 7.482 $ 5.153 $ 6.365 Accumulation Unit Value, End of Period $ 8.67 $ 7.482 $ 5.153 $ 6.365 $ 6.648 Number of Units Outstanding, End of Period 21,939 71,223 158,710 177,633 197,713 FIDELITY VIP CONTRAFUND(R) - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.39 $ 8.138 $ 7.285 $ 9.242 Accumulation Unit Value, End of Period $ 9.39 $ 8.138 $ 7.285 $ 9.242 $ 10.539 Number of Units Outstanding, End of Period 2,196 31,995 97,646 147,589 197,911 FIDELITY VIP GROWTH - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.53 $ 6.934 $ 4.786 $ 6.279 Accumulation Unit Value, End of Period $ 8.53 $ 6.934 $ 4.786 $ 6.279 $ 6.410 Number of Units Outstanding, End of Period 27,151 90,481 208,536 257,920 354,754 FIDELITY VIP HIGH INCOME - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.40 $ 7.317 $ 7.474 $ 9.393 Accumulation Unit Value, End of Period $ 8.40 $ 7.317 $ 7.474 $ 9.393 $ 10.166 Number of Units Outstanding, End of Period 33 20,582 43,029 63,385 103,282 FIDELITY VIP INDEX 500 - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.04 $ 7.845 $ 6.025 $ 7.640 Accumulation Unit Value, End of Period $ 9.04 $ 7.845 $ 6.025 $ 7.640 $ 8.345 Number of Units Outstanding, End of Period 0 67,571 215,402 267,570 404,671 FIDELITY VIP INVESTMENT GRADE BOND - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 10.44 $ 11.179 $ 12.181 $ 12.655 Accumulation Unit Value, End of Period $ 10.44 $ 11.179 $ 12.181 $ 12.655 $ 13.054 Number of Units Outstanding, End of Period 132 26,618 143,699 202, 195,735 FIDELITY VIP OVERSEAS - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.97 $ 6.982 $ 5.496 $ 7.781 Accumulation Unit Value, End of Period $ 8.97 $ 6.982 $ 5.496 $ 7.781 $ 8.732 Number of Units Outstanding, End of Period 92 25,188 36,513 43,249 52,535 MFS RESEARCH BOND - INITIAL CLASS SUB-ACCOUNT ** Accumulation Unit Value, Beginning of Period $ 10.00 $ 10.39 $ 11.150 $ 11.993 $ 12.949 Accumulation Unit Value, End of Period $ 10.39 $ 11.150 $ 11.993 $ 12.949 $ 13.563 Number of Units Outstanding, End of Period 0 18,271 100,799 121,895 110,249
36 PROSPECTUS
MFS HIGH INCOME - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.22 $ 9.298 $ 9.417 $ 10.969 Accumulation Unit Value, End of Period $ 9.22 $ 9.298 $ 9.417 $ 10.969 $ 11.823 Number of Units Outstanding, End of Period 108 10,338 9,733 15,277 49,548 MFS INVESTORS TRUST - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.73 $ 8.078 $ 6.305 $ 7.605 Accumulation Unit Value, End of Period $ 9.73 $ 8.078 $ 6.305 $ 7.605 $ 8.363 Number of Units Outstanding, End of Period 0 27,560 73,504 87,690 114,180 MFS NEW DISCOVERY - INITIAL CLASS SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.89 $ 8.336 $ 5.628 $ 7.432 Accumulation Unit Value, End of Period $ 8.89 $ 8.336 $ 5.628 $ 7.432 $ 7.817 Number of Units Outstanding, End of Period 6,891 19,369 66,020 77,933 86,243 OPPENHEIMER CORE BOND/VA SUB-ACCOUNT *** Accumulation Unit Value, Beginning of Period $ 10.00 $ 10.20 $ 10.857 $ 11.695 $ 12.332 Accumulation Unit Value, End of Period $ 10.20 $ 10.857 $ 11.695 $ 12.332 $ 12.847 Number of Units Outstanding, End of Period 0 25,776 106,484 121,184 143,175 OPPENHEIMER CAPITAL APPRECIATION/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.95 $ 7.723 $ 5.578 $ 7.213 Accumulation Unit Value, End of Period $ 8.95 $ 7.723 $ 5.578 $ 7.213 $ 7.617 Number of Units Outstanding, End of Period 91 107,889 186,591 237,209 299,956 OPPENHEIMER GLOBAL SECURITIES/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.63 $ 8.363 $ 6.431 $ 9.082 Accumulation Unit Value, End of Period $ 9.63 $ 8.363 $ 6.431 $ 9.082 $ 10.687 Number of Units Outstanding, End of Period 0 41,075 84,628 108,776 130,413 OPPENHEIMER HIGH INCOME/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 9.46 $ 9.520 $ 9.176 $ 11.232 Accumulation Unit Value, End of Period $ 9.46 $ 9.520 $ 9.176 $ 11.232 $ 12.087 Number of Units Outstanding, End of Period 0 23,570 52,432 63,049 95,050 OPPENHEIMER MAIN STREET SMALL CAP/VA SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 8.73 $ 8.589 $ 7.146 $ 10.187 Accumulation Unit Value, End of Period $ 8.73 $ 8.589 $ 7.146 $ 10.187 $ 12.013 Number of Units Outstanding, End of Period 240 22,387 77,910 119,444 164,702 VAN KAMPEN LIT COMSTOCK, CLASS I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 11.58 $ 11.154 $ 8.894 $ 11.505 Accumulation Unit Value, End of Period $ 11.58 $ 11.154 $ 8.894 $ 11.505 $ 13.379 Number of Units Outstanding, End of Period 337 38,811 117,684 175,133 232,285 VAN KAMPEN LIT EMERGING GROWTH, CLASS I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 7.47 $ 5.053 $ 3.369 $ 4.237 Accumulation Unit Value, End of Period $ 7.47 $ 5.053 $ 3.369 $ 4.237 $ 4.478 Number of Units Outstanding, End of Period 16,637 65,356 138,721 171,774 182,412 VAN KAMPEN LIT GOVERNMENT, CLASS I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period -- -- $ 10.000 $ 10.642 $ 10.692 Accumulation Unit Value, End of Period -- -- $ 10.642 $ 10.692 $ 10.999 Number of Units Outstanding, End of Period -- -- 46,592 56,776 48,986 VAN KAMPEN LIT MONEY MARKET, CLASS I SUB-ACCOUNT Accumulation Unit Value, Beginning of Period $ 10.00 $ 10.14 $ 10.381 $ 10.377 $ 10.305 Accumulation Unit Value, End of Period $ 10.14 $ 10.381 $ 10.377 $ 10.305 $ 10.258 Number of Units Outstanding, End of Period 0 129,426 199,118 192,771 199,636
* The Contracts were first offered on September 22, 2000. The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.15% and an administrative expense charge of 0.10%. All of the Variable Sub-Accounts were first offered under the Contracts on September 19, 2000, with the exception of the Van Kampen LIT Government, Class I Sub-Account that was first offered April 30, 2002. ** Effective May 1, 2005, the MFS Bond Series - Initial Class will change its name to MFS Research Bond Series - Initial Class. We will make a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. *** Effective Apil 29, 2005, the Oppenheimer Bond Fund/VA changed its name to Oppenheimer Core Bond Fund/VA. We have made a corresponding change in the name of the Variable Sub-Account that invests in that Portfolio. 37 PROSPECTUS APPENDIX B MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the applicable Guarantee Period for the week preceding the establishment of the Guarantee Period. N = the number of whole and partial years from the date we receive the withdrawal, transfer, or death benefit request, or from the Payout Start Date, to the end of the Guarantee Period; and J = the Treasury Rate for a maturity equal to N years for the week preceding the receipt of the withdrawal, transfer, death benefit, or income payment request. If a note for a maturity of length N is not available, a weighted average will be used. "Treasury Rate" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Board Statistical Release H.15. The Market Value Adjustment factor is determined from the following formula: ..9 X (I - J) X N To determine the Market Value Adjustment, we will multiply the Market Value Adjustment factor by the amount transferred (in excess of the Preferred Withdrawal Amount) paid as a death benefit, or applied to an Income Plan, from a Guarantee Period at any time other than during the 30 day period after such Guarantee Period expires. 38 PROSPECTUS EXAMPLES OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 allocated to a Guarantee Period Guarantee Period: 5 years Guaranteed Interest Rate: 4.50% 5 Year Treasury Rate at the time the Guarantee Period is established: 4.50% Full Surrender: End of Contract Year 3 NOTE: These examples assume that premium taxes are not applicable. EXAMPLE 1 (ASSUME DECLINING INTEREST RATES) Step 1. Calculate Contract $10,000.00 X (1.045)/3/ = $11,411.66 Value at End of Contract Year 3: Step 2. Calculate the Preferred .15 X $10,000.00 = $1,500.00 Withdrawal Amount: Step 3. Calculate the Market I = 4.5% Value Adjustment: J = 4.2% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .042) X (730/365) = .0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: = .0054 X ($11,411.66 - $1,500.00) = $53.32 EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1. Calculate Contract $10,000.00 X (1.045)/3/ = $11,411.66 Value at End of Contract Year 3: Step 2. Calculate the Preferred .15 X $10,000.00 = $1,500.00 Withdrawal Amount: Step 3. Calculate the Market I = 4.5% Value Adjustment: J = 4.8% 730 days N = -------- = 2 365 days Market Value Adjustment Factor: .9 X (I - J) X N = .9 X (.045 - .048) X (730/365) = -.0054 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject to Market Value Adjustment: = -.0054 X ($11,411.66 - $1,500.00) = -$53.52 39 PROSPECTUS APPENDIX C WITHDRAWAL ADJUSTMENT EXAMPLE Issue Date: January 1, 2005 Initial Purchase Payment: $50,000 Death Benefit Amount
- ----------------------------------------------------------------------------------------------- Contract Contract Greatest Type Value Before Transaction Value After Death Benefit Anniversary Date of Occurrence Occurrence Amount Occurrence Anniversary Value Value - ----------------------------------------------------------------------------------------------- 1/1/05 IssueDate -- $50,000 $50,000 $50,000 $50,000 - ----------------------------------------------------------------------------------------------- 1/1/06 Contract $55,000 -- $55,000 $50,000 $55,000 Anniversary - ----------------------------------------------------------------------------------------------- 7/1/06 Partial $60,000 $15,000 $45,000 $37,500 $41,250 Withdrawal - -----------------------------------------------------------------------------------------------
Withdrawal adjustment equals the partial withdrawal amount divided by the Contract Value immediately prior to the partial withdrawal multiplied by the value of the applicable death benefit amount alternative immediately prior to the partial withdrawal.
DEATH BENEFIT ANNIVERSARY VALUE DEATH BENEFIT - -------------------------------------------------------------------------------------------------------------- PARTIAL WITHDRAWAL AMOUNT (w) $15,000 - -------------------------------------------------------------------------------------------------------------- Contract Value Immediately Prior to Partial Withdrawal (a) $60,000 - -------------------------------------------------------------------------------------------------------------- Value of Applicable Death Benefit Amount Immediately Prior to Partial (d) $50,000 Withdrawal - -------------------------------------------------------------------------------------------------------------- Withdrawal Adjustment [(w)/(a)] X (d) $12,500 - -------------------------------------------------------------------------------------------------------------- Adjusted Death Benefit $37,500 - -------------------------------------------------------------------------------------------------------------- GREATEST ANNIVERSARY VALUE DEATH BENEFIT - -------------------------------------------------------------------------------------------------------------- PARTIAL WITHDRAWAL AMOUNT (w) $15,000 - -------------------------------------------------------------------------------------------------------------- Contract Value Immediately Prior to Partial Withdrawal (a) $60,000 - -------------------------------------------------------------------------------------------------------------- Value of Applicable Death Benefit Amount Immediately Prior to Partial (d) $55,000 Withdrawal - -------------------------------------------------------------------------------------------------------------- Withdrawal Adjustment [(w)/(a)] X (d) $13,750 - -------------------------------------------------------------------------------------------------------------- Adjusted Death Benefit $41,250 - --------------------------------------------------------------------------------------------------------------
Please remember that you are looking at a hypothetical example, and that your investment performance may be greater or less than the figures shown. 40 PROSPECTUS STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Additions, Deletions or Substitutions of Investments The Contract Purchase of Contracts Calculation of Accumulation Unit Values Calculation of Variable Income Payments General Matters Incontestability Settlements Safekeeping of the Variable Account's Assets Experts Financial Statements THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS. 41 PROSPECTUS PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13.OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Registrant anticipates that it will incur the following approximate expenses in connection with the issuance and distribution of the securities to be registered: Registration fees................ $ 0 Cost of printing and engraving... $4,000 Legal fees....................... $ 0 Accounting fees.................. $3,000 Mailing fees..................... $6,500 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The By-laws of Allstate Life Insurance Company of New York ("Registrant") provide that Registrant will indemnify all of its directors, former directors, officers and former officers, to the fullest extent permitted under law, who were or are a party or are threatened to be made a party to any proceeding by reason of the fact that such persons were or are directors or officers of Registrant, against liabilities, expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by them. The indemnity shall not be deemed exclusive of any other rights to which directors or officers may be entitled by law or under any articles of incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. In addition, the indemnity shall inure to the benefit of the legal representatives of directors and officers or of their estates, whether such representatives are court appointed or otherwise designated, and to the benefit of the heirs of such directors and officers. The indemnity shall extend to and include claims for such payments arising out of any proceeding commenced or based on actions of such directors and officers taken prior to the effectiveness of this indemnity; provided that payment of such claims had not been agreed to or denied by Registrant before such date. The directors and officers of Registrant have been provided liability insurance for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers of Registrant. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During the period beginning on December 1, 2008 and ending on April 3, 2009, the Registrant inadvertently sold deferred annuity contracts or participating interests therein pursuant to two registration statements on Form S-3 that were not in compliance with Rule 415(a)(5) under the Securities Act of 1933. The aggregate amount of securities sold was $2,908,070. Purchasers, however, did receive all material information relating to the security prior to sale, including the prospectus from the existing registration statement. When the technical violation was discovered, the Registrant filed new registration statements on Form S-3 with the Commission to comply with the requirements of Rule 415(a)(5) for continuous offering. These registration statements were declared effective on March 27, 2009 (SEC File No. 333-158183) and April 27, 2009 (SEC File No. 333-158655). Although the legal effect of a violation of Rule 415(a)(5) is not entirely clear, the Registrant may have been deemed to have inadvertently sold unregistered securities during the time period noted above. New procedures have been implemented to ensure timely submission of future registration statement filings. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 16(a) Exhibit No. Description (1) Form of Underwriting Agreement (Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registrant's Form N-4 Registration Statement (File No. 033-65381) dated September 23, 1996.) (2) None 3(i) Restated Certificate of Incorporation of Allstate Life Insurance Company of New York dated December 2, 2003. Incorporated herein by reference to Exhibit 3(i) to Allstate Life Insurance Company of New York's Annual Report on Form 10-K for 2003, SEC File No. 333-100029. 3(ii) Amended By-Laws of Allstate Life Insurance Company of New York dated December 16, 1998. Incorporated herein by reference to Exhibit 3(ii) to Allstate Life Insurance Company of New York's Annual Report on Form 10-K for 1998, SEC File No. 333-100029. (4)(a) Form of AIM Lifetime Plus(SM) Variable Annuity Contract (Incorporated herein by reference to Pre-Effective Amendment No. 1 to Form N-4 Registration Statement of Allstate Life of New York Separate Account A (File No. 033-65381) dated September 23, 1996.) (b) Form of AIM Lifetime Plus(SM) II Variable Annuity Contract (Incorporated herein by reference to Post-Effective Amendment No. 4 to Form N-4 Registration Statement of Allstate Life of New York Separate Account A (File No. 033-65381) dated November 12, 1999.) (c) Form of "Allstate Custom Portfolio," "Allstate Provider" or "SelectDirections(SM)" Variable Annuity Contract (Incorporated herein by reference to Form N-4 Registration Statement of Allstate Life of New York Separate Account A (File No. 333-94785) dated January 14, 2000.) (d) Form of Amendatory Endorsement to Add Dollar Cost Averaging Fixed Accounts to the "Allstate Custom Portfolio", "Allstate Provider", or "SelectDirections" Variable Annuity (Incorporated herein by reference to Post-Effective Amendment No. 23 to Form N-4 Registration Statement of Allstate Life of New York Separate Account A (File No. 333-94785) dated April 20, 2001.) (e) Form of Amendatory Endorsement for Transfer Limitations under the "Allstate Custom Portfolio", "Allstate Provider", or "SelectDirections" Variable Annuity (Incorporated herein by reference to Post-Effective Amendment No. 23 to Form N-4 Registration Statement of Allstate Life of New York Separate Account A (File No. 333-94785) dated April 20, 2001.) (f) Form of Death Benefit Endorsement (Previously filed in Post-Effective Amendment No. 1 to this Registration Statement (File No. 333-100029) dated April 11, 2003.) (5)(a) Opinion and Consent of General Counsel re: Legality (Incorporated herein by reference to Pre-Effective Amendment No. 1 to Form S-3 Registration Statement of Allstate Life Insurance Company of New York (File No. 033-65355) dated September 23, 1996.) (5)(b) Opinion and Consent of General Counsel re: Legality (Incorporated herein by reference to Post-Effective Amendment No. 4 to Form S-3 Registration Statement of Allstate Life Insurance Company of New York (File No. 033-65355) dated November 12, 1999.) (5)(c) Opinion and Consent of General Counsel re: Legality (Incorporated herein by reference to Post-Effective Amendment No. 1 to the Form S-3 Registration Statement (File No.333-95703) dated February 14, 2000.) (5)(d) Opinion of General Counsel Re: Legality (Incorporated herein by reference to Post-Effective Amendment No. 3 to the Form S-3 Registration Statement (File No.333-95703) dated July 21, 2000.) (5)(e) Opinion of General Counsel Re: Legality (Incorporated herein by reference to Post-Effective Amendment No. 4 to the Registration Statement on Form S-3 (File No. 333-95703) dated August 21, 2000.) (5)(f) Opinion of General Counsel Re: Legality (Incorporated herein by reference to Registrant's Form S-3 Initial Registration Statement (File No. 333-61846) dated May 30, 2001.) (5)(g) Opinion of General Counsel Re: Securities registered (Previously filed in Registrant's Form S-3 Initial Registration Statement (File No. 333-100029) dated September 24, 2002.) (5)(h) Opinion of General Counsel Re: Legality (Incorporated by reference to Registrant's Form S-3 Registration Statement (File No. 333-158183) dated March 24, 2009) (8) None (9) None (10) Material Contracts 10.1 Form of Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation and certain affiliates effective January 1, 2004. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company's Annual Report on Form 10-K for 2007. (SEC File No.000-31248) 10.2 Form of Amendment No. 1 to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation and certain affiliates effective January 1, 2009. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company's Current Report on Form 8-K filed February 17, 2010. (SEC File No. 000-31248) 10.3 New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and Intramerica Life Insurance Company, effective March 5, 2005. Incorporated herein by reference to Exhibit 10.2 to Allstate Life Insurance Company's Quarterly Report on Form 10-Q for quarter ended June 30, 2005. (SEC File No. 000-31248) 10.4 Investment Advisory Agreement and Amendment to Service Agreement as of January 1, 2002 between Allstate Insurance Company, Allstate Investments, LLC and Allstate Life Insurance Company of New York. Incorporated herein by reference to Exhibit 10.2 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended March 31, 2002. (SEC File No. 333-61846) 10.5 Form of Tax Sharing Agreement among The Allstate Corporation and certain affiliates dated as of November 12, 1996. Incorporated herein by reference to Exhibit 10.24 to Allstate Life Insurance Company's Annual Report Form 10-K for 2007. (SEC File No.000-31248) 10.6 Underwriting Agreement between Allstate Life Insurance Company of New York and ALFS, Inc., effective October 1, 1996. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-61846) 10.7 Principal Underwriting Agreement between Allstate Life Insurance Company of New York and Allstate Distributors, L.L.C., effective May 1, 2000. Incorporated herein by reference to Exhibit 10.2 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-61846) 10.8 Amendment Number One to the Principal Underwriting Agreement between Allstate Life Insurance Company of New York and Allstate Distributors, L.L.C. effective October 1, 2002. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006. (SEC File No. 333-100029) 10.9 Selling Agreement between Allstate Life Insurance Company of New York, ALFS, Inc. and Allstate Financial Services, LLC effective May 1, 2005. Incorporated herein by reference to Exhibit 10.7 to Allstate Life Insurance Company's Annual Report on Form 10-K for 2003. (SEC File No. 000-31248) 10.10 Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective January 1, 1984 as amended by Amendment No. 1 effective September 1, 1984, Amendment No.2 effective January 1, 1987, Amendment No.3 effective October 1, 1988, Amendment No.4 effective January 1, 1994 and Amendment No.5 effective December 31, 1995. Incorporated herein by reference to Exhibit 10.6 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-61846) 10.11 Amendment No. 6 to Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective December 1, 2007. Filed herewith. 10.12 Amendment No. 7 to Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective November 1, 2009. Filed herewith. 10.13 Assumption Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective July 1, 1984. Incorporated herein by reference to Exhibit 10.7 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-61846) 10.14 Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York, effective January 1, 1986, as amended by Amendment No.1 effective December 31, 1995 and Amendment No. 2 effective December 1, 1995. Incorporated herein by reference to Exhibit 10.8 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-61846) 10.15 Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York, effective January 1, 1991, as amended by Amendment No.1 effective December 31, 1995. Incorporated herein by reference to Exhibit 10.9 to Allstate Life Insurance Company of New York's Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-61846) 10.16 Stop Loss Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective December 31, 2001. Incorporated herein by reference to Exhibit 10.16 to Allstate Life Insurance Company of New York's Annual Report on Form 10-K for 2003. (SEC File No. 333- 100029) 10.17 Cash Management Services Master Agreement between Allstate Insurance Company and Allstate Bank (f/k/a Allstate Federal Savings Bank) dated March 16, 1999. Incorporated herein by reference to Exhibit 10.32 to Allstate Life Insurance Company's Form 10 filed on April 24, 2002. (SEC File No. 000-31248) 10.18 Amendment No. 1 effective January 5, 2001 to Cash Management Services Master Agreement between Allstate Insurance Company and Allstate Bank dated March 16, 1999. Incorporated herein by reference to Exhibit 10.33 to Allstate Life Insurance Company's Form 10 filed on April 24, 2002. (SEC File No. 000- 31248) 10.19 Amendment No. 2 entered into November 8, 2002 to the Cash Management Services Master Agreement between Allstate Insurance Company, Allstate Bank and Allstate Motor Club, Inc. dated March 16, 1999. Incorporated herein by reference to Exhibit 10.19 to Allstate Life Insurance Company's Annual Report on Form 10-K filed for 2007. (SEC File No. 000-31248) 10.20 Premium Depository Service Supplement dated as of September 30, 2005 to Cash Management Services Master Agreement between Allstate Insurance Company, Allstate Bank, Allstate Motor Club, Inc. and certain other parties. Incorporated herein by reference to Exhibit 10.20 to Allstate Life Insurance Company's Annual Report on Form 10-K filed for 2007. (SEC File No. 000-31248) 10.21 Variable Annuity Service Supplement dated November 10, 2005 to Cash Management Services Agreement between Allstate Bank, Allstate Life Insurance Company of New York and certain other parties. Incorporated herein by reference to Exhibit 10.21 to Allstate Life Insurance Company's Annual Report on Form 10-K filed for 2007. (SEC File No. 000-31248) 10.22 Sweep Agreement Service Supplement dated as of October 11, 2006 to Cash Management Services Master Agreement between Allstate Life Insurance Company, Allstate Bank, Allstate Motor Club, Inc. and certain other companies. Incorporated herein by reference to Exhibit 10.22 to Allstate Life Insurance Company's Annual Report on Form 10-K filed for 2007. (SEC File No. 000-31248) 10.23 Agreement for the Settlement of State and Local Tax Credits among Allstate Insurance Company and certain affiliates effective January 1, 2007. Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company of New York's Current Report on Form 8-K filed February 21, 2008. (SEC File No. 333-100029) 10.24 Intercompany Loan Agreement among The Allstate Corporation, Allstate Life Insurance Company, Lincoln Benefit Life Company and other certain subsidiaries of The Allstate Corporation dated February 1, 1996. Incorporated herein by reference to Exhibit 10.24 of Allstate Life Insurance Company's Annual Report on Form 10-K for 2006. (SEC File No. 000-31248) 10.25 Administrative Agreement between Allstate Life Insurance Company, ALFS, Inc., and Allstate Life Insurance Company of New York effective June 1, 1993. Incorporated herein by reference to Exhibit 10.22 to Allstate Life Insurance Company of New York's Annual Report on Form 10-K for 2008. (SEC File No. 333- 100029) 10.26 Administrative Services Agreement between Allstate Life Insurance Company of New York and ALFS, Inc. effective January 1, 2002. Incorporated herein by reference to Exhibit 10.23 to Allstate Life Insurance Company of New York's Annual Report on Form 10-K for 2008. (SEC File No. 333-100029) (24) Powers of Attorney for Marcia D. Alazraki, Robert K. Becker, Michael B. Boyle, Matthew S. Easley, Mark A. Green, Robert J. Holden, Cleveland Johnson, Jr., Susan L. Lees, Kenneth R. O'Brien, Samuel H. Pilch, John C. Pintozzi, John Raben, Jr., Phyllis Hill Slater, Matthew E. Winter. Filed herewith. 16(b) Financial statement schedules required by Regulation S-X (17 CFR Part 210) and Item 11(e) of Form S-1 are included in Part I. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bonafide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. (5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 ((S)230.424 of this chapter); (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, Allstate Life Insurance Company of New York, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the Township of Northfield, State of Illinois on the 8th day of April, 2010. ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) By: /s/ SUSAN L. LEES ---------------------------------------- Susan L. Lees, Director, Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the 8th day of April, 2010. */MARCIA D. ALAZRAKI Director - ------------------------------------- Marcia D. Alazraki */ROBERT K. BECKER Director and Vice President - ------------------------------------- Robert K. Becker */MICHAEL B. BOYLE Director and Vice President - ------------------------------------- Michael B. Boyle */MATTHEW S. EASLEY Director and Vice President - ------------------------------------- Matthew S. Easley */MARK A. GREEN Director and Vice President - ------------------------------------ Mark. A. Green */ROBERT J. HOLDEN Director, Vice President and Chief - ------------------------------------- Operations Officer Robert J. Holden */CLEVELAND JOHNSON, JR. Director - ------------------------------------- Cleveland Johnson, Jr. /s/ SUSAN L. LEES Director, Vice President, General - ------------------------------------- Counsel and Secretary Susan L. Lees */KENNETH R. O'BRIEN Director - ------------------------------------- Kenneth R. O'Brien */SAMUEL H. PILCH Controller and Group Vice President - ------------------------------------- (Principal Accounting Officer) Samuel H. Pilch */JOHN C. PINTOZZI Director, Vice President and Chief - ------------------------------------- Financial Officer (Principal Financial John C. Pintozzi Officer) */JOHN R. RABEN, JR. Director - ------------------------------------- John R. Raben, Jr. */PHYLLIS H. SLATER Director - ------------------------------------- Phyllis H. Slater */MATTHEW E. WINTER Director, Chairman, President and - ------------------------------------- Chief Executive Officer Matthew E. Winter (Principal Executive Officer) */ By Susan L. Lees, pursuant to Power of Attorney. EXHIBIT LIST The following exhibits are filed herewith: Exhibit No. Description 10.11 Amendment No. 6 to Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective December 1, 2007. 10.12 Amendment No. 7 to Reinsurance Agreement between Allstate Life Insurance Company and Allstate Life Insurance Company of New York effective November 1, 2009. (23) Consent of Independent Registered Public Accounting Firm (24) Powers of Attorney for Marcia D. Alazraki, Robert K. Becker, Michael B. Boyle, Matthew S. Easley, Mark A. Green, Robert J. Holden, Cleveland Johnson, Jr., Susan L. Lees, Kenneth R. O'Brien, Samuel H. Pilch, John C. Pintozzi, John Raben, Jr., Phyllis Hill Slater, Matthew E. Winter. EX-10.11 2 dex1011.txt AMENDMENT NO. 6 TO REINSURANCE AGREEMENT EFFECTIVE DECEMBER 1, 2007 Exhibit 10.11 SIXTH AMENDMENT TO REINSURANCE AGREEMENT THIS SIXTH AMENDMENT TO REINSURANCE AGREEMENT (this "Sixth Amendment") dated this 1st day of December 2007 by and between Allstate Life Insurance Company of New York ("Ceding Company") and Allstate Life Insurance Company ("Accepting Company"). RECITALS WHEREAS, Ceding Company and Accepting Company entered into that certain Reinsurance Agreement, effective as of January 1, 1984 which was amended by amendments effective as of September 1, 1984, January 1, 1987, October 1, 1988, January 1, 1994 and December 31, 1995 (the "Agreement"); and WHEREAS, Ceding Company and Accepting Company desire to make additional amendments to the Agreement as more particularly described herein. AGREEMENT NOW, THEREFORE, for good and valuable consideration and for the mutual covenants set forth below, the parties hereto, intending legally to be bound, hereby agree as follows: 1. Ceding Company and Accepting Company hereby agree to replace Paragraph 2 in Article X of the Agreement titled "SETTLEMENT OF CLAIMS" with the following: 2. Whenever a claim is made under a policy of the Ceding Company which has been reinsured hereunder, it shall be taken and considered by the Accepting Company to be a claim for the amount of reinsurance on such risk, and the Accepting Company shall abide the issue as it shall be settled by the Ceding Company. No less frequently than quarterly, and within 90 (ninety) days after the receipt of due notice, the Accepting Company shall pay the amount of reinsurance covered by the policy of reinsurance. 2. Unless expressly modified by this Sixth Amendment, the terms and conditions of the Agreement remain unchanged and in full force and effect. 3. This Sixth Amendment shall be binding on the parties hereto, including their successors and assigns. IN WITNESS WHEREOF, the parties hereto have executed this Sixth Amendment as of the day and year first set forth above. ALLSTATE LIFE INSURANCE COMPANY By: /s/ Samuel H. Pilch ----------------------------------- Name: Samuel H. Pilch Title: Group Vice President and Controller Date: November 18, 2009 ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK By: /s/ Samuel H. Pilch ----------------------------------- Name: Samuel H. Pilch Title: Group Vice President and Controller Date: November 18, 2009 EX-10.12 3 dex1012.txt AMENDMENT NO. 7 TO REINSURANCE AGREEMENT EFFECTIVE NOVEMBER 1, 2009 Exhibit 10.12 Amendment Number 7 To the Reinsurance Agreement Effective January 1, 1984 between Allstate Life Insurance Company of New York (hereinafter called the "Ceding Company") and Allstate Life Insurance Company (hereinafter called the "Accepting Company") IT IS HEREBY AGREED, that the Reinsurance Agreement effective January 1, 1984, between the Ceding Company and the Accepting Company, as previously amended by Amendment Numbers 1 through 6 (hereinafter "Agreement") is hereby amended as provided below. A. Effective November 1, 2009, Article IV (Premium Accounting) is amended by adding the following to paragraph 1: Beginning on the first policy anniversary month following November 1, 2009, of each policy reinsured under this Agreement (except Accidental Death Benefit riders), the Ceding Company shall pay to the Accepting Company the annual reinsurance premium for such policy. Beginning on the first policy anniversary month following December 31, 2010, of each Accidental Death Benefit rider reinsured under this Agreement the Ceding Company shall pay to the Accepting Company the annual reinsurance premium for such policy. B. Effective November 1, 2009, Article IV (Premium Accounting) is further amended by adding the following to paragraph 2: Within 35 (thirty-five) days after the end of each month, the Ceding Company shall remit to the Accepting Company the annual reinsurance premium for all policies reinsured hereunder whose policy anniversary occurred during that month subject to the implementation schedule specified in the preceding paragraph 1 of this Article IV. In the event any policy reinsured under this Agreement terminates before its anniversary, the Accepting Company will refund the pro-rata portion of reinsurance premium previously paid by the Ceding Company. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS WHEREOF, the parties to the Agreement have caused this Amendment Number 7 to be duly executed by their respective officers on the dates shown below. Allstate Life Insurance Company of New York By: /s/ Samuel H. Pilch ----------------------------------- Name: Samuel H. Pilch Title: Group Vice President and Controller Date: February 8, 2010 Allstate Life Insurance Company By: /s/ Samuel H. Pilch ----------------------------------- Name: Samuel H. Pilch Title: Group Vice President and Controller Date: February 8, 2010 EX-23 4 dex23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Exhibit (23) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Post-Effective Amendment No. 2 to Registration Statement No. 333-158183 on Form S-1 of our report dated March 12, 2010 relating to the financial statements and financial statement schedules of Allstate Life Insurance Company of New York (which report expresses an unqualified opinion and includes an explanatory paragraph relating to a change in recognition and presentation for other-than-temporary impairments of debt securities in 2009), appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" in such Other Information. /S/ DELOITTE & TOUCHE LLP Chicago, Illinois April 7, 2010 EX-24 5 dex24.txt POWER OF ATTORNEY Exhibit (24) POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as her true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ MARCIA D. ALAZRAKI - -------------------------------------- Marcia D. Alazraki Director POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ ROBERT K. BECKER - -------------------------------------- Robert K. Becker Director and Vice President POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ MICHAEL B. BOYLE - -------------------------------------- Michael B. Boyle Director and Vice President POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ MATTHEW S. EASLEY - -------------------------------------- Matthew S. Easley Director and Vice President POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ MARK A. GREEN - -------------------------------------- Mark A. Green Director and Vice President POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ ROBERT J. HOLDEN - -------------------------------------- Robert J. Holden Director, Vice President and Chief Operations Officer POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ CLEVELAND JOHNSON, JR. - -------------------------------------- Cleveland Johnson, Jr. Director POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints John C. Pintozzi and Matthew E. Winter and each of them (with full power to each of them to act alone) as her true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ SUSAN L. LEES - -------------------------------------- Susan L. Lees Director, Vice President, General Counsel and Secretary POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ KENNETH R. O'BRIEN - -------------------------------------- Kenneth R. O'Brien Director POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned officer of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ SAMUEL H. PILCH - -------------------------------------- Samuel H. Pilch Controller and Group Vice President POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ JOHN C. PINTOZZI - -------------------------------------- John C. Pintozzi Director, Vice President, and Chief Financial Officer POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ JOHN R. RABEN, JR. - -------------------------------------- John R. Raben, Jr. Director POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone) as her true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ PHYLLIS H. SLATER - -------------------------------------- Phyllis H. Slater Director POWER OF ATTORNEY WITH RESPECT TO ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK (REGISTRANT) The undersigned director of Allstate Life Insurance Company of New York constitutes and appoints Susan L. Lees and John C. Pintozzi and each of them (with full power to each of them to act alone) as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign this Form S-1 registration statement of Allstate Life Insurance Company of New York, as registrant, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 7, 2010 /s/ MATTHEW E. WINTER - -------------------------------------- Matthew E. Winter Director, Chairman, President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----