-----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, J6XU3zLPWlHJ9agzW8dU7a4wj8KpcN8+5P75G3fgj2CBDaQQkLqEByoh+fpldEkS Z/Naa5P9dpApRku2K7p0GA== 0000945094-02-000125.txt : 20020415 0000945094-02-000125.hdr.sgml : 20020415 ACCESSION NUMBER: 0000945094-02-000125 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHBROOK LIFE INSURANCE CO CENTRAL INDEX KEY: 0000716791 IRS NUMBER: 363001527 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-39268 FILM NUMBER: 02593519 BUSINESS ADDRESS: STREET 1: 3100 SANDERS RD STREET 2: PO BOX 3005 CITY: NORTHBROOK STATE: IL ZIP: 60062 BUSINESS PHONE: 7084025000 MAIL ADDRESS: STREET 1: 3100 SANDERS RD CITY: NORTHBROOK STATE: IL ZIP: 60062 10-K405 1 nlicfin01.txt NORTHBROOK LIFE INSURANCE COMPANY UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------- FORM 10-K The Registrant meets the conditions set forth in General Instruction I(1)(a) and(b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 333-58520 NORTHBROOK LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) ARIZONA 36-3001527 (State of Incorporation) (I.R.S. Employer Identification No.) 3100 SANDERS ROAD NORTHBROOK, ILLINOIS 60062 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 847/402-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_| INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILIERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES |X| NO |_| AS OF MARCH 29, 2002, THERE WERE 25,000 SHARES OF COMMON STOCK OUTSTANDING, PAR VALUE $100 PER SHARE, ALL OF WHICH SHARES ARE HELD BY ALLSTATE LIFE INSURANCE COMPANY. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business* 2 Item 2. Properties* 3 Item 3. Legal Proceedings 3 Item 4. Submission of Matters to a Vote of Security Holders** N/A PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 3 Item 6. Selected Financial Data** N/A Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 4 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant** N/A Item 11. Executive Compensation** N/A Item 12. Security Ownership of Certain Beneficial Owners and Management** N/A Item 13. Certain Relationships and Related Transactions** N/A PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15 Signatures 16 Index to Financial Statements 18
* Item prepared in accordance with General Instruction I(2) of Form 10-K. **Omitted pursuant to General Instruction I(2) of Form 10-K. PART I ITEM 1. BUSINESS Northbrook Life Insurance Company ("Northbrook Life" or the "Company") is a stock life insurance company originally organized under the laws of the State of Illinois in 1978. In 1998, the Company was redomesticated to the State of Arizona. Since its inception, the Company has done business continuously as "Northbrook Life Insurance Company." Northbrook Life is a wholly owned subsidiary of Allstate Life Insurance Company ("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 incorporated under the laws of the State of Illinois. All of the outstanding capital stock of AIC is owned by The Allstate Corporation (the "Corporation"), a Delaware company which has several different classes of securities, including common stock, registered with the Securities and Exchange Commission. Northbrook Life, a single segment entity, markets a diversified group of products to meet consumer's lifetime needs in the areas of protection and retirement solutions exclusively through Morgan Stanley DW, Inc. ("MSDW"). MSDW, a registered broker-dealer under the Securities Exchange Act of 1934, is a subsidiary of Morgan Stanley Dean Witter & Co. These products include interest-sensitive life, including single premium life and variable life; fixed annuities including market value adjusted annuities; immediate annuities; and variable annuities. MSDW, along with its various insurance agency affiliates, also serves as the general agent for the sale of Northbrook's insurance products. Approximately 15,000 MSDW Financial Advisors have been appointed by Northbrook to sell its products. MSDW Financial Advisors are employees of MSDW. Northbrook Life and ALIC entered into reinsurance agreements, effective December 31, 1987, under which Northbrook Life reinsures substantially all of its business with ALIC. Under these agreements, premiums, contract charges, credited interest, policy benefits and certain expenses under substantially all general account contracts are reinsured with ALIC. ALIC is bound to stand behind the Company's contractual obligations to its policyholders. However, the obligations of ALIC under the reinsurance agreements are to the Company. The Company continues to have primary liability as the direct insurer for risks reinsured. In addition, assets of the Company that relate to insurance in-force, excluding Separate Accounts assets, are transferred to ALIC. Therefore, the funds necessary to support the operations of the Company are provided by ALIC and the Company is not required to obtain additional capital to support in-force or future business. Under the Company's reinsurance agreements with ALIC, the Company reinsures substantially all reserve liabilities with ALIC. The assets which support these liabilities are owned and managed by ALIC. The assets and liabilities of the variable contracts are held in legally-segregated, unitized Separate Accounts and are retained by the Company. Contract charge revenue is reinsured to ALIC and consists of charges assessed against the account values of the Separate Accounts. Northbrook Life's and ALIC's general account assets must be invested in accordance with applicable state laws. These laws govern the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. Northbrook Life is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities competing in the sale of insurance and annuities. As of December 2000, the last year for which current information is available, there were approximately 1,400 stock, mutual and other types of insurers in business in the United States. Several independent rating agencies regularly evaluate life insurer's claims paying ability, quality of investments and overall stability. A.M. Best Company has assigned A+ (Superior) to ALIC, which automatically reinsures all net business of Northbrook Life. A.M. Best Company also has assigned Northbrook Life the rating of A+(r) because Northbrook Life automatically reinsures substantially all business with ALIC. Standard & Poor's Insurance Rating Services has assigned AA+ (very strong) to the Company's claims-paying ability, and Moody's Investors Service has assigned an Aa2 (excellent) financial strength rating to the Company. Northbrook Life shares the same ratings of its parent, ALIC. In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings. Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and affiliates to "negative" from "stable". This revision is part of an ongoing life insurance industry review recently initiated by Standard & Poor's. Moody's and A.M. Best reaffirmed its ratings and outlook for the Company and ALIC. 2 The Company's business is subject to the effects of a changing social, economic and regulatory environment. State and federal regulatory initiatives have varied and have included employee benefit regulations, removal of barriers preventing banks from engaging in the securities and insurance businesses, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles, and the overall expansion of regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. Northbrook Life is registered with the Securities and Exchange Commission ("SEC") as an issuer of registered products. The SEC also regulates certain Northbrook Life Separate Accounts that issue variable life contracts or, together with the Company, issue variable annuity contracts. ITEM 2. PROPERTIES Northbrook Life occupies office space provided by AIC in Northbrook, Illinois. Expenses associated with these offices are allocated to Northbrook Life. ITEM 3. LEGAL PROCEEDINGS The Company and its Board of Directors know of no material legal proceedings pending to which the Company is a party or which would materially affect the Company. The Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate the ultimate liability arising from such pending or threatened litigation to have a material effect on the financial position or results of operations of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's outstanding shares of common stock are owned by its parent, ALIC. ALIC's outstanding shares are owned directly or indirectly by AIC. All of the outstanding shares of AIC are owned by the Corporation. 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL POSITION OF NORTHBROOK LIFE INSURANCE COMPANY (THE "COMPANY"). IT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES. TO CONFORM WITH THE 2001 PRESENTATION, CERTAIN PRIOR YEAR AMOUNTS HAVE BEEN RECLASSIFIED. CRITICAL ACCOUNTING POLICIES In response to the Securities and Exchange Commission's ("SEC") release "Cautionary Advice Regarding Disclosure about Critical Accounting Policies", the Company identified critical accounting policies by considering policies that involve the most complex or subjective judgments or assessments. The Company has identified three policies as critical accounting policies because they involve a higher degree of judgment and complexity. A brief summary of each critical accounting policy follows. For a more complete discussion of the judgments and other factors affecting the measurement of these items, see the referenced sections of Management's Discussion and Analysis ("MD&A"). - INVESTMENTS -All fixed income securities are carried at fair value and may be sold prior to their contractual maturity ("available for sale"). The difference between the amortized cost of fixed income securities and fair value, net of deferred income taxes, is reflected as a component of Shareholder's equity. The Company closely monitors its fixed income portfolios for declines in value that are other than temporary. Securities are placed on non-accrual status when they are in default or when timing or receipt of principal or interest payments are in doubt. Provisions for losses are recognized for declines in the value of fixed income securities that are deemed to be other than temporary. Such write-downs are included in Realized capital gains and losses. - LIFE INSURANCE RESERVES AND CONTRACTHOLDER FUNDS - Reserves for life-contingent contract benefits, which relate to immediate annuities with life contingencies are computed on the basis of long-term actuarial assumptions as to future investment yields, mortality, morbidity, terminations and expenses. These assumptions include provisions for adverse deviation and generally vary by such characteristics as type of coverage, year of issue and policy duration. Contractholder funds arise from the issuance of contracts that include an investment component, including fixed annuities, interest-sensitive life policies and other investment contracts. Deposits received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses. The Company reinsures substantially all reserve liabilities with Allstate Life Insurance Company ("ALIC"). - REINSURANCE RECOVERABLE - The Company has reinsurance agreements whereby substantially all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC. Reinsurance does not extinguish the Company's primary liability under the policies written. The Company also discloses its significant accounting policies in Note 2 to the financial statements. OVERVIEW The Company, a wholly owned subsidiary of ALIC, which is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"), markets a diversified group of products to meet consumer's lifetime needs in the area of protection and retirement solutions exclusively through Morgan Stanley DW, Inc., a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. Northbrook Life Insurance Company's products include interest-sensitive life, including single premium life and variable life; fixed annuities including market value adjusted annuities; immediate annuities; and variable annuities. The Company has identified itself as a single segment entity. 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
(IN THOUSANDS) 2001 2000 1999 --------- --------- --------- Net investment income $ 6,098 $ 6,802 $ 6,010 Realized capital gains and losses 95 (230) 510 Income tax expense 2,159 2,293 2,264 --------- --------- --------- Net income $ 4,034 $ 4,279 $ 4,256 ========= ========= =========
The Company has reinsurance agreements under which substantially all contract and policy related transactions are transferred to ALIC. The Company's results of operations include only net investment income and realized capital gains and losses earned on the assets of the Company that are not transferred under reinsurance agreements. Net income in 2001 decreased 5.7% to $4.0 million compared to $4.3 million in 2000 due to the decrease in net investment income partially offset by the increase in realized capital gains from the sale of fixed income securities. In 2000, net income was comparable to 1999 as the increase in net investment income was offset by realized capital losses. Net investment income decreased 10.3% to $6.1 million in 2001 compared to 2000 due to lower investment balances, excluding unrealized gains and losses, and lower yields. In 2000, net investment income increased 13.2% to $6.8 million compared to 1999 due to higher investment balances and higher yields. Investments, excluding Separate Accounts and unrealized gains and losses on fixed income securities, decreased 1.0% and increased 2.8% in 2001 and 2000, respectively. The Company expects to experience lower investment yields due, in part, to the reinvestment of proceeds from calls and maturities in securities yielding less than the average portfolio rate. Realized capital gains, after-tax, were $62 thousand in 2001 compared to realized capital losses, after-tax, of $150 thousand and $332 thousand in 2000 and 1999, respectively. In 2001, 2000 and 1999, realized capital gains and losses resulted from the sale of corporate bonds. Period to period fluctuations in realized capital gains and losses are the result of timing of sales decisions reflecting management's decision on positioning the portfolio, assessments of individual securities, overall market conditions and write-downs when an assessment is made by the Company that a decline in value of a security is other than temporary. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL POSITION
2001 2000 ------------- ------------- (IN THOUSANDS) Fixed income securities (1) $ 91,969 $ 93,030 Short-term 5,746 3,859 ------------- ------------- Total investments $ 97,715 $ 96,889 ============= ============= Reinsurance recoverable from ALIC $ 2,046,987 $ 1,975,150 ============= ============= Contractholder funds $ 1,896,647 $ 1,826,062 ============= ============= Reserves for life-contingent contract benefits $ 150,349 $ 149,111 ============= ============= Separate Accounts assets and liabilities $ 6,236,902 $ 7,614,673 ============= =============
(1) Fixed income securities are carried at fair value. Amortized cost for these securities was $88.3 million and $91.1 million at December 31, 2001 and 2000, respectively. Total investments were $97.7 million at December 31, 2001 compared to $96.9 million at December 31, 2000. In 2001, the decrease in fixed income securities due to sales was more than offset by an increase in unrealized capital gains and short-term investments. FIXED INCOME SECURITIES The Company's fixed income securities portfolio consists of publicly traded corporate bonds, U.S. government bonds, mortgage-backed securities, privately placed corporate obligations, taxable and tax-exempt municipal bonds and foreign government bonds. The Company generally holds its fixed income securities to maturity, but has classified all of these securities as available for sale to allow maximum flexibility in portfolio management. At December 31, 2001 unrealized net capital gains on fixed income securities were $3.7 million compared to $1.9 million at December 31, 2000. The increase in the unrealized capital gain position is primarily attributable to interest rate fluctuations from year to year. As of December 31, 2001, 99.5% of the fixed income securities portfolio was invested in taxable securities. The Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC") evaluates the fixed income securities investments of insurers for regulatory reporting purposes and assigns securities to one of six investment categories called "NAIC designations." The NAIC designations parallel the credit ratings of the Nationally Recognized Statistical Rating Organizations for marketable securities. NAIC designations 1 and 2 include securities considered investment grade (rated "Baa3" or higher by Moody's, or rate "BBB-" or higher by Standard & Poor's ("S&P")) by such rating organizations. NAIC designations 3 through 6 include securities considered below investment grade (rated "Ba1" or lower by Moody's, or rated "BB+" or lower by S&P). At December 31, 2001, substantially all of the Company's fixed income securities portfolio was rated investment grade, which is defined by the Company as a security having a NAIC rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating. The quality mix of the Company's fixed income securities portfolio at December 31, 2001 is presented in the following table:
(IN THOUSANDS) NAIC RATINGS MOODY'S EQUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL ------- ------------------------------ ---------- ---------------- 1 Aaa/Aa/A $ 74,677 81.2% 2 Baa 16,270 17.7 3 Ba 1,022 1.1 --------- --------- $ 91,969 100.0% ========= =========
As of December 31, 2001, the fixed income securities portfolio contained $1.7 million of privately placed corporate obligations. There were no investments in such securities at December 31, 2000. The benefits of privately placed securities as compared to public securities are generally higher yields, improved cash flow predictability through pro-rata sinking funds on many 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS bonds, and a combination of covenant and call protection features designed to better protect the holder against losses resulting from credit deterioration, reinvestment risk and fluctuations in interest rates. A relative disadvantage of privately placed securities as compared to public securities is relatively reduced liquidity. At December 31, 2001, 100% of the privately placed securities were rated as investment grade by either the NAIC or the Company's internal ratings. The Company determines the fair value of privately placed fixed income securities based on discounted cash flows using current interest rates for similar securities. At December 31, 2001 and 2000, $14.3 million and $20.2 million, respectively, of the fixed income securities portfolio was invested in mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of securities that were issued by or have underlying collateral that is guaranteed by U.S. government agencies. Therefore, the MBS portfolio has relatively low credit risk. The Company closely monitors its fixed income securities portfolios for rating changes or other declines in value that are other than temporary. Securities are placed on non-accrual status when they are in default or when the timing or receipt of principal or interest payments are in doubt. SHORT-TERM INVESTMENTS The Company's short-term investment portfolio was $5.7 million and $3.9 million at December 31, 2001 and 2000, respectively. The Company invests available cash balances primarily in taxable short-term securities having a final maturity date or redemption date of one year or less. REINSURANCE RECOVERABLE FROM ALIC, CONTRACTHOLDER FUNDS AND RESERVES FOR LIFE-CONTINGENT CONTRACT BENEFITS Under accounting principles generally accepted in the United States of America ("GAAP"), when reinsurance contracts do not relieve the ceding company of legal liability to policyholders, the ceding company is required to report reinsurance recoverables arising from these contracts separately as assets. The liabilities for the contracts are reported as contractholder funds or reserves for life-contingent contract benefits, depending on the characteristics of the contracts. Under the reinsurance agreements with ALIC, substantially all policyholder obligations are reinsured to ALIC. At December 31, 2001, Contractholder funds increased to $1.90 billion from $1.83 billion at December 31, 2000 as the result of additional fixed annuity deposits and credited interest partially offset by surrenders and withdrawals. Reserves for life-contingent contract benefits increased $1.2 million to $150.3 million at December 31, 2001 resulting from increased sales of immediate annuity contracts with life contingencies partially offset by benefits paid. Reinsurance recoverable from ALIC increased correspondingly by $71.8 million due to the increase in policyholder obligations discussed above. SEPARATE ACCOUNTS Separate Accounts assets and liabilities decreased 18.1% to $6.24 billion in 2001. The decrease was primarily attributable to unfavorable investment performance of the Separate Accounts' investment portfolios which more than offset sales of variable annuity contracts. The assets and liabilities related to variable contracts are legally segregated and reflected as Separate Accounts. The assets of the Separate Accounts are carried at fair value. Separate Accounts liabilities represent the contractholders' claims to the related assets and are carried at the fair value of the 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. Revenues to the Company from the Separate Accounts consist of contract maintenance and administration fees and mortality, surrender and expense charges and are ceded to ALIC. Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death or annuitization, variable annuity and variable life contractholders bear the investment risk that the Separate Accounts' funds may not meet their stated objectives. MARKET RISK Market risk is the risk that the Company will incur losses due to adverse changes in equity prices or interest rates. The Company's primary market risk exposure is to changes in interest rates, although the Company also has certain exposures to changes in equity prices. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CORPORATE OVERSIGHT The Company administers and oversees investment risk management processes primarily through its Board of Directors and the Credit and Risk Management Committee ("CRMC"). The Board of Directors provides executive oversight of investment activities. The CRMC is a senior investment management committee consisting of the Chief Investment Officer, the Investment Risk Manager, and other investment officers who are responsible for the day-to-day management of investment risk. The CRMC meets at least monthly to provide detailed oversight of investment risk, including market risk. The Company has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. In addition, the Company has a specific Board of Directors-approved investment policy delineating the investment limits and strategies that are appropriate for the Company's liquidity, surplus, product and regulatory requirements. The day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by the investment policy. The Company has implemented a comprehensive daily measurement process, administered by the Investment Risk Manager, for monitoring compliance to limits established by the investment policy. INTEREST RATE RISK Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates, as the Company invests substantial funds in interest-sensitive assets. One of the measures used to quantify this exposure is duration. Duration measures the sensitivity of the fair value of assets to changes in interest rates. For example, if interest rates increase by 1%, the fair value of an asset with a duration of 5 is expected to decrease in value by approximately 5%. At December 31, 2001, the Company's asset duration was approximately 4.6, versus 4.4 at December 31, 2000. To calculate duration, the Company projects asset cash flows, and discounts them to a net present value basis using a risk-free market rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates, and determining the percentage change in fair value from the base case. The projections include assumptions (based upon historical market experience and Company specific experience) reflecting the impact of changing interest rates on the prepayment and/or option features of instruments, where applicable. Such assumptions relate primarily to mortgage-backed securities, collateralized mortgage obligations, and municipal and corporate obligations. Based upon the information and assumptions the Company uses in its duration calculation and interest rates in effect at December 31, 2001, management estimates that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would decrease the net fair value of its assets identified above by approximately $4.2 million, the same amount reported at December 31, 2000. The selection of a 100 basis point immediate parallel increase in interest rates should not be construed as a prediction by the Company's management of future market events, but only as an illustration of the potential impact of such an event. To the extent that actual results differ from the assumptions utilized, the Company's duration and rate shock measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. EQUITY PRICE RISK Equity price risk is the risk that the Company will incur economic losses due to adverse changes in a particular stock, stock fund or stock index. At December 31, 2001, the Company had Separate Accounts assets totaling $6.24 billion. This is a decrease from the $7.61 billion of Separate Accounts assets at December 31, 2000. The Company earns mortality and expense fees as a percentage of account value in the Separate Accounts. In the event of an immediate decline of 10% in the account values due to equity market declines, the Company would earn approximately $9.5 million less in annualized fee income, which would be ceded to ALIC. This is a slight decrease from the $10.6 million amount determined at December 31, 2000. The contractholder of a variable annuity product may elect to purchase a minimum death benefit guarantee or a minimum income benefit guarantee, generally at the time of purchase. Both guarantees may subject the Company to additional equity price risk, as the beneficiary or contractholder may receive their benefit for 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS an amount greater than the fund balance under contractually defined circumstances and terms. These guarantees are ceded to ALIC. The Company expects growth in its variable annuity products in the future, stemming from both new sales as well as market value appreciation, which will increase the Company's, as well as ALIC's, exposure to equity price risk. CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES The Company's capital resources consist of shareholder's equity. The following table summarizes the capital resources for the year ended December 31:
(IN THOUSANDS) 2001 2000 1999 ---------- ---------- ---------- Common stock and retained income $ 93,009 $ 88,975 $ 88,696 Accumulated other comprehensive income (loss) 2,409 1,228 (1,435) ---------- ---------- ---------- Total shareholder's equity $ 95,418 $ 90,203 $ 87,261 ========== ========== ==========
SHAREHOLDER'S EQUITY Shareholder's equity increased for 2001 and 2000 due to Net income and increased Unrealized net capital gains. DEBT The Company had no outstanding debt at December 31, 2001 and 2000, respectively. The Company has entered into an intercompany loan agreement with the Corporation. The amount of funds 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. No amounts were outstanding for the Company under the intercompany loan agreement at December 31, 2001 and 2000, respectively. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings. FINANCIAL RATINGS AND STRENGTH Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies and, generally, may be expected to have an effect on an insurance company's sales. On an ongoing basis, rating agencies review the financial performance and condition of insurers. A downgrade, while not expected, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's current financial strength ratings are dependent on ALIC's financial strength ratings and are listed below:
RATING AGENCY RATING RATING STRUCTURE Aa2 Second highest of nine ratings categories Moody's Investors Service, Inc. ("Excellent") and mid-range within the category based on modifiers (e.g., Aa1, Aa2 and Aa3 are "Excellent") AA Second highest of nine ratings categories Standard & Poor's Ratings Services ("Very Strong") and highest within the category based on modifiers (e.g., AA+, AA and AA- are "Very Strong") A.M. Best Company, Inc. A+ Highest of nine ratings categories and ("Superior") second highest within the category based on modifiers (e.g., A++ and A+ are "Superior" while A and A- are "Excellent")
In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings. Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and affiliates to "negative" from "stable". This revision is part of an ongoing life insurance industry 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS review recently initiated by Standard & Poor's. Moody's and A.M. Best reaffirmed its ratings and outlook for the Company and ALIC. The NAIC has a standard for assessing the solvency of insurance companies, which is referred to as risk-based capital ("RBC"). The standard is based on a formula for determining each insurer's RBC and a model law specifying regulatory actions if an insurer's RBC falls below specified levels. The RBC formula, which regulators use to assess the sufficiency of an insurer's capital, measures the risk characteristics of a company's assets, liabilities and certain off-balance sheet items. RBC is calculated by applying factors to various asset, premium and liability items. Within a given risk category, these factors are higher for those items with greater underlying risk and lower for items with lower underlying risk. At December 31, 2001, the Company's RBC was significantly above levels that would require regulatory actions. 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 action from insurance regulatory authorities. The NAIC analyzes data provided by insurance companies using prescribed financial data 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. The Company is currently not under regulatory scrutiny based on these ratios. LIQUIDITY The primary sources of funds for the Company are collection of principal and interest from the investment portfolio, capital contributions from ALIC and intercompany loans from the Corporation. The primary uses of these funds are to purchase investments, pay costs associated with the maintenance of the Company's investment portfolio, income taxes, dividends to ALIC and the repayment of intercompany loans from the Corporation. Under the terms of reinsurance agreements, substantially all premiums and deposits, excluding those relating to Separate Accounts, are transferred to ALIC, which maintains the investment portfolios supporting the Company's products. Substantially all payments of policyholder claims, benefits, contract maturities, contract surrenders and withdrawals and certain operating costs are also reimbursed by ALIC, under the terms of the reinsurance agreements. The Company continues to have primary liability as a direct insurer for risks reinsured. The Company's ability to meet liquidity demands on the reinsured products is dependent on ALIC's ability to meet those demands. 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 by Arizona law to formula amounts based on statutory surplus and statutory net gain from operations, as well as the timing and amount of dividends paid in the preceding twelve months. The maximum amount of dividends that the Company can distribute during 2002 without prior approval of the Arizona Department of Insurance is $4.1 million. The Company did not pay any dividends for the year ending December 31, 2001. In December of 2000, the Company paid a cash dividend of $4.0 million to ALIC. REGULATION AND LEGAL PROCEEDINGS The Company's business is subject to the effects of a changing social, economic and regulatory environment. State and federal initiatives have varied and have included employee benefit regulations, removal of barriers preventing banks from engaging in the securities and insurance businesses, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles and the overall expansion of regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. From time to time, the Company is involved in pending and threatened litigation in the normal course of business in which claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, in one or more of these actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company. STATE INSURANCE REGULATION State insurance authorities have broad administrative powers with respect to all aspects of the life insurance business including: - Licensing to transact business - Licensing agents 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Admittance of assets to support statutory surplus - Approving policy forms - Regulating unfair trade and claims practices - Establishing reserve requirements and solvency standards - Regulating the type, amounts and valuations of investments permitted and other matters State insurance laws require the Company to file financial statements with insurance departments in all states in which the Company does business. The operations of the Company and the accounts are subject to examination by those departments at any time. The Company prepares statutory financial statements in accordance with accounting practices and procedures prescribed or permitted by these departments. State insurance departments conduct periodic examinations of the books and records, financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other states under guidelines promulgated by the NAIC. MARKET CONDUCT REGULATION State insurance laws and regulations include numerous provisions governing the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. FEDERAL REGULATION AND SECURITIES OPERATIONS The Company's variable annuity and variable life insurance products generally are considered securities within the meaning of federal and state securities laws and are registered under the Securities Act of 1933 and are subject to regulation by the SEC, the National Association of Securities Dealers ("NASD") and state securities regulations. The Company's Separate Accounts are registered as investment companies under the Investment Company Act of 1940. 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 a particular state. The Company's expenses related to these funds are immaterial and are ceded to ALIC under reinsurance agreements. PENDING ACCOUNTING STANDARDS In December 2001, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 01-6, "Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others", which is effective for interim and annual financial statements issued for the fiscal year beginning after December 15, 2001. The SOP conforms accounting and financial reporting practices for certain lending and financing activities, eliminating various specialized accounting practices that developed from the issuance of AICPA finance company, bank, and credit union audit guides. The SOP also explicitly incorporates lending and financing activities of insurance companies within its scope. The Company's adoption of SOP 01-6 is not expected to have a material effect on the results of operations or financial position. FORWARD-LOOKING STATEMENTS AND RISK FACTORS This document contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," "intends," "believes," "likely," and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Forward-looking statements are based on management's current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate. However, we believe that our forward-looking statements are based on reasonable, current expectations and assumptions. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments. If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS arise, actual results could differ materially from those communicated in these forward-looking statements. In addition to the normal risks of business, the Company is subject to significant risk factors, including those listed below which apply to it as an insurance business and a provider of other financial services. - - In December 2001, the NAIC announced that it reached an agreement regarding the wording of insurance policy exclusions for acts of terrorism for commercial lines. In January 2002, the NAIC issued the following statement, "It is the sense of NAIC membership that terrorism exclusions are generally not necessary in personal lines property and casualty products to maintain a competitive market, and they may violate state law. However we recognize that state laws vary in their authority and discretion. Further, there may be unique company circumstances that need to be considered in individual cases. We expect these cases to be limited." In addition, several states have announced that they will not approve terrorism exclusions for personal and/or commercial lines of property and casualty insurance. Currently, the Corporation is examining the potential exposure in any of its insurance operations from acts of terrorism. The Corporation is also examining how best to address this exposure, if any, considering the interests of policyholders, shareholders, the lending community, regulators and others. The Company generally does not have exclusions for terrorist events included in its life insurance policies. In the event that a terrorist act occurs, the Company may be adversely impacted, depending on the nature of the event. With respect to the Company's investment portfolio, in the event that commercial insurance coverage for terrorism becomes unavailable or very expensive, there could be significant adverse impacts on some portion of the Company's portfolio, particularly in sectors such as airlines and real estate. For example, certain debt obligations might be adversely affected due to the inability to obtain coverage to restore the related real estate or other property, thereby creating the potential for increased default risk. - - Changes in market interest rates can have adverse effects on the Company's investment portfolio and investment income. Increases in market interest rates have an adverse impact on the value of the investment portfolio by decreasing unrealized capital gains on fixed income securities. In addition, increases in market interest rates as compared to rates offered on some of the Company's products could make those products less attractive and lead to lower sales and/or increase the level of surrenders on these products. Declining market interest rates could have an adverse impact on the Company's investment income as the Company reinvests proceeds from positive cash flows from operations and proceeds from maturing and called investments into new investments that could be yielding less than the portfolio's average rate. - - The impact of decreasing Separate Accounts balances as a result of volatile market conditions could cause contract charges realized by the Company, as well as ALIC, to decrease and increase the exposure to guaranteed minimum income and death benefits. - - In order to manage interest rate risk, from time to time the Company adjusts the effective duration of the assets of the investment portfolio. Those adjustments may have an impact on the value of the investment portfolio and on investment income. - - The Company amortizes DAC related to contractholder funds in proportion to gross profits over the estimated lives of the contract periods. Periodically, the Company updates the assumptions underlying the gross profits, which include estimated future fees, investment margins and expense margins, in order to reflect actual experience. Updates to these assumptions result in adjustments to the cumulative amortization of DAC. These adjustments may have a material effect on results of operations. DAC and any related adjustments are ceded to ALIC. - - It is possible that the assumptions and projections used by the Company in establishing prices for the guaranteed minimum death benefits and guaranteed minimum income benefits on variable annuities, particularly assumptions and projections about investment performance, do not accurately anticipate the level of costs that the Company will ultimately incur and cede to ALIC in providing those benefits. - - Management believes the reserves for life-contingent contract benefits are adequate to cover ultimate policy benefits, despite the underlying risks and uncertainties associated with their determination when payments will not occur until well into the future. Reserves are based on many assumptions and estimates, including estimated premiums received over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of benefits on claims to be paid and the investment returns on the assets purchased with the premium received. The Company periodically reviews and revises its estimates. If future experience differs from assumptions, it may have a material impact on results of operations ceded to ALIC. - - Under current U.S. tax law and regulations, deferred and immediate annuities and life insurance, including interest-sensitive products, receive favorable policyholder tax treatment. Any legislative or regulatory changes that adversely alter this treatment are likely to negatively affect the demand for these products. In addition, recent changes in the federal estate tax laws will affect the demand for the types of life insurance used in estate planning. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - The Company distributes its products under an agreement with another member of the financial services industry that is not affiliated with the Company. Termination of this agreement due to, for example, changes in control of this entity could have a detrimental effect on the Company's sales. This risk may be exacerbated by the enactment of the Gramm-Leach-Bliley Act of 1999, which eliminated many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers. - - The Corporation's liquidity could be significantly constrained by a catastrophe which results in extraordinary losses, a downgrade of the Corporation's current long-term debt rating of A1 and A+ (from Moody's and Standard & Poor's, respectively) to non-investment grade status of below Baa3/BBB-, a downgrade in AIC's financial strength rating from Aa2, AA and A+ (from Moody's Standard & Poor's and A.M. Best, respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard & Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a downgrade of the Corporations' rating, ALIC and its subsidiaries would also experience a similar downgrade. - - In the wake of the September 11 attack on the World Trade Center in New York City and the Pentagon in Washington D.C. and the plane crash in Pennsylvania, the resulting disruption in the financial markets revealed weaknesses in the physical and operational infrastructure that underlies the U.S. and worldwide financial systems. Those weaknesses did not impair the Company's liquidity in the wake of September 11. However, if an event of similar or greater magnitude occurs in the future and if the weaknesses in the physical and operational infrastructure of the U.S. and worldwide financial systems are not remedied, the Company could encounter significant difficulties in transferring funds, buying and selling securities and engaging in other financial transactions that support its liquidity. - - State insurance regulatory authorities require insurance companies to maintain specified levels of statutory capital and surplus. In addition, competitive pressures require the Company to maintain financial strength ratings. These restrictions affect the Company's ability to pay shareholder dividends and to use its capital in other ways. - - Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies and may be expected to have an effect on an insurance company's sales. On an ongoing basis, rating agencies review the financial performance and condition of insurers. A downgrade of either the Company or ALIC, while not expected, could have a material adverse effect on the Company's business, including the competitiveness of the Company's product offerings, its ability to market products, and its financial condition and results of operations. - - Following enactment of the Gramm-Leach-Bliley Act of 1999, federal legislation that allows mergers that combine commercial banks, insurers and securities firms, state insurance regulators have been collectively participating in a reexamination of the regulatory framework that currently governs the United States insurance business in an effort to determine the proper role of state insurance regulation in the U. S. financial services industry. We cannot predict whether any state or federal measures will be adopted to change the nature or scope of the regulation of the insurance business or what affect any such measures would have on the Company. - - The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had limited the ability of banks to engage in securities-related businesses and the Bank Holding Company Act of 1956 had restricted banks from being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, bank holding companies may acquire insurers and insurance holding companies may acquire banks. In addition, grand-fathered unitary thrift holding companies, including the Allstate Corporation, may engage in activities that are not financial in nature. The ability of banks to affiliate with insurers may materially adversely affect all of the Company's product lines by substantially increasing the number, size and financial strength of potential competitors. - - In some states, mutual insurance companies can convert to a hybrid structure known as a mutual holding company. This process converts insurance companies owned by their policyholders to become stock insurance companies owned (through one or more intermediate holding companies) partially by their policyholders and partially by stockholders. Also some states permit the conversion of mutual insurance companies into stock insurance companies (demutualization). The ability of mutual insurance companies to convert to mutual holding companies or to demutualize may materially adversely affect all of our product lines by substantially increasing competition for capital in the financial services industry. 13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The pertinent provisions of Management's Discussion and Analysis of Financial Condition and Results of Operations are herein incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disclosure is required by this Item. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report 1. Financial Statements. The Registrant's financial statements, as of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999, together with the Report of Independent Accountants, are set forth on pages F-1 to F-16 of this report. 2. Financial Statement Schedules. The following is included in Part IV of this report: Schedule IV - Reinsurance: page F-17 All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto. 3. Exhibits. The exhibits required to be filed by Item 601 of Regulation S-K are listed under the caption "Exhibits" in Item 14(c). (b) Reports on Form 8-K No reports on Form 8-K were filed for the year ended December 31, 2001. (c) Exhibits
---------------------------------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 3(i) Amended and Restated Articles of Incorporation and Articles of Redomestication of 3(i) Northbrook Life Insurance Company (previously filed in Form 10-K, dated March 30, 1999) ---------------------------------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 3(ii) Amended and Restated By-laws of Northbrook Life Insurance Company (previously filed in form 10-K, dated March 30, 1999) ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 10.1 Form of General Agency Agreement dated as of October 1, 1993 between Northbrook Life Insurance Company and Morgan Stanley DW, Inc. (formerly Dean Witter Reynolds, Inc.). Incorporated herein by reference to Exhibit 3(B) to Post-Effective Amendment No. 13 to Registration Statement No. 33-35412. ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- Service and Expense Agreement among Allstate Insurance Company and The Allstate 10.2 Corporation and Certain Insurance Subsidiaries. ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- 10.3 Investment management agreement and amendment to certain service and expense agreements among Allstate Investments, LLC and Allstate Insurance Company and the Allstate Corporation and certain affiliates effective as of January 1, 2002. ---------------------------------------------------------------------------------------------------------- 23 Independent Auditor's Consent ----------------------------------------------------------------------------------------------------------
15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHBROOK LIFE INSURANCE COMPANY /s/ THOMAS J. WILSON, II By: ------------------------ Thomas J. Wilson, II President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 28, 2002 --------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ THOMAS J. WILSON, II ------------------------ Thomas J. Wilson, II President, Chief Executive Officer and Director (Principal Executive Officer) Date: March 28, 2002 ------------------ By: /s/ STEVEN E. SHEBIK -------------------- Steven E. Shebik Vice President and Director (Principal Financial Officer) Date: March 28, 2002 ------------------ By: /s/ SAMUEL H. PILCH ------------------- Samuel H. Pilch Vice President and Controller (Principal Accounting Officer) Date: March 28, 2002 ------------------ By: /s/ MICHAEL J. VELOTTA ---------------------- Michael J. Velotta Vice President, Secretary, General Counsel and Director Date: March 28, 2002 ------------------ By: /s/ MARLA G. FRIEDMAN --------------------- 16 Marla G. Friedman Vice President and Director Date: March 28, 2002 ------------------ By: /s/ MARGARET G. DYER ------------------- Margaret G. Dyer Director Date: March 28, 2002 ------------------ By: /s/ JOHN C. LOUNDS ----------------- John C. Lounds Director Date: March 28, 2002 ------------------ By: /s/ J. KEVIN MCCARTHY --------------------- J. Kevin McCarthy Director Date: March 28, 2002 ------------------ 17 Financial Statements INDEX
PAGE ---- Independent Auditors' Report F-1 Financial Statements: Statements of Operations and Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999 F-2 Statements of Financial Position December 31, 2001 and 2000 F-3 Statements of Shareholder's Equity for the Years Ended December 31, 2001, 2000 and 1999 F-4 Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 F-5 Notes to Financial Statements F-6 Schedule IV- Reinsurance for the Years Ended December 31, 2001, 2000 and 1999 F-17
18 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF NORTHBROOK LIFE INSURANCE COMPANY: - -------------------------------------------------------------------------------- We have audited the accompanying Statements of Financial Position of Northbrook Life Insurance Company (the "Company", an affiliate of The Allstate Corporation) as of December 31, 2001 and 2000, 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, 2001. Our audits also included Schedule IV--Reinsurance. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Schedule IV--Reinsurance, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Chicago, Illinois February 20, 2002 F-1 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- (IN THOUSANDS) REVENUES Net investment income..................................... $6,098 $6,802 $6,010 Realized capital gains and losses......................... 95 (230) 510 ------ ------ ------ INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE............ 6,193 6,572 6,520 Income Tax Expense.......................................... 2,159 2,293 2,264 ------ ------ ------ NET INCOME.................................................. 4,034 4,279 4,256 ------ ------ ------ OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX Change in unrealized net capital gains and losses......... 1,181 2,663 (4,802) ------ ------ ------ COMPREHENSIVE INCOME (LOSS)................................. $5,215 $6,942 $ (546) ====== ====== ======
See notes to financial statements. F-2 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ------------------------- 2001 2000 ----------- ----------- (IN THOUSANDS, EXCEPT PAR VALUE DATA) ASSETS Investments Fixed income securities, at fair value (amortized cost $88,263 and $91,141)..................................... $ 91,969 $ 93,030 Short-term................................................ 5,746 3,859 ---------- ---------- Total investments......................................... 97,715 96,889 Receivable from affiliates, net............................. 202 -- Reinsurance recoverable from Allstate Life Insurance Company................................................... 2,046,987 1,975,150 Other assets................................................ 2,561 4,817 Separate Accounts........................................... 6,236,902 7,614,673 ---------- ---------- TOTAL ASSETS.......................................... $8,384,367 $9,691,529 ========== ========== LIABILITIES Contractholder funds........................................ $1,896,647 $1,826,062 Reserve for life-contingent contract benefits............... 150,349 149,111 Current income taxes payable................................ 2,057 2,078 Deferred income taxes....................................... 2,994 2,279 Payable to affiliates, net.................................. -- 7,123 Separate Accounts........................................... 6,236,902 7,614,673 ---------- ---------- TOTAL LIABILITIES..................................... 8,288,949 9,601,326 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 8) SHAREHOLDER'S EQUITY Common stock, $100 par value, 25,000 shares authorized, issued and outstanding.................................... 2,500 2,500 Additional capital paid-in.................................. 56,600 56,600 Retained income............................................. 33,909 29,875 Accumulated other comprehensive income: Unrealized net capital gains and losses................... 2,409 1,228 ---------- ---------- Total accumulated other comprehensive income.......... 2,409 1,228 ---------- ---------- TOTAL SHAREHOLDER'S EQUITY............................ 95,418 90,203 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............ $8,384,367 $9,691,529 ========== ==========
See notes to financial statements. F-3 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- (IN THOUSANDS) COMMON STOCK................................................ $ 2,500 $ 2,500 $ 2,500 ------- ------- ------- ADDITIONAL CAPITAL PAID IN.................................. 56,600 56,600 56,600 ------- ------- ------- RETAINED INCOME Balance, beginning of year.................................. 29,875 29,596 25,340 Net income.................................................. 4,034 4,279 4,256 Dividends................................................... -- (4,000) -- ------- ------- ------- Balance, end of year........................................ 33,909 29,875 29,596 ------- ------- ------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of year.................................. 1,228 (1,435) 3,367 Change in unrealized net capital gains and losses........... 1,181 2,663 (4,802) ------- ------- ------- Balance, end of year........................................ 2,409 1,228 (1,435) ------- ------- ------- TOTAL SHAREHOLDER'S EQUITY.............................. $95,418 $90,203 $87,261 ======= ======= =======
See notes to financial statements. F-4 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 4,034 $ 4,279 $ 4,256 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Amortization and other non-cash items................... 684 756 559 Realized capital gains and losses....................... (95) 230 (510) Changes in: Life-contingent contract benefits and contractholder funds................................................ (14) 5 (68) Income taxes payable.................................. 58 7 355 Payable to affiliates................................. (7,325) 1,133 (596) Other operating assets and liabilities................ 1,432 (31) 1,520 -------- -------- -------- Net cash (used in) provided by operating activities..... (1,226) 6,379 5,516 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed income securities Proceeds from sales....................................... 13,493 6,780 17,992 Investment collections.................................... 4,317 2,933 6,555 Investments purchases..................................... (14,697) (11,561) (32,050) Change in short-term investments, net..................... (1,887) (552) 2,008 -------- -------- -------- Net cash provided by (used in) investing activities..... 1,226 (2,400) (5,495) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid.............................................. -- (4,000) -- -------- -------- -------- Net cash used in financing activities................... -- (4,000) -- -------- -------- -------- NET (DECREASE) INCREASE IN CASH............................. -- (21) 21 CASH AT BEGINNING OF YEAR................................... -- 21 -- -------- -------- -------- CASH AT END OF YEAR......................................... $ -- $ -- $ 21 ======== ======== ========
See notes to financial statements. F-5 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- 1. GENERAL BASIS OF PRESENTATION The accompanying financial statements include the accounts of Northbrook Life Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), 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 with the 2001 presentation, certain amounts in the prior years' financial statements and notes have been reclassified. NATURE OF OPERATIONS The Company markets a diversified group of products to meet consumer's lifetime needs in the area of protection and retirement solutions exclusively through Morgan Stanley DW, Inc., ("MSDW") (see Note 4), a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. Northbrook Life Insurance Company's products include interest-sensitive life, including single premium life and variable life; fixed annuities including market value adjusted annuities; immediate annuities; and variable annuities. In 2001, substantially all of the Company's statutory premiums and deposits were from annuities. Statutory premiums and deposits is a measure used by management to analyze sales trends. Statutory premiums and deposits includes premiums and annuity considerations determined in conformity with statutory accounting practices prescribed or permitted by the insurance regulatory authorities of the state of Arizona, and all other funds received from customers on deposit-type products which are treated as liabilities. The statutory accounting practices differ in certain, material aspects from GAAP. Annuity contracts and life insurance policies issued by the Company are subject to discretionary surrender or withdrawal by customers, subject to applicable surrender charges. These policies and contracts are reinsured primarily with ALIC (see Note 3), which invests premiums and deposits to provide cash flows that will be used to fund future benefits and expenses. The Company monitors economic and regulatory developments that have the potential to impact its business. Federal legislation has allowed banks and other financial organizations to have greater participation in the securities and insurance businesses. This legislation may present an increased level of competition for sales of the Company's products. Furthermore, under current U.S. tax law and regulations, deferred and immediate annuities and life insurance, including interest-sensitive products, receive favorable policyholder tax treatment. Any legislative or regulatory changes that adversely alter this treatment are likely to negatively affect the demand for these products. In addition, recent changes in the federal estate tax laws will affect the demand for the types of life insurance used in estate planning. Additionally, traditional demutualizations of mutual insurance companies and enacted and pending state legislation to permit mutual insurance companies to convert to a hybrid structure known as a mutual holding company could have a number of significant effects on the Company by (1) increasing industry competition through consolidation caused by mergers and acquisitions related to the new corporate form of business; and (2) increasing competition in the capital markets. The Company is authorized to sell life and investment products in all states except New York, as well as in the District of Columbia and Puerto Rico. The top geographic locations for statutory premiums and deposits for the Company were California, Florida, and Texas for the year ended December 31, 2001. No other jurisdiction accounted for more than 5% of statutory premiums and deposits. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Fixed income securities include bonds and mortgage-backed securities. All fixed income securities are carried at fair value and may be sold prior to their contractual maturity ("available for sale"). The fair value of exchange traded fixed income securities are based upon quoted market prices or dealer quotes. The fair value of non-exchange traded fixed income securities is based on either independent third party pricing sources or widely accepted pricing valuation models which utilize internally developed ratings and independent third party data as inputs. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of Accumulated other comprehensive income. Short-term investments are carried at cost or amortized cost, which approximates fair value. Investment income consists primarily of interest. Interest is recognized on an accrual basis. Interest income on mortgage-backed securities is determined on the effective yield method, based on the estimated principal repayments. Accrual of income is suspended for fixed income securities that are in default or when the receipt of interest payments is in doubt. F-6 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- Realized capital gains and losses are determined on a specific identification basis. They include gains and losses on portfolio trading and write-downs in value due to other than temporary declines in fair value. The Company monitors its fixed income portfolios for ratings changes or other events that may result in declines in value that are other than temporary. Factors considered in evaluating whether a decline in fair value is other than temporary are: 1) the Company's ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the duration for and extent to which the fair value has been less than cost; and 3) the financial condition and near-term prospects of the issuer. REINSURANCE RECOVERABLE The Company has reinsurance agreements whereby substantially all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC (See Note 3). Such amounts are reflected net of such reinsurance in the statements of operations and comprehensive income. Reinsurance recoverable and the related reserve for life- contingent contract benefits and contractholder funds are reported separately in the statements of financial position. Reinsurance does not extinguish the Company's primary liability under the policies written and therefore reinsurers and amounts recoverable are regularly evaluated by the Company. Investment income earned on the assets which support contractholder funds and the reserve for life-contingent contract benefits is not included in the Company's financial statements as those assets are owned and managed under terms of reinsurance agreements. RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED Immediate annuities with life contingencies, including certain structured settlement annuities, provide insurance protection over a period that extends beyond the period in which premiums are collected. Gross premiums in excess of the net premium on immediate annuities with life contingencies are deferred and recognized over the contract period. Contract benefits are recognized in relation to such revenues so as to result in the recognition of profits over the life of the policy. Interest-sensitive life contracts, such as 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 one or more amounts assessed against the contractholder. Premiums from these contracts are reported as deposits to contractholder funds. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and surrender charges. These revenues are recognized when levied against the contract balance. Contract benefits include life- contingent benefit payments in excess of the reserves held. Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, market value adjusted annuities and immediate annuities without life contingencies are considered investment contracts. Deposits received for such contracts are reported as deposits to contractholder funds. Contract charges for investment contracts consist of fees assessed against the contractholder account balance for contract administration and surrender charges. These revenues are recognized when levied against the contractholder account balance. Interest credited to contractholders' funds represents contractual interest accrued or paid for interest-sensitive life contracts and investment contracts. Crediting rates for fixed rate annuities and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions. Separate Account products include variable annuity and variable life contracts. The assets supporting these products are legally segregated and available only to settle Separate Accounts contract obligations. Deposits received are reported as Separate Accounts liabilities. Contract charges for these contracts consist of fees assessed against the Separate Accounts fund balances for contract maintenance, administration, mortality, expense and surrenders. Contract benefits incurred for Separate Accounts include, for example, guaranteed minimum death benefits paid on variable annuity contracts. All premiums, contract charges, contract benefits and interest credited are reinsured. INCOME TAXES The income tax provision is calculated under the liability method and presented net of reinsurance. 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 fixed income securities carried at fair value and differences in the tax bases of investments. SEPARATE ACCOUNTS The assets and liabilities related to variable annuity and variable life contracts are legally segregated and reflected as Separate Accounts. The assets of the Separate Accounts are carried at fair value. Separate Accounts liabilities represent the contractholders' claims to the related assets and are carried at the fair value of the assets. Investment income and realized capital gains and losses of the Separate Accounts F-7 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- accrue directly to the contractholders and therefore, are not included in the Company's statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance and administration fees and mortality, surrender and expense charges and are ceded to ALIC. Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death or annuitization, contractholders bear the investment risk that the Separate Accounts' funds may not meet their stated objectives. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS The reserve for life-contingent contract benefits, which relates to immediate annuities with life contingencies, is computed on the basis of long-term actuarial assumptions as to future investment yields, mortality, morbidity, terminations and expenses. These assumptions include provisions for adverse deviation and generally vary by such characteristics as type of coverage, year of issue and policy duration. Detailed reserve assumptions and reserve interest rates are outlined in Note 7. CONTRACTHOLDER FUNDS Contractholder funds arise from the issuance of interest-sensitive life policies and investment contracts. Deposits received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses. Detailed information on crediting rates and surrender and withdrawal protection on contractholder funds are outlined in Note 7. USE OF ESTIMATES 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. PENDING ACCOUNTING STANDARDS In December 2001, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 01-6, "Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others", which is effective for interim and annual financial statements issued for the fiscal year beginning after December 15, 2001. The SOP conforms accounting and financial reporting practices for certain lending and financing activities, eliminating various specialized accounting practices that developed from the issuance of AICPA finance company, bank, and credit union audit guides. The SOP also explicitly incorporates lending and financing activities of insurance companies within its scope. The Company's adoption of SOP 01-6 is not expected to have a material effect on the results of operations or financial position. 3. RELATED PARTY TRANSACTIONS REINSURANCE The Company has reinsurance agreements whereby substantially all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC and reflected net of such reinsurance in the statements of operations and comprehensive income. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contracholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. Investment income earned on the assets which support contractholder funds and the reserve for life-contingent contract benefits is not included in the Company's financial statements as those assets are owned and managed under the terms of the reinsurance agreements. The following table summarizes amounts that were ceded to ALIC under reinsurance agreements:
YEAR ENDED DECEMBER 31, 2001 2000 1999 (IN THOUSANDS) -------- -------- -------- Premiums $ 977 $ 289 $ 2,966 Contract charges 108,600 124,250 118,290 Credited interest, policy benefits, and certain expenses 217,500 224,265 222,513
BUSINESS OPERATIONS The Company utilizes services provided by AIC and ALIC and business facilities owned or leased, and operated by AIC in conducting its business activities. The Company reimburses AIC and ALIC 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 and retirement and other benefit programs, allocated to the Company were $32.4 million, $22.0 million and $33.9 million in 2001, 2000 and 1999, respectively. Of these costs, the Company retains investment related expenses. All other costs are ceded to ALIC under reinsurance agreements. INCOME TAXES The Company is a party to a federal income tax allocation agreement with the Corporation (Note 9). DEBT The Company has entered into an intercompany loan agreement with the Corporation. The amount of funds available to the Company at a given point in time is dependent upon the debt position of the Corporation. No amounts were F-8 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- outstanding for the Company under the intercompany loan agreement at December 31, 2001 and 2000, respectively. 4. EXCLUSIVE DISTRIBUTION AGREEMENT The Company has a strategic alliance with MSDW to develop, market and distribute proprietary insurance products through Morgan Stanley Dean Witter Financial Advisors. Affiliates of MSDW are the investment managers for the Morgan Stanley Dean Witter Variable Investment Series and the Universal Institutional Funds, Inc., the funds in which certain assets of the Separate Accounts products are invested. Under the terms of the alliance, the Company has agreed to use MSDW as an exclusive distribution channel for the Company's products. In addition to the Company's products, MSDW markets other products that compete with those of the Company. Pursuant to the alliance agreement, MSDW provides approximately half of the statutory capital necessary to maintain these products on the Company's books through loans to a subsidiary of AIC. AIC unconditionally guarantees the repayment of these loans and interest thereon issued to MSDW under terms of a distribution agreement to the Northbrook Corporation. Under a reinsurance agreement with ALIC, the assets of this alliance are held in a trust. The Company shares approximately half the net profits with MSDW on contracts written under the alliance. The strategic alliance is cancelable for new business by either party by giving 30 days written notice, however, the Company believes the benefits derived by MSDW will preserve the alliance. 5. INVESTMENTS FAIR VALUES The amortized cost, gross unrealized gains and losses, and fair value for fixed income securities are as follows:
GROSS UNREALIZED AMORTIZED ------------------- FAIR AT DECEMBER 31, 2001 COST GAINS LOSSES VALUE -------------------- --------- -------- -------- -------- (IN THOUSANDS) U.S. government and agencies $20,129 $1,120 $ (3) $21,246 Municipal 1,030 2 (3) 1,029 Corporate 53,326 1,926 (249) 55,003 Mortgage-backed securities 13,372 948 (53) 14,267 Foreign government 406 18 -- 424 ------- ------ ----- ------- Total fixed income securities $88,263 $4,014 $(308) $91,969 ======= ====== ===== ======= AT DECEMBER 31, 2000 -------------------- U.S. government and agencies $10,778 $1,193 $ -- $11,971 Municipal 1,095 4 (38) 1,061 Corporate 59,449 656 (720) 59,385 Mortgage-backed securities 19,413 958 (186) 20,185 Foreign government 406 22 -- 428 ------- ------ ----- ------- Total fixed income securities $91,141 $2,833 $(944) $93,030 ======= ====== ===== =======
SCHEDULED MATURITIES The scheduled maturities for fixed income securities are as follows at December 31, 2001:
AMORTIZED FAIR COST VALUE (IN THOUSANDS) --------- -------- Due in one year or less $ 5,757 $ 5,888 Due after one year through five years 28,486 29,945 Due after five years through ten years 26,843 27,087 Due after ten years 13,805 14,782 ------- ------- 74,891 77,702 Mortgage-backed securities 13,372 14,267 ------- ------- Total $88,263 $91,969 ======= =======
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------------------- -------- -------- -------- (IN THOUSANDS) Fixed income securities $6,036 $6,635 $5,881 Short-term investments 253 249 261 ------ ------ ------ Investment income, before expense 6,289 6,884 6,142 Investment expense 191 82 132 ------ ------ ------ Net investment income $6,098 $6,802 $6,010 ====== ====== ======
F-9 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- REALIZED CAPITAL GAINS AND LOSSES, AFTER TAX
YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------------------- -------- -------- -------- (IN THOUSANDS) Fixed income securities $ 95 $(230) $ 510 ---- ----- ----- Realized capital gains and losses 95 (230) 510 Income taxes (33) 80 (178) ---- ----- ----- Realized capital gains and losses, after tax $ 62 $(150) $ 332 ==== ===== =====
Excluding calls and prepayments, gross gains of $203 thousand, $78 thousand and $629 thousand were realized on sales of fixed income securities during 2001, 2000 and 1999, respectively, and gross losses of $108 thousand, $308 thousand and $119 thousand were realized on sales of fixed income securities during 2001, 2000 and 1999, respectively. UNREALIZED NET CAPITAL GAINS AND LOSSES Unrealized net capital gains and losses on fixed income securities included in shareholder's equity at December 31, 2001 are as follows:
GROSS COST/ UNREALIZED AMORTIZED FAIR ------------------- UNREALIZED COST VALUE GAINS LOSSES NET GAINS (IN THOUSANDS) --------- -------- -------- -------- ---------- Fixed income securities $88,263 $91,969 $4,014 $(308) $ 3,706 ======= ======= ====== ===== Deferred income taxes (1,297) ------- Unrealized net capital gains and losses $ 2,409 =======
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------------------- -------- -------- -------- (IN THOUSANDS) Fixed income securities $1,817 $ 4,096 $(7,387) Deferred income taxes (636) (1,433) 2,585 ------ ------- ------- Increase (decrease) in unrealized net capital gains and losses $1,181 $ 2,663 $(4,802) ====== ======= =======
SECURITIES ON DEPOSIT At December 31, 2001, fixed income securities with a carrying value of $6.4 million were on deposit with regulatory authorities as required by law. 6. FINANCIAL INSTRUMENTS In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The fair value estimates of financial instruments presented below are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential taxes and other transaction costs have not been considered in estimating fair value. The disclosures that follow do not reflect the fair value of the Company as a whole since a number of the Company's significant assets (including reinsurance recoverable) and liabilities (including interest-sensitive life insurance reserves and deferred income taxes) are not considered financial instruments and are not carried at fair value. Other assets and liabilities considered financial instruments, such as accrued investment income and cash are generally of a short-term nature. Their carrying values are deemed to approximate fair value. FINANCIAL ASSETS The carrying value and fair value of financial assets at December 31, are as follows:
2001 2000 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (IN THOUSANDS) ---------- ---------- ---------- ---------- Fixed income securities $ 91,969 $ 91,969 $ 93,030 $ 93,030 Short-term 5,746 5,746 3,859 3,859 Separate Accounts 6,236,902 6,236,902 7,614,673 7,614,673
Fair values for exchange traded fixed income securities are based upon quoted market prices or dealer quotes. The fair value of non-exchange traded fixed income securities is based on either independent third party pricing sources or widely accepted pricing valuation models which utilize internally developed ratings and independent third party data as inputs. Short-term investments are highly liquid investments with maturities of less than one year whose carrying values are deemed to approximate fair value. Separate Accounts assets are carried in the statements of financial position at fair value based on quoted market prices. FINANCIAL LIABILITIES The carrying value and fair value of financial liabilities at December 31, are as follows:
2001 2000 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (IN THOUSANDS) ---------- ---------- ---------- ---------- Contractholder funds on investment contracts $1,721,592 $1,708,679 $1,652,039 $1,644,231 Separate Accounts 6,236,902 6,236,902 7,614,673 7,614,673
Contractholder funds include interest-sensitive life insurance contracts and investment contracts. Interest-sensitive life insurance contracts and certain other contractholder liabilities are not considered to be financial instruments subject to fair value disclosure requirements. The fair value of investment contracts is based on the terms of the underlying contracts. Fixed annuities and immediate annuities without life contingencies are valued at the account balance less F-10 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- surrender charges. Market value adjusted annuities' fair value is estimated to be the market adjusted surrender value. Separate Accounts liabilities are carried at the fair value of the underlying assets. 7. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS At December 31, the Reserve for life-contingent contract benefits consists of the following:
2001 2000 (IN THOUSANDS) -------- -------- Immediate annuities: Structured settlement annuities $108,911 $108,441 Other immediate annuities 41,438 40,670 -------- -------- Total Reserve for life-contingent contract benefits $150,349 $149,111 ======== ========
The assumptions for mortality generally utilized in calculating reserves include the U.S. population with projected calendar year improvements and age setbacks for impaired lives for structured settlement annuities; and the 1983 group annuity mortality table for other immediate annuities. Interest rate assumptions vary from 3.0% to 10.0% for immediate annuities. Other estimation methods used include the present value of contractually fixed future benefits for structured settlement annuities and other immediate annuities. Premium deficiency reserves are established, if necessary, for the immediate annuity business, to the extent the unrealized gains on fixed income securities would result in a premium deficiency had those gains actually been realized. The Company did not have a premium deficiency reserve at December 31, 2001 and 2000. At December 31, Contractholder funds consists of the following:
2001 2000 (IN THOUSANDS) ---------- ---------- Interest-sensitive life $ 175,011 $ 171,192 Fixed annuities: Immediate annuities 69,857 66,051 Deferred annuities 1,651,779 1,588,819 ---------- ---------- Total Contractholder funds $1,896,647 $1,826,062 ========== ==========
Contractholder funds are equal to deposits received and interest credited for the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses. Interest rates credited range from 5.8% to 6.3% for interest-sensitive life contracts; 3.2% to 10.2% for immediate annuities and 4.3% to 6.8% for deferred annuities. Withdrawal and surrender charge protection includes: i) for interest-sensitive life, either a percentage of account balance or dollar amount grading off generally over 20 years; and, ii) for deferred annuities not subject to a market value adjustment, either a declining or a level percentage charge generally over nine years or less. Approximately 49.7% of deferred annuities are subject to a market value adjustment. 8. COMMITMENTS AND CONTINGENT LIABILITIES REGULATION AND LEGAL PROCEEDINGS The Company's business is subject to the effects of a changing social, economic and regulatory environment. State and federal regulatory initiatives have varied and have included employee benefit regulations, removal of barriers preventing banks from engaging in the securities and insurance businesses, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles, and the overall expansion of regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. From time to time, the Company is involved in pending and threatened litigation in the normal course of business in which claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, in one or more of these actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company. 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 a particular state. The Company's expenses related to these funds are immaterial and are ceded to ALIC under reinsurance agreements. 9. INCOME TAXES The Company joins the Corporation and its other eligible 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. The Company has also entered into a supplemental tax sharing agreement with respect to reinsurance ceded to ALIC to allocate to ALIC the tax consequences of such reinsurance. Effectively, these agreements result in the Company's annual income tax provision being computed as if the Company filed F-11 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- a separate return, as adjusted for the reinsurance ceded to ALIC. Prior to June 30, 1995, the Corporation was a subsidiary of Sears Roebuck & Co. ("Sears") and, with its eligible domestic subsidiaries, was included in the Sears consolidated federal income tax return and federal income tax allocation agreement. Effective June 30, 1995, the Corporation and Sears entered into a new tax sharing agreement, which governs their respective rights and obligations with respect to federal income taxes for all periods during which the Corporation was a subsidiary of Sears, including the treatment of audits of tax returns for such periods. The Internal Revenue Service ("IRS") has completed its review of the Allstate Group's federal income tax returns through the 1993 tax year. Any adjustments that may result from IRS examinations of tax returns are not expected to have a material impact on the financial position, liquidity or results of operations of the Company. The components of the deferred income tax assets and liabilities at December 31, are as follows:
2001 2000 (IN THOUSANDS) -------- -------- DEFERRED LIABILITIES Difference in tax bases of investments $1,697 $1,618 Unrealized net capital gains 1,297 661 ------ ------ Total deferred liability $2,994 $2,279 ====== ======
The components of income tax expense for the year ended December 31, are as follows:
2001 2000 1999 (IN THOUSANDS) -------- -------- -------- Current $2,080 $2,193 $2,249 Deferred 79 100 15 ------ ------ ------ Total income tax expense $2,159 $2,293 $2,264 ====== ====== ======
The Company paid income taxes of $2.1 million, $2.3 million and $1.9 million in 2001, 2000 and 1999, respectively. A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the year ended December 31, is as follows:
2001 2000 1999 -------- -------- -------- Statutory federal income tax rate 35.0% 35.0% 35.0% Tax-exempt income (0.1) (0.1) (0.1) Other -- -- (0.2) ---- ---- ---- Effective income tax rate 34.9% 34.9% 34.7% ==== ==== ====
Prior to January 1, 1984, the Company was entitled to exclude certain amounts from taxable income and accumulate such amounts in a "policyholder surplus" account. The balance in this account at December 31, 2001, approximately $16 thousand, will result in federal income taxes payable of $6 thousand if distributed by the Company. No provision for taxes has been made as the Company has no plan to distribute amounts from this account. No further additions to the account have been permitted since 1983. 10. STATUTORY FINANCIAL INFORMATION The following table reconciles Net income for the year ended December 31, and Shareholder's equity at December 31, as reported herein in conformity with GAAP with total statutory net income and capital and surplus of the Company, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities:
SHAREHOLDER'S NET INCOME EQUITY ------------------------------ ------------------- 2001 2000 1999 2001 2000 (IN THOUSANDS) -------- -------- -------- -------- -------- Balance per GAAP $4,034 $4,279 $4,256 $ 95,418 $90,203 Unrealized gain/loss on fixed income securities -- -- -- (3,706) (1,889) Deferred income taxes 79 440 895 2,027 1,567 Employee benefits (29) -- 1 1,040 1,022 Reserves and non-admitted assets (30) 174 (312) (13,888) (5,505) Other 28 -- -- 11,010 (1,063) ------ ------ ------ -------- ------- Balance per statutory accounting practices $4,082 $4,893 $4,840 $ 91,901 $84,335 ====== ====== ====== ======== =======
The Company prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the State of Arizona. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Effective January 1, 2001, the State of Arizona required insurance companies domiciled in its state to prepare statutory-basis financial statements in accordance with the NAIC Accounting Practices and Procedures Manual--Version effective January 1, 2001 ("codification") subject to any deviations prescribed or permitted by the State of Arizona insurance commissioner. Accounting changes adopted to the provisions of codification are reported as changes in accounting principles. The cumulative effect of changes in accounting principles is reported as an adjustment to unassigned funds (surplus) in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported F-12 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------- at that date if the new accounting principles had been applied retroactively for all periods. The Company reported an increase to surplus of $239 thousand effective January 1, 2001 as a result of recognizing a net deferred tax asset. The NAIC is currently in the process of clarifying and interpreting requirements as the insurance industry implements codification. As the NAIC announces changes and as they are approved by the Arizona Department of Insurance, the impact of the changes will be recorded. 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 statutory surplus and statutory net gain from operations, determined in accordance with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. The maximum amount of dividends that the Company can distribute during 2002 without prior approval of the Arizona Department of Insurance is $4.1 million. In December of 2000, the Company paid a cash dividend of $4.0 million to ALIC. RISKED-BASED CAPITAL The NAIC has a standard for assessing the solvency of insurance companies, which is referred to as risk-based capital ("RBC"). The requirement consists of a formula for determining each insurer's RBC and a model law specifying regulatory actions if an insurer's RBC falls below specified levels. At December 31, 2001, RBC for the Company was significantly above levels that would require regulatory action. 11. OTHER COMPREHENSIVE INCOME The components of other comprehensive income on a pretax and after-tax basis for the year ended December 31 are as follows:
2001 2000 1999 ------------------------------- ------------------------------- ------------------------------- PRETAX TAX AFTER-TAX PRETAX TAX AFTER-TAX PRETAX TAX AFTER-TAX (IN THOUSANDS) -------- -------- --------- -------- -------- --------- -------- -------- --------- UNREALIZED CAPITAL GAINS AND LOSSES: - ---------------------------- Unrealized holding gains (losses) arising during the period $1,912 $(669) $1,243 $3,843 $(1,344) $2,499 $(6,877) $2,407 $(4,470) Less: reclassification adjustments 95 (33) 62 (253) 89 (164) 510 (178) 332 ------ ----- ------ ------ ------- ------ ------- ------ ------- Unrealized net capital gains (losses) 1,817 (636) 1,181 4,096 (1,433) 2,663 (7,387) 2,585 (4,802) ------ ----- ------ ------ ------- ------ ------- ------ ------- Other comprehensive income (loss) $1,817 $(636) $1,181 $4,096 $(1,433) $2,663 $(7,387) $2,585 $(4,802) ====== ===== ====== ====== ======= ====== ======= ====== =======
F-13 NORTHBROOK LIFE INSURANCE COMPANY SCHEDULE IV--REINSURANCE (IN THOUSANDS)
GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- YEAR ENDED DECEMBER 31, 2001 Life insurance in force..................................... $450,633 $450,633 $ -- ======== ======== ======== Premiums and contract charges: Life and annuities........................................ $109,665 $109,665 $ -- ======== ======== ========
GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- YEAR ENDED DECEMBER 31, 2000 Life insurance in force..................................... $460,143 $460,143 $ -- ======== ======== ======== Premiums and contract charges: Life and annuities........................................ $124,621 $124,621 $ -- ======== ======== ========
GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- YEAR ENDED DECEMBER 31, 1999 Life insurance in force..................................... $474,824 $474,824 $ -- ======== ======== ======== Premiums and contract charges: Life and annuities........................................ $121,351 $121,351 $ -- ======== ======== ========
F-14 EX-10 3 nexhibit10.txt AGREEMENTS EXHIBIT 10.2 SERVICE AND EXPENSE AGREEMENT AMONG ALLSTATE INSURANCE COMPANY AND THE ALLSTATE CORPORATION AND CERTAIN INSURANCE SUBSIDIARIES This Agreement made and effective as of this 1st day of January, 1999, among ALLSTATE INSURANCE COMPANY, an Illinois insurance company ("Allstate"), THE ALLSTATE CORPORATION, a Delaware corporation and parent of Allstate ("Allcorp"), and Certain Insurance Subsidiaries identified as follows: ALLSTATE COUNTY MUTUAL INSURANCE COMPANY, a Texas county mutual insurance company, ALLSTATE TEXAS LLOYD'S, a Texas Lloyds plan insurer, LINCOLN BENEFIT LIFE COMPANY, a Nebraska insurance company, SURETY LIFE INSURANCE COMPANY, a Nebraska insurance company, ALLSTATE INDEMNITY COMPANY, an Illinois insurance company, ALLSTATE PROPERTY AND CASUALTY INSURANCE COMPANY, an Illinois insurance company, DEERBOOK INSURANCE COMPANY, an Illinois insurance company, FORESTVIEW MORTGAGE INSURANCE COMPANY, a California insurance company, ALLSTATE LIFE INSURANCE COMPANY, an Illinois insurance company, NORTHBROOK LIFE INSURANCE COMPANY, an Arizona insurance company, GLENBROOK LIFE AND ANNUITY COMPANY, an Arizona insurance company, ALLSTATE FLORIDIAN INDEMNITY COMPANY, an Illinois insurance company, ALLSTATE FLORIDIAN INSURANCE COMPANY, an Illinois insurance company, ALLSTATE NEW JERSEY INSURANCE COMPANY, an Illinois insurance company, AMERICAN SURETY & CASUALTY COMPANY, a Florida insurance company, CHARTER NATIONAL LIFE INSURANCE COMPANY, an Illinois insurance company, AMERICAN HERITAGE LIFE INSURANCE COMPANY, a Florida insurance company, FIRST COLONIAL REINSURANCE COMPANY, a Florida insurance company, COLUMBIA UNIVERSAL LIFE INSURANCE COMPANY, a Texas insurance company, KEYSTONE STATE LIFE INSURANCE COMPANY, a Pennsylvania insurance company, CONCORD HERITAGE LIFE INSURANCE COMPANY, INC., a New Hampshire insurance company, and AHL SELECT HMO, INCORPORATED, a Florida insurance company. For purposes of this agreement, the Insurance Subsidiaries shall be referred to herein, individually as "Affiliate" and collectively as "Affiliates." W I T N E S S E T H: WHEREAS, Allcorp and each Affiliate desire that Allstate furnish or cause to be furnished to them certain services and facilities. NOW, THEREFORE, it is agreed as follows: 1. Allstate shall furnish or cause to be furnished, at cost and in the same manner as such services and facilities are furnished to its other affiliates, (a.) to each Affiliate that is a property and casualty insurer, services and facilities listed on Exhibit A; (b.) to each Affiliate that is a life insurer, services and facilities listed on Exhibit B; (c.) to ALLCORP such services and facilities as are required; and (d) to Allcorp and each Affiliate the investment services as described in Exhibit E, each attached hereto. Allstate and any Affiliate may from time to time agree that only certain of the listed services and facilities will be provided by Allstate. 2. Costs are defined as Allstate's actual costs and expenses incurred which are attributable to the services and facilities provided under this Agreement, such as: salaries and benefits; space rental; overhead expenses which may include items such as electricity, heat, and water; building maintenance services; furniture and other office equipment; supplies and special equipment such as reference libraries, electronic data processing equipment and the like. 3. Allocations for the above services and facilities shall be made by Allstate in accordance with the general provisions contained in Exhibits A through E. Exhibits A and B are based upon NAIC expense classification and allocation guidelines. In the event such guidelines are amended, Exhibits A and B shall be deemed amended to conform thereto. Allstate will exercise reasonable judgment in appropriately revising these Exhibits, maintain proper documentation for revisions and communicate changes in allocation requirements to affected Affiliates or Allcorp parties in a timely manner. Exhibit C provides a narrative overview of the expense management process and Exhibit D provides certain definitions used throughout. 4. Notwithstanding anything contained in this Agreement to the contrary, the amount charged to any Affiliate or Allcorp shall not exceed the cost to Allstate. Allstate will exercise reasonable judgement in periodically reviewing the expenses incurred and the percentage thereof allocated. Any Affiliate or Allcorp may request a review of such expenses and their allocation and such review will occur promptly thereafter. 5. Allstate will charge Allcorp and each Affiliate for all the services and facilities provided pursuant to this Agreement via the monthly expense allocation process, and payments will be through the monthly intercompany settlement process. The process will be completed by Allstate personnel in the most timely and effective method available. 6. Allstate shall maintain such records as may be required relating to the accounting system of Allstate, Allcorp and its Affiliates. Each Affiliate and Allcorp understand and accept the financial records generated by this system which utilizes the concepts detailed in the addenda attached to Exhibits A and B, respectively. 7. Upon reasonable notice, and during normal business hours, each Affiliate and Allcorp shall be entitled to, at its own expense, inspect records which pertain to the computation of charges for the facilities or services provided pursuant to this Agreement. Allstate shall at all times maintain correct and complete books, records and accounts of all services and facilities furnished pursuant to this Agreement. Each Affiliate and Allcorp shall have unconditional right of ownership of any records prepared on its behalf under this Agreement. 8. Certain agreements relating to reinsurance and other service and expense sharing exist by and among Allstate and certain of its Affiliates. Except for those Agreements listed on Exhibit F, nothing in this Agreement shall be deemed to amend any such previously executed agreement between the parties. 9. Allstate employees performing duties hereunder at all times during the term of this Agreement shall be in the employment, under the supervision and control of Allstate and shall not be deemed employees of ALLCORP or any Affiliate. 10. The scope of, and the manner in which, Allstate provides facilities and services to Allcorp and the Affiliates shall be reviewed periodically by Allstate, Allcorp and each Affiliate. All services and facilities shall be of good quality and suitable for the purpose for which they are intended. 11. Allstate shall not assign its obligations or rights under this Agreement without the written consent of each Affiliate and Allcorp. Allstate may terminate this Agreement in its entirety, and Allcorp or any Affiliate may cancel its participation in the arrangements under this Agreement, each by giving six months written notice to the other parties to this Agreement; provided, however, that in the event that the affiliate relationship ceases to exist with respect to any Affiliate, this Agreement shall terminate immediately with respect to such Affiliate. Under no circumstances will the initial term of this Agreement exceed five (5) years. 12. All communications provided for hereunder shall be in writing, and if to an Affiliate, mailed or delivered to such Affiliate at its office at the address listed in such Affiliate's Statutory Annual Statement Blank, Attention: Secretary, or if to Allcorp or Allstate, mailed or delivered to its office at 3075 Sanders Road, Northbrook, Illinois 60062, Attention: Controller, or addressed to any party at the address such party may hereafter designate by written notice to the other parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the day and year above written. ALLSTATE INSURANCE COMPANY By_________________________________ Samuel H. Pilch Vice President and Controller ALLSTATE COUNTY MUTUAL INSURANCE COMPANY By_________________________________ James P. Zils Vice President and Treasurer ALLSTATE TEXAS LLOYDS By_________________________________ James P. Zils Vice President and Controller LINCOLN BENEFIT LIFE COMPANY By_________________________________ Janet P. Anderbery Vice President and Controller SURETY LIFE INSURANCE COMPANY By_________________________________ Janet P. Anderbery Vice President and Controller ALLSTATE INDEMNITY COMPANY By_________________________________ Rita P. Wilson President ALLSTATE PROPERTY AND CASUALTY INSURANCE COMPANY By_________________________________ Richard I. Cohen President DEERBROOK INSURANCE COMPANY By_________________________________ Rita P. Wilson President FORESTVIEW MORTGAGE INSURANCE COMPANY By_________________________________ Thomas J. Wilson, II President and Chief Executive Officer ALLSTATE LIFE INSURANCE COMPANY By_________________________________ Kevin R. Slawin Vice President NORTHBROOK LIFE INSURANCE COMPANY By_________________________________ Kevin R. Slawin Vice President GLENBROOK LIFE AND ANNUITY COMPANY By_________________________________ Kevin R. Slawin Vice President THE ALLSTATE CORPORATION By_________________________________ James P. Zils Treasurer ALLSTATE FLORIDIAN INDEMNITY COMPANY By_________________________________ Ronald D. McNeil President ALLSTATE FLORIDIAN INSURANCE COMPANY By_________________________________ Ronald D. McNeil President ALLSTATE NEW JERSEY INSURANCE COMPANY By_________________________________ Richard C. Crist, Jr. President AMERICAN SURETY & CASUALTY COMPANY By_________________________________ Richard L. Ervin, Jr. Chief Financial Officer and Treasurer CHARTER NATIONAL LIFE INSURANCE COMPANY By_________________________________ Thomas J. Wilson, II President AMERICAN HERITAGE LIFE INSURANCE COMPANY By_________________________________ T. O' Neal Douglas Chairman of the Board FIRST COLONIAL INSURANCE COMPANY By_________________________________ T. O' Neal Douglas Chairman of the Board COLUMBIA UNIVERSAL LIFE INSURANCE COMPANY By_________________________________ T. O' Neal Douglas Chairman of the Board KEYSTONE STATE LIFE INSURANCE COMPANY By_________________________________ T. O' Neal Douglas Chairman of the Board CONCORD HERITAGE LIFE INSURANCE COMPANY, INC. By_________________________________ T. O' Neal Douglas Chairman of the Board AHL SELECT HMO INCORPORATED By_________________________________ T. O' Neal Douglas Chairman of the Board EXHIBIT A INTERCOMPANY SERVICE AND EXPENSE ALLOCATION SUMMARY MATRIX ALLSTATE INSURANCE COMPANY AND PROPERTY & CASUALTY AFFILIATES
- ----------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER U&I EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - ----------------------------------------------------------------------------------------------------------------------------------- 1. Claim Adjustment Investigation and adjustment of policy claims for direct, No allocation - direct charge to company Services reinsurance assumed and ceded business. The more significant expenses and fees related to: (1) all outside costs associated with independent adjusters, (2) lawyers for legal services in the defense, trial, or appeal of suits, (3) general court costs, (4) medical testimony, (5) expert and lay witnesses, (6) medical examinations for the purpose of trial and resolution of liability and (7) miscellaneous (appraisals, surveys, detective reports, audits, character reports, etc.). - ----------------------------------------------------------------------------------------------------------------------------------- 2. Commission and All payments, reimbursements and allowances (on direct and No allocation - direct charge to company Brokerage reinsurance assumed and ceded business) to managers, based on agent contract agents, brokers, solicitors or other producer types. - -----------------------------------------------------------------------------------------------------------------------------------
- ---------- * Expense classifications per the statutory Underwriting and Investment Exhibit, Part 4, Expenses. The company uses these twenty-one classifications to record its operating expenses incurred. As described in Exhibit C, expenses for these classifications are also spread to three distinct functional expense groups: loss adjustment, other underwriting and investment expenses. ** This description provides only a synopsis of the types of expenses for each classification. Parties to the Agreement will utilize the NAIC Examiners Handbook in expense handling. *** Before consideration of any applicable reinsurance agreement.
- ----------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER U&I EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - ----------------------------------------------------------------------------------------------------------------------------------- 4. Advertising Typical expenses would include services of: (1) Direct charge by company where known. advertising agents, (2) public relations counsel, (3) Allocated items handled as follows:See advertisements in newspapers, periodicals, billboards, Exhibit A Appendix at B; C 1; D 1 and E pamphlets and literature issued for advertising or 1 for explanation of allocation by type promotional purposes, (4) related paper and printing of office charges for advertising purposes, (5) radio broadcasts, (6) prospect and mailing lists, (7) signs and medals for agents and (8) television commercials. - ----------------------------------------------------------------------------------------------------------------------------------- 5. Boards, Bureaus and Various dues, assessments, fees and charges for items such No allocation - direct charge to company Associations as: (1) underwriting boards, rating organizations, statistical agencies, inspection and audit bureaus, (2) underwriters' advisory and service organizations, (3) accident and loss prevention organizations, (4) claim organizations, (5) underwriting syndicates, pools and associations, assigned risk plans. - ----------------------------------------------------------------------------------------------------------------------------------- 6. Surveys and Costs to support the business including: (1) survey, See Exhibit A Appendix at B; D 1; and Underwriting Reports credit, moral hazard, character reports for underwriting, E-1 for explanation of allocation by (2) appraisals for underwriting, (3) fire records, (4) type of office inspection and engineering billed specifically, (5) medical examiner services relating to underwriting. - ----------------------------------------------------------------------------------------------------------------------------------- 7. Audit of Assured's Auditing fees and expenses of independent auditors for No allocation - direct charge to company Records auditing payroll and other premium bases. - ----------------------------------------------------------------------------------------------------------------------------------- 8. Salary and Related Salaries, bonus, overtime, contingent compensation, and See Exhibit A Appendix at A; B; C 1, 2; Items other compensation of employees. This would include D-1, 2, 3, 4; E 2, 5; and F-1, 2, 3, 4 commission and brokerage to employees when the activities for explanation by type of office for which the commission is paid are a part of their duties as employees. - ----------------------------------------------------------------------------------------------------------------------------------- 9. Employee Relations This category includes a variety of pension and insurance See Exhibit A Appendix at A; B; C 1, 2; and Welfare benefits for employees, as well as some miscellaneous D-1, 2, 3, 4; E 2, 5; and F-1, 2, 3, 4 expenditures. The first area entails: (1) cost of for explanation by type of office retirement insurance, pensions or other retirement allowances and funds irrevocably devoted to the payment of pensions or other employees' benefits, and (2) accident, health and hospitalization insurance, group life insurance and workers' compensation insurance. The miscellaneous category may include the following items (1) training and welfare; (2) physical exams for employees or candidates; (3) gatherings, outings and entertainment; (4) supper money; and (5) donations to or on behalf of employees. - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER U&I EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - ----------------------------------------------------------------------------------------------------------------------------------- 10. Insurance Costs of insurance for employee/agent fidelity or surety See Exhibit A Appendixat D 1; E 1; and F bonds, public liability, burglary and robbery, automobiles 1, 2, 3, 4 for explanation by type of and office contents. office - ----------------------------------------------------------------------------------------------------------------------------------- 12. Travel and Travel Major expense subcategories include: (1) transportation, See Exhibit A Appendix at A; B; C 1, 2; Items hotel, meals, telephone and other related costs associated D-1, 2, 3, 4; E 2, 5; and F-1, 2, 3, 4 for employees traveling, (2) expense for transfer of for explanation by type of office employees, (3)-automobile rental and license plates, depreciation, repairs and other operating costs of automobiles (4) transportation, hotel and meals/entertainment of guests, (5) dues and subscriptions to accounting, legal, actuarial or similar societies and associations. - ----------------------------------------------------------------------------------------------------------------------------------- 13. Rent and Rent Items Rent of home office and branch offices, space occupied in Direct charges by company are based on company owned buildings, storage and warehouse space, safe square footage. Allocated expenses deposit boxes and post office boxes. Related expenses handled per Exhibit A Appendix at A; B; C for: (1) light, heat, power and water, (2) interest, 1, 2; D-1, 2, 3, 4; E 2, 5; and F-1, 2, taxes, (3) cost of alterations and repairs to leased 3, 4 properties, and (4) costs of cleaning and general maintenance. - ----------------------------------------------------------------------------------------------------------------------------------- 14. Equipment Rent and repair of furniture, equipment, and office See Exhibit A Appendix at A; B; C 1, 2; machines, including the related depreciation charges. D-1, 2, 3, 4; E 1, 2, 3, 4; and F-1, 2, 3, 4 - ----------------------------------------------------------------------------------------------------------------------------------- 15. Printing and Generally, printing, stationery and office supplies (paper See Exhibit A Appendix at A; B; C 1, 2; Stationery stock, printed forms and manuals, Photostat copies, pens D-1, 2, 3, 4; E 2, 5; and F-1, 2, 3, 4 and pencils, etc.). Also included would be policies and policy forms, in-house employee publications, books, newspapers and periodicals including investment, tax and legal publications and services. - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER U&I EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - ----------------------------------------------------------------------------------------------------------------------------------- 16. Postage, Telephone, All express, freight and cartage expenses, postage, and See Exhibit A Appendix at A; B; C 1, 2; etc. telephone. D-1, 2, 3, 4; E 2, 5; and F-1, 2, 3, 4 - ----------------------------------------------------------------------------------------------------------------------------------- 17. Legal & Auditing Legal fees and retainers excluding loss and salvage See Exhibit A Appendix at A; D 2, 3, 4; related, auditing fees of independent auditors for E-2; and F 1, 2 examining records, services of tax experts and investment counsel, custodian fees, notary and trustees' fees. - ----------------------------------------------------------------------------------------------------------------------------------- 18. Taxes, Licenses and Several categories comprise this expense classification: No allocation - direct charge to company Fees (1) state and local insurance taxes; (2) Insurance Department licenses and fees; (3) payroll taxes; and (4) all other, excluding real estate and federal income. Taxes, licenses and fees based on premiums and payments to state industrial commissions for administration of workers' compensation or other state benefit acts would be in the first classification. Expenses relating to the Insurance Department would include agents' licenses, filing fees, certificates of authority and fees and expenses of examination. Payroll related expenses normally include old age benefit and unemployment insurance taxes. More significant expenses in the all other section would be financial statement publication fees, legally mandated advertising and personal property and state income taxes. - ----------------------------------------------------------------------------------------------------------------------------------- 19. Real Estate Expenses Salaries, wages and other compensation of maintenance Direct charges by company are based on workers in connection with owned real estate. Other square footage. Allocated expenses expense items assigned to this category may also include handled per Exhibit A Appendix at A; B; C expenses associated with: operations; maintenance; 1, 2; D-1, 2, 3, 4; E 1, 2, 3, 4; and insurance and advertising. F-1, 2, 3, 4 - -----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER U&I EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - ----------------------------------------------------------------------------------------------------------------------------------- 20. Real Estate Taxes Taxes, licenses and fees on owned real estate. Direct charges by company are based on square footage. Allocated expenses handled per Exhibit A Appendix at A; B; C 1, 2; D-1, 2, 3, 4; E 1, 2, 3, 4; and F-1, 2, 3, 4 - -----------------------------------------------------------------------------------------------------------------------------------
Note: Expense classification for lines 3, 11 and 20a are not applicable for the Allstate Group. EXHIBIT A APPENDIX INTERCOMPANY SERVICE AND EXPENSE ALLOCATION SUMMARY MATRIX ALLSTATE INSURANCE COMPANY AND AFFILIATES A. Offices 001 (Corporate Home Office), 201 (Investment Shared Services), 203 (Research Center Shared Services), 204 (Human Resources Shared Service), 205 (Corporate Relations Shared Services), 206 (Technical Shared Services), 207 (Law and Regulation Shared Services), 208 (Finance Shared Services) and 209 (Market Brand Development) factors are based on Service Level Agreements. These Agreements are written documents detailing services and associated costs performed by the provider for the benefit of the recipient and are generated and approved through extensive discussions between service providers and service recipients. B. Support Centers, Data Centers, and Output Processing Centers (OPC) factors are based on Stat Policies in Force and Time and Effort studies that roll-up to the Support Center/Data Center/OPC. C. P&C Head Office (Office 032) factors are based on: 1. Total agents' compensation 2. Time and effort studies D. Regional Office factors are based on the following methodologies: 1. Agent compensation 2. Gross policies issued (GPI) 3. Notice counts 4. Time and effort studies 5. System capacity studies E. Regional Commercial Centers factors are based on the following methodologies: 1. Agent compensation 2. Gross policies issued (GPI) 3. Notice counts 4. Time and effort studies 5. General office compensation F. Claim Service Areas factors are based on the following: 1. Headcount (Property vs. Auto) 2. Notice counts 3. Incurred loss 4. Claim legal matter counts EXHIBIT B INTERCOMPANY SERVICE AND EXPENSE ALLOCATION SUMMARY MATRIX ALLSTATE LIFE INSURANCE COMPANY AND LIFE AFFILIATES
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 1. Rent Rent for all premises occupied by the company, including Direct charges by company are based any adequate rent for occupancy of its own buildings, in on square footage. whole or in part, except to the extent that allocation to Allocated expenses are handled per other expense classifications on a functional basis is Exhibit B Appendix at A; B 1,2; C permitted and used. 1,2 and D 1,2,3 - --------------------------------------------------------------------------------------------------------------------------------- 2. Salaries and wages Salaries and wages, bonuses and incentive compensation to Agents' compensation is a direct employees, overtime payments, continuation of salary charge to company. The remaining during temporary short-term absences, dismissal expenses in this category are allowances, payments to employees while in training and allocated per Exhibit B Appendix at other compensation to employees not specifically A; B 1,2; C 1,2; and D 1,2,3 designated herein, except to the extent that allocation to their expense classifications is permitted and used. - ---------------------------------------------------------------------------------------------------------------------------------
- -------- * Expense classifications per Statutory Exhibits 5 & 6. The company uses these classifications to record its operating expenses incurred. This expense data is also captured by four distinct functional expense groups: life, accident and health, all other lines of business and investment expenses. ** These descriptions were written using the NAIC Life Annual Statement Instructions. Refer to this publication for a complete breakdown of the expenses included in each line item. *** Before consideration of any applicable reinsurance agreement.
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 3.11 Contributions for Contributions by company for pension and total permanent See Exhibit B Appendix benefit plans for disability benefits, life insurance benefits, accident, at A; B 1,2; C 1,2; and employees health, hospitalization, medical, surgical, or other D 1,2,3 temporary disability benefits under a self-administered or trusteed plan or for the purchase of annuity or insurance contracts. Appropriation of any other assignment of funds by company in connection with any benefit plan of the types enumerated herein. - --------------------------------------------------------------------------------------------------------------------------------- 3.12 Contributions for Contributions by company for pension and total permanent See Exhibit B Appendix benefit plans for disability benefits, life insurance benefits, accident, at C 1,2; and D 1,2,3 agents health, hospitalization, medical, surgical, or other temporary disability benefits under a self-administered or trusteed plan or for the purchase of annuity or insurance contracts. Appropriation of any other assignment of funds by company in connection with any benefit plan of the types enumerated herein. - --------------------------------------------------------------------------------------------------------------------------------- 3.21 Payments to employees Payments by company under a program for pension and total No allocation - direct charge to under non-funded and permanent disability benefits, death benefits, company benefit plans accident, health, hospitalization, medical, surgical or other temporary disability benefits where no contribution or appropriation is made prior to the payment of the benefit. - --------------------------------------------------------------------------------------------------------------------------------- 3.22 Payments to agents Payments by company under a program for pension and total No allocation - direct charge to under non-funded and permanent disability benefits, death benefits, company benefit plans accident, health, hospitalization, medical, surgical or other temporary disability benefits where no contribution or appropriation is made prior to the payment of the benefit. - --------------------------------------------------------------------------------------------------------------------------------- 3.31 Other employee welfare The net periodic postretirement benefit cost, meals to Agents' compensation is a direct employees, contribution to employee associations or clubs, charge to company. The remaining dental examinations, medical dispensary or convalescent expenses in this category are home expenses for employees. allocated per Exhibit B Appendix at A; B 1,2; C 1,2; and D 1,2,3 - ---------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 3.32 Other agent welfare The net periodic postretirement benefit cost, meals to Agents' compensation is a direct employees, contribution to employee associations or clubs, charge to company. The remaining dental examinations, medical dispensary or convalescent expenses in this category are home expenses for agents. allocated per Exhibit B Appendix at C 1,2; and D 1,2,3 - --------------------------------------------------------------------------------------------------------------------------------- 4.1 Legal fees and Court costs, penalties and all fees or retainers for legal No allocation - direct charge to expenses services or expenses in connection with matters before company administrative or legislative bodies. - --------------------------------------------------------------------------------------------------------------------------------- 4.2 Medical examination Fees to medical examiners in connection with new business See Exhibit B Appendix fees reinstatements, policy changes and applications for at D 1,2 employment. - --------------------------------------------------------------------------------------------------------------------------------- 4.3 Inspection report fees Fee for inspection reports in connection with new See Exhibit B Appendix business, reinstatements, policy changes and applications at D 1,2 for employment. Cost of services furnished by the Medical Information Bureau. - --------------------------------------------------------------------------------------------------------------------------------- 4.4 Fees of public Include expenses relating to this category except exclude See Exhibit B Appendix accountants and examination fees made by State Departments and internal at A; B 1,2; C 1,2; and D 1,2 consulting actuaries audits by company employees. - --------------------------------------------------------------------------------------------------------------------------------- 4.6 Expense of Payment to other than employees of fees and expenses for See Exhibit B Appendix investigation and the investigation, litigation and settlement of policy at D 1,2 settlement of policy claims. claims - --------------------------------------------------------------------------------------------------------------------------------- 5.1 Traveling expenses Traveling expense of officers, other employees, directors See Exhibit B Appendix and agents, including hotel, meals, telephone, telegraph at A; B 1,2; C 1,2; and D 1,2,3 and postage charges incurred while traveling. Also include amounts allowed employees for use of their own cars on company business and the cost of, or depreciation on, and maintenance and running expenses of company-owned automobiles. - ---------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 5.2 Advertising Newspaper, magazine and trade journal advertising for the See Exhibit B Appendix purpose of solicitation and conservation of business. at B 1,2; C 1; and D 1,2 Billboard, sign and telephone directory, television, radio broadcasting and motion picture advertising, excluding subjects dealing wholly with health and welfare. All canvassing or other literature, such as pamphlets, circulars, leaflets, policy illustration forms and other sales aids, printed material, etc., prepared for distribution to the public by agents or through the mail for the purposes of solicitation and conservation of business. All calendars, blotters, wallets, advertising novelties, etc., for distribution to the public. Printing, paper stock, etc. in connection with advertising. Prospect and mailing lists when used for advertising purposes. Fees and expenses of advertising agencies related to advertising. - --------------------------------------------------------------------------------------------------------------------------------- 5.3 Postage, express, Freight and cartage, cables, radiograms and teletype. See Exhibit B Appendix telegraph and Also charges for use, installation and maintenance of at A; B 1,2; C 1,2; and D 1,2,3 telephone related equipment if not included elsewhere. - --------------------------------------------------------------------------------------------------------------------------------- 5.4 Printing and Policy forms, riders, supplementary contracts, See Exhibit B Appendix stationery applications, etc., rate books, instruction manuals, at A; B 1,2; C 1,2; and D 1,2,3 punch-cards, house organs, and all other printed material which is not required to be included in any other expense classification. Office supplies and pamphlets on health, welfare and education subjects. Also include annual reports to policyholders and stockholders if not included in Line 5.2. - --------------------------------------------------------------------------------------------------------------------------------- 5.5 Cost or depreciation The cost or depreciation of office machines except for See Exhibit B Appendix of furniture and such charges as may be reported in Line 5.3. at A; B 1,2; C 1,2; and D 1,2,3 equipment - --------------------------------------------------------------------------------------------------------------------------------- 5.6 Rental of equipment Rental of office machines except for such charges as may See Exhibit B Appendix be reported in Line 5.3. at A; B 1,2; C 1,2; and D 1,2,3 - --------------------------------------------------------------------------------------------------------------------------------- 6.1 Books and periodicals Books, newspapers, periodicals, etc., including investment See Exhibit B Appendix tax and legal publications and information services, and at A; B 1,2; C 1,2; and D 1,2,3 including all such material for company's law department and libraries. - ---------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 6.2 Bureau and All dues and assessments of organizations of which the No allocation - direct charge to association fees company is a member. All dues for employees' and agents' company memberships on the company's behalf. - --------------------------------------------------------------------------------------------------------------------------------- 6.3 Insurance, except on Premiums for Workers' Compensation, burglary, holdup, See Exhibit B Appendix real estate forgery and the public liability insurance, fidelity or at A; B 1,2; C 1,2; surety bonds, insurance on contents of company-occupied and D 1,2,3 buildings and all other insurance or bonds not included elsewhere. - --------------------------------------------------------------------------------------------------------------------------------- 6.4 Miscellaneous losses Uncollectible losses due to deficiencies, defalcations, Primarily a direct charge to robbery, or forgery, except those offset by bonding company. Remaining expenses are companies' payments. Also include Worker's Compensation allocated per Exhibit B Appendix at A; benefits not covered by insurance and other uninsured D 1,2,3 losses not included elsewhere. - --------------------------------------------------------------------------------------------------------------------------------- 6.5 Collection and bank Collection charges on checks and drafts and charges for See Exhibit B Appendix service charges checking accounts and money orders. at A; and D 1,2,3 - --------------------------------------------------------------------------------------------------------------------------------- 6.6 Sundry general Direct expense of local agency meetings, luncheons and See Exhibit B Appendix expenses dinners, tabulating service rendered by outside at A; B 1,2; C 1,2; and organizations, gifts and donations. Any portion of D 1,2,3 commissions and expense allowances on reinsurance assumed for group business which represents specific reimbursement of expenses. Reimbursement to another insurer for expense of jointly underwritten group contracts. - --------------------------------------------------------------------------------------------------------------------------------- 6.7 Group service and Administration fees, service fees, or any other form of See Exhibit B Appendix administration fees allowance, reimbursement of expenses, or compensation at D 1,2 (other than commissions) to agents, brokers, applicants, policyholders or third parties in connection with the solicitation, sale, issuance, service and administration of group business. - ---------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 6.8 Reimbursements by Report as a negative amount administrative fees, direct No allocation - direct charge to uninsured accident reimbursement of expenses, or other similar receipts or company and health plans credits attributable to uninsured accident and health plans and the uninsured portion of partially insured accident and health plans. - ---------------------------------------------------------------------------------------------------------------------------------- 7.1 Agency expense All bona fide allowance for agency expense, but not No allocation - direct charge to allowance allowances constituting additional compensation. company - ---------------------------------------------------------------------------------------------------------------------------------- 7.2 Agents' balances Agents' balances charged off less any amounts recovered No allocation - direct charge to charged off during the year. company - ---------------------------------------------------------------------------------------------------------------------------------- 7.3 Agency conferences Cost of banquets and rental of meeting rooms. Expenses Primary dollars are a direct charge other than local of all persons traveling to conferences and their to company. The remaining expenses meetings expenses at conferences. in this category are allocated per Exhibit B Appendix at C 1; and D 1 - ---------------------------------------------------------------------------------------------------------------------------------- 9.1 Real estate expenses The cost of repairs, maintenance, service, and operation Direct charges by company are based of all real estate properties including insurance whether on square footage. Allocated occupied by the company or not; salaries and other expenses are handled per Exhibit B compensation of managing agents and their employees; Appendix at A; B 1,2; C 1,2; and D expenses incurred in connection with rental of such 1,2,3 properties; legal fees specifically associated with real estate transactions other than sale; rent, salaries and wages, and other direct expenses of any branch of Home Office until engaged solely in real estate work (not real estate and mortgages combined). - ---------------------------------------------------------------------------------------------------------------------------------- 9.2 Investment expenses Only items for which no specific provisions has been made See Exhibit B Appendix not included elsewhere elsewhere, e.g., contributions or assessments for at A; and D 1,2,3 bondholders' protective committees, fees of investment counsel, custodian and trustee fees. - ---------------------------------------------------------------------------------------------------------------------------------
Note: Line 9.3, Aggregate write-ins for expenses, was not detailed in this exhibit. The types of expenses, if any, and the corresponding allocation basis are completely variable year-to-year. The Cost Management Department will maintain appropriate records for this line item.
- --------------------------------------------------------------------------------------------------------------------------------- EXPENSE LINE ITEM PER GENERAL EXPENSE EXHIBIT* EXPENSE CLASSIFICATION DESCRIPTION** BASIS OF EXPENSE ALLOCATION*** - --------------------------------------------------------------------------------------------------------------------------------- 1. Real estate taxes Those taxes directly assessed against property owned by Direct charges by company are based the company. Canadian and other foreign taxes should be on square footage. Allocated included appropriately. expenses are handled per Exhibit B Appendix at A; B 1,2; C 1,2; and D 1,2,3 - --------------------------------------------------------------------------------------------------------------------------------- 2. State insurance Assessments to defray operating expenses of any state No allocation - direct charge to department licenses and insurance department. Canadian and other foreign taxes company fees should be included appropriately. Fees for examinations by state departments. - --------------------------------------------------------------------------------------------------------------------------------- 3. State taxes on premiums State taxes based on policy reserves, if in lieu of No allocation - direct charge to premium taxes. Canadian and other foreign taxes should company be included appropriately. Any portion of commissions or allowances on reinsurance assumed for group business which represents specific reimbursement of premium taxes. Deduct any portion of commissions or allowances on reinsurance ceded for group business which represents specific reimbursement of premium taxes. - --------------------------------------------------------------------------------------------------------------------------------- 4. Other state taxes Assessments of state industrial or other boards for No allocation - direct charge to operating expenses or for benefits to sick unemployed company persons in connection with disability benefit laws or similar taxes levied by states. Canadian and other foreign taxes are to be included appropriately. Advertising required by law, regulation or ruling, except in connection with investments. State sales taxes, if company does not exercise option of including such taxes with the cost of goods and services purchased. State income taxes. - --------------------------------------------------------------------------------------------------------------------------------- 5. U.S. Social Security Company's contribution is based on the current tax rate, See Exhibit B Appendix taxes which is applied to all wages, salary or compensation at A; B 1,2; C 1,2; and D 1,2,3 entered on the employees earning record and federal unemployment tax. - --------------------------------------------------------------------------------------------------------------------------------- 6. All other taxes Guaranty fund assessments and taxes of Canada or of any No allocation - direct charge to other foreign country not specifically provided for company elsewhere. Sales taxes, other than state sales taxes, if company does not exercise option of including such taxes with the cost of goods and services purchased. - ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT B APPENDIX INTERCOMPANY SERVICE AND EXPENSE ALLOCATION SUMMARY MATRIX ALLSTATE LIFE INSURANCE COMPANY AND LIFE AFFILIATES A. Office 001, 201, 203, 204, 205, 206, 207, 208 and 209 factors to the Life Parent Company are based on Service Level Agreements. Once expenses are charged to the Life Parent Company a second and third tier of allocation occurs, which allocates expenses to Profit Centers and Life Affiliates. B. P&C Head Office (Office 032) allocations to the Life Parent Company are based on: 1. Agents' compensation 2. Time and effort studies C. Regional Office allocations to the Life Parent Company are based on: 1. Agents' compensation 2. Time and effort/usage studies 3. System capacity studies D. Life Parent Company allocations to Life Affiliates are based on: 1. Expenses are direct coded to the appropriate company. 2. Determination of how expense is to be allocated to profit center is based on time studies, project activity, required capital and invested assets. The intercompany factors are based on the following methodology:
PROFIT CENTER METHODOLOGY COMPANY ------------- ----------- ------- Allstate Agent Policies in force 030, 036 Northbrook/Glenbrook Reserves in force 031, 036,038 Structured Settlements Premium income 030, 036 Direct Response Premium income 030, 036 Lincoln Benefit Time and effort studies direct to 034 Surety Life Time and effort studies direct to 032 Group Pensions Time and effort studies direct to 030
3. Any Investment Expense is based on Invested Assets. EXHIBIT C EXPENSE PROCESS OVERVIEW ALLSTATE INSURANCE GROUP For purposes of operational analysis and financial reporting, functional expense groups are made up of three primary categories: (1) Loss adjustment expenses, (2) Other underwriting expenses; and (3) Investment expenses. A more detailed description of expense items, which comprise these categories, is provided in Exhibits A and B. These exhibits are the framework for reporting expenses required by the NAIC. The expense categories, in turn, flow into the financial records based on the following cost allocation methods: a direct charge basis; an allocated or shared basis; or in accordance with the terms of one or several reinsurance agreements. The combined expense process ultimately provides for financial records that reflect the financial performance of the business. On a day-to-day basis, expenses are incurred directly by companies within the Allstate Group. The expenses are charted numerically by account. Formalized procedures are used in order to ensure that the expenses are accurately recorded and allocated to the appropriate office, company, cost center and cost element. Allocations are also provided for various support costs, which include: company, cost center and general ledger account (cost element) level with the objective of providing for an accurate means of tracking expenses.. A brief description of each of the three expense categories follows: - - Loss adjustment expenses are various costs associated with the claim handling process. These costs, which comprise all aspects of the claims handling function, include: the adjustment, factual investigation, defense and recordkeeping functions. Salaries of claim personnel and allocated executive salaries, as well as other basic costs associated with the claim function (accounting, data processing, rent, utilities, etc.) are grouped in this category. Generally, these expenses may be either direct charged, allocated, or flow to an entity by means of a separate reinsurance agreement. - - Other underwriting expenses include acquisition, general expenses, taxes, licenses and fees. The larger piece, acquisition expenses, is comprised of agent commissions, various expenses related to underwriting (motor vehicle reports, home inspections, etc.), salaries, marketing and other allocations of expenses which support the production of new and renewal business. General expenses are typically administrative in nature and do not fit cleanly in any other expense grouping. Taxes, licenses and fees pertain to: taxes (income and franchise) and licenses fees levied by state and local government; insurance department expenses; and guaranty fund assessments. These expense categories are charged to an entity in any of the same three methods shown above for Loss adjustment expenses. - - Investment expenses for research, purchase and sale activities, safekeeping, accounting and data support are the bulk of expenses in this bucket. Generally, these expenses will flow to an entity by direct charges to an entity or on an allocated basis. The mechanism for recording expenses can occur by means of one of the following three methods: - - DIRECT CHARGES - This method is used where the expenses are unique to the company incurring them. These types of expenses are not allocated to another Allstate Company due to their unique relationship to the company incurring them. Expense payments are classified to the responsible company through an accounting coding expense system involving charge company, cost center, and cost element (See Exhibits A and B for more detail). By way of example: agents' commissions, taxes, licenses and fees, and bad debt expense are company specific, and therefore, coded directly to the appropriate company. - - ALLOCATIONS THE EXPENSE ALLOCATION PROCESS CAN BE DIVIDED INTO 3 SUBCATEGORIES: 1. OFFICE - The objective of this phase of the allocation process is to properly transfer various support costs performed by one organization to another organization that they directly relate to. The basic justification for this cost transfer is efficiency gain, which is mutually beneficial to both parties. Certain processes are centrally performed on behalf of a number of entities, then allocated to the office/company being supported. Routine expenses of this nature often include support activities from the following functional areas: Accounting; Systems; Investments; Corporate Relations; Law and Regulation; and Human Resources. These costs cannot be directly expensed, it is necessary to provide for an appropriate method of allocation. An example of this method of allocation would relate to the accounting treatment of costs and expenses attributable to Allstate's Internal Audit Department (IAD). As part of the Allstate Corporate Home Office structure, IAD salaries and related expenses are allocated to other Affiliates companies and/or offices (i.e. data and profit centers) based on time and effort studies. The terms for this allocation are delineated in a separate agreement between the parties which is referred to as a Shared Service Agreement (SSA). The SSA is a vehicle which allows the parties to agree in advance on certain essential terms and conditions which include: a description of the services to be provided; the period covered; costs and standards. The SSA concept can be used to transfer expenses between Brands (e.g., Allstate, Indemnity, Life), between Shared Services (e.g., Finance, Investments, Human Resources, Technical) or between a Brand and Shared Service. The Accounting Department database is programmed to perform the allocation process on a monthly basis. The process begins with the extraction of direct costs for each office, company, cost center and general ledger account. Varying premium and claim statistics (e.g., policies in force, claim counts) as well as other common factors (e.g., number of employees, number of retirees) are then entered into the program. The resulting data provides the bases, or allocation drivers, for transferring expenses from an office/cost center /general ledger account level of detail to other charge offices/cost centers /general ledger accounts. Detail records are generated in order to provide the source and recipient of the allocated expenses. A separate process has been initiated in order to periodically review the accuracy of the factors or drivers of the allocations. The accuracy of service provider time and effort studies may be taken into account (i.e. projected v. actual). Other factors that may be considered include an inventory of activities and customers in order to ensure that allocations are accurate. Intensive discussions and management agreement between the provider and customer are also an integral part of the process. Flexibility in the overall allocation process must routinely occur to provide for changes in the business activities or organizational structure. 2. COMPANY - This step in the expense allocation process is similar the office expense allocation process described above in that allocations are charged to other affiliates . For instance, both Allstate Insurance Company and Allstate Life Insurance Company incur expenses on a direct basis for themselves and on behalf of their affiliates. A portion of these expenses may be transferred to the affiliated companies, as appropriate. Fixed factors are normally based on internal time and effort studies, agents' compensation, or statistical criteria such as gross policies issued or claim notice counts. 3. UNIFORM ACCOUNTING TRANSFER (UAT) - The next step in the process is to reclassify all of the general office expenses addressed in the direct charges and expense allocation (office and company) sections above, having been recorded on a management basis, to their required statutory expense classifications. The use of a consistent basis for reporting expenses, as dictated by the NAIC, allows the Regulators to better compare various insurance companies' operations. On the property/casualty side, broad expense categories and detail breakouts are required for both the Expense Exhibit in the annual Statutory Statement as well as the Supplemental Expense Filing, which is contained in the Insurance Expense Exhibit. For Life companies, the General Expense and the Taxes, Licenses and Fees Exhibits from the annual Statutory Statement have distinct expense categories. A synopsis of these required expense categories, along with a description of each expense category and the basis of allocation presently used by Allstate is contained in Exhibit A and appendix (Property & Casualty affiliates) and Exhibit B and appendix (Life Company affiliates). In order to provide for accurate summarization and reporting, each general ledger account (cost element) included in the Chart of Accounts is assigned a statutory expense classification. Loss adjustment, other underwriting and investment expenses are the broad classifications that UAT applies to. By way of example, a systems function, whether relating to claims, sales, or investments, is initially classified as a general office expense on a management basis. Based on the UAT process, these expenses are reclassified for statutory reporting purposes to loss adjustment, other underwriting or investments. Taxes, licenses and fees, although included in the other underwriting expense category, are not used in the UAT calculation process. These expenses are directly charged to the appropriate statutory classification within company. REINSURANCE AGREEMENTS - Separate arrangements exist between the property/casualty parent, Allstate Insurance Company, and certain affiliates, and the life parent, Allstate Life Insurance Company, and certain affiliates that drive expenses. Terms and conditions relating to methods of expense classification are contained in each of the individual reinsurance agreements. Typically, the reinsurer will be liable for a pre determined pro-rata share of all underwriting related expenses to support the assumed business. However, the reinsurer is not generally liable for the investment expenses. EXHIBIT D DEFINITIONS The following terms shown by "process flow" and "general" categories are commonly used in explanation of the Allstate Group's overall expense process. Presentation of the "process flow" section follows the same hierarchical order of our current expense processing methodology. PROCESS FLOW COMPANY - Identifies legal entity that expense is charged to and may be disbursed from. Each entity who is a party to this agreement is assigned a separate three digit company code (e.g., Allstate Insurance Company - 010, Allstate Life Insurance Company - 030). A "charged company" is the Allstate entity charged with the expense under review and whose Statement of Income would be ultimately impacted. COST CENTERS -- Describe where specific costs were incurred. Cost Centers will be the most common object used. Cost centers are areas of organizational responsibility in which costs are incurred and planned. Identifies administrative grouping within an office and duties as well as the manager responsible. Regional Office Departments include: Underwriting; Sales; Human Resources; and Claims. Each Regional Office is assigned a distinct four digit number. COST ELEMENTS -- They describe what specific costs have occurred. They are used to plan and incur direct expenses for cost objects representing a unique item or category of expense to the company. INTERNAL ORDERS -- A short-term cost collector used to collect, identify and allocate costs associated with a process, event or activity. OFFICE --Typically, office codes identify high level responsibility for the expenses charged. Office level configuration (by type or geographical location) is a key building block in the accumulation of Allstate's expenses. This data is used in preparing the various expense analyses/reports prepared. A "charged office" is the office within an Allstate entity charged with the expense under review. The decision regarding which office to charge with an expense is based on Statement of Income impact analysis. Offices may include various high level types, such as Profit Centers (Midwest Regional Office - 002), , Data Centers (Atlantic - 136), Shared Services (Human Resources - 204), and Home Offices (Corporate Home Office - 001, PP&C Head Office - 032). Each Office is designated by a three-digit code. PROFIT CENTER -- Aligns expense to a distribution channel, geographic location and product grouping (i.e. Denver Region, Colorado, Standard Auto). - GENERAL ASSESSMENTS/ALLOCATED EXPENSES -- which are incurred by one Allstate Company or office and charged, or allocated, to other companies or offices on the basis of mutual benefit. Examples of the types of allocated expenses include: Loss Adjustment, Other Underwriting and Investment Expenses. These expenses include allocations in Cost Centers from Cost Elements to Secondary Cost Elements and are described in Exhibit C. Criteria for cost allocation "drivers" are based on the implementation of management objectives. The assessments can use all three methods of allocations: Field Percentage; Fixed Amount; and Variable Portions which contain Statistical Key Figures. Additional information is included in the Exhibits and Appendixes attached. Allocation drivers agreed to by Management are used to allocate expenses, and these are described in detail in the various exhibits and appendixes. REINSURANCE AGREEMENT - An agreement between two parties where one insurer spreads its risk (premium, loss and expense) of losses with other insurers. EXHIBIT E INVESTMENT SERVICES A. APPOINTMENT. The Board of Directors of Affiliate (the "Board") has appointed Allstate as the investment advisor and manager of its investment assets (the "Account"). Pursuant to the Service and Expense Agreement of which this is Exhibit E (the "Agreement"), AFFILIATE grants Allstate the power and authority to advise, manage, and direct the investment and reinvestment of the assets of the Account for the period and on the terms and conditions set forth herein, subject to the supervision of the Board. Such Activities shall be conducted subject to and in accordance with the investment objectives, restrictions, and strategies set forth in the of Investment Policy and Investment Plan (the "Policy") adopted by the Board, and in accordance with such other limitations and guidelines as may be established from time to time for the Account by the Board (such investment objectives, restrictions, strategies, limitations, and guidelines herein referred to collectively as the "Investment Guidelines"). Allstate hereby accepts such responsibility and agrees during such period to render the services and to assume the obligations herein set forth. B. ALLSTATE AS AGENT. Allstate shall, for purposes of this Agreement, be granted and exercise full investment discretion and authority in buying, selling or otherwise disposing of or managing the investment of the assets held in the Account and in the performance of the services rendered hereunder, and shall do so as AFFILIATE's agent only, subject to Allstate's adherence to the policy stated in Item A, above. AFFILIATE hereby authorizes Allstate to exercise all such powers with respect to the assets of the Account as may be necessary or appropriate for the performance by Allstate of its obligations under this Agreement, subject to the supervision of the Board and any limitations contained herein. C. INVESTMENT ADVISORY SERVICES. In furtherance of the foregoing, and in carrying out its obligations to manage the investment and reinvestment of the assets in the Account, Allstate shall, as appropriate and consistent with the Investment Guidelines: (a) perform research and obtain and evaluate such information relating to the economics, industries, businesses, markets and new investment structures, techniques, practices, and financial data as Allstate deems appropriate in its discharge of its duties under this Agreement; (b) consult with and furnish to the Board recommendations with respect to overall investment strategies for the Account; (c) seek out and implement specific investment opportunities, consistent with such overall investment strategies approved by the Board, including making and carrying out day-to-day decisions to acquire or dispose of permissible investments, managing the investment of the assets of the Account, and providing or obtaining such services as may be necessary in managing, acquiring or disposing of investments; (d) regularly report to the Board with respect to the implementation of investment strategies and any other activities in connection with management of the Account's assets, including furnishing to the Board, within 45 days after the end of each quarter, a report including a summary of investment activity during the quarter; (e) maintain all required accounts, records, memoranda, instructions or authorizations relating to the acquisition or disposition of investments for the Account; (f) determine the securities to be purchased or sold by the Account and place orders either directly with the issuer, with any broker-dealer or underwriter that specializes in the securities for which the order is made, or with any other broker or dealer that Allstate selects; and (g) perform the services hereunder in a manner consistent with investment objectives and policies of AFFILIATE as detailed in the Investment Guidelines, as amended from time to time, and in compliance with the applicable provisions of the insurance laws and regulations of AFFILIATE's domicile, as amended and any other applicable insurance laws. D. ALLOCATION OF BROKERAGE. Allstate is authorized in its sole discretion to select the brokers or dealers that will execute the purchases and sales of securities for the Account. In making such selection, Allstate shall use its best efforts to obtain for the Account the most favorable net price and execution available taking into account all appropriate factors, including price, dealer spread or commission, if any, and size and difficulty of the transaction. If, in the judgment of Allstate, AFFILIATE would be benefited by supplemental investment research, Allstate is authorized, but not obligated, to select brokers or dealers on the basis of research information, materials, or services they could furnish to Allstate for potential use in supplementing Allstate's own information and in making investment decisions for the Account. The expenses of Allstate and the charges to AFFILIATE may not necessarily be reduced as a result of receipt of such supplemental information. Subject to the above requirements, nothing shall prohibit Allstate from selecting brokers or dealers with which it or AFFILIATE is affiliated. E. SERVICE TO OTHER CLIENTS. AFFILIATE acknowledges that Allstate may perform services for clients other than AFFILIATE which are similar to the services to be performed pursuant to this Agreement, and that Allstate is free to do so provided that its services pursuant to this Agreement are not in any way impaired. AFFILIATE agrees that Allstate may provide investment advice to any of its other clients that may differ from advice given to AFFILIATE, or take action with respect to assets owned by it or its other clients that may differ from the action taken with respect to the Account and/or assets held therein, so long as Allstate, to the extent reasonable and practicable, allocates investment opportunities to the Account on a fair and equitable basis relative to Allstate's other clients. It is understood that Allstate shall have no obligation to purchase or sell, or to recommend for purchase or sale for the Account, any security which Allstate, its affiliates, employees or agents may purchase or sell for its or their own accounts or for the account of any other client, if, in the opinion of Allstate, such transaction or investment appears unsuitable, impractical or undesirable for the Account. It is agreed that Allstate may use any supplemental investment research obtained for the benefit of AFFILIATE in providing investment advice to its other clients or its own accounts. Conversely, such supplemental information obtained by the placement of business for Allstate or other entities advised by Allstate will be considered by and may be useful to Allstate in carrying out its obligations to AFFILIATE. F. ALLOCATION OF TRADES. It is acknowledged that securities held by AFFILIATE may also be held by separate investment accounts or other funds for which Allstate may act as a manager or by Allstate or its other affiliates. If purchases or sales of securities for AFFILIATE or other entities for which Allstate or its affiliates act as investment manager arise for consideration at or about the same time, AFFILIATE agrees that Allstate may make transactions in such securities, insofar as feasible, for the respective entities in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of Allstate during the same period may increase the demand for securities being purchased or the supply of securities being sold, AFFILIATE recognizes that there may be an adverse effect on price. It is agreed that, on occasions when Allstate deems the purchase or sale of a security to be in the best interests of AFFILIATE as well as other accounts or companies, it may, to the extent permitted by applicable laws and regulations, but will not be obligated to, aggregate the securities to be so sold or purchased for AFFILIATE with those to be sold or purchased for other accounts or companies in order to obtain favorable execution and lower brokerage commissions. In that event, allocation of the securities purchased or sold, as well as the expenses incurred in the transaction, will be made by Allstate in the manner it considers to be most equitable and consistent with its obligations to AFFILIATE and to such other accounts or companies. AFFILIATE recognizes that in some cases this procedure may adversely affect the size of the position obtainable for AFFILIATE. G. CONTRACTS; AUTHORIZED SIGNATORIES. Allstate shall have the full power, right and authority, as AFFILIATE's agent, in accordance with this Agreement and the Investment Guidelines, to negotiate, apply for, enter into, execute, deliver, amend, modify and/or terminate legal documents of every kind and nature relating to or required by the investment of the assets of the Account. All such documents may be entered into in AFFILIATE's name or in Allstate's name (as agent for AFFILIATE), as Allstate shall determine, and all such documents shall be legally binding on AFFILIATE. Those certain employees and officers of Allstate who are authorized to execute transactions and sign documentation pursuant to the Policies and Procedures and Investment Guidelines adopted pursuant to authorization of the Investment Committee of Allstate, as they may be amended from time to time, shall also be authorized to the same extent to execute transactions and sign documentation on behalf of AFFILIATE and/or Allstate in connection with transactions entered into on behalf of the assets of the Account pursuant to this Agreement. H. COMPLIANCE WITH LEGAL REQUIREMENTS. Allstate shall make all reasonable efforts to comply with and cause to be complied with all applicable laws, rules, and regulations of the AFFILIATE's domicile, and any federal, state or municipal authority governing this Agreement, the services rendered hereunder, the Account and the assets held therein. Without limiting the foregoing, Allstate shall comply with all securities laws and other laws applicable to the services provided under this Agreement. I. TRANSACTION PROCEDURES. The assets of the Account are or will be held in custody by the bank custodian(s) appointed by AFFILIATE from time to time. Allstate shall not act as custodian for the assets of the Account and shall not under any circumstances have or be deemed to have ownership, custody or physical control of any of the assets of the Account. Allstate may, however, issue instructions to, and communicate with, the bank custodian for the Account as may be necessary and appropriate in connection with provision of its services pursuant to this Agreement. At the option of Allstate, instructions by Allstate to the bank custodian may be made orally or by computer, electronic instruction systems or telecommunications terminals. Allstate will confirm that the bank custodian has effected such instructions either by access to the bank's computerized identification system or by telephonic confirmation. The bank custodian will confirm with Allstate receipt of trade instructions orally or by computer for the Account. Allstate will instruct all brokers, dealers and counterparties executing orders on behalf of the assets of the Account to forward to Allstate and AFFILIATE copies of all confirmations. J. STANDARD OF PERFORMANCE. Allstate shall discharge its duties hereunder at all times in good faith and with that degree of prudence, diligence, care and skill which a prudent person rendering services as an institutional investment manager and adviser would exercise under similar circumstances. The provisions of this Agreement shall not be interpreted to imply any obligation on the part of Allstate to observe any standard of care other than as set forth in this Section J. K. RECORDKEEPING. Allstate shall keep and maintain an accurate and detailed accounting of each transaction concerning the assets of the Account and of all receipts, disbursements, and other transactions relating to the purchase and sale transactions arising hereunder. Allstate agrees to preserve such records for the greater of (i) six years; (ii) the required period pursuant to the insurance laws of AFFILIATE's domicile and related regulations; or (iii) such other time period that AFFILIATE may from time to time request. Allstate acknowledges that all such records shall be the property of AFFILIATE and shall be made available, within five (5) business days of a written request, to AFFILIATE, its accountants, auditors or other representatives of AFFILIATE for inspection and/or copying (at AFFILIATE's expense) during regular business hours. In addition, Allstate shall provide any materials, reasonably related to the investment advisory services provided hereunder, as may be reasonably requested in writing by the directors or officers of AFFILIATE or as may be required by any governmental agency with jurisdiction hereunder. Allstate further agrees to prepare and furnish to AFFILIATE and to other persons designated by AFFILIATE, at such regular intervals and other times as may be specified by AFFILIATE from time to time (i) such balance sheets, income and expense statements and other financial statements and reports, and (ii) such other statements, reports and information, in each case regarding the assets of the Account as AFFILIATE shall from time to time reasonably require. In the event of termination for any reason, all such records or copies thereof shall be returned promptly to AFFILIATE, free from any claim or retention of rights by Allstate. L. LIABILITY OF ALLSTATE. In the absence of Allstate's willful or negligent misconduct (or the willful or negligent misconduct of its officers, directors, agents, employees, controlling persons, shareholders, and any other person or entity affiliated with Allstate or retained by it to perform or assist in the performance of its obligations under this Agreement), neither Allstate nor any of its officers, directors, employees or agents shall be subject to liability to AFFILIATE for any act or omission in the course of, or connected with, rendering services hereunder. M. INDEPENDENT CONTRACTOR. Allstate shall for all purposes be deemed to be an independent contractor. Allstate shall have no power or authority to bind AFFILIATE or to assume or create an obligation or responsibility, express or implied, on behalf of AFFILIATE, nor shall it represent to anyone that it has such power or authority, except as expressly provided in this Agreement. Nothing in this Agreement shall be deemed to create a partnership between or among the parties, whether for purposes of taxation or otherwise. EXHIBIT F TO INCLUDE A LIST OF AGREEMENTS WHICH WILL TERMINATE AS OF THE EFFECTIVE DATE OF THE MASTER SERVICE AND EXPENSE AGREEMENT. / Investment Advisory and Management Agreement between Allstate Insurance Company and Lincoln Benefit Life Company effective as of January 1, 1996 pursuant to which Allstate Insurance Company provides investment advisory services to Lincoln Benefit Life Company, as amended effective January 1, 1996. (Form D-1 filed with Illinois Insurance Department on April 5, 1996 and Forms D filed in April and May 1996 with the Department of Insurance of Nebraska.) Investment Advisory and Management Agreement between Allstate Insurance Company and Surety Life Insurance Company effective as of January 1, 1996 pursuant to which Allstate Insurance Company provides investment advisory services to Surety Life Insurance Company, as amended effective January 1, 1996. (Form D-1 filed with Illinois Insurance Department on April 5, 1996 and Forms D filed in April and May 1996 with the Department of Insurance of Utah.) Investment Advisory and Management Agreement effective as of August 21, 1996 between Allstate Floridian Insurance Company and Allstate Insurance Company, pursuant to which Allstate Insurance provides investment advisory and management services to Allstate Floridian. (See Form D-1 dated July 23, 1996 filed with the Illinois Department of Insurance. See also letter dated January 23, 1997 from Florida Department of Insurance.) Services Agreement executed September 25, 1996 and effective as of June 25, 1996 between Allstate Insurance Company and Allstate Floridian Insurance Company pursuant to which Allstate Insurance provides Allstate Floridian underwriting, claims, actuarial, policy processing, tax, legal, systems, accounting and customer support services. (See Form D-1 dated July 23, 1996 filed with the Illinois Department of Insurance. See also letter dated January 23, 1997 from Florida Department of Insurance.) Service and Expense Agreement between Allstate Insurance Company and certain of its Subsidiaries and Affiliates effective June 16, 1997. (See Form D-1 filed with the Illinois Department of Insurance in May 1997 and other prior notification forms filed with the insurance departments of California, Nebraska, Texas and Utah in May 1997. Texas HCS# 27286.) Investment Advisory and Management Agreement effective as of January 1, 1998 between Allstate Insurance Company and Allstate Floridian Indemnity Company pursuant to which Allstate Insurance provides investment services to Allstate Floridian Indemnity. Investment Advisory and Management Agreement effective as of January 1, 1998 between Allstate Insurance Company and Allstate New Jersey Insurance Company pursuant to which Allstate Insurance provides investment services to Allstate New Jersey. Investment Advisory and Management Agreement between American Surety and Casualty Company ("ASCC") and Allstate Insurance Company ("Allstate") dated January 1, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to ASCC for those assets so designated by ASCC (Form D-1 filed with Illinois Department of Insurance on November 17, 1998 and accepted pursuant to a letter dated December 3, 1998). Investment Advisory and Management Agreement between Allstate Insurance Company ("Allstate") and American Heritage Life Insurance Company ("AHL") dated October 31, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to AHL for those assets so designated by AHL (Form D-1 filed with the Illinois Department of Insurance in October 1999 and other prior notification forms filed with the Florida Department of Insurance in October 1999). Investment Advisory and Management Agreement between Allstate Insurance Company ("Allstate") and AHL Select HMO Incorporated ("AHL Select") dated October 31, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to AHL Select for those assets so designated by AHL Select (Form D-1 filed with the Illinois Department of Insurance in October 1999 and other prior notification forms filed with the Florida Department of Insurance in October 1999). Investment Advisory and Management Agreement between Allstate Insurance Company ("Allstate") and First Colonial Insurance Company ("First Colonial") dated October 31, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to First Colonial for those assets so designated by First Colonial (Form D-1 filed with the Illinois Department of Insurance in October 1999 and other prior notification forms filed with the Florida Department of Insurance in October 1999). Investment Advisory and Management Agreement between Allstate Insurance Company ("Allstate") and Columbia Universal Life Insurance Company ("Columbia") dated October 31, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to Columbia for those assets so designated by Columbia (Form D-1 filed with the Illinois Department of Insurance in October 1999 and other prior notification forms filed with the Texas Department of Insurance in October 1999). Investment Advisory and Management Agreement between Allstate Insurance Company ("Allstate") and Concord Heritage Life Insurance Company, Inc. ("Concord") dated October 31, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to Concord for those assets so designated by Concord (Form D-1 filed with the Illinois Department of Insurance in October 1999 and other prior notification forms filed with the New Hampshire Department of Insurance in October 1999). Investment Advisory and Management Agreement between Allstate Insurance Company ("Allstate") and Keystone Life Insurance Company ("Keystone") dated October 31, 1999 pursuant to which Allstate will provide investment management services, investment advisory services, and certain other operational and administrative support services to Keystone for those assets so designated by Keystone (Form D-1 filed with the Illinois Department of Insurance in October 1999 and other prior notification forms filed with the Pennsylvania Department of Insurance in October 1999). Exhibit 10.3 INVESTMENT MANAGEMENT AGREEMENT AND AMENDMENT TO CERTAIN SERVICE AND EXPENSE AGREEMENTS AMONG ALLSTATE INVESTMENTS, LLC AND ALLSTATE INSURANCE COMPANY AND THE ALLSTATE CORPORATION AND CERTAIN AFFILIATES This Agreement made and effective as of January 1, 2002, among ALLSTATE INVESTMENTS, LLC, a Delaware limited liability company ("ALLSTATE INVESTMENTS"), ALLSTATE INSURANCE COMPANY, an Illinois insurance company ("Allstate"), THE ALLSTATE CORPORATION, a Delaware corporation and parent of Allstate and ALLSTATE INVESTMENTS ("Allcorp"), and those additional subsidiaries of Allcorp whose signatures appear below (individually an "Affiliate" and collectively with Allstate and Allcorp, the "Allstate Affiliates"). W I T N E S S E T H: Allstate currently provides investment management services to Allcorp and certain insurance Affiliates pursuant to a Service and Expense Agreement, dated as of January 1, 1999 (the "Insurance Affiliates Service Agreement") and to certain non-insurance Affiliates pursuant to a Service and Expense Agreement, dated as of January 1, 2000 (the "Non-Insurance Affiliates Service Agreement," and, collectively with the Insurance Affiliates Service Agreement, the "Service Agreements"). It has been determined that such investment management services in the future will be more appropriately provided to the Allstate Affiliates by a separate entity performing only investment management activities rather than by a department of Allstate, resulting in benefits to the Allstate Affiliates. Therefore, subject to obtaining all required regulatory approvals, effective January 1, 2002, Allstate's Investment Department will cease providing investment management services pursuant to the Service Agreements. All investment management services will instead be provided to the Allstate Affiliates by ALLSTATE INVESTMENTS, an Allcorp subsidiary. To accomplish this change, the Allstate Affiliates desire to amend the Service Agreements to terminate the provision of investment management services by Allstate. They also desire to contract with ALLSTATE INVESTMENTS for the rendering of investment management services by ALLSTATE INVESTMENTS subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, it is agreed as follows: ARTICLE 1 AMENDMENT OF EXISTING SERVICE AGREEMENTS 1.1 INSURANCE AFFILIATES SERVICE AGREEMENT. Allcorp, Allstate, and each insurance Affiliate hereby agree to amend the Insurance Affiliates Service Agreement by deleting Exhibit E and all references thereto such that Allstate no longer provides investment management services to Allcorp or any insurance Affiliate. 1.2 NON-INSURANCE AFFILIATES SERVICE AGREEMENT. Allstate and each non-insurance Affiliate hereby agree to amend the Non-Insurance Affiliates Service Agreement by deleting Exhibit B and all references thereto such that Allstate no longer provides investment management services to any non-insurance Affiliate. ARTICLE 2 INVESTMENT MANAGEMENT SERVICES 2.1 APPOINTMENT. Each Allstate Affiliate hereby engages ALLSTATE INVESTMENTS as the investment manager of its investment assets and grants ALLSTATE INVESTMENTS the power and authority to advise, manage, and direct the investment and reinvestment of such assets for the period and on the terms and conditions set forth herein. Such activities shall be conducted subject to and in accordance with the investment objectives, restrictions, and strategies set forth in the Investment Policy and Investment Plan (the "Policy") adopted by the Board of Directors of each such Allstate Affiliate with respect to its respective investment portfolios, and in accordance with such other limitations and guidelines as may be established from time to time for such portfolios by such Boards (such investment objectives, restrictions, strategies, limitations, and guidelines herein referred to collectively as the "Investment Guidelines"). ALLSTATE INVESTMENTS hereby accepts such responsibility and agrees during such period to render the services and to assume the obligations herein set forth, all as more fully described in Exhibit A, attached hereto (the "Services"). Each of the Allstate Affiliates may from time to time reach agreement with ALLSTATE INVESTMENTS that only certain of the listed Services will be provided. 2.2 CHARGES AND EXPENSES. Each Allstate Affiliate agrees to pay ALLSTATE INVESTMENTS a fee for the Services equal to ALLSTATE INVESTMENTS' fully burdened basis point charge for the management of such Allstate Affiliate's portfolio. 2 The fully burdened basis point charge is ALLSTATE INVESTMENTS's actual cost of managing the portfolios in which such Allstate Affiliate invests, including the provision of all administrative, reporting or other services required to manage the portfolios and provide the Services. To the extent any of ALLSTATE INVESTMENTS's costs are determined by allocations from any Allstate Affiliate, the allocation shall be made in accordance with the general provisions of the NAIC expense classification and allocation guidelines applicable to all intercompany allocations between Allstate and its insurance affiliates. ALLSTATE INVESTMENTS shall maintain and make available for review by any Allstate Affiliate, or any regulator having jurisdiction over such Allstate Affiliate, documentation showing the calculation of all such charges. Any Allstate Affiliate may request a review of such charges for the Services and such review will occur promptly thereafter. All brokerage commissions and other direct transaction charges payable to third parties shall be in addition to any fees payable to ALLSTATE INVESTMENTS for Services and may be paid on each Allstate Affiliate's behalf from the assets in the such entities portfolio or may be paid by ALLSTATE INVESTMENTS and reimbursed by such Allstate Affiliate. 2.3 PAYMENT. ALLSTATE INVESTMENTS will charge each Allstate Affiliate for the Services via the monthly expense allocation process, and payments will be through the monthly intercompany settlement process. The process will be completed by personnel of ALLSTATE INVESTMENTS and each of the Allstate Affiliates in the most timely and effective method available. ARTICLE 3 MISCELLANEOUS PROVISIONS 3.1 PREVIOUS AGREEMENTS. Except for the amendments to the Service Agreements pursuant to Article 1 above, nothing in this Agreement shall be deemed to amend any previously executed agreement between the parties. 3.2 SCOPE OF SERVICES. The scope of, and the manner in which, ALLSTATE INVESTMENTS provides the Services to the Allstate Affiliates shall be reviewed periodically by ALLSTATE INVESTMENTS and the Allstate Affiliates. 3.3 STANDARD OF PERFORMANCE. ALLSTATE INVESTMENTS shall discharge its duties hereunder at all times in good faith and with that degree of prudence, diligence, care and skill which a prudent person rendering services as an institutional investment manager would exercise under similar circumstances. The provisions of this Agreement shall not be interpreted to imply any obligation on the part of ALLSTATE INVESTMENTS to observe any standard of care other than as set forth in this Section 3.3. 3.4 BOOKS AND RECORDS. Upon reasonable notice, and during normal business hours, each Allstate Affiliate shall be entitled to, at its own expense, inspect records that pertain to the computation of charges for the Services. ALLSTATE INVESTMENTS shall at all times maintain correct and complete books, records and accounts of all Services. Each 3 Allstate Affiliate shall have unconditional right of ownership of any records prepared on its behalf under this Agreement. 3.5 LIABILITY OF ALLSTATE INVESTMENTS. In the absence of ALLSTATE INVESTMENTS's willful or negligent misconduct (or the willful or negligent misconduct of its officers, directors, agents, employees, controlling persons, shareholders, and any other person or entity affiliated with ALLSTATE INVESTMENTS or retained by it to perform or assist in the performance of its obligations under this Agreement), neither ALLSTATE INVESTMENTS nor any of its officers, directors, employees or agents shall be subject to liability to any Allstate Affiliate for any act or omission in the course of, or connected with, rendering services hereunder. 3.6 INDEPENDENT CONTRACTOR. ALLSTATE INVESTMENTS shall for all purposes be deemed to be an independent contractor. All persons performing duties hereunder at all times during the term of this agreement shall be under the supervision and control of ALLSTATE INVESTMENTS, and shall not be deemed employees of any Allstate Affiliate as a result of this Agreement and the Services provided hereunder. ALLSTATE INVESTMENTS shall have no power or authority to bind any Allstate Affiliate or to assume or create an obligation or responsibility, express or implied, on behalf of any Allstate Affiliate, nor shall it represent to anyone that it has such power or authority, except as expressly provided in this Agreement. Nothing in this Agreement shall be deemed to create a partnership between or among the parties, whether for purposes of taxation or otherwise. 3.7 ASSIGNMENT. ALLSTATE INVESTMENTS shall not assign its obligations or rights under this Agreement without the written consent of each Allstate Affiliate. ALLSTATE INVESTMENTS may terminate this Agreement in its entirety, and each Allstate Affiliate may cancel its participation in the arrangements under this Agreement, each by giving six months written notice to the other parties to this Agreement; provided, however, that in the event that the affiliate relationship ceases to exist with respect to any Affiliate, this Agreement shall terminate immediately with respect to such Allstate Affiliate. Under no circumstances will the initial term of this Agreement exceed five (5) years. 3.8 NOTICES. All communications provided for hereunder shall be in writing, and if to an Allstate Affiliate, mailed or delivered to such Allstate Affiliate at its office at the address listed in such Affiliate's Statutory Annual Statement Blank, Attention: Secretary, or if to an entity not filing a statutory Annual Statement Blank, mailed or delivered to its office at 3075 Sanders Road, Northbrook, Illinois 60062, Attention: Controller, or addressed to any party at the address such party may hereafter designate by written notice to the other parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the day and year above written. 4 THE ALLSTATE CORPORATION By: ______________________ James P. Zils Treasurer ALLSTATE INSURANCE COMPANY By: ______________________ James p. Zils Vice President and Treasurer ALLSTATE INVESTMENTS, LLC By: ______________________ Casey J. Sylla Chairman of the Board and President 5 AHL SELECT HMO, INC. By: ______________________ John. Anderson, Jr. Secretary and Treasurer ALLSTATE ASSURANCE COMPANY By: ______________________ James P. Zils Treasurer ALLSTATE COUNTY MUTUAL INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE ENTERPRISES, INC. By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE FINANCIAL, LLC By: ______________________ James P. Zils Treasurer ALLSTATE FINANCIAL CORPORATION By: ______________________ James P. Zils Treasurer 6 ALLSTATE FIRE AND CASUALTY INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE FLORIDIAN INDEMNITY COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE FLORIDIAN INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE HOLDINGS, LLC By: ______________________ James P. Zils Executive Vice President and Treasurer ALLSTATE INDEMNITY COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE INTERNATIONAL INC. By: ______________________ James P. Zils Executive Vice President and Treasurer 7 ALLSTATE INTERNATIONAL INSURANCE HOLDINGS, INC. By: ______________________ James P. Zils Executive Vice President and Treasurer ALLSTATE LIFE INSURANCE COMPANY By: ______________________ James P. Zils Treasurer ALLSTATE MOTOR CLUB, INC. By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE NEW JERSEY HOLDINGS, LLC By: ______________________ James P. Zils Executive Vice President and Treasurer ALLSTATE NEW JERSEY INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE NON-INSURANCE HOLDINGS, INC. By: ______________________ James P. Zils Treasurer 8 ALLSTATE NORTH AMERICAN INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer ALLSTATE PROPERTY AND CASUALTY INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer AMERICAN HERITAGE LIFE INSURANCE COMPANY By: ______________________ John K. Anderson, Jr. Executive Vice President, Treasurer, Chief Financial Officer and Corporate Secretary AMERICAN HERITAGE LIFE INVESTMENT CORPORATION By: ______________________ James P. Zils Treasurer ALLSTATE TEXAS LLOYD'S. INC. By:_______________________ James P. Zils Vice President and Treasurer 9 CHARTER NATIONAL LIFE INSURANCE COMPANY By: ______________________ James P. Zils Treasurer COLUMBIA UNIVERSAL LIFE INSURANCE COMPANY By: ______________________ James P. Zils Treasurer CONCORD HERITAGE LIFE INSURANCE COMPANY INC. By: ______________________ James P. Zils Treasurer DEERBROOK INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer DIRECT MARKETING CENTER INC. By: ______________________ James P. Zils Vice President and Treasurer ENCOMPASS HOLDINGS, LLC By: ______________________ James P. Zils Vice President and Treasurer 10 ENCOMPASS INDEMNITY COMPANY By: ______________________ James P. Zils Vice President and Treasurer ENTERPRISES SERVICES CORPORATION By: ______________________ James P. Zils Vice President and Treasurer FIRST COLONIAL INSURANCE COMPANY By: ______________________ John K. Anderson, Jr. Senior Vice President and Secretary GLENBROOK LIFE AND ANNUITY COMPANY By: ______________________ James P. Zils Treasurer IVANTAGE GROUP, LLC By: ______________________ James P. Zils Vice President and Treasurer IVANTAGE SELECT AGENCY, INC. By: ______________________ James P. Zils Treasurer 11 IVORY HOLDINGS, LLC By: ______________________ John K. Anderson, Jr. Secretary KEYSTONE STATE LIFE INSURANCE COMPANY By: ______________________ James P. Zils Treasurer LINCOLN BENEFIT LIFE COMPANY By: ______________________ James P. Zils Treasurer NORTHBROOK INDEMNITY COMPANY By: ______________________ James P. Zils Vice President and Treasurer NORTHBROOK LIFE INSURANCE COMPANY By: _____________________ James P. Zils Treasurer NORTHBROOK SERVICES, INC. By: ______________________ James P. Zils Treasurer 12 PEMBRIDGE AMERICA INC. By: ______________________ James P. Zils Vice President and Treasurer RESCUE EXPRESS, INC. By: ______________________ James P. Zils Vice President and Treasurer ROADWAY PROTECTION AUTO CLUB, INC. By: ______________________ James P. Zils Vice President and Treasurer STERLING COLLISION CENTERS, INC. By: ______________________ James P. Zils Treasurer SURETY LIFE INSURANCE COMPANY By: ______________________ James P. Zils Treasurer TECH-COR, INC. By: ______________________ James P. Zils Treasurer 13 THE NORTHBROOK CORPORATION By: ______________________ James P. Zils Treasurer USF&G BUSINESS INSURANCE COMPANY By: ______________________ James P. Zils Vice President and Treasurer WILLOW INSURANCE HOLDINGS INC. By: ______________________ James P. Zils Vice President and Treasurer WILLOW LAKE HOLDINGS, LLC By: ______________________ James P. Zils Vice President and Treasurer 14 Exhibit 10.3 INVESTMENT SERVICES A. APPOINTMENT. This Exhibit A details the Services to be provided by ALLLSTATE INVESTMENTS pursuant to the Investment Management Agreement among ALLSTATE INVESTMENTS and certain Allstate Affiliates to which this Exhibit A is attached. For purposes of this Exhibit A, the investment portfolio of each Allstate Affiliate will be referred to as an Account B. ALLSTATE INVESTMENTS AS AGENT. ALLSTATE INVESTMENTS shall be granted and exercise full investment discretion and authority in buying, selling or otherwise disposing of or managing the investment of the assets held in each Account and in the performance of the services rendered hereunder, and shall do so as each Allstate Affiliate's agent only, subject to ALLSTATE INVESTMENTS' adherence to the Policies and Investment Guidelines. Each Allstate Affiliate hereby authorizes ALLSTATE INVESTMENTS to exercise all such powers with respect to the assets of its respective Account as may be necessary or appropriate for the performance by ALLSTATE INVESTMENTS of its obligations under the Agreement, subject to the supervision of the Board of Directors of such Allstate affiliate (the "Board"), and any limitations contained herein. C. INVESTMENT ADVISORY SERVICES. In furtherance of the foregoing, and in carrying out its obligations to manage the investment and reinvestment of the assets in each Account, ALLSTATE INVESTMENTS shall, as appropriate and consistent with the Investment Guidelines: (a) perform research and obtain and evaluate such information relating to the economics, industries, businesses, markets and new investment structures, techniques, practices, and financial data as ALLSTATE INVESTMENTS deems appropriate in the discharge of its duties under this Agreement; (b) consult with and furnish to each Board recommendations with respect to overall investment strategies for each respective Account; (c) seek out and implement specific investment opportunities, consistent with such overall investment strategies approved by each Board, including making and carrying out day-to-day decisions to acquire or dispose of permissible investments, managing the investment of the assets of each Account, and providing or obtaining such services as may be necessary in managing, acquiring or disposing of investments; (d) regularly report to the Boards with respect to the implementation of investment strategies and any other activities in connection with management of each Account's assets, including furnishing to each Board, within 45 days after the end of each quarter, a report concerning investment activity during the quarter; (e) maintain all required accounts, records, memoranda, instructions or authorizations relating to the acquisition or disposition of investments for each Account; (f) determine the securities to be purchased or sold by each Account and place orders either directly with the issuer, with any broker-dealer or underwriter that specializes in the securities for which the order is made, or with any other broker or dealer that ALLSTATE INVESTMENTS selects; and (g) perform the services hereunder in a manner consistent with investment objectives and policies of each Allstate Affiliate as detailed in the respective Investment Guidelines, as amended from time to time, and in compliance, as appropriate, with the applicable provisions of the insurance laws and regulations of each Allstate Affiliate's domicile, as amended and any other applicable laws. D. ALLOCATION OF BROKERAGE. ALLSTATE INVESTMENTS is authorized in its sole discretion to select the brokers or dealers that will execute the purchases and sales of securities for each Account. In making such selection, ALLSTATE INVESTMENTS shall use its best efforts to obtain for each Account the most favorable net price and execution available taking into account all appropriate factors, including price, dealer spread or commission, if any, and size and difficulty of the transaction. If, in the judgment of ALLSTATE INVESTMENTS, an Allstate Affiliate would be benefited by supplemental investment research, ALLSTATE INVESTMENTS is authorized, but not obligated, to select brokers or dealers on the basis of research information, materials, or services they could furnish to ALLSTATE INVESTMENTS for potential use in supplementing ALLSTATE INVESTMENTS' own information and in making investment decisions for each Account. The expenses of ALLSTATE INVESTMENTS and the charges to an Allstate Affiliate may not necessarily be reduced as a result of receipt of such supplemental information. Subject to the above requirements, nothing shall prohibit ALLSTATE INVESTMENTS from selecting brokers or dealers with which it or any Allstate Affiliate is affiliated. E. SERVICE TO OTHER CLIENTS. Each Allstate Affiliate acknowledges that ALLSTATE INVESTMENTS may perform services for clients other than the Allstate Affiliates that are similar to the services to be performed pursuant to this Agreement, and that ALLSTATE INVESTMENTS is free to do so provided that its services pursuant to this Agreement are not in any way impaired. Each Allstate Affiliate agrees that ALLSTATE INVESTMENTS may provide investment advice to any of its other clients that may differ from advice given to such Allstate Affiliate, or take action with respect to assets owned by it or its other clients that may differ from the action taken with respect to any Account and/or assets held therein, so long as ALLSTATE INVESTMENTS, to the extent reasonable and practicable, allocates investment opportunities to each Account on a fair and equitable basis relative to ALLSTATE INVESTMENTS' other clients. It is understood that ALLSTATE INVESTMENTS shall have no obligation to purchase or sell, or to recommend for purchase or sale for any Account, any security that ALLSTATE INVESTMENTS, its affiliates, employees or agents may purchase or sell for its or their own accounts or for the account of any other client, if, in the opinion of ALLSTATE INVESTMENTS, such transaction or investment appears unsuitable, impractical or undesirable for such Account. It is agreed that ALLSTATE INVESTMENTS may use any supplemental investment research obtained for the benefit of an Allstate Affiliate in providing investment advice to its other clients or its own accounts. Conversely, such supplemental information obtained by the placement of business for ALLSTATE INVESTMENTS or other entities advised by ALLSTATE INVESTMENTS will be considered by and may be useful to ALLSTATE INVESTMENTS in carrying out its 2 obligations to each Allstate Affiliate. F. ALLOCATION OF TRADES. It is acknowledged that securities held by an Allstate Affiliate may also be held by separate investment accounts or other funds for which ALLSTATE INVESTMENTS may act as a manager. If purchases or sales of securities for an Allstate Affiliate or other entities for which ALLSTATE INVESTMENTS acts as investment manager arise for consideration at or about the same time, each such Allstate Affiliate agrees that ALLSTATE INVESTMENTS may make transactions in such securities, insofar as feasible, for the respective entities in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of ALLSTATE INVESTMENTS during the same period may increase the demand for securities being purchased or the supply of securities being sold, each Allstate Affiliate recognizes that there may be an adverse effect on price. It is agreed that, on occasions when ALLSTATE INVESTMENTS deems the purchase or sale of a security to be in the best interests of an Allstate Affiliate as well as other accounts or companies, it may, to the extent permitted by applicable laws and regulations, but will not be obligated to, aggregate the securities to be so sold or purchased for such Allstate Affiliate with those to be sold or purchased for other accounts or companies in order to obtain favorable execution and lower brokerage commissions. In that event, allocation of the securities purchased or sold, as well as the expenses incurred in the transaction, will be made by ALLSTATE INVESTMENTS in the manner it considers to be most equitable and consistent with its obligations to such Allstate Affiliate and to such other accounts or companies. Each Allstate Affiliate recognizes that in some cases this procedure may adversely affect the size of the position obtainable for such Allstate Affiliate. G. CONTRACTS; AUTHORIZED SIGNATORIES. ALLSTATE INVESTMENTS shall have the full power, right and authority, as each Allstate Affiliate's agent, in accordance with this Agreement and the Investment Guidelines, to negotiate, apply for, enter into, execute, deliver, amend, modify and/or terminate legal documents of every kind and nature relating to or required by the investment of the assets of each Account. All such documents may be entered into in an Allstate Affiliate's name or in ALLSTATE INVESTMENTS' name (as agent for such Allstate Affiliate), as ALLSTATE INVESTMENTS shall determine, and all such documents shall be legally binding on such Allstate Affiliate. Those certain employees and officers of ALLSTATE INVESTMENTS who are authorized to execute transactions and sign documentation pursuant to the Policies and Procedures adopted pursuant to authorization of the ALLSTATE INVESTMENTS' Board of Directors, as they may be amended from time to time, shall also be authorized to the same extent to execute transactions and sign documentation on behalf of any Allstate Affiliate and/or ALLSTATE INVESTMENTS in connection with transactions entered into on behalf of the assets of any Account pursuant to this Agreement. H. COMPLIANCE WITH LEGAL REQUIREMENTS. ALLSTATE INVESTMENTS 3 shall make all reasonable efforts to comply with and cause to be complied with all applicable laws, rules, and regulations of the each Allstate Affiliate's domicile, and any federal, state or municipal authority governing this Agreement, the services rendered hereunder, each Account and the assets held therein. Without limiting the foregoing, ALLSTATE INVESTMENTS shall comply with all securities laws and other laws applicable to the services provided under this Agreement. I. TRANSACTION PROCEDURES. The assets of each Account are or will be held in custody by the bank custodian(s) appointed by each Allstate Affiliate from time to time. ALLSTATE INVESTMENTS shall not act as custodian for the assets of any Account and shall not, under any circumstances, have or be deemed to have ownership, custody or physical control of any of the assets of any Account. ALLSTATE INVESTMENTS may, however, issue instructions to, and communicate with, the bank custodian for each Account as may be necessary and appropriate in connection with provision of its services pursuant to this Agreement. At the option of ALLSTATE INVESTMENTS, instructions by ALLSTATE INVESTMENTS to the bank custodian may be made orally or by computer, electronic instruction systems or telecommunications terminals. ALLSTATE INVESTMENTS will confirm that the bank custodian has effected such instructions either by access to the bank's computerized identification system or by telephonic confirmation. The bank custodian will confirm with ALLSTATE INVESTMENTS receipt of trade instructions orally or by computer for the Account. ALLSTATE INVESTMENTS will instruct all brokers, dealers and counterparties executing orders on behalf of the assets of an Account to forward to ALLSTATE INVESTMENTS copies of all confirmations. J. RECORDKEEPING. ALLSTATE INVESTMENTS shall keep and maintain an accurate and detailed accounting of each transaction concerning the assets of each Account and of all receipts, disbursements, and other transactions relating to the purchase and sale transactions arising hereunder. ALLSTATE INVESTMENTS agrees to preserve such records for the greater of (i) six years; (ii) the required period pursuant to the insurance laws of an Allstate Affiliate's domicile and related regulations; or (iii) such other time period that an Allstate Affiliate may from time to time request. ALLSTATE INVESTMENTS acknowledges that all such records shall be the property of each Allstate Affiliate and shall be made available, within five (5) business days of receipt of a written request, to an Allstate Affiliate, its accountants, auditors or other representatives of the Allstate Affiliate for inspection and/or copying (at such Allstate Affiliate's expense) during regular business hours. In addition, ALLSTATE INVESTMENTS shall provide any materials, reasonably related to the investment advisory services provided hereunder, as may be reasonably requested in writing by the directors or officers of an Allstate Affiliate, or as may be required by any governmental agency with jurisdiction hereunder. ALLSTATE INVESTMENTS further agrees to prepare and furnish to each Allstate Affiliate and to other persons designated by such Allstate Affiliate, at such regular intervals and other times as may be specified by such Allstate Affiliate from time to time (i) such balance sheets, income and expense statements and other financial 4 statements and reports, and (ii) such other statements, reports and information, in each case regarding the assets of its Account as such Allstate Affiliate shall from time to time reasonably require. In the event of termination of this Agreement for any reason, all such records or copies thereof shall be returned promptly to the respective Allstate Affiliate, free from any claim or retention of rights by ALLSTATE INVESTMENTS. 5 EX-23 4 nexhibit23.txt CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 033-84480, No. 033-50884, and No. 333-58520 of Northbrook Life Insurance Company on Form S-3 of our report dated February 20, 2002, appearing in this Annual Report on Form 10-K of Northbrook Life Insurance Company for the year ended December 31, 2001. /s/ Deloitte & Touche LLP Chicago, Illinois March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----