-----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, P89e+q/ZfYYItAQgnjcjZ71OnNFV9OFezbB+ilk6tC4IvZPi8YMrDCwCPoG5/SsM 9DXyAi0w9xjkFNmnS2DU5g== 0000945094-02-000522.txt : 20020814 0000945094-02-000522.hdr.sgml : 20020814 20020814134129 ACCESSION NUMBER: 0000945094-02-000522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-39268 FILM NUMBER: 02734051 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-Q 1 nlic2qdoc.txt NORTHBROOK LIFE INSURANCE COMPANY 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2002 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 or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3100 Sanders Road 60062 Northbrook, Illinois (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 847-402-5000 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 31, 2002, Registrant had 25,000 shares of common stock outstanding, par value $100 per share, all of which shares are held by Allstate Life Insurance Company. NORTHBROOK LIFE INSURANCE COMPANY INDEX TO QUARTERLY REPORT ON FORM 10-Q JUNE 30, 2002
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Statements of Operations for the Three Month and Six Month Periods Ended June 30, 2002 and 2001 (unaudited) 3 Condensed Statements of Financial Position as of June 30, 2002 (unaudited) and December 31, 2001 4 Condensed Statements of Cash Flows for the Six Month Periods Ended June 30, 2002 and 2001 (unaudited) 5 Notes to Condensed Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature Page 19
2 PART 1. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS NORTHBROOK LIFE INSURANCE COMPANY CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------ ------------- ----------- ------------------------ (in thousands) 2002 2001 2002 2001 ------------- ----------- ----------- ----------- (Unaudited) (Unaudited) REVENUES Net investment income $ 1,462 $ 1,479 $ 2,944 $ 3,052 Realized capital gains and losses - (43) 51 - ------------- ----------- ----------- ----------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 1,462 1,436 2,995 3,052 Income tax expense 510 500 1,044 1,063 ------------- ----------- ----------- ----------- NET INCOME $ 952 $ 936 $ 1,951 $ 1,989 ============= =========== =========== ===========
See notes to condensed financial statements. 3 NORTHBROOK LIFE INSURANCE COMPANY CONDENSED STATEMENTS OF FINANCIAL POSITION
June 30, December 31, 2002 2001 --------------- ----------------- --------------- ----------------- (in thousands, except par value data) (Unaudited) ASSETS Investments Fixed income securities, at fair value (amortized cost $89,479 and $88,263) $ 94,284 $ 91,969 Short-term 5,343 5,746 -------------- ---------------- Total investments 99,627 97,715 Cash 35,965 - Receivable from affiliates, net - 202 Reinsurance recoverable from Allstate Life Insurance Company, net 2,159,325 2,046,987 Other assets 2,188 2,561 Separate Accounts 5,702,026 6,236,902 -------------- ---------------- TOTAL ASSETS $ 7,999,131 $ 8,384,367 ============== ================ LIABILITIES Contractholder funds $ 2,009,392 $ 1,896,647 Reserve for life-contingent contract benefits 149,898 150,349 Current income taxes payable 914 2,057 Deferred income taxes 3,393 2,994 Other liabilities and accrued expenses 16,492 - Payable to affiliates, net 18,933 - Separate Accounts 5,702,026 6,236,902 -------------- ---------------- TOTAL LIABILITIES 7,901,048 8,288,949 -------------- ---------------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4) 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 35,860 33,909 Accumulated other comprehensive income: Unrealized net capital gains and losses 3,123 2,409 -------------- ---------------- Total accumulated other comprehensive income 3,123 2,409 -------------- ---------------- TOTAL SHAREHOLDER'S EQUITY 98,083 95,418 -------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,999,131 $ 8,384,367 ============== ================
See notes to condensed financial statements. 4 NORTHBROOK LIFE INSURANCE COMPANY CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ---------------------------- ---------------------------- (in thousands) 2002 2001 ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,951 $ 1,989 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and other non-cash items 379 336 Realized capital gains and losses (51) - Changes in: Life-contingent contract benefits and contractholder funds, net of reinsurance recoverables (44) 5 Income taxes payable (1,129) 1,064 Receivable/payable to affiliates, net 19,135 (5,633) Other operating assets and liabilities 16,459 83 ------------- ------------ Net cash provided by (used in) operating activities 36,700 (2,156) ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Fixed income securities Proceeds from sales 2,062 9,127 Investment collections 2,857 1,738 Investment purchases (6,057) (6,428) Change in short-term investments, net 403 (2,281) ------------- ------------ Net cash (used in) provided by investing activities (735) 2,156 ------------- ------------ NET INCREASE IN CASH 35,965 - CASH AT BEGINNING OF PERIOD - - ------------- ------------ CASH AT END OF PERIOD $ 35,965 $ - ============= ============
See notes to condensed financial statements. 5 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed 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"). The condensed financial statements and notes as of June 30, 2002, and for the three-month and six-month periods ended June 30, 2002 and 2001, are unaudited. The condensed financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. These condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Northbrook Life Insurance Company Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. To conform with the 2002 and year-end 2001 presentations, certain prior year amounts have been reclassified. PENDING ACCOUNTING STANDARDS On July 31, 2002, the AICPA issued an exposure draft Statement of Position ("SOP") entitled "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts". The accounting guidance contained in the proposed SOP applies to several of the Company's products and product features. The proposed effective date of the SOP is fiscal years beginning after December 15, 2003, with earlier adoption encouraged. Initial application should be as of the beginning of the fiscal year; therefore, if adopted during an interim period of 2003, prior interim periods should be restated. Most provisions of the proposed SOP will have a minimal impact to the Company, however, a provision that requires the establishment of a liability in addition to the account balance for contracts that contain death or other insurance benefits may have a material impact on the condensed statement of operations ceded to ALIC depending on the market conditions at the time of adoption. Contracts affected are those that contain provisions wherein the amounts assessed against the contractholder each period for the insurance benefit feature are not proportionate to the insurance coverage provided for the period. These contract provisions are commonly referred to as guaranteed minimum death benefits. The SOP concludes, in accordance with the Company's policy, that no liability should be recognized during the accumulation phase for contract features that guarantee a minimum amount for annuitization, upon election by the contractholder, at a contractually specified future date. These product features are commonly referred to as guaranteed minimum income benefits. 6 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. REINSURANCE The Company has reinsurance agreements whereby all premiums, contract charges, credited interest, policy benefits and expenses are ceded to ALIC and a non-affiliate and are reflected net of such reinsurance in the condensed statements of operations. The Company follows a comprehensive evaluation process involving credit scoring and capacity to select reinsurers. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the condensed 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 are not included in the Company's condensed financial statements as those assets are owned and managed by ALIC under terms of the reinsurance agreements. The effects of reinsurance on premiums and contract charges are as follows:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- ------------------------------- ------------- --------------- ------------- -------------- 2002 2001 2002 2001 ------------- --------------- ------------- -------------- (in thousands) PREMIUMS AND CONTRACT CHARGES Direct $ 25,537 $ 28,055 $ 50,339 $ 56,543 Ceded Affiliate (25,478) (28,030) (50,236) (56,436) Non-affiliate (59) (25) (103) (107) --------- ------------- ------------ ------------ Premiums and contract charges, net of reinsurance $ - $ - $ - $ - ========= ============= ============ ============
The effects of reinsurance on credited interest, policy benefits and other expenses are as follows: Three Months Ended Six Months Ended June 30, June 30, --------------------------- -------------------------------- ---------- ----------- -------------- ------------ (in thousands) 2002 2001 2002 2001 ---------- ----------- -------------- ------------ ---------- ----------- -------------- ------------ CREDITED INTEREST, POLICY BENEFITS AND OTHER EXPENSES Direct $ 51,469 $ 58,325 $ 95,830 $ 108,844 Ceded Affiliate (51,419) (58,307) (95,682) (108,818) Non-affiliate (50) (18) (148) (26) ---------- ---------- ----------- ------------- Credited interest, policy benefits and other expenses, net of reinsurance $ - $ - $ - $ - ========== ========== =========== =============
7 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 3. COMPREHENSIVE INCOME The components of other comprehensive income on a pretax and after-tax basis are as follows:
Three Months Ended June 30, -------------------------------------------------------------------------------- (in thousands) 2002 2001 ------------------------------------ --------------------------------------- After- After- Pretax Tax tax Pretax Tax tax --------- ------- --------- ---------- --------- ---------- --------- ------- --------- ---------- --------- ---------- UNREALIZED CAPITAL GAINS AND LOSSES: Unrealized holding gains (losses) arising during the period $ 2,433 $ (852) $ 1,581 $ (1,108) $ 388 $ (720) Less: reclassification adjustments - - - (43) 15 (28) --------- ------- ----------- ---------- --------- -------- Unrealized net capital gains (losses) 2,433 (852) 1,581 (1,065) 373 (692) --------- ------- ----------- ---------- --------- -------- Other comprehensive income (loss) $ 2,433 $ (852) 1,581 $ (1,065) $ 373 (692) ========= ======= ========== ========= Net income 952 936 ----------- -------- Comprehensive income $ 2,533 $ 244 =========== ======== Six Months Ended June 30, -------------------------------------------------------------------------------- (in thousands) 2002 2001 ------------------------------------ --------------------------------------- After- After- Pretax Tax tax Pretax Tax tax --------- ------- --------- ---------- --------- ---------- --------- ------- --------- ---------- --------- ---------- UNREALIZED CAPITAL GAINS AND LOSSES: Unrealized holding gains (losses) arising during the period $ 1,150 $ (403) $ 747 $ 335 $ (117) $ 218 Less: reclassification adjustments 51 (18) 33 - - - --------- ------- -------- --------- --------- --------- Unrealized net capital gains (losses) 1,099 (385) 714 335 (117) 218 --------- ------- -------- --------- --------- --------- Other comprehensive income (loss) $ 1,099 $ (385) 714 $ 335 $ (117) 218 ========= ======= ========= ========= Net income 1,951 1,989 -------- --------- Comprehensive income $ 2,665 $ 2,207 ======== =========
4. 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. Various other legal and regulatory actions are currently pending that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of an increasing number of class action lawsuits and other types of litigation based on a variety of issues, some of which involve claims for substantial and/or indeterminate amounts (including punitive and treble damages) and the outcomes of which are unpredictable. However, at this time, based on their present status, it is the opinion of management that the ultimate liability, if any, in one or more of these other 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. 8 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 5. EXCLUSIVE DISTRIBUTION AGREEMENT The Company has a strategic alliance with Morgan Stanley DW, Inc. ("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 the 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 of the net profits with MSDW on contracts written under the alliance, except for the fees and benefits related to enhanced guaranteed minimum death or income benefits which are reinsured to ALIC or external reinsurers. The strategic alliance is cancelable for new business by either party by giving 30 days written notice, however, the Company believes MSDW is unlikely to terminate the alliance given the benefits derived by it. 9 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 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 CONDENSED FINANCIAL STATEMENTS AND RELATED NOTES THERETO FOUND UNDER PART I. ITEM 1. CONTAINED HEREIN AND WITH THE DISCUSSION, ANALYSIS, FINANCIAL STATEMENTS AND NOTES THERETO IN PART I. ITEM 1. AND PART II. ITEM 7. AND ITEM 8. OF THE NORTHBROOK LIFE INSURANCE COMPANY ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, WHICH INCLUDES A DISCUSSION OF THE COMPANY'S CRITICAL ACCOUNTING POLICIES. OVERVIEW The Company, a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a wholly owned subsidiary of 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., ("MSDW") a subsidiary of Morgan Stanley Dean Witter & Co. The 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. 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 condensed statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance and administration fees and mortality, surrender and expense charges, all of which 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. These guarantees are ceded to ALIC in accordance with the reinsurance agreements. RESULTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ------------------------------ ------------ ------------ ------------ ------------ (in thousands) 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net investment income $ 1,462 $ 1,479 $ 2,944 $ 3,052 Realized capital gains and losses - (43) 51 - Income tax expense 510 500 1,044 1,063 ------------ ------------ ----------- ------------ Net income $ 952 $ 936 $ 1,951 $ 1,989 ============ ============ =========== ============
The Company has reinsurance agreements whereby all premiums, contract charges, credited interest, policy benefits and expenses are ceded to ALIC and a non-affiliate, and reflected net of such reinsurance in the condensed statements of operations. The Company's results of operations include net investment income and realized capital gains and losses earned on the assets of the Company that are not transferred under the reinsurance agreements. 10 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 Net income increased 1.7% for the second quarter of 2002 when compared to the same period in 2001 due to no realized capital losses. For the first six months of 2002, net income decreased 1.9% when compared to the same period last year as a result of lower net investment income being only partially offset by realized capital gains. Pretax net investment income in the second quarter of 2002 was comparable to the same period in 2001. For the first six months of 2002 pretax net investment income decreased 3.5% compared to the same period last year. The decrease in net investment income is due to slightly lower yields partially offset by increased investment balances. Investment balances at June 30, 2002, excluding Separate Accounts and unrealized gains and losses on fixed income securities, increased 2.1% compared to June 30, 2001. There were no after-tax realized capital gains or losses in the second quarter of 2002 compared to a loss of $28 thousand in the same period in 2001. For the first six months of 2002, after-tax realized capital gains were $33 thousand compared to none in the same period last year. Realized capital gains and losses result from the sale of fixed income securities. 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 the Company determines that a decline in the value of a security is other than temporary.
FINANCIAL POSTION (in thousands) June 30, December 31, 2002 2001 -------------- ------------------ -------------- ------------------ Fixed income securities (1) $ 94,284 $ 91,969 Short-term 5,343 5,746 ------------- ----------------- Total investments $ 99,627 $ 97,715 ============= ================= Cash $ 35,965 $ - ============= ================= Reinsurance recoverable from ALIC, net $ 2,159,325 $ 2,046,987 ============= ================= Contractholder funds $ 2,009,392 $ 1,896,647 ============= ================= Reserves for life-contingent contract benefits $ 149,898 $ 150,349 ============= ================= Separate Accounts assets and liabilities $ 5,702,026 $ 6,236,902 ============= =================
(1) Fixed income securities are carried at fair value. Amortized cost for these securities was $89.5 million at June 30, 2002 and $88.3 million at December 31, 2001. Total investments were $99.6 million at June 30, 2002 compared to $97.7 million at December 31, 2001. The increase in total investments was due to positive cash flows from operations and an increase in unrealized capital gains on fixed income securities. At June 30, 2002, unrealized capital gains on fixed income securities were $4.8 million compared to $3.7 million at December 31, 2001. At June 30, 2002, 98.9% of the Company's fixed income securities portfolio was rated investment grade, which is defined by the Company as a security having a rating from the National Association of Insurance Commissioners ("NAIC") of 1 or 2, a Moody's rating of Aaa, Aa, A, Baa or comparable Company internal rating. Commencing in late July 2002, deterioration of U.S. credit markets significantly escalated. For example, in July the Lehman Bothers U.S. Investment-Grade Credit Index under-performed U.S. Treasuries by 259 basis points, its second-worst month ever. In particular, the telecommunications, airlines, and energy sectors in which the Company has holdings have been adversely affected. This deterioration, along with reduced market liquidity, could also extend to other segments of the economy and is expected to lead to increased recognition of realized capital losses from investment write-downs and portfolio trading in subsequent periods. At June 30, 2002, cash was $36.0 million compared to none at December 31, 2001. Cash increased due to a change in the management process for Separate Accounts receipts and disbursements. 11 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 At June 30, 2002 Contractholder funds increased $112.7 million to $2.01 billion from $1.90 billion at December 31, 2001 as the result of additional deposits from fixed annuities and credited interest that were partially offset by surrenders and withdrawals. Reinsurance recoverable from ALIC increased correspondingly by $112.3 million due to the increase in contractholder funds. At June 30, 2002, Separate Accounts assets and liabilities decreased 8.6% to $5.70 billion compared to the December 31, 2001 balance. The decreases were primarily attributable to unrealized losses in the Separate Accounts investment portfolios due to equity market conditions and surrenders and withdrawals, partially offset by sales of variable annuity contracts and transfers from the fixed account contract option to variable Separate Accounts funds. CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES The Company's capital resources consist of shareholder's equity. The following table summarizes the capital resources. June 30, December 31, (in thousands) 2002 2001 ------------ ---------------- ------------ ---------------- Common stock and retained income $ 94,960 $ 93,009 Accumulated other comprehensive income 3,123 2,409 ------------ --------------- Total shareholder's equity $ 98,083 $ 95,418 ============ =============== SHAREHOLDER'S EQUITY Shareholder's equity increased $2.7 million in the first six months of 2002 when compared to December 31, 2001, due to net income and an increase in unrealized net capital gains and losses. DEBT The Company had no outstanding debt at June 30, 2002 and December 31, 2001. 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 multiple level downgrade, while not expected, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company shares its financial strength ratings with its parent, ALIC, due to the 100% reinsurance agreements. 12 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 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, including the Company, to "negative" from "stable". This revision is part of an ongoing life insurance industry review being conducted by Standard & Poor's. Moody's and A.M. Best reaffirmed their ratings and outlook for the Company and ALIC. LIQUIDITY The principal sources of funds for the Company include the following activities: SOURCES OF FUNDS Statutory premiums and deposits Reinsurance recoveries Receipts of principal, interest and dividends on investments Sales of investments Capital contributions from ALIC Inter-company loans The principal uses of funds for the Company include the following activities: USES OF FUNDS Payment of contract benefits, maturities, surrenders and withdrawals Reinsurance cessions and payments Operating expenses Purchase of investments Repayment of inter-company loans Dividends to ALIC 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, including guaranteed minimum income and death benefits, contract maturities, contract surrenders and withdrawals and certain operating costs, excluding those relating to Separate Accounts, 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 is dependent on ALIC's ability to meet its obligations under the reinsurance program. ALIC's financial strength was rated Aa2, AA+, and A+ by Moody's, Standard & Poor's and A.M. Best, respectively, at June 30, 2002. The Company has entered into an inter-company loan agreement with the Corporation. The amount of inter-company loans available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. No amounts were outstanding for the Company under the inter-company loan agreement at June 30, 2002 and December 31, 2001. RECENT DEVELOPMENTS The Company is currently evaluating the benefits of, and taking preliminary steps towards, merging the Company into ALIC. FORWARD-LOOKING STATEMENTS 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. 13 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties 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. o Currently, the Corporation is examining the potential exposure, if 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 too 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. o Changes in market interest rates can have adverse effects on the Company's investment portfolio and investment income. Increasing market interest rates have an adverse impact on the value of the investment portfolio, for example, 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 maturities, calls and prepayments of investments into new investments that could be yielding less than the portfolio's average rate. Changes in market interest rates as compared to rates offered on some of the Company's products could make those products less attractive if competitive investment margins are not maintained, leading to lower sales and/or changes in the level of surrenders and withdrawals on these products. o The Company amortizes deferred policy acquisition costs ("DAC") related to interest-sensitive life and investment contracts in proportion to gross profits over the estimated lives of the contract periods. Periodically, the Company updates the assumptions underlying the estimated future gross profits, which include estimated future contract charges, investment margins and expenses, in order to reflect actual and expected experience and its potential impact to the valuation of DAC. Updates to these assumptions could potentially result in adjustment to the cumulative amortization of DAC. For example, reduced estimated future gross profits resulting from declines in contract charges assessed against the Separate Accounts' balances invested in equity securities which have declined in value, could potentially result in increased amortization of DAC. An adjustment, if any, may have a material effect on results of operations ceded to ALIC. DAC and any related adjustments are ceded to ALIC. o The impact of decreasing Separate Accounts balances resulting from volatile market conditions, underlying fund performance and sales management performance could cause contract charges realized by the Company, as well as ALIC, to decrease and lead to an increase of exposure to pay guaranteed minimum income and death benefits and could result in increased statutory reserves for these benefits, reducing the Company's, as well as ALIC's statutory capital and surplus. In addition, 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, resulting in adverse mortality trends that may have a material effect on results of operations ceded to ALIC. 14 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 o Conditions in the U.S. and international stock markets can have an impact on the Company's variable annuities sales. In general, sales of variable annuities increase when the stock markets are generally rising over an extended period of time and decrease when stock markets are falling over an extended period of time. o 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. o 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 contract benefits 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. o 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. o The Company is affiliated with various entities registered under the federal securities laws as broker-dealers, investment advisers and/or investment companies. These entities are subject to the regulatory jurisdiction of the Securities and Exchange Commission, the National Association of Securities Dealers and /or, in some cases, state securities administrators. The laws regulating the securities products and activities of the Company are complex, numerous and subject to change. As with any highly regulated industry, there is some degree of risk of regulatory non-compliance; however the Company has in place various legal and compliance personnel, procedures and systems designed to reasonably assure compliance with these requirements. o The Company distributes its products under an agreement with MSDW who 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 due to 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. o While positive operating cash flows are expected to continue to meet the Corporation's liquidity requirements, the Corporation's liquidity could be 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 could also experience a similar downgrade. o The events of September 11, 2001, and 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, 2001. However, if an event of similar or greater magnitude occurred 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. 15 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 o 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 business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change a company's ratings due to, for example, a decline in the value of a company's investment portfolio or increased reserves due to additional minimum income or death benefit exposure resulting from market declines. A multiple level downgrade of either the Company or ALIC, while not expected, could have a material adverse effect on the Company's sales, including the competitiveness of the Company's product offerings, its ability to market products, and its financial condition and results of operations. Also, the rating agencies have a variety of policies and practices regarding the relationships among ratings of affiliated entities. As such, the ratings of the Company or ALIC could be affected by changes in ratings of AIC and/or the Corporation. o 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 to ALIC and to use its capital in other ways. o The Company currently has Separate Account liabilities which contain death benefit features covered by the exposure draft Statement of Position ("SOP") entitled "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts". The Company does not currently hold liabilities for death benefit features covered by the SOP. If adopted, the Company's establishment of liabilities with respect to the contracts could have a material impact on the statement of operations ceded to ALIC, however the market values at the time of adoption will affect the amount of the liability required. o 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. In addition, members of Congress have introduced or discussed measures to permit optional federal chartering, and thus regulation, of some types of insurance business, such as life insurance and annuities. 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 effect any such measures would have on the Company. o 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, grandfathered 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. 16 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 o 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. o The impact of The Sarbanes-Oxley Act of 2002 on the business of the Company is being evaluated but cannot be determined at this time. 17 PART II - Other Information Item 1. Legal Proceedings The discussion "Regulation and Legal Proceedings" in Part I, Item 1, Note 4 of this Form 10-Q is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits An Exhibit Index has been filed as part of this report on page E-1. (b) Reports on Form 8-K None. 18 SIGNATURES Pursuant to the requirements 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. Dated August 13, 2002. NORTHBROOK LIFE INSURANCE COMPANY ---------------------------------- (Registrant) By /s/SAMUEL H. PILCH ------------------ Samuel H. Pilch Group Vice President and Controller (chief accounting officer and authorized officer of registrant) 19 Exhibit Index EXHIBIT NO. DESCRIPTION 10.1 Reinsurance Agreement between Allstate Life Insurance Company and Northbrook Life Insurance Company, effective December 31, 1987; as amended by Amendment No.1 effective September 1, 1990; Amendment No.2 effective September 28, 1993; Amendment No.3 effective February 1, 1995; Amendment No.4 effective June 12, 1995; Amendment No.5 executed January 26, 1996; Amendment No.6 effective December 30, 1996 and Amendment No.7 executed October 22, 1998 10.2 Reinsurance Agreement between Allstate Life Insurance Company and Northbrook Life Insurance Company, effective December 31, 1987; as amended by Amendment No.1 effective September 1, 1990; Amendment No.2 effective June 8, 1995; Amendment No.3 effective February 1, 1995; Amendment No.4 executed January 26, 1996; Amendment No.5 effective December 30, 1996 and Amendment No.6 executed October 22, 1998 E-1 EX-10 3 nlicqexh10.txt AGREEMENTS Exhibit 10.1 REINSURANCE AGREEMENT BETWEEN THE NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") Article I. BASIS OF REINSURANCE 1. One-hundred percent (100%) of the net benefits (defined in Article II, Paragraph 1), under all eligible policies (defined in Schedule A) of NORTHBROOK, will be reinsured with ALLSTATE. 2. This reinsurance will be ceded to ALLSTATE on an automatic coinsurance basis. 3. In no event will reinsurance under this Agreement be in force unless the corresponding policy issued by NORTHBROOK or the reinsurance accepted by NORTHBROOK is in force. Article II. REINSURANCE BENEFITS 1. Net benefits are defined as follows: (a) For a policy issued directly by NORTHBROOK and reinsured under this Agreement, net benefits are the actual amounts payable by NORTHBROOK to the policyholder, less any amounts payable to NORTHBROOK by another reinsurer with respect to the policy. These payments include death benefits, endowment benefits, annuity benefits, disability benefits, benefits under A & H policies, surrender benefits and payments on supplementary contracts with and without life contingencies. (b) For policies reinsured by NORTHBROOK and retroceded under this Agreement, net benefits are the actual amounts payable by NORTHBROOK to the ceding company with respect to the policy reinsured by NORTHBROOK. These payments will include commissions and expense allowances on reinsurance accepted. 2. With respect to policies issued directly or reinsured by NORTHBROOK on or prior to the Effective Date of this Agreement, ALLSTATE's liability for net benefits will begin on the first day following the Agreement's Effective Date. This liability will include net benefits incurred on or prior to the Effective Date of this Agreement, but not paid until after the Agreement's Effective Date. 3. With respect to policies issued directly or reinsured by NORTHBROOK after the Effective Date of this Agreement, ALLSTATE's liability for net benefits will begin simultaneously with that of NORTHBROOK and will include any liability NORTHBROOK may incur as a result of a Temporary Insurance Agreement or Conditional Receipt issued in conjunction with a policy subject to this Agreement. 4. ALLSTATE's liability under this Agreement will continue as long as NORTHBROOK remains liable on the underlying coverage, and will terminate simultaneously with NORTHBROOK's termination of liability. Article III. RESERVE TRANSFERS 1. On or before the Effective Date of this Agreement, NORTHBROOK shall pay to ALLSTATE one million dollars ($1,000,000) in cash. 2. Within one-hundred and eighty (180) days following the Effective Date of this Agreement, NORTHBROOK shall pay to ALLSTATE assets with statutory book value equal to (a) less (b), where (a) and (b) are as defined below. NORTHBROOK shall also pay to ALLSTATE interest on this amount; such amount being equal to the sum of (c) and (d), as defined below. (a) Net statutory reserves determined as the portion of the following items (i) through (viii), minus items (ix) through (xi) attributable to the policies (or portion of such policies) ceded to ALLSTATE under this Agreement. The applicable portion of these items will be calculated as of the Effective Date of this Agreement and will be based on the corresponding items from NORTHBROOK's General Account statutory financial statement as filed with the Illinois Insurance Department. Page 2 of 9
ITEM NAIC STATEMENT REFERENCE* DESCRIPTION ---- ------------------------------- ----------------------------------------------------------------------- (i) Page 3, Line 1 Aggregate reserve for life policies and contracts (ii) Page 3, Line 2 Aggregate reserve for A & H policies and contracts (iii) Page 3, Line 3 Supplementary contracts without life contingencies (iv) Page 3, Lines 4.1 & 4.2 Policy and contract claims (v) Page 3, Line 9 Premium and annuity considerations received in advance (vi) Page 3, Lines 10.1, 10.2 & 10.3 Liability for premiums and other deposit funds (vii) Page 3, Lines 11.1, 11.2 & 11.3 Policy and contract liabilities not included elsewhere (viii) Page 3, Line 15 Cost of collection on premiums and annuity considerations deferred and uncollected in excess of total loading (ix) Page 2, Lines 11.1, 11.2 & 11.3 Reinsurance ceded (amounts due) (x) Page 2, Line 14 Life insurance premiums and annuity considerations deferred and uncollected (xi) Page 2, Line 15 Accident and health premiums due and unpaid
(b) The amount transferred under Article III, Paragraph 1. (c) All interest payments, dividend payments and mortgage payments received by NORTHBROOK, between the Effective Date of this Agreement and the date of asset transfer, on the assets transferred. (d) Interest on cash transferred at an effective rate of six percent (6%) per annum, compounded daily, from the Effective Date of this Agreement to the date of asset transfer. * References herein are to the 1986 NAIC Statutory Statement. Appropriate adjustments will be made for changes, if any, in the NAIC Statutory Statement on or after the Effective Date. Page 3 of 9 3. Within sixty (60) days following the filing of ALLSTATE's 1987 Federal Income Tax return, NORTHBROOK shall pay to ALLSTATE assets with statutory book value equal to 0.4 X [(a)-(b)], where (a) and (b) are as defined below. (a) Net statutory reserves on the Effective Date of this Agreement as calculated under Article III, Paragraph 2, Item (a). (b) Net tax reserves on the Effective Date of this Agreement for the items listed in Article III, Paragraph 2, Item (a), as revalued for purposes of calculating the 1987 Federal Income Tax liability. 4. Within ninety (90) days following the recapture by NORTHBROOK of any business ceded to another reinsurer, NORTHBROOK shall pay to ALLSTATE assets with statutory book value equal to (a)X [1+(b)(c)/365], where (a) through (c) are as defined below. (a) Net Statutory reserves, as defined in Article III, Paragraph 2, Item (a), attributable to the policies so recaptured. The applicable portion of these items will be calculated as of the end of the month following the date of recapture. (b) The annual rate of interest appearing on NORTHBROOK's General Account statutory financial statement (NAIC Statement Reference*: Exhibit 2, Line 8) as filed with the Illinois Insurance Department as of the end of the calendar year immediately preceding the date of recapture. (c) The number of days between the end of the month following the date of recapture and the date when payment is made. 5. Within sixty (60) days following the filing of an Allstate Federal Income Tax return for a year in which there was a recapture by NORTHBROOK of any business ceded to another reinsurer, NORTHBROOK shall pay to ALLSTATE assets with statutory book value equal to the product of the then current Federal Income Tax rate applicable to ALLSTATE and the amount (a)-(b), where (a) and (b) are as defined below. (a) Net Statutory reserves, as defined in Article III, Paragraph 2, Item (a), attributable to the policies so recaptured. The applicable portion of these items will be calculated as of the end of the calendar year following the date of recapture. (b) Net tax reserves for the items listed in Article III, Paragraph 2, Item (a), attributable to the policies so recaptured and as revalued for purposes of calculating ALLSTATE's Federal Income Tax liability. The applicable portion of these items will be calculated as of the end of the calendar year following the date of recapture. * References herein are to the 1986 NAIC Statutory Statement. Appropriate adjustments will be made for changes, if any, in the NAIC Statutory Statement on or after the Effective Date. Page 4 of 9 Article IV. MONTHLY SETTLEMENTS 1. Within thirty (30) days following the end of each calendar month in which this Agreement is in effect, NORTHBROOK shall pay to ALLSTATE, with respect to eligible policies under this Agreement, a reinsurance premium equal to (or the accounting equivalent of) the sum of Items (a) and (b) below less the sum of Items (c), (d) and (e) below. (a) Gross premiums (direct and reinsurance assumed) collected by NORTHBROOK during the month. (b) Reserves transferred from a NORTHBROOK Separate Account to the NORTHBROOK General Account during the month. (c) Gross premiums refunded by NORTHBROOK during the month to policyholders. (d) Reserves transferred from the NORTHBROOK General Account to a NORTHBROOK Separate Account during the month. (e) Reinsurance premiums paid by NORTHBROOK during the month to reinsurers other than ALLSTATE. 2. Within thirty (30) days following the end of each calendar month in which this Agreement is in effect, ALLSTATE shall pay to NORTHBROOK a benefit and expense allowance equal to (or the accounting equivalent of) the sum of Items (a), (b), (c) and (d) below. (a) Net benefits (as defined in Article II, Paragraph 1) paid by NORTHBROOK during the month with respect to the policies ceded under this Agreement. (b) Commissions and other sales compensation incurred by NORTHBROOK during the month with respect to the policies ceded under this Agreement. (c) General insurance expenses incurred by NORTHBROOK during the month with respect to the policies ceded under this Agreement. (d) Insurance taxes, licenses and fees (excluding Federal Income Tax) incurred by NORTHBROOK during the month with respect to the policies ceded under this Agreement. Article V. OVERSIGHTS ALLSTATE shall be bound as NORTHBROOK is bound, and it is expressly understood and agreed that if failure to reinsure or failure to comply with any terms of this Agreement is shown to be unintentional and the result of misunderstanding or oversight on the part of either NORTHBROOK or ALLSTATE, both NORTHBROOK and ALLSTATE shall be restored to the positions they would have occupied had no such error or oversight occurred. Page 5 of 9 Article VI. POLICY CHANGES If any change is made in coverage reinsured under this Agreement, NORTHBROOK shall notify ALLSTATE. Article VII. RECAPTURE 1. If a policy reinsured under this Agreement becomes ineligible for reinsurance (as specified in Schedule A), the policy will be immediately recaptured by NORTHBROOK. 2. NORTHBROOK shall notify ALLSTATE of any such recapture. 3. Upon receiving notice of recapture, ALLSTATE shall pay to NORTHBROOK an amount equal to the net statutory reserves associated with the recaptured policy. This amount will be determined in accordance with the formula defined in Article III, Paragraph 2, Item (a), as of the end of the month following the date of recapture. Article VIII. INSPECTION OF RECORDS NORTHBROOK and ALLSTATE shall have the right, at any reasonable time, to examine at the office of the other, any books, documents, reports or records which pertain in any way to the policies reinsured under this Agreement. Article IX. INSOLVENCY 1. In the event of the insolvency of NORTHBROOK, reinsurance hereunder is payable by ALLSTATE on the basis of its liability hereunder without diminution because of the insolvency of NORTHBROOK. 2. Further, in the event of the insolvency of NORTHBROOK, the liquidator, receiver or statutory successor of the insolvent NORTHBROOK shall give written notice to ALLSTATE of the pendency of an obligation of the insolvent NORTHBROOK on any policy reinsured, whereupon ALLSTATE may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to NORTHBROOK or its liquidator or statutory successor. The expense thus incurred by ALLSTATE shall be chargeable, subject to court approval, against the insolvent NORTHBROOK as part of the expenses of liquidation to the extent of a proportionate share of the benefit which may accrue to NORTHBROOK solely as a result of the defense undertaken by ALLSTATE. Page 6 of 9 3. All monies due NORTHBROOK or ALLSTATE under this Agreement shall be offset against each other, dollar for dollar, regardless of any insolvency of either party. Article X. ARBITRATION Any dispute arising with respect to this Agreement which is not settled by mutual agreement of the parties shall be referred to arbitration. Within twenty (20) days from receipt of written notice from one party that an arbitrator has been appointed, the other party will also name an arbitrator. The two arbitrators will choose a third arbitrator and will forthwith notify the contracting parties of such choice. Each arbitrator should be a present or former officer of a life insurance company and should have no present or past affiliation with this Agreement or with either party. The arbitrators will consider this Agreement as an honorable engagement rather than merely as a legal obligation, and will be relieved of all judicial formalities. The decision of the arbitrators will be final and binding upon the parties hereto. Each party shall bear the expenses of its own arbitrator and shall jointly and equally bear the expenses of the third arbitrator and of the arbitration. Any such arbitration will take place at the Home Office of NORTHBROOK, unless some other location is mutually agreed upon. Article XI. PARTIES TO AGREEMENT This Agreement is solely between NORTHBROOK and ALLSTATE. The acceptance of reinsurance hereunder does not create any right or legal relation whatever between ALLSTATE and any party in interest under any policy reinsured hereunder. NORTHBROOK shall be and remain solely liable to any insured, contract owner, or beneficiary under any policy reinsured hereunder. Page 7 of 9 Article XII. DURATION OF AGREEMENT This Agreement will be effective as of December 31, 1987, and will be unlimited as to its duration; provided, however, it may be terminated with respect to the reinsurance of new business by either party giving sixty (60) days prior written notice of termination to the other party. IN WITNESS HEREOF, the parties to this Agreement have caused it to be duly executed in duplicate by their respective officers on the date shown below. NORTHBROOK LIFE INSURANCE COMPANY of Northbrook, Illinois By /s/ James D. Clements --------------------------------- Title Assistant Vice President, Assistant Secretary & Assistant General Counsel ------------------------------- Date October 20, 1987 ------------------------------- ALLSTATE LIFE INSURANCE COMPANY of Northbrook, Illinois By /s/ Joseph A. Haas ------------------------------- Title Vice President and Controller ----------------------------- Date October 20, 1987 ----------------------------- [SEAL] Page 8 of 9 REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") Schedule A ELIGIBLE AND INELIGIBLE POLICIES 1. This Agreement covers all eligible policies in force in NORTHBROOK (or no longer in force but with remaining liability to NORTHBROOK) on the Effective Date of this Agreement, all eligible policies issued directly by NORTHBROOK after the Effective Date of this Agreement, and all reinsurance accepted by NORTHBROOK before and after the Effective Date of this Agreement. 2. An eligible policy is defined as any policy whose reserve is invested, in whole or in part, in the NORTHBROOK General Account; provided, however, that the portion of any such policy which is not so invested is not covered under this Agreement. Page 9 of 9 AMENDMENT NO. 1 to the REINSURANCE AGREEMENT between the NORTHBROOK LIFE INSURANCE COMPANY, Northbrook, Illinois (hereinafter "NORTHBROOK") and ALLSTATE LIFE INSURANCE COMPANY, Northbrook, Illinois (hereinafter "ALLSTATE") IT IS HEREBY AGREED that the Reinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereinafter "Coinsurance Agreement"), is amended as follows: 1. Article II, paragraphs 1(a) and 3 of the Coinsurance Agreement are amended as set out below: 1. Net benefits are defined as follows: (a) For an application received, or a policy issued directly by NORTHBROOK and reinsured under this Agreement, net benefits are the actual amounts payable by NORTHBROOK to the policyholder, less any amounts payable to NORTHBROOK by another reinsurer with respect to the policy. These payments include death benefits, endowment benefits, annuity benefits, disability benefits, benefits under accident and health policies, surrender benefits, and payments on supplementary contracts with and without life contingencies. 3. With respect to applications received, or policies issued directly or reinsured by NORTHBROOK, after the Effective Date of this Agreement, ALLSTATE's liability for net benefits will begin simultaneously with that of NORTHBROOK and will include any liability NORTHBROOK may incur as a result of a Temporary Insurance Agreement or Conditional Receipt issued in conjunction with a policy subject to this Agreement. 2. Article IV of the Coinsurance Agreement, is deleted, and replaced with new Article IV set out below: - 1 - ARTICLE IV SETTLEMENTS 1. While this Agreement is in effect, NORTHBROOK shall pay to ALLSTATE no less frequently than weekly, with respect to eligible policies under this Agreement, a reinsurance premium equal to (or the accounting equivalent of) the sum of Items (a), (b) and (c) below, less the sum of Items (d) and (e) below, as applicable for the period since the date of NORTHBROOK's last payment to ALLSTATE. (a) Gross premiums (direct and reinsurance assumed) collected by NORTHBROOK. (b) Reserves transferred from a NORTHBROOK Separate Account to the NORTHBROOK General Account. (c) Policy loan repayments collected by NORTHBROOK with respect to the policies ceded under this Agreement. (d) Gross premiums refunded by NORTHBROOK to policyholders. (e) Reserves transferred from the NORTHBROOK General Account to the NORTHBROOK Separate Account. 2. While this Agreement is in effect, ALLSTATE shall pay to NORTHBROOK no less frequently than weekly a benefit and expense allowance equal to (or the accounting equivalent of) the sum of Items (a), (b), (c), (d) and (e) below, as applicable for the period since the date of ALLSTATE's last payment to NORTHBROOK. (a) Net benefits (as defined in Article II) paid by NORTHBROOK with respect to the policies ceded under this Agreement. (b) Commissions and other sales compensation incurred by NORTHBROOK with respect to the policies ceded under this Agreement. (c) General insurance expenses incurred by NORTHBROOK with respect to the policies ceded under this Agreement. (d) Insurance taxes, licenses and fees (excluding Federal Income Tax) incurred by NORTHBROOK with respect to the policies ceded under this Agreement. (e) Policy loan distributions to policyholders incurred by NORTHBROOK with respect to the policies ceded under this Agreement. This Amendment shall be effective as of September 1, 1990. - 2 - IN WITNESS WHEREOF, the parties to the Coinsurance Agreement have caused their respective officers to execute this Amendment on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY BY: /s/ Marla Friedman ------------------------------- TITLE: Vice President ---------------------------- DATE: June 6, 1991 ----------------------------- ALLSTATE LIFE INSURANCE COMPANY BY: /s/ BARRY S. PAUL ------------------------------- TITLE: Assistant Vice President & Corporate Actuary ---------------------------- DATE: June 4, 1991 ----------------------------- - 3 - AMENDMENT No. 2 to the REINSURANCE AGREEMENT between NORTHBROOK LIFE INSURANCE COMPANY, Northbrook, Illinois (hereinafter "NORTHBROOK") and ALLSTATE LIFE INSURANCE COMPANY, Northbrook, Illinois (hereinafter "ALLSTATE") IT IS HEREBY AGREED that the 100% Coinsurance Reinsurance Agreement effective December 31, 1987, between NORTHBROOK and ALLSTATE is amended as follows: 1. A new Article VIII is added, to read as follows: Article VIII CONVERSION TO FUNDS WITHHELD (a.) Effective on the date and at the time of transfer of all or substantially all Assets to NORTHBROOK pursuant to Section 6(f) of the Security and Trust Agreement among the parties hereto, Dean Witter Reynolds, Inc., and Harris Trust and Savings Bank, the reinsurance hereunder provided shall convert from an automatic coinsurance basis to a funds withheld basis. The delivery to the Trustee of the Instructions for Release to Beneficiary, as provided in Section 6(f) of the Security and Trust Agreement, shall operate as notice to NORTHBROOK and ALLSTATE of such conversion. NORTHBROOK shall hold all assets received pursuant to such transfer, including subsequent additions and investment income, under the Funds Withheld provisions of this Article. (b.) In the event of a conversion, as provided in Section (a.) of this Article VIII, from an automatic coinsurance to a funds withheld basis, Article IV, MONTHLY SETTLEMENTS, as amended by Amendment No. 1 to this Reinsurance Agreement, shall be automatically modified to operate as follows: (i) In addition to the settlements described in Article IV, which shall continue, NORTHBROOK shall pay to ALLSTATE no less frequently than weekly the net investment income, including all realized capital gains and losses, earned on the assets held in accordance with Section (a) of this Article VIII. (ii) Notwithstanding the requirements of Article IV and Section (b) (i) of this Article VIII, NORTHBROOK shall withhold from ALLSTATE and hold an amount not greater than the sum A, B and C below, such sum hereafter referred to as the "Funds Withheld" A. an amount equal to the net statutory reserves in respect of the business reinsured; B. an amount equal to the Interest Maintenance Reserve related to the Assets held in trust in accordance with Section (a) of this Article VIII; C. an amount not greater at any time than 20% of the net statutory reserves with respect to the business reinsured, equal to the accumulation, if positive, of the amounts due ALLSTATE from NORTHBROOK less the amounts due NORTHBROOK from ALLSTATE, beginning from the date Assets are transferred to NORTHBROOK pursuant to Section 6(f) of the Security and Trust Agreement. (iii) The net periodic settlements described in Article IV shall be adjusted to provide for Funds Withheld by reducing the amount paid to ALLSTATE by any increase in the Funds Withheld for the settlement period or increasing the amount paid ALLSTATE by any decrease in the Funds Withheld. (c) Notwithstanding any of the foregoing provisions of this Article VIII, NORTHBROOK shall at all times have the right to use any Assets in its possession for the payment of benefits due and owing under policies issued by NORTHBROOK. 2 2. This Reinsurance Agreement is amended further by renumbering current Article VIII to be Article IX, and each subsequent Article is renumbered consecutively from such new Article IX. 3. This Reinsurance Agreement is amended further by deleting current Article XII, entitled DURATION OF AGREEMENT, and inserting, in its place, the following: ARTICLE XIII. DURATION OF AGREEMENT This Agreement will be effective as of December 31, 1987, and shall remain in force so long as any policies issued by NORTHBROOK through Dean Witter Reynolds, Inc., pursuant to various General Agent's Agreements, remain in force. 4. This Reinsurance Agreement is amended further by adding an Article XIV, to read as follows: ARTICLE XIV. ENTIRE AGREEMENT This Reinsurance Agreement, together with all amendments thereto and the Security and Trust Agreement to which ALLSTATE and NORTHBROOK are parties dated as of September 1, 1993, constitutes the entire agreement between ALLSTATE and NORTHBROOK with respect to the subject matter hereof, and there are no written or oral understandings, agreements, conditions, or qualifications to the terms and conditions of this Reinsurance Agreement which are not fully expressed herein and in such Security and Trust Agreement. 3 IN WITNESS HEREOF, the parties to this Agreement have caused this Amendment No. 2 to be duly executed in duplicate by their respective officers on the date shown below. NORTHBROOK LIFE INSURANCE COMPANY, of Northbrook, Illinois By: /s/ Marla G. Friedman -------------------------------- Marla G. Friedman Title: Vice President Date: September 28, 1993 ALLSTATE LIFE INSURANCE COMPANY, of Northbrook, Illinois By: /s/ Peter H. Heckman -------------------------------- Peter H. Heckman Title: Vice President Date: September 28, 1933 4 AMENDMENT # 3 TO THE REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") IT IS HEREBY AGREED, that the Coinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereafter "Agreement"), is amended as follows; 1.) Schedule A, ELIGIBLE AND INELIGIBLE POLICIES, is hereby amended by deleting said Schedule in its entirety, and replacing it with the following new Schedule A: SCHEDULE A ELIGIBLE AND INELIGIBLE POLICIES 1. This Agreement covers all eligible policies in force in NORTHBROOK (or no longer in force but with remaining liability to NORTHBROOK) on the Effective Date of this Agreement, all eligible policies issued directly by NORTHBROOK after the Effective Date of this Agreement, and all reinsurance accepted by NORTHBROOK before and after the Effective Date of this Agreement. 2. An eligible policy is defined as any policy whose reserve is invested, in whole or in part, in the NORTHBROOK general account, except for those policies described in paragraph 3, below; provided, however, that the portion of any such policy which is not so invested is not covered under this Agreement. 3. No policy which is registered with the Securities and Exchange Commission and which is sold to a pension plan as the term "pension plan" is defined under the Employee Retirement Income Security Act of 1974, including, but not limited to, pension plans qualified under Sections 401(a), 401(k), and 403(b) of the Internal Revenue Code, shall be considered an eligible policy under this Agreement. 2.) This Amendment shall be effective February 1, 1995. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY ALLSTATE LIFE INSURANCE COMPANY By: /s/ Marla G. Friedman By: /s/ Michael J. Velotta -------------------------- --------------------------- Title: VP Title: VP, GENERAL COUNSEL & SECY -------------------------- --------------------------- Date: 2/28/95 Date: Feb. 23, 1995 -------------------------- --------------------------- AMENDMENT # 4 TO THE REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") WHEREAS, Northbrook and Allstate entered into a Coinsurance Agreement (hereinafter "Agreement") having an effective date of December 31, 1987; and, WHEREAS, the California Insurance Department has determined that various changes to the Agreement are required under California insurance law; and, WHEREAS, Northbrook and Allstate desire to amend the Agreement with respect to coverage issued to California residents to meet the California requirements; NOW THEREFORE, the Agreement is hereby amended with respect to California residents, as follows; 1.) Article IX, "INSOLVENCY", is hereby amended by deleting said Article in its entirety, and replacing it with the following new Article IX. ARTICLE IX INSOLVENCY 1. The portion of any risk or obligation assumed by Allstate, when such portion is ascertained, shall be payable on demand of Northbrook at the same time as Northbrook shall pay its net retained portion of such risk or obligation, and the reinsurance shall be payable by Allstate on the basis of the liability of Northbrook under the contract or contracts reinsured under this Agreement without diminution because of the insolvency of Northbrook. In the event of insolvency and the appointment of a conservator, liquidator or statutory successor of Northbrook, such portion shall be payable to such conservator, liquidator or statutory successor immediately upon demand, on the basis of claims allowed against Northbrook by any court of competent jurisdiction or, by any conservator, liquidator, or statutory successor of Northbrook having authority to allow such claims, without diminution because of such insolvency or because such conservator, liquidator or statutory successor has failed to pay all or a portion of any claims. Payments by Allstate as above set forth shall be made directly to Northbrook or its conservator, liquidator or statutory successor. 2. Further, in the event of the insolvency of Northbrook, the liquidator, receiver or statutory successor of the insolvent Northbrook shall give written notice to Allstate of the pendency of an obligation of the insolvent Northbrook on any policy reinsured, whereupon Allstate may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to Northbrook or its liquidator or statutory successor. The expense thus incurred by Allstate shall be chargeable, subject to court approval, against the insolvent Northbrook as part of the expenses of liquidation to the extent of a proportionate share of the benefit which may accrue to Northbrook solely as a result of the defense undertaken by Allstate 2.) Article X, ARBITRATION, shall be amended to include the following language at the end of that article: The decision of the Arbitrators shall be handed down within 45 days of the date on which the arbitration is concluded. 3.) Article XII, PARTIES TO THE AGREEMENT, shall be deleted in its entirety and shall be replaced with the following language: This Agreement shall be effective as of December 31, 1987, and will be unlimited as to its duration; provided, however, it may be terminated with respect to the reinsurance of new business by either party giving the other party ninety (90) days prior written notice of termination to the other party. 4.) Article VII, paragraph 1(c) as amended in Amendment No. 2 shall be deleted in its entirety and shall be replaced with the following language: (c) Notwithstanding any of the foregoing provisions of this Article VII, NORTHBROOK shall at all times have the right to use any Assets in its possession for the payment of benefits due and owing under policies issued by NORTHBROOK. Provided, however, NORTHBROOK will not use any such Assets to satisfy any liabilities under the Northbrook Separate Account. 5.) In addition, a new Article XIII is added to the Agreement, as follows: ARTICLE XIII OFFSET All monies due Northbrook or Allstate under this Agreement shall be offset against each other dollar for dollar. 6.) Further, a new Article XIV is added to the agreement, as follows: ARTICLE XIV ENTIRE AGREEMENT This Agreement constitutes the entire contract between ALLSTATE and NORTHBROOK. No variation, modification or changes to this Agreement shall be binding unless in writing and signed by an officer of each party. This Amendment shall be effective on June 12, 1995. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY ALLSTATE LIFE INSURANCE COMPANY By: /s/ Sarah R. Donahue By: /s/ John R. Hunt ------------------------- ------------------ Title: First Vice President Title: AVP ------------------------- ------------------ Date: 6/12/95 Date: 6/12/95 ------------------------- ------------------ AMENDMENT NUMBER 5 TO THE REINSURANCE AGREEMENT EFFECTIVE DECEMBER 31, 1987 BETWEEN NORTHBROOK LIFE INSURANCE COMPANY (HEREINAFTER CALLED "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY (HEREINAFTER CALLED "ALLSTATE") IT IS HEREBY AGREED, that the Reinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereinafter "Agreement"), is amended as provided below. 1. Effective January 1, 1995, Article IV is hereby amended by adding the following new subparagraph 3: 3. ALLSTATE shall pay to NORTHBROOK, no less frequently than annually, any taxes incurred by NORTHBROOK as a result of Section 848 of the Internal Revenue Code which concerns capitalization of policy acquisition costs. 2. Effective January 1, 1993, Article IV is hereby amended by adding the following new subparagraph 4: 4. ALLSTATE and NORTHBROOK agree to an election under Treasury Regulations 1-848-2(g)(8), as follows: (a) For each taxable year under this Agreement, the party with net positive consideration, as defined in the regulations promulgated under Treasury Code Section 848, will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1); (b) NORTHBROOK and ALLSTATE agree to exchange information pertaining to the amount of net consideration for all reinsurance agreements in force between them to ensure consistency for purposes of computing specified policy acquisition expenses. NORTHBROOK and ALLSTATE shall agree on the amount of such net consideration for each taxable year no later than the May 1 following the end of such year. (c) This election shall be effective for 1993 and for all subsequent taxable years for which this Agreement remains in effect. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. Page 1 of 2 Northbrook Life Insurance Company By /s/ Sarah R. Donahue ---------------------------------- Title VP ------------------------------- Date 1/26/96 -------------------------------- Allstate Life Insurance Company By /s/ C. Nelson Strom ---------------------------------- Title AVP ------------------------------- Date 1/26/96 -------------------------------- Page 2 of 2 AMENDMENT NO. 6 TO THE REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") IT IS HEREBY AGREED, that the Coinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereafter "Agreement"), is amended as follows: 1.) Schedule A, ELIGIBLE AND INELIGIBLE POLICIES, is hereby amended by deleting said Schedule in its entirety, and replacing it with the following new Schedule A: SCHEDULE A ELIGIBLE AND INELIGIBLE POLICIES 1. This Agreement covers all eligible policies in force in NORTHBROOK (or no longer in force but with remaining liability to NORTHBROOK) on the Effective Date of this Agreement, all eligible policies issued directly by NORTHBROOK after the Effective Date of this Agreement, and all reinsurance accepted by NORTHBROOK before and after the Effective Date of this Agreement. 2. An eligible policy is defined as any policy whose reserve is invested, in whole or in part, in the NORTHBROOK general account, provided, however, that the portion of any such policy which is not so invested is not covered under this Agreement. 2.) This Amendment shall be effective December 30, 1996. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE ALLSTATE LIFE INSURANCE COMPANY COMPANY By: /s/ Sarah R. Donahue By: /s/ C. Nelson Strom ---------------------------- -------------------------- Title: Assistant Vice President Title: Assistant Vice President & ---------------------------- Corporate Actuary -------------------------- Date: January 15, 1997 Date: January 15, 1997 ---------------------------- -------------------------- AMENDMENT NUMBER 7 TO THE REINSURANCE AGREEMENT EFFECTIVE DECEMBER 31, 1987 BETWEEN NORTHBROOK LIFE INSURANCE COMPANY (HEREINAFTER CALLED "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY (HEREINAFTER CALLED "ALLSTATE") WHEREAS, NORTHBROOK and ALLSTATE entered into a Reinsurance Agreement effective December 31, 1987 (hereinafter "Agreement"); and WHEREAS, the parties now believe that the Agreement does not accurately reflect their existing practices relating to settlements for certain tax benefits and liabilities; and WHEREAS, the parties desire to amend the Agreement to reflect the existing practices with respect to such tax settlements; NOW, THEREFORE, IT IS HEREBY AGREED, that the Agreement is amended as provided below. 1.) Article IV, paragraph 2, is amended by replacing subparagraph (d) with a new subparagraph (d), as follows: (d) Insurance taxes, licenses and fees (excluding Federal Income Tax that is not related to the contracts reinsured under this Agreement), incurred by NORTHBROOK with respect to the contracts reinsured under this Agreement. 2.) Article IV is further amended by adding a new paragraph 3, as follows: 3. No less frequently than quarterly, ALLSTATE will calculate the amount of federal and state income tax liabilities incurred by Page 1 of 2 NORTHBROOK for the quarter related to the contracts reinsured under this Agreement, and the amount of federal and state income tax benefits earned by NORTHBROOK for the quarter related to the contracts reinsured under this Agreement. If tax liabilities exceed tax benefits, the difference, plus a gross-up for additional federal and state income taxes, will be paid by ALLSTATE to NORTHBROOK. If tax benefits exceed tax liabilities, the difference, plus a gross-up for additional federal and state income taxes, will be paid by NORTHBROOK to ALLSTATE. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. Northbrook Life Insurance Company By /s/ [ILLEGIBLE] ------------------------------ Title Assistant Vice President ------------------------------ Date October 22, 1998 ------------------------------ Allstate Life Insurance Company By /s/ [ILLEGIBLE] ------------------------------ Title AVP ------------------------------ Date 10/22/98 ------------------------------ Page 2 of 2 Exhibit 10.2 REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") Article I BASIS OF REINSURANCE 1. ALLSTATE will indemnify and NORTHBROOK will automatically reinsure with ALLSTATE, according to the terms and conditions hereof, the net liability for contracts in force (or no longer in force but with remaining liability) on the Effective Date and contracts directly issued subsequent to the Effective Date by NORTHBROOK on the contracts listed in Schedule A. 2. The indemnity reinsurance provided hereunder shall be on a modified coinsurance basis. NORTHBROOK shall retain, maintain, and own all assets held in relation to the Reserve, as defined in Article III. 3. In no event will reinsurance under this Agreement be in force with respect to a contract of NORTHBROOK unless such contract is in force. Article II LIABILITY OF ALLSTATE The liability of ALLSTATE with respect to any contract reinsured hereunder will begin simultaneously with that of NORTHBROOK, but not prior to the Effective Date of this Agreement. ALLSTATES'S liability with respect to any contract reinsured hereunder will terminate on the date NORTHBROOK's liability on such contract terminates or the date this Agreement is terminated, whichever is earliest. However, termination of this Agreement will not terminate ALLSTATE's liability for benefit payments incurred prior to the date of termination. Page 1 of 6 Article III INITIAL CONSIDERATION 1. On the Effective Date of this Agreement, NORTHBROOK will pay ALLSTATE an initial consideration which shall be equal to (or the accounting equivalent of) one hundred (100) percent of the Reserve, as defined in Paragraph 2 of this Article III, as of the Effective Date of this Agreement, with respect to the contracts reinsured hereunder. 2. For the purpose of this Agreement, the term "Reserve" will be the total liability for the reinsured contracts corresponding to the sum of the amounts on page 3, line 18 of NORTHBROOK's Statutory Separate Account (excluding Variable Life) Statement and page 3, line 12 of NORTHBROOK's Statutory Variable Life Separate Account Statement. Article IV MONTHLY SETTLEMENTS 1. Within thirty (30) days following the end of each calendar month in which this Agreement is in effect, NORTHBROOK shall pay to ALLSTATE, with respect to contracts reinsured under this Agreement, a reinsurance premium equal to (or the accounting equivalent of) the sum of Items (a) and (b) below less the sum of Items (c), (d) and (e) below. (a) Gross premiums (direct and reinsurance assumed) collected by NORTHBROOK during the month. (b) Reserves transferred from the NORTHBROOK General Account to a NORTHBROOK Separate Account during the month. (c) Gross premiums refunded by NORTHBROOK during the month to policyholders. (d) Reserves transferred from a NORTHBROOK Separate Account to the NORTHBROOK General Account during the month. (e) Reinsurance premiums paid by NORTHBROOK during the month to reinsurers other than ALLSTATE. 2. Within thirty (30) days following the end of each calendar month in which this Agreement is in effect, ALLSTATE shall pay to NORTHBROOK a benefit and expense allowance equal to (or the accounting equivalent of) the sum of Items (a), (b), (c) and (d) below. (a) Net benefits (as defined in Paragraph 3 of this Article IV) paid by NORTHBROOK during the month with respect to the contracts reinsured under this Agreement. (b) Commissions and other sales compensation incurred by NORTHBROOK during the month with respect to the contracts reinsured under this Agreement. (c) General insurance expenses incurred by NORTHBROOK during the month with respect to the contracts reinsured under this Agreement. (d) Insurance taxes, licenses and fees (excluding Federal Income Tax) incurred by NORTHBROOK during the month with respect to the contracts reinsured under this Agreement. Page 2 of 6 3. Net Benefits are defined as follows: (a) For a contract issued directly by NORTHBROOK and reinsured under this Agreement, net benefits are the actual amounts payable by NORTHBROOK to the policyholder, less any amounts payable to NORTHBROOK by another reinsurer with respect to the contract. These payments include death benefits, endowment benefits, annuity benefits, disability benefits, benefits under A & H policies, surrender benefits and payments on supplementary contracts with and without life contingencies. (b) For contracts reinsured by NORTHBROOK and retroceded under this Agreement, net benefits are the actual amounts payable by NORTHBROOK to the ceding company with respect to the contract reinsured by NORTHBROOK. These payments will include commissions and expense allowances on reinsurance accepted. Article V MONTHLY RESERVE ADJUSTMENTS 1. Simultaneously with the payment of the initial consideration described in Article III, Paragraph 1, ALLSTATE will pay to NORTHBROOK an initial reserve adjustment in an amount that is equal to the Reserve on the Effective Date of this Agreement with respect to the contracts reinsured hereunder. 2. Within thirty (30) days following the end of each calendar month in which this Agreement is in effect, a reserve adjustment equal to (or the accounting equivalent of) the amount defined below shall be paid. Let: RC = The Reserve change from the end of the prior accounting period to the end of the current accounting period for the reinsured contracts corresponding to the sum of the amounts on page 4, lines 9, 10, 10A and 11 of NORTHBROOK's Statutory Separate Account (excluding Variable Life) Statement and page 4, lines 14 and 15 of NORTHBROOK's Statutory Variable Life Separate Account Statement. NII = The net investment income corresponding to the sum of the amounts on page 4, line 2 of NORTHBROOK's Statutory Separate Account (excluding Variable Life) Statement and page 4, lines 4 and 5 of NORTHBROOK's Statutory Variable Life Separate Account Statement. If RC is greater than NII then a reserve adjustment of RC-NII is payable by ALLSTATE to NORTHBROOK. If NII is greater than RC, then a reserve adjustment of NII-RC is payable by NORTHBROOK to ALLSTATE. Page 3 of 6 Article VI STATEMENT REFERENCES All references in this Agreement are to the 1986 NAIC Statutory General and Separate Account Statements of NORTHBROOK, as filed with the Illinois Insurance Department. Appropriate adjustments will be made for changes, if any, in the NAIC Statutory General and Separate Account Statements on or after the Effective Date. Article VII OVERSIGHTS ALLSTATE shall be bound as NORTHBROOK is bound, and it is expressly understood and agreed that if failure to reinsure or failure to comply with any terms of this Agreement is shown to be unintentional and the result of misunderstanding or oversight on the part of either NORTHBROOK or ALLSTATE, both NORTHBROOK and ALLSTATE shall be restored to the positions they would have occupied had no such error or oversight occurred. Article VIII INSPECTION OF RECORDS NORTHBROOK and ALLSTATE shall have the right, at any reasonable time, to examine at the office of the other, any books, documents, reports or records which pertain in any way to the contracts reinsured under this Agreement. Article IX INSOLVENCY 1. In the event of the insolvency of NORTHBROOK, reinsurance hereunder is payable by ALLSTATE on the basis of its liability hereunder without diminution because of the insolvency of NORTHBROOK. 2. Further, in the event of the insolvency of NORTHBROOK, the liquidator, receiver or statutory successor of the insolvent NORTHBROOK shall give written notice to ALLSTATE of the pendency of any obligation of the insolvent NORTHBROOK on any policy reinsured, whereupon ALLSTATE may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to NORTHBROOK or its liquidator or statutory successor. The expense thus incurred by ALLSTATE shall be chargeable, subject to court approval, against the insolvent NORTHBROOK as part of the expenses of liquidation to the extent of a proportionate share of the benefit which may accrue to NORTHBROOK solely as a result of the defense undertaken by ALLSTATE. 3. All moneys due NORTHBROOK or ALLSTATE under this agreement shall be offset against each other, dollar for dollar, regardless of any insolvency of either party. Article X ARBITRATION Any dispute arising with respect to this Agreement which is not settled by mutual agreement of the parties shall be referred to arbitration. Within Page 4 of 6 twenty (20) days from receipt of written notice from one party that an arbitrator has been appointed, the other party shall also name an arbitrator. The two arbitrators shall choose a third arbitrator and shall forthwith notify the contracting parties of such choice. Each arbitrator shall be a present or former officer of a life insurance company and should have no present or past affiliation with this Agreement or with either party. The arbitrators shall consider this Agreement as a honorable engagement rather than merely as a legal obligation, and shall be relieved of all judicial formalities. The decision of the arbitrators shall be final and binding upon the parties hereto. Each party shall bear the expenses of its own arbitrator and shall jointly and equally bear the expenses of the third arbitrator and of the arbitration. Any such arbitration shall take place at the Home Office of NORTHBROOK, unless some other location is mutually agreed upon. Article XI PARTIES TO AGREEMENT This Agreement is solely between NORTHBROOK and ALLSTATE. The acceptance of reinsurance hereunder shall not create any right or legal relation whatever between ALLSTATE and any party in interest under any contract of NORTHBROOK reinsured hereunder. NORTHBROOK shall be and remain solely liable to any insured, contract owner, or beneficiary under any contract reinsured hereunder. This Agreement will be effective as of December 31, 1987, and will be unlimited as to its duration; provided, however, it may be terminated with respect to the reinsurance of new business by either party giving the other party sixty (60) days prior written notice of termination to the other party. IN WITNESS HEREOF, the parties to this Agreement have caused it to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY of Northbrook, Illinois By /s/ James D. Clements ----------------------------- Title Assistant Vice President, Assistant Secretary & Assistant General Counsel -------------------------- Date October 20, 1987 -------------------------- ALLSTATE LIFE INSURANCE COMPANY of Northbrook, Illinois By /s/ Joseph A. Haas ----------------------------- Title Vice President and Controller ----------------------------- Date October 20, 1987 -------------------------- Page 5 of 6 REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") SCHEDULE A CONTRACTS SUBJECT TO REINSURANCE UNDER THIS TREATY Any contract whose reserve is invested, in whole or in part, in any account designated as a NORTHBROOK Separate Account shall be reinsured under this Agreement; provided, however, that the portion of any such contract which is not so invested is not covered under this Agreement. Page 6 of 6 AMENDMENT NO. 1 to the REINSURANCE AGREEMENT between the NORTHBROOK LIFE INSURANCE COMPANY, Northbrook, Illinois (hereinafter "NORTHBROOK") and ALLSTATE LIFE INSURANCE COMPANY, Northbrook, Illinois (hereinafter "ALLSTATE") IT IS HEREBY AGREED that the Reinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereinafter "Modified Coinsurance Agreement"), is amended as follows: 1. Article IV, paragraphs 1 and 2 of the Modified Coinsurance Agreement, are deleted, and replaced with new paragraphs 1 and 2 set out below: 1. While this Agreement is in effect, NORTHBROOK shall pay to ALLSTATE on a daily basis, with respect to eligible policies under this Agreement, a reinsurance premium equal to (or the accounting equivalent of) the sum of Items (a) and (b) below, less the sum of Items (c) and (d) below. (a) Gross premiums (direct and reinsurance assumed) collected by NORTHBROOK. (b) Reserves transferred from the NORTHBROOK General Account to a NORTHBROOK Separate Account. (c) Gross premiums refunded by NORTHBROOK to policyholders. (d) Reserves transferred from a NORTHBROOK Separate Account to the NORTHBROOK General Account. 2. While this Agreement is in effect, ALLSTATE shall pay to NORTHBROOK on a daily basis a benefit and expense allowance equal to (or the accounting equivalent of) the sum of Items (a), (b), (c) and (d) below. (a) Net benefits (as defined in Paragraph 3 of this Article IV) paid by NORTHBROOK with respect to the contracts reinsured under this Agreement. (b) Commissions and other sales compensation incurred by NORTHBROOK with respect to the contracts reinsured under this Agreement. (c) General insurance expenses incurred by NORTHBROOK with respect to the contracts reinsured under this Agreement. - 1 - (d) Insurance taxes, licenses and fees (excluding Federal Income Tax) incurred by NORTHBROOK with respect to the contracts reinsured under this Agreement. 2. Article IV is further amended by adding new sub-paragraph 4 set out below: 4. Allstate shall pay to NORTHBROOK, no less frequently than annually, any taxes incurred by NORTHBROOK as a result of Section 848 of the Internal Revenue Code which concerns capitalization of policy acquisition costs. 3. Article V, paragraph 2, is deleted, and replaced with the following new paragraph 2: 2. While this Agreement is in effect, on a daily basis a reserve adjustment equal to (or the accounting equivalent of) the amount defined below shall be paid. Let: RC = The Reserve change from the end of the prior accounting period to the end of the current accounting period for the reinsured contracts corresponding to the sum of the amounts on page 4, lines 10, 11, 12 and 13 of NORTHBROOK's Statutory Separate Account (excluding Variable Life) Statement. NII = The net investment income corresponding to the sum of the amounts on page 4, line 2 of NORTHBROOK's Statutory Separate Account (excluding Variable Life) Statement, minus interest income on NORTHBROOK's capital investment. If RC is greater than NII then a reserve adjustment of RC-NII is payable by ALLSTATE to NORTHBROOK. If NII is greater than RC, then a reserve adjustment of NII-RC is payable by NORTHBROOK to ALLSTATE. This Amendment shall be effective as of September 1, 1990. - 2 - IN WITNESS WHEREOF, the parties to have caused their respective officers to execute this Amendment on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY BY: /s/ Marla Friedman --------------------------------- TITLE: Vice President ------------------------------ DATE: June 6, 1991 ------------------------------- ALLSTATE LIFE INSURANCE COMPANY BY: /s/ Barry S. Paul --------------------------------- TITLE: Assistant Vice President & Corporate Actuary ------------------------------ DATE: June 4, 1991 ------------------------------- - 3 - AMENDMENT # 2 TO THE REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") WHEREAS, Northbrook and Allstate entered into a Modified Coinsurance Agreement (hereinafter "Agreement") having an effective date of December 31, 1987; and, WHEREAS, the California Insurance Department has determined that various changes to the Agreement are required under California insurance law; and, WHEREAS, Northbrook and Allstate desire to amend the Agreement with respect to coverage issued to California residents to meet the California requirements; NOW THEREFORE, the Agreement is hereby amended with respect to California residents, as follows; 1.) Article IX, "INSOLVENCY", is hereby amended by deleting said Article in its entirety, and replacing it with the following new Article IX. ARTICLE IX INSOLVENCY 1. The portion of any risk or obligation assumed by Allstate, when such portion is ascertained, shall be payable on demand of Northbrook at the same time as Northbrook shall pay its net retained portion of such risk or obligation, and the reinsurance shall be payable by Allstate on the basis of the liability of Northbrook under the contract or contracts reinsured under this Agreement without diminution because of the insolvency of Northbrook. In the event of insolvency and the appointment of a conservator, liquidator or statutory successor of Northbrook, such portion shall be payable to such conservator, liquidator or statutory successor immediately upon demand, on the basis of claims allowed against Northbrook by any court of competent jurisdiction or, by any conservator, liquidator, or statutory successor of Northbrook having authority to allow such claims, without diminution because of such insolvency or because such conservator, liquidator or statutory successor has failed to pay all or a portion of any claims. Payments by Allstate as above set forth shall be made directly to Northbrook or its conservator, liquidator or statutory successor. 2. Further, in the event of the insolvency of Northbrook, the liquidator, receiver or statutory successor of the insolvent Northbrook shall give written notice to Allstate of the pendency of an obligation of the insolvent Northbrook on any policy reinsured, whereupon Allstate may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to Northbrook or its liquidator or statutory successor. The expense thus incurred by Allstate shall be chargeable, subject to court approval, against the insolvent Northbrook as part of the expenses of liquidation to the extent of a proportionate share of the benefit which may accrue to Northbrook solely as a result of the defense undertaken by Allstate 2.) Article X, ARBITRATION, shall be amended to include the following language at the end of that article: The decision of the Arbitrators shall be handed down within 45 days of the date on which the arbitration is concluded. 3.) The second paragraph of Article XI, PARTIES TO THE AGREEMENT, shall be deleted in its entirety and shall be replaced with the following language: This Agreement shall be effective as of December 31, 1987, and will be unlimited as to its duration; provided, however, it may be terminated with respect to the reinsurance of new business by either party giving the other party ninety (90) days prior written notice of termination to the other party. 4.) In addition, a new Article XII is added to the Agreement, as follows: ARTICLE XII OFFSET All monies due Northbrook or Allstate under this Agreement shall be offset against each other dollar for dollar. 5.) Further, a new Article XIII is added to the agreement, as follows: ARTICLE XIII ENTIRE AGREEMENT This Agreement constitutes the entire contract between ALLSTATE and NORTHBROOK. No variation, modification or changes to this Agreement shall be binding unless in writing and signed by an officer of each party. 6.) Finally, the definition of "RC" in Article V, paragraph 2, is deleted, and replaced with the following language: RC = The Reserve change from the end of the prior accounting period to the end of the current accounting period for the reinsured contracts corresponding to the sum of the amounts on page 4, lines 10, 11, 12 and 13 of NORTHBROOK's Statutory Separate Account Statement. An accounting period shall be defined as one day. This Amendment shall be effective on June 8, 1995. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY ALLSTATE LIFE INSURANCE COMPANY By: /s/ M Friedman By: /s/ Michael J. Velotta ------------------------- ---------------------------- Title: Vice President Title: VP, Secy & Gen Counsel ------------------------ --------------------------- Date: June 8, 1995 Date: June 8, 1995 ------------------------- ---------------------------- AMENDMENT # 3 TO THE REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") IT IS HEREBY AGREED, that the Modified Coinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereafter "Agreement"), is amended as follows; 1.) Schedule A, CONTRACTS SUBJECT TO REINSURANCE UNDER THIS TREATY, is hereby amended by deleting said Schedule in its entirety, and replacing it with the following new Schedule A: SCHEDULE A CONTRACTS SUBJECT TO REINSURANCE UNDER THIS TREATY I. Any contract whose reserve is invested, in whole or in part, in any account designated as a NORTHBROOK Separate Account shall be reinsured under this Agreement; provided, however, that portion of any such contract which is not invested is not covered under this Agreement. II. Any contract registered with the Securities and Exchange Commission which is sold to a pension plan as the term "pension plan" is defined under the Employee Retirement Income Security Act of 1974, including, but not limited to, pension plans qualified under Sections 401(a), 401(k) and 403(b) of the Internal Revenue Code. 2.) This Amendment shall be effective February 1, 1995. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY ALLSTATE LIFE INSURANCE COMPANY By: /s/ Marla Friedman By: /s/ Michael J. Velotta ------------------------- ---------------------------- Title: VP Title: VP, General Counsel & Secy ----------------------- -------------------------- Date: 2/28/95 Date: Feb. 23, 1995 ------------------------- --------------------------- AMENDMENT NUMBER 4 TO THE REINSURANCE AGREEMENT EFFECTIVE DECEMBER 31, 1987 BETWEEN NORTHBROOK LIFE INSURANCE COMPANY (HEREINAFTER CALLED "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY (HEREINAFTER CALLED "ALLSTATE") IT IS HEREBY AGREED, that the Reinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereinafter "Agreement"), is amended as provided below. Effective January 1, 1993, Article IV is hereby amended by adding the following new sub-paragraph 5: 5. ALLSTATE and NORTHBROOK agree to an election under Treasury Regulations 1-848-2(g)(8), as follows: (a) For each taxable year under this Agreement, the party with net positive consideration, as defined in the regulations promulgated under Treasury Code Section 848, will capitalize specified policy acquisition expenses with respect to this Agreement without regard to the general deductions limitation of Section 848(c)(1); (b) NORTHBROOK and ALLSTATE agree to exchange information pertaining to the amount of net consideration for all reinsurance agreements in force between them to ensure consistency for purposes of computing specified policy acquisition expenses. NORTHBROOK and ALLSTATE shall agree on the amount of such net consideration for each taxable year no later than the May 1 following the end of such year. (c) This election shall be effective for 1993 and for all subsequent taxable years for which this Agreement remains in effect. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. Northbrook Life Insurance Company By /s/ Sarah R. Donahue ------------------------ Title VP ------------------------ Date 1/26/96 ------------------------ Page 1 of 2 Allstate Life Insurance Company By /s/ C. Nelson Strom -------------------------- Title AVP ----------------------- Date 1/24/95 ------------------------ Page 2 of 2 AMENDMENT NO. 5 TO THE REINSURANCE AGREEMENT BETWEEN NORTHBROOK LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY, NORTHBROOK, ILLINOIS (HEREINAFTER "ALLSTATE") IT IS HEREBY AGREED, that the Modified Coinsurance Agreement effective December 31, 1987 between NORTHBROOK and ALLSTATE (hereafter "Agreement"), is amended as follows: 1.) Schedule A, CONTRACTS SUBJECT TO REINSURANCE UNDER THIS TREATY, is hereby amended by deleting said Schedule in its entirety, and replacing it with the following new Schedule A: SCHEDULE A CONTRACTS SUBJECT TO REINSURANCE UNDER THIS TREATY Any contract whose reserve is invested, in whole or in part, in any account designated as a NORTHBROOK Separate Account shall be reinsured under this Agreement; provided, however, that the portion of any such contract which is not so invested is not covered under this Agreement. 2.) This Amendment shall be effective December 30, 1996. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. NORTHBROOK LIFE INSURANCE COMPANY ALLSTATE LIFE INSURANCE COMPANY By: /s/ Sarah R. Donahue By: /s/ C. Nelson Strom ------------------------- ----------------------------- Title: Assistant Vice President Title: Assistant Vice President & ------------------------- Corporate Actuary ----------------------------- Date: January 15, 1997 Date: January 15, 1997 ------------------------- ----------------------------- AMENDMENT NUMBER 6 TO THE REINSURANCE AGREEMENT EFFECTIVE DECEMBER 31, 1987 BETWEEN NORTHBROOK LIFE INSURANCE COMPANY (HEREINAFTER CALLED "NORTHBROOK") AND ALLSTATE LIFE INSURANCE COMPANY (HEREINAFTER CALLED "ALLSTATE") WHEREAS, NORTHBROOK and ALLSTATE entered into a Reinsurance Agreement effective December 31, 1987 (hereinafter "Agreement"); and WHEREAS, the parties now believe that the Agreement does not accurately reflect their existing practices relating to settlements for certain tax benefits and liabilities; and WHEREAS, the parties desire to amend the Agreement to reflect the existing practices with respect to such tax settlements; NOW, THEREFORE, IT IS HEREBY AGREED, that the Agreement is amended as provided below. 1.) Article IV, paragraph 2, is amended by replacing subparagraph (d) with a new subparagraph (d), as follows: (d) Insurance taxes, licenses and fees (excluding Federal Income Tax that is not related to the contracts reinsured under this Agreement), incurred by NORTHBROOK with respect to the contracts reinsured under this Agreement. 2.) Article IV is further amended by adding a new paragraph 5, as follows: Page 1 of 2 5. No less frequently than quarterly, ALLSTATE will calculate the amount of federal and state income tax liabilities incurred by NORTHBROOK for the quarter related to the contracts reinsured under this Agreement, and the amount of federal and state income tax benefits earned by NORTHBROOK for the quarter related to the contracts reinsured under this Agreement. If tax liabilities exceed tax benefits, the difference, plus a gross-up for additional federal and state income taxes, will be paid by ALLSTATE to NORTHBROOK. If tax benefits exceed tax liabilities, the difference, plus a gross-up for additional federal and state income taxes, will be paid by NORTHBROOK to ALLSTATE. Except as amended hereby, the Agreement shall remain unchanged. IN WITNESS HEREOF, the parties to the Agreement have caused this Amendment to be duly executed in duplicate by their respective officers on the dates shown below. Northbrook Life Insurance Company By /s/ Sarah R. Donahue ----------------------------- Title Assistant Vice President ----------------------------- Date October 22, 1998 ----------------------------- Allstate Life Insurance Company By /s/ C. Nelson Strom ----------------------------- Title AVP ----------------------------- Date 10/22/98 ----------------------------- Page 2 of 2 -----END PRIVACY-ENHANCED MESSAGE-----