-----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, PXHCNHxyuN/DzMPv2GXCKyCIJIYOOU6J2Z98JfblqE3kAF+g0/5vMB1P1YTRYSb7 Uol4oAuySoD3/Hixr9d4CQ== 0000945094-98-000108.txt : 19980525 0000945094-98-000108.hdr.sgml : 19980525 ACCESSION NUMBER: 0000945094-98-000108 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980522 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHBROOK LIFE INSURANCE CO CENTRAL INDEX KEY: 0000716791 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 363001527 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: SEC FILE NUMBER: 033-50884 FILM NUMBER: 98630742 BUSINESS ADDRESS: STREET 1: 3100 SANDERS RD CITY: NORTHBROOK STATE: IL ZIP: 60062 BUSINESS PHONE: 7084025000 MAIL ADDRESS: STREET 1: 3100 SANDERS RD CITY: NORTHBROOK STATE: IL ZIP: 60062 424B2 1 NORTHBROOK CUSTOM NORTHBROOK LIFE INSURANCE COMPANY 3100 SANDERS ROAD NORTHBROOK, ILLINOIS 60062 (800) 654-2397 GROUP AND INDIVIDUAL DEFERRED ANNUITY CONTRACTS DISTRIBUTED BY DEAN WITTER REYNOLDS INC. TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 This Prospectus describes the group and individual Flexible Premium Deferred Annuity Contract ("Contract") offered by Northbrook Life Insurance Company ("Company"), a wholly owned subsidiary of Allstate Life Insurance Company. Dean Witter Reynolds Inc. ("Dean Witter"), a wholly owned subsidiary of Morgan Stanley Dean Witter & Co., is the principal underwriter and distributor of the Contracts. In certain states the Contract is only available as a group Contract. In these states a Certificate (hereinafter referred to as "Contract"), which summarizes the provisions of the Master Group Policy issued to Dean Witter, is issued to customers of Dean Witter. The Contract has the flexibility to allow you to shape an annuity to fit your particular needs. It is designed to aid you in your choice of short-term, mid-term, or long-term financial planning and can be used for retirement planning regardless of whether the plan qualifies for special federal income tax treatment. Presently, the Company will accept Purchase Payments of $1,000 or more which may be added to the Contract. Partial withdrawals and Surrenders under the Contract may be subject to a Market Value Adjustment. Therefore, the Owner bears some investment risk under the Contract. The Securities and Exchange Commission has not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Please read this prospectus carefully and retain it for future reference. The Contracts may not be available in all states. Please check with your Dean Witter Account Executive for availability in your state. At least once each contract year, the Company will send the Owner an annual statement that contains certain information pertinent to the individual Owner's Contract. The annual statement details values and specific Contract data for each Contract. The annual statement does not contain financial statements of the Company, although the Company's financial statements are on page F-1 of this prospectus. Our Company files annual and quarterly reports and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's public reference room in Washington, DC. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC Internet site (http://www.sec.gov). This prospectus does not constitute an offering in any jurisdiction in which such offering may not lawfully be made. No dealer, salesman, or other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus, and, if given or made, such other information or representations must not be relied upon. THE DATE OF THIS PROSPECTUS IS MAY 1, 1998. TABLE OF CONTENTS PAGE GLOSSARY.................................................................. 3 INTRODUCTION.............................................................. 5 THE CONTRACTS............................................................. 6 Purchase of the Contract.................................................. 6 THE ACCUMULATION PHASE.................................................... 6 The Accumulation Phase Defined............................................ 6 Subsequent Guarantee Periods.............................................. 6 Interest Credited......................................................... 6 Example of Interest Crediting During the Guarantee Period................. 7 Partial Withdrawals and Surrenders........................................ 7 Withdrawal Charge......................................................... 8 Market Value Adjustment................................................... 8 Withdrawals at the End of the Guarantee Period............................ 8 Taxes..................................................................... 8 Payment Upon Partial Withdrawal or Surrender.............................. 8 Death Benefits............................................................ 9 THE PAYOUT PHASE.......................................................... 9 Income Plans.............................................................. 9 Payout Terms.............................................................. 10 AMENDMENT OF THE CONTRACTS................................................ 10 DISTRIBUTION OF THE CONTRACTS............................................. 10 CUSTOMER INQUIRIES........................................................ 10 FEDERAL TAX MATTERS....................................................... 10 Introduction.............................................................. 10 Taxation of the Company................................................... 10 Taxation of Annuities in General.......................................... 10 Qualified Plans........................................................... 12 Types of Qualified Plans.................................................. 12 Tax Sheltered Annuities................................................... 12 Corporate and Self-Employed Pension and Profit Sharing Plans................................................. 12 State and Local Government and Tax-Exempt Organization Deferred Compensation Plans............................. 13 Income Tax Withholding.................................................... 13 THE COMPANY............................................................... 13 Business.................................................................. 13 Reinsurance Agreements.................................................... 13 Investments by the Company................................................ 13 SELECTED FINANCIAL DATA................................................... 14 NORTHBROOK LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........ 14 COMPETITION............................................................... 18 EMPLOYEES................................................................. 18 PROPERTIES................................................................ 18 STATE AND FEDERAL REGULATION.............................................. 18 EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY........................... 19 EXECUTIVE COMPENSATION.................................................... 20 LEGAL PROCEEDINGS......................................................... 21 EXPERTS................................................................... 21 LEGAL MATTERS............................................................. 21 FINANCIAL STATEMENTS.................................................... F-1 APPENDIX A................................................................ A-1 GLOSSARY Account Value--The Account Value is the sum of all Sub-Account Values. Accumulation Phase--The Accumulation Phase is the first of two phases in the life of the Contract. The Accumulation Phase begins on the Issue Date. The Accumulation Phase will continue until the Payout Start Date, unless the Contract is terminated before that date. Age--Age on last birthday. Annuitant--The person designated in the Contract whose life determines the duration of Income Payments involving life contingencies. The Annuitant includes any Joint Annuitant. Automatic Additions--Additional Purchase Payments of $1,000 or more which are made automatically from the Owner's bank account or Dean Witter Active Assets(TM) Account. Automatic Additions are available monthly, quarterly, semi-annually and annually. Automatic Laddering Program--A program which allows the Owner to choose, in advance, one renewal Guarantee Period for all renewing Sub-Accounts. The Owner can participate in the Automatic Laddering Program at any time during the Accumulation Phase, including on the Issue Date. The Automatic Laddering Program automatically continues and the Owner can discontinue participation upon written notice to the Company. Beneficiary--The person(s) designated in the Contract who, during the Accumulation Phase, after the death of all Owners, may elect to receive the Death Benefit or continue the Contract as described in the "Death Benefits" section. If the sole surviving Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed Income Payments scheduled to continue. Company--The issuer of the Contract, Northbrook Life Insurance Company, is a wholly owned subsidiary of Allstate Life Insurance Company, a wholly owned subsidiary of Allstate Insurance Company ("Allstate"). Allstate is a wholly owned subsidiary of The Allstate Corporation. Contract/Certificate--The Northbrook Life Insurance Company flexible premium deferred annuity contract, known as "The Custom Annuity," that is described in this prospectus. Date of Death--The Date that an Owner and/or Annuitant dies. Death Benefit--The Death Benefit is the greater of: (1) the Account Value or (2) the Settlement Value. Due Proof of Death--one of the following: (a) A certified copy of a death certificate. (b) A certified copy of a decree of a court of competent jurisdiction as to the finding of death. (c) Any other proof satisfactory to the Company. Free Withdrawal Amount--A portion of the Account Value which may be annually withdrawn from each Sub-Account without incurring a Withdrawal Charge or a Market Value Adjustment. Guarantee Period--The period for which a particular declared effective annual interest rate is guaranteed. Income Payments--A series of periodic payments made by the Company to the Owner during the Payout Phase of the Contract. Issue Date--The date the Contract becomes effective. Joint Annuitant--The person, along with the Annuitant, whose life determines the duration of Income Payments under a joint and last survivor annuity. Market Value Adjustment--The Market Value Adjustment is the adjustment made to the money distributed prior to the end of the Guarantee Period from one or more Sub-Accounts under the Contract to reflect the impact of changes in interest rates between the time each Sub-Account was established and the time of distribution. Non-Qualified Contracts--Contracts that do not qualify for special federal tax treatment. Owner--With respect to individual Contracts, the person designated as the Owner in the Contract. With respect to group Contracts, the person designated as the Owner in a group Certificate. The Owner will receive the Death Benefit upon the death of the Annuitant, who is not also an Owner. Payout Phase--The Payout Phase is the second of the two phases in the life of the Contract. It begins on the Payout Start Date. Payout Start Date--The date Income Payments are to begin under the Contract. Purchase Payments--The premiums paid by the Owner to the Company. Qualified Contracts--Contracts issued under plans that qualify for special federal income tax treatment. Settlement Value--The Settlement Value is the Account Value adjusted by any applicable Market Value Adjustment less any applicable Withdrawal Charges and premium tax. Sub-Accounts--Sub-Accounts are distinguished by Guarantee Periods and the dates the periods begin. Sub-Accounts are established when Purchase Payments are made and when previous Sub-Accounts expire and new Guarantee Periods are selected. Sub-Account Value--The Sub-Account Value is the accumulation of funds allocated to that Sub-Account and interest credited less withdrawals. Surrender--Termination of the Contract. Systematic Withdrawals--Periodic partial withdrawals of $100 or more may be deposited in the Owner's bank account or Dean Witter Active Assets(TM) Account. Systematic Withdrawals are available monthly, quarterly, semi- annually and annually. Withdrawal Charge--The charge that will be assessed by the Company on full or partial withdrawals in excess of the Free Withdrawal Amount. INTRODUCTION 1. WHAT IS THE PURPOSE OF THE CONTRACT? The Contract described in this Prospectus provides a cash withdrawal benefit and a Death Benefit during the Accumulation Phase and periodic Income Payments beginning on the Payout Start Date during the Payout Phase. (See, "Partial Withdrawals and Surrenders," pg. 7, "Death Benefits," pg. 9, and "The Payout Phase," pg. 9.) The cash withdrawal benefit may be subject to a Market Value Adjustment. As such, the Owner bears some investment risk under the Contract. (See, "Market Value Adjustment," pg. 8.) 2. HOW DO I PURCHASE A CONTRACT? The Company has discontinued the offering of new contracts. Additional Purchase Payments to existing Contracts are accepted by the Company. At the time of purchase, you select the Guarantee Period(s) in which to allocate your Purchase Payment. Guarantee Periods, which are offered at our discretion, may range from one to ten years. No less than $1,000 may be allocated to any one Guarantee Period. You may participate in the Automatic Laddering Program at the time of purchase. The Automatic Laddering Program allows you to choose future renewal Guarantee Periods. (See, "Purchase of the Contract," pg. 6.) 3. CAN I MAKE SUBSEQUENT PURCHASE PAYMENTS TO THIS CONTRACT? Purchase Payments may be made at any time during the Accumulation Phase of the Contract. Subsequent Purchase Payments must be at least $1,000. Additional Purchase Payments may also be made from your bank account or your Dean Witter Active Assets(TM) Account through Automatic Additions. For each Purchase Payment you will select a Guarantee Period(s) to which the Purchase Payment will be allocated. (See, "Purchase of the Contract," pg. 6.) 4. WHAT IS A GUARANTEE PERIOD AND WHAT HAPPENS AT THE END OF IT? Interest is credited, at an effective annual rate declared by the Company, for the Guarantee Period. At the end of the Guarantee Period, you can select a renewal Guarantee Period(s), or the selection of a renewal Guarantee Period(s) can be made through the Automatic Laddering Program. If the Company does not receive a selection by the end of the Guarantee Period, a Guarantee Period of the same duration as the previous one will automatically be established. If a different selection is made within 10 calendar days after the end of the Guarantee Period, the Sub-Account automatically set will be changed as of the end of the Guarantee Period just expired to match this selection. (See, "Subsequent Guarantee Periods," pg. 6.) 5. IS THERE A FREE-LOOK PROVISION? The Owner may cancel the Contract anytime within 20 days after the receipt of the Contract and receive a full refund of Purchase Payments. 6. DOES THE CONTRACT HAVE CHARGES OR DEDUCTIONS? There are no front-end charges under the Contract. A Withdrawal Charge will be applied to a partial withdrawal or Surrender. Withdrawal Charges will be the lesser of (a) one-half the effective annual interest rate credited for the Sub-Account multiplied by the amount withdrawn in excess of the Free Withdrawal Amount; or (b) interest earned at the time of withdrawal on the amount withdrawn. If money is withdrawn from the Sub-Account prior to the end of its Guarantee Period, a Market Value Adjustment will be made to the money distributed in excess of the Free Withdrawal Amount. The Market Value Adjustment may be positive or negative. (See, "Withdrawal Charge," pg. 8, and "Market Value Adjustment," pg. 8.) Money may be withdrawn from a Sub-Account during the 10 calendar days after the end of the Guarantee Period without incurring a Withdrawal Charge or being subject to a Market Value Adjustment. If a surrender request is received by the Company at its home office within 10 calendar days after the end of the Guarantee Period, funds will be liquidated as of the end of the Guarantee Period. 7. CAN I GET MY MONEY IF I NEED IT? All or part of the Account Value can be withdrawn before the earliest of the Payout Start Date, the death of the Owner, or the death of the Annuitant. Withdrawal Charges, taxes, tax penalties, and a Market Value Adjustment may be applied to the partial withdrawal or Surrender. (See, "Partial Withdrawals and Surrenders," pg. 7.) THE COMPANY GUARANTEES THAT IF YOU SURRENDER THE CONTRACT, YOU WILL RECEIVE AN AMOUNT AT LEAST EQUAL TO ALL PURCHASE PAYMENTS LESS ANY PRIOR PARTIAL WITHDRAWALS. 8. DOES THE CONTRACT HAVE A GUARANTEED DEATH BENEFIT? Prior to the Payout Start Date, the Contract offers a Death Benefit upon the death of the Owner or Annuitant, whichever occurs first. The Death Benefit is the greater of the Account Value or the Settlement Value as of the receipt of a complete request for payment of the Death Benefit. (See, "Death Benefits," pg. 9.) Death Benefits after the Payout Start Date depend on the income plan chosen. 9. WHAT HAPPENS IN THE PAYOUT PHASE OF THE CONTRACT? During this phase, the Account Value less premium tax and any other applicable tax is applied to the income plan you choose and monies are paid to you on a scheduled basis as provided in that plan. The Payout Phase begins on the Payout Start Date. It continues until the Company makes the last payment as provided by the income plan chosen. (See, "The Payout Phase," pg. 9.) THE CONTRACTS PURCHASE OF THE CONTRACT The Company will apply Purchase Payments to the Contract within seven days of the receipt of the Purchase Payment and required issuing information. The Company reserves the right to limit or increase the amount of Purchase Payments it will accept. The Company has discontinued the offering of new Contracts. Additional Purchase Payments to existing Contracts are accepted by the Company. Subsequent Purchase Payments may be made at any time during the Accumulation Phase of the Contract. Subsequent Purchase Payments must be at least $1,000. Additional Purchase Payments may also be made from your bank account or your Dean Witter Active Assets(TM) Account through Automatic Additions. The Automatic Additions Program is not available for Qualified Contracts issued pursuant to a Dean Witter Custodial Account. The Contract described in this prospectus is made up of two phases -- the Accumulation Phase and the Payout Phase. THE ACCUMULATION PHASE THE ACCUMULATION PHASE DEFINED The Accumulation Phase begins on the Issue Date and continues until the Payout Start Date. During this phase, cash withdrawal benefits and a Death Benefit are available. Interest will be credited to initial Purchase Payments from the Issue Date. Interest will be credited to subsequent Purchase Payments from the date of receipt. No deductions are made from Purchase Payments. Therefore, the full amount of each Purchase Payment is invested in a Sub-Account for accumulation of interest. At least once every Contract year, the Company will send the Owner a statement containing Account Value information. SUBSEQUENT GUARANTEE PERIODS For each subsequent Purchase Payment, the Owner will be required to designate Guarantee Period(s) in which to allocate funds. Guarantee Periods, which are offered at the Company's discretion, may range from one to ten years. No less than $1,000 may be allocated to any one Guarantee Period at the time a Purchase Payment is made or a renewal Guarantee Period is selected. A notice will be mailed 21 calendar days prior to the expiry of each Sub-Account directing you to select a renewal Guarantee Period(s) or reminding you of the choice you made through the Automatic Laddering Program. If the Company does not receive a selection by the end of the Guarantee Period, a Guarantee Period of the same duration as the previous one will automatically be established. If a renewal Guarantee Period selection is made within 10 calendar days after the end of the Guarantee Period, a Sub-Account(s) will be established as of the renewal date, in accordance with that selection. INTEREST CREDITED Interest will be credited daily based on the effective annual interest rate declared by us at that time for that particular Guarantee Period. "Effective annual rate" means the yield earned when interest credited at the underlying daily rate has compounded for a full year. Effective annual interest rates will be declared periodically for each Guarantee Period then being offered. The declared rates will be greater than or equal to the minimum guaranteed interest rate under the Contract. The "minimum guaranteed interest rate under the Contract" is a rate of interest specified in the Contract that is guaranteed for the life of the Contract. The Company has no specific formula for determining the rate of interest that it will declare initially or in the future. Such interest rates will be reflective of investment returns available at the time of the determination. In addition, the management of the Company may also consider various other factors in determining interest rates, including regulatory and tax requirements, sales commissions and administrative expenses borne by the Company, general economic trends and competitive factors. THE MANAGEMENT OF THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO THE INTEREST RATES TO BE DECLARED. THE COMPANY CAN NEITHER PREDICT NOR GUARANTEE FUTURE INTEREST RATES TO BE DECLARED. Set forth below is an illustration of how interest will be credited to the funds in your Sub-Account during the Guarantee Period. NOTE: The following illustration assumes no withdrawals of any amount during the entire five year period. A Market Value Adjustment and Withdrawal Charge would apply to any such interim withdrawal in excess of the Free Withdrawal Amount. The hypothetical interest rates are for illustrative purposes only and are not intended to predict future interest rates to be declared under the Contract. Actual interest rates declared for any given Guarantee Period may be more or less than those shown. EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD Purchase Payment:................................................. $10,000.00 Guarantee Period:................................................. 5 years Effective Annual Rate:............................................ 4.50%
END OF CONTRACT YEAR: YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ------ ------ ------ ------ ------ Beginning Account Value $10,000.00 x (1 + Effective Annual Rate) 1.045 ---------- $10,450.00 ---------- Account Value at end of Contract $10,450.00 year 1 x (1 + Effective Annual Rate) 1.045 ---------- $10,920.25 ---------- Account Value at end of Contract $10,920.25 year 2 x (1 + Effective Annual Rate) 1.045 ---------- $11,411.66 ---------- Account Value at end of Contract $11,411.60 year 3 x (1 + Effective Annual Rate) 1.045 ---------- $11,925.19 ---------- Account Value at end of Contract $11,925.19 year 4 x (1 + Effective Annual Rate) 1.045 ---------- $12,461.82 ---------- Total Interest Credited in Guarantee Period: $2,461.82 ($12,461.82 - $10,000.00)
PARTIAL WITHDRAWALS AND SURRENDERS You have the right to make a partial withdrawal or Surrender at any time during the Accumulation Phase. You must specify the Sub-Account(s) from which you wish to make a withdrawal. A withdrawal amount free of Withdrawal Charges and Market Value Adjustments will be available in each year for each Sub-Account. The Free Withdrawal Amount is 10% of the amount of the Sub-Account's Purchase Payment or funds initially allocated to the Sub-Account. Any Free Withdrawal Amount not withdrawn in a Sub-Account year may not be carried over to increase the Free Withdrawal Amount in a subsequent Sub-Account year. Similarly, the Free Withdrawal Amount not withdrawn in one Sub-Account may not be transferred to increase the Free Withdrawal Amount in another Sub-Account. Amounts withdrawn from the Sub-Account will be adjusted by any applicable Withdrawal Charge, Market Value Adjustment, and taxes. The applicable Withdrawal Charge and Market Value Adjustment will be applied to any withdrawal in excess of the Free Withdrawal Amount. The minimum partial withdrawal is $100. If a partial withdrawal would leave a Sub-Account Value of less than $1,000, then the Company will treat the request as one for a withdrawal of the Sub-Account's entire value. If a partial withdrawal reduces the Account Value of the Contract to less than $1,000, the Company will treat the request as a withdrawal of the entire Account Value and the Contract will terminate. Partial withdrawals may also be taken automatically through Systematic Withdrawals. Please consult with your Dean Witter Account Executive for detailed information about Systematic Withdrawals. Withdrawals and surrenders may be subject to income tax and a 10% tax penalty. The tax and penalty are explained in "Federal Tax Matters" on page 10. WITHDRAWAL CHARGE A Withdrawal Charge will be applied to a partial withdrawal or Surrender made prior to the end of a Guarantee Period and will be deducted from the amount distributed. (See, "Appendix A".) Withdrawal Charges will be the lesser of: a. one-half the effective annual interest crediting rate for the Sub-Account multiplied by the amount withdrawn in excess of the Free Withdrawal Amount; or b. interest earned on the amount withdrawn. MARKET VALUE ADJUSTMENT The amount payable on a partial withdrawal or full surrender made from a Sub-Account prior to the end of any Guarantee Period may be adjusted up or down, or not at all, by the application of the Market Value Adjustment. The Market Value Adjustment factor is applied to the amount withdrawn in excess of the Free Withdrawal Amount. The Market Value Adjustment will reflect the relationship between the current effective annual interest rate for the duration remaining in the Guarantee Period at the time of the request for withdrawal or surrender, and the effective annual interest rate guaranteed for that Sub-Account. Generally, if the effective annual interest rate for the Sub-Account is higher than the applicable current effective annual interest rate (interest rate for a duration equal to the time remaining in the Sub-Account), then the Market Value Adjustment will result in a higher payment upon surrender. Similarly, if the effective annual interest rate for the Sub-Account is lower than the applicable current effective annual interest rate, then the Market Value Adjustment will result in a lower payment upon surrender. For example, the Owner purchases a Contract and selects an initial Guarantee Period of five years and the Company's effective annual rate for that duration is 4.50%. Assume that at the end of 3 years, the Owner makes a partial withdrawal. If the current interest rate for a 2 year Guarantee Period is 4.20%, then the Market Value Adjustment will be positive, which will result in an increase in the amount payable to the Owner upon the partial withdrawal. Similarly, if the current interest rate for the 2 year Guarantee Period is 4.80%, then the Market Value Adjustment will be negative, which will result in a decrease in the amount payable to the Owner upon partial withdrawal. Since current interest rates are based, in part, upon investment yields available at the time, the effect of the Market Value Adjustment will be closely related to the levels of such yields. It is theoretically possible, therefore, that, should such yields increase significantly from the time the Purchase Payment was made, coupled with the application of the Withdrawal Charge, the amount received by the Owner upon full surrender of the Contract would be less than the Purchase Payment plus interest at the minimum guaranteed interest rate under the Contract. HOWEVER, THE COMPANY GUARANTEES THAT THE AMOUNT RECEIVED UPON SURRENDER WILL BE AT LEAST EQUAL TO THE PURCHASE PAYMENTS LESS ANY PRIOR PARTIAL WITHDRAWALS. The renewal of any individual Sub-Account(s) within the entire Contract does not in any way change the return of Purchase Payment guarantee provided by this Contract. Upon Sub-Account renewal the return of Purchase Payment guarantee will not be adjusted to include any accrued interest, but will continue to apply to the initial and any subsequent Purchase Payments. The formula for calculating the Market Value Adjustment is set forth in Appendix A to this prospectus, which also contains additional illustrations of the application of the Market Value Adjustment. WITHDRAWALS AT THE END OF THE GUARANTEE PERIOD During the first 10 days of a renewal Guarantee Period, any amount withdrawn will not incur a Withdrawal Charge or Market Value Adjustment, nor will it reflect any interest earned during this 10-day period. TAXES A premium tax deduction will be made, if provided under applicable law, on full surrender, or upon annuitization of the Contract. Current premium tax rates range from 0 to 3.5%, but are subject to change by state regulation. Any other applicable taxes will be deducted as well. PAYMENT UPON PARTIAL WITHDRAWAL OR SURRENDER The Company may defer payment of any partial withdrawal or surrender for a period not exceeding six months from the date of the receipt of the request. DEATH BENEFITS If any Owner or Annuitant dies prior to the Payout Start Date, a Death Benefit may be paid. If an Owner dies prior to the Payout Start Date, the new Owner (any surviving Owner(s), and if none, the Beneficiary) may elect, within 60 days of the Date of Death, to receive the Death Benefit in a lump sum or apply the Death Benefit to an income plan. The Company is currently waiving the 60 day limitation. The Company reserves the right to enforce the limitation in the future. Payments from the income plan must begin within one year of the Date of Death and must be over the life of the new Owner, or a period not to exceed the life expectancy of the new Owner. Otherwise, the new Owner may elect to receive the Settlement Value payable in a lump sum within 5 years of the Date of Death. Any remaining funds will be distributed at the end of the 5-year period. An Annuitant is necessary to continue the Contract between the date of the Owner's death and the final distributions. If there is no Annuitant at that time, the new Annuitant will be the youngest new Owner. If the new Owner is the surviving spouse of the deceased Owner, then the spouse may continue the Contract in the Accumulation Phase as if the death had not occurred. If there is no Annuitant at that time, the new Annuitant will be the surviving spouse. The surviving spouse may also select one of the options listed above. If the new Owner is a non-natural person (other than a grantor trust), then the Owner must receive the Death Benefit in a lump sum, and the options listed above are not available. If the Annuitant, not also an Owner, dies prior to the Payout Start Date, then, in most cases, the Owner has the following three options: - continue the Contract as if the death had not occurred. The new Annuitant will be the youngest Owner unless the Owner names a different Annuitant; or - receive the Death Benefit in a lump sum. The Death Benefit is equal to the greater of the Account Value or the Cash Surrender Value, or - apply the Death Benefit to an Income Plan. THE PAYOUT PHASE The Payout Phase is the second of the two phases in the Contract. The Payout Phase begins on the Payout Start Date and continues until the Company makes the last payment as provided by the income plan. Unless the Owner notifies the Company in writing, the Payout Start Date will be the later of the Annuitant's 90th birthday or the 10th anniversary date of the Contract. The Owner may change the Payout Start Date at any time by notifying the Company in writing of the change at least 30 days before the current Payout Start Date. The Payout Start Date must be no later than the Annuitant's 90th birthday or the 10th anniversary date of the Contract, if later. The Owner of a Qualified Contract may be limited by the plan under which the Contract is issued with regard to a Payout Start Date after age 70 1/2. INCOME PLANS The Owner may elect an income plan which distributes Income Payments on a scheduled basis. Up to 30 days before the Payout Start Date, the Owner may change the income plan or request any other form of income plan agreeable to both the Company and the Owner. If the Company does not receive a written choice from the Owner, the income plan will be life income with 120 monthly payments guaranteed. If an income plan is chosen which depends on the Annuitant or Joint Annuitant's life, proof of age will be required before Income Payments begin. If the sole surviving Owner dies after the Payout Start Date, the Beneficiary will receive any guaranteed Income Payments scheduled to continue. The Account Value on the Payout Start Date, less any applicable tax, will be applied to the income plan selected by the Owner. The income plans include: INCOME PLAN 1--Life Income with Guaranteed Payments Payments will be made to the Owner for as long as the Annuitant lives. If the Annuitant dies before all the guaranteed payments have been made, the remainder of the guaranteed payments will be paid to the Owner. INCOME PLAN 2--Joint and Survivor Life Income with Guaranteed Payments Payments beginning on the Payout Start Date will be made to the Owner for as long as either the Annuitant or Joint Annuitant is living. If both the Annuitant and Joint Annuitant die before all the guaranteed payments have been made, the remainder of the guaranteed payments will be made to the Owner. INCOME PLAN 3--Guaranteed Payments for a Specified Period Payments beginning on the Payout Start Date will be made to the Owner for a specified period. Payments under this option do not depend on the continuation of the Annuitant's life. The number of guaranteed months may be 60 to 360 months. At the Company's discretion, other income plans may be available. PAYOUT TERMS The Contracts described in this prospectus (except in states which require unisex annuity tables) contain life annuity tables that provide for different benefit payments to men and women of the same age. Nevertheless, in accordance with the U.S. Supreme Court's decision in Arizona Governing Committee v. Norris, in certain employment-related situations, annuity tables that do not vary on the basis of sex may be used. Accordingly, if the Contract is to be used in connection with an employment-related retirement or benefit plan, consideration should be given, in consultation with legal counsel, to the impact of Norris on any such plan before making any contributions under these Con- tracts. The duration of the income plan will generally affect the dollar amounts of each Income Payment. For example, if an income plan guaranteed for life is chosen, the Income Payments may be greater or lesser than Income Payments under an income plan for a specified period depending on the life expectancy of the Annuitant. After the Account Value has been applied to an income plan on the Payout Start Date, the income plan cannot be changed and no withdrawals can be made. The Company may require proof that the Annuitant or Joint Annuitant is still alive before the Company makes each payment that depends on their continued life. If any Owner dies during the Payout Phase, Income Payments will continue as scheduled, in accordance with the income plan in effect. If the Account Value to be applied to an income plan is less than $2,000, or if the monthly Income Payments determined under the income plan are less than $20, the Company may pay the Account Value in a lump sum or change the payment frequency to an interval which results in Income Payments of at least $20. AMENDMENT OF THE CONTRACTS The Company reserves the right to amend the Contracts to meet the requirements of applicable federal or state laws or regulations. The Company will notify the Owner of any such amendments. DISTRIBUTION OF THE CONTRACTS The Contracts will be distributed exclusively by Dean Witter, which serves as the principal underwriter of the Contracts under a General Agency Agreement with the Company. Dean Witter is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The Company may pay up to a maximum sales commission of 8% both upon sale of the Contract and upon renewal of a Guarantee Period. Dean Witter is located at Two World Trade Center, New York, New York, 10048. Dean Witter is a member of the New York Stock Exchange and the National Association of Securities Dealers, Inc. The General Agency Agreement between the Company and Dean Witter provides that the Company will indemnify Dean Witter for certain damages that may be caused by actions, statements or omissions by the Company. CUSTOMER INQUIRIES The Owner or any persons interested in the Contract may make inquiries regarding the Contract by calling or writing their Dean Witter Account Executive. FEDERAL TAX MATTERS INTRODUCTION THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax consequences of ownership or receipt of distributions under an annuity contract depend on the individual circumstances of each person. If you are concerned about any tax consequences with regard to your individual circumstances, you should consult a competent tax adviser. TAXATION OF THE COMPANY The Company is taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code. The following discussion assumes that the Company is taxed as a life insurance company under Part I of Subchapter L. TAXATION OF ANNUITIES IN GENERAL TAX DEFERRAL In general, an annuity contract owned by a natural person is not taxed on increases in the contract value until a distribution occurs. Annuity contracts owned by non-natural persons are generally not treated as annuity contracts for federal income tax purposes and the income on such contracts is taxed as ordinary income received or accrued by the owner during the taxable year. There are exceptions to the non-natural owner rule and you should discuss these with your tax advisor. DELAYED MATURITY DATE If the contract's scheduled maturity date is at a time when the annuitant has reached an advanced age, it is possible that the contract would not be treated as an annuity. In that event, the income and gains under the contract would be currently includible in the owner's income. TAXATION OF PARTIAL AND FULL WITHDRAWALS In the case of a partial withdrawal under a non-qualified contract, amounts received are taxable to the extent the contract value, without regard to any surrender charges, exceeds the investment in the contract. The contract value is the sum of all sub-account values. The investment in the contract is the gross premium or other consideration paid for the contract reduced by any amounts previously received from the contract to the extent such amounts were properly excluded from gross income. No matter which sub-account a withdrawal is made from, all subaccount values are combined and the total contract value is used to determine the amount of taxable income. In the case of a partial withdrawal under a qualified contract, the portion of the payment that bears the same ratio to the total payment that the investment in the contract bears to the contract value, can be excluded from income. No definitive guidance exists on the proper tax treatment of Market Value Adjustments and you should contact a competent tax advisor with respect to the potential tax consequences of a Market Value Adjustment. In the case of a full withdrawal under a non-qualified contract or a qualified contract, the amount received will be taxable only to the extent it exceeds the investment in the contract. If an individual transfers an annuity contract without full and adequate consideration to a person other than the individual's spouse (or to a former spouse incident to a divorce), the owner will be taxed on the difference between the contract value and the investment in the contract at the time of transfer. Other than in the case of certain qualified contracts, any amount received as a loan under a contract, and any assignment or pledge (or agreement to assign or pledge) of the contract value is treated as a withdrawal of such amount or portion. TAXATION OF ANNUITY PAYMENTS Generally, the rule for income taxation of payments received from an annuity contract provides for the return of the owner's investment in the contract in equal tax-free amounts over the payment period. The balance of each payment received is taxable. In the case of fixed annuity payments, the amount excluded from income is determined by multiplying the payment by the ratio of the investment in the contract (adjusted for any refund feature or period certain) to the total expected value of annuity payments for the term of the contract. Once the total amount of the investment in the contract is excluded using this ratio, the annuity payments are fully taxable. If annuity payments cease because of the death of the annuitant before the total amount of the investment in the contract is recovered, the unrecovered amount will be allowed as a deduction to the annuitant for his last taxable year. TAXATION OF ANNUITY DEATH BENEFITS Amounts may be distributed from an annuity contract because of the death of an owner or annuitant. Generally, such amounts are includible in income as follows: (1) if distributed in a lump sum, the amounts are taxed in the same manner as a full withdrawal or (2) if distributed under an annuity option, the amounts are taxed in the same manner as an annuity payment. PENALTY TAX ON PREMATURE DISTRIBUTIONS There is a 10% penalty tax on the taxable amount of any premature distribution from a non-qualified annuity contract. The penalty tax generally applies to any distribution made prior to the date the owner attains age 59 1/2. However, there should be no penalty tax on distributions to owners: (1) made on or after the date the owner attains age 59 1/2; (2) made as a result of the owner's death or disability; (3) made in substantially equal periodic payments over life or life expectancy; or (4) made under an immediate annuity. Similar rules apply for distributions from qualified contracts. Consult a competent tax advisor for other possible exceptions to the penalty tax. AGGREGATION OF ANNUITY CONTRACTS All non-qualified deferred annuity contracts issued by the Company (or its affiliates) to the same owner during any calendar year will be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. IRS REQUIRED DISTRIBUTION AT DEATH RULES In order to be considered an annuity contract for federal income tax purposes, an annuity contract must provide: (1) if any owner dies on or after the annuity start date but before the entire interest in the contract has been distributed, the remaining portion of such interest must be distributed at least as rapidly as under the method of distribution being used as of the date of the owner's death; (2) if any owner dies prior to the annuity start date, the entire interest in the contract will be distributed within five years after the date of the owner's death. These requirements are satisfied if any portion of the owner's interest which is payable to, or for the benefit of, a designated beneficiary is distributed over the life of such beneficiary (or over a period not extending beyond the life expectancy of the beneficiary) and the distributions begin within one year of the owner's death. If the owner's designated beneficiary is the surviving spouse of the owner, the contract may be continued with the surviving spouse as the new owner. If the owner of the contract is a nonnatural person, then the annuitant will be treated as the owner for purposes of applying the distribution at death rules. Also, a change of annuitant on a contract owned by a nonnatural person will be treated as the death of the owner. QUALIFIED PLANS This annuity contract may be used with several types of qualified plans. The tax rules applicable to participants in such qualified plans vary according to the type of plan and the terms and conditions of the plan itself. Adverse tax consequences may result from excess contributions, premature distributions, distributions that do not conform to specified commencement and minimum distribution rules, excess distributions and in other circumstances. Owners and participants under the plan and annuitants and beneficiaries under the contract may be subject to the terms and conditions of the plan regardless of the terms of the contract. TYPES OF QUALIFIED PLANS INDIVIDUAL RETIREMENT ANNUITIES Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity. Individual Retirement Annuities are subject to limitations on the amount that can be contributed and on the time when distributions may commence. Certain distributions from other types of qualified plans may be "rolled over" on a tax- deferred basis into an Individual Retirement Annuity. ROTH INDIVIDUAL RETIREMENT ANNUITIES Section 408A of the Code permits eligible individuals to make nondeductible contributions to an individual retirement program known as a Roth Individual Retirement Annuity. Roth Individual Retirement Annuities are subject to limitations on the amount that can be contributed and on the time when distributions may commence. "Qualified distributions" from Roth Individual Retirement Annuities are not includible in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to the Roth Individual Retirement Annuity, and which are made on or after the date the individual attains age 59 1/2 , made to a beneficiary after the owner's death, attributable to the owner being disabled or for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" are treated as made from contributions first and are includible in gross income to the extent such distributions exceed the contributions made to the Roth Individual Retirement Annuity. The taxable portion of a "nonqualified distribution" may be subject to the 10% penalty tax on premature distributions. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The taxable portion of a conversion or rollover distribution is includible in gross income, but is exempted from the 10% penalty tax on premature distributions. SIMPLIFIED EMPLOYEE PENSION PLANS Section 408(k) of the Code allows employers to establish simplified employee pension plans for their employees using the employees' Individual Retirement Annuities if certain criteria are met. Under these plans the employer may, within specified limits, make deductible contributions on behalf of the employees to their Individual Retirement Annuities. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS) Sections 408(p) and 401(k) of the Code allow employers with 100 or fewer employees to establish SIMPLE retirement plans for their employees. SIMPLE plans may be structured as a SIMPLE retirement account using an employee's Individual Retirement Annuity to hold the assets or as a Section 401(k) qualified cash or deferred arrangement. In general, a SIMPLE plan consists of a salary deferral program for eligible employees and matching contributions made by employers. Employers intending to use the contract in conjunction with SIMPLE plans should seek competent tax and legal advice. TAX SHELTERED ANNUITIES Section 403(b) of the Code permits public school employees and employees of certain types of tax-exempt organizations (specified in Section 501(c)(3) of the Code) to have their employers purchase annuity contracts for them, and subject to certain limitations, to exclude the purchase payments from the employees' gross income. An annuity contract used for a Section 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee attains age 59 1/2, separates from service, dies, becomes disabled or on the account of hardship (earnings on salary reduction contributions may not be distributed for hardship). CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS Sections 401(a) and 403(a) of the Code permit corporate employers to establish various types of tax favored retirement plans for employees. The Self-Employed Individuals Retirement Act of 1962, as amended (commonly referred to as "H.R. 10" or "Keogh"), permits self-employed individuals to establish tax favored retirement plans for themselves and their employees. Such retirement plans may permit the purchase of annuity contracts in order to provide benefits under the plans. STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION DEFERRED COMPENSATION PLANS Section 457 of the Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. To the extent the contracts are used in connection with an eligible plan, employees are considered general creditors of the employer and the employer as owner of the contract has the sole right to the proceeds of the contract. Generally, under the non-natural owner rules, such contracts are not treated as annuity contracts for federal income tax purposes. However, under these plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan. INCOME TAX WITHHOLDING The Company is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless an individual elects to make a "direct rollover" of such amounts to another qualified plan or Individual Retirement Account or Annuity (IRA). Eligible rollover distributions generally include all distributions from qualified contracts, excluding IRAs, with the exception of (1) required minimum distributions, or (2) a series of substantially equal periodic payments made over a period of at least 10 years, or the life (joint lives) of the participant (and beneficiary). For any distributions from non-qualified annuity contracts, or distributions from qualified contracts which are not considered eligible rollover distributions, the Company may be required to withhold federal and state income taxes unless the recipient elects not to have taxes withheld and properly notifies the Company of such election. THE COMPANY BUSINESS Incorporated in 1978 as a stock life insurance company under the laws of the State of Illinois, the Company has done business continuously since that time as "Northbrook Life Insurance Company." The Company issues group and individual annuities and life insurance. The Company is a wholly owned subsidiary of Allstate Life Insurance Company ("Allstate Life"), a stock life insurance company incorporated under the laws of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company ("Allstate"), a stock property-liability insurance company incorporated under the laws of Illinois. With the exception of directors' qualifying shares, all of the outstanding capital stock of Allstate is owned by The Allstate Corporation ("Corporation"). On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed its 80.3% ownership in the Corporation to Sears common shareholders through a tax-free dividend. REINSURANCE AGREEMENTS The Company and Allstate Life entered into a reinsurance agreement, effective December 31, 1987, under which the Company reinsures all of its business with Allstate Life. Under the reinsurance agreement, Purchase Payments under general account contracts are transferred to and become invested with the assets of Allstate Life which accepts 100% of the liability under such contracts. However, the obligations of Allstate Life under the reinsurance agreement are to the Company; the Company remains the sole obligor under the Contracts to the Owners. Because the reinsurance obligations of Allstate Life to the Company would be subordinated by operation of current state insurance rehabilitation and liquidation laws to the obligations of Allstate Life to its direct policyholders, Allstate Life has established a trust arrangement involving the pledge of as- sets for the benefit of the Company, in an amount at least equal to the net statutory reserves under the Contracts, under the terms of which legal title to such assets would transfer to the Company in the event that Allstate Life should become impaired or insolvent. Such arrangement should have the effect of avoiding the risk of subordination by operation of state insurance rehabilitation and liquidation laws. INVESTMENTS BY THE COMPANY The Company's general account assets must be invested in accordance with applicable state laws. These laws govern the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state, and municipal obligations, corporate bonds, preferred stocks, real estate mortgages, real estate and certain other investments. All of the Company's general account assets are available to meet the Company's obligations. The Company will primarily invest its general account assets in investment-grade fixed income securities including the following: Securities issued by the United States Government or its agencies or instrumentalities, which may or may not be guaranteed by the United States Government; Debt instruments, including, but not limited to, issues of or guaranteed by banks or bank holding companies, and of corporations, which are deemed by the Company's management to have qualities appropriate for inclusion in this portfolio; Commercial mortgages, mortgage-backed securities collateralized by real estate mortgage loans, or securities collateralized by other assets, that are insured or guaranteed by the Federal Home Loan Mortgage Association, the Federal National Mortgage Association or the Government National Mortgage Association, or that have an investment grade at time of purchase within the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating service; Commercial paper, cash, or cash equivalents, and other short-term investments having a maturity of less than one year that are considered by the Company's management to have investment quality comparable to securities having the ratings stated above. In addition, interest rate swaps, futures, options, rate caps, and other hedging instruments may be used solely for non-speculative hedging purposes. Anticipated use of these financial instruments shall be limited to protecting the value of portfolio sales or purchases, or to enhance yield through the creation of a synthetic security. In addition, the Company maintains certain unitized separate accounts which invest in shares of an open-end investment company registered under the Investment Company Act of 1940. These separate account assets which relate to the Company's variable annuity contracts, do not support the Company's obligations under the Contracts. SELECTED FINANCIAL DATA The following selected financial data for the Company should be read in conjunction with the financial statements and notes thereto included in this Prospectus beginning on page F-1.
NORTHBROOK LIFE INSURANCE COMPANY SELECTED FINANCIAL DATA (IN THOUSANDS) YEAR-END FINANCIAL DATA 1997 1996 1995 1994 1993 - ----------------------- ---- ---- ---- ---- ---- For The Years Ended December 31: Income Before Income Tax Expense $ 5,078 $ 4,868 $ 4,849 $ 2,688 $ 3,257 Net Income 3,322 3,202 3,163 1,733 2,507 As of December 31: Total Assets 8,098,230 6,915,771 6,071,603 5,764,233 5,886,038
Northbrook Life Insurance Company Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion highlights significant factors influencing results of operations and changes in financial position of Northbrook Life Insurance Company (the "Company"). It should be read in conjunction with the financial statements and related notes. 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, markets life insurance and annuity products through Dean Witter Reynolds Inc., a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. The Company issues flexible premium deferred variable annuity contracts and variable life policies, the assets and liabilities of which are legally segregated and reflected as Separate Account assets and liabilities. Separate Account assets and liabilities are carried at fair value in the statements of financial position. Investment income and realized gains and losses of the Separate Accounts accrue directly to the contractholders (net of fees) and, therefore, are not included in the Company's statements of operations.
Results of Operations ($ in thousands) 1997 1996 1995 ------------- -------------- ------------ Net investment income $ 5,146 $ 4,888 $ 4,782 ============= ============= ============= Realized capital gains and losses, after-tax $ (44) $ (13) $ 44 ============= ============= ============= Net income $ 3,322 $ 3,202 $ 3,163 ============= ============= ============= Investments $ 79,433 $ 74,069 $ 71,278 ============= ============= =============
The Company and ALIC have reinsurance agreements under which all contract and policy related transactions are transferred to ALIC. The Company's results of operations include only investment income and realized capital gains and losses earned on the assets of the Company that are not transferred to ALIC under the reinsurance agreements. Net income for 1997 and 1996 increased $120 thousand and $39 thousand, respectively, due to increased net investment income partially offset by realized capital losses. Pretax net investment income increased by $258 thousand, or 5.3% in 1997 and $106 thousand, or 2.2% in 1996. Additional investment income was earned on higher investment balances arising from positive cash flows from operating activities, partially offset by increased investment expenses. Realized capital losses were $44 thousand and $13 thousand after tax in 1997 and 1996, respectively, and arose principally from the sale of fixed income securities, the proceeds of which were used to acquire higher yielding investments. Realized capital gains in 1995 of $44 thousand after tax were the result of the sale of fixed income securities sold in response to changes in market conditions. Financial Position ($ in thousands) 1997 1996 -------------- -------------- Fixed income securities (1) $ 76,402 $ 67,479 Short-term investments 3,031 6,590 -------------- -------------- Total investments $ 79,433 $ 74,069 ============== ============== Reinsurance recoverable from ALIC $ 2,293,094 $ 2,480,034 ============== ============== Separate Account assets and liabilities $ 5,719,203 $ 4,354,783 ============== ============== Contractholder funds $ 2,148,555 $ 2,336,296 ============== ============== (1) Fixed income securities are carried at fair value. Amortized cost for these securities was $72,491 and $65,500 at December 31, 1997 and 1996, respectively. The Company's fixed income securities portfolio consists of mortgage-backed securities, publicly traded corporate bonds, U.S. government bonds and tax-exempt municipal bonds. The Company generally holds its fixed income securities for the long term, but has classified all of these securities as available for sale to allow maximum flexibility in portfolio management. Investments grew $5.4 million, or 7.2%, during 1997 primarily due to amounts invested from positive cash flows generated from operations and increased unrealized capital gains of $1.9 million on fixed income securities. At December 31, 1997, unrealized net capital gains on the fixed income securities portfolio were $3.9 million compared to $2.0 million as of December 31, 1996. The increase in the unrealized gain position is primarily attributable to lower interest rates. At the end of 1997, all of the Company's fixed income securities portfolio is rated investment grade, with a National Association of Insurance Commissioners ("NAIC") rating of 1 or a Moody's rating of Aaa, Aa or A. At December 31, 1997 and 1996, $39.0 million and $40.7 million, respectively, of the fixed income securities portfolio were invested in mortgage-backed securities ("MBS"). At December 31, 1997, all of the MBS had underlying collateral that is guaranteed by U.S. government entities, thus credit risk was minimal. MBS, however, are subject to interest rate risk as the duration and ultimate realized yield are affected by the rate of repayment of the underlying mortgages. The Company attempts to limit interest rate risk by purchasing MBS whose cost does not significantly exceed par value, and with repayment protection to provide a more certain cash flow to the Company. At December 31, 1997, the amortized cost of the MBS portfolio was below par value by $1.5 million and over 10% of the MBS portfolio was invested in planned amortization class bonds. This type of MBS is purchased to provide additional protection against rising interest rates. The Company closely monitors its fixed income securities portfolio for declines in value that are other than temporary. Securities are placed on non-accrual status when they are in default or when the receipt of interest payments is in doubt. The Company's short-term investment portfolio was $3.0 million and $6.6 million at December 31, 1997 and 1996, respectively. The Company invests available cash balances primarily in taxable short-term securities having a final maturity date or redemption date of one year or less. During 1997, contractholder funds decreased by $187.7 million and reinsurance recoverable from ALIC under reinsurance agreements decreased by $186.9 million. Interest credited to contractholders and sales of fixed annuity contracts were more than offset by fixed annuity surrenders, withdrawals, policyholder transfers from fixed annuity contracts to flexible premium deferred variable annuity contracts, and benefits paid. Reinsurance recoverable from ALIC relates to contract benefit obligations ceded to ALIC. Separate Account assets and liabilities increased by $1.36 billion, primarily attributable to sales of flexible premium deferred variable annuity contracts, the favorable investment performance of the Separate Account investment portfolios and transfers from fixed annuity contracts, partially offset by variable annuity surrenders and withdrawals. Market Risk Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The Company's primary market risk exposure is to changes in interest rates. Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates, as the Company invests substantial funds in interest-sensitive assets. One way to quantify this exposure is duration. Duration measures the sensitivity of the fair value of assets to changes in interest rates. For example, if interest rates increase 1%, the fair value of an asset with a duration of 5 years is expected to decrease in value by approximately 5%. At December 31, 1997, the Company's asset duration was approximately 4.7 years. To calculate duration, the Company projects asset cash flows, and discounts them to a net present value basis using a risk-free market rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates, and determining the percentage change in fair value from the base case. The projections include assumptions (based upon historical market and Company specific experience) reflecting the impact of changing interest rates on the prepayment and/or option features of instruments, where applicable. Such assumptions relate primarily to mortgage-backed securities, collateralized mortgage obligations, and municipal and corporate obligations. Based upon the information and assumptions the Company uses in its duration calculation and in effect at December 31, 1997, management estimates that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would decrease the net fair value of its total investments by approximately $3.6 million. The selection of a 100 basis point immediate rate shock should not be construed as a prediction by the Company's management of future market events; but rather, to illustrate the potential impact of such an event. To the extent that actual results differ from the assumptions utilized, the Company's duration and rate shock measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. In formulating and implementing policies for investing new and existing funds, AIC, as parent company of ALIC, administers and oversees investment risk management processes primarily through three oversight bodies: the Boards of Directors and Investment Committees of its operating subsidiaries, and the Credit and Risk Management Committee ("CRMC"). The Boards of Directors and Investment Committees provide executive oversight of investment activities. The CRMC is a senior management committee consisting of the Chief Investment Officer, the Investment Risk Manager, and other investment officers who are responsible for the day-to-day management of market risk. The CRMC meets at least monthly to provide detailed oversight of investment risk, including market risk. AIC has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. In addition, AIC has specific investment policies for each of its affiliates, including the Company, that delineate the investment limits and strategies that are appropriate for the Company's liquidity, surplus, product and regulatory requirements. Liquidity and Capital Resources Under the terms of reinsurance agreements, premiums and deposits on universal life policies and investment contracts, excluding those relating to Separate Accounts, are transferred to ALIC, which maintains the investment portfolios supporting the Company's products. The Company continues to have primary liability as a direct insurer for risks reinsured. The NAIC has a standard for assessing the solvency of insurance companies, which is referred to as risk-based capital ("RBC"). The requirement consists of a formula for determining each insurer's RBC and a model law specifying regulatory actions if an insurer's RBC falls below specified levels. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks. At December 31, 1997, RBC for the Company was significantly above a level that would require regulatory action. Year 2000 The Company is heavily dependent upon complex computer systems for all phases of its operations, including customer service, and policy and contract administration. Since many of the Company's older computer software programs recognize only the last two digits of the year in any date, some software may fail to operate properly in or after the year 1999, if the software is not reprogrammed or replaced, ("Year 2000 Issue"). The Company believes that many of its counterparties and suppliers also have Year 2000 Issues which could affect the Company. In 1995, AIC commenced a plan intended to mitigate and/or prevent the adverse effects of Year 2000 Issues. These strategies include normal development and enhancement of new and existing systems, upgrades to operating systems already covered by maintenance agreements and modifications to existing systems to make them Year 2000 compliant. The plan also includes the Company actively working with its major external counterparties and suppliers to assess their compliance efforts and the Company's exposure to them. The Company presently believes that it will resolve the Year 2000 Issue in a timely manner, and the financial impact will not materially affect its results of operations, liquidity or financial position. Year 2000 costs are and will be expensed as incurred. Pending Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 requires the presentation of comprehensive income in the financial statements. Comprehensive income is a measurement of all changes in equity that result from transactions and other economic events other than transactions with stockholders. The requirements of this statement will be adopted effective January 1, 1998. SFAS No. 131 redefines how segments are determined and requires additional segment disclosures for both annual and quarterly reporting. Under this statement, segments are determined using the "management approach" for financial statement reporting. The management approach is based on the way an enterprise makes operating decisions and assesses performance of its businesses. The Company is currently reviewing the requirements of this SFAS and has yet to determine its impact on its current reporting segments. The requirements of this statement will be adopted effective December 31, 1998. In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-related Assessments." The SOP provides guidance concerning when to recognize a liability for insurance-related assessments and how those liabilities should be measured. Specifically, insurance-related assessments should be recognized as liabilities when all of the following criteria have been met: a) an assessment has been imposed or it is probable that an assessment will be imposed, b) the event obligating an entity to pay an assessment has occurred and c) the amount of the assessment can be reasonably estimated. The requirements of this standard will be adopted in 1999 and are not expected to have a material impact on the results of operations, cash flows or financial position of the Company. The SOP is expected to be adopted in 1999. In March 1998, the Accounting Standards Executive Committee of the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP provides guidance on accounting for the costs of computer software developed or obtained for internal use. Specifically, certain external, payroll and payroll related costs should be capitalized during the application development state of a project and depreciated over the computer software's useful life. The Company currently expenses these costs as incurred and is evaluating the effects of this SOP on its accounting for internally developed software. The SOP is expected to be adopted in 1998. Forward-Looking Statements The statements contained in this Management's Discussion and Analysis that are not historical information are forward-looking statements that are based on management's estimates, assumptions and projections. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of 1933 and The Securities Exchange Act of 1934 for forward-looking statements. COMPETITION The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities competing in the sale of insurance and annuities. There are approximately 1,700 stock, mutual and other types of insurers in business in the United States. Several independent rating agencies regularly evaluate life insurer's claims-paying ability, quality of investments and overall stability. A.M. Best Company assigns A+ (Superior) to Allstate Life which reinsures all net business of the Company. A.M. Best Company also assigns the Company the rating of A+(r) because the Company reinsures all net business with Allstate Life. Standard & Poor's Insurance Rating Services assigns AA+ (Excellent) to the Company's claims-paying ability and Moody's assigns Aa2 (Excellent) financial strength rating to the Company. The Company shares the same ratings of its parent, Allstate Life Insurance Company. EMPLOYEES As of December 31, 1997, Northbrook Life had approximately 124 employees at its Home Office in Northbrook, Illinois. PROPERTIES The Company occupies office space provided by Allstate Insurance Company in Northbrook, Illinois. Expenses associated with these offices are allocated on a direct and indirect basis to the Company. STATE AND FEDERAL REGULATION The insurance business of the Company is subject to comprehensive and de- tailed regulation and supervision throughout the United States. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amounts of investments permitted. Each insurance company is required to file detailed annual reports with supervisory agencies in each of the jurisdictions in which it does business and its operations and accounts are subject to examination by such agencies at regular intervals. Under insurance guaranty fund law, in most states, insurers doing business therein can be assessed up to prescribed limits for contract owner losses incurred as a result of company insolvencies. The amount of any future assessments on the Company under these laws cannot be reasonably estimated. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. In addition, several states, including Illinois, regulate affiliated groups of insurers, such as the Company and its affiliates, under insurance holding company legislation. Under such laws, intercompany transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefit regulation, controls on medical care costs, removal of barriers preventing banks from engaging in the securities and insurance business, 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 proposed legislation to prohibit the use of gender in determining insurance and pension rates and benefits. The directors and executive officers are listed below, together with information as to their ages, dates of election and principal business occupations during the last five years (if other than their present business occupations). Except as otherwise indicated, the directors and executive officers of the Company have been associated with the Company for more than five years in the position shown or in other positions. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY LOUIS G. LOWER, II, 52, Chief Executive Officer and Chairman of the Board (1995)* Also Director (1986-Present) and Senior Vice President (1995-Present) of Allstate Insurance Company; Director (1991-Present) of Allstate Life Financial Services, Inc.; Director (1986-Present) and President (1990-Present) Allstate Life Insurance Company; Director (1983-Present) and Chairman of the Board (1990-Present) of Allstate Life Insurance Company of New York; Chairman of the Board of Directors and Chief Executive Officer (1995-1997), Chairman of the Board of Directors and President (1990-1995) of Glenbrook Life Insurance Company; Director (1992-Present), Chairman of the Board of Directors and Chief Executive Officer (1995-Present) of Glenbrook Life and Annuity Company; Director and Chairman of the Board (1995-Present) of Laughlin Group Holdings, Inc.; Director and Chairman of the Board of Directors and Chief Executive Officer (1989-Present) Lincoln Benefit Life Company; Chairman of the Board of Directors and Chief Executive Officer (1995-Present) Surety Life Insurance Company; and Trustee (1991-Present) and Vice President (1995-Present) The Allstate Foundation. PETER H. HECKMAN, 52, President, Chief Operating Officer and Director (1996)* Also Director and Vice President (1988-Present) of Allstate Life Insurance Company; Director (1990-1996), Vice President (1989-Present), Allstate Life Insurance Company of New York; Director (1991-1993) of Allstate Life Financial Services, Inc.; Director (1990-1997), President and Chief Operating Officer (1996-1997), and Vice President (1990-1996), Glenbrook Life Insurance Company; Director (1992-Present) President and Chief Operating Officer (1996- Present), and was Vice President (1995-1996), Glenbrook Life and Annuity Company; Director (1995-Present) and Vice Chairman of the Board (1996-Present) Laughlin Group Holdings, Inc.; Director (1990-Present) and Vice Chairman of the Board (1996- Present) Lincoln Benefit Life Company; and Director (1995-Present) and Vice Chairman of the Board (1996-Present) Surety Life Insurance Company. MICHAEL J. VELOTTA, 52, Vice President, Secretary, General Counsel, and Director (1992)* Also Director and Secretary (1993-Present) of Allstate Life Financial Services, Inc.; Director (1992-Present) Vice President, Secretary and General Counsel (1993-Present) Allstate Life Insurance Company; Director (1992- Present) Vice President, Secretary and General Counsel (1993-Present) Allstate Life Insurance Company of New York; Director (1992-1997) Vice President, Secretary and General Counsel (1993-1997) Glenbrook Life Insurance Company; Director (1992-Present) Vice President, Secretary and General Counsel (1993- Present) Glenbrook Life and Annuity Company; Director and Secretary (1995- Present) Laughlin Group Holdings, Inc.; Director (1992-Present) and Assistant Secretary (1995-Present) Lincoln Benefit Life Company; and Director and Assistant Secretary (1995-Present) Surety Life Insurance Company. JOHN R. HUNTER, 43, Director (1994)* and Assistant Vice President (1990)* Also Assistant Vice President (1990-Present) Allstate Life Insurance Company; Assistant Vice President (1996-Present) Allstate Life Insurance Company of New York; President and Chief Operating Officer (1998-Present), Allstate Life Financial Services, Inc., Director (1996-1997) Glenbrook Life Insurance Company; and Director (1996-Present) and Senior Vice President (1995-Present) Glenbrook Life and Annuity Company. MARLA G. FRIEDMAN, 44, Vice President (1996)* Also Director (1991-Present) and Vice President (1988-Present) Allstate Life Insurance Company; Director (1993-1996) Allstate Life Financial Services, Inc.; Director (1997-Present) and Assistant Vice President (1996-Present) Allstate Life Insurance Company of New York; Director (1995-1996) Allstate Settlement Corporation; Director (1991-1996), President and Chief Operating Officer (1995-1996) and Vice President (1990-1995) and (1996-1997) Glenbrook Life Insurance Company; Director (1992-1996), President and Chief Operating Officer (1995-1996) and Vice President (1992-1995) and (1996-Present) Glenbrook Life and Annuity Company; and Director and Vice Chairman of the Board (1995-1996) Laughlin Group Holdings, Inc. KAREN C. GARDNER, 44, Vice President (1996)* Vice President (1996-Present) Allstate Insurance Company; Vice President (1996-Present) Allstate Life Insurance Company; Vice President (1996- Present) Allstate Life Insurance Company of New York; President and Chief Operating Officer (1998-Present), Allstate Life Financial Services, Inc., Vice President (1996-1997) Glenbrook Life Insurance Company; Vice President (1996- Present) Laughlin Group Holdings, Inc.; Assistant Vice President (1996-Present) Lincoln Benefit Life Company; Vice President (1996-Present) Northbrook Life Insurance Company; Assistant Vice President (1996-Present) Surety Life Insurance Company. Prior to 1996 she was a Partner (1975-1996) with Ernst & Young LLP. KEVIN R. SLAWIN, 40, Director and Vice President (1996)* Also Assistant Vice President and Assistant Treasurer (1995-1996) Allstate Insurance Company; Director (1996-Present) and Assistant Treasurer (1995-1996) Allstate Life Financial Services, Inc.; Director and Vice President (1996- Present) and Assistant Treasurer (1995-1996) Allstate Life Insurance Company; Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Allstate Life Insurance Company of New York; Director and Vice President (1996-1997) and Assistant Treasurer (1995-1996) Glenbrook Life Insurance Company; Vice President (1996-Present) and Assistant Treasurer (1995-1996) Glenbrook Life and Annuity Company; Director (1996-Present) and Assistant Treasurer (1995-1996) Laughlin Group Holdings, Inc.; Director (1996- Present) Lincoln Benefit Life Company; Director (1996-Present) Surety Life Insurance Company; Assistant Treasurer and Director (1994-1995) Sears Roebuck and Co.; and Treasurer and First Vice President (1986-1994) Sears Mortgage Corporation. CASEY J. SYLLA, 54, Chief Investment Officer and Director (1995)* Also Director (1995-Present) Senior Vice President and Chief Investment Officer (1995-Present) Allstate Insurance Company; Director (1995-Present) Chief Investment Officer (1995-Present) Allstate Life Insurance Company; Chief Investment Officer (1995-Present) Allstate Life Insurance Company of New York; Chief Investment Officer (1995-1997) Glenbrook Life Insurance Company; Chief Investment Officer (1995-Present) Glenbrook Life and Annuity Company; Prior to 1995 he was Senior Vice President and Executive Officer-Investments (1992-1995) of Northwestern Mutual Life Insurance Company. JAMES P. ZILS, 47, Treasurer (1995)* Also Vice President and Treasurer (1995-Present) Allstate Insurance Company; Treasurer (1995-Present) Allstate Life Financial Services, Inc.; Treasurer (1995-Present) Allstate Life Insurance Company; Treasurer (1995-Present) Allstate Life Insurance Company of New York; Treasurer (1995-1997) Glenbrook Life Insurance Company; Treasurer (1995-Present) Glenbrook Life and Annuity Company; and Treasurer (1995-Present) Laughlin Group Holdings, Inc. Prior to 1995 he was Vice President of Allstate Life Insurance Company. Prior to 1993 he held various management positions. *Date elected to current office. EXECUTIVE COMPENSATION Executive officers of the Company also serve as officers of Allstate Life and receive no compensation directly from the Company. Some of the officers also serve as officers of other companies affiliated with the Company. Allocations have been made as to each individual's time devoted to his or her duties as an executive officer of the Company. The allocated cash compensation of all officers of the Company as a group for services rendered in all capacities to the Company during 1997 totaled $216,987.34. Directors of the Company receive no compensation in addition to their compensation as employees of the Company.
SUMMARY COMPENSATION TABLE (ALLSTATE LIFE INSURANCE COMPANY) LONG TERM COMPENSATION ---------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------- ------ ------- (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL COMPENSATION STOCK OPTIONS/ PAYOUTS COMPENSATION POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) SARS(#) ($) ($) -------- ---- --------- --------- ------------ ---------- ---------- ------- ------------ Louis G. Lower, II ...... 1997 $453,225 $500,000 $27,768 $280,589 $25,914 $570,068 $8,000(1) Chief Executive Officer 1996 $436,800 $246,781 $10,246 $ 0 $18,258 $ 0 $5,250(1) and Chairman of the 1995 $416,000 $286,650 $17,044 $ 0 $89,359 $411,122 $5,250(1) Board of Directors
(1) Amount received by Mr. Lower which represents the value allocated to his account from employer contributions under The Savings and Profit Sharing Fund of Allstate Employees and prior to 1996, The Profit Sharing Fund and to its predecessor, The Savings and Profit Sharing Fund of Sears employees. LEGAL PROCEEDINGS The Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate the ultimate liability arising from such pending or threatened litigation to have a material effect on the financial condition of the Company. EXPERTS The financial statements and financial statement schedule of the Company included in this prospectus have been audited by Deloitte & Touche LLP, Two Prudential Plaza, 180 North Stetson Avenue, Chicago, IL 60601-6779, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS Freedman, Levy, Kroll & Simonds, Washington DC has advised the Company on certain federal securities law matters. All matters of Illinois law pertaining to the Contracts, including the validity of the Contracts and the Company's right to issue such Contracts under Illinois insurance law, have been passed upon by Michael J. Velotta, General Counsel of the Company. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF NORTHBROOK LIFE INSURANCE COMPANY: We have audited the accompanying Statements of Financial Position of Northbrook Life Insurance Company (the "Company") as of December 31, 1997 and 1996, and the related Statements of Operations, Shareholder's Equity and Cash Flows for each of the three years in the period ended December 31, 1997. Our audits also included Schedule IV - Reinsurance. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Chicago, Illinois February 20, 1998 F-1 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, --------------------- 1997 1996 ---------- ---------- ($ IN THOUSANDS) ASSETS Investments Fixed income securities, at fair value (amortized cost $72,491 and $65,500) $ 76,402 $ 67,479 Short-term 3,031 6,590 ------------------ ------------------ Total investments 79,433 74,069 Reinsurance recoverable from Allstate Life Insurance Company 2,293,094 2,480,034 Net receivable from Allstate Life Insurance Company 1,467 4,246 Other assets 5,033 2,639 Separate Accounts 5,719,203 4,354,783 ------------------ ------------------ Total assets $ 8,098,230 $ 6,915,771 ================== ================== LIABILITIES Reserve for life-contingent contract benefits $ 144,352 $ 143,346 Contractholder funds 2,148,555 2,336,296 Income taxes payable 162 555 Deferred income taxes 2,674 2,085 Separate Accounts 5,719,203 4,354,783 ------------------ ------------------ Total liabilities 8,014,946 6,837,065 ------------------ ------------------ 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 Unrealized net capital gains 2,542 1,286 Retained income 21,642 18,320 ------------------ ------------------ Total shareholder's equity 83,284 78,706 ------------------ ------------------ Total liabilities and shareholder's equity $ 8,098,230 $ 6,915,771 ================== ==================
See notes to financial statements. F-2 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------ ------ ------ ($ IN THOUSANDS) REVENUES Net investment income $ 5,146 $ 4,888 $ 4,782 Realized capital gains and losses (68) (20) 67 --------------- --------------- --------------- INCOME BEFORE INCOME TAX EXPENSE 5,078 4,868 4,849 INCOME TAX EXPENSE 1,756 1,666 1,686 --------------- --------------- --------------- NET INCOME $ 3,322 $ 3,202 $ 3,163 =============== =============== ===============
See notes to financial statements. F-3 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, ------------------------- 1997 1996 1995 ------- ------- ------- ($ IN THOUSANDS) COMMON STOCK $ 2,500 $ 2,500 $ 2,500 --------------- --------------- --------------- ADDITIONAL CAPITAL PAID-IN 56,600 56,600 56,600 --------------- --------------- --------------- UNREALIZED NET CAPITAL GAINS Balance, beginning of year 1,286 2,657 (1,553) Net change 1,256 (1,371) 4,210 --------------- --------------- --------------- Balance, end of year 2,542 1,286 2,657 --------------- --------------- --------------- RETAINED INCOME Balance, beginning of year 18,320 15,118 11,955 Net income 3,322 3,202 3,163 --------------- --------------- --------------- Balance, end of year 21,642 18,320 15,118 --------------- --------------- --------------- Total shareholder's equity $ 83,284 $ 78,706 $ 76,875 =============== =============== ===============
See notes to financial statements. F-4 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 1995 ------- ------ ------- ($ IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,322 $ 3,202 $ 3,163 Adjustments to reconcile net income to net cash provided by operating activities Amortization and other non-cash items 516 782 903 Realized capital losses (gains) 68 20 (67) Increase (decrease) in life-contingent contract benefits and contractholder funds 205 (198) 113 Change in deferred income taxes (87) 24 608 Changes in other operating assets and liabilities (657) 864 (2,705) ------------ ------------ ------------- Net cash provided by operating activities 3,367 4,694 2,015 ------------ ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed income securities Proceeds from sales 1,606 3,522 5,423 Investment collections 10,036 5,770 7,108 Investment purchases (18,568) (15,532) (9,843) Change in short-term investments, net 3,559 1,459 (4,675) ------------- ------------ ------------- Net cash used in investing activities (3,367) (4,781) (1,987) ------------- ------------ ------------- NET (DECREASE) INCREASE IN CASH - (87) 28 CASH AT BEGINNING OF YEAR - 87 59 ------------- ------------ ------------- CASH AT END OF YEAR $ - $ - $ 87 ============= ============ =============
See notes to financial statements. F-5 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 1. General Basis of presentation The accompanying financial statements include the accounts of Northbrook Life Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"). On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed its 80.3% ownership in the Corporation to Sears common shareholders through a tax-free dividend (the "Distribution"). These financial statements have been prepared in conformity with generally accepted accounting principles. To conform with the 1997 presentation, certain amounts in the prior years' financial statements and notes have been reclassified. Nature of operations The Company markets life insurance and annuity products in the United States through Dean Witter Reynolds Inc. ("Dean Witter") (see Note 4), a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. Life insurance contracts sold by the Company include universal life and other interest-sensitive life and variable life products. Annuities include both deferred annuities, such as variable annuities and fixed rate single and flexible premium annuities, and immediate annuities. Annuity contracts and life insurance policies issued by the Company are subject to discretionary withdrawal or surrender by customers, subject to applicable surrender charges. These policies and contracts are reinsured with ALIC (see Note 3), which invests premiums and deposits to provide cash flows that will be used to fund future benefits and expenses. In order to support competitive crediting rates and limit interest rate risk, ALIC, as the Company's reinsurer, adheres to a basic philosophy of matching assets with related liabilities while maintaining adequate liquidity and a prudent and diversified level of credit risk. The Company monitors economic and regulatory developments which have the potential to impact its business. There continues to be new and proposed federal and state regulation and legislation that would allow banks greater participation in the securities and insurance businesses, which will present an increased level of competition for sales of the Company's life and annuity products. Furthermore, the market for deferred annuities and interest-sensitive life insurance is enhanced by the tax incentives available under current law. Any legislative changes which lessen these incentives are likely to negatively impact the demand for these products. Enacted and pending state legislation to permit mutual insurance companies to convert to a hybrid structure known as a mutual holding company could have a number of significant effects on the Company by (1) increasing industry competition through consolidation caused by mergers and acquisitions related to the new corporate form of business; (2) increasing competition in capital markets; and (3) reopening stock/mutual company disagreements related to such issues as taxation disparity between mutual and stock insurance companies. The Company is authorized to sell life and annuity products in all states except New York, as well as in the District of Columbia and Puerto Rico. The top geographic locations for statutory premiums and deposits earned by the Company are California, Florida and Texas for the year ended December 31, 1997. No other jurisdiction accounted for more than 5% of statutory premiums and deposits. All premiums and contract charges are ceded to ALIC under reinsurance agreements. F-6 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUTED) ($ IN THOUSANDS) 2. Summary of Significant Accounting Policies Investments Fixed income securities include bonds and mortgage-backed securities. All fixed income securities are carried at fair value and may be sold prior to their contractual maturity ("available for sale"). The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of shareholder's equity. Provisions are recognized for declines in the value of fixed income securities that are other than temporary. Such writedowns are included in realized capital gains and losses. Short-term investments are carried at cost which approximates fair value. Investment income consists primarily of interest, which is recognized on an accrual basis. Interest income on mortgage-backed securities is determined on the effective yield method, based on the estimated principal repayments. Accrual of income is suspended for fixed income securities that are in default or when the receipt of interest payments is in doubt. Realized capital gains and losses are determined on a specific identification basis. Reinsurance The Company has reinsurance agreements whereby all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC and reflected net of such cessions in the statements of operations. The amounts shown in the Company's statements of operations relate to the investment of those assets of the Company that are not transferred to ALIC under reinsurance agreements. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. Recognition of premium revenues and contract charges Revenues on interest-sensitive life insurance policies are comprised of contract charges and fees, and are recognized when assessed against the policyholder account balance. Revenues on most annuities, which are considered investment contracts, include contract charges and fees for contract administration and surrenders. These revenues are recognized when levied against the contract balance. Income taxes The income tax provision is calculated under the liability method. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates, and reflect the impact of reinsurance agreements. Deferred income taxes arise primarily from unrealized capital gains and losses on fixed income securities carried at fair value. Separate Accounts The Company issues flexible premium deferred variable annuity contracts and single premium variable life policies, the assets and liabilities of which are legally segregated and reflected in the accompanying statements of financial position as assets and liabilities of the Separate Accounts (Northbrook Variable Annuity Account, Northbrook Variable Annuity Account II and Northbrook Life Variable Life Separate Account A, unit investment trusts registered with the Securities and Exchange Commission). Assets of the Separate Accounts are carried at fair value. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the policy- and contractholders and, therefore, are not included in the Company's statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance fees, administration fees, mortality and expense risk charges, cost of insurance charges and tax expense charges, all of which are ceded to ALIC. Reserve for life-contingent contract benefits The reserve for life-contingent contract benefits, which relates to structured settlement annuities and supplemental contracts with life contingencies, is computed on the basis of assumptions as to future investment yields, mortality and expenses. These assumptions include provisions for adverse deviation and generally vary by such characteristics as type of coverage, year of issue and policy duration. Reserve interest rates ranged from 4.00% to 11.00% during 1997. F-7 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Contractholder funds Contractholder funds arise from the issuance of individual or group policies and contracts that include an investment component, including most annuities and universal life policies. Payments received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less withdrawals, mortality charges and administrative expenses. During 1997, credited interest rates on contractholder funds ranged from 3.30% to 9.51% for those contracts with fixed interest rates and from 3.25% to 7.39% for those with flexible rates. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. Related Party Transactions Reinsurance Premiums and contract charges ceded to ALIC were $1,979 and $83,559 in 1997, $3,775 and $60,744 in 1996, and $2,284 and $52,348 in 1995, respectively. Credited interest, policy benefits and expenses ceded to ALIC amounted to $201,526, $218,088 and $229,525 in 1997, 1996 and 1995, respectively. Investment income earned on the assets which support contractholder funds is not included in the Company's financial statements as those assets are owned and managed by ALIC under the terms of reinsurance agreements. Business operations The Company utilizes services and business facilities owned or leased, and operated by AIC in conducting its business activities. The Company reimburses AIC for the operating expenses incurred by AIC on behalf of the Company. The cost to the Company is determined by various allocation methods and is primarily related to the level of services provided. Operating expenses, including compensation and retirement and other benefit programs, allocated to the Company were $7,842, $8,074 and $5,341 in 1997, 1996 and 1995, respectively. Of these costs, the Company retains investment related expenses. All other costs are ceded to ALIC under reinsurance agreements. 4. Exclusive Distribution Agreement The Company and ALIC have a strategic alliance with Dean Witter to develop, market and distribute proprietary annuity and life insurance products through Dean Witter account executives. Dean Witter provides a portion of the funding for these products through loans to an affiliate of the Company. An affiliate of Dean Witter, Dean Witter InterCapital Inc., is the investment manager for the Dean Witter Variable Investment Series, the funds in which the assets of the Separate Accounts are invested. Under the terms of the strategic alliance, the Company has agreed to use Dean Witter as an exclusive distribution channel for the Company's products. Although the strategic alliance is cancelable by either party, termination of the alliance would not impact existing policies and contracts. F-8 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 5. INVESTMENTS Fair values The amortized cost, gross unrealized gains and losses, and fair value for fixed income securities are as follows:
GROSS UNREALIZED AMORTIZED ------------------ FAIR COST GAINS LOSSES VALUE --------- ----- --------- ------- At December 31, 1997 U.S. government and agencies $ 8,638 $ 823 $ - $ 9,461 Municipal 1,143 28 - 1,171 Corporate 25,913 897 (12) 26,798 Mortgage-backed securities 36,797 2,315 (140) 38,972 -------- ------- ------ ------- Total fixed income securities $ 72,491 $4,063 $(152) $76,402 ======== ======= ====== ======= At December 31, 1996 U.S. government and agencies $ 8,629 $ 193 $ (54) $ 8,768 Municipal 873 48 - 921 Corporate 16,902 260 (69) 17,093 Mortgage-backed securities 39,096 1,883 (282) 40,697 -------- ------ ------ ------- Total fixed income securities $ 65,500 $2,384 $(405) $67,479 ======== ======= ====== ========
Scheduled maturities The scheduled maturities for fixed income securities are as follows at December 31, 1997:
Amortized Fair Cost Value ------------ ---------- Due in one year or less $ 2,133 $ 2,155 Due after one year through five years 5,343 5,472 Due after five years through ten years 19,410 20,217 Due after ten years 8,808 9,586 ------------ ---------- 35,694 37,430 Mortgage-backed securities 36,797 38,972 ------------ ---------- Total $ 72,491 $ 76,402 ============ ==========
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. F-9 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Net Investment Income
Year Ended December 31, 1997 1996 1995 - ----------------------- ------ ------ ------ Fixed income securities $ 5,364 $ 4,675 $ 4,633 Short-term investments 84 390 215 ----------- ----------- ----------- Investment income, before expense 5,448 5,065 4,848 Investment expense 302 177 66 ----------- ----------- ----------- Net investment income $ 5,146 $ 4,888 $ 4,782 =========== =========== =========== Realized capital gains and losses Year Ended December 31, 1997 1996 1995 - ----------------------- ------ ------ ------ Fixed income securities $ (70) $ (22) $ 67 Short-term investments 2 2 - ------------- ------------- ------------- Realized capital gains and losses (68) (20) 67 Income tax benefit (expense) 24 7 (23) ------------- ------------- ------------- Realized capital losses and gains, after tax $ (44) $ (13) $ 44 ============= ============= =============
Excluding calls and prepayments, gross losses of $70 and $32 and gross gains of $67 were realized on sales of fixed income securities during 1997, 1996 and 1995, respectively. Unrealized net capital gains Unrealized net capital gains on fixed income securities included in shareholder's equity at December 31, 1997 are as follows:
Cost/ Fair Unrealized Amortized Cost Value Net Gains -------------- ----- ------------- Fixed income securities $ 72,491 $ 76,402 $ 3,911 ============== ============== Deferred income taxes (1,369) ------------- Unrealized net capital gains $ 2,542 =============
F-10 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Change in unrealized net capital gains
Year ended December 31, 1997 1996 1995 - ----------------------- ------- ------- ------- Fixed income securities $ 1,932 $(2,108) $ 6,477 Deferred income taxes (676) 737 (2,267) ------- ------- ------- Increase (decrease) in unrealized net capital gains $ 1,256 $(1,371) $ 4,210 ======= ======= =======
Securities on deposit At December 31, 1997, fixed income securities with a carrying value of $8,039 were on deposit with regulatory authorities as required by law. 6. Financial Instruments In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The fair value estimates of financial instruments presented below are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential taxes and other transaction costs have not been considered in estimating fair value. The disclosures that follow do not reflect the fair value of the Company as a whole since a number of the Company's significant assets (including reinsurance recoverable) and liabilities (including deferred income taxes and reserve for life-contingent contract benefits) are not considered financial instruments and are not carried at fair value. Other assets and liabilities considered financial instruments, such as accrued investment income, are generally of a short-term nature. It is assumed that their carrying value approximates fair value. Financial assets The carrying value and fair value of financial assets at December 31, are as follows:
1997 1996 ---- ---- Carrying Fair Carrying Fair Value Value Value Value ------------ -------------- --------------- --------------- Fixed income securities $ 76,402 $ 76,402 $ 67,479 $ 67,479 Short-term investments 3,031 3,031 6,590 6,590 Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
Fair values for fixed income securities are based on quoted market prices. Short-term investments are highly liquid investments with maturities of less than one year whose carrying value approximates fair value. Separate Accounts assets are carried in the statements of financial position at fair value. F-11 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Financial liabilities The carrying value and fair value of financial liabilities at December 31, are as follows:
1997 1996 ----------------------------- ------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- Contractholder funds on investment contracts $ 1,977,479 $ 1,951,214 $ 2,143,482 $ 2,118,583 Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts. Reserves on investment contracts with no stated maturities (single premium and flexible premium deferred annuities) are valued at the account balance less surrender charges. The fair value of immediate annuities and annuities without life contingencies with fixed terms is estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and durations. Separate Accounts liabilities are carried at the fair value of the underlying assets. 7. Income Taxes The Company joins the Corporation and its other eligible domestic subsidiaries in the filing of a consolidated federal income tax return (the "Allstate Group") and is party to a federal income tax allocation agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement, the Company paid to or received from the Corporation the amount, if any, by which the Allstate Group's federal income tax liability was affected by virtue of inclusion of the Company in the consolidated federal income tax return. Effectively, this results in the Company's annual income tax provision being computed, with adjustments, as if the Company filed a separate return. Prior to the Distribution, the Corporation and all of its eligible domestic subsidiaries, including the Company, joined with Sears and its domestic business units (the "Sears Group") in the filing of a consolidated federal income tax return (the "Sears Tax Group") and were parties to a federal income tax allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax Sharing Agreement, the Company, through the Corporation, paid to or received from the Sears Group the amount, if any, by which the Sears Tax Group's federal income tax liability was affected by virtue of inclusion of the Company in the consolidated federal income tax return. Effectively, this resulted in the Company's annual income tax provision being computed as if the Allstate Group filed a separate consolidated return, except that items such as net operating losses, capital losses or similar items, which might not be recognized in a separate return, were allocated according to the Sears Tax Sharing Agreement. The Allstate Group and Sears Group have entered into an agreement which governs their respective rights and obligations with respect to federal income taxes for all periods prior to the Distribution ("Consolidated Tax Years"). The agreement provides that all Consolidated Tax Years will continue to be governed by the Sears Tax Sharing Agreement with respect to the Allstate Group's federal income tax liability. F-12 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) The components of the deferred income tax assets and liabilities at December 31, are as follows:
1997 1996 ------- ------- Deferred assets Separate Accounts $ 149 $ - ------- ------- Deferred liabilities Difference in tax bases of investments (1,454) (1,392) Unrealized net capital gains (1,369) (693) ------- ------- Total deferred liabilities (2,823) (2,085) -------- -------- Net deferred liability $(2,674) $(2,085) ======== ========
The components of income tax expense for the year ended December 31, are as follows:
1997 1996 1995 ---- ---- ---- Current $ 1,843 $ 1,642 $ 1,078 Deferred (87) 24 608 ----------- ----------- ----------- Total income tax expense $ 1,756 $ 1,666 $ 1,686 =========== =========== ===========
The Company paid income taxes of $2,236, $2,308 and $4,980 in 1997, 1996 and 1995, respectively. A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the year ended December 31, is as follows:
1997 1996 1995 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% Tax-exempt income (0.4) (0.6) - Other - (0.2) (0.3) ---- ----- ----- Effective federal income tax rate 34.6% 34.2% 34.7% ==== ==== ====
F-13 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Prior to January 1, 1984, the Company was entitled to exclude certain amounts from taxable income and accumulate such amounts in a "policyholder surplus" account. The balance in this account at December 31, 1997, approximately $16, will result in federal income taxes payable of $6 if distributed by the Company. No provision for taxes has been made as the Company has no plan to distribute amounts from this account. No further additions to the account have been permitted since the Tax Reform Act of 1984. 8. Statutory Financial Information The following tables reconcile net income for the year ended December 31, and shareholder's equity at December 31, as reported herein in conformity with generally accepted accounting principles with statutory net income and capital and surplus, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities:
Net Income ---------- 1997 1996 1995 ---- ---- ---- Balance per generally accepted accounting principles $ 3,322 $ 3,202 $ 3,163 Deferred income taxes (87) 24 608 Statutory investment reserves 79 30 (28) Other (405) (691) (1,443) ----------- ------------ ------------ Balance per statutory accounting practices $ 2,909 $ 2,565 $ 2,300 =========== ============ ============
F-14 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) ($ IN THOUSANDS)
SHAREHOLDER'S EQUITY ---------------- 1997 1996 ------- ------- Balance per generally accepted accounting principles $ 83,284 $ 78,706 Deferred income taxes 2,674 2,085 Unrealized gain/loss on fixed income securities (3,911) (1,979) Non-admitted assets and statutory investment reserves (4,431) (3,317) Other (1,939) (397) ---------- ------------ Balance per statutory accounting practices $ 75,677 $ 75,098 ========== ============
Permitted statutory accounting practices The Company prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the Illinois Department of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company follows a permitted statutory accounting practice whereby it includes amounts receivable from an affiliated insurance company in statutory admitted assets at a level which exceeds the threshold prescribed by the Illinois Department of Insurance by $7,737. Final approval of the NAIC's proposed "Comprehensive Guide" on statutory accounting principles is expected in early 1998. Implementation could be as early as January 1, 1999. The requirements of the Comprehensive Guide are not expected to have a material impact on statutory surplus of the Company. Under the NAIC's proposed accounting practices, the Company's practice related to its receivable from affiliate will be prescribed rather than permitted. Dividends The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. The payment of shareholder dividends by insurance companies without the prior approval of the state insurance regulator is limited to formula amounts based on net income and capital and surplus, determined in accordance with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. The maximum amount of dividends that the Company can distribute during 1998 without prior approval of the Illinois Department of Insurance is $7,318. F-15 NORTHBROOK LIFE INSURANCE COMPANY SCHEDULE IV--REINSURANCE ($ IN THOUSANDS)
Gross Net Year ended December 31, 1997 amount Ceded amount - ---------------------------- -------- -------- ------ Life insurance in force $ 515,890 $ 515,890 $ - =========== ========== ========= Premiums and contract charges: Life and annuities $ 85,538 $ 85,538 $ - =========== ========== ========= Gross Net Year ended December 31, 1996 amount Ceded amount - ---------------------------- ------- ------ ------ Life insurance in force $ 556,242 $ 556,242 $ - =========== ========== ========= Premiums and contract charges: Life and annuities $ 64,519 $ 64,519 $ - =========== ========== ========= Gross Net Year ended December 31, 1995 amount Ceded amount - ---------------------------- ------ ----- ------ Life insurance in force $ 610,478 $ 610,478 $ - =========== ========== ========= Premiums and contract charges: Life and annuities $ 54,632 $ 54,632 $ - =========== ========== =========
F-16 APPENDIX A MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I= the effective annual Interest Crediting Rate for that Sub-Account N= the number of complete days from the withdrawal to the end of the Sub-Account's Guarantee Period; and J= the current interest rate credited for contracts, on the date the withdrawal request is received, for a Guarantee Period of duration N. If a Guarantee Period of duration N is not currently being offered, J will be determined by a linear interpolation (weighted average). If N is less than or equal to 365 days, J will be the rate for a Guarantee Period of duration 365. The Market Value Adjustment factor is determined from the following formula: [.9 x (I-J) x (N/365)]. The amount withdrawn less any applicable Free Withdrawal Amount will be multiplied by the Market Value Adjustment factor to determine the Market Value Adjustment.
ILLUSTRATION EXAMPLE OF MARKET VALUE ADJUSTMENT Purchase Payment: ........................................................................$10,000 Guarantee Period: ........................................................................5 years Interest Rate:............................................................................ 4.5% Full Surrender:............................................................End of Contract Year 3 NOTE: This illustration assumes that premium taxes were not applicable.
EXAMPLE 1: (Assumes declining interest rates) Step 1: Calculate Account Value at End of Contract Year 3: = 10,000.00 x (1.045)3 = $11,411.66 Step 2: Calculate The Amount Withdrawn in Excess of the Free Withdrawal Amount: Amount Withdrawn: 11,411.66 Free Withdrawal Amount: .10 x 10,000.00 = 1,000.00 Amount Withdrawn in Excess of the Free Withdrawal Amount: = 11,411.66 - 1,000.00 = $10,411.66 Step 3: Calculate the Withdrawal Charge: = .0225 x 10,411.66 = $234.26 Step 4: Calculate the Market Value Adjustment: I= 4.5% J= 4.2% N= 730 days Market Value Adjustment Factor: .9 x (I-J) x (N/365) = .9 x (.045 - .042) x (730/365) = .0054 Market Value Adjustment = Factor x Amount in Excess of Free Withdrawal Amount: = .0054 x 10,411.66 = $56.22 Step 5: Calculate The Net Surrender Value at End of Contract Year 3: = 11,411.66 - 234.26 + 56.22 = $11,233.62 EXAMPLE 2: (Assumes rising interest rates) Step 1: Calculate Account Value at End of Contract Year 3: = 10,000.00 x (1.045)3 = $11,411.66 Step 2: Calculate The Amount Withdrawn in Excess of the Free Withdrawal Amount: Amount Withdrawn: 11,411.66 Free Withdrawal Amount: .10 x 10,000.00 = 1,000.00 Amount Withdrawn in Excess of the Free Withdrawal Amount: = 11,411.66 - 1,000.00 = $10,411.66 Step 3: Calculate the Withdrawal Charge: = .0225 x 10,411.66 = $234.26 Step 4: Calculate the Market Value Adjustment: I= 4.5% J= 4.8% N = 730 days Market Value Adjustment Factor: .9 x (I-J) x (N/365) = .9 x (.045 - .048) x (730/365) = -.0054 Market Value Adjustment = Factor x Amount in Excess of Free Withdrawal Amount: = -.0054 x 10,411.66 = -$56.22 Step 5: Calculate The Net Surrender Value at End of Contract Year 3: = 11,411.66 - 234.26 - 56.22 = $11,121.18 A-2 -----END PRIVACY-ENHANCED MESSAGE-----