-----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, Rkb5ILm9lAdDF5DnA3zKdX8zu28bkqaPDDKmz+HI9D8YBavJCYeuaMZez7WA6WuZ BahMQA0kRHMOu07gycQGdQ== 0000950131-96-001926.txt : 19960507 0000950131-96-001926.hdr.sgml : 19960507 ACCESSION NUMBER: 0000950131-96-001926 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960503 SROS: NASD 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-50884 FILM NUMBER: 96556397 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 424B3 1 CUSTOM ANNUNITY Filed Pursuant to Rule 424(b)(3) File No. 33-50884 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") 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. A minimum initial Purchase Payment of $4,000 must be presented at the time of application for a Contract ($1,000 for a Qualified Contract). Presently, the Company will accept an initial Purchase Payment of $1,000, but reserves the right to increase this amount to no more than $4,000. Additional Purchase Payments of $1,000 or more may be added to the Contract. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI- TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC- TUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. THE DATE OF THIS PROSPECTUS IS MAY 1, 1996. 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 that applies to each particular Contract. The annual statement does not contain financial statements of the Company. The Company, however, is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission. Reports and other information filed by the Company can be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, at prescribed rates. 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. TABLE OF CONTENTS
PAGE ---- GLOSSARY.............................................................. 4 INTRODUCTION.......................................................... 6 THE CONTRACTS......................................................... 7 Purchase of the Contract............................................ 7 THE ACCUMULATION PHASE................................................ 8 The Accumulation Phase Defined...................................... 8 Initial and Subsequent Guarantee Periods............................ 8 Interest Credited................................................... 8 Example of Interest Crediting During the Guarantee Period........... 9 Partial Withdrawals and Surrenders.................................. 10 Withdrawal Charge................................................... 10 Market Value Adjustment............................................. 10 Withdrawals at the End of the Guarantee Period...................... 11 Taxes............................................................... 11 Payment Upon Partial Withdrawal or Surrender........................ 11 Death Benefits...................................................... 11 THE PAYOUT PHASE...................................................... 12 Income Plans........................................................ 12 Payout Terms........................................................ 13 AMENDMENT OF THE CONTRACTS............................................ 13 DISTRIBUTION OF THE CONTRACTS......................................... 13 CUSTOMER INQUIRIES.................................................... 14
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PAGE ---- FEDERAL TAX MATTERS................................................ 14 Introduction..................................................... 14 Taxation of the Company.......................................... 14 Taxation of Annuities in General................................. 14 Qualified Plans.................................................. 16 Other Considerations............................................. 17 THE COMPANY........................................................ 17 Business......................................................... 17 Reinsurance Agreements........................................... 17 Investments by the Company....................................... 18 SELECTED FINANCIAL DATA............................................ 19 Northbrook Life Insurance Company Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20 Results of Operations............................................ 20 Financial Position............................................... 20 Liquidity and Capital Resources.................................. 21 COMPETITION........................................................ 21 EMPLOYEES.......................................................... 22 PROPERTIES......................................................... 22 STATE AND FEDERAL REGULATION....................................... 22 EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY.................... 23 EXECUTIVE COMPENSATION............................................. 24 LEGAL PROCEEDINGS.................................................. 25 EXPERTS............................................................ 25 LEGAL MATTERS...................................................... 25 FINANCIAL STATEMENTS............................................... F-1 APPENDIX A......................................................... A-1
3 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. 4 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 Period(s) and the dates the period(s) begins. Sub-Accounts are established when Purchase Payments are made; and when previous Sub-Accounts expire and a new Guarantee Period is selected. Sub-Account Value--The Sub-Account Value is the accumulation of funds allocated to that Sub-Account and interest credited. 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. 5 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. 10, "Death Benefits," pg. 11, and "The Payout Phase," pg. 12.) 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. 10.) 2. HOW DO I PURCHASE A CONTRACT? You may purchase the Contract from Dean Witter, the Company's sales repre- sentative. The first Purchase Payment must be at least $4,000 ($1,000 for a Qualified Contract). Presently, the Company will accept an initial Purchase Payment of $1,000, but reserves the right to increase this amount to no more than $4,000. At the time of purchase, you will 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 allo- cated to any one Guarantee Period. You may participate in the Automatic Laddering Program at the time of purchase. The Automatic Laddering Program al- lows you to choose future renewal Guarantee Periods. (See, "Purchase of the Contract," pg. 7.) 3. CAN I MAKE SUBSEQUENT PURCHASE PAY- MENTS 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 Pay- ment you will select a Guarantee Period(s) to which the Purchase Payment will be allocated. (See, "Purchase of the Contract," pg. 7.) 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 Guar- antee Period, the Sub-Account automatically set will be changed as of the end of the Guarantee Period just expired to match this selection. (See, "Initial and Subsequent Guarantee Periods," pg. 8.) 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 full 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 6 Sub-Account prior to the end of its Guarantee Period, a Market Value Adjust- ment will be made to the money distributed in excess of the Free Withdrawal Amount. The Market Value Adjustment may be positive or negative. (See, "With- drawal Charge," pg. 10, and "Market Value Adjustment," pg. 10.) 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 Pe- riod. 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. 10.) 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 WITH- DRAWALS. 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. 11.) 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 applica- ble 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. 12.) THE CONTRACTS - ------------------------------------------------------------------------------- PURCHASE OF THE CONTRACT The Contracts may be purchased through sales representatives of Dean Witter, the principal underwriter of the Contracts. 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 first Purchase Payment must be at least $4,000 ($1,000 for a Qualified Contract). Presently, the Company will accept an initial Purchase Payment of $1,000, but reserves the right to increase this amount to no more than $4,000. 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. 7 THE ACCUMULATION PHASE - ------------------------------------------------------------------------------- THE ACCUMULATION PHASE DEFINED The Accumulation Phase begins on the Issue Date and continues until the Pay- out Start Date. During this phase, cash withdrawal benefits and a Death Bene- fit 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 ac- cumulation of interest. At least once every year, the Company will send the Owner a statement containing Account Value information. INITIAL AND SUBSEQUENT GUARANTEE PERIODS For each initial Purchase Payment and subsequent Purchase Payments, 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 in- terest rate under the Contract. The "minimum guaranteed interest rate under the Contract" is a rate of interest specified in the Contract that is guaran- teed 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 require- ments, 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. 8 EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD Beginning Sub-Account Value:........................................ $10,000.00 Guarantee Period:................................................... 5 years Effective Annual Rate:.............................................. 5.25%
END OF CONTRACT YEAR: - --------------------------------------------------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 ---------- ---------- ---------- ---------- ---------- Beginning Sub-Account Value $10,000.00 x (1 + Effective Annual Rate) 1.0525 ---------- $10,525.00 ---------- Sub-Account Value at end of Contract $10,525.00 year 1 x (1 + Effective Annual Rate) 1.0525 ---------- $11,077.56 ---------- Sub-Account Value at end of Contract $11,077.56 year 2 x (1 + Effective Annual Rate) 1.0525 ---------- $11,659.13 ---------- Sub-Account Value at end of Contract $11,659.13 year 3 x (1 + Effective Annual Rate) 1.0525 ---------- $12,271.24 ---------- Sub-Account Value at end of Contract $12,271.24 year 4 x (1 + Effective Annual Rate) 1.0525 ---------- Sub-Account Value at end of Guarantee Period: $12,915.48 ----------
Total Interest Credited in Guarantee Period: $2,915.48 ($12,915.48-- $10,000.00) 9 PARTIAL WITHDRAWALS AND SURRENDERS You have the right to make a partial withdrawal or full 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-Ac- count'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 With- drawal 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 re- quest 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 With- drawals. 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 penal- ty. The tax and penalty are explained in "Federal Tax Matters" on page 14. WITHDRAWAL CHARGE A Withdrawal Charge will be applied to a partial withdrawal or full 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 rela- tionship 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-Ac- count. Generally, if the effective annual interest rate for the Sub-Account is lower 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 lower payment upon surrender. Simi- larly, if the effective annual interest rate for the Sub-Account is higher than the applicable current effective annual interest rate, then the Market Value Adjustment will result in a higher payment upon surrender. 10 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 5.25%. Assume that at the end of 3 years, the Owner makes a partial with- drawal. If the current interest rate for a 2 year Guarantee Period is 4.95%, then the Market Value Adjustment will be positive, which will result in an in- crease in the amount payable to the Owner upon the 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 guaran- teed interest rate under the Contract. HOWEVER, THE COMPANY GUARANTEES THAT THE AMOUNT RECEIVED UPON SURRENDER WILL BE AT LEAST EQUAL TO THE PURCHASE PAY- MENTS 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 Ap- pendix A (see pg. A-1) to this prospectus, which also contains additional il- lustrations 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 re- flect 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 Bene- fit may be paid. If an Owner dies prior to the Payout Start Date, the new Owner (any surviv- ing 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. 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 pe- riod 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 be- tween 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 11 death had not occurred. If there is no Annuitant at that time, the new Annui- tant 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: n 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 n receive the Death Benefit in a lump sum. The Death Benefit is equal to the greater of the Account Value and the Cash Surrender Value, or n 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 Com- pany 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 birth- day 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 is- sued 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 Annui- tant 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 con- tinue. 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 the guaranteed payments have been made, the remainder of the guaranteed payments will be made to the Owner. 12 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, con- sideration 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 less 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 Agents' Agreement with the Company. 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. Dean Witter is a member of the New York Stock Exchange and the National Association of Securities Dealers, Inc. The General Agents' 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. 13 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 Contract was designed for use by individuals in retirement plans which may or may not be plans qualified for special tax treatment under Section 401, 403, 408, or 457 of the Internal Revenue Code ("Code"). The ultimate effect of federal income taxes on the Account Value, on Income Payments and on the economic benefit to the Owner, the Annuitant or the Beneficiary depends on the type of retirement plan for which the Contract is purchased, on the tax and employment status of the individual concerned and on the Company's tax status. THE TAX DISCUSSION BELOW IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. Any person concerned about these tax implications should consult a competent tax adviser. This discussion is based upon the Company's understanding of the present federal income tax laws as they are currently interpreted by the Internal Revenue Service. No representation is made as to the likelihood of continuation of these present federal income tax laws or of the current interpretations by the Internal Revenue Service. Moreover, no attempt has been made to consider any applicable state or other tax laws. TAXATION OF THE COMPANY The Company is taxed as a life insurance company under Part I of Subchapter L of the Code. The following discussion assumes that the Company will continue to be taxed as a life insurance company under Part I of Subchapter L. TAXATION OF ANNUITIES IN GENERAL The following discussion assumes that the Contract will qualify as an annu- ity contract for federal income tax purposes. Such qualifications are dis- cussed below. Generally, an annuity contract owner who is a natural person is not taxed on increases in the Account Value until a distribution occurs. For federal income tax purposes, distributions include the receipt of proceeds from loans and an assignment or pledge of any portion of the value of the Contract, as well as withdrawals, Income Payments, or Death Benefits. The exception to this rule is that Owners who are not natural persons generally must include in income any increase during the taxable year in the Account Value (once the Account Value exceeds the investment in the Contract). However, there are exceptions to this non-natural owner rule and you should discuss these with your tax adviser. The following discussion only applies to Contracts owned by natural persons. Generally, in the case of a surrender, withdrawal, loan, assignment or pledge under a Non-Qualified Contract before the Payout Start Date, amounts received are first treated as taxable income to the extent that the Account Value of the Contract immediately before the surrender exceeds the "investment in the contract" (as defined in the Code) at that time. Any additional amount is not taxable. The Account Value is the sum of all Sub-Account Values. No matter which Sub-Account a withdrawal is made from, all Sub-Account Values are combined and the Account Value is used to determine the amount of taxable in- come. The recipient of periodic Income Payments under the Contract is, in general, taxed on a portion of each payment. Generally, for Income Payments (prior to recovery of the investment in the Con- 14 tract), there is no tax on the amount of each payment which represents the same ratio that the "investment in the contract" bears to the total expected value of the Income Payments for the term of the payments; however, the re- mainder of each Income Payment is taxable. After the Owner's investment in the Contract has been recovered, the full amount of any additional payments will be taxed. The taxable portion of a distribution (in the form of an Income Payment or a lump sum payment) is taxed as ordinary income. Premature distributions from Non-Qualified Contracts may be subject to a penalty equal to ten percent (10%) of the amount treated as taxable income. The penalty applies to the taxable portion of any distribution except those (1) made on or after the Owner attains age 59 1/2; (2) made as a result of the Owner's death or disability; (3) received in substantially equal installments as a life annuity or over a period not exceeding the life expectancy of the owner; or (4) allocable to investments in the Contract prior to August 14, 1982. Other tax penalties may apply to certain distributions under Qualified Contracts. All Non-Qualified deferred annuity contracts that are issued by the Company (or its affiliates) to the same Owner during any calendar year will be aggre- gated and treated as one annuity contract for purposes of determining the amount includable in gross income under section 72(e) of the Code. According- ly, an Owner should consult a competent tax adviser when purchasing more than one Non-Qualified Deferred Annuity Contract in one calendar year. Transfer of ownership of a Contract, the designation of an Annuitant or a Beneficiary who is not also the Owner, or the exchange of a Contract may re- sult in certain tax consequences to the Owner that are not discussed herein. An Owner contemplating any such transfer, assignment, or exchange of a Con- tract should contact a competent tax adviser with respect to the potential tax effects of such a transaction. In order to be treated as an annuity contract for federal income tax purpos- es, Section 72(s) of the Code requires any Non-Qualified Contract issued after January 18, 1985 to provide that (a) if any Owner dies on or after the Payout Start Date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of such interest will be distributed at least as rapidly under the method of distribution being used as of the date of that Owner's death; and (b) if any Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within five years af- ter the date of the Owner's death. These requirements shall be considered sat- isfied with respect to any portion of the Owner's interest which is payable to, or for the benefit of, a "designated beneficiary," if such portion is dis- tributed over the life of such "designated beneficiary" or over a period not extending beyond the life expectancy of that Beneficiary and such distribu- tions begin within one year of that Owner's death. The Owner's "designated beneficiary" is the surviving Owner(s) or the person(s) designated by such Owner as a Beneficiary. The "designated beneficiary" is the person to whom ownership of the Contract passes by reason of death. If the Owner's "desig- nated beneficiary" is the surviving spouse of the Owner, the Contract may be continued with the surviving spouse as the new Owner. Non-Qualified Contracts contain provisions which are intended to comply with the requirements of section 72(s) of the Code, although regulations interpret- ing these requirements have not yet been issued. The Company intends to review such provisions and modify them if necessary to assure that they comply with the requirements of Code Section 72(s) when clarified by regulation or other- wise. Other rules may apply to Qualified Contracts. 15 QUALIFIED PLANS The Contract is designed for use 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 in itself. Adverse tax consequences may result from contributions in excess of specified limits, distributions prior to age 59 1/2, distributions that do not conform to speci- fied commencement and minimum distribution rules, aggregate distributions in excess of a specified annual amount and in other circumstances. Therefore, the Company makes no attempt to provide more than general information about the use of the Contracts with the various types of qualified plans. Owners and participants under qualified plans as well as Annuitants and Beneficiaries are cautioned that the rights of any person to any benefits under qualified plans may be subject to the terms and conditions of the plans themselves regardless of the terms and conditions of the Contract issued in connection therewith. Purchasers of the Contracts for use with any qualified plan should seek compe- tent advice regarding the suitability of the Contract. (a) Section 403(b) Plans. Under Section 403(b) of the Code, payments made by public school systems and certain not-for-profit organizations to purchase annuity contracts for their employees are excludable from the gross income of the employee, subject to certain limitations. In accordance with the requirements of Section 403(b), any contract used for a Section 403(b) Plan will prohibit distributions of (i) elective contributions made in years beginning after December 31, 1988, (ii) earnings on those contribu- tions, and (iii) earnings on amounts attributable to elective contribu- tions held as of the end of the last year beginning before January 1, 1989. However, distributions of such amounts will be allowed upon death of an employee, attainment of age 59 1/2, separation from service, disabili- ty, or financial hardship, except that income attributable to elective contributions may not be distributed in the case of hardship. (b) H.R. 10 Plans. The Self-Employed Individuals Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh," permits self-em- ployed individuals to establish qualified plans for themselves and their employees. These plans are limited by law to maximum permissible contribu- tions, distribution dates, and nonforfeitability of interests. In order to establish such a plan, a plan document, usually in a form approved in ad- vance by the Internal Revenue Service, is adopted and implemented by the employer. (c) Individual Retirement Annuities. Sections 219 and 408 of the Code permit individuals or their employers to contribute to an individual retirement program known as an "Individual Retirement Annuity." Individual Retirement Annuities are subject to limitations on the amount which may be contrib- uted and on the time when distribution may commence. In addition, distri- butions from certain other types of qualified plans may be placed into an Individual Retirement Annuity on a tax-deferred basis. (d) Corporate Pension and Profit-Sharing Plans. Section 401(a) and 403(a) of the Code permit corporate employers to establish various types of retire- ment plans for employees. Such retirement plans may permit the purchase of the Contracts to provide benefits under the plans. (e) State and Local Governments Deferred Compensation Plans. Section 457 of the Code, while not actually providing for a qualified plan as that term is normally used, provides for certain Deferred Compensation Plans with respect to service to state governments, local governments, political sub- divisions, agencies, instrumentalities and certain affiliates of such en- tities and certain tax exempt organizations which enjoy special treatment. Under such plans a participant may specify the form of in- 16 vestment in which his or her participation will be made. All such invest- ments, however, are owned by and subject to the claims of general creditors of the sponsoring employer. OTHER CONSIDERATIONS The Company is required to withhold federal income tax at a rate of 20% on all distributions which constitute "eligible rollover distributions," unless the recipient elects to rollover such amounts to another qualified plan or IRA in a direct rollover. Eligible rollover distributions generally include all distributions from qualified plans, excluding IRA's, with the exception of (1) minimum distributions pursuant to Section 401(a)(9), and (2) a series of sub- stantially equal periodic payments made over a period of at least 10 years, or the life (joint lives) of the participant (and beneficiaries). In addition, some states require that state income tax be withheld. For any distributions which do not constitute "eligible rollover distribu- tions," the Company is required to withhold federal and, where required, state income taxes on all distributions, unless the recipient elects not to have taxes withheld and properly notifies the Company of that election. The foregoing comments about the federal tax consequences under these Con- tracts are not exhaustive, and special rules are provided with respect to other tax situations not discussed in this prospectus. Before making an in- vestment, a qualified tax adviser should be consulted. Further, the federal income tax consequences discussed herein reflect current law. Federal estate, state and local estate, inheritance, and other tax conse- quences of ownership or receipt of distributions under a Contract depend on the individual circumstances of each Owner or recipient of the distribution. A competent tax adviser should be consulted for further information. 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's products, group and in- dividual annuities and life insurance, have been approved by the various states where offered. 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 incorpo- rated 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"). In June 1995, Sears, Roebuck and Co. ("Sears") distributed in a tax-free dividend to its stockholders its remaining 80.3% ownership in the Corporation. As a result of the distribution, Sears no longer has an ownership interest in the Corporation. REINSURANCE AGREEMENTS The Company and Allstate Life entered into a reinsurance agreement, effec- tive December 31, 1987, under which the Company automatically reinsures sub- stantially all of its fixed annuity business, with the exception of certain Qualified Contracts (as discussed in the following paragraph), with Allstate Life. Under the reinsurance agreement, Purchase Payments under general account contracts are automatically transferred to Allstate Life and become invested with the assets of Allstate Life, and Allstate Life accepts 100% of the lia- bility under such contracts. (See "Management's Discussion and Analysis of Fi- nancial Condition and Results of Operations", pg. 20). However, the obli- gations of Allstate Life under the reinsurance agreement are to the Company; the Company re- 17 mains the sole obligor under the Contracts to the Owners. Because the reinsur- ance obligations of Allstate Life to the Company would be subordinated by op- eration 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 assets for the benefit of the Company, in an amount at least equal to the net statutory reserves un- der 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. Purchase Payments of Qualified Contracts issued in conjunction with a Sec- tion 401(a), 401(k) or 403(b) plan, will be invested in the general account of the Company. The Company and Allstate Life have entered into a modified coin- surance agreement under which Allstate Life will continue to reinsure all of the Company's general account obligations under such Qualified Contracts; the reserves for such Qualified Contracts will be held in the Company's general account and, therefore, will not be subject to the trust agreement described above. INVESTMENTS BY THE COMPANY The Company's general account assets must be invested in accordance with ap- plicable state laws. These laws govern the nature and quality of investments that may be made by life insurance companies and the percentage of their as- sets 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 invest- ments. 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 instru- mentalities, which may or may not be guaranteed by the United States Govern- ment; 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 port- folio; Commercial mortgages, mortgage-backed securities collateralized by real es- tate mortgage loans, or securities collateralized by other assets, that are insured or guaranteed by the Federal Home Loan Mortgage Association, the Fed- eral National Mortgage Association or the Government National Mortgage Associ- ation, 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 nation- ally recognized rating service; Commercial paper, cash, or cash equivalents, and other short-term invest- ments having a maturity of less than one year that are considered by the Company's management to have investment quality comparable to securities hav- ing 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 In- vestment Company Act of 1940. These separate account assets which relate to the Company's variable annuity contracts, do not support the Company's obliga- tions under the Contracts. 18 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)
1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- For The Years Ended December 31: Income Before Taxes.... $ 4,849 $ 2,688 $ 3,257 $ 3,153 $ 3,743 Net Income............. 3,163 1,733 2,507 2,965 2,729 As of December 31: Total Assets/1/........ 6,071,603 5,764,233 5,886,038 5,623,675 5,050,071
/1/The Company adopted SFAS No. 115, "Accounting for Certain Instruments in Debt and Equity Securities" on December 31, 1993. See Note 3 to the Financial Statements. 19 NORTHBROOK LIFE INSURANCE COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following highlights significant factors influencing results of opera- tions and financial position. Northbrook Life Insurance Company ("the Company"), which is wholly owned by Allstate Life Insurance Company ("Allstate Life"), issues single and flexible premium fixed annuity contracts and universal life insurance policies. In ad- dition, the Company issues flexible premium deferred variable annuity con- tracts, the assets and liabilities of which are legally segregated and re- flected in the accompanying statements of financial position as the assets and liabilities of the Separate Accounts. Dean Witter Reynolds is the sole dis- tributor of the Company's products and also manages the funds in which the as- sets of the Separate Accounts are invested. The Company reinsures substantially all of its annuity deposits and life in- surance in force with Allstate Life. Accordingly, the financial results re- flected in the Company's statements of operations relate only to the invest- ment of those assets of the Company that are not transferred to Allstate Life under the reinsurance treaties. Variable annuity assets and liabilities are carried at fair value in the statements of financial position. Investment income and realized gains and losses of the Separate Account investments accrue directly to the contractholders (net of fees) and, therefore, are not included in the Company's statements of operations. RESULTS OF OPERATIONS
1995 1994 1993 ------- ------- ------- ($ IN THOUSANDS) Net investment income................................. $ 4,782 $ 2,881 $ 2,934 ======= ======= ======= Realized capital gain (losses), after tax............. $ 44 $ (125) $ 210 ======= ======= ======= Net income............................................ $ 3,163 $ 1,733 $ 2,507 ======= ======= ======= Fixed income securities, at amortized cost............ $59,142 $61,581 $34,529 ======= ======= =======
In 1995, net investment income increased $1.9 million. This increase related to an increased level of investments which resulted from a $25 million capital contribution from Allstate Life during December 1994. Net investment income decreased in 1994 over 1993, primarily due to slightly lower portfolio yields, partially offset by the increase in investments during the year. Realized capital gains after tax were $44 thousand in 1995 compared to capi- tal losses of $125 thousand in 1994. Overall, the market values of fixed in- come securities were higher in 1995 than in 1994, which resulted in gains in 1995 and losses in 1994 when certain fixed income securities were sold in re- sponse to changes in market conditions. Net income increased $1.4 million in 1995 reflecting the increase in net in- vestment income and realized capital gains. The $0.8 million decrease in 1994 from 1993 is primarily attributable to increased realized capital losses and a higher effective income tax rate in 1994. FINANCIAL POSITION
1995 1994 ---------- ---------- ($ IN THOUSANDS) Fixed income securities, at fair value.................. $ 63,229 $ 59,191 ========== ========== Unrealized net capital gains (losses)(/1/).............. $ 4,087 $ (2,390) ========== ========== Separate Account assets, at fair value.................. $3,354,910 $2,604,623 ========== ========== Contractholder funds.................................... $2,497,278 $2,950,532 ========== ========== Reinsurance recoverable from Allstate Life.............. $2,636,981 $3,085,781 ========== ==========
- ------- (1) Unrealized net capital gains (losses) exclude the effect of deferred income taxes. 20 Fixed income securities are classified as "available for sale" and carried in the statements of financial position at fair value. Although the Company generally intends to hold its fixed income securities for the long-term, such classification affords the Company flexibility in managing the portfolio in response to changes in market conditions. At December 31, 1995 unrealized capital gains were $4.1 million compared to an unrealized capital loss of $2.4 million at December 31, 1994. The signifi- cant change in the unrealized capital gain/loss position is primarily attrib- utable to declining interest rates. Contractholder funds decreased by $453 million and reinsurance recoverable from Allstate Life under reinsurance treaties decreased by $449 million, re- flecting policyholder transfers from fixed annuities to variable annuities and fixed annuity surrenders. Reinsurance recoverable from Allstate Life relates to policy benefit obligations ceded to Allstate Life. Separate Accounts increased by $750 million attributable to sales of vari- able annuities, the favorable investment performance of the Separate Account funds, and the policyholder transfers previously described. LIQUIDITY AND CAPITAL RESOURCES In December 1994, Allstate Life made a $25 million capital contribution to the Company. Under the terms of intercompany reinsurance agreements, assets of the Com- pany that relate to insurance in force, excluding Separate Account assets, are transferred to Allstate Life who maintains the investment portfolios which support the Company's products. 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 enti- ties competing in the sale of insurance and annuities. There are approximately 2,000 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 automatically reinsures all net business of the Company. A.M. Best Company also assigns the Company the rating of A+(r) because the Company automatically reinsures all business with Allstate Life. Standard & Poor's Insurance Rating Services assigns AA+ (Excellent) to the Company's claims-paying ability and Moody's assigns Aa3 (excellent) financial strength to the Company. The Company shares the same fi- nancial ratings of its parent, Allstate Life Insurance Company. 21 EMPLOYEES - ------------------------------------------------------------------------------- As of December 31, 1995, Northbrook Life had approximately 178 employees at its Home Office in Northbrook, Illinois. PROPERTIES - ------------------------------------------------------------------------------- The Company occupies office space provided by its parent, Allstate Life, 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, estab- lishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescrib- ing 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 ju- risdictions in which it does business and its operations and accounts are sub- ject 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 in- curred as a result of company insolvencies. The amount of any future assess- ments 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 busi- ness in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefit regula- tion, controls on medical care costs, removal of barriers preventing banks from engaging in the insurance business, tax law changes affecting the taxa- tion 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 insur- ance and pension rates and benefits. 22 EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY - ------------------------------------------------------------------------------- The directors and executive officers are listed below, together with infor- mation 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. LOUIS G. LOWER, II, 50, Chairman of the Board of Directors and Chief Executive Officer (1995)* He is also the President of Allstate Life Insurance Company; President and Chairman of the Board of Allstate Life Insurance Company of New York; Chairman of the Board of Directors and Chief Executive Officer of Lincoln Benefit Life Company, Surety Life Insurance Company, Glenbrook Life Insurance Company, and Glenbrook Life and Annuity Company; Chairman of the Board of Allstate Settle- ment Corporation; and a Director of Allstate Insurance Company and Allstate Life Financial Services, Inc. MICHAEL J. VELOTTA, 50, Vice President, Secretary, General Counsel, and Director (1993)* He is also Vice President, Secretary, General Counsel and Director of Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook Life Insurance Company, Glenbrook Life and Annuity Company and Surety Life Insurance Company; and a Director of Lincoln Benefit Life Company and Allstate Life Financial Services, Inc. From 1989 through 1992, he was Vice President, Assistant General Counsel of Allstate Insurance Company. MARLA G. FRIEDMAN, 42, President, Chief Operating Officer and Director (1995)* She is also Vice President and Director of Allstate Life Insurance Company; President and Chief Operating Officer Glenbrook Life Insurance Company, and Glenbrook Life and Annuity Company; and a Director of Allstate Life Financial Services, Inc. PETER H. HECKMAN, 50, Vice President and Director (1989)* He is also Vice President and Director of Allstate Life Insurance Company; Vice President of Allstate Life Insurance Company of New York, Glenbrook Life and Annuity Company, Glenbrook Life Insurance Company; and Director of Surety Life Insurance Company and Lincoln Benefit Life Company. LAWRENCE P. MOEWS, 44, Director (1995)* He is also Director of Glenbrook Life Insurance Company. Prior to 1995 he was Director and Vice President of Allstate Life Insurance Company. JOHN R. HUNTER, 40, First Vice President, Assistant Vice President and Director (1995)* He is also Assistant Vice President of Allstate Life Insurance Company. Prior to 1995 he was Assistant Vice President and Director of Northbrook Life Insurance Company and Assistant Vice President of Allstate Life Insurance Com- pany. BARRY S. PAUL, 40, Assistant Vice President and Controller (1991)* He is also Assistant Vice President of Allstate Life Insurance Company; As- sistant Vice President and Controller of Allstate Life Insurance Company of New York; and Assistant Vice President and Controller of Glenbrook Life Insur- ance Company and Glenbrook Life and Annuity Company. 23 EXECUTIVE COMPENSATION - ------------------------------------------------------------------------------- CASEY J. SYLLA, 52, Chief Investment Officer and Director (1995)* He is also Director of Allstate Insurance Company, Allstate Indemnity Compa- ny, Allstate Property and Casualty Insurance Company, Deerbrook Insurance Com- pany, First Assurance Company, Northbrook Indemnity Company, Northbrook Na- tional Insurance Company, Northbrook Property and Casualty Insurance Company and Allstate Life Insurance Company. He is also Chief Investment Officer of Glenbrook Life and Annuity Company, Allstate Settlement Corporation, The Northbrook Corporation, Allstate Insurance Company, Allstate Indemnity Compa- ny, Allstate Property and Casualty, Deerbrook Insurance Company, First Assur- ance Company, Northbrook Indemnity Company, Northbrook National Insurance Com- pany, Northbrook Property and Casualty Insurance Company and Allstate Life In- surance Company. Prior to 1995, he was Senior Vice President and Executive Of- ficer Investments for Northwestern Mutual Life Insurance Company. JAMES P. ZILS, 44, Treasurer (1995)* He is also Treasurer of Allstate Life Financial Services, Inc., Allstate Settlement Corporation, Allstate Life Insurance Company, Allstate Life Insur- ance Company of New York, Glenbrook Life and Annuity Company, Glenbrook Life Insurance Company, The Northbrook Corporation. He is Treasurer and Vice Presi- dent of AEI Group, Inc., Allstate International Inc., Allstate Motor Club, Inc., Direct Marketing Center, Inc., Enterprises Services Corporation, The Allstate Foundation, Forestview Mortgage Insurance Company, Allstate Indemnity Company, Allstate Property and Casualty, Deerbrook Insurance Company, First Assurance Company, Northbrook Indemnity Company, Northbrook National Insurance Company, Northbrook Property and Casualty Insurance Company. 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 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. Alloca- tions 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 1995 totalled $392,156.41. Directors of the Company receive no compensation in addition to their compensation as employees of the Company. 24 SUMMARY COMPENSATION TABLE (ALLSTATE LIFE INSURANCE COMPANY)
LONG TERM COMPENSATION ------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------ --------------------- -------- (A) (B) (C) (D) (E) (F) (G) (H) (I) OTHER SECURITIES ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/ PAYOUTS COMPENSATION POSITION YEAR ($) ($) ($) AWARD(S) SARS(#) ($) ($) ------------------ ---- -------- -------- ------------ ---------- ---------- -------- ------------ Louis G. Lower, II...... 1995 $416,000 $266,175 $17,044 $199,890 N/A $411,122 $5,250(1) Chief Executive Officer 1994 $389,050 $ 43,973 $26,990 $170,660 N/A 0 $1,890(1) and Chairman of the 1993 $374,200 $294,683 $52,443 $318,625 N/A $ 13,451 $6,296(1) Board of Directors John R. Hunter.......... 1995 $144,600 $ 35,037 0 N/A N/A 0 0 First Vice President, Assistant Vice Presi- dent and Director(2)
- ------- (1) Amount received by Mr. Lower which represents the value allocated to his account from employer contributions under The Profit Sharing Fund and to its predecessor, The Savings and Profit Sharing Fund of Sears employees. (2) This amount represents the portion of Mr. Hunter's total compensation allocated to Northbrook Life. Prior to 1995, no Northbrook Life Officer's compensation exceeded $100,000. 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, the financial statement schedule and the financial statements from which the Selected Financial Data included in this prospectus have been derived, 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 have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS - ------------------------------------------------------------------------------- Certain legal matters relating to the federal securities laws applicable to the issue and sale of the Contracts have been passed upon by Routier and Johnson, P.C., of Washington, D.C. 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. 25 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 as of December 31, 1995 and 1994, and the related Statements of Operations, Shareholder's Equity and Cash Flows for each of the three years in the period ended December 31, 1995. 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 Northbrook Life Insurance Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, Schedule IV--Reinsurance, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 3 to the financial statements, in 1993 the Company changed its method of accounting for investment in fixed income securities. Deloitte & Touche llp Chicago, Illinois March 1, 1996 F-1 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, --------------------- 1995 1994 ---------- ---------- ($ IN THOUSANDS) ASSETS Investments Fixed income securities Available for sale, at fair value (amortized cost $59,142 and $61,581)............................. $ 63,229 $ 59,191 Short-term.......................................... 8,049 3,374 ---------- ---------- Total investments............................... 71,278 62,565 Reinsurance recoverable from Allstate Life Insurance Company.............................................. 2,636,981 3,085,781 Cash.................................................. 87 59 Deferred income taxes................................. 77 Net receivable from Allstate Life Insurance Company... 6,183 8,895 Other assets.......................................... 2,164 2,233 Separate Accounts..................................... 3,354,910 2,604,623 ---------- ---------- Total assets.................................... $6,071,603 $5,764,233 ========== ========== LIABILITIES Reserve for life insurance policy benefits............ $ 139,509 $ 134,942 Contractholder funds.................................. 2,497,278 2,950,532 Income taxes payable.................................. 233 4,634 Deferred income taxes................................. 2,798 Separate Accounts..................................... 3,354,910 2,604,623 ---------- ---------- Total liabilities............................... 5,994,728 5,694,731 ---------- ---------- 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 (losses)................. 2,657 (1,553) Retained income....................................... 15,118 11,955 ---------- ---------- Total shareholder's equity...................... 76,875 69,502 ---------- ---------- Total liabilities and shareholder's equity...... $6,071,603 $5,764,233 ========== ==========
See notes to financial statements. F-2 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------- 1995 1994 1993 ------ ------ ------ ($ IN THOUSANDS) Revenues Net investment income.................................. $4,782 $2,881 $2,934 Realized capital gains and losses...................... 67 (193) 323 ------ ------ ------ Income before income taxes............................... 4,849 2,688 3,257 Income tax expense....................................... 1,686 955 750 ------ ------ ------ Net income............................................... $3,163 $1,733 $2,507 ====== ====== ======
See notes to financial statements. F-3 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
UNREALIZED NET ADDITIONAL CAPITAL COMMON CAPITAL GAINS RETAINED STOCK PAID-IN (LOSSES) INCOME TOTAL ------ ---------- ---------- -------- ------- ($ IN THOUSANDS) Balance, December 31, 1992...... $2,500 $31,600 $ 7,715 $41,815 Net income.................... 2,507 2,507 Change in unrealized net capital gains and losses..... $ 747 747 ------ ------- ------- ------- ------- Balance, December 31, 1993...... 2,500 31,600 747 10,222 45,069 Net income.................... 1,733 1,733 Change in unrealized net capital gains and losses..... (2,300) (2,300) Capital contribution.......... 25,000 25,000 ------ ------- ------- ------- ------- Balance, December 31, 1994...... 2,500 56,600 (1,553) 11,955 69,502 Net income.................... 3,163 3,163 Change in unrealized net capital gains and losses..... 4,210 4,210 ------ ------- ------- ------- ------- Balance, December 31, 1995...... $2,500 $56,600 $ 2,657 $15,118 $76,875 ====== ======= ======= ======= =======
See notes to financial statements. F-4 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 ------- ------- -------- ($ IN THOUSANDS) Cash flows from operating activities Net income....................................... $ 3,163 $ 1,733 $ 2,507 Adjustments to reconcile net income to net cash from operating activities Realized capital (gains) losses................ (67) 193 (323) Amortization and other non-cash items.......... 903 640 415 Net change in reserve for policy benefits and contractholder funds.......................... 113 (58) 18,338 Change in deferred income taxes................ 608 (114) 1,227 Changes in other operating assets and liabili- ties.......................................... (2,705) (3,835) (19,325) ------- ------- -------- Net cash from operating activities........... 2,015 (1,441) 2,839 ------- ------- -------- Cash flows from investing activities Fixed income securities Proceeds from sales............................ 5,423 1,256 14,279 Investment collections......................... 7,108 7,626 10,375 Investment purchases........................... (9,843) (36,071) (29,778) Change in short-term investments, net............ (4,675) 3,475 2,369 ------- ------- -------- Net cash from investing activities........... (1,987) (23,714) (2,755) ------- ------- -------- Cash flows from financing activities Capital contribution............................. 25,000 ------- ------- -------- Net cash from financing activities........... 25,000 ------- ------- -------- Net increase (decrease) in cash.................... 28 (155) 84 Cash at beginning of year.......................... 59 214 130 ------- ------- -------- Cash at end of year................................ $ 87 $ 59 $ 214 ======= ======= ========
See notes to financial statements. F-5 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) 1. ORGANIZATION AND NATURE OF OPERATIONS Northbrook Life Insurance Company (the "Company") is wholly owned by Allstate Life Insurance Company ("Allstate Life"), which is wholly owned by Allstate Insurance Company ("Allstate"), 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"). The Company develops and markets single and flexible premium annuities and flexible premium deferred and variable annuity contracts to individuals in the United States through Dean Witter Reynolds ("Dean Witter")(Note 4). Other products include universal life and single premium life insurance. Annuity contracts issued by the Company are subject to discretionary withdrawal or surrender by the contractholder, subject to applicable surrender charges. These contracts are reinsured with Allstate Life (Note 4) which selects assets to meet the anticipated cash flow requirements of the assumed liabilities. Allstate Life utilizes various modeling techniques in managing the relationship between assets and liabilities and employs strategies to maintain investments which are sufficiently liquid to meet obligations to contractholders in various interest rate scenarios. The Company monitors economic and regulatory developments which have the potential to impact its business. Currently there is proposed federal legislation which would permit banks greater participation in securities businesses, which could eventually present an increased level of competition for sales of the Company's annuity contracts. Furthermore, the federal government may enact changes which could possibly eliminate the tax-advantaged nature of annuities or eliminate consumers' need for tax deferral, thereby reducing the incentive for customers to purchase the Company's products. While it is not possible to predict the outcome of such issues with certainty, management evaluates the likelihood of various outcomes and develops strategies, as appropriate, to respond to such challenges. Certain reclassifications have been made to the prior year financial statements to conform to the presentation for the current year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LIFE INSURANCE ACCOUNTING The Company writes long-duration insurance contracts with terms that are not fixed and guaranteed and single premium life insurance contracts, which are considered universal life-type contracts. The Company also sells long-duration contracts that do not involve significant risk of policyholder mortality or F-6 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) morbidity (principally single and flexible premium annuities, structured settlement annuities and supplemental contracts when sold without life contingencies) which are considered investment contracts. Limited payment contracts (policies with premiums paid over a period shorter than the contract period), primarily consist of structured settlement annuities and supplemental contracts when sold with life contingencies. TRADITIONAL LIFE The reserve for life insurance policy benefits, which relates to structured settlement annuities and supplementary contracts when sold with life contingencies, is computed on the basis of assumptions as to future investment yields, mortality, morbidity, terminations and expenses. These assumptions, which for traditional life are applied using the net level premium method, include provisions for adverse deviation and generally vary by such characteristics as plan, year of issue and policy duration. Reserve interest rates ranged from 7.3% to 9.5% during 1995. UNIVERSAL LIFE-TYPE CONTRACTS Reserves for universal life-type contracts are established using the retrospective deposit method. Under this method, liabilities are equal to the account balance that accrues to the benefit of the policyholder. CONTRACTHOLDER FUNDS Contractholder funds arise from the issuance of individual contracts that include an investment component, including universal life-type contracts. Payments received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest accrued to the benefit of the contractholder less withdrawals, mortality charges and administrative expenses. During 1995, credited interest rates on contractholder funds ranged from 3.0% to 8.0% for those contracts with fixed interest rates and from 3.0% to 8.7% for those with flexible rates. SEPARATE ACCOUNTS The Company issues flexible premium deferred variable annuity contracts, the assets and liabilities of which are legally segregated and reflected in the accompanying statements of financial position as assets and liabilities of the Separate Accounts. Assets and liabilities of the Separate Accounts represent funds of Northbrook Variable Annuity Account and Northbrook Variable Annuity Account II ("Separate Accounts"), unit investment trusts registered with the Securities and Exchange Commission. The assets of the Separate Accounts are carried at fair value. Investment income and realized gains and losses of the Separate Accounts accrue directly to the contractholders and, therefore, are not included in the accompanying statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance fees, administrative fees and mortality and expense risk charges, which are entirely ceded to Allstate Life. F-7 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) REINSURANCE Premiums, contract charges, credited interest, and policy benefits are ceded and reflected net of such cessions in the statements of operations. Reinsurance recoverable and the related reserves for policy benefits and contractholder funds are reported separately in the statements of financial position. INVESTMENTS Fixed income securities include bonds and mortgage-backed securities. Fixed income securities are carried at fair value. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of shareholder's equity. Provisions are made to write down the value of fixed income securities for declines in value 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. Realized capital gains and losses are determined on a specific identification basis. 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 and the enacted tax rates. Deferred income taxes also arise from unrealized capital gains or losses on fixed income securities carried at fair value. 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. ACCOUNTING CHANGE Effective December 31, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments classified as available for sale be carried at fair value. Previously, fixed income securities classified as available for sale were carried at the lower of amortized cost or fair value, determined in the aggregate. Unrealized holding gains and losses are reflected as a separate component of shareholder's equity, net of deferred income taxes. The net effect of adoption of this statement increased shareholder's equity at December 31, 1993 by $747, with no impact on net income. F-8 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 4. RELATED PARTY TRANSACTIONS REINSURANCE The Company reinsures substantially all business with Allstate Life. Premiums and contract charges ceded to Allstate Life were $2,284 and $52,348 in 1995, $1,886 and $38,306 in 1994, and $2,688 and $22,446 in 1993. Credited interest, policy benefits and other expenses ceded to Allstate Life amounted to $229,525, $243,326, and $525,467 in 1995, 1994, and 1993, respectively. Investment income earned on the assets which support contractholder funds was excluded from the Company's financial statements as those assets were transferred to Allstate Life under the terms of reinsurance treaties. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. BUSINESS OPERATIONS The Company utilizes services and business facilities owned or leased, and operated by Allstate in conducting its business activities. The Company reimburses Allstate for the operating expenses incurred by Allstate. 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 $5,341, $5,483 and $5,301 in 1995, 1994 and 1993, respectively. Investment-related expenses are retained by the Company. All other costs are assumed by Allstate Life under reinsurance agreements. DEAN WITTER The Company and Allstate Life have formed a strategic alliance with Dean Witter to develop, market and distribute proprietary annuity and life insurance products through Dean Witter account executives. Dean Witter provides a portion of the funding for these products through loans to an affiliate of the Company. Under the terms of the strategic alliance, which is cancelable by either party, the Company has agreed to use Dean Witter as an exclusive distribution channel for the Company's products. Dean Witter is also the investment manager for the Dean Witter Variable Investment Series, the fund in which the assets of the Separate Accounts are invested. 5. INCOME TAXES Allstate Life and its life insurance subsidiaries, including the Company, will file a consolidated federal income tax return. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective subsidiaries, whether or not such benefits generated by the subsidiaries would be available on a separate return basis. The Corporation and its domestic subsidiaries, including the Company (the "Allstate Group"), will be eligible to file a consolidated tax return beginning in the year 2000. Prior to the Distribution, the Allstate Group joined with Sears and its domestic business units (the "Sears Group") in the filing of a consolidated federal income tax return (the "Sears Tax Group") and were parties to a federal income tax allocation agreement (the "Tax Sharing Agreement"). As a member of the F-9 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) Sears Tax Group, the Corporation was jointly and severally liable for the consolidated income tax liability of the Sears Tax Group. Under the 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 Allstate Group in the consolidated federal income tax return. Effectively, this resulted in the Company's annual income tax provision being computed as if the Company filed a separate return, except that items such as net operating losses, capital losses, foreign tax credits or similar items which might not be immediately recognizable in a separate return, were allocated according to the Tax Sharing Agreement and reflected in the Company's provision to the extent that such items reduced the Sears Tax Group's federal tax liability. The Allstate Group and Sears Group have entered into an agreement which governs their respective rights and obligations with respect to federal income taxes for all periods prior to the Distribution ("Consolidated Tax Years"). The agreement provides that all Consolidated Tax Years will continue to be governed by the Tax Sharing Agreement with respect to the Company's federal income tax liability and taxes payable to or recoverable from the Sears Group. The components of the deferred income tax assets and liabilities at December 31, 1995 and 1994 are as follows:
1995 1994 ------- ----- Deferred assets Unrealized net capital losses on fixed income securities...... $ $837 ------- ----- Total deferred assets....................................... 837 ------- ----- Deferred liabilities Difference in tax bases of investments........................ (1,368) (760) Unrealized net capital gains on fixed income securities....... (1,430) ------- ----- Total deferred liabilities.................................. (2,798) (760) ------- ----- Net deferred (liability) asset.................................. $(2,798) $ 77 ======= =====
The components of income tax expense are as follows:
YEAR ENDED DECEMBER 31, ------------------- 1995 1994 1993 ------ ------ ---- Current..................................................... $1,078 $1,069 $641 Deferred.................................................... 608 (114) 109 ------ ------ ---- Income tax expense.......................................... $1,686 $ 955 $750 ====== ====== ====
F-10 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) The Company paid income taxes of $4,206, $4,219 and $1,175 in 1995, 1994 and 1993, respectively under the Tax Sharing Agreement. Included in these amounts are $2,651, $2,826 and $1,111 reimbursed to the Company by Allstate Life under the terms of reinsurance agreements for 1995, 1994 and 1993, respectively. The Company had income taxes payable to Allstate Life of $233 and $4,634 at December 31, 1995 and 1994, respectively. A reconciliation of the statutory federal income tax rate to the effective federal income tax rate is as follows:
YEAR ENDED DECEMBER 31, ----------------- 1995 1994 1993 ---- ---- ----- Statutory federal income tax rate............................ 35.0% 35.0% 35.0% Dividends received deduction................................. (10.6) Tax-exempt income............................................ (1.7) Other........................................................ (0.3) 0.5 0.3 ---- ---- ----- Effective federal income tax rate.......................... 34.7% 35.5% 23.0% ==== ==== =====
6. INVESTMENTS FAIR VALUES The amortized cost, fair value and gross unrealized gains and losses for fixed income securities are as follows:
GROSS UNREALIZED AMORTIZED ------------- FAIR AT DECEMBER 31, 1995 COST GAINS LOSSES VALUE - -------------------- --------- ------ ------ ------- U.S. government and agencies................... $ 8,619 $ 880 $ $ 9,499 Municipal...................................... 1,583 83 1,666 Corporate...................................... 4,967 349 5,316 Mortgage-backed securities..................... 43,973 3,003 228 46,748 ------- ------ ------ ------- Totals..................................... $59,142 $4,315 $ 228 $63,229 ======= ====== ====== ======= GROSS UNREALIZED AMORTIZED ------------- FAIR AT DECEMBER 31, 1994 COST GAINS LOSSES VALUE - -------------------- --------- ------ ------ ------- U.S. government and agencies................... $ 9,619 $ 49 $ 825 $ 8,843 Municipal...................................... 1,642 77 3 1,716 Corporate...................................... 3,172 63 3,109 Mortgage-backed securities..................... 47,148 75 1,700 45,523 ------- ------ ------ ------- Totals..................................... $61,581 $ 201 $2,591 $59,191 ======= ====== ====== =======
F-11 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) SCHEDULED MATURITIES The scheduled maturities for fixed income securities at December 31, 1995 are as follows:
AMORTIZED COST FAIR VALUE -------------- ---------- Due in one year or less......................... $ 270 $ 272 Due after one year through five years........... 3,021 3,182 Due after five years through ten years.......... 4,647 5,124 Due after ten years............................. 7,231 7,903 ------- ------- 15,169 16,481 Mortgage-backed securities...................... 43,973 46,748 ------- ------- Total....................................... $59,142 $63,229 ======= =======
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. UNREALIZED NET CAPITAL GAINS AND LOSSES Unrealized net capital gains and losses on fixed income securities included in shareholder's equity at December 31, 1995 are as follows:
UNREALIZED NET AMORTIZED COST FAIR VALUE GAINS/(LOSSES) -------------- ---------- -------------- Fixed income securities......... $59,142 $63,229 $ 4,087 ======= ======= Deferred income taxes........... (1,430) ------- Total....................... $ 2,657 =======
The change in unrealized net capital gains and losses for fixed income securities is as follows:
YEAR ENDED DECEMBER 31, ----------------- 1995 1994 ------- -------- Fixed income securities................................ $ 6,477 $ (3,539) Deferred income taxes.................................. (2,267) 1,239 ------- -------- Change in unrealized net capital gains and losses............................................ $ 4,210 $ (2,300) ======= ========
F-12 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) COMPONENTS OF INVESTMENT INCOME Investment income by type of investment is as follows:
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 1993 ------ ------ ------ Investment income: Fixed income securities........................... $4,633 $2,735 $2,793 Short-term........................................ 215 192 172 ------ ------ ------ Investment income, before expense................... 4,848 2,927 2,965 Investment expense.................................. 66 46 31 ------ ------ ------ Net investment income........................... $4,782 $2,881 $2,934 ====== ====== ======
REALIZED CAPITAL GAINS AND LOSSES Realized capital gains and losses on investments are as follows:
YEAR ENDED DECEMBER 31, ----------------- 1995 1994 1993 ---- ----- ----- Fixed income securities................................ $ 67 $(193) $ 323 Income tax (expense) benefit........................... (23) 68 (113) ---- ----- ----- Net realized gains (losses)............................ $ 44 $(125) $ 210 ==== ===== =====
PROCEEDS FROM SALES OF FIXED INCOME SECURITIES The proceeds from sales of investments in fixed income securities, excluding calls, and related gross realized gains and losses are as follows:
YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ------ ------ ------- Proceeds.......................................... $5,423 $1,256 $14,279 ====== ====== ======= Gross realized gains.............................. $ 67 $ 318 Gross realized losses............................. $ (179) (34) ------ ------ ------- Net realized gains (losses)....................... $ 67 $ (179) $ 284 ====== ====== =======
SECURITIES ON DEPOSIT At December 31, 1995, fixed income securities with a carrying value of $8,041 were on deposit with regulatory authorities as required by law. F-13 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) 7. FINANCIAL INSTRUMENTS In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The assets and liabilities of the Separate Accounts are carried at the fair value of the funds in which the assets are invested. The fair value of all financial assets other than fixed income securities and all liabilities other than contractholder funds approximates their carrying value as they are short-term in nature. Fair values for fixed income securities are based on quoted market prices. The December 31, 1995 and 1994 fair values and carrying values of fixed income securities are discussed in Note 6. The fair value of contractholder funds related to 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 fund balance less surrender charge. The fair value of immediate annuities and annuities without life contingencies with fixed terms are estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and duration. Contractholder funds on investment contracts had a carrying value of $2,294,536 at December 31, 1995 and a fair value of $2,274,053. The carrying value and fair value at December 31, 1994 were $2,738,823 and $2,685,448, respectively. 8. STATUTORY FINANCIAL INFORMATION The following tables reconcile net income and shareholder's equity 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 YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 ------ ------ ------ Balance per generally accepted accounting principles..................................... $3,163 $1,733 $2,507 Income taxes.................................. (88) (114) 825 Non-admitted assets and statutory reserves.... (775) (27) (91) ------ ------ ------ Balance per statutory accounting principles..... $2,300 $1,592 $3,241 ====== ====== ======
SHAREHOLDER'S EQUITY DECEMBER 31, ---------------- 1995 1994 ------- ------- Balance per generally accepted accounting principles... $76,875 $69,502 Income taxes......................................... (1,614) (77) Unrealized net capital gains (losses)................ (4,087) 2,390 Non-admitted assets and statutory reserves........... 1,891 (1,086) ------- ------- Balance per statutory accounting principles............ $73,065 $70,729 ======= =======
F-14 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ($ IN THOUSANDS) PERMITTED STATUTORY ACCOUNTING PRACTICES The Company prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the insurance department of the State of Illinois. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company does not follow any permitted statutory accounting practices that have a material effect on statutory surplus or risk-based capital. 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 1996 without prior approval of both the Illinois and California Departments of Insurance is $7,057. F-15 NORTHBROOK LIFE INSURANCE COMPANY SCHEDULE IV--REINSURANCE ($ IN THOUSANDS) YEAR ENDED DECEMBER 31, 1995
GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- Life insurance in force............................. $610,478 $610,478 $ ======== ======== ======== Premiums and contract charges: Life and annuities................................ $ 54,632 $ 54,632 $ ======== ======== ======== YEAR ENDED DECEMBER 31, 1994 GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- Life insurance in force............................. $661,356 $661,356 $ ======== ======== ======== Premiums and contract charges: Life and annuities................................ $ 40,192 $ 40,192 $ ======== ======== ======== YEAR ENDED DECEMBER 31, 1993 GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- Life insurance in force............................. $702,975 $702,975 $ ======== ======== ======== Premiums and contract charges: Life and annuities................................ $ 25,134 $ 25,134 $ ======== ======== ========
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:.................................................... 5.25% 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 (1.0525)/3/ = $11,659.13 Step 2: Calculate The Amount Withdrawn in Excess of the Free Withdrawal Amount: Amount Withdrawn: 11,659.13 Free Withdrawal Amount: .10 X 10,000.00 = 1,000.00 Amount Withdrawn in Excess of the Free Withdrawal Amount: = 11,659.13 - 1,000.00 = $10,659.13 Step 3: Calculate the Withdrawal Charge: = .02625 X 10,659.13 = $279.80 A-1 Step 4: Calculate the Market Value Adjustment: I= 5.25% J= 4.95% N = 730 days Market Value Adjustment Factor: .9 X (I-J) X (N/365) = .9 X (.0525 - .0495) X (730/365) = .0054 Market Value Adjustment = Factor X Amount in Excess of Free Withdrawal Amount: = .0054 X 10,659.13 = $57.56 Step 5: Calculate The Net Surrender Value at End of Contract Year 3: = 11,659.13 - 279.80 + 57.56 = $11,436.89 EXAMPLE 2: (Assumes rising interest rates) Step 1: Calculate Account Value at End of Contract Year 3: = 10,000.00 X (1.0525)/3/ = $11,659.13 Step 2: Calculate The Amount Withdrawn in Excess of the Free Withdrawal Amount: Amount Withdrawn: 11,659.13 Free Withdrawal Amount: .10 X 10,000.00 = 1,000.00 Amount Withdrawn in Excess of the Free Withdrawal Amount: = 11,659.13 - 1,000.00 = $10,659.13 Step 3: Calculate the Withdrawal Charge: = .02625 X 10,659.13 = $279.80 Step 4: Calculate the Market Value Adjustment: I= 5.25% J= 5.55% N = 730 days Market Value Adjustment Factor: .9 X (I-J) X (N/365) = .9 X (.0525 - .0555) X (730/365) = -.0054 Market Value Adjustment = Factor X Amount in Excess of Free Withdrawal Amount: = -.0054 X 10,659.13 = -$57.56 Step 5: Calculate The Net Surrender Value at End of Contract Year 3: = 11,659.13 - 279.80 - 57.56 = $11,321.77 A-2 -----END PRIVACY-ENHANCED MESSAGE-----