-----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, PVOC+dyA7dLRqjrS0gGvCzCzxFMCRW2aW5J71YGtqn86+wBOFYRx5z9nK3qadJ9W JcT1iMNw15zsOFrudG34TA== 0000945094-01-000095.txt : 20010330 0000945094-01-000095.hdr.sgml : 20010330 ACCESSION NUMBER: 0000945094-01-000095 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLENBROOK LIFE & ANNUITY CO CENTRAL INDEX KEY: 0000945094 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 351113325 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 811-09623 FILM NUMBER: 1584169 BUSINESS ADDRESS: STREET 1: 3100 SANDERS ROAD CITY: NORTHBROOK STATE: IL ZIP: 60062 BUSINESS PHONE: 8474022400 MAIL ADDRESS: STREET 1: 3100 SANDERS RD CITY: NORTHBROOK STATE: IL ZIP: 60062 10-K405 1 0001.txt GLAC 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 333-52806 GLENBROOK LIFE AND ANNUITY COMPANY (Exact name of registrant as specified in its charter) ARIZONA 35-1113325 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 SANDERS ROAD NORTHBROOK, ILLINOIS 60062 Attn: Anthony Poole (Address of Principal executive offices)(Zip Code) 847/402-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 29, 2001, there were 5,000 shares of common capital stock outstanding, par value $500 per share, all of which shares are held by Allstate Life Insurance Company. TABLE OF CONTENTS PAGE ---- PART I Item 1. Business*.......................................................2 Item 2. Properties*.....................................................3 Item 3. Legal Proceedings...............................................3 Item 4. Submission of Matters to a Vote of Security Holders*........... N/A PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................................3 Item 6. Selected Financial Data**...................................... N/A Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................3 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................................8 Item 8. Financial Statements and Supplementary Data.....................8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................8 PART III Item 10. Directors and Executive Officers of the Registrant*............ N/A Item 11. Executive Compensation**........................................N/A Item 12. Security Ownership of Certain Beneficial Owners and Management**....................................................N/A Item 13. Certain Relationships and Related Transactions**................N/A PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................9 Signatures..................................................................10 Index to Financial Statement Schedules......................................11 * Item prepared in accordance with General Instruction I(2) of Form 10-K. **Omitted pursuant to General Instruction I(2) of Form 10-K. PART I Item 1. Business Glenbrook Life and Annuity Company (hereinafter "Glenbrook Life" or the "Company"), is a stock life insurance company which was organized under the laws of the State of Illinois in 1992 and redomesticated to Arizona in December, 1998. The Company was originally organized under the laws of the State of Indiana in 1965. From 1965 to 1983 the Comany was known as "United Standard Life Assurance Company" and from 1983 to 1992 the Company was known as "William Penn Life Assurance Company of America." Glenbrook Life is a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), a stock life insurance company incorporated under the laws of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a stock property-liability insurance company incorporated under the laws of Illinois. All of the outstanding capital stock of AIC is owned by The Allstate Corporation ("Corporation"), a Delaware company which has several different classes of securities, including common stock, registered with the Securities and Exchange Commission. Glenbrook Life, a single segment entity, markets life insurance and investment products through registered broker-dealers that have relationships with banks or other financial institutions, or by employees of such banks. Glenbrook Life currently offers interest-sensitive life and single premium variable life insurance. Glenbrook Life's annuity products include single premium fixed annuities, flexible premium variable annuities, and flexible premium market value adjusted annuities. ALFS, Inc. ("ALFS") is the principal underwriter for the Glenbrook Life investment products, such as variable life insurance, variable annuities and market value adjusted annuities. ALFS is a wholly owned subsidiary of ALIC and is a registered broker-dealer under the Securities Exchange Act of 1934. Glenbrook Life and ALIC entered into reinsurance agreements, effective June 5, 1992, under which Glenbrook Life reinsures substantially all of its business with ALIC. Under the agreements, purchase payments under substantially all general account contracts are transferred to ALIC and become invested with the assets of ALIC, and ALIC is bound to stand behind the Company's contractual obligations to its policyholders. However, the obligations of ALIC under the reinsurance agreements are to the Company. In addition, assets of the Company that relate to insurance in-force excluding Separate Account assets are transferred to ALIC. Therefore, the funds necessary to support the operations of the Company are provided by ALIC and the Company is not required to obtain additional capital to support in-force or future business. Under the Company's reinsurance agreements with ALIC, the Company reinsures substantially all reserve liabilities with ALIC except for variable contracts. The Company's variable contract assets and liabilities are held in legally-segregated, unitized Separate Accounts and are retained by the Company. However, the transactions related to such variable contracts such as premiums, expenses and benefits are transferred to ALIC. The assets and liabilities of the variable annuity and variable life contracts are held in legally-segregated, unitized Separate Accounts and retained by the Company. Contract charge revenue is reinsured to ALIC and consists of charges assessed against the account values of the Separate Accounts. Glenbrook Life's and ALIC's general account assets must be invested in accordance with applicable state laws. These laws govern the nature and quality of investments that may be made by life insurance companies and the percentage of their assets that may be committed to any particular type of investment. 2 Glenbrook Life is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities competing in the sale of insurance and annuities. As of December 1999, the last year for which current information is available, there were approximately 1,400 stock, mutual and other types of insurers in business in the United States. Several independent rating agencies regularly evaluate life insurer's claims paying ability, quality of investments and overall stability. A.M. Best Company assigns A+(Superior) to ALIC which automatically reinsures all net business of Glenbrook Life. A.M. Best Company also assigns Glenbrook Life the rating of A+(r) because Glenbrook Life automatically reinsures all business with ALIC. Standard & Poor's Insurance Rating Services assigns AA+(Excellent) to the Company's claims-paying ability and Moody's Investors Service assigns an Aa2 (excellent) financial strength rating to the Company. Glenbrook Life shares the same ratings of its parent, ALIC. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed measures which may significantly affect the Company's insurance business relate to the taxation of insurance companies, the tax treatment of insurance products and the removal of barriers preventing banks from engaging in the insurance business. Glenbrook Life is registered with the Securities and Exchange Commission ("SEC") as an issuer of registered products. The SEC also regulates certain Glenbrook Life Separate Accounts which issue variable life contracts or, together with the Company, issue variable annuity contracts. Item 2. Properties Glenbrook Life occupies office space provided by AIC, in Northbrook, Illinois. Expenses associated with these offices are allocated to Glenbrook Life. Item 3. Legal Proceeding The Company and its Board of Directors know of no material legal proceedings pending to which the Company is a party or which would materially affect the Company. The Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate the ultimate liability arising from such pending or threatened litigation to have a material effect on the position or results of operations of the Company. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters All of the Company's outstanding shares are owned by its parent, ALIC. ALIC's outstanding shares are owned by AIC. All of the outstanding shares of AIC are owned by The Corporation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations GLENBROOK LIFE AND ANNUITY COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING RESULTS OF OPERATIONS AND CHANGES IN FINANCIAL POSITION OF GLENBROOK LIFE AND ANNUITY COMPANY (THE "COMPANY"). IT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES. OVERVIEW The Company, a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"), markets investment and life products through banks and securities firms. Investment products include deferred annuities and immediate annuities without life contingencies. Deferred annuities include fixed rate, market value adjusted, indexed and variable annuities. Life insurance consists of interest-sensitive life and variable life insurance. The Company has identified itself as a single segment entity. The assets and liabilities related to variable annuity and variable life contracts are legally segregated and reflected as Separate Accounts. The assets of the Separate Accounts are carried at fair value. Separate Accounts liabilities represent the contractholders' claim to the related assets and are carried at the fair value of the assets. In the event that the asset value of certain contractholder accounts are projected to be below the value guaranteed by the Company, a liability is established through a charge to earnings. 3 Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contractholders and therefore, are not included in the Company's statements of operations and comprehensive income. RESULTS OF OPERATIONS ($ in thousands)
2000 1999 1998 ---- ---- ---- Net investment income $ 10,808 $ 6,579 $ 6,231 Realized capital gains and losses 419 312 (5) Income tax expense 3,925 2,382 2,182 --------- --------- --------- Net income $ 7,302 $ 4,509 $ 4,044 ========= ========= =========
The Company has a reinsurance agreement under which all contract and policy related transactions are transferred to ALIC. The Company's results of operations include only net investment income and realized capital gains and losses earned on the assets of the Company that are not transferred under the reinsurance agreements. Net income increased $2.8 million to $7.3 million in 2000 and increased $465 thousand to $4.5 million in 1999 from $4.0 million in 1998 due to increases in net investment income and realized capital gains. Net investment income increased 64.3% to $10.8 million in 2000. The increase resulted from the investment of the $49.6 million capital contribution in late 1999 and was partially offset by lower investment yields. In 1999, pretax net investment income increased 5.6% to $6.6 million as additional investment income was earned on higher investment balances, partially offset by lower investment yields. Investments, excluding Separate Accounts and unrealized gains and losses on fixed income securities, decreased 2.9% in 2000 and increased 60.0% in 1999, respectively. The Company expects to experience lower investment yields due, in part, to the reinvestment of proceeds from calls and maturities and the investment of positive cash flows from operations in securities yielding less than the average portfolio rate. Realized capital gains, after-tax, were $272 thousand and $203 thousand in 2000 and 1999, respectively. In 2000, realized capital gains resulted from the sale of fixed income securities. Year to year fluctuations in realized capital gains and losses are largely the result of the timing of sales decisions reflecting management's view of individual securities and overall market conditions. FINANCIAL POSITION ($ in thousands)
2000 1999 ------------ ------------ Fixed income securities (1) $ 144,127 $ 92,937 Short-term 3,085 53,063 ------------ ------------ Total investments $ 147,212 $ 146,000 ============ ============ Reinsurance recoverable from ALIC $ 4,702,940 $ 4,144,165 ============ ============ Separate Accounts assets and liabilities $ 1,740,328 $ 1,541,756 ============ ============ Contractholder funds $ 4,696,846 $ 4,143,365 ============ ============
(1) Fixed income securities are carried at fair value. Amortized cost for these securities was $139,819 and $94,173 at December 31, 2000 and 1999, respectively. Total investments increased $1.2 million from December 31, 1999 to $147.2 million at December 31, 2000. The increase was primarily due to unrealized gains on fixed income securities. FIXED INCOME SECURITIES The Company's fixed income securities portfolio consists of publicly traded corporate bonds, U.S. government bonds, mortgage-backed securities and municipal bonds. The Company generally holds its fixed income securities to maturity, but has classified all of these securities as available for sale to allow maximum flexibility in portfolio management. At December 31, 2000, unrealized net capital gains on the fixed income securities portfolio totaled $4.3 million compared to unrealized net capital losses of $1.2 million at December 31, 1999. The change in the unrealized position is primarily attributable to a decrease in interest rates. In addition, the capital 4 contribution of $49.6 million in December 1999 from ALIC was invested in the fixed income securities portfolio in 2000. At December 31, 2000, substantially all of the Company's fixed income securities portfolio was rated investment grade, which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating. The quality mix of the Company's fixed income securities portfolio at December 31, 2000 is presented in the following table. ($ in thousands)
NAIC RATINGS MOODY'S EQUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL ------- ------------------------------ ---------- ---------------- 1 Aaa/Aa/A $ 118,698 82.4% 2 Baa 24,805 17.2 5 Caa and lower 624 0.4 ---------- ----- $ 144,127 100.0% ========== =====
At December 31, 2000 and 1999, $43.7 million and $18.6 million, respectively, of the fixed income securities portfolio was invested in mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of securities which were issued by or have underlying collateral that is guaranteed by U.S. government agencies or sponsored entities, thus minimizing credit risk. The MBS portfolio is subject to interest rate risk since the price volatility and ultimate realized yield are affected by the rate of repayment of the underlying mortgages. The Company attempts to limit interest rate risk on these securities by investing a portion of the portfolio in securities that provide prepayment protection. At December 31, 2000, over 16.1% of the MBS portfolio was invested in planned amortization class bonds. The Company closely monitors its fixed income securities portfolio for declines in value that are other than temporary. Securities are placed on non-accrual status when they are in default or when the receipt of interest payments is in doubt. SHORT-TERM INVESTMENTS The Company's short-term investment portfolio was $3.1 million and $53.1 million at December 31, 2000 and 1999, respectively. The significant decrease is primarily due to a $49.6 million capital contribution from ALIC in December 1999, which was subsequently invested in the fixed income securities portfolio in 2000. The Company invests available cash balances primarily in taxable short-term securities having a final maturity date or redemption date of one year or less. CONTRACTHOLDER FUNDS AND REINSURANCE RECOVERABLE FROM ALIC During 2000, contractholder funds and amounts recoverable from ALIC under the reinsurance agreement increased $553.5 million and $558.8 million, respectively. The increases resulted primarily from sales of the Company's fixed rate annuity contracts partially offset by fixed annuity surrenders and withdrawals. Reinsurance recoverable from ALIC relates to contract benefit obligations ceded to ALIC. SEPARATE ACCOUNTS Separate Accounts assets and liabilities increased 12.9% to $1.74 billion in 2000. The increases were primarily attributable to increased sales of variable annuity contracts and transfers from the fixed account, which were partially offset by unrealized losses in the Separate Accounts investment portfolios and by surrenders and withdrawals. MARKET RISK Market risk is the risk that the Company will incur losses due to adverse changes in equity prices or interest rates. The Company's primary market risk exposure is to changes in interest rates, although the Company also has certain exposures to changes in equity prices. CORPORATE OVERSIGHT The Company, administers and oversees investment risk management processes primarily through its Board of Directors and the Credit and Risk Management Committee ("CRMC"). The Board of Directors provide executive oversight of investment activities. The CRMC is a senior management committee consisting of the Chief Investment Officer, the Investment Risk Manager, and other investment officers who are responsible for the day-to-day management of investment risk. The CRMC meets at least monthly to provide detailed oversight of investment risk, including market risk. 5 The Company has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. In addition, the Company has specific Board of Directors-approved investment policies that delineate the investment limits and strategies that are appropriate given the liquidity, surplus, product and regulatory requirements. The day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by the investment guidelines and investment policies. The Company has implemented a comprehensive daily measurement process, administered by the Investment Risk Manager, for monitoring compliance to limits established by these governance documents. INTEREST RATE RISK Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates, as the Company invests substantial funds in interest-sensitive assets. One of the measures used to quantify this exposure is duration. Duration measures the sensitivity of the fair value of assets to changes in interest rates. For example, if interest rates increase 1%, the fair value of an asset with a duration of 5 is expected to decrease in value by approximately 5%. At December 31, 2000, the Company's asset duration was approximately 4.2 versus 4.9 at December 31, 1999. To calculate duration, the reinsurer projects asset cash flows, and discounts them to a net present value basis using a risk-free market rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates, and determining the percentage change in fair value from the base case. The projections include assumptions (based upon historical market experience and Company specific experience) reflecting the impact of changing interest rates on the prepayment and/or option features of instruments, where applicable. Such assumptions relate primarily to mortgage-backed securities, collateralized mortgage obligations, and municipal and corporate obligations. Based upon the information and assumptions the Company uses in its duration calculation and interest rates in effect at December 31, 2000, management estimates that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would decrease the net fair value of its assets identified above by approximately $6.0 million, versus $4.5 million at December 31, 1999. The selection of a 100 basis point immediate parallel increase in interest rates should not be construed as a prediction by the Company's management of future market events, but only as an illustration of the potential impact of such an event. To the extent that actual results differ from the assumptions utilized, the Company's duration and rate shock measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. EQUITY PRICE RISK Equity price risk is the risk that the Company will incur economic losses due to adverse changes in a particular stock, stock fund or stock index. At December 31, 2000 the Company had Separate Accounts assets totaling $1.74 billion. This is an increase over the $1.54 billion of Separate Accounts assets at December 31, 1999. The Company earns mortality and expense fees as a percentage of the account value in the Separate Accounts. In the event of an immediate decline of 10% in the account values due to equity market declines, the Company would earn approximately $2.2 million less in annualized fee income which would be ceded to ALIC. This is an increase over the $1.8 million amount determined at December 31, 1999. The contractholder of a variable annuity product may elect to purchase a minimum death benefit guarantee or a minimum income benefit guarantee, generally at the time of purchase. Both guarantees may subject the Company to additional equity price risk, as the beneficiary or contractholder may receive their benefit for an amount greater than the fund balance under contractually defined circumstances and terms. The Company recorded actuarially determined reserves as of December 31, 2000 for these exposures and has ceded them to ALIC. The Company expects growth in its variable annuity products in the future, stemming from both new sales as well as market value appreciation, which will increase its exposure to equity price risk. 6 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES Under the terms of reinsurance agreements, substantially all premiums and deposits, excluding those relating to Separate Accounts, are transferred to ALIC, which maintains the investment portfolios supporting the Company's products. Substantially all payments of policyholder claims, benefits, contract maturities, contract surrenders and withdrawals and certain operating costs are also reimbursed by ALIC, under the terms of the reinsurance agreements. The Company continues to have primary liability as a direct insurer for risks reinsured. The Company's ability to meet liquidity demands is dependent on ALIC's ability to meet those demands. ALIC's claims-paying ability was rated Aa2, AA+ and A+ by Moody's, Standard and Poor's and A.M. Best, respectively, at December 31, 2000. The primary sources for the remainder of the Company's funds are collection of principal and interest from the investment portfolio and capital contributions from ALIC. The primary uses for the remainder of the Company's funds are to purchase investments and pay costs associated with the maintenance of the Company's investment portfolio. FINANCIAL RATINGS AND STRENGTH At December 31, 2000, the Moody's, Standard and Poor's and A.M. Best claims-paying ratings for the Company were Aa2, AA+ and A+, respectively. Additionally, A.M. Best affirmed its 12/31/00 rating in the first quarter of 2001. LIQUIDITY The NAIC has a standard for assessing the solvency of insurance companies, which is referred to as risk-based capital ("RBC"). The requirement consists of a formula for determining each insurer's RBC and a model law specifying regulatory actions if an insurer's RBC falls below specified levels. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks. At December 31, 2000, RBC for the Company was significantly above a level that would require regulatory action. OTHER DEVELOPMENTS The NAIC's codification initiative has produced a comprehensive guide of statutory accounting principles, which the Company will implement effective January 2001. The Company's state of domicile, Arizona, has passed legislation revising various statutory accounting requirements to conform to codification. These requirements will not have a material impact on the statutory surplus of the Company. FORWARD-LOOKING STATEMENTS This document contains "forward-looking statements" that anticipate results based on management's plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," "intends," "believes," "likely" and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, regulatory approvals, market position, expenses, financial results and reserves. Forward-looking statements are based on management's current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate. However, we believe that our forward-looking statements are based on reasonable, current expectations and assumptions. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments. If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those communicated in our forward-looking statements. In addition to the normal risks of business, the Company is subject to significant risk factors, including those listed below which apply to it as an insurance business. - - Changes in market interest rates can have adverse effects on the Company's investment portfolio and investment income. Increases in market interest rates have an adverse impact on the value of the investment portfolio by decreasing unrealized capital gains on fixed income securities. In addition, increases in market interest rates as compared to rates offered on some of the Company's products could make those products less attractive and lead to lower sales and/or increase the level of surrenders on these products. Declining market interest rates could have an adverse impact on the Company's investment income as the Company invests proceeds from positive cash flows from operations and reinvests proceeds from maturing and called investments into new investments that could be yielding less than the portfolio's average rate. 7 - - The impact of decreasing Separate Accounts balances as a result of fluctuating market conditions could cause contract charges ceded by the Company to decrease. - - In order to manage interest rate risk, from time to time the effective duration of the assets and liabilities of the investment portfolio is adjusted. Those adjustments may have an impact on the value of the investment portfolio and on investment income. - - State insurance regulatory authorities require insurance companies to maintain specified levels of statutory capital and surplus. In addition, competitive pressures require the Company to maintain financial strength or claims-paying ability ratings. These restrictions affect the Company's ability to use its capital. - - The Company distributes some of its products under agreements with other members of the financial services industry that are not affiliated with the Company. Termination of one or more of these agreements due to changes in control or other factors of any of these entities could have a detrimental effect on the segment's sales. This risk may be exacerbated by the enactment of the Gramm-Leach-Bliley Act of 1999, which eliminates many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers. - - A number of enacted and pending legislative measures could lead to increased consolidation and increased competition for business and for capital in the financial services industry. - At the federal level, these measures include the recently enacted Gramm-Leach-Bliley Act of 1999, which eliminates may federal and state law barriers to affiliations among banks, securities firms, insurers and other financials service providers. - At the state level, these measures include legislation to permit mutual insurance companies to covert to a hybrid structure known as a mutual holding company, thereby allowing insurance companies owned by their policyholders to become stock insurance companies owned (through one or more intermediate holding companies) more than 50% by their policyholders and potentially up to 49% by stockholders. Also several large mutual life insurers have used or are expected to use existing state laws and regulations governing the conversion of mutual insurance companies into stock insurance companies (demutualization). - In addition, state insurance regulators are reexamining the regulatory framework that currently governs the United States insurance business. They are engaged in an effort to determine the proper role of the state insurance regulation in the United States financial services industry following the enactment of the Graham-Leach-Bliley Act. The Company cannot predict whether any state or federal measures will be adopted to change the nature or scope of the regulation of the insurance business or what effect any such measures would have on the Company. - - Deferred annuities and interest-sensitive life insurance products receive favorable policyholder taxation under current tax laws and regulations. Any legislative or regulatory changes that adversely alter this treatment are likely to negatively affect the demand for these products. Additionally, the demand for life insurance products which are used to address a customer's estate planning needs may be impacted to the extent any legislative changes to the current estate tax laws occur. - - Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies and, generally, may be expected to have an effect on an insurance company's sales. On an ongoing basis, rating agencies review the financial performance and condition of insurers. A downgrade, while not expected, could have a material adverse effect on the Company's business, financial condition and results of operations. - - Additional risk factors regarding market risk are incorporated by reference to the discussion of "Market Risk" beginning on page 5. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The pertinent provisions of Management's Discussion and Analysis of Financial Condition and Results of Operations are herein incorporated by reference. Item 8. Financial Statements and Supplementary Data See Index to Financial Statements filed with this report. Item 9. Changes in and Disagreements With Accountants On Accounting and Financial Disclosure No disclosure required by this Item. 8 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K (a) Documents Filed as Part of This Report 1. Financial Statements. The Registrants financial statements, for the year ended December 31, 2000, together with the Report of Independent Accountants are set forth on pages F-1 to F-17 of this report. 2. Financial Statement Schedules. The following are included in Part IV of this report: Schedule IV - Reinsurance page F-17 All other schedules have been omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto. 3. Exhibits. The exhibits required to be filed by Item 601 of Regulation S-K are listed under the caption "Exhibits" in Item 14(c). (b) Reports On Form 8-K No reports on Form 8-K were filed for the quarter ended December 31, 2000. (c) Exhibits Exhibit No. Description 3(i) Amended and Restated Articles of Incorporation and Articles of Redomestication of Glenbrook Life and Annuity Insurance Company (previously file on Form 10-K, dated March 30, 1999) 3(ii) Amended and Restated By-laws of Glenbrook Life and Annuity Company (previously filed on Form 10-K, dated March 30, 1999) 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GLENBROOK LIFE AND ANNUITY COMPANY By: /s/ THOMAS J. WILSON, II ------------------------- Thomas J. Wilson, II President, Chief Operating Officer and Director (Principal Executive Officer) Date: March 26, 2001 -------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/THOMAS J. WILSON, II President, Chief Operating Officer, ----------------------- and Director Thomas J. Wilson, II (Principal Executive Officer) Date: March 26, 2001 --------------- By: /s/MICHAEL J. VELOTTA Vice President, Secretary, ---------------------- General Counsel, and Director Michael J. Velotta Date: March 26, 2001 --------------- By: /s/STEVEN C. VERNEY Director and Vice President -------------------- (Principal Financial Officer) Steven C. Verney Date: March 26, 2001 --------------- By: /s/SAMUEL H. PILCH Controller ------------------ (Principal Accounting Officer) Samuel H. Pilch Date: March 26, 2001 --------------- By: /s/MARLA G. FRIEDMAN Vice President and Director ---------------------- Marla G. Friedman Date: March 26, 2001 --------------- By: /s/MARGARET G. DYER Director ------------------- Margaret G. Dyer Date: March 26, 2001 --------------- By: /s/JOHN C. LOUNDS Director ------------------- John C. Lounds Date: March 26, 2001 --------------- By: /s/J. KEVIN MCCARTHY Director -------------------- J. Kevin McCarthy Date: March 26, 2001 ----------------- 10 Financial Statements INDEX PAGE Independent Auditors' Report................................................F-1 Financial Statements: Statements of Operations and Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998..................................F-2 Statements of Financial Position December 31, 2000 and 1999........................................F-3 Statements of Shareholder's Equity for the Years Ended December 31, 2000, 1999 and 1998..................................F-4 Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998..................................F-5 Notes to Financial Statements........................................F-6 Schedule IV - Reinsurance for the Years Ended December 31, 2000, 1999 and 1998..................................F-17 11 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of Glenbrook Life and Annuity Company: - -------------------------------------------------------------------------------- We have audited the accompanying Statements of Financial Position of Glenbrook Life and Annuity Company (the "Company", an affiliate of The Allstate Corporation) as of December 31, 2000 and 1999, and the related Statements of Operations and Comprehensive Income, Shareholder's Equity and Cash Flows for each of the three years in the period ended December 31, 2000. Our audits also included Schedule IV--Reinsurance. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Schedule IV--Reinsurance, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Chicago, Illinois February 23, 2001 F-1 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- ($ IN THOUSANDS) REVENUES Net investment income..................................... $10,808 $ 6,579 $6,231 Realized capital gains and losses......................... 419 312 (5) ------- ------- ------ INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE............ 11,227 6,891 6,226 INCOME TAX EXPENSE.......................................... 3,925 2,382 2,182 ------- ------- ------ NET INCOME.................................................. 7,302 4,509 4,044 ------- ------- ------ OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX Change in unrealized net capital gains and losses......... 3,603 (5,286) 1,315 ------- ------- ------ COMPREHENSIVE INCOME (LOSS)................................. $10,905 $ (777) $5,359 ======= ======= ======
See notes to financial statements. F-2 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, --------------------------- 2000 1999 ------------ ------------ ($ IN THOUSANDS, EXCEPT PAR VALUE DATA) ASSETS Investments Fixed income securities, at fair value (amortized cost $139,819 and $94,173).................................... $ 144,127 $ 92,937 Short-term................................................ 3,085 53,063 ---------- ---------- Total investments......................................... 147,212 146,000 Cash........................................................ 13,500 9 Reinsurance recoverable from Allstate Life Insurance Company, net.............................................. 4,702,940 4,144,165 Deferred income taxes....................................... -- 293 Other assets................................................ 3,391 2,706 Separate Accounts........................................... 1,740,328 1,541,756 ---------- ---------- TOTAL ASSETS.......................................... $6,607,371 $5,834,929 ========== ========== LIABILITIES Reserve for life-contingent contract benefits............... $ 6,094 $ 800 Contractholder funds........................................ 4,696,846 4,143,365 Current income taxes payable................................ 3,729 2,360 Deferred income taxes....................................... 1,842 -- Payable to affiliates, net.................................. 5,101 4,122 Separate Accounts........................................... 1,740,328 1,541,756 ---------- ---------- TOTAL LIABILITIES..................................... 6,453,940 5,692,403 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 7) SHAREHOLDER'S EQUITY Common stock, $500 par value, 10,000 shares authorized, 5,000 shares issued and outstanding....................... 2,500 2,500 Additional capital paid-in.................................. 119,241 119,241 Retained income............................................. 28,890 21,588 Accumulated other comprehensive income (loss): Unrealized net capital gains (losses)..................... 2,800 (803) ---------- ---------- Total accumulated other comprehensive income (loss)... 2,800 (803) ---------- ---------- TOTAL SHAREHOLDER'S EQUITY............................ 153,431 142,526 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............ $6,607,371 $5,834,929 ========== ==========
See notes to financial statements. F-3 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- ($ IN THOUSANDS) COMMON STOCK Balance, beginning of year.................................. $ 2,500 $ 2,100 $ 2,100 Issuance of new shares of stock............................. -- 400 -- -------- -------- ------- Balance, end of year........................................ 2,500 2,500 2,100 -------- -------- ------- ADDITIONAL CAPITAL PAID-IN Balance, beginning of year.................................. $119,241 $ 69,641 $69,641 Capital contribution........................................ -- 49,600 -- -------- -------- ------- Balance, end of year........................................ 119,241 119,241 69,641 -------- -------- ------- RETAINED INCOME Balance, beginning of year.................................. $ 21,588 $ 17,079 $13,035 Net income.................................................. 7,302 4,509 4,044 -------- -------- ------- Balance, end of year........................................ 28,890 21,588 17,079 -------- -------- ------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of year.................................. $ (803) $ 4,483 $ 3,168 Change in unrealized net capital gains and losses........... 3,603 (5,286) 1,315 -------- -------- ------- Balance, end of year........................................ 2,800 (803) 4,483 -------- -------- ------- Total shareholder's equity.............................. $153,431 $142,526 $93,303 ======== ======== =======
See notes to financial statements. F-4 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- ($ IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 7,302 $ 4,509 $ 4,044 Adjustments to reconcile net income to net cash provided by operating activities Amortization and other non-cash items................... (468) (65) (24) Realized capital gains and losses....................... (419) (312) 5 Changes in: Income taxes payable.................................. 1,563 235 1,590 Other operating assets and liabilities................ 254 264 915 -------- -------- -------- Net cash provided by operating activities............... 8,232 4,631 6,530 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed income securities Proceeds from sales....................................... 20,682 9,049 1,966 Investment collections.................................... 3,163 4,945 7,123 Investment purchases...................................... (68,967) (20,328) (15,250) Change in short-term investments, net....................... 50,381 (48,288) (369) -------- -------- -------- Net cash provided by (used in) investing activities..... 5,259 (54,622) (6,530) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock...................... -- 400 -- Capital contribution........................................ -- 49,600 -- -------- -------- -------- Net cash provided by financing activities............... -- 50,000 -- -------- -------- -------- NET INCREASE IN CASH........................................ 13,491 9 -- CASH AT BEGINNING OF YEAR................................... 9 -- -- -------- -------- -------- CASH AT END OF YEAR......................................... $ 13,500 $ 9 $ -- ======== ======== ========
See notes to financial statements. F-5 GLENBROOK LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS ($ IN THOUSANDS) - ------------------------------------------------------------------- 1. GENERAL BASIS OF PRESENTATION The accompanying financial statements include the accounts of Glenbrook Life and Annuity Company (the "Company"), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"). These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. NATURE OF OPERATIONS The Company markets investment and life insurance products through banks and securities firms. Investment products include deferred annuities and immediate annuities without life contingencies. Deferred annuities include fixed rate, market value adjusted, indexed and variable annuities. Life insurance consists of interest-sensitive life and variable life insurance. In 2000, substantially all of the Company's statutory premiums and deposits were from annuities. Annuity contracts and life insurance policies issued by the Company are subject to discretionary surrender or withdrawal by customers, subject to applicable surrender charges. These policies and contracts are reinsured with ALIC (see Note 3), which invests premiums and deposits to provide cash flows that will be used to fund future benefits and expenses. The Company monitors economic and regulatory developments that have the potential to impact its business. Federal legislation has allowed for banks and other financial organizations to have greater participation in the securities and insurance businesses. This legislation presents an increased level of competition for sales of the Company's products. Furthermore, the market for deferred annuities and interest-sensitive life insurance is enhanced by the tax incentives available under current law. Any legislative changes which lessen these incentives are likely to negatively impact the demand for these products. The demand for life insurance products, that are used to address a customer's estate planning needs, may be impacted to the extent any legislative changes occur to the current estate tax laws. Additionally, traditional demutualizations of mutual insurance companies and enacted and pending state legislation to permit mutual insurance companies to convert to a hybrid structure known as a mutual holding company could have a number of significant effects on the Company by: (1) increasing industry competition through consolidation caused by mergers and acquisitions related to the new corporate form of business; and (2) increasing competition in the capital markets. Although the Company currently benefits from agreements with financial services entities who market and distribute its products, change in control or other factors of these non-affiliated entities with which the Company has alliances could negatively impact the Company's sales. The Company is authorized to sell investment and life products in all states except New York, as well as in the District of Columbia. The top geographic locations for statutory premiums and deposits for the Company were California, Pennsylvania, Florida, New Jersey, Illinois, Texas and Michigan for the year ended December 31, 2000. No other jurisdiction accounted for more than 5% of statutory premiums and deposits. All premiums and deposits are ceded to ALIC under reinsurance agreements. F-6 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Fixed income securities include bonds and mortgage-backed securities. All fixed income securities are carried at fair value and may be sold prior to their contractual maturity ("available for sale"). The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of shareholder's equity. Provisions are recognized for declines in the value of fixed income securities that are other than temporary. Such writedowns are included in Realized capital gains and losses. Short-term investments are carried at cost or amortized cost, which approximates fair value. Investment income consists primarily of interest. Interest is recognized on an accrual basis. Interest income on mortgage-backed securities is determined on the effective yield method, based on the estimated principal repayments. Accrual of income is suspended for fixed income securities that are in default or when the receipt of interest payments is in doubt. Realized capital gains and losses are determined on a specific identification basis. REINSURANCE RECOVERABLE The Company has reinsurance agreements whereby all contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC (see Note 3). Such amounts are reflected net of such reinsurance in the statements of operations and comprehensive income. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. Investment income earned on the assets which support contractholder funds and the reserve for life-contingent contract benefits is not included in the Company's financial statements as those assets are owned and managed under terms of reinsurance agreements. RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED Interest-sensitive life contracts are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and one or more amounts assessed against the contractholder. Premiums from these contracts are reported as deposits to contractholder funds. Contract charge revenue consists of fees assessed against the contractholder account balance for cost of insurance (mortality risk), contract administration and surrender charges. Contract benefits include interest credited to contracts and claims incurred in excess of the related contractholder account balance. Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed rate annuities, market value adjusted annuities, indexed annuities and immediate annuities without life contingencies are considered investment contracts. Deposits received for such contracts are reported as deposits to contractholder funds. Contract charge revenue for investment contracts consists of charges assessed against the contractholder account balance for contract administration and surrenders. Contract benefits include interest credited and claims incurred in excess of the related contractholder account balance. F-7 Crediting rates for fixed rate and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions. Crediting rates for indexed annuities are based on an interest rate index, such as LIBOR or an equity index, such as the S&P 500. Variable annuity and variable life contracts are sold as Separate Accounts products. The assets supporting these products are legally segregated and available only to settle Separate Accounts contract obligations. Deposits received are reported as Separate Accounts liabilities. The Company's contract charge revenue for these contracts consists of charges assessed against the Separate Accounts fund balances for contract maintenance, administration, mortality, expense and surrenders. All premiums, contract charges, contract benefits and interest credited are reinsured. INCOME TAXES The income tax provision is calculated under the liability method and presented net of reinsurance. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. Deferred income taxes arise primarily from unrealized capital gains and losses on fixed income securities carried at fair value and differences in the tax bases of investments. SEPARATE ACCOUNTS The Company issues deferred variable annuities and variable life contracts, the assets and liabilities of which are legally segregated and recorded as assets and liabilities of the Separate Accounts. Absent any contract provision wherein the Company guarantees either a minimum return or account value upon death or annuitization, variable annuity and variable life contractholders bear the investment risk that the Separate Accounts' funds may not meet their stated investment objectives. The assets of the Separate Accounts are carried at fair value. Separate Accounts liabilities represent the contractholders' claims to the related assets and are carried at the fair value of the assets. In the event that the asset value of certain contractholder accounts are projected to be below the value guaranteed by the Company, a liability is established through a charge to earnings. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contractholders and therefore, are not included in the Company's statements of operations and comprehensive income. As described earlier, revenues to the Company from the Separate Accounts are recorded as contract charges. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS The reserve for life-contingent contract benefits, which relates to certain variable annuity contract guarantees, is computed on the basis of assumptions as to future investment yields, mortality, terminations and expenses. These assumptions include provisions for adverse deviation and generally vary by such characteristics as type of coverage, year of issue and policy duration. Detailed reserve assumptions and reserve interest rates are outlined in Note 6. CONTRACTHOLDER FUNDS Contractholder funds arise from the issuance of contracts that include an investment component, including interest-sensitive life policies and certain other investment contracts. Deposits received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less withdrawals, mortality charges, and administrative expenses. Detailed information on crediting rates and surrender and withdrawal protection on contractholder funds are outlined in Note 6. F-8 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. RELATED PARTY TRANSACTIONS REINSURANCE The Company has reinsurance agreements whereby all contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC and reflected net of such reinsurance in the statements of operations and comprehensive income. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. Investment income earned on the assets which support contractholder funds and the reserve for life-contingent contract benefits is not included in the Company's financial statements as those assets are owned and managed under terms of reinsurance agreements. The following table summarizes amounts that were ceded to ALIC under reinsurance agreements.
Year Ended December 31, 2000 1999 1998 -------- -------- -------- Contract charges $ 37,965 $ 27,175 $ 19,009 Credited interest, policy benefits, and certain expenses 331,220 253,945 218,008
BUSINESS OPERATIONS The Company utilizes services performed by AIC and ALIC and business facilities owned or leased, and operated by AIC in conducting its business activities. The Company reimburses AIC and ALIC for the operating expenses incurred on behalf of the Company. The Company is charged for the cost of these operating expenses based on the level of services provided. Operating expenses, including compensation and retirement and other benefit programs, allocated to the Company were $48,553, $26,555 and $15,949 in 2000, 1999 and 1998, respectively. Of these costs, the Company retains investment related expenses. All other costs are ceded to ALIC under reinsurance agreements. F-9 4. INVESTMENTS FAIR VALUES The amortized cost, gross unrealized gains and losses, and fair value for fixed income securities are as follows:
Gross Unrealized Amortized ------------------- Fair At December 31, 2000 Cost Gains Losses Value - ---------------------- --------- -------- -------- -------- U.S. government and agencies $ 13,210 $2,376 $ -- $ 15,586 Municipal 1,656 24 (38) 1,642 Corporate 82,269 2,092 (1,167) 83,194 Mortgage-backed securities 42,684 1,081 (60) 43,705 -------- ------ ------- -------- Total fixed income securities $139,819 $5,573 $(1,265) $144,127 ======== ====== ======= ======== At December 31, 1999 U.S. government and agencies $ 24,274 $1,260 $ -- $ 25,534 Municipal 1,656 -- (112) 1,544 Corporate 49,255 9 (2,022) 47,242 Mortgage-backed securities 18,988 96 (467) 18,617 -------- ------ ------- -------- Total fixed income securities $ 94,173 $1,365 $(2,601) $ 92,937 ======== ====== ======= ========
SCHEDULED MATURITIES The scheduled maturities for fixed income securities are as follows at December 31, 2000:
Amortized Fair Cost Value --------- -------- Due after one year through five years $ 41,889 $ 42,368 Due after five years through ten years 43,676 44,318 Due after ten years 11,570 13,736 -------- -------- 97,135 100,422 Mortgage-backed securities 42,684 43,705 -------- -------- Total $139,819 $144,127 ======== ========
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. NET INVESTMENT INCOME
Year Ended December 31, 2000 1999 1998 ----------------------- -------- -------- -------- Fixed income securities $10,317 $6,458 $6,151 Short-term investments 587 230 183 ------- ------ ------ Investment income, before expense 10,904 6,688 6,334 Investment expense 96 109 103 ------- ------ ------ Net investment income $10,808 $6,579 $6,231 ======= ====== ======
REALIZED CAPITAL GAINS AND LOSSES, AFTER TAX
Year Ended December 31, 2000 1999 1998 ----------------------- -------- -------- -------- Fixed income securities $ 419 $ 312 $(5) ----- ----- --- Realized capital gains and losses 419 312 (5) Income taxes (147) (109) 2 ----- ----- --- Realized capital gains and losses, after tax $ 272 $ 203 $(3) ===== ===== ===
F-10 Excluding calls and prepayments, gross gains of $807 and $370 were realized on sales of fixed income securities during 2000 and 1999, and gross losses of $388, $58 and $5 were realized on sales of fixed income securities during 2000, 1999 and 1998, respectively. There were no gross gains realized on sales of fixed income securities during 1998. UNREALIZED NET CAPITAL GAINS Unrealized net capital gains on fixed income securities included in shareholder's equity at December 31, 2000 are as follows:
Gross Unrealized Amortized Fair ------------------- Unrealized Cost Value Gains Losses Net Gains --------- -------- -------- -------- ---------- Fixed income securities $139,819 $144,127 $5,573 $(1,265) $ 4,308 ======== ======== ====== ======= Deferred income taxes (1,508) ------- Unrealized net capital gains $ 2,800 =======
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
Year Ended December 31, 2000 1999 1998 ----------------------- -------- -------- -------- Fixed income securities $ 5,544 $(8,134) $2,024 Deferred income taxes (1,941) 2,848 (709) ------- ------- ------ Increase (decrease) in unrealized net capital gains (losses) $ 3,603 $(5,286) $1,315 ======= ======= ======
SECURITIES ON DEPOSIT At December 31, 2000, fixed income securities with a carrying value of $11,044 were on deposit with regulatory authorities as required by law. 5. FINANCIAL INSTRUMENTS In the normal course of business, the Company invests in various financial assets and incurs various financial liabilities. The fair value estimates of financial instruments presented below are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential taxes and other transaction costs have not been considered in estimating fair value. The disclosures that follow do not reflect the fair value of the Company as a whole since a number of the Company's significant assets (including reinsurance recoverable and deferred income taxes) and liabilities (including interest-sensitive life insurance reserves and deferred income taxes) are not considered financial instruments and are not carried at fair value. Other assets and liabilities considered financial instruments, such as accrued investment income and cash, are generally of a short-term nature. Their carrying values are deemed to approximate fair value. F-11 FINANCIAL ASSETS The carrying value and fair value of financial assets at December 31, are as follows:
2000 1999 ----------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- Fixed income securities $ 144,127 $ 144,127 $ 92,937 $ 92,937 Short-term investments 3,085 3,085 53,063 53,063 Separate Accounts 1,740,328 1,740,328 1,541,756 1,541,756
Fair values for fixed income securities are based on quoted market prices where available. Non-quoted securities are valued based on discounted cash flows using current interest rates for similar securities. Short-term investments are highly liquid investments with maturities of less than one year whose carrying value are deemed to approximate fair value. Separate Accounts assets are carried in the statements of financial position at fair value based on quoted market prices. FINANCIAL LIABILITIES The carrying value and fair value of financial liabilities at December 31, are as follows:
2000 1999 ----------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- Contractholder funds on investment contracts $4,694,695 $4,467,866 $4,156,964 $3,924,117 Separate Accounts 1,740,328 1,740,328 1,541,756 1,541,756
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts. Investment contracts with no stated maturities (single premium and flexible premium deferred annuities) are valued at the account balance less surrender charges. The fair value of immediate annuities and annuities without life contingencies with fixed terms is estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and durations. Separate Accounts liabilities are carried at the fair value of the underlying assets. 6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS Reserves for life-contingent contract benefits represent death-benefit guarantees which exist on variable annuity products. The reserves are calculated assuming the expected payout in any year approximates the average payout over time. F-12 At December 31, Contractholder funds consists of the following:
2000 1999 ---------- ---------- Interest-sensitive life $ 27,997 $ 9,503 Fixed annuities: Immediate annuities 20,577 17,856 Deferred annuities 4,648,272 4,116,006 ---------- ---------- Total Contractholder funds $4,696,846 $4,143,365 ========== ==========
Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less withdrawals, mortality charges and administrative expenses. Interest rates credited range from 4.2% to 7.1% for interest-sensitive life contracts; 3.5% to 7.3% for immediate annuities and 0.0% to 12.0% for deferred annuities. Withdrawal and surrender charge protection includes: i) for interest-sensitive life, either a percentage of account balance or dollar amount grading off generally over 20 years; and, ii) for deferred annuities not subject to a market value adjustment, either a declining or a level percentage charge generally over nine years or less. Approximately 2% of deferred annuities are subject to a market value adjustment. 7. COMMITMENTS AND CONTINGENT LIABILITIES REGULATION AND LEGAL PROCEEDINGS The Company's business is subject to the effects of a changing social, economic and regulatory environment. Public and regulatory initiatives have varied and have included employee benefit regulations, removal of barriers preventing banks from engaging in the securities and insurance business, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles, and proposed legislation to prohibit the use of gender in determining insurance rates and benefits. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. In the normal course of its business, the Company is involved in pending or threatened litigation and regulatory actions in which claims for monetary damages are asserted. At this time, based on their present status, it is the opinion of management, that the ultimate liability, if any, in one or more of these actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company. GUARANTY FUNDS Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. The Company's expenses related to these funds are immaterial and are ceded to ALIC under reinsurance agreements. MARKETING AND COMPLIANCE ISSUES Companies operating in the insurance and financial services markets have come under the scrutiny of regulators with respect to market conduct and compliance issues. Under certain circumstances, companies have been held responsible for providing incomplete or misleading sales materials and for replacing existing policies with policies that were less advantageous to the policyholder. The Company monitors its sales materials and enforces compliance procedures to mitigate exposure to potential litigation. The Company is a member of the Insurance Marketplace Standards Association, an organization which advocates ethical market conduct. F-13 8. INCOME TAXES For 1996, the Company filed a separate federal income tax return. Beginning in 1997, the Company joined the Corporation and its other eligible domestic subsidiaries (the "Allstate Group") in the filing of a consolidated federal income tax return and is party to a federal income tax allocation agreement (the "Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the Company pays to or receives from the Corporation the amount, if any, by which the Allstate Group's federal income tax liability is affected by virtue of inclusion of the Company in the consolidated federal income tax return. The Company has also entered into a supplemental tax sharing agreement with respect to reinsurance ceded to ALIC to allocate the tax benefits and detriments related to such reinsurance. Effectively, these agreements result in the Company's annual income tax provision being computed as if the Company filed a separate return, adjusted for the reinsurance ceded to ALIC. Prior to June 30, 1995, the Corporation was a subsidiary of Sears Roebuck & Co. ("Sears") and , with its eligible domestic subsidiaries, was included in the Sears consolidated federal income tax return and federal income tax allocation agreement. Effective June 30, 1995, the Corporation and Sears entered into a new tax sharing agreement, which governs their respective rights and obligations with respect to federal income taxes for all periods during which the Corporation was a subsidiary of Sears, including the treatment of audits of tax returns for such periods. The Internal Revenue Service ("IRS") has completed its review of the Allstate Group's federal income tax returns through the 1993 tax year. Any adjustment that may result from IRS examinations of tax returns are not expected to have a material impact on the financial position, liquidity or results of operations of the Company. The components of the deferred income tax assets and liabilities at December 31, are as follows:
2000 1999 -------- -------- Deferred assets Unrealized net capital losses $ -- $ 433 ------- ----- Total deferred assets -- 433 Deferred liabilities Unrealized net capital gains (1,508) -- Difference in tax bases of investments (334) (140) ------- ----- Total deferred liabilities (1,842) (140) ------- ----- Net deferred (liability) asset $(1,842) $ 293 ======= =====
Although realization is not assured, management believes it is more likely than not that the deferred tax asset will be realized based on the assumptions that certain levels of income will be achieved. F-14 The components of income tax expense for the year ended December 31, are as follows:
2000 1999 1998 -------- -------- -------- Current $3,730 $2,326 $2,164 Deferred 195 56 18 ------ ------ ------ Total income tax expense $3,925 $2,382 $2,182 ====== ====== ======
The Company paid income taxes of $2,361, $2,148 and $592 in 2000, 1999 and 1998, respectively. A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the year ended December 31, is as follows:
2000 1999 1998 -------- -------- -------- Statutory federal income tax rate 35.0% 35.0% 35.0% Other -- (0.4) -- ---- ---- ---- Effective income tax rate 35.0% 34.6% 35.0% ==== ==== ====
9. STATUTORY FINANCIAL INFORMATION The Company's statutory capital and surplus was $147,081 and $141,362 at December 31, 2000 and 1999, respectively. The Company's statutory net income was $6,597, $4,179 and $4,698 for the years ended December 31, 2000, 1999 and 1998, respectively. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Arizona Department of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company does not follow any permitted statutory accounting practices that have a significant impact on statutory surplus or statutory net income. The NAIC has approved a January 1, 2001 implementation date for newly developed statutory accounting principles ("codification"). The Company's state of domicile, Arizona, has passed legislation revising various statutory accounting requirements to conform to codification. These requirements will not have a material impact on the statutory surplus of the Company. The NAIC has installed a formal maintenance process to develop and propose new guidance, as well as on- going clarification and interpretation of issues. The impact of any future changes will be recorded as they are approved by the NAIC. F-15 DIVIDENDS The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. The payment of shareholder dividends by the Company without the prior approval of the state insurance regulator is limited to formula amounts based on net income and capital and surplus, determined in 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 2001 without prior approval of the Arizona Department of Insurance is $6,597. RISK-BASED CAPITAL The NAIC has a standard for assessing the solvency of insurance companies, which is referred to as risk-based capital ("RBC"). The standard is based on a formula for determining each insurer's RBC and a model law specifying regulatory actions if an insurer's RBC falls below specified levels. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks. At December 31, 2000, RBC for the Company was significantly above levels that would require regulatory action. 10. OTHER COMPREHENSIVE INCOME The components of other comprehensive income on a pretax and after-tax basis for the year ended December 31, are as follows:
2000 1999 1998 ------------------------------- ------------------------------- ------------------------------- PRETAX TAX AFTER-TAX PRETAX TAX AFTER-TAX PRETAX TAX AFTER-TAX -------- -------- --------- -------- -------- --------- -------- -------- --------- Unrealized capital gains and losses: - ---------------------------- Unrealized holding gains (losses) arising during the period $5,752 $(2,014) $3,738 $(7,822) $2,739 $(5,083) $2,019 $(707) $1,312 Less: reclassification adjustments 208 (73) 135 312 (109) 203 (5) 2 (3) ------ ------- ------ ------- ------ ------- ------ ----- ------ Unrealized net capital gains (losses) 5,544 (1,941) 3,603 (8,134) 2,848 (5,286) 2,024 (709) 1,315 ------ ------- ------ ------- ------ ------- ------ ----- ------ Other comprehensive income (loss) $5,544 $(1,941) $3,603 $(8,134) $2,848 $(5,286) $2,024 $(709) $1,315 ====== ======= ====== ======= ====== ======= ====== ===== ======
F-16 GLENBROOK LIFE AND ANNUITY COMPANY SCHEDULE IV--REINSURANCE ($ IN THOUSANDS)
GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- YEAR ENDED DECEMBER 31, 2000 Life insurance in force..................................... $65,852 $65,852 $ -- ======= ======= ======= Premiums and contract charges: Life and annuities........................................ $37,965 $37,965 $ -- ======= ======= ======= GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- YEAR ENDED DECEMBER 31, 1999 Life insurance in force..................................... $23,586 $23,586 $ -- ======= ======= ======= Premiums and contract charges: Life and annuities........................................ $27,175 $27,175 $ -- ======= ======= ======= GROSS NET AMOUNT CEDED AMOUNT -------- -------- -------- YEAR ENDED DECEMBER 31, 1998 Life insurance in force..................................... $12,056 $12,056 $ -- ======= ======= ======= Premiums and contract charges: Life and annuities........................................ $19,009 $19,009 $ -- ======= ======= =======
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