-----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, N+0OLfRsUKeGN+9LZE550DR1MqcIdf13nKU+2FMB6/2Pasxfdw3HwoOGo374K0j8 d5SnhUklkAA5Nm03vtLAQg== 0000945094-99-000110.txt : 19990331 0000945094-99-000110.hdr.sgml : 19990331 ACCESSION NUMBER: 0000945094-99-000110 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K SEC ACT: SEC FILE NUMBER: 033-91916 FILM NUMBER: 99576906 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-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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. For fiscal year ended December 31, 1998 Commission file numbers: 033-62193 033-91916 033-92842 333-00987 333-07275 333-50873 333-60337 333-50879 033-91914 333-00999 333-02581 333-28227 333-25045 033-62203 GLENBROOK LIFE AND ANNUITY COMPANY (Exact name of registrant as specified in its charter) ILLINOIS 35-1113325 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 SANDERS ROAD NORTHBROOK, ILLINOIS 60062 (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 December 31, 1998, there were 4,200 shares of common capital stock outstanding, par value $500 per share all of which shares are held by Allstate Life Insurance Company. GLENBROOK LIFE AND ANNUITY COMPANY (A wholly owned subsidiary of Allstate Life Insurance Company) Annual Report for 1998 On Form 10-K TABLE OF CONTENTS PAGE ---- PART I ITEM 1. Business**.......................................................3 ITEM 2. Properties**.....................................................4 ITEM 3. Legal Proceedings................................................4 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......................................5 ITEM 6. Selected Financial Data*....................................... N/A ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................6 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk......................................................13 ITEM 8. Financial Statements and Supplementary Data.......................13 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................13 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............................................14 Index to Financial Statement Schedules.....................................15 Signatures.................................................................16 Exhibit Index..............................................................E-1 * Omitted pursuant to General Instruction I(2) of Form 10-K. ** Item prepared in accordance with 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"). Glenbrook Life's operations consist of one business segment which is the sale of life insurance and savings products. 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 accepts 100% of the liability under such contracts. 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. 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. 3 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. There are approximately 1,700 stock, mutual and other types of insurers in business in the United States. Several independent rating agencies regularly evaluate life insurer's claims paying ability, quality of investments and overall stability. A.M. Best Company assigns A+(Superior) to 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 PROCEEDINGS The Company and its Board of Directors know of no material legal proceedings pending to which the Company is a party or which would materially affect the Company. The Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate the ultimate liability arising from such pending or threatened litigation to have a material effect on the position or results of operations of the Company. 4 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. 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights significant factors influencing results of operations and changes in financial position of Glenbrook Life and Annuity Company (the "Company"). It should be read in conjunction with the financial statements and related notes. The Company, a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"), markets savings products and life insurance products through banks, direct marketing and broker-dealers. Savings products include deferred annuities, such as variable annuities, and fixed rate single and flexible premium annuities. Life insurance includes universal life and variable life products. The Company has identified itself as a single segment entity. The assets and liabilities related to flexible premium deferred variable annuity contracts and variable life policies are legally segregated and reflected as Separate Account assets and liabilities and are carried at fair value in the statements of financial position. Certain Separate Account investment portfolios were initially funded with a $10.0 million seed money contribution from the Company in 1995. During 1997, the Company liquidated its ownership interest in the Separate Account investment portfolios ("Participation"). Investment income and realized gains and losses of the Separate Accounts, other than the portion related to the Company's Participation in 1996 and 1997, accrue directly to the contractholders (net of fees) and, therefore, are not included in the Company's statements of operations and comprehensive income. RESULTS OF OPERATIONS ($ in thousands) 1998 1997 1996 -------- -------- -------- Net investment income $ 6,231 $ 5,304 $ 3,774 ======== ======== ======== Realized capital gains and losses, after-tax $ (3) $ 2,249 $ -- ======== ======== ======== Net income $ 4,044 $ 5,686 $ 2,435 ======== ======== ======== Total investments $ 98,976 $ 90,474 $ 50,676 ======== ======== ======== The Company has reinsurance agreements under which substantially all contract and policy related transactions are transferred to ALIC. The Company's results of operations include only net investment income and realized capital gains and losses earned on the assets of the Company that are not transferred under the reinsurance agreements. Net income decreased $1.6 million in 1998 as increases in net investment income were more than offset by a decline in realized capital gains. In 1997, net income increased $3.3 million due to realized capital gains and higher net investment income. In 1997, the Company liquidated its Participation which resulted in a $2.2 million, after tax, realized capital gain. Pretax net investment income increased 17.5% to $6.2 million in 1998 as additional investment income was earned on higher investment balances arising from positive cash flows from operating activities. In addition, in 1998, positive cash flows from operating activities were favorably impacted by changes in inter-company settlement procedures. In 1997, pretax net investment income increased 40.5% to $5.3 million. This higher investment income was caused by a significant increase in the level of investments primarily arising from a $20.0 million capital contribution received from ALIC in January 1997 and the liquidation of the Company's Separate Accounts Participation, partially offset by an increase in investment expenses. 6 FINANCIAL POSITION ($ in thousands) 1998 1997 ---------- ---------- Fixed income securities (1) $ 94,313 $ 86,243 Short-term investments 4,663 4,231 ---------- ---------- Total investments $ 98,976 $ 90,474 ========== ========== Reinsurance recoverable from ALIC $3,113,278 $2,637,983 ========== ========== Separate Account assets and liabilities $ 993,622 $ 620,535 ========== ========== Contractholder funds $3,113,278 $2,637,983 ========== ========== (1) Fixed income securities are carried at fair value. Amortized cost for these securities was $87,415 and $81,369 at December 31, 1998 and 1997, respectively. Total investments increased to $99.0 million at December 31, 1998 from $90.5 million at December 31, 1997. The increase was primarily due to amounts invested from positive cash flows generated from operations and an increase in the unrealized gain on fixed income securities. In 1998, positive cash flows from operating activities were favorably impacted by changes in inter-company cash settlement procedures. FIXED INCOME SECURITIES The Company's fixed income securities portfolio consists of publicly traded corporate bonds, mortgage-backed securities, U.S. government bonds and tax-exempt municipal bonds. The Company generally holds its fixed income securities for the long term, but has classified all of these securities as available for sale to allow maximum flexibility in portfolio management. At December 31, 1998, unrealized net capital gains on the fixed income securities portfolio totaled $6.9 million compared to $4.9 million as of December 31, 1997. The increase in the unrealized gain position is primarily attributable to lower interest rates. 7 At December 31, 1998, all of the Company's fixed income securities portfolio was rated investment grade, which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating. The quality mix of the Company's fixed income securities portfolio at December 31, 1998 is presented below. ($ in thousands) NAIC RATINGS MOODY'S EQUUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL - ------- ------------------------------- ---------- ---------------- 1 Aaa/Aa/A $ 91,328 96.8% 2 Baa 2,985 3.2 ---------- ----------- $ 94,313 100.0% ========== =========== At December 31, 1998 and 1997, $30.4 million and $31.9 million, respectively, of the fixed income securities portfolio was invested in mortgage-backed securities ("MBS"). At December 31, 1998, all of the MBS are investment grade and have underlying collateral that is guaranteed by U.S. government entities; thus credit risk is minimal. MBS, however, are subject to interest rate risk as the duration and ultimate realized yield are affected by the rate of repayment of the underlying mortgages. The Company attempts to limit interest rate risk by purchasing MBS where cost does not significantly exceed par value, and with repayment protection to provide more certain cash flow to the Company. At December 31, 1998, the amortized cost of the MBS portfolio was below par value by $259 thousand and over 32% of the MBS portfolio was invested in planned amortization class bonds. This type of MBS is purchased to provide additional protection against declining interest rates. The Company closely monitors its fixed income securities portfolio for declines in value that are other than temporary. Securities are placed on non-accrual status when they are in default or when the receipt of interest payments is in doubt. SHORT TERM INVESTMENTS The Company's short-term investment portfolio was $4.7 million and $4.2 million at December 31, 1998 and 1997, respectively. The Company invests available cash balances primarily in taxable short-term securities having a final maturity date or redemption date of one year or less. CONTRACTHOLDER FUNDS AND REINSURANCE RECOVERABLE FROM ALIC During 1998, contractholder funds and amounts recoverable from ALIC under the reinsurance agreements increased by $475.3 million. The increases resulted from sales of the Company's fixed annuity contracts and interest credited to contractholders which were partially offset by surrenders, withdrawals and benefits paid. Reinsurance recoverable from ALIC relates to contract benefit obligations ceded to ALIC. SEPARATE ACCOUNTS Separate Account assets and liabilities increased 60.1% to $993.6 million in 1998. The increases were primarily attributable to increased sales of flexible premium deferred variable annuity contracts and favorable investment performance of the Separate Accounts investment portfolios, partially offset by variable annuity surrenders and withdrawals. 8 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. 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 way to quantify this exposure is duration. Duration measures the sensitivity of the fair value of assets to changes in interest rates. For example, if interest rates increase 1%, the fair value of an asset with a duration of 5 years is expected to decrease in value by approximately 5%. At December 31, 1998, the Company's asset duration was approximately 4.6 years, a slight decrease from the 5.3 years reported for December 31, 1997. To calculate duration, the Company projects asset cash flows, and discounts them to a net present value basis using a risk-free market rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at an alternative level of interest rates, and determining the percentage change in fair value from the base case. The projections include assumptions (based upon historical market and Company specific experience) reflecting the impact of changing interest rates on the prepayment and/or option features of instruments, where applicable. Such assumptions relate primarily to mortgage-backed securities, collateralized mortgage obligations, and municipal and corporate obligations. Based upon the information and assumptions the Company uses in its duration calculation and interest rates in effect at December 31, 1998, management estimates that a 100 basis point immediate, parallel increase in interest rates ("rate shock") would decrease the net fair value of its assets identified above by approximately $4.3 million, an amount essentially unchanged from the amount reported for December 31, 1997. The selection of a 100 basis point immediate rate shock should not be construed as a prediction by the Company's management of future market events; but rather, to illustrate the potential impact of such an event. To the extent that actual results differ from the assumptions utilized, the Company's duration and rate shock measures could be significantly impacted. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. EQUITY PRICE RISK Equity price risk is the risk that the Company will incur economic losses due to adverse changes in equity prices. At December 31, 1998 the Company had variable annuity and variable life funds with balances totaling $993.6 million. The Company earns mortality and expense fees as a percentage of fund balance. In the event of an immediate decline of 10% in the fund balances due to equity market declines, the Company would earn approximately $1.3 million less in annualized fee income which would be ceded to ALIC. CORPORATE OVERSIGHT In formulating and implementing policies for investing new and existing funds, AIC, an indirect parent of the Company, administers and oversees investment risk management processes primarily through three oversight bodies: the Boards of Directors and Investment Committees of its operating subsidiaries, and the Credit and Risk Management Committee ("CRMC"). The Boards of Directors and Investment Committees provide executive oversight of investment activities. The CRMC is a senior management committee consisting of the Chief Investment Officer, the Investment Risk Manager, and other investment officers who are responsible for the day-to-day management of market risk. The CRMC meets at least monthly to provide detailed oversight of investment risk, including market risk. 9 AIC has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. In addition, AIC has specific investment policies for each of its affiliates, including the Company, that delineate the investment limits and strategies that are appropriate for the Company's liquidity, surplus, product and regulatory requirements. LIQUIDITY AND CAPITAL RESOURCES Under the terms of reinsurance agreements, 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 dependant 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, 1998. In January 1997, a $20.0 million capital contribution was received from ALIC. 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. At December 31, 1998, the Moody's and Standard and Poor's financial strength ratings for the Company were Aa2 and AA+, respectively. 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, 1998, RBC for the Company was significantly above a level that would require regulatory action. YEAR 2000 The Company is dependent upon certain services provided for it by the Corporation including computer-related systems, and systems and equipment that are not typically thought of as computer-related (referred to as "non-IT"). For this reason, the Company is reliant upon the Corporation for the establishment and maintenance of its computer-related systems and non-IT. The Corporation is heavily dependent upon complex computer systems for all phases of its operations, including customer service, insurance processing, underwriting, loss reserving, investments and other enterprise systems. Since many of the Corporation's older computer software programs recognize only the last two digits of the year in any date, some software may fail to operate properly in or after the year 1999, if the software is not reprogrammed, remediated, or replaced ("Year 2000"). Also, non-IT often contain embedded hardware or software that may have a Year 2000 sensitive component. The Corporation believes that many of its counterparties and suppliers also have Year 2000 issues and non-IT issues which could affect the Corporation. 10 In 1995, the Corporation commenced a plan consisting of four phases which are intended to mitigate and/or prevent the adverse affects of the Year 2000 issues on its systems: 1) inventory and assessment of affected systems and equipment, 2) remediation and compliance of systems and equipment through strategies that include the replacement or enhancement of existing systems, upgrades to operating systems already covered by maintenance agreements and modifications to existing systems to make them Year 2000 compliant, 3) testing of systems using clock-forward testing for both current and future dates and for dates which trigger specific processing, and 4) contingency planning which will address possible adverse scenarios and the potential financial impact to the Corporation's results of operations, liquidity or financial position. The Corporation believes that the first three steps of this plan, assessment, remediation and testing, including clock-forward testing which is being performed on the Corporation's systems and non-IT, are mostly complete for the Corporation's critical systems. In April 1998, the Corporation announced its main premium application system, ALERT, which manages more than 20 million auto and homeowners policies, is Year 2000 compliant. The Corporation is relying on other remediation techniques for its midrange and personal computer environments, and certain mainframe applications. Certain investment processing systems, midrange computers and personal computer enviornments are planned to be remediated by the middle of 1999, and some systems and non-IT related to discontinued or non-critical functions of the Corporation are planned to be abandoned by the end of 1999. The Corporation is currently in the process of identifying key processes and developing contingency plans in the event that the systems supporting these key processes are not Year 2000 compliant at the end of 1999. Management believes these contingency plans should be completed by mid-1999. Until these plans are complete, management is unable to determine an estimate of the most reasonably possible worst case scenario due to issues relating to the Year 2000. In addition, the Corporation is actively working with its major external counterparties and suppliers to assess their compliance efforts and the Corporation's exposure to both their Year 2000 issues and non-IT issues. This assessment has included the solicitation of external counterparties and suppliers, evaluating responses received and testing third party interfaces and interactions to determine compliance. Currently the Corporation has solicited approximately 1,500, and has received responses from approximately 75% of its counterparties and suppliers. The Corporation will continue its efforts to solicit responses on Year 2000 compliance from these parties. The majority of these responses have stated that the counterparties and suppliers believe that they will be Year 2000 compliant and that no transactions will be affected. However, some key vendors have not provided affirmative responses to date. The Corporation has also decided to test certain interfaces and interactions to gain additional assurance on third party compliance. If key vendors are unable to meet the Year 2000 requirement, the Corporation is preparing contingency plans that will allow the Corporation to continue to sell its products and to service its customers. Management believes these contingency plans should be completed by mid-1999. The Corporation currently does not have sufficient information to determine whether or not all of its external counterparties and suppliers will be Year 2000 ready. The Corporation is currently assessing the level of Year 2000 risk associated with certain personal lines policies that have been issued. To date, no changes have been made in the coverages provided by the Corporation's personal auto and homeowners lines policies to specifically exclude coverage for Year 2000 related claims. This does not mean that all losses, or any particular type of loss, that might be related to Year 2000 will be covered. Rather, all claims will continue to be evaluated on a case-by-case basis to determine whether coverage is available for a particular loss in accordance with the applicable terms and conditions of the policy in force. 11 The Corporation also has investments which have been publicly and privately placed. The Corporation may be exposed to the risk that the issuers of these investments will be adversely impacted by Year 2000 issues. The Corporation assesses the impact which Year 2000 issues have on the Corporation's investments as part of due diligence for proposed new investments, and in its ongoing review of all current portfolio holdings. Any recommended actions with respect to individual investments are determined by taking into account the potential impact of Year 2000 on the issuer. Contingency plans are being created for any securities held whose issuer is determined to not be Year 2000 compliant. The Corporation presently believes that it will resolve the Year 2000 issue in a timely manner. Year 2000 costs are expensed as incurred, therefore the majority of the expenses related to this project have been incurred as of December 31, 1998. The Corporation estimates that approximately $125 million in costs will be incurred between the years of 1995 and 2000. These amounts include costs directly related to fixing Year 2000 issues, such as modifying software and hiring Year 2000 solution providers. These amounts also include costs incurred to replace certain non-compliant systems which would not have been otherwise replaced. A portion of these costs will be incurred by the Company on a pro rata basis of usage of the computer-related systems and non-IT, as compared to the usage of all entities which share these services with the Corporation. These amounts are not expected to be material to the results of operations of the Company. PENDING ACCOUNTING STANDARDS In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-related Assessments." The SOP is required to be adopted in 1999. The SOP provides guidance concerning when to recognize a liability for insurance-related assessments and how those liabilities should be measured. Specifically, insurance-related assessments should be recognized as liabilities when all of the following criteria have been met: 1) an assessment has been imposed or it is probable that an assessment will be imposed, 2) the event obligating an entity to pay an assessment has occurred and 3) the amount of the assessment can be reasonably estimated. The Company is currently evaluating the effects of this SOP on its accounting for insurance-related assessments. Certain information required for compliance is not currently available and therefore the Company is studying alternatives for estimating the accrual. In addition, industry groups are working to improve the information available. Adoption of this standard is not expected to be material to the results of operations or financial position of the Company. FORWARD-LOOKING STATEMENTS The statements contained in this Management's Discussion and Analysis that are not historical information are forward-looking statements that are based on management's estimates, assumptions and projections. The Private Securities Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of 1933 and The Securities Exchange Act of 1934 for forward-looking statements. 12 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 on pages 9 to 10 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. 13 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, 1998, together with the Report of Independent Accountants are set forth on pages F-1 - F-16 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, 1998. (c) EXHIBITS Exhibit No. Description 3(i) Amended and Restated Articles of Incorporation and Articles of Redomestication of Glenbrook Life and Annuity Insurance Company (filed herewith) 3(ii) Amended and Restated By-laws of Glenbrook Life and Annuity Company (filed herewith) 27 Financial Data Schedule (filed herewith) 14 Financial Statements INDEX PAGE Independent Auditors' Report................................................F-1 Financial Statements: Statements of Financial Position December 31, 1998 and 1997........................................F-2 Statements of Operations and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996..................................F-3 Statements of Shareholder's Equity for the Years Ended December 31, 1998, 1997 and 1996..................................F-4 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996..................................F-5 Notes to Financial Statements........................................F-6 Schedule IV - Reinsurance for the Years Ended December 31, 1998, 1997 and 1996..................................F-17 15 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, 1998 and 1997, 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, 1998. Our audits also included Schedule IV - Reinsurance. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Deloitte & Touche LLP Chicago, Illinois February 19, 1999 F-1 F-2 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF FINANCIAL POSITION December 31, ------------ ($ in thousands) 1998 1997 ---- ---- ASSETS Investments Fixed income securities, at fair value (amortized cost $87,415 and $81,369) $ 94,313 $ 86,243 Short-term 4,663 4,231 ---------- ---------- Total investments 98,976 90,474 Reinsurance recoverable from Allstate Life Insurance Company 3,113,278 2,637,983 Other assets 2,590 2,549 Separate Accounts 993,622 620,535 ---------- ---------- TOTAL ASSETS $4,208,466 $3,351,541 ========== ========== LIABILITIES Contractholder funds 3,113,278 2,637,983 Current income taxes payable 2,181 609 Deferred income taxes 2,499 1,772 Payable to affiliates, net 3,583 2,698 Separate Accounts 993,622 620,535 ---------- ---------- TOTAL LIABILITIES 4,115,163 3,263,597 ---------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9) SHAREHOLDER'S EQUITY Common stock, $100 par value, 25,000 shares authorized, issued and outstanding 2,100 2,100 Additional capital paid-in 69,641 69,641 Retained income 17,079 13,035 Accumulated other comprehensive income: Unrealized net capital gains 4,483 3,168 ---------- ---------- Total accumulated other comprehensive income 4,483 3,168 ---------- ---------- TOTAL SHAREHOLDER'S EQUITY 93,303 87,944 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,208,466 $3,351,541 ========== ========== See notes to financial statements. F-3 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Year Ended December 31, ----------------------- ($ in thousands) 1998 1997 1996 ---- ---- ---- REVENUES Net investment income $ 6,231 $ 5,304 $ 3,774 Realized capital gains and losses (5) 3,460 -- ------- ------- ------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 6,226 8,764 3,774 Income tax expense 2,182 3,078 1,339 ------- ------- ------- NET INCOME 4,044 5,686 2,435 ------- ------- ------- OTHER COMPREHENSIVE INCOME, AFTER-TAX Change in unrealized net capital gains and losses 1,315 378 (567) ------- ------- ------- COMPREHENSIVE INCOME $ 5,359 $ 6,064 $ 1,868 ======= ======= ======= See notes to financial statements. F-4 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY December 31, ------------ ($ in thousands) 1998 1997 1996 ---- ---- ---- COMMON STOCK $ 2,100 $ 2,100 $ 2,100 -------- -------- -------- ADDITIONAL CAPITAL PAID-IN Balance, beginning of year 69,641 69,641 49,641 Capital contribution -- -- 20,000 -------- -------- -------- Balance, end of year 69,641 69,641 69,641 -------- -------- -------- RETAINED INCOME Balance, beginning of year 13,035 7,349 4,914 Net income 4,044 5,686 2,435 -------- -------- -------- Balance, end of year 17,079 13,035 7,349 -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of year 3,168 2,790 3,357 Change in unrealized net capital gains and losses 1,315 378 (567) -------- -------- -------- Balance, end of year 4,483 3,168 2,790 -------- -------- -------- Total shareholder's equity $ 93,303 $ 87,944 $ 81,880 ======== ======== ======== See notes to financial statements. F-5
GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF CASH FLOWS Year Ended December 31, ----------------------- ($ in thousands) 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,044 $ 5,686 $ 2,435 Adjustments to reconcile net income to net cash provided by operating activities Amortization and other non-cash items (24) 29 -- Realized capital gains and losses 5 (3,460) -- Changes in: Income taxes payable 1,590 240 (1,223) Other operating assets and liabilities 915 961 717 -------- -------- -------- Net cash provided by operating activities 6,530 3,456 1,929 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed income securities Proceeds from sales 1,966 1,405 -- Investment collections 7,123 14,217 2,891 Investment purchases (15,250) (50,115) (5,667) Participation in Separate Accounts -- 13,981 (232) Change in short-term investments, net (369) (2,944) 815 -------- -------- -------- Net cash used in investing activities (6,530) (23,456) (2,193) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution -- 20,000 -- -------- -------- -------- Net cash provided by financing activities -- 20,000 -- -------- -------- -------- NET DECREASE IN CASH -- -- (264) CASH AT THE BEGINNING OF YEAR -- -- 264 -------- -------- -------- CASH AT END OF YEAR $ -- $ -- $ -- ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Noncash financing activity: Capital contribution receivable from Allstate Life Insurance Company $ -- $ -- $ 20,000 ======== ======== ======== See notes to financial statements.
F-6 GLENBROOK LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS 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 generally accepted accounting principles. To conform with the 1998 presentation, certain amounts in the prior years' financial statements and notes have been reclassified. NATURE OF OPERATIONS The Company markets savings products and life insurance through banks, direct marketing and broker-dealers. Savings products include deferred annuities, such as variable annuities and fixed rate single and flexible premium annuities. Life insurance includes universal life and variable life products. The Company has entered into exclusive distribution arrangements with management investment companies to market its variable annuity contracts. In 1998, substantially all of the Company's statutory premiums and deposits were from annuities. The Company re-domesticated its operations from Illinois to Arizona in 1998. Annuity contracts and life insurance policies issued by the Company are subject to discretionary surrender or withdrawal by customers, subject to applicable surrender charges. These policies and contracts are reinsured primarily with ALIC (see Note 3), which invests premiums and deposits to provide cash flows that will be used to fund future benefits and expenses. The Company monitors economic and regulatory developments which have the potential to impact its business. There continues to be proposed federal and state regulation and legislation that, if passed, would allow banks greater participation in securities and insurance businesses, which would present an increased level of competition, as well as opportunities, for sales of the Company's life and savings 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. Although the Company currently benefits from agreements with financial services entities who market and distribute its products, change in control of these non-affiliated entities with which the Company has alliances could have a detrimental effect on the Company's sales. 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. F-7 The Company is authorized to sell life and savings 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 are Florida, Pennsylvania, Texas, California and Tennessee for the year ended December 31, 1998. No other jurisdiction accounted for more than 5% of statutory premiums and deposits. Substantially all premiums and deposits are ceded to ALIC under reinsurance agreements. 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 and dividends on short-term investments. Interest is recognized on an accrual basis and dividends are recorded at the ex-dividend date. Interest income on mortgage-backed securities is determined on the effective yield method, based on the estimated principal repayments. Accrual of income is suspended for fixed income securities that are in default or when the receipt of interest payments is in doubt. Realized capital gains and losses are determined on a specific identification basis. REINSURANCE The Company has reinsurance agreements whereby substantially all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC. Such amounts are reflected net of such reinsurance in the statements of operations and comprehensive income. The amounts shown in the Company's statements of operations and comprehensive income relate to the investment of those assets of the Company that are not transferred under reinsurance agreements. Reinsurance recoverable and the related contractholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES Revenues on universal life-type contracts are comprised of contract charges and fees, and are recognized when assessed against the policyholder account balance. Revenues on investment contracts include contract charges and fees for contract administration and surrenders. These revenues are recognized when levied against the contract balance. All premium revenues and contract charges are primarily reinsured with ALIC. 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. F-8 Deferred income taxes arise 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 flexible premium deferred variable annuity and variable life policies, the assets and liabilities of which are legally segregated and reflected in the accompanying statements of financial position as assets and liabilities of the Separate Accounts. The Company's Separate Accounts consist of: Glenbrook Life and Annuity Company Separate Account A, Glenbrook Life and Annuity Company Variable Annuity Account, Glenbrook Life Variable Life Separate Account A, Glenbrook Life Scudder Variable Account (A), Glenbrook Life Multi-Manager Variable Account, Glenbrook Life AIM Variable Life Separate Account A and Glenbrook Life Variable Life Separate Account B. Each of the Separate Accounts are 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 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. Revenues to the Company from the Separate Accounts consist of contract maintenance fees, administration fees, mortality and expense risk charges and cost of insurance charges, all of which are reinsured with ALIC. Prior to 1998, the Company had an ownership interest ("Participation") in the Separate Accounts. The Company's Participation was carried at fair value and unrealized gains and losses, net of deferred income taxes, were shown as a component of shareholder's equity. Investment income and realized capital gains and losses which arose from the Participation were included in the Company's statements of operations and comprehensive income. The Company liquidated its Participation during 1997, which resulted in a pretax realized capital gain of $3.5 million. CONTRACTHOLDER FUNDS Contractholder funds arise from the issuance of individual or group policies and contracts that include an investment component, including most fixed annuities and universal life policies. Payments received are recorded as interest-bearing liabilities. Contractholder funds are equal to deposits received and interest credited to the benefit of the contractholder less withdrawals, mortality charges and administrative expenses. During 1998, credited interest rates on contractholder funds ranged from 3.46% to 11.00% for those contracts with fixed interest rates and from 3.75% to 10.00% for those with flexible rates. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-9 NEW ACCOUNTING STANDARDS In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive income is a measurement of certain changes in shareholder's equity that result from transactions and other economic events other than transactions with shareholders. For the Company, these consist of changes in unrealized gains and losses on the investment portfolio (See Note 8). In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 redefines how segments are determined and requires additional segment disclosures for both annual and interim financial reporting. The Company has identified itself as a single operating segment. PENDING ACCOUNTING STANDARDS In December 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-related Assessments." The SOP is required to be adopted in 1999. The SOP provides guidance concerning when to recognize a liability for insurance-related assessments and how those liabilities should be measured. Specifically, insurance-related assessments should be recognized as liabilities when all of the following criteria have been met: 1) an assessment has been imposed or it is probable that an assessment will be imposed, 2) the event obligating an entity to pay an assessment has occurred and 3) the amount of the assessment can be reasonably estimated. The Company is currently evaluating the effects of this SOP on its accounting for insurance-related assessments. Certain information required for compliance is not currently available and therefore the Company is studying alternatives for estimating the accrual. In addition, industry groups are working to improve the information available. Adoption of this standard is not expected to be material to the results of operations or financial position of the Company. 3. RELATED PARTY TRANSACTIONS REINSURANCE The Company has reinsurance agreements whereby substantially all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC and reflected net of such reinsurance in the statements of operations and comprehensive income. The amounts shown in the Company's statements of operations and comprehensive income relate to the investment of those assets of the Company that are not transferred under reinsurance agreements. Reinsurance recoverable and the related contracholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. F-10 Investment income earned on the assets which support contractholder funds is not included in the Company's financial statements as those assets are owned and managed under terms of reinsurance agreements. The following amounts were ceded to ALIC under reinsurance agreements. YEAR ENDED DECEMBER 31, ----------------------- ($ in thousands) 1998 1997 1996 -------- -------- -------- Contract charges $ 19,009 $ 11,641 $ 4,254 Credited interest, policy benefits, and certain expenses 218,008 179,954 113,703 BUSINESS OPERATIONS The Company utilizes services provided by AIC and ALIC and business facilities owned or leased, and operated by AIC in conducting its business activities. The Company reimburses AIC and ALIC for the operating expenses incurred on behalf of the Company. The 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 $15,949, $19,243 and $4,804 in 1998, 1997 and 1996, respectively. Of these costs, the Company retains investment related expenses. All other costs are ceded to ALIC under reinsurance agreements. 4. INVESTMENTS FAIR VALUES The amortized cost, gross unrealized gains and losses, and fair value for fixed income securities are as follows: AMORTIZED GROSS UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- AT DECEMBER 31, 1998 U.S. government and agencies $24,350 $ 4,308 $ -- $28,658 Municipal 656 24 -- 680 Corporate 33,009 1,575 (39) 34,545 Mortgage-backed securities 29,400 1,047 (17) 30,430 ------- ------- ------- ------- Total fixed income securities $87,415 $ 6,954 $ (56) $94,313 ======= ======= ======= ======= AT DECEMBER 31, 1997 U.S. government and agencies $24,419 $ 2,961 $ -- $27,380 Municipal 656 17 -- 673 Corporate 25,476 840 -- 26,316 Mortgage-backed securities 30,818 1,056 -- 31,874 ------- ------- ------- ------- Total fixed income securities $81,369 $ 4,874 $ -- $86,243 ======= ======= ======= ======= F-11 SCHEDULED MATURITIES The scheduled maturities for fixed income securities are as follows at December 31, 1998: AMORTIZED FAIR COST VALUE ---- ----- Due in one year or less $ 400 $ 400 Due after one year through five years 8,711 8,943 Due after five years through ten years 36,027 39,009 Due after ten years 12,877 15,531 ------- ------- 58,015 63,883 Mortgage-backed securities 29,400 30,430 ------- ------- Total $87,415 $94,313 ======= ======= Actual maturities may differ from those scheduled as a result of prepayments by the issuers. NET INVESTMENT INCOME YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- ------- Fixed income securities $ 6,151 $ 5,014 $ 3,478 Short-term investments 183 231 126 Participation in Separate Accounts -- 161 232 ------- ------- ------- Investment income, before expense 6,334 5,406 3,836 Investment expense 103 102 62 ------- ------- ------- Net investment income $ 6,231 $ 5,304 $ 3,774 ======= ======= ======= REALIZED CAPITAL GAINS AND LOSSES YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- ------- Fixed income securities $ (5) $ (61) $ -- Short-term investments -- 6 -- Participation in Separate Accounts -- 3,515 -- ------- ------- ------- Realized capital gains and losses (5) 3,460 -- Income taxes 2 (1,211) -- ------- ------- ------- Realized capital gains and losses, after tax $ (3) $ 2,249 $ -- ======= ======= ======= Excluding calls and prepayments, gross losses of $5 and $61 were realized on sales of fixed income securities during 1998 and 1997, respectively. There were no gains or losses, excluding calls and prepayments during 1996. F-12 UNREALIZED NET CAPITAL GAINS Unrealized net capital gains on fixed income securities included in shareholder's equity at December 31, 1998 are as follows:
COST/ AMORTIZED FAIR GROSS UNREALIZED UNREALIZED COST VALUE GAINS LOSSES NET GAINS ---- ----- ----- ------ --------- Fixed income securities $ 87,415 $ 94,313 $ 6,954 $ (56) $ 6,898 ======== ======== ======== ======== Deferred income taxes (2,415) -------- Unrealized net capital gains $ 4,483 ========
CHANGE IN UNREALIZED NET CAPITAL GAINS YEAR ENDED DECEMBER 31, 1998 1997 1996 ------- ------- ------- Fixed income securities $ 2,024 $ 2,410 $(2,239) Participation in Separate Accounts -- (1,829) 1,368 Deferred income taxes (709) (203) 304 ------- ------- ------- Increase (decrease) in unrealized net capital gains $ 1,315 $ 378 $ (567) ======= ======= ======= SECURITIES ON DEPOSIT At December 31, 1998, fixed income securities with a carrying value of $11,416 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 liabilities (including universal life-type 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, are generally of a short-term nature. Their carrying values are assumed to approximate fair value. F-13 FINANCIAL ASSETS The carrying value and fair value of financial assets at December 31, are as follows: 1998 1997 ---- ---- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----- ----- ----- ----- Fixed income securities $ 94,313 $ 94,313 $ 86,243 $ 86,243 Short-term investments 4,663 4,663 4,231 4,231 Separate Accounts 993,622 993,622 620,535 620,535 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 approximates 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: 1998 1997 ---- ---- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----- ----- ----- ----- Contractholder funds on investment contracts $3,130,228 $2,967,101 $2,636,331 $2,492,095 Separate Accounts 993,622 993,622 620,535 620,535 The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts. Reserves on investment contracts with no stated maturities (single premium and flexible premium deferred annuities) are valued at the account balance less surrender charges. The fair value of immediate annuities and annuities without life contingencies with fixed terms is estimated using discounted cash flow calculations based on interest rates currently offered for contracts with similar terms and durations. Separate Accounts liabilities are carried at the fair value of the underlying assets. 6. 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. Effectively, this results in the Company's annual income tax provision being computed, with adjustments, as if the Company filed a separate return. F-14 Prior to Sears, Roebuck and Co.'s ("Sears") distribution ("Sears distribution") on June 30, 1995 of its 80.3% ownership in the Corporation to Sears shareholders, 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"). 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 Company in the consolidated federal income tax return. As a result of the Sears distribution, the Allstate Group was no longer included in the Sears Tax Group, and the Tax Sharing Agreement was terminated. Accordingly, the Allstate Group and Sears Group entered into a new tax sharing agreement, which adopts many of the principles of the Tax Sharing Agreement and governs their respective rights and obligations with respect to federal income taxes for all periods prior to the Sears distribution, 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 liability at December 31, are as follows: 1998 1997 ------- ------- Unrealized net capital gains $(2,415) $(1,706) Difference in tax bases of investments (84) (66) ------- ------- Total deferred liability $(2,499) $(1,772) ======= ======= The components of income tax expense for the year ended December 31, are as follows: 1998 1997 1996 ------ ------ ------ Current $2,164 $3,037 $1,335 Deferred 18 41 4 ------ ------ ------ Total income tax expense $2,182 $3,078 $1,339 ====== ====== ====== The Company paid income taxes of $592, $2,839 and $2,446 in 1998, 1997 and 1996, respectively. The Company had a current income tax liability of $2,181 and $609 at December 31, 1998 and 1997, respectively. F-15 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: 1998 1997 1996 ------ ------ ------ Statutory federal income tax rate 35.0% 35.0% 35.0% Other -- .1 .5 ------ ------ ------ Effective income tax rate 35.0% 35.1% 35.5% ====== ====== ====== 7. STATUTORY FINANCIAL INFORMATION PERMITTED STATUTORY ACCOUNTING PRACTICES The Company prepares its statutory financial statements in accordance with accounting principles and 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's codification initiative has produced a comprehensive guide of revised statutory accounting principles. While the NAIC has approved a January 1, 2001 implementation date for the newly developed guidance, companies must adhere to the implementation date adopted by their state of domicile. The Company's state of domicile, Arizona, is continuing its comparison of codification and current statutory accounting requirements to determine necessary revisions to existing state laws and regulations. The requirements are not expected to have a material impact on the statutory surplus of the Company. 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 1999 without prior approval of the Arizona Department of Insurance is $4,698. F-16 8. 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:
1998 1997 1996 ----------------------------- ---------------------------- ----------------------------- After- After- After- Pretax Tax tax Pretax Tax tax Pretax Tax tax ------ --- --- ------ --- --- ------ --- --- Unrealized capital gains and losses: - -------------------------- Unrealized holding gains (losses) arising during the period $ 2,019 $ (707) $ 1,312 $ 4,034 $(1,412) $ 2,622 $ (871) $ 304 $ (567) Less: reclassification adjustment for realized net capital gains included in net income (5) 2 (3) 3,453 (1,209) 2,244 -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- Unrealized net capital gains (losses) $ 2,024 $ (709) $ 1,315 $ 581 $ (203) $ 378 $ (871) $ 304 $ (567) ------- ------- ------- ------- ------- ------- ------- ------- ------- Other comprehensive income $ 2,024 $ (709) $ 1,315 $ 581 $ (203) $ 378 $ (871) $ 304 $ (567) ======= ======= ======= ======= ======= ======= ======= ======= =======
9. 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. From time to time the Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, arising from such pending or threatened litigation is not expected to have a material effect on the results of operations, liquidity or financial position of the Company. F-17 GLENBROOK LIFE AND ANNUITY COMPANY SCHEDULE IV--REINSURANCE ($ IN THOUSANDS) GROSS NET YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT --------- --------- ------- Life insurance in force $ 12,056 $ 12,056 $ -- ========= ========= ======= Premiums and contract charges: Life and annuities $ 19,009 $ 19,009 $ -- ========= ========= ======= GROSS NET YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED AMOUNT --------- --------- ------- Life insurance in force $ 4,095 $ 4,095 $ -- ========= ========= ======= Premiums and contract charges: Life and annuities $ 11,641 $ 11,641 $ -- ========= ========= ======= GROSS NET YEAR ENDED DECEMBER 31, 1996 AMOUNT CEDED AMOUNT --------- --------- ------- Life insurance in force $ 2,436 $ 2,436 $ -- ========= ========= ======= Premiums and contract charges: Life and annuities $ 4,254 $ 4,254 $ -- ========= ========= ======= 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/ LOUIS G. LOWER, II ---------------------- Louis G. Lower, II Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date March 3, 1999 -------------------- 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/ LOUIS G. LOWER, II ---------------------- Louis G. Lower, II Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date March 3, 1999 --------------------- By /s/ PETER H. HECKMAN --------------------- Peter H. Heckman President, Chief Operating Officer and Director Date March 4, 1999 --------------------- By /s/ MICHAEL J. VELOTTA ---------------------- Michael J. Velotta Vice President, Secretary, General Counsel and Director Date March 4, 1999 --------------------- By /s/ KEVIN R. SLAWIN --------------------- Kevin R. Slawin Vice President and Director Date March 1, 1999 --------------------- By /s/ KEITH A. HAUSCHILDT ----------------------- Keith A. Hauschildt Assistant Vice President and Controller (Chief Accounting Officer) Date March 4, 1999 --------------------- By /s/ SARAH R. DONAHUE -------------------- Sarah R. Donahue Assistant Vice President and Director Date March 8, 1999 ----------------- 16 By /s/ BRENT H. HAMANN ------------------- Brent H. Hamann Vice President and Director Date March 5, 1999 ----------------- By /s/ JOHN R. HUNTER ------------------ John R. Hunter Assistant Vice President and Director Date March 4, 1999 ----------------- By /s/ TIMOTHY N. VANDER PAS ------------------------- Timothy N. Vander Pas Assistant Vice President and Director Date March 3, 1999 ----------------- By /s/ G. CRAIG WHITEHEAD ---------------------- G. Craig Whitehead Assistant Vice President and Director Date March 4, 1999 ----------------- By /s/ THOMAS J. WILSON, II ------------------------ Thomas J. Wilson, II Vice Chairman and Director Date March 5, 1999 ----------------- 17 EXHIBIT INDEX The Glenbrook Life and Annuity Company Form 10-K for the year ended December 31, 1998 Exhibit No. Description 3(i) Amended and Restated Articles of Incorporation and Articles of Redomestication of Glenbrook Life and Annuity Insurance Company (filed herewith) 3(ii) Amended and Restated By-laws of Glenbrook Life and Annuity Company (filed herewith) 27 Financial Data Schedule (filed herewith) E-1 EX-3.(I) 2 ARTICLES OF INCORPORATION AMENDED AND RESTATED ARTICLES OF INCORPORATION AND ARTICLES OF REDOMESTICATION OF GLENBROOK LIFE AND ANNUITY INSURANCE COMPANY We, the undersigned, acting as incorporators for the purpose of redomesticating Glenbrook Life and Annuity Company, an Illinois corporation, which intends to continue its existence, without interruption, as a corporation organized under the laws of the State of Arizona pursuant to Arizona Revised Statutes ss. 20-231.A, do hereby adopt the following Amended and Restated Articles of Incorporation and Articles of Redomestication for said corporation. ARTICLE I The name of the corporation shall be Glenbrook Life and Annuity Company ARTICLE II The corporation was incorporated in the State of Indiana on August 25, 1965, and subsequently reorganized under the laws of the State of Illinois on April 17, 1992. ARTICLE III The existence of the corporation shall be perpetual. ARTICLE IV Upon the approval of these Amended and Restated Articles of Incorporation and Articles of Redomestication by the necessary regulatory authorities, Glenbrook Life and Annuity Company shall be and continue to be possessed of all privileges, franchises and powers to the same extent as if it had been originally incorporated under the laws of the State of Arizona; and all privileges, franchises and powers belonging to said corporation, and all property, real, personal and mixed, and all debts due on whatever account, all Certificates of Authority, agent appointments, and all chooses in action, shall be and the same are hereby ratified, approved, confirmed and assured to Glenbrook Life and Annuity Company with like effect and to all intents and purposes as if it had been originally incorporated under the laws of the State of Arizona. Said corporation shall be given recognition as a domestic corporation of the State of Arizona from and after August 25, 1965, and as a domestic insurer of the State of Arizona from and after August 25, 1965, the dates of its initial incorporation and authorization to transact insurance business under the laws of the State of Indiana, effective the date of filing with the Arizona Corporation Commission. ARTICLE V The nature of the business to be transacted and the objects and purposes for which this corporation is organized include the transaction of any and all lawful business for which insurance corporations may be incorporated under the laws of the State of Arizona without limitation, and as said laws may be amended from time to time, and specifically said corporation shall be authorized to transact disability insurance, life insurance, annuities, variable life insurance and variable annuities as defined pursuant to A.R.S. ss.ss. 20-253, 20-254, 20-254.01, 20-2601 and 20-2632 respectively, together with such other kinds of insurance as the corporation may from time to time be authorized to transact, and to act as a reinsurer of business for which it is duly authorized consistent with the applicable federal and state requirements. ARTICLE VI The authorized capital of the corporation shall be $2,100,000, and shall consist of 4,200 shares of voting common stock with a par value of $500.00 per share. No holders of stock of the corporation shall have any preferential right to subscription to any shares securities convertible into shares of stock of the corporation, nor any right of subscription to any thereof other than such, if any, as the Board of Directors in its discretion may determine, and at such price as the Board of Directors in its discretion may fix; and any shares or convertible securities which the Board of Directors may determine to offer for subscription to the holders of stock at the time existing. Nothing herein contained shall be construed as prohibiting the corporation from issuing any shares of authorized but unissued common stock for such consideration as the Board of Directors may determine, provided such issuance is approved by the shareholders of the corporation by a majority of the votes entitled to be cast at any annual or special meeting of shareholders called for that purpose. No such authorized but unissued stock may, however, be issued to the shareholders of the corporation by way of a stock dividend, split-up or in any other manner of distribution unless the same ratable stock dividend, stock split-up or other distribution be declared or made in voting common stock to the holder of such voting common stock at the time outstanding. Each holder of common stock shall be entitled to participate share for share in any cash dividends which may be declared from time to time on the common stock of the corporation by the Board of Directors and to receive pro rata the net assets of the corporation on liquidation. ARTICLE VII The affairs of the corporation shall be conducted by a Board of Directors consisting of not less than five (5) nor more than fifteen (15) directors as fixed by the bylaws, and such officers as said directors may at any time elect or appoint. No officer or director need be a shareholder of this corporation. Ten (10) directors shall constitute the initial Board of Directors. The names and addresses of the persons who are to serve as directors until the next annual meeting of shareholders or until their successors are elected and qualified, and of the persons who are to serve as officers until the next annual meeting of the directors or until their successors are elected and qualify, are: Board of Directors Louis Gordon Lower, II., Chairman Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Peter Hall Heckman Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Michael Joseph Velotta Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 George Craig Whitehead Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 John Roger Hunter Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Brent Herman Hamann Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Sarah Romans Donahue Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Kevin Rourke Slawin Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Timothy Nicholas Vander Pas Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Thomas Joseph Wilson, II. Allstate Plaza North 2775 Sanders Road Northbrook, Illinois 60062-7154 Officers Louis Gordon Lower, II, Chief Executive Officer Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Pete Hall Heckman - President and Chief Operating Officer Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Michael Joseph Velotta - Vice President, Secretary and General Counsel Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 James Philip Zils - Treasurer Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Marla Gay Friedman - Vice President Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Kevin Rourke Slawin - Vice President Allstate Plaza West 3100 Sanders Road Northbrook, Illinois 60062-7154 Casey Joseph Sylla - Chief Investment Officer Allstate Plaza North 2775 Sanders Road Northbrook, Illinois 60062-7154 The directors shall have the power to adopt, amend, alter and repeal the Bylaws, to manage the corporate affairs and make all rules and regulations expedient for the management of the affairs of the corporation, to remove any officer and to fill all vacancies occurring in the Board of Directors and offices for any cause, and to appoint from their own number an executive committee and other committees and vest said committees with all the powers permitted by the Bylaws. ARTICLE VIII The Corporation may indemnify any person as permitted by the laws of the State of Arizona, and as further specified in its Bylaws, including the power to purchase and maintain insurance to indemnify the corporation for any obligation which it may incur as a result of such indemnification. ARTICLE IX All directors of the corporation shall be elected at the annual meeting of the shareholders, which shall be held on the third Tuesday of February of each year or such other date and time as may be determined by the Board of Directors, unless such day falls on a holiday, in which event the regular annual meeting shall be held on the next succeeding business day. ARTICLE X The registered office of business of the corporation shall be located in the City of Phoenix, Maricopa County, Arizona, but it may have other places of business and transact business, and its Board of Directors or shareholders may meet for the transaction of business, at such other place or places within or without the State of Arizona which its Board of Directors may designate. ARTICLE XI The fiscal year of the corporation shall be the calendar year. ARTICLE XII In no event shall the corporation incur indebtedness in excess of the amount authorized by law. ARTICLE XIII The shares of the corporation, when issued, shall be non-assessable, except to the extent required by the Constitution, specifically, but not in limitation thereof, as provided by Article XIV, Section 11 of the Constitution of the State of Arizona and the laws of the State of Arizona. ARTICLE XIV The private property of the shareholders, directors and officers of the corporation shall be forever exempt from debts and obligations of the corporation. ARTICLE XV The Bylaws of the corporation may be repealed, altered amended, or substitute Bylaws may be adopted, by the directors or the shareholders, in accordance with the provisions contained in said Bylaws. ARTICLE XVI J. Michael Low of 2999 North 44th Street, Suite 250, Phoenix, Arizona, 85018, having been a bona fide resident of Arizona for at least three (3) years, is hereby appointed the statutory agent of this corporation in the State of Arizona, upon whom notices and processes, including service of summons, may be served, and which, when so served shall have lawful personal service on the corporation. The Board of Directors may revoke this appointment at any time, and shall fill the vacancy in such position whenever one exists. ARTICLE XVII The names and addresses of the incorporators of the corporation are: J. Michael Low Low & Childers, P.C. 2999 North 44th Street, Suite 250 Phoenix, Arizona 85018 S. David Childers Low & Childers, P.C. 2999 North 44th Street, Suite 250 Phoenix, Arizona 85018 Steven R. Henry Low & Childers, P.C. 2999 North 44th Street, Suite 250 Phoenix, Arizona 85018 Kathleen T. Newcomb Low & Childers, P.C. 2999 North 44th Street, Suite 250 Phoenix, Arizona 85018 Charles R. Bassett Low & Childers, P.C. 2999 North 44th Street, Suite 250 Phoenix, Arizona 85018 All individual incorporators are eighteen (18) years of age or older. All powers, duties and responsibilities of the incorporators shall cease at the time of delivery of these Amended and Restated Articles of Incorporation and Articles of Redomestication to the Arizona Corporation Commission for filing. IN WITNESS WHEREOF, we hereunto affix our signatures as of the ____ day of , --------------------------- 199 . ---- - ---------------------------- ----------------------------- J. Michael Low S. David Childers - ---------------------------- ----------------------------- Steven R. Henry Kathleen T. Newcomb - ---------------------------- Charles R. Bassett Subscribed, sworn to and acknowledged before me this _______ day of , 199 . ------------------------- Notary Public My Commission Expires: - ------------------------- APPOINTMENT OF STATUTORY AGENT I, J. Michael Low, being a resident of the State of Arizona for at least three (3) years preceding this appointment, do hereby accept appointment as Statutory Agent for Glenbrook Life and Annuity Company in accordance with the Arizona Revised Statutes until appointment of a successor Statutory Agent and removal. DATED, this ____ day of , 199 . ---------------------- ------- ------------------------------ J. Michael Low, Esq. Low & Childers, P.C. APPOINTMENT OF STATUTORY AGENT I, J. Michael Low, being a resident of the State of Arizona for at least three (3) years preceding this appointment, do hereby accept appointment as Statutory Agent for Glenbrook Life and Annuity Company in accordance with the Arizona Revised Statutes until appointment of a successor Statutory Agent and removal. DATED, this ____ day of , 199 . --------------------------- ------- ------------------------------ J. Michael Low, Esq. Low & Childers, P.C. EX-3.(II) 3 BY-LAWS AMENDED AND RESTATED BYLAWS OF GLENBROOK LIFE AND ANNUITY COMPANY ARTICLE I Meetings of Stockholders Section 1. Annual Meeting. The annual meeting of the stockholders of the corporation shall be held at the principal office of the corporation, or at such other place as shall be set forth in the notice of meeting, on the third Tuesday in February, or on such other date as the Board of Directors or the Chief Executive Officer and/or President may determine, for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting. Section 2. Notice of Annual Meeting. Notice of the time and place of holding such annual meeting shall be given by the Secretary by mailing a copy thereof to each stockholder entitled to vote thereat at his address as it appears on the books of the corporation, or by delivering it to him in person, not less than ten days nor more than sixty days before such meeting. The officer or agent having charge of the stock transfer books for shares of the corporation shall make a complete record of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. Such record shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting for the purposes thereof. Section 3. Special Meetings. Special meetings of the stockholders, to be held at the principal office of the corporation or elsewhere, shall be called by the Chief Executive Officer and/or President, and must be called by him, or in his absence by the Vice President, on receipt of a written request from the holders of a majority of the outstanding stock of the corporation or from a majority of the directors of the corporation. Section 4. Notice of Special Meetings. Notice of the time, place, and purpose of each special meeting shall be given by the Secretary by mailing a copy thereof to each stockholder entitled to vote thereat at his address as it appears on the books of the corporation, or by delivering it to him in person, at least ten days and not more than sixty days prior to the date of such meeting. Section 5. Waiver of Notice of Meeting. Notice of any meeting of stockholders, annual or special, shall not be required to be given to any stockholder entitled to vote thereat who shall attend such meeting in person or by proxy, or who shall before or after such meeting, in person or by proxy thereunto authorized, waive notice of such meeting in writing or by telegraph or cable. Section 6. Quorum; Adjournments of Meetings. At all meetings of the stockholders, except as otherwise provided by law, the holders of a majority of the outstanding stock of the corporation, present in person or by proxy and entitled to vote thereat, shall constitute a quorum for the transaction of business, unless the representation of a larger number shall be required by law, in which event such number shall constitute a quorum. In the absence of a quorum, a majority in interest of the stockholders so present or represented may adjourn the meeting from time to time until a quorum is obtained. No notice shall be necessary for any such adjourned meeting except the statement at the meeting which is adjourned. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 7. Organization. Except where otherwise provided by statute, the Chief Executive Officer and/or President of the corporation, shall call meetings of the stockholders and shall act as chairman of such meetings. In the absence of the Chief Executive Officer and/or President and Vice President, a chairman shall be chosen by the stockholders present. The Secretary of the corporation shall act as secretary at all meetings of the stockholders, but in the absence of the Secretary the presiding officer may appoint any person to act as secretary of the meeting. Section 8. Voting. At each meeting of the stockholders, every stockholder entitled to vote thereat shall be entitled to vote in person or by proxy appointed by an instrument in writing, subscribed by such stockholder or his duly authorized attorney, and delivered to the secretary of the meeting, and he shall have one vote for each share of the voting stock outstanding in his name, except that the cumulative system of voting as required by the laws of Arizona shall govern the election of directors. Upon demand of any stockholder, the votes for directors or upon any question before the meeting shall be by ballot. Section 9. Consents. Whenever the vote of stockholders is required or permitted to be taken at a meeting thereof in connection with any corporate action, the meeting and the vote of stockholders may be dispensed with if all the stockholders who would have been entitled to vote upon the actions, if such meeting were held, shall consent in writing to such corporate actions being taken. ARTICLE II Board of Directors Section 1. Number, Qualifications, Election, and Term of Office. The number of directors shall be not less than five (5) no more than fifteen (15) which number may be altered from time to time as provided by the Arizona General Corporation Law, Title 10, Chapter 8, Section 10-803, et seq. No director need be a holder of capital stock of the corporation. The directors shall be elected annually, and each shall continue in office until the next annual meeting held after his election and until his successor shall have been elected and qualified, except that a director may be removed with or without cause, and his successor elected and qualified, in advance of an annual meeting, at a special meeting of stockholders called for that purpose, by vote of a majority of the outstanding stock of the corporation. A director whose removal is thus proposed shall be given written notice of the meeting not less than seven days prior thereto. Section 2. Vacancies and Resignation. In case of any vacancy in the Board of Directors through death, resignation, disqualification, increase in number, or other cause, the remaining director or directors, although less than a quorum, by affirmative vote of a majority thereof may elect a successor or successors to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election and qualification of his successor or successors. Any director of the corporation may resign by giving written notice to the Chief Executive Officer and/or President or Secretary, which resignation shall be effective on the date specified in the notice, or, if no date is specified, upon its acceptance by the Board of Directors. Section 3. Powers and Duties. The Board of Directors shall have general power to manage and control the business and property of the corporation. Section 4. Place of Meeting. The Board of Directors may hold its meetings at such place or places within or without the State of Arizona as the Board may from time to time determine. Section 5. Annual Meeting. After each annual meeting of stockholders for the election of directors, the newly elected Board of Directors shall meet for the purpose of organization and the transaction of such other business as may properly come before the meeting. Such an annual meeting shall be held at the place where the annual meeting of stockholders was held at which they were elected, or at such other place as the new Board shall determine. Notice of such annual meeting need not be given. Section 6. Regular Meetings: Notice. Regular meetings of the Board of Directors may be held at such time and place as may be determined by the Board, and thereupon no notice of such regular meetings need be given. Section 7. Special Meetings: Notice. Special meetings of the Board of Directors shall be held at any time and place upon the call of the Chief Executive Officer and/or President, or any two (2) Directors. Notice of the time, place, and purpose of every special meeting of the Board shall be given to each director by the Chief Executive Officer and/or President or Secretary either by mail, personally, telegram or telephone at least two day's before the meeting. Section 8. Waiver of Notice of Meeting. Notice of any special meeting of the Board of Directors need not be given to any director who shall attend such meeting in person or shall participate in such meeting by telephone, or who shall before or after such meeting waive notice in writing, by telegraph or by cable. Section 9. Quorum. A majority of the directors in office present in person or by participation by telephone shall constitute a quorum for the transaction of business, but if at any meeting of the Board there shall be less than such quorum, the directors present may adjourn the meeting from time to time until a quorum is obtained. No notice shall be necessary for any such adjourned meeting except the statement at the meeting which is adjourned. Section 10. Organization. Every meeting of the Board of Directors shall be presided over by the Chairman of the Board, or in his absence the Chief Executive Officer and/or President. In the absence of the Chairman and the Chief Executive Officer and/or President, a presiding officer shall be chosen by the directors present. The Secretary of the corporation shall act as secretary of the meeting, but in his absence the presiding officer may appoint any person to act as secretary of the meeting. Section 11. Consents. Whenever the vote of directors is required or permitted to be taken at a meeting thereof in connection with any corporate action, the meeting and the vote of directors may be dispensed with if all the directors shall consent in writing to such corporate actions being taken. Section 12. Action Without Meeting. Unless otherwise restricted by the articles of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 13. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending such meetings. The amount or rate of such compensation of members of the Board of Directors or of committees shall be established by the Board of Directors and shall be set forth in the minutes of the Board. Section 14. Distributions From Capital Surplus. The Board of Directors of the corporation may, from time to time, distribute on a pro rata basis to its stockholders out of the capital surplus of the corporation a portion of its assets, in cash or property. Section 15. Repurchase of Shares. The Board of Directors of the corporation may from time to time cause the corporation to purchase its own shares to the extent of the unreserved and unrestricted earned and capital surplus of the corporation. Section 16. Chairman of the Board. If the Board of Directors appoints a Chairman of the Board, he shall, notwithstanding any other provision in these bylaws to the contrary, preside at all meetings of stockholders and the Board of Directors. He shall have such powers and perform such other duties as may be prescribed by the Board of Directors. ARTICLE III Officers Section 1. Number. The officers of the corporation shall be Chief Executive Officer and/or President, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers as may be appointed from time to time by the Board of Directors. One person may hold more than one office in the corporation. Section 2. Election, Qualification and Term of Office. The officers of the corporation shall be chosen annually at the first meeting of the newly elected Board of Directors held immediately following the annual meeting of stockholders. Section 3. Other Officers and Agents. The Board of Directors may appoint from time to time such other officers or agents as it shall deem necessary, each of whom shall hold office during the pleasure of the Board and have such authority and perform such duties as the Board of Directors may from time to time determine. Section 4. Removal and Resignation. Any officer, agent or employee of the corporation may be removed, with or without cause, by the Board of Directors, and may resign by giving written notice to the Chief Executive Officer and/or President or Secretary, which resignation shall be effective on the date specified in the notice, or, if no date is specified, upon its acceptance by the Board of Directors. Section 5. Chief Executive Officer and/or President: Powers and Duties. The Chief Executive Officer and/or President shall, subject to the control of the Board of Directors, have general charge of the business of the corporation. He shall keep the Board of Directors fully informed, shall freely consult with them concerning the business of the corporation, and shall perform such other duties as may be assigned to him by the Board of Directors. They may sign, in the name of the corporation, all authorized contracts, documents, checks, and bonds, or other obligations. Section 6. Vice President: Powers and Duties. In the absence of the Chief Executive Officer and/or President, the Vice President (and if there be more than one, then the First Vice President, and in his absence then the Second Vice President, and so on) shall assume and exercise all the powers of the Chief Executive Officer and/or President. The Vice President or Vice Presidents shall perform such other duties and have such other powers as the Board of Directors may prescribe. Section 7. Secretary: Powers and Duties. The Secretary shall keep the minutes of all meetings in the books proper for that purpose. He shall attend to the giving and serving of all notices of the corporation. He may sign, if authorized by the Board of Directors, in the name of the corporation all authorized contracts, documents, checks, bonds, or other obligations, and he shall affix the seal of the corporation thereto. He shall have charge of the certificate books, stock books, and such other books and papers as the Board of Directors may direct. He shall make all such corporate records available for inspection as required by law. Section 8. Assistant Secretary. The Board of Directors may appoint one or more Assistant Secretaries who shall have such powers and perform such duties as may be prescribed by the Board of Directors. Section 9. Treasurer: Powers and Duties. The Treasurer shall have the custody of all of the funds and securities of the corporation. He shall endorse on behalf of the corporation, for collection, checks, notes, and other obligations, and shall deposit the same to the credit of the corporation in such bank or banks as the Board of Directors may designate. He shall sign all receipts and vouchers for payments made to the corporation. He may sign in the name of the corporation, if authorized by the Board of Directors, all authorized contract, documents, checks, bonds, and other obligations. He shall keep books of account of the financial business and affairs of the corporation, and shall render a statement of his accounts and records to the Board of Directors or to the stockholders at a meeting thereof whenever so required. He shall exhibit all accounts and records to any director upon reasonable request. He shall make all such records available for inspection as required by law. Section 10. Assistant Treasurer. The Board of Directors may appoint one or more Assistant Treasurers who shall have such powers and perform such duties as may be prescribed by the Board of Directors. ARTICLE IV Contracts, Checks, Drafts, Bank Accounts, Etc. Section 1. Contracts. Any contract or instrument necessary for the business of the corporation may be signed by the Chief Executive Officer and/or President or by any other officers thereunto authorized by the Board of Directors, or any of the Board Members, and attested by the Secretary, who may affix thereto the seal of the corporation. Section 2. Bank Accounts. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select, or as may be selected by any officer or officers, agent or agents, of the corporation to whom such power may from time to time be delegated by the Board of Directors. Section 3. Checks, Drafts, Etc. All checks, drafts, or orders for the payment of money, and all notes and other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, or person or persons, as shall from time to time be authorized so to do by resolution of the Board of Directors. ARTICLE V Shares and Their Transfer: Dividends Section 1. Certificates of Stock. Certificates for the shares of the respective classes of capital stock of the corporation shall be numbered in the order of their issue, and shall be signed by the Chief Executive Officer and/or President or the Vice President and by the Secretary or Treasurer, and the seal of the corporation shall be thereunto affixed. Section 2. Transfer of Stock. Transfers of the shares of the capital stock of the corporation shall be made on the books of the corporation only by the holder thereof or by his attorney thereunto authorized by a power of attorney duly executed by the stockholder and filed with the Secretary of the corporation, and on surrender of the certificate or certificates for such shares. Every certificate surrendered to the corporation shall be marked "Cancelled", and no new certificate shall be issued in exchange therefor until the old certificate has been surrendered and cancelled. A person in whose name shares of stock stand on the books of the corporation shall be deemed the sole owner thereof as regards the corporation. The Board of Directors may, by resolution, close the share transfer books of the corporation for a period not exceeding ten (10) days before the holding of any annual or special meeting of the shareholders. The Board of Directors may, by resolution, also close the transfer books of the corporation for a period not exceeding ten (10) days before payment of any dividends which may be declared upon the shares of the corporation. Section 3. Lost, Destroyed and Mutilated Certificates. The holder of any stock of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate thereof, and the Board of Directors may in its discretion cause a new certificate or certificates to be issued to him upon the surrender of the mutilated certificates or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction, and, if the Board shall so require, upon the delivery to the corporation of a bond in such form and amount and with such surety or sureties as the Board may require. Section 4. Dividends. The Board of Directors shall have the power to authorize dividends to the maximum and fullest extent permitted by Title 10, Chapter 6, Article 4, Section 10-640, et seq. of the Arizona Revised Statues ARTICLE VI Indemnification Subject to the further provisions hereof, the corporation shall indemnify any and all of its existing and former directors, officers, employees, and agents to the fullest extent permissible pursuant to Title 10, Chapter 8, Article 5, Section 10-850, et seq. ARTICLE VII Seal The corporate seal of the corporation shall be circular in form with the name of the corporation and the state and year of incorporation appearing therein. ARTICLE VIII Amendments The stockholders or the Board of Directors may amend or change the bylaws of the corporation at any annual, regular or special meeting when the notice or waiver of notice of the meeting contains the amendments or changes proposed. ARTICLE IX Committees Section 1. Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate an executive committee and one (1) or more other committees, each consisting of one or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. A committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) authorize distributions; (b) approve or submit to shareholders any action that requires the shareholders' approval under this chapter; (c) fill vacancies on the board of directors or on any of its committees; (d) amend articles of incorporation pursuant to section 10-002; (e) adopt, amend or repeal bylaws; (f) approval a plan of merger not requiring shareholder approval; (g) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the board of directors; (h) authorize or approve the issuance, sale or contract for sale of shares or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the board of directors may authorize a committee or an executive officer of the corporation to do so within limits specifically prescribed by the board of directors; (i) fix the compensation of directors for serving on the board or any committee of the board of directors. The Board of Directors, with or without cause, may dissolve any such committee or remove any member thereof at any time. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed by laws. Section 2. Meetings and Action of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article II of these bylaws, Section 4 (place of meetings), Section 6 (regular meetings and notice), Section 7 (special meetings and notice), Section 8 (waiver of notice of meeting), Section 9 (quorum), and Section 12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE X Miscellaneous Section 1. (a) As used in this Article: (i) "acted properly" as to any employee shall mean that such person (A) acted in good faith; (B) acted in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation; and (C) with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, itself, create a presumption that the person did not act properly. (ii) "covered person" shall mean an Indemnitee (as defined below) or an Employee Indemnitee (as defined below). (iii)"Employee Indemnitee" shall mean any non-officer employee of the corporation (but not subsidiaries of the corporation). (iv) "expenses" shall include attorneys' fees and expenses and any attorneys' fees and expenses of establishing a right to indemnification under this Section. (v) "Indemnitee" shall mean any person who is or was: (A) a director or officer of the Corporation and/or any subsidiary; (B) a trustee or a fiduciary under any employee pension, profit sharing, welfare or similar plan or trust of the Corporation and/or any subsidiary; or (C) serving at the request of the Corporation as a director or officer of or in a similar capacity in another corporation, partnership, joint venture, trust or other enterprise, (which shall, for the purpose of this Section be deemed to include not-for-profit or for-profit entities of any type), whether acting in such capacity or in any other capacity including, without limitation, as a trustee or fiduciary under any employee pension, profit sharing, welfare or similar plan of trust. (vi) "proceeding" shall mean any threatened, pending or completed action or proceeding, whether civil or criminal, and whether judicial, legislative or administrative and shall include investigative action by any person or body. (vii)"subsidiary" shall mean a corporation, 50% or more of the shares of which at the time outstanding having voting power for the election of directors are owned directly or indirectly by the Company or by one or more subsidiaries or by the Company and one or more subsidiaries. (b) The Corporation shall indemnify any Indemnitee to the fullest extent permitted under law (as the same now or thereafter exists), who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was an Indemnitee against liabilities, expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her. (c) The Corporation shall indemnify any Employee Indemnitee who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was an employee against liabilities, expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such proceeding if such person acted properly. (d) The Company shall indemnify any Employee Indemnitee who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was an employee against amounts paid in settlement and against expenses actually and reasonably incurred by him or her in connection with the defense or settlement of such proceeding if he or she acted properly, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication or liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which such court shall deem proper. (e) Expense incurred in defending a proceeding shall be paid by the Corporation to or on behalf of a covered person in advance of the final disposition of such proceeding if the Corporation shall have received an undertaking by or on behalf of such person to repay such amounts unless it shall ultimately be determined that he or she is entitled to be indemnified by the Corporation as authorized in this Section. (f) Any indemnification or advance under this Section (unless ordered by a court) shall be made by the Company only as authorized in the specific proceeding upon a determination that indemnification or advancement to a covered person is proper in the circumstances. Such determination shall be made: (i) by the Board of Directors, by a majority vote of a quorum consisting of directors who were not made parties to such proceedings, or (ii) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii)in the absence of a determination made under (i) or (ii), by the stockholders. (g) The Corporation shall indemnify or advance funds to any Indemnitee described in Section (a)(v)(C), only after such person shall have sought indemnification or an advance from the corporation, partnership, joint venture, trust or other enterprise in which he or she was serving at the Company's request, shall have failed to receive such indemnification or advance and shall have assigned irrevocably to the Corporation any right to receive indemnification which he or she might be entitled to assert against such other corporation, partnership, joint venture, trust or other enterprise. (h) The indemnification provided to a covered person by this Section: (i) shall not be deemed exclusive of any other rights to which such person may be entitled by law or under any articles of incorporation, bylaw agreement, vote of shareholders or disinterested directors or otherwise; (ii) shall inure to the benefit of the legal representatives of such person or his or her estate, whether such representatives are court appointed or otherwise designated, and to the benefit of the heirs of such person; and (iii)shall be contract right between the Corporation and each such person who serves in any such capacity at any time while this Section 1 of Article VII is in effect, and any repeal or modification of this Section shall not affect any rights or obligations then existing with respect to any state of facts or any proceedings then existing. (i) The indemnifications and advances provided to a covered person by this Section shall extend to and include claims for such payments arising out of any proceeding commenced or based on actions of such person taken prior to the effective date of this Section; provided that payment of such claims had not been agreed to or denied by the Corporation at the effective date. (j) The Corporation shall have power to purchase and maintain insurance on behalf of any covered person against any liability asserted against him or her and incurred by him or her as a covered person or arising out of his or her status of such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Section. The Corporation shall also have power to purchase and maintain insurance to indemnify the Corporation for any obligation which it may incur as a result of the indemnification of covered persons under the provisions of this Section. (k) The invalidity or unenforceability of any provision in this Section shall not affect the validity or enforceability of the remaining provisions of this Section. Section 2. The Fiscal year of the Corporation shall begin in each year on the first day of January, and end on the thirty-first day of the December following. Section 3. The common seal of the Corporation shall be circular in form and shall contain the name of the Company and the words: "CORPORATE SEAL" and "ARIZONA". Section 4. These Bylaws may be amended or repealed by the vote of a majority of the Directors present at any meeting at which a quorum is present. CERTIFICATION OF BYLAWS I, Michael J. Velotta, the duly elected and acting Secretary of Glenbrook Life and Annuity Company, an Arizona corporation, hereby certify that annexed hereto are true, correct, complete and current copies of the duly adopted Bylaws of the Corporation. IN WITNESS WHEREOF, I have executed this Certification this ____ day of January, 1999. --------------------------------- Michael J. Velotta, Secretary EX-27 4 FDS GLENBROOK LIFE & ANNUITY COMPANY
7 THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS OF FINANCIAL POSITION AT DECEMBER 31, 1998; STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998; STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998; AND STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998. 0000945094 GLENBROOK LIFE AND ANNUITY COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 94,313 0 0 0 0 0 98,976 0 3,113,278 0 4,208,466 0 0 0 3,113,278 0 0 0 2,100 91,203 4,208,466 0 6,231 (5) 0 0 0 0 6,226 2,182 4,044 0 0 0 4,044 0 0 0 0 0 0 0 0 0
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