As filed with the Securities and Exchange Commission on April 30, 1999.
-----------------------------------------------------------------------
File No. 333-25057
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 2
TO THE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
(Exact Name of Trust)
NORTHBROOK LIFE INSURANCE COMPANY
(Name of Depositor)
3100 SANDERS ROAD
NORTHBROOK, IL 60062
(COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL J. VELOTTA, ESQ.
NORTHBROOK LIFE INSURANCE COMPANY
3100 SANDERS ROAD
NORTHBROOK, IL 60062
(NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
RICHARD T. CHOI, ESQUIRE CHRISTINE A. EDWARDS, ESQ.
FREEDMAN, LEVY, KROLL & SIMONDS DEAN WITTER REYNOLDS INC.
1050 CONNECTICUT AVENUE, N.W. TWO WORLD TRADE CENTER
SUITE 825 74th FLOOR
WASHINGTON, D.C. 20036-5366 NEW YORK, NEW YORK, 10048
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX)
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/x/ on May 1, 1999 pursuant to paragraph (b) of Rule 485
/ / days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on (date) pursuant to paragraph (a)(i) of Rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ /This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Securities being offered - interests in Northbrook Life Variable Life Separate
Account A of Northbrook Life Insurance Company under modified single premium
variable life insurance contracts.
Approximate date of proposed public offering: continuous.
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE LIFE
Northbrook Life Insurance Company Prospectus Dated May 1, 1999
3100 Sanders Road
Northbrook, Illinois 60062
Telephone Number: (800) 654-2397
This prospectus describes the "Morgan Stanley Dean Witter Variable Life," a
modified single premium variable life insurance contract ("Contract") offered
by Northbrook Life Insurance Company ("we", or the "Company") for prospective
insured persons age 0-85. The Contract lets you, as the Contract Owner, pay a
significant single premium and, subject to restrictions, additional premiums.
The Contracts are modified endowment contracts for federal income tax
purposes, except in certain cases described under "Federal Tax Matters," page
__. You will be taxed on any loan, distribution or other amount you receive
from a Modified Endowment Contract during the life of the Insured to the
extent of any accumulated income in the Contract. Any amounts that are taxable
withdrawals will be subject to a 10% penalty, with certain exceptions.
The minimum initial premium the Company will accept is $10,000. We allocate
premiums to Northbrook Life Variable Life Separate Account A ("Variable
Account"). The Variable Account invests exclusively in shares of the following
mutual funds ("Funds"):
Morgan Stanley Dean Witter Variable Investment Series
Morgan Stanley Dean Witter Universal Funds, Inc.
Van Kampen Life Investment Trust
The Funds have, in the aggregate, twenty-one different investment portfolios
(Portfolios) among which you can choose to allocate your premiums. Not all of
the Funds and/or Portfolios, however, may be available with your Contract. You
should check with your representative for further information on the
availability of Funds and/or Portfolios.
There is no guaranteed minimum Account Value for a Contract. The Account Value
of a Contract will vary up or down to reflect the investment experience of the
Portfolios to which you have allocated premiums. You will bear the investment
risk for all amounts so allocated. The Contract continues in effect so long as
Cash Surrender Value is sufficient to pay its monthly charges ("Monthly
Deduction Amount").
The Contracts provide for an Initial Death Benefit shown on the Contract Data
page. The death benefit ("Death Benefit") payable under a Contract may be
greater than the Initial Death Benefit. However, so long as the Contract
continues in effect and if no withdrawals or loans are made, the Death Benefit
will never be less than the Initial Death Benefit. The Account Value will, and
under certain circumstances the Death Benefit of the Contract may, increase or
decrease based on the investment experience of the Portfolios to which you
have allocated premiums. At the death of the Insured, we will pay a Death
Benefit to the beneficiary.
It may not be to your advantage to purchase Variable Life Insurance either as
a replacement for your current life insurance or if you already own a Variable
Life Insurance Contract.
The Securities and Exchange Commission has not approved or disapproved the
securities described in this Prospectus, nor has it passed upon the accuracy
or adequacy of this Prospectus. Anyone who tells you otherwise is committing a
federal crime.
Investment in the Contracts involves investment risks, including possible loss
of principal.
The Contracts are not FDIC insured.
<PAGE>
TABLE OF CONTENTS
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Page
Special Terms
Summary
The Company
The Variable Account
General
Funds
The Contract
Application for a Contract
Premiums
Allocation of Premiums
Accumulation Unit Values
Deductions and Charges
Monthly Deductions
Cost of Insurance Charge
Tax Expense Charge
Administrative Expense Charge
Other Deductions
Mortality and Expense Risk Charge
Annual Maintenance Fee
Taxes Charged Against the Variable Account
Charges Against the Funds
Withdrawal Charge
Confinement Waiver Benefit
Due and Unpaid Premium Tax Charge
Contract Benefits and Rights
Death Benefit
Accelerated Death Benefit
Account Value
Transfer of Account Value
Dollar Cost Averaging
Automatic Protfolio Rebalancing Program
Access to Your Money
Contract Loans
Amount Payable on Surrender of the Contract
Partial Withdrawals
Payment Options
Maturity
Lapse and Reinstatement
Cancellation and Exchange Rights
Suspension of Valuation, Payments and Transfers
Last Survivor Contracts
Other Matters
Voting Rights
Statements to Contract Owners
Limit on Right to Contest
Misstatement as to Age and Sex
Beneficiary
Assignment
Dividends
Distribution of the Contracts
Safekeeping of the Variable Account's Assets
Federal Tax Matters
Introduction
Taxation of the Company and the Variable Account
Taxation of Contract Benefits
Modified Endowment Contracts
Diversification Requirements
Ownership Treatment
Policy Loan Interest
Additional Information About the Company
Executive Officers and Directors of the Company
Year 2000
Legal Proceedings
Legal Matters
Registration Statement
Experts
Financial Information
Financial Statements
F-1
<PAGE>
SPECIAL TERMS
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As used in this prospectus, the following terms have the indicated meanings:
Account Value--The aggregate value under a Contract of the Variable
Sub-Accounts and the Loan Account.
Accumulated Income--The Account Value less premiums paid (assuming no loans
have been made.)
Accumulation Unit--An accounting unit of measure used to calculate the value
of a Variable Sub-Account.
Age--The Insured's age at the Insured's last birthday.
Cash Value--The Account Value less any (1) applicable withdrawal charges, and
(2) due and unpaid premium tax charges.
Cash Surrender Value--The Cash Value less all Indebtedness and the annual
maintenance fee, if applicable.
Code--The Internal Revenue Code of 1986, as amended.
Contract Anniversary--The same day and month as the Contract Date for each
subsequent year the Contract remains in force.
Contract Date--The date on or as of which coverage under a Contract becomes
effective and the date from which Contract Anniversaries, Contract Years and
Contract months are determined.
Contract Owner--The person having rights to benefits under the Contract during
the lifetime of the Insured; the Contract Owner may or may not be the Insured.
Contract Years--Annual periods computed from the Contract Date.
Death Benefit--The greater of (1) the Specified Amount or (2) the Account
Value on the date of death multiplied by the death benefit ratio as specified
in the Contract.
Free Withdrawal Amount--The amount of a surrender or partial withdrawal that
is not subject to a withdrawal charge. This amount in any Contract Year is 15%
of total premiums paid.
Initial Death Benefit--The Initial Death Benefit under a Contract is shown on
the Contract data page.
Fund--(1) The Morgan Stanley Dean Witter Variable Investment Series, (2)
Morgan Stanley Dean Witter Universal Funds, Inc., or (3) Van Kampen Life
Investment Trust.
Indebtedness--All Contract loans, if any, and accrued loan interest.
Insured--The person whose life is insured under a Contract.
Loan Account--An account in the Company's general account, established for any
amounts transferred from the Variable Sub-Accounts for requested loans. The
Loan Account credits a fixed rate of interest that is not based on the
investment experience of the Variable Account.
Monthly Activity Date--The day of each month on which the Monthly Deduction
Amount is deducted from the Account Value of the Contract. Monthly Activity
Dates occur on the same day of the month as the Contract Date. If there is no
date equal to the Monthly Activity Date in a particular month, the Monthly
Activity Date will be the last day of that month.
Monthly Deduction Amount--A deduction on each Monthly Activity Date for the
cost of insurance charge, a tax expense charge and an administrative expense
charge.
4
<PAGE>
Specified Amount--The minimum Death Benefit under a Contract, equal to the
Initial Death Benefit on the Contract Date. Thereafter it may change in
accordance with the terms of the partial withdrawal and the subsequent premium
provisions of the Contract.
Valuation Day--Every day the New York Stock Exchange is open for trading. The
value of the Variable Account is determined at the close of regular trading on
the New York Stock Exchange (currently 4:00 p.m. Eastern Time) on such days.
Valuation Period--The period between the close of regular trading on the New
York Stock Exchange on successive Valuation Days.
Variable Account--Northbrook Life Variable Life Separate Account A, an account
established by the Company to separate the assets funding the Contracts from
other assets of the Company.
Variable Sub-Account--The subdivisions of the Variable Account used to
allocate a Contract Owner's Account Value, less Indebtedness, among the
Portfolios of the Funds.
5
<PAGE>
SUMMARY
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THE CONTRACT
The Contracts are life insurance contracts with death benefits, cash values,
and other traditional life insurance features. The Contracts are "variable."
Unlike the fixed benefits of ordinary whole life insurance, the Account Value
will increase or decrease based on the investment experience of the investment
Portfolios of the Funds to which you have allocated premiums. Similarly, the
Death Benefit may increase or decrease under some circumstances. However, so
long as the Contract remains in effect, the Death Benefit it will not decrease
below the Initial Death Benefit if you make no withdrawals or loans. We credit
each Contract with units ("Accumulation Units") to calculate cash values. You
may transfer the Account Value among the Variable Account's underlying
investment Portfolios.
We can issue the Contracts on either a single life or a "last survivor" basis.
For a discussion of how last survivor Contracts operate differently from
single life Contracts, see "Access to Your Money--Last Survivor Contracts,"
page __.
In some states, the Contracts may be issued in the form of a group Contract.
In those states, we will issue a certificate evidencing a your rights under
the group Contract. The terms "Contract" and "Contract Owner", as used in this
Prospectus, refer to and include such a certificate and certificate owner,
respectively.
THE VARIABLE ACCOUNT AND THE FUNDS
The Variable Account funds the variable life insurance Contracts offered by
this prospectus. The Variable Account is a unit investment trust registered as
such with the Securities and Exchange Commission, or "SEC", under the
Investment Company Act of 1940 ("1940 Act"). It consists of multiple
sub-accounts ("Variable Sub-Accounts"), each investing in a corresponding
Portfolio of one of the Funds. The assets of each Portfolio are accounted for
separately from the other Portfolios.
Applicants should read the prospectuses for the Funds in connection with the
purchase of a Contract. We have briefly summarized the investment objectives
of the Portfolios below under "The Variable Account--Funds," page __.
PREMIUMS
The Contract requires the Contract Owner to pay an initial premium of at least
$10,000. You may make additional premium payments of at least $500 once in
each Contract year, subject to certain additional conditions (see "The
Contract--Premiums" at page __):
only one payment is allowed in any Contract Year;
the attained age of the Insured must be less than age 91; and
absent submission of new evidence of insurability of the Insured,
the maximum additional payment permitted in a Contract Year is the
"Guaranteed Additional Payment." The Guaranteed Additional Payment
is the lesser of (1) $5,000 or (2) a percentage of the initial
premium (5% for attained ages 40-70, and 0% for attained ages 20-39
and 71-90).
We reserve the right to obtain satisfactory evidence of insurability before
accepting any additional premium payments requiring an increase in specified
amount. We also reserve the right to reject an additional premium payment for
any reason.
Additional premium payments may require an increase in the Specified Amount in
order for the Contract to meet the definition of a life insurance contract
under the Internal Revenue Code. Additional Premiums may also be paid at any
time and in any amount necessary to avoid termination of the Contract.
6
<PAGE>
DEATH BENEFIT
At the death of the Insured while the Contract is in force, we will pay the
Death Benefit (less any Indebtedness and certain due and unpaid Monthly
Deduction Amounts) to the beneficiary. The Death Benefit determined on the
date of the Insured's death is the greater of (1) the Specified Amount, which
is the then current value of the guaranteed death benefit under the Contract,
or (2) the Account Value multiplied by the death benefit ratio set forth in
the Contract. See "Contract Benefits and Rights--Death Benefit," page __.
ACCOUNT VALUE
The Account Value of the Contract will increase or decrease to reflect (1) the
investment experience of the Fund Portfolios underlying the Variable
Sub-Account to which Account Value is allocated; (2) interest credited to the
Loan Account; and (3) deductions for the mortality and expense risk charge,
the Monthly Deduction Amount, and the annual maintenance fee. There is no
minimum guaranteed Account Value. You bear the risk of investment in the
Variable Sub-Accounts. See "Contract Benefits and Rights Account Value," page
__.
CONTRACT LOANS
You may obtain one or both of two types of cash loans from the Company. Both
types of loans are secured by your Contract. The maximum amount available for
such loans is 90% of the Contract's Cash Value, less the sum of:
the amount of all loans existing on the date of the loan request
(including loan interest to the next Contract Anniversary):
any annual maintenance fee due on or before the next Contract
Anniversary, and
any due and unpaid Monthly Deduction Amounts.
See "Access to Your Money--Contract Loans," page __.
LAPSE
Your Contract may terminate if its Cash Surrender Value on any Monthly
Activity Date is less than the required Monthly Deduction Amount. We will give
you written notice of the circumstance and a 61 day grace period during which
additional amounts may be paid to continue the Contract. See "Access to Your
Money--Contract Loans," page __ and "Lapse and Reinstatement," page __.
CANCELLATION AND EXCHANGE RIGHTS
You have a limited period of time in which you may return your Contract for
cancellation after you purchase it. We call this period of time the
"cancellation" period. The cancellation period (which varies by state) is
specified in your Contract. If you choose to exercise this right, you must
return the Contract by mail or hand delivery, to the Financial Advisor who
sold you the Contract, within the cancellation period following delivery of
the Contract to you. We will then return to you, within 7 days thereafter, the
premiums paid for the Contract adjusted, if state law permits, to reflect any
investment gain or loss resulting from allocation to the Variable Account
prior to the date of cancellation. In those states where the Company is
required to return the premiums paid without such adjustment we reserve the
right, if state law so permits, to allocate all premium payments made prior to
the expiration of the cancellation period to the Money Market Variable
Sub-Account of the Variable Account.
In addition, once the Contract is in effect, you may be able to exchange it
during the first 24 months after its issuance for a permanent life insurance
contract on the life of the Insured without submitting proof of insurability.
The Company reserves the right to make such a contract available that is
offered by the Company's parent or by any affiliate of the Company. See
"Access to Your Money--Cancellation and Exchange Rights," page __.
TAX CONSEQUENCES
Current federal tax law generally excludes all death benefit payments from the
gross income of the Contract beneficiary. The Contracts generally will be
treated as modified endowment contracts. This status does not affect the
Contracts' classification as life insurance, nor does it affect the exclusion
of death benefit payments from gross income. However, loans, distributions or
other amounts received under a modified endowment contract are taxed to the
extent of accumulated income in the Contract (generally, the excess of Account
7
<PAGE>
Value over premiums paid) and may be subject to a 10% penalty tax. See
"Federal Tax Matters," page __.
PERSONALIZED ILLUSTRATIONS
We will furnish, upon request and at no charge, a personalized illustration of
hypothetical performance under the contract based upon the proposed Insured's
age, sex, and underwriting classification. Where applicable, we will also
furnish upon request an illustration for a Contract that is not affected by
the sex of the Insured. Those illustrations will be based, as appropriate, on
the methodology and format of the hypothetical illustrations that we have
included in the registration statement we filed with the SEC for the
Contracts. See "Additional Information About the Company--Registration
Statement," page __, for further information.
Fees and Expenses
We provide the following tables to help you understand the various fees and
expenses that you will bear, directly or indirectly, as a Contract owner. The
first table describes the Contract charges and deductions you will directly
bear under the Contracts. The second table describes the fees and expenses of
the Fund Portfolios you will indirectly bear when you invest in the Contracts.
For further information, see "Deductions and Charges" on page ___ .
CONTRACT CHARGES AND DEDUCTIONS
Account Value Charges (deducted monthly and shown as an annualized percentage
of Account Value):(1)
<TABLE>
<CAPTION>
<S> <C> <C>
Current(2) Maximum
--------- -------
Cost of Insurance Charge......... Single Life Single Life
----------- -----------
Standard: 0.65% (Contract Years 1-10); Standard-Ranges from $0.06 per
55% (Contract Years 11+) 1,000 of net amount at risk (younger
ages) up to $82.50 (age 99)
Special: 1.00% (Contract Years 1-10); Special-Ranges from $0.12 per
0.90% (contract Years 11+) $1,000 of net amount at risk Contract
Years up to $82.92 (age 99).
Joint Life Joint Life
---------- ----------
Standard: 0.30% (Contract Years 1-10); Standard-Ranges from $0.00015 per
0.20% (Contract Years 11+) $1,000 of net amount at risk (younger
ages) up to $61.995 per $1,000 of net
amount at risk (age 99)
Special: 0.65% (Contract Years 1-10); Special-Ranges from $0.00061 per
0.55% (Contract Years 11+) $1,000 of net amount at risk (younger
ages up to $78.71083 (age 99).
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Administrative Expense Charge.................... 0.25%
Tax Expense Charge............................... 0.40%(3)
</TABLE>
<TABLE>
<CAPTION>
Annual Separate Account Charges (deducted daily and shown as a percentage of
average net assets):
<S> <C>
Mortality and Expense Risk Charge............. 0.90%
Federal Income Tax Charge..................... Currently none(4)
Annual Maintenance Fee:.......................... $30(5)
Transfer Charges:................................ $25(6)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Maximum Withdrawal Charge:....................... 7.75% of initial premium withdrawn(7)
Due and Unpaid Premium Tax Charge:............... 2.25% of initial premium withdrawn(8)
</TABLE>
(1) Except for the maximum or "guaranteed" cost of insurance charge,
which is expressed as a range of monthly costs per thousand dollars of
net amount at risk. The net amount at risk is the difference between the
Death Benefit and the Account Value. See "Deductions and Charges--Monthly
Deductions--Cost of Insurance Charge," page ___.
(2) The actual amount of insurance purchased will depend on the insured's
age, sex (where permitted) and rate class. See "Deductions and
Charges--Monthly Deductions--Cost of Insurance Charge," page __. The
current cost of insurance charge under the Contracts will never exceed
the guaranteed cost of insurance charge shown in your Contract.
(3) This charge includes a premium tax deduction of 0.25%, and a federal
tax deduction of 0.15%, of Account Value. We assess this charge only
during the first 10 Contract Years. See "Deductions and Charges--Monthly
Deductions--Tax Expense Charge," page ___.
(4) We do not currently assess a charge for federal income taxes that may
be attributable to the operations of the Variable Account, although we
may do so in the future. See "Deductions and Charges--Other
Deductions--Taxes Charged Against the Variable Account," page ___.
(5) We waive this fee if total premiums paid are $40,000 or more.
(6) We currently do not impose these charges on the first 12 transfers in
any Contract Year. The Company reserves the right to assess a $25 charge
for each transfer in excess of 12 in any Contract Year, excluding
transfers due to dollar cost averaging.
(7) This charge applies only upon withdrawals of the initial premium paid
at the time of Contract purchase, and it applies only to withdrawals in
excess of the Free Withdrawal Amount. It does not apply to withdrawals of
any additional payments paid under a Contract. The withdrawal charge
declines to 0% over nine years. We impose it to cover a portion of the
sales expense we incur in distributing the Contracts. See "Deductions and
Charges -- Other Deductions -- Withdrawal Charge," page __. We do not
impose a withdrawal charge on any withdrawal to the extent that aggregate
withdrawal charges and the federal tax portion of the tax expense charge
imposed would otherwise exceed 9% of total premiums paid prior to the
withdrawal.
(8) This charge applies only upon withdrawals of the initial premium paid
at the time of Contract purchase, and it applies only to withdrawals in
excess of the Free Withdrawal Amount. It does not apply to withdrawals of
any additional payments paid under a Contract. The charge for due and
unpaid premium tax declines to 0% over nine years, and it applies to full
or partial withdrawals in excess of the Free Withdrawal Amount.
9
<PAGE>
PORTFOLIO ANNUAL EXPENSES (After Voluntary Reductions and
Reimbursements) (as a percentage of Portfolio
average daily net assets)(1)
<TABLE>
<CAPTION>
Total
Portfolio
Management Other Annual
Fees Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Portfolio
- ---------
Morgan Stanley Dean Witter Variable
Investment Series(2)
Money Market 0.50% 0.02% 0.52%
Quality Income Plus 0.50% 0.02% 0.52%
Short-Term Bond 0.45% 0.00% 0.45%
High Yield 0.50% 0.03% 0.53%
Utilities 0.65% 0.02% 0.67%
Income Builder 0.75% 0.06% 0.81%
Dividend Growth 0.52% 0.01% 0.53%
Aggressive Equity 0.75% 0.00% 0.75%
Capital Growth 0.65% 0.05% 0.70%
Global Dividend Growth 0.75% 0.09% 0.84%
European Growth 0.99% 0.12% 1.11%
Pacific Growth 0.99% 0.52% 1.51%
Equity(2) 0.50% 0.02% 0.52%
S&P 500 Index(2) 0.00% 0.00% 0.00%
Competitive Edge "Best Ideas"(2) 0.00% 0.00% 0.00%
Strategist 0.50% 0.02% 0.62%
Morgan Stanley Dean Witter Universal Funds, Inc.(3)
Equity Growth 0.09% 0.76% 0.88%
U.S. Real Estate 0.17% 0.93% 1.10%
International Magnum 0.15% 1.00% 1.15%
Emerging Markets Equity 0.00% 1.95% 1.95%
Van Kampen Life Investment Trust(4)
Emerging Growth 0.32% 0.53% 0.85%
</TABLE>
(1) Figures shown are for the year ended December 31, 1998.
(2) After the close of business on March 19, 1999, the former
Capital Appreciation Portfolio merged with and into the Equity
Portfolio. Morgan Stanley Dean Witter Advisers, Inc. has
undertaken to assume all expenses of the S&P 500 Index and
Competitive Edge "Best Ideas" Portfolios (except for brokerage
fees) and to waive the compensation provided for each of these
Portfolios in its management agreement with the Fund until such
time as the pertinent Portfolio has $50 million of net assets
or until six months from the date of the Portfolio's
commencement of operations, whichever occurs first. Thereafter,
the investment manager has agreed to assume all expenses of the
S&P 500 Index Portfolio (except for brokerage fees) and to
waive the compensation provided in its management agreement
with the Fund to the extent that such expenses and compensation
on an annualized basis exceed .50% of the daily net assets of
the S&P 500 Index Portfolio. Absent such reductions, the
management fees, other expenses, and total annual expenses
would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
S&P 500 Index 0.40% 0.19% 0.59%
Competitive Edge "Best Ideas" 0.65% 0.27% 0.92%
</TABLE>
11
<PAGE>
(3) Morgan Stanley Dean Witter Investment Management, Inc. has
voluntarily agreed to a reduction in its management fees and to
reimburse the Portfolios for which it acts as investment
adviser if such fees would cause "Total Fund Annual Expenses"
to exceed the amount set forth in the table above. Absent such
reductions, the management fees, other expenses, and total
annual expenses would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Equity Growth 0.55% 0.76% 1.31%
U.S. Real Estate 0.80% 0.93% 1.73%
International Magnum 0.80% 1.00% 1.80%
Emerging Markets Equity 1.25% 2.20% 3.45%
</TABLE>
(4) Van Kampen Asset Management, Inc. has voluntarily agreed to a
reduction in its management fees and to reimburse the Emerging
Growth Portfolio for which it acts as investment adviser if
such fees would cause "Total Fund Annual Expenses" to exceed
the amount set forth in the table above. Absent such
reductions, the management fees, other expenses, and total
annual expenses would have been 0.70%%, 0.53%, and 1.23%,
respectively.
11
<PAGE>
THE COMPANY
The Company is the issuer of the Contract. It is a stock life insurance
company organized in 1998 under the laws of the State of Arizona. Previously,
it was organized in 1978 under the laws of the State of Illinois. The Company
is licensed to operate in the District of Columbia, all states (except New
York) and Puerto Rico. Our home office is located at 3100 Sanders Road,
Northbrook, Illinois 60062.
The Company is a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), a stock life insurance company incorporated under the laws
of the State of Illinois. Allstate Life is a wholly owned subsidiary of
Allstate Insurance Company ("Allstate"), a stock property-liability insurance
company incorporated under the laws of Illinois. All of the outstanding
capital stock of Allstate is owned by The Allstate Corporation
("Corporation").
12
<PAGE>
THE VARIABLE ACCOUNT
GENERAL
The Variable Account is a separate account of the Company established on
January 15, 1996 pursuant to the insurance laws of the State of Illinois. The
Variable Account is organized as a unit investment trust and registered as
such with the SEC under the 1940 Act. The Variable Account meets the
definition of "separate account" under federal securities law. Under Illinois
law, we hold the assets of the Variable Account exclusively for the benefit of
Contract Owners and persons entitled to payments under the Contracts. The
assets of the Variable Account are not chargeable with liabilities arising out
of any other business which the Company may conduct.
FUNDS
You may allocate your purchase payments to up to 21 Variable Sub-Accounts.
Each Variable Sub-Account invests in the shares of a corresponding Portfolio.
Each Portfolio has its own investment objective(s) and policies. We briefly
describe the Portfolios below.
For more complete information about each Portfolio, including expenses and
risks associated with the Portfolio, please refer to the accompanying
prospectuses for the Funds. You should carefully review the Fund prospectuses
before allocating amounts to the Variable Sub-Accounts.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Adviser:
Portfolio: Each Portfolio Seeks:
- -----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series
- -----------------------------------------------------------------------------------------------------------------------------------
Money Market Portfolio High current income, preservation of capital, and liquidity
Quality Income Plus Portfolio High current income and, as a secondary objective, capital
appreciation when consistent with its primary objective
Short-Term Bond Portfolio High current income consistent with preservation of capital
High Yield Portfolio High current income and, as a secondary objective, capital
appreciation when consistent with its primary objective
Utilities Portfolio Current income and long-term growth of income and capital
Income Builder Portfolio Reasonable income and, as a secondary objective, growth
of capital
Dividend Growth Portfolio Reasonable current income and long-term growth of
income and capital
Capital Growth Portfolio Long-term capital growth Morgan Stanley
Global Dividend Growth Portfolio Reasonable current income and long-term growth of Dean Witter
income and capital Advisors, Inc.
European Growth Portfolio To maximize the capital appreciation on its investments
Pacific Growth Portfolio To maximize the capital appreciation of its investments
Aggressive Equity Portfolio Capital growth
Equity Portfolio Growth of capital and, as a secondary objective, income
when consistent with its primary objective.
S&P 500 Index Portfolio Investment results that, before expenses, correspond to the
total return of the Standard and Poor's 500 Composite
Stock Price Index
Competitive Edge "Best Ideas" Long-term capital growth
Portfolio
Strategist Portfolio High total investment return
- ---------------------------------------------------------------------------------------------------------------------------------
13
<PAGE>
Morgan Stanley Universal Funds Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Equity Growth Portfolio Long-term capital appreciation Morgan Stanley
U.S. Real Estate Portfolio Above-average current income and long-term capital Dean Witter
appreciation Investment
International Magnum Portfolio Long-term capital appreciation Management, Inc.
Emerging Markets Equity Long-term capital appreciation
Portfolio
Van Kampen Life Investment Trust
- ---------------------------------------------------------------------------------------------------------------------------
Emerging Growth Portfolio Capital appreciation Van Kampen
American Capital
Asset Management,
Inc.
</TABLE>
You should read the Funds' Prospectuses carefully before you decide to
allocate purchase payments to a particular Variable Sub-Account
It is conceivable that in the future it may be disadvantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in a Fund simultaneously. Neither the Company nor the Funds currently
foresee any such disadvantages either to variable life insurance or variable
annuity contract owners. Nevertheless, the Funds' Boards of Directors intend
to monitor events in order to identify any material conflicts between variable
life and variable annuity contract owners and to determine what action, if
any, should be taken in response thereto. If a Fund's Board of Directors were
to conclude that separate funds should be established for variable life and
variable annuity separate accounts, we will bear the attendant expenses.
We reinvest all investment income of and other distributions to each Variable
Sub-Account arising from the corresponding Portfolio in additional shares of
that Portfolio at net asset value. The income and both realized and unrealized
gains or losses on the assets of each Variable Sub-Account are therefore
separate and are credited to or charged against the Variable Sub-Account
without regard to income, gains or losses from any other Variable Sub-Account
or from any other business of the Company. The Company will purchase shares in
the Funds in connection with premiums allocated to the corresponding Variable
Sub-Account in accordance with Contract Owners' directions and will redeem
shares in the Fund to meet Contract obligations or make adjustments in
reserves, if any.
We reserve the right, subject to compliance with the law as then in effect, to
make additions to, deletions from, or substitutions for the Fund shares
underlying the Variable Sub-Accounts. If shares of a Fund should no longer be
available for investment, or if, in the judgment of the Company's management,
further investment in shares of a Fund should become inappropriate in view of
the purposes of the Contracts, we may substitute shares of another Fund for
shares already purchased, or to be purchased in the future, under the
Contracts. We will not make any such substitution without notice to Contract
Owners. We will also obtain prior approval of the Securities and Exchange
Commission to the extent required by the 1940 Act. We reserve the right to
establish additional Variable Sub-Accounts of the Variable Account, each of
which would invest in shares of another Fund or Portfolio. Subject to Contract
Owner approval, We also reserve the right to end the registration under the
1940 Act of the Variable Account or any other separate accounts of which it is
the depositor or to operate the Variable Account as a management company under
the 1940 Act.
The Funds are subject to certain investment restrictions and policies which
may not be changed without the approval of a majority of the shareholders of
the affected Fund. See the accompanying prospectuses for the Funds for further
information.
14
<PAGE>
THE CONTRACT
APPLICATION FOR A CONTRACT
Individuals wishing to purchase a Contract must submit an application to the
Company. We will issue a Contract only on the lives of Insureds age 0-90 who
supply evidence of insurability satisfactory to us. Acceptance is subject to
our underwriting rules, and we reserve the right to reject an application for
any lawful reason. We will not change the terms or conditions of a Contract
without the consent of the Contract Owner.
You must submit your application and obtain our approval before you pay your
initial premium. The Insured will be covered under the Contract as of the
Contract Date. The Contract Date also determines Monthly Activity Dates,
Contract months, and Contract Years.
PREMIUMS
The Contract is designed to permit an initial premium payment and, subject to
certain conditions, additional premium payments. The initial premium payment
purchases a Death Benefit initially equal to the Contract's Specified Amount.
The minimum initial payment is $10,000.
Under our current underwriting rules, which are subject to change, proposed
Insureds are eligible for simplified underwriting without a medical
examination if their application responses and anticipated initial premium
payment meet simplified underwriting standards. Customary underwriting
standards will apply to all other proposed Insureds. The maximum initial
premium currently permitted on a simplified underwriting basis varies with the
issue age of the Insured according to the following table:
<TABLE>
<CAPTION>
<S> <C>
SIMPLIFIED UNDERWRITING
ISSUE AGE MAXIMUM INITIAL PREMIUM
0-34.................................................. Not available
35-44................................................. $15,000
45-54................................................. $30,000
55-64................................................. $50,000
65-80................................................. $100,000
Over age 80........................................... Not available
</TABLE>
Additional premium payments may be made at any time, subject to the following
conditions:
only one additional premium payment may be made in any Contract Year;
each additional premium payment must be at least $500;
the attained age of the Insured must be less than 91; and absent
submission of new evidence of insurability of the Insured, the maximum
additional payment permitted in a Contract Year is the "Guaranteed
Additional Payment." The Guaranteed Additional Payment is the lesser of
(1) $5,000, or (2) a percentage of initial payment (5% for attained ages
40-70, and 0%for attained ages 20-39 and 71-90).
We reserve the right to obtain satisfactory evidence of insurability upon any
additional premium payments requiring an increase in specified amount. We also
reserve the right to reject any additional premium payment for any reason.
Additional premium payments may require an increase in Specified Amount in
order for the Contract to remain within the definition of a life insurance
contract under Section 7702 of the Code.
15
<PAGE>
Unless you request otherwise in writing, we will apply any additional premium
payment received while a Contract loan is outstanding: first, as a repayment
of Indebtedness, and second, as an additional premium payment, subject to the
conditions described above.
You may pay additional premiums at any time and in any amount necessary to
avoid termination of the Contract without evidence of insurability.
ALLOCATION OF PREMIUMS
Upon completion of underwriting, the Company will either issue a Contract, or
deny coverage. If we issue a Contract, we will allocate the initial premium
payment on the date the Contract is issued according to the initial premium
allocation instructions you specified in your application. We reserve the
right to allocate the initial premium to the Money Market Variable Sub-Account
during the cancellation period in those states where state law requires
premiums to be returned upon exercise of the cancellation right.
ACCUMULATION UNIT VALUES
The Accumulation Unit value for each Variable Sub-Account will vary to reflect
the investment experience of the corresponding Fund Portfolio. We determine
the Accumulation Unit value on each Valuation Day by multiplying the
Accumulation Unit value for the particular Variable Sub-Account on the
preceding Valuation Day by a "Net Investment Factor". We determine the Net
Investment Factor for each Variable Sub-Account during a Valuation Period by
first dividing (A) the net asset value per share of the corresponding Fund
Portfolio at the end of the current Valuation Period (plus the per share
dividends or capital gains by that Portfolio if the ex-dividend date occurs in
the Valuation Period then ended), by (B) the net asset value per share of that
Portfolio at the end of the immediately preceding Valuation Period. We then
subtract from the result an amount equal to the daily deductions for mortality
and expense risk charges imposed during the Valuation Period. You should refer
to the prospectuses for the Funds for a description of how the shares of the
Portfolios are valued. See "Contract Benefits and Rights--Account Value," page
__.
All valuations in connection with a Contract, (e.g., with respect to
determining Account Value or with respect to determining the number of
Accumulation Units to be credited to a Contract with each premium), other than
determinations with respect to the initial premium and additional premiums
requiring underwriting, will be made on the date we receive, at our Home
Office, the corresponding request or payment in good order. However, if such
date is not a Valuation Day, we will make such determination on the next
succeeding Valuation Day.
Specialized Uses of the Contract: Because the Contract provides for an
accumulation of Cash Value as well as a Death Benefit, you can use the
Contract for various individual and business financial planning purposes.
Purchasing the Contract in part for such purposes entails certain risks. For
example, if the investment performance of Variable Sub-Accounts to which you
have allocated Account Value is poorer than expected or if sufficient premiums
are not paid, the Contract may lapse. Even if it does not lapse, it may not
accumulate sufficient Account Value to fund the purpose for which the Contract
was purchased. Withdrawals and Contract loans may significantly affect current
and future Account Value, Cash Surrender Value, or Death Benefit proceeds.
Depending upon Sub-Account investment performance and the amount of a Contract
loan, the loan may cause a Contract to lapse. Because the Contract is designed
to provide benefits on a long-term basis, before purchasing a Contract for a
specialized purpose you should consider whether the long-term nature of the
Contract is consistent with the purpose for which you are considering it.
Using a Contract for a specialized purpose may have tax consequences. (See
"Federal Tax Matters," page __.)
16
<PAGE>
DEDUCTIONS AND CHARGES
-----------------------------------------------------------------------------
MONTHLY DEDUCTIONS
On each Monthly Activity Date including the Contract Date, we will deduct from
your Account Value attributable to the Variable Account an amount ("Monthly
Deduction Amount") to cover charges and expenses incurred in connection with a
Contract. We deduct this amount from each Variable Sub-Account in proportion
to your Account Value attributable to each Variable Sub-Account. The Monthly
Deduction Amount will vary from month to month. If the Cash Surrender Value is
not sufficient to cover a Monthly Deduction Amount due on any Monthly Activity
Date, the Contract may lapse. See "Access to Your Money--Lapse and
Reinstatement," page __. The following is a summary of the monthly deductions
and charges which constitute the Monthly Deduction Amount:
Cost of Insurance Charge: The cost of insurance charge covers the Company's
anticipated mortality costs for standard and special risks. Current cost of
insurance rates are lower after the 10th Contract Year. The current cost of
insurance charge is taken by deducting a specified percentage of your Account
Value. However, this current charge will not exceed the guaranteed cost of
insurance charge. The monthly guaranteed charge is equal to the maximum annual
cost of insurance per $1,000 as indicated in the Contract (1) multiplied by
the difference between the Death Benefit and the Account Value (both as
determined on the Monthly Activity Date); (2) divided by $1,000; and (3)
divided by 12. For standard risks, the guaranteed cost of insurance rate is
based on the 1980 Commissioners Standard Ordinary Mortality Table, age last
birthday. (Unisex rates may be required in some states). A table of guaranteed
cost of insurance charges per $1,000 is included in each Contract. However,
the Company reserves the right to use rates less than those shown in the
table. Special risks will be charged at a higher cost of insurance rate that
will not exceed rates based on a multiple of the 1980 Commissioners Standard
Ordinary Mortality Table, age last birthday. The multiple will be based on the
Insured's special rating class.
The guaranteed cost of insurance charge rates are applied to the difference
between the Death Benefit determined on the Monthly Activity Date and the
Account Value on that same date prior to assessing the Monthly Deduction
Amount, because the difference is the amount for which the Company is at risk
should the Death Benefit be then payable. The Death Benefit as computed on a
given date is the greater of (1) the Specified Amount on that date, and (2)
the Account Value on that date multiplied by the applicable Death Benefit
ratio. (For an explanation of the Death Benefit, together with Examples, see
"Contract Benefits and Rights" - "Death Benefit" on page __.)
Because the Account Value (and, as a result, the amount for which the Company
is at risk under a Contract) may vary from month to month, the cost of
insurance charge may also vary on each Monthly Activity Date. However, once we
have assigned a risk rating class to an Insured when the Contract is issued,
we will not change that rating class if additional premium payments or partial
withdrawals increase or decrease the Specified Amount.
The level of Specified Amount that an initial premium will purchase will vary
based on age and sex. For example, a $10,000 initial premium paid by a male at
age 45 would result in a Specified Amount of $39,998. If a female age 65 paid
a $10,000 premium, the Specified Amount would be equal to $22,749.
Tax Expense Charge: We will deduct monthly from the Account Value a tax
expense charge equal to an annual rate of 0.40% for the first ten Contract
Years. This charge compensates the Company for premium taxes imposed by
various states and local jurisdictions and for federal taxes related to our
receipt of premiums under the Contract. The charge includes a premium tax
deduction of 0.25% and a federal tax deduction of 0.15%. The 0.25% premium tax
deduction over ten Contract Years approximates the Company's average expenses
for state and local premium taxes (2.5%). Premium taxes vary, ranging from
zero to 3.5%. We will impose the premium tax deduction regardless of a
Contract owner's state of residence. Therefore, we take this deduction whether
or not any premium tax applies to your Contract. The deduction may be higher
or lower than any premium tax imposed. The 0.15% federal tax deduction helps
reimburse the Company for approximate expenses we incur for federal taxes
under Section 848 of the Code.
Administrative Expense Charge: We will deduct monthly from your Account Value
an administrative expense charge an equivalent to an annual rate of 0.25%.
This charge compensates us for administrative expenses we incur in
administering the Variable Account and the Contracts.
We take all monthly deductions by canceling Accumulation Units of the Variable
Account under your Contract.
17
<PAGE>
OTHER DEDUCTIONS
Mortality and Expense Risk Charge: We deduct from the assets of the Variable
Account a daily charge equivalent to an annual rate of 0.90% for the mortality
risks and expense risks we assume in relation to the Contracts. The mortality
risk assumed includes the risk that the cost of insurance charges specified in
the Contract will be insufficient to meet claims. We also assume a risk that
the Death Benefit will exceed the amount on which the cost of insurance
charges were based, because we made that computation on the Monthly Activity
Date preceding the death of the Insured. The expense risk we assume is that
expenses we incur in issuing and administering the Contracts will exceed the
administrative charges set by the Contract.
Annual Maintenance Fee: We will deduct from your Account Value an annual
maintenance fee of $30 on each Contract Anniversary. This fee will help
reimburse the us for administrative and maintenance costs of the Contracts.
Currently, we waive this charge for Contracts which have an aggregate premium
which equals or exceeds the dollar amount indicated on your Contract data page
(currently $40,000).
Taxes Charged Against the Variable Account: Currently, no charge is made to
the Variable Account for federal income taxes that may be attributable to the
operations of the Variable Account (as opposed to the federal tax related to
our receipt of premiums under the Contract). We may, however, make such a
charge in the future. We may also assess charges for other taxes, if any,
attributable to the Variable Account or this class of Contracts.
Charges Against the Funds: The Variable Account purchases shares of the Funds
at net asset value. The net asset value of the Fund shares reflect Fund
investment management fees already deducted from the assets of the Funds. The
Fund investment management fees are a percentage of the average daily value of
the net assets of the Portfolios. See the "Fund Fees and Expenses" table on
page __.
Withdrawal Charge: We may assess a withdrawal amount upon (1) surrender of the
Contract, and (2) partial withdrawals in excess of the Free Withdrawal Amount.
The Free Withdrawal Amount in any Contract Year is 15% of total premiums paid.
Any Free Withdrawal Amount not taken in a Contract Year may not be carried
forward to increase the Free Withdrawal Amount in any subsequent year.
Withdrawals in excess of the Free Withdrawal Amount will be subject to a
withdrawal charge as set forth in the table below:
Contract Year 1 - 4 5 6 7 8 9 10
----- - - - - - --
Percentage of
Initial Premium
Withdrawn 7.75% 6.25% 5.25% 4.25% 3.25% 2.25% 0.00%
We will not impose a withdrawal charge after the ninth Contract Year. In
addition, we will not impose a withdrawal charge on any withdrawal to the
extent that aggregate withdrawal charges and the federal tax portion of the
tax expense charge imposed would otherwise exceed 9% of total premiums paid
prior to the withdrawal. We may waive the withdrawal charge under certain
circumstances if the Insured is confined to a qualified long-term care
facility or hospital. See "Access to Your Money--Confinement Waiver Benefit",
page __.
We impose the withdrawal charge to cover a portion of the sales expense we incur
in distributing the Contracts. This expense includes agents' commissions,
advertising and the printing of prospectuses.
Due and Unpaid Premium Tax Charge: During the first nine Contract Years, we
impose a charge for due and unpaid premium tax on full or partial withdrawals
in excess of the Free Withdrawal Amount. This charge is shown below, as a
percent of the Initial Premium withdrawn: ---------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1 2 3 4 5 6 7 8 9 10
- - - - - - - - - --
Percentage of
Initial Premium
Withdrawn 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00%
</TABLE>
After the ninth Contract Year, no due and unpaid premium tax charge will be
imposed. The percentages indicated above are guaranteed not to increase.
18
<PAGE>
CONTRACT BENEFITS AND RIGHTS
-----------------------------------------------------------------------------
DEATH BENEFIT
The Contracts provide for the payment of Death Benefit proceeds to the named
beneficiary when the Insured under the Contract dies. The Proceeds payable to
the beneficiary equal the Death Benefit less any Indebtedness and less any due
and unpaid Monthly Deduction Amounts occurring during a grace period (if
applicable). The Death Benefit equals the greater of (1) the Specified Amount
or (2) the Account Value, multiplied by the Death Benefit ratio. The ratios
vary according to the attained age of the Insured and are specified, in the
Contract. Therefore, an increase in Account Value due to favorable investment
experience may increase the Death Benefit above the Specified Amount; and a
decrease in Account Value due to unfavorable investment experience may
decrease the Death Benefit (but not below the Specified Amount).
<TABLE>
<CAPTION>
<S> <C> <C>
EXAMPLES: A B
Specified Amount............................................... $100,000 $100,000
Insured's Age.................................................. 45 45
Account Value on Date of Death................................. $48,000 $34,000
Death Benefit Ratio............................................ 2.15 2.15
</TABLE>
In Example A, the Death Benefit equals $103,200, i.e., the greater of (1)
$100,000 (the Specified Amount), and (2) $103,200 (the Account Value at the
Date of Death of $48,000 multiplied by the Death Benefit ratio of 2.15). This
amount, less any Indebtedness and due and unpaid Monthly Deduction Amounts,
constitutes the proceeds which we would pay to the beneficiary.
In Example B, the Death Benefit is $100,000, i.e., the greater of $100,000
(the Specified Amount) or $73,100 (the Account Value of $34,000 multiplied by
the Death Benefit ratio of 2.15).
All or part of the proceeds may be paid in cash or applied under an income
plan. See "Other Matters--Payment Options," page __.
ACCELERATED DEATH BENEFIT
If the Insured becomes terminally ill, you may request an Accelerated Death
Benefit in an amount up to the lesser of (1) 50% of the Specified Amount on
the day we receive the request, and (2) $250,000 for all policies issued by
the Company which cover the Insured. "Terminally ill" means an illness or
physical condition of the Insured that, notwithstanding appropriate medical
care, results in a life expectancy of 12 months or less. If the Insured is
terminally ill as the result of an illness, the accelerated Death Benefit is
not available unless the illness occurred at least 30 days after the issue
date. If the Insured is terminally ill as the result of an accident, the
Accelerated Death Benefit is available if the accident occurred after the
issue date. The minimum amount of death benefit we will accelerate is $10,000.
We will pay benefits due under the Accelerated Death Benefit provision upon
receipt of a written request from the Contract Owner and due proof that the
Insured has been diagnosed as terminally ill. We also reserve the right to
require supporting documentation of the diagnosis and to require (at our
expense) an examination of the Insured by a physician of the Company's choice
to confirm the diagnosis. The amount of the payment will be the amount you
requested, reduced by the sum of (1) a 12 month interest discount to reflect
the early payment; (2) an administrative fee (not to exceed $250); and (3) a
pro rata amount of any outstanding Contract loan and accrued loan interest.
After the payment has been made, the Specified Amount, the Account Value and
any outstanding Contract loan will be reduced on a pro rata basis.
We allow only one request for an Accelerated Death Benefit per Insured. The
Accelerated Death Benefit may not be available in all states. Its features may
differ from those discussed above as required by state law. Please refer to
the Contract for further information.
19
<PAGE>
CONFINEMENT WAIVER BENEFIT
Under the terms of an endorsement to the Contract, we will waive any
withdrawal charges on partial withdrawals and surrenders of the Contract
requested while the Insured is confined to a qualified long-term care facility
or hospital for a period of more than 90 consecutive days. The period of
confinement must begin 30 days or more after the issue date. The request must
be made either during such confinement or within 90 days after the Insured is
discharged from such confinement. The confinement must have been prescribed by
a licensed medical doctor or a licensed doctor of osteopathy, operating within
the scope of his or her license, and must be medically necessary. The
prescribing doctor may not be the Insured, the Contract Owner, or any spouse,
child, parent, grandchild, grandparent, sibling or in-law of the Contract
Owner. "Medically necessary" means appropriate and consistent with the
diagnosis and which could not have been omitted without adversely affecting
the Insured's condition. The confinement waiver benefit may not be available
in all states. In addition, its features may differ from those discussed above
as required by state law. Please refer to the Contract for further
information. The Company reserves the right to discontinue the offering of the
confinement waiver benefit endorsement upon the purchase of a new contract.
ACCOUNT VALUE
We will compute the Account Value of a Contract on each Valuation Day. On the
Contract Date, the Account Value is equal to the initial premium less the
Monthly Deduction Amount for the first month. Thereafter, the Account Value
will vary to reflect the investment experience of the Portfolio, the value of
the Loan Account and the Monthly Deduction Amounts. There is no minimum
guaranteed Account Value.
The Account Value of a particular Contract is related to the net asset value
of the Variable Sub-Accounts to which you have allocated premiums on the
Contract. We calculate the Account Value on any Valuation Day by (1)
multiplying the number of Accumulation Units credited to the Contract in each
Variable Sub-Account as of the Valuation Day by the then Accumulation Unit
value of that Sub-Account, and then (2) adding the results for all the
Sub-Accounts credited to the Contract to the value of the Loan Account. See
"The Contract--Accumulation Unit Values," page __.
TRANSFER OF ACCOUNT VALUE
While the Contract remains in force and subject to the Company's transfer
rules then in effect, you may request that part or all of the Account Value of
a particular Variable Sub-Account be transferred to other Variable
Sub-Accounts. We reserve the right to impose a $25 charge on each such
transfer in excess of 12 per Contract Year. However, there are no charges on
transfers at the present time. The minimum amount that you may transfer is
shown on the Contract data page (currently $100) or the total amount in the
Variable Sub-Account, whichever is less.
On days when the New York Stock Exchange ("NYSE") is open for trading,
telephone, we will accept transfer requests if we receive them at 1(800)
654-2397 by 4:00 p.m., Eastern Time. We effect telephone transfer requests we
receive before 4:00 p.m., Eastern Time at the next computed value. In the
event that the NYSE closes early, i.e., before 4:00 p.m. Eastern Time, or in
the event that the NYSE closes early for a period of time but then reopens for
trading on the same day, we will process telephone transfer requests as of the
close of the NYSE on that particular day. We will not accept telephone
requests received at any telephone number other than the number that appears
in this paragraph or received after the close of trading on the NYSE.
Transfers by telephone may be made by the Contract Owner's Account Executive
or attorney-in-fact pursuant to a power of attorney. Telephone transfers may
not be permitted in some states. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from
acting upon telephone requests they reasonably believe to be genuine. The
Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable
for any losses due to unauthorized or fraudulent instructions. The procedures
the Company follows for transactions initiated by telephone include
requirements that callers on behalf of a Contract Owner identify themselves
and the Contract Owner by name and social security number or other identifying
information. All transfer instructions by telephone are tape recorded.
Otherwise, you must submit transfer requests in writing, on a form we provide.
As a result of a transfer, we will reduce the number of Accumulation Units
credited to the Variable Sub-Account from which the transfer is made. The
reduction is equal to the amount transferred divided by the Accumulation Unit
value of that Variable Sub-Account on the Valuation Date we receive the
transfer request. Similarly, we will increase the number of Accumulation Units
credited to the Variable Sub-Account to which the transfer is made. The
increase is equal to the amount transferred divided by the Accumulation Unit
20
<PAGE>
value of that Sub-Account on the Valuation Day we receive the transfer
request.
For Contracts issued after May 1, 1999, we reserve the right to limit
transfers among the Variable Sub-Accounts if we determine, in our sole
discretion, that transfers by one or more Contract owners would be to the
disadvantage of other Contract owners. We may limit transfers by taking such
steps as:
imposing a minimum time period between each transfer, or
refusing to accept transfer requests of an agent acting under a
power of attorney on behalf of more than one Contract owner,
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract owners.
We reserve the right to waive any transfer restrictions.
DOLLAR COST AVERAGING
You may make transfers automatically through Dollar Cost Averaging while the
Contract is in force. Dollar Cost Averaging permits you to transfer a
specified amount every month (or some other frequency as may be determined by
the Company) from any one Variable Sub-Account to any other Variable
Sub-Accounts. The minimum amount that can be transferred is shown on the
Contract data page (currently $100) or the total amount in the Variable
Sub-Account whichever is less. The theory of Dollar Cost Averaging is that, if
purchases of equal dollar amounts are made at fluctuating prices, the
aggregate average cost per unit will be less than the average of the unit
prices on the same purchase dates. However, participation in the Dollar Cost
Averaging program does not assure you of a greater profit from your purchases
under the program; nor will it prevent or alleviate losses in a declining
market. We impose no additional charges upon participants in the Dollar Cost
Averaging program. We do not count transfers under Dollar Cost Averaging
toward the 12 free transfers per Contract Year currently permitted.
AUTOMATIC PORTFOLIO REBALANCING PROGRAM
Once you have allocated your money among the Variable Sub-Accounts, the
performance of each Sub-Account may cause a shift in the percentage you
allocated to each Sub-Account. If you select our Automatic Portfolio
Rebalancing Program, we will automatically rebalance the Account Value in each
Variable Sub-Account and return it to the desired percentage allocations.
We will rebalance your account each quarter (or other intervals we may offer)
according to your instructions. We will transfer amounts among the Variable
Sub-Accounts to achieve the percentage allocations you specify. You can change
your allocations at any time by contacting us in writing. The new allocation
will be effective with the first rebalancing that occurs after we receive your
written request. We are not responsible for rebalancing that occurs prior to
receipt of your request.
Example:
Assume that you want your initial purchase payment split among 2
Variable Sub-Accounts. You want 40% to be in the Quality Income
Plus Variable Sub-Account and 60% to be in the Capital Growth
Variable Sub-Account. Over the next 2 months the bond market does
very well while the stock market performs poorly. At the end of the
first quarter, the Quality Income Plus Variable Sub-Account now
represents 50% of your holdings because of its increase in value.
If you choose to have your holdings rebalanced quarterly, on the
first day of the next quarter, we would sell some of your units in
the Quality Income Plus Variable Sub-Account and use the money to
buy more units in the Capital Growth Variable Sub-Account so that
the percentage allocations would again be 40% and 60% respectively.
Transfers made under the Automatic Portfolio Rebalancing Program do not count
towards the 12 transfers you can make without paying a transfer fee, and are
not subject to a transfer fee.
21
<PAGE>
Portfolio rebalancing is consistent with maintaining your allocation of
investments among market segments, although it is accomplished by reducing
your Contract Value allocated to the better performing segments.
22
<PAGE>
ACCESS TO YOUR MONEY
CONTRACT LOANS
While the Contract is in force, you may obtain, without the consent of the
beneficiary (provided the designation of beneficiary is not irrevocable), one
or both of two types of cash loans from the Company. These types include
preferred loans (described below) and non-preferred loans. Both types of loans
are secured by your Contract. The maximum amount available for a loan is 90%
of the Contract's Cash Value, less the sum of:
the amount of all Contract loans existing on the date of the loan
(including loan interest to the next Contract Anniversary),
any due and unpaid Monthly Deduction Amounts, and
any annual maintenance fee due on or before the next Contract
Anniversary.
We will transfer the loan amount pro rata from each Variable Sub-Account
attributable to your Contract (unless you specify otherwise) to the Loan
Account. We will credit the amounts allocated to the Loan Account with
interest at the loan credited rate set forth in the Contract. Loans will bear
interest at rates we determine from time to time, but which will not exceed
the maximum rate indicated in the Contract. The amount of the Loan Account
that equals the excess of the Account Value over the total of all premiums
paid under the Contract net of (1) any premiums returned due to partial
withdrawals, and (2) any prior loan balance, as determined on each Contract
Anniversary, is considered a "preferred loan." Preferred loans bear interest
at a rate not to exceed the preferred loan rate set forth in the Contract. The
difference between the value of the Loan Account and the Indebtedness will be
transferred on a pro rata basis from the Variable Sub-Accounts to the Loan
Account on each Contract Anniversary. If the aggregate outstanding loan(s) and
loan interest secured by the Contract exceeds the Cash Value of the Contract,
we will give you written notice that unless we receive an additional payment
within 61 days to reduce the aggregate outstanding loan(s) secured by the
Contract, the Contract may lapse.
You may repay all or any part of any loan secured by a Contract while the
Contract is still in effect. When you make loan repayments or interest
payments, we will allocate the payment among the Variable Sub-Accounts in the
same percentages as for subsequent premium payments (unless you request a
different allocation), and we will deduct an amount equal to the payment from
the Loan Account. You must repay any outstanding loan at the end of a grace
period before we will reinstate the Contract. See "Lapse and Reinstatement,"
page __.
A loan, whether or not repaid, will have a permanent effect on the Account
Value because the investment results of each Variable Sub-Account will apply
only to the amount remaining in that Sub-Account. The longer a loan is
outstanding, the greater the effect is likely to be. The effect could be
favorable or unfavorable. If the Variable Sub-Accounts earn more than the
annual interest rate for amounts held in the Loan Account, a Contract Owner's
Account Value will not increase as rapidly as it would have had no loan been
made. If the Variable Sub-Accounts earn less than that rate, the Contract
Owner's Account Value will be greater than it would have been had no loan been
made. Also, if not repaid, the aggregate outstanding loan(s) will reduce the
Death Benefit proceeds and Cash Surrender Value otherwise payable.
AMOUNT PAYABLE ON SURRENDER OF THE CONTRACT
While the Contract is in force, you may elect, without the consent of the
beneficiary (provided the designation of beneficiary is not irrevocable), to
fully surrender the Contract. Upon surrender, we will pay you the Cash
Surrender Value determined as of the day we receive your written request or
the date you request, whichever is later. The Cash Surrender Value equals the
Cash Value less the annual maintenance fee and any Indebtedness. We will pay
the Cash Surrender Value of the Contract within seven days of our receipt of
the written request or on the effective surrender date you request, whichever
is later.
The Contract will terminate on the date of our receipt of your written
request, or the date you request the surrender to be effective, whichever is
later. For a discussion of the tax consequences of surrendering the Contract,
see "Federal Tax Matters," page __.
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You may elect to apply the surrender proceeds to an Income Plan (see "Access
to Your Money--Payment Options," page __).
PARTIAL WITHDRAWALS
While the Contract is in force, you may elect by written request to make
partial withdrawals from the Cash Surrender Value of at least $100, or the
total amount in the Variable Sub-Account, whichever is less. The Cash
Surrender Value, after the partial withdrawal, must at least equal $2,000;
otherwise, we will treat your request as a request for full surrender. The
partial withdrawal will be deducted pro rata from each Variable Sub-Account,
unless the Contract Owner instructs otherwise. The Specified Amount after the
partial withdrawal will be the greater of:
the Specified Amount prior to the partial withdrawal reduced
proportionately to the reduction in Account Value;or
the minimum Specified Amount necessary in order to meet the
definition of a life insurance contract under section 7702 of the
Code.
Partial withdrawals in excess of the Free Withdrawal Amount may be subject to
a withdrawal charge and any due and unpaid premium tax charges. See
"Deductions and Charges--Other Deductions--Withdrawal Charge" and "Due and
Unpaid Premium Tax Charge," page __. For a discussion of the tax consequences
of partial withdrawals, see "Federal Tax Matters," page __.
PAYMENT OPTIONS
The surrender proceeds or Death Benefit proceeds under the Contracts may be
paid in a lump sum. You may also apply the proceeds to one of the Company's
Income Plans. If the amount to be applied to an Income Plan is less than
$3,000 or if it would result in an initial income payment of less than $20, we
may require that the frequency of income payments be decreased such that the
income payments are greater than $20 each, or we may elect to pay the amount
in a lump sum. No surrender or partial withdrawals are permitted after
payments under an Income Plan commence.
We will pay interest on the proceeds from the date of the Insured's death to
the date payment is made or a payment option is elected. At such times, the
proceeds are not subject to the investment experience of the Variable Account.
The Income Plans are fixed annuities payable from the Company's general
account. They do not reflect the investment experience of the Variable
Account. Fixed annuity payments are determined by multiplying the amount
applied to the annuity by a rate to be determined by the Company which is no
less than the rate specified in the fixed payment annuity tables in the
Contract. The annuity payment will remain level for the duration of the
annuity. The Company may require proof of age and gender of the payee (and
joint payee, if applicable) before payments begin. The Company may also
require proof that such person(s) are living before it makes each payment.
The following options are available under the Contracts (the Company may offer
other payment options):
INCOME PLAN 1--LIFE INCOME WITH GUARANTEED PAYMENTS The Company will make
payments for as long as the payee lives. If the payee dies before the selected
number of guaranteed payments have been made, the Company will continue to pay
the remainder of the guaranteed payments.
INCOME PLAN 2--JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS The
Company will make payments for as long as either the payee or Joint payee,
named at the time of Income Plan selection, is living. If both the payee and
the Joint payee die before the selected number of guaranteed payments have
been made, the Company will continue to pay the remainder of the guaranteed
payments.
The Company will make any other arrangements for income payments as may be
agreed on.
MATURITY
The Contract has no maturity date.
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LAPSE AND REINSTATEMENT
The Contract will remain in force until the Cash Surrender Value is
insufficient to cover a Monthly Deduction Amount due on a Monthly Activity
Date. We will give you written notice that if an amount shown in the notice
(which will be sufficient to cover the Monthly Deduction Amount(s) due) is not
paid within 61 days ("Grace Period"), there is a danger of lapse.
The Contract will continue through the grace period. If sufficient payment is
not forthcoming, however, the Contract will terminate at the end of the grace
period. If the Insured dies during the grace period, the proceeds payable
under the Contract are reduced by the Monthly Deduction Amount(s) due and
unpaid. See "Contract Benefits and Rights--Death Benefit," page __.
If the Contract lapses, you may apply for its reinstatement by payment of the
reinstatement premium (and any applicable charges) required under the
Contract. You must make a request for reinstatement within five years of the
date the Contract entered a grace period. If a loan was outstanding at the
time of lapse, we will require repayment of the loan before permitting
reinstatement. In addition, we reserve the right to require evidence of
insurability satisfactory to us. The reinstatement premium is equal to an
amount sufficient to (1) cover all Monthly Deduction Amounts and annual
maintenance fees due and unpaid during the grace period, and (2) keep the
Contract in force for three months after the date of reinstatement. The
Specified Amount upon reinstatement cannot exceed the Specified Amount of the
Contract at its lapse. The Account Value on the reinstatement date will
reflect the Account Value at the time of termination of the Contract plus the
premiums paid at the time of reinstatement. Withdrawal charges and due and
unpaid premium tax charges, cost of insurance, and tax expense charges will
continue to be based on the original Contract Date.
CANCELLATION AND EXCHANGE RIGHTS
You have a limited right to return a Contract for cancellation. This right to
return exists during the cancellation period. The cancellation period is a
number of days (which varies by state) as specified in your Contract. If you
choose to cancel your Contract, you must return it for cancellation by mail or
personal delivery to the Company or to the Account Executive who sold the
Contract within the cancellation period following delivery of the Contract to
you. We will then return to you within 7 days thereafter the sum of (1) the
Account Value on the date we (or our agent) receive the returned Contract; and
(2) any deductions taken under the Contract or by the Funds for taxes, charges
or fees. Some states may require the Company to return the premiums paid for
the returned Contract.
Once the Contract is in effect, you may exchange it during the first 24 months
after its issuance for a non-variable permanent life insurance contract
offered by the Company on the life of the Insured. The amount at risk to the
Company (i.e., the difference between the Death Benefit and the Account Value)
under the new contract will be equal to or less than the amount at risk to the
Company under the exchanged Contract on the date of exchange. Premiums under
the new Contract will be based on the same risk classification as the
exchanged Contract. The exchange is subject to adjustments in premiums and
Account Value to reflect any variance between the exchanged Contract and the
new contract. The Company reserves the right to make such a contract available
that is offered by the Company's parent or by any affiliate of the Company.
SUSPENSION OF VALUATION, PAYMENTS AND TRANSFERS
The Company will suspend all procedures requiring valuation of the Variable
Account (including transfers, surrenders and loans) on any day the New York
Stock Exchange is closed or trading is restricted due to an existing emergency
as defined by the Securities and Exchange Commission, or on any day the
Securities and Exchange Commission has ordered that the right of surrender of
the Contracts be suspended for the protection of Contract Owners, until such
condition has ended.
LAST SURVIVOR CONTRACTS
We offer the Contracts on either a single life or a "last survivor" basis.
Contracts sold on a last survivor basis operate in a manner almost identical
to the single life version. The most important difference is that the last
survivor version involves two Insureds and the proceeds are paid only on the
death of the last surviving Insured. The other significant differences between
the last survivor and single life versions are listed below:
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Last survivor Contracts are offered for prospective insured persons
age 18-85.
The cost of insurance charges under the last survivor Contracts
reflect the anticipated mortality of the two Insureds and the fact
that the Death Benefit is not payable until the death of the second
Insured.
To qualify for simplified underwriting under a last survivor
Contract, both Insureds must meet the simplified underwriting
standards.
For a last survivor Contract to be reinstated, both Insureds must
be alive on the date of reinstatement.
The Contract provisions regarding misstatement of age or sex,
suicide and incontestability apply to either Insured.
Additional tax disclosures applicable to last survivor Contracts
are provided in "Federal Tax Matters," page __.
The Accelerated Death Benefit provision is only available upon
terminal illness of the last survivor.
The Confinement Waiver Benefit is available upon confinement of
either Insured.
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OTHER MATTERS
VOTING RIGHTS
In accordance with our view of presently applicable law, we will vote the
shares of the Funds at regular and special meetings of its shareholders in
accordance with instructions from Contract Owners (or their assignees, as the
case may be) having a voting interest in the Variable Account. The number of
shares of a Portfolio held in a Variable Sub-Account which are attributable to
each Contract Owner is determined by dividing the Contract Owner's interest in
that Variable Sub-Account by the per share net asset value of the
corresponding Portfolio. We will vote shares for which we have not received
instructions and shares that are not attributable to Contract Owners (i.e.,
shares we own) in the same proportion as we vote shares for which we have
received instructions. If the 1940 Act or any rule promulgated to hereunder
should be amended, however, or if our present interpretation should change
and, as a result, we determine we are permitted to vote the shares of the
Funds in our own right, we may elect to do so.
We determine the voting interests of the Contract Owner (or the assignee) in
the Funds as follows: Contract Owners are entitled to give voting instructions
to the Company with respect to Fund Portfolio shares attributable to them as
described above, determined on the record date for the shareholder meeting for
the Fund. Therefore, if a Contract Owner has taken a loan secured by the
Contract, amounts transferred from the Sub-Account(s) to the Loan Account in
connection with the loan (see "Access to Your Money--Contract Loans," page __)
will not be considered in determining the voting interests of the Contract
Owner. Contract Owners should review the current prospectuses for the Funds to
determine matters on which Fund shareholders may vote.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the sub-classification or investment objective of a Fund
or to approve or disapprove an investment advisory contract for a Fund.
In addition, we may disregard voting instructions in favor of changes
initiated by Contract Owners in the investment objectives or the investment
adviser of a Fund if we reasonably disapprove of such changes. We will
disapprove a change would be disapproved only if the proposed change is
contrary to state law or prohibited by state regulatory authorities. If we do
disregard voting instructions, we will include a summary of that action and
the reasons therefor in the next periodic report to Contract Owners.
STATEMENTS TO CONTRACT OWNERS
We will maintain all records relating to the Variable Account and the Variable
Sub-Accounts. At least once each Contract Year, we will send to each Contract
Owner a statement showing the coverage amount and the Account Value of his or
her Contract (indicating the number of Accumulation Units credited to the
Contract in each Variable Sub-Account and the corresponding Accumulation Unit
value), and any outstanding loan secured by the Contract as of the date of the
statement. The statement will also show premiums paid, Monthly Deduction
Amounts under the Contract since the last statement, and any other information
required by any applicable law or regulation.
LIMIT ON RIGHT TO CONTEST
The Company may not contest the validity of the Contract after it has been in
effect during the Insured's lifetime for two years from the Contract Date. If
the Contract is reinstated, the two-year period is measured from the date of
reinstatement. Any increase in the Specified Amount for which evidence of
insurability was obtained is contestable for 2 years from its effective date.
In addition, if the Insured dies by suicide while sane or self destruction
while insane in the two-year period after the Contract Date, or such period as
specified in state law, the benefit payable will be limited to the premiums
paid less any Indebtedness and partial withdrawals. If the Insured dies by
suicide while sane or self-destruction while insane in the two-year period
following an increase in the Specified Amount, the benefit payable with
respect to the increase will be limited to the additional premium paid for
such increase, less any Indebtedness and partial withdrawals.
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MISSTATEMENT AS TO AGE AND SEX
If the age or sex of the Insured is incorrectly stated, the Death Benefit will
be appropriately adjusted as specified in the Contract.
BENEFICIARY
You name the beneficiary in the application for the Contract. You may change
the beneficiary (unless irrevocably named) during the Insured's lifetime by
written request to the Company. If no beneficiary is living when the Insured
dies, the proceeds will be paid to the Contract Owner if living; otherwise to
the Contract Owner's estate.
ASSIGNMENT
Unless required by state law, the Contract may not be assigned as collateral
for a loan or other obligation.
DIVIDENDS
No dividends will be paid under the Contracts.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be distributed exclusively by Dean Witter Reynolds Inc.
("Dean Witter"), which serves as the principal underwriter of the Contracts
under a general agency agreement with the Company.
Dean Witter is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
Dean Witter is located at Two World Trade Center, New York, New York. Dean
Witter is a member of the New York Stock Exchange and the National Association
of Securities Dealers.
We may pay up to a maximum sales commission of 6.75%. Dean Witter will pay
annually to its Account Executives from its profits, an amount equal to .10%
of the net assets of the Variable Account attributable to the Contracts. In
addition, sale of the Contract may count toward incentive program awards for
the Account Executive.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
We hold the assets of the Variable Account. We keep those assets physically
segregated and held separate and apart from the general account of the
Company. We maintain records of all purchases and redemptions of shares of the
Fund.
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FEDERAL TAX MATTERS
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INTRODUCTION
The following discussion is general and is not intended as tax advice. The
Company makes no guarantee regarding the tax treatment of any Contract or
Transaction involving a Contract. Federal, state, local and other tax
consequences of ownership or purchase of a life insurance contract depend upon
the individual circumstances of each person. If you are concerned about any
tax consequences with regard to your individual circumstances, you should
consult a qualified tax advisor.
TAXATION OF THE COMPANY AND THE VARIABLE ACCOUNT
We are taxed as a life insurance company under Part I of Subchapter L of the
Internal Revenue Code. Since the Variable Account is not an entity separate
from the Company and its operations form a part of the Company, it will not be
taxed separately. Under the Code, the Company believes that the Variable
Account investment income and net capital gains will not be taxed because they
are applied to increase the reserves under the Contracts. Accordingly, the
Company does not currently make provisions for any such taxes. If the Company
is taxed on investment income or capital gains of the Variable Account, then
the Company may impose a charge against the Variable Account in the future.
TAXATION OF CONTRACT BENEFITS
To qualify as a life insurance contract for federal income tax purposes, the
Contract must meet the definition of a life insurance contract set forth in
Section 7702 of the Code. Section 7702 limits the amount of premiums that may
be invested in a contract. Section 7702 does not address certain features of
the Contract. Nevertheless, the Company believes that the Contact will meet
the Section 7702 definition of a life insurance contract. This means that:
the death benefit should be fully excludable from the gross income
of the beneficiary under Section 101(a)(1) of the Code; and
the Contract Owner should not be taxed on the Cash Value of the
Contract, including any increases, until actual distributions from
the Contract.
In addition, under proposed regulations interpreting Section 7702, it is
unclear whether a substandard risk Contract will meet the Section 7702
definition. If a Contract were not a life insurance contract under Section
7702, the Contract would not provide most of the tax advantages normally
provided by a life insurance contract. The Company reserves the right to amend
the Contracts to comply with any future changes in the Code, any regulations
or rulings under the Code and any other requirements imposed by the Internal
Revenue Service.
Upon surrender of the Contract, the cash surrender value is taxable to the
extent it exceeds the investment in the Contract. The investment in the
Contract is the gross premium or other consideration paid for the Contract
reduced by any amounts previously received from the Contract to the extent
such amounts were properly excluded from gross income. For non-modified
endowment contracts, a partial withdrawal, or a reduction in benefit in the
first fifteen years of the Contract, may result in a taxable distribution of
income before recovery of the investment in the Contract. Partial withdrawals
and reduction in benefits on non-modified endowment contracts after fifteen
years are taxed first as a recovery of investment in the Contract, then as a
taxable distribution of income.
If you own and are the Insured under the Contract, the Death Benefit will be
included in your gross estate for federal estate tax purposes if the proceeds
are payable to your estate. If the beneficiary is other than your estate but
you retained incidents of ownership in the Contract, the Death Benefit will
also be included in your gross estate. Examples of incidents of ownership
include, but are not limited to, the right:
to change beneficiaries.
to assign the Contract or revoke an assignment,
to pledge the Contract, or
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to obtain a policy loan.
If you own and are the Insured under the Contract and you transfer all
incidents of ownership in the Contract, the Death Benefit will be included in
your gross estate if you die within three years from the date of the ownership
transfer. State and local estate and inheritance tax consequences may also
apply. In addition, certain transfers of the Contract or Death Benefit, either
during life or at death, to individuals (or trusts for the benefit of such
individuals) two or more generations below that of the transferor may be
subject to the federal generation skipping transfer tax.
In addition, the Contract may be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans, and
others. The tax consequences of such plans may vary depending on the
particular facts and circumstances of each individual arrangement. Therefore,
if you are contemplating the use of a Contract in any arrangement in which the
value depends in part on tax consequences, you should be sure to consult a
qualified tax advisor about the tax attributes of the arrangement.
MODIFIED ENDOWMENT CONTRACTS
A life insurance contract is treated as a "modified endowment contract" under
Section 7702A of the Code if it meets the definition of life insurance in
Section 7702 but fails the "seven-pay" test of Section 7702A. The seven-pay
test provides that premiums cannot be paid at a rate more rapidly than that
allowed by the payment of seven annual premiums using specified computational
rules provided in Section 7702A(c).
The large single premium permitted under the Contract (which is equal to 100%
of the "Guideline Single Premium" as defined in Section 7702 of the Code) does
not meet the specified computational rules for the "seven-pay test" under
Section 7702A(c). Therefore, the Contract will generally be treated as a
modified endowment contract for federal income tax purposes. However, an
exchange of a life insurance contract that is not a modified endowment
contract will not cause the new contract to be a modified endowment contract
if no additional premiums are paid. An exchange under Section 1035 of the Code
of a life insurance contract that is a modified endowment contract for a new
life insurance contract will always cause the new contract to be a modified
endowment contract.
A contract that is classified as a modified endowment contract is generally
eligible for the beneficial tax treatment accorded to life insurance.
Accordingly, the death benefit is excluded from income and increases in value
are not subject to current taxation. If a person receives any amount as a
policy loan from a modified endowment contract, or assigns or pledges any part
of the value of the contract, that amount is treated as a distribution. All
distributions received before the insured's death are treated first as income
(to the extent of gain) and then as recovery of investment in the contract.
Any amounts that are taxable withdrawals will be subject to a 10% additional
tax, with certain exceptions:
distributions made on or after the date on which the taxpayer
attains age 59 1/2;
distributions attributable to the taxpayer's becoming disabled
(within the meaning of Section 72(m)(7) of the Code); or
any distribution that is part of a series of substantially equal
periodic payments (not less frequently than annually) made for the
life (or life expectancy) of the taxpayer or the joint lives (or
joint life expectancies) of such taxpayer and his or her
beneficiary.
All modified endowment contracts that are issued within any calendar year to
the same Contract Owner by one company or its affiliates shall be treated as
one modified endowment contract in determining the taxable portion of any loan
or distributions.
DIVERSIFICATION REQUIREMENTS
For a Contract to be treated as a variable life insurance contract for federal
tax purposes, the investments in the Variable Account must be "adequately
diversified" in accordance with the standards provided in the Treasury
regulations. If the investments in the Variable Account are not adequately
diversified, then the Contract will not be treated as a variable life
insurance contract for federal income tax purposes and the Owner will be taxed
on the excess of the Contract Value over the investment in the Contract.
Although the Company does not have control over the Funds or their
investments, the Company expects the Funds to meet the diversification
requirements.
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OWNERSHIP TREATMENT
In connection with the issuance of the regulations on the adequate
diversification standards, the Department of the Treasury announced that the
regulations do not provide guidance concerning the extent to which contract
owners may direct their investments among sub-accounts of a Variable Account.
The Internal Revenue Service has previously stated in published rulings that a
variable contract owner will be considered the owner of separate account
assets if the owner possesses incidents of ownership in those assets such as
the ability to exercise investment control over the assets. At the time the
diversification regulations were issued, the Treasury Department announced
that guidance would be issued in the future regarding the extent that owners
could direct their investments among sub-accounts without being treated as
owners of the underlying assets of the Variable Account.
The ownership rights under this contract are similar to, but different in
certain respects from, those described by the service in rulings in which it
was determined that contract owners were not owners of separate account
assets. For example, the owner of this contract has the choice of more
investment options to which to allocate premiums and contract values, and may
be able to transfer among investment options more frequently than in such
rulings. These differences could result in the contract owner being treated as
the owner of the Variable Account. In those circumstances, income and gain
from the Variable Account assets would be includible in the Contract Owner's
gross income. In addition, the Company does not know what standards will be
set forth in the regulations or rulings which the Treasury Department has
stated it expects to issue. It is possible that Treasury Department's
position, when announced, may adversely affect the tax treatment of existing
contracts. The Company, therefore, reserves the right to modify the contract
as necessary to attempt to prevent the contract owner from being considered
the federal tax owner of the assets of the Variable Account. However, the
Company makes no guarantee that such modification to the contract will be
successful.
POLICY LOAN INTEREST
Interest paid on loans against a Contract is generally not deductible.
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ADDITIONAL INFORMATION ABOUT THE COMPANY
The Company also acts as the sponsor for two other of its separate accounts
that are registered investment companies: Northbrook Variable Annuity Account
and Northbrook Variable Annuity Account II. The officers and employees of the
Company are covered by a fidelity bond in the amount of $5,000,000. No person
beneficially owns more than 5% of the outstanding voting stock of The Allstate
Corporation, of which the Company is an indirect wholly owned subsidiary.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company are listed below, together
with information as to their ages, dates of election and principal business
occupations during the last five years (if other than their present business
occupations).
LOUIS G. LOWER, II, 52, Chief Executive Officer and Chairman of the Board
(1995)*
Also Director (1986-Present) and Senior Vice President (1995-Present) of
Allstate Insurance Company; Director (1991-Present) of Allstate Life Financial
Services, Inc.; Director (1986-Present) and President (1990-Present) Allstate
Life Insurance Company; Director (1983-Present) and Chairman of the Board
(1990-Present) of Allstate Life Insurance Company of New York; Chairman of the
Board of Directors and Chief Executive Officer (1995-1997), Chairman of the
Board of Directors and President (1990-1995) of Glenbrook Life Insurance
Company; Director (1992-Present), Chairman of the Board of Directors and Chief
Executive Officer (1995-Present) of Glenbrook Life and Annuity Company;
Director and Chairman of the Board (1995-Present) of Laughlin Group Holdings,
Inc.; Director and Chairman of the Board of Directors and Chief Executive
Officer (1989-Present) Lincoln Benefit Life Company; Chairman of the Board of
Directors and Chief Executive Officer (1995-Present) Surety Life Insurance
Company; and Trustee (1991- Present) and Vice President (1995-Present) The
Allstate Foundation.
THOMAS J. WILSON, II, 41, Vice Chairman (1999)*
Also Director (1995-Present) and Senior Vice President (1999) of Allstate
Insurance Company; Director (1999) Allstate Life Financial Services, Inc.;
Director (1995-Present) and President (1999) Allstate Life Insurance Company;
Director (1999) and President (1998-Present) of Allstate Life Insurance Company
of New York; Director (1999) and Vice Chairman of Glenbrook Life and Annuity
Company; Director (1999) Lincoln Benefit Life Company; Director (1999) and Vice
Chairman of Northbrook Life Insurance Company; Director (1999) of Surety Life
Insurance Company.
PETER H. HECKMAN, 52, President, Chief Operating Officer and Director (1996)*
Also Director and Vice President (1988-Present) of Allstate Life Insurance
Company; Director (1990-1996), Vice President (1989-Present), Allstate Life
Insurance Company of New York; Director (1991-1993) of Allstate Life Financial
Services, Inc.; Director (1990-1997), President and Chief Operating Officer
(1996-1997), and Vice President (1990-1996), Glenbrook Life Insurance Company;
Director (1992-Present) President and Chief Operating Officer (1996-Present),
and was Vice President (1995-1996), Glenbrook Life and Annuity Company;
Director (1995-Present) and Vice Chairman of the Board (1996-Present) Laughlin
Group Holdings, Inc.; Director (1990-Present) and Vice Chairman of the Board
(1996-Present) Lincoln Benefit Life Company; and Director (1995-Present) and
Vice Chairman of the Board (1996-Present) Surety Life Insurance Company.
MICHAEL J. VELOTTA, 52, Vice President, Secretary, General Counsel, and
Director (1992)*
Also Director and Secretary (1993-Present) of Allstate Life Financial
Services, Inc.; Director (1992-Present) Vice President, Secretary and General
Counsel (1993-Present) Allstate Life Insurance Company; Director
(1992-Present) Vice President, Secretary and General Counsel (1993-Present)
Allstate Life Insurance Company of New York; Director (1992-Present) Vice
President, Secretary and General Counsel (1993-1997) Glenbrook Life Insurance
Company; Director (1992-Present) Vice President, Secretary and General Counsel
(1993-Present) Glenbrook Life and Annuity Company; Director and Secretary
(1995-Present) Laughlin Group Holdings, Inc.; Director (1992-Present) and
Assistant Secretary (1995-Present) Lincoln Benefit Life Company; and Director
and Assistant Secretary (1995-Present) Surety Life Insurance Company.
JOHN R. HUNTER, 43, Assistant Vice President (1990)* and Director (1994)*
Also Assistant Vice President (1990-Present) Allstate Life Insurance Company;
Assistant Vice President (1996-Present) Allstate Life Insurance Company of New
York; President and Chief Operating Officer (1998-Present) Allstate Life
Financial Services, Inc.; Director (1996-1997) Glenbrook Life Insurance
Company; and Director (1996-Present) and Senior Vice President--Product
Management (1995-Present) Glenbrook Life and Annuity Company.
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MARLA G. FRIEDMAN, 44, Vice President (1996)*
Also Director (1991-Present) and Vice President (1988-Present) Allstate Life
Insurance Company; Director (1993-1996) Allstate Life Financial Services,
Inc.; Director (1997-Present) and Assistant Vice President (1996-Present)
Allstate Life Insurance Company of New York; Director (1995-1996) Allstate
Settlement Corporation; Director (1991-1996), President and Chief Operating
Officer (1995-1996) and Vice President (1990-1995) and (1996-1997) Glenbrook
Life Insurance Company; Director (1992-1996), President and Chief Operating
Officer (1995-1996) and Vice President (1992-1995) and (1996-Present)
Glenbrook Life and Annuity Company; and Director and Vice Chairman of the
Board (1995-1996) Laughlin Group Holdings, Inc.
KAREN C. GARDNER, 44, Vice President (1996)*
Vice President (1996-Present) Allstate Insurance Company; Vice President
(1996-Present) Allstate Life Insurance Company; Vice President (1996-Present)
Allstate Life Insurance Company of New York; Vice President (1997-Present),
Allstate Life Financial Services, Inc.; Vice President (1996-1997) Glenbrook
Life Insurance Company; Vice President (1996-Present) Laughlin Group Holdings,
Inc.; Assistant Vice President (1996-Present) Lincoln Benefit Life Company;
Vice President (1996-Present) Northbrook Life Insurance Company; Assistant
Vice President (1996-Present) Surety Life Insurance Company. Prior to 1996 she
was a Partner (1975-1996) Ernst & Young LLP.
KEVIN R. SLAWIN, 40, Director and Vice President (1996)*
Also Assistant Vice President and Assistant Treasurer (1995-1996) Allstate
Insurance Company; Director (1996-Present) and Assistant Treasurer (1995-1996)
Allstate Financial Services, Inc.; Director and Vice President (1996-Present)
and Assistant Treasurer (1995-1996) Allstate Life Insurance Company; Director
and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Allstate
Life Insurance Company of New York; Director and Vice President (1996-1997)
and Assistant Treasurer (1995-1996) Glenbrook Life Insurance Company; Vice
President (1996-Present) and Assistant Treasurer (1995-1996) Glenbrook Life
and Annuity Company; Director (1996-Present) and Assistant Treasurer
(1995-1996) Laughlin Group Holdings, Inc.; Director (1996-Present) Lincoln
Benefit Life Company; Director (1996-Present) Surety Life Insurance Company;
Assistant Treasurer and Director (1994-1995) Sears Roebuck and Company; and
Treasurer and First Vice President (1986-1994) Sears Mortgage Corporation.
CASEY J. SYLLA, 54, Chief Investment Officer and Director (1995)*
Also Director (1995-Present) Senior Vice President and Chief Investment
Officer (1995-Present) Allstate Insurance Company; Director (1995-Present)
Chief Investment Officer (1995-Present) Allstate Life Insurance Company; Chief
Investment Officer (1995-Present) Allstate Life Insurance Company of New York;
Chief Investment Officer (1995-1997) Glenbrook Life Insurance Company; Chief
Investment Officer (1995-Present) Glenbrook Life and Annuity Company; Prior to
1995 he was Senior Vice President and Executive Officer--Investments
(1992-1995) of Northwestern Mutual Life Insurance Company.
JAMES P. ZILS, 47, Treasurer (1995)*
Also Vice President and Treasurer (1995-Present) Allstate Insurance Company;
Treasurer (1995-Present) Allstate Life Financial Services, Inc.; Treasurer
(1995-Present) Allstate Life Insurance Company; Treasurer (1995-Present)
Allstate Life Insurance Company of New York; Treasurer (1995-1997) Glenbrook
Life Insurance Company; Treasurer (1995-Present) Glenbrook Life and Annuity
Company; and Treasurer (1995-Present) Laughlin Group Holdings, Inc. From 1995
to 1993 he was Vice President of Allstate Life Insurance Company.
* Date elected to current office
YEAR 2000
Northbrook is heavily dependent upon complex computer systems for all phases
of its operations, including customer service and policy and contract
administration. Since many of Northbrook's older computer software programs
recognize only the last two digits of the year in any date, some software may
fail to operate properly in or after the year 1999, if the software is not
reprogrammed or replaced ("YEAR 2000 ISSUE"). Northbrook believes that may of
its counterparties and suppliers also have Year 2000 Issues which could affect
Northbrook. In 1995, Allstate Insurance Company commenced a plan intended to
mitigate and/or prevent the adverse effects of Year 2000 Issues. These
strategies include normal development and enhancement of new and existing
systems, upgrades to operating systems already covered by maintenance
agreements and modifications to existing systems to make them Year 2000
compliant. The plan also includes Northbrook actively working with it major
external counterparties and suppliers to asses their compliance efforts and
Northbrook's exposure to them. Northbrook presently believes that it will
resolve the Year 2000 Issue in a timely manner, and the financial impact will
not materially affect its results of operations, liquidity or financial
position. Year 2000 costs are and will be expensed as incurred.
LEGAL PROCEEDINGS
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. Management, after consultation with legal counsel, does not
anticipate the ultimate liability arising from such pending or threatened
litigation to have a material effect on the financial condition of the Company
or the Variable Account.
33
<PAGE>
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds, Washington, D.C., has advised the Company on
certain federal securities law matters. All matters of State law pertaining to
the Contracts, including the validity of the Contracts and the Company's right
to issue such Contracts have been passed upon by Michael J. Velotta, General
Counsel of the Company.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. This prospectus does
not contain all information set forth in the registration statement, its
amendments and exhibits, to all of which reference is made for further
information concerning the Variable Account, the Funds, the Company, and the
Contracts. The exhibits previously filed with this registration statement
include hypothetical illustrations of the Contract that show how the Death
Benefit, Account Value and Cash Surrender Value could vary over an extended
period of time assuming hypothetical gross rates of return (i.e., investment
income and capital gains and losses, realized or unrealized) for the Variable
Account equal to annual rates of 0%, 6%, and 12%, an initial premium of $10,000,
Insureds in the standard rating class, and based on current and guaranteed
Contract charges.
EXPERTS
The financial statements and the related financial statement schedule of
Northbrook and the financial statements of the Variable Account included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The hypothetical Contract illustrations previously included in the Company's
registration statement have been approved by Diana Montigney, FSA, Allstate Life
Insurance Company, and were included in reliance upon her opinion as to their
reasonableness.
34
<PAGE>
FINANCIAL INFORMATION
-----------------------------------------------------------------------------
The financial statements of the Company and the Variable Account appear
immediately below. The financial statements for the Company should be
considered as bearing only on the ability of the Company to fulfill its
obligations under the Contracts. They do not relate to the investment
performance of the Variable Account.
35
<PAGE>
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
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statements of Financial Position of Northbrook
Life Insurance Company (the "Company", 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
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
December 31,
------------
($ in thousands) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $81,156 and $72,491) $ 86,336 $ 76,402
Short-term 5,083 3,031
---------- ----------
Total investments 91,419 79,433
Reinsurance recoverable from Allstate Life
Insurance Company 2,148,091 2,293,094
Receivable from affiliates, net -- 1,467
Other assets 8,206 5,033
Separate Accounts 7,031,083 5,719,203
---------- ----------
TOTAL ASSETS $9,278,799 $8,098,230
========== ==========
LIABILITIES
Reserve for life-contingent contract benefits $ 145,055 $ 144,352
Contractholder funds 2,003,122 2,148,555
Current income taxes payable 1,830 162
Deferred income taxes 3,316 2,674
Payable to affiliates, net 6,586 --
Separate Accounts 7,031,083 5,719,203
---------- ----------
TOTAL LIABILITIES 9,190,992 8,014,946
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 56,600 56,600
Retained income 25,340 21,642
Accumulated other comprehensive income:
Unrealized net capital gains 3,367 2,542
---------- ----------
Total accumulated other comprehensive income 3,367 2,542
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 87,807 83,284
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $9,278,799 $8,098,230
========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net investment income $ 5,691 $ 5,146 $ 4,888
Realized capital gains and losses 2 (68) (20)
------- ------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 5,693 5,078 4,868
Income tax expense 1,995 1,756 1,666
------- ------- -------
NET INCOME 3,698 3,322 3,202
------- ------- -------
OTHER COMPREHENSIVE INCOME, AFTER-TAX
Change in unrealized net capital gains and losses 825 1,256 (1,371)
------- ------- -------
COMPREHENSIVE INCOME $ 4,523 $ 4,578 $ 1,831
======= ======= =======
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
December 31,
------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL CAPITAL PAID-IN 56,600 56,600 56,600
-------- -------- --------
RETAINED INCOME
Balance, beginning of year 21,642 18,320 15,118
Net income 3,698 3,322 3,202
-------- -------- --------
Balance, end of year 25,340 21,642 18,320
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year 2,542 1,286 2,657
Change in unrealized net capital gains and losses 825 1,256 (1,371)
-------- -------- --------
Balance, end of year 3,367 2,542 1,286
-------- -------- --------
Total shareholder's equity $ 87,807 $ 83,284 $ 78,706
======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,698 $ 3,322 $ 3,202
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, amortization and
other non-cash items 518 516 782
Realized capital gains and losses (2) 68 20
Changes in:
Life-contingent contract benefits and
contractholder funds 273 205 (198)
Income taxes payable 1,866 (480) 346
Other operating assets and liabilities 4,126 (264) 542
-------- -------- --------
Net cash provided by operating activities 10,479 3,367 4,694
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,922 1,606 3,522
Investment collections 10,253 10,036 5,770
Investment purchases (20,690) (18,568) (15,532)
Change in short-term investments, net (1,964) 3,559 1,459
-------- -------- --------
Net cash used in investing activities (10,479) (3,367) (4,781)
-------- -------- --------
NET DECREASE IN CASH -- -- (87)
CASH AT THE BEGINNING OF YEAR -- -- 87
-------- -------- --------
CASH AT END OF YEAR $ -- $ -- $ --
======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. GENERAL
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Northbrook Life
Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"). 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 exclusively through Dean
Witter Reynolds Inc. ("Dean Witter") (see Note 4), a wholly owned subsidiary of
Morgan Stanley Dean Witter. Savings products include deferred annuities, such as
variable annuities and fixed rate single and flexible premium annuities, and
immediate annuities. Life insurance includes universal life and variable life
products. 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 surrenders 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. Such events would present
an increased level of competition for sales of the Company's products.
Furthermore, the market for deferred annuities and interest-sensitive life
insurance is enhanced by the tax incentives available under current law. Any
legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
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.
The Company is authorized to sell life and savings products in all states except
New York, as well as in the District of Columbia and Puerto Rico. The top
geographic locations for statutory premiums and deposits for the Company are
California, Florida and Texas 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.
F-6
<PAGE>
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 reserve for
life-contingent contract benefits and contractholder funds are reported
separately in the statements of financial position. The Company continues to
have primary liability as the direct insurer for risks reinsured.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES
Revenues on 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. 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.
F-7
<PAGE>
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: Northbrook Variable Annuity Account, Northbrook Variable Annuity Account II
and Northbrook Life Variable Life Separate Account A. 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.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to structured
settlement annuities with life contingencies, is computed on the basis of
assumptions as to future investment yields, mortality, morbidity, terminations
and expenses. These assumptions include provisions for adverse deviation and
generally vary by such characteristics as type of coverage, year of issue and
policy duration. Reserve interest rates ranged from 4.00% to 11.00% during 1998.
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 3.25% to 6.50% 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.
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 9).
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.
F-8
<PAGE>
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 reserve for life-contingent
contract benefits and 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.
Investment income earned on the assets which support contractholder funds and
the reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed under the
terms of reinsurance agreements. The following amounts were ceded to ALIC under
reinsurance agreements.
YEAR ENDED DECEMBER 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
Premiums $ 2,528 $ 1,979 $ 3,775
Contract charges 102,218 83,559 60,744
Credited interest, policy benefits,
and certain expenses 217,428 201,526 218,088
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 $26,230, $23,978 and $26,583 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.
F-9
<PAGE>
4. EXCLUSIVE DISTRIBUTION AGREEMENT
The Company and ALIC have a strategic alliance with Dean Witter to develop,
market and distribute proprietary annuity and life insurance products through
Morgan Stanley Dean Witter Financial Advisors. Affiliates of Dean Witter are the
investment managers for the Morgan Stanley Dean Witter Variable Investment
Series, Morgan Stanley Universal Funds, Inc. and the Van Kampen American Capital
Life Investment Trust, the funds in which the assets of the Separate Accounts
are invested.
Under the terms of the strategic alliance, the Company has agreed to use Dean
Witter as an exclusive distribution channel for the Company's products. In
addition to the Company's products, Dean Witter markets other products which
compete with those of the Company. The strategic alliance is cancelable by
either party, however, the Company believes the benefits derived by Dean Witter
will preserve the alliance. If Dean Witter would choose to cancel the alliance,
existing contracts and policies would not be affected.
5. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
--------------------
AMORTIZED FAIR
COST GAINS LOSSES VALUE
---------- ------- ------- -------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1998
U.S. government and agencies $ 8,648 $ 1,469 $ -- $10,117
Municipal 590 11 -- 601
Corporate 33,958 1,634 (16) 35,576
Mortgage-backed securities 37,960 2,250 (168) 40,042
------- ------- ------- -------
Total fixed income securities $81,156 $ 5,364 $ (184) $86,336
======= ======= ======= =======
AT DECEMBER 31, 1997
U.S. government and agencies $ 8,638 $ 823 $ -- $ 9,461
Municipal 1,143 28 -- 1,171
Corporate 25,913 897 (12) 26,798
Mortgage-backed securities 36,797 2,315 (140) 38,972
------- ------- ------- -------
Total fixed income securities $72,491 $ 4,063 $ (152) $76,402
======= ======= ======= =======
</TABLE>
F-10
<PAGE>
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 $ 1,443 $ 1,452
Due after one year through five years 7,546 7,950
Due after five years through ten years 26,008 27,429
Due after ten years 8,199 9,463
------- -------
43,196 46,294
Mortgage-backed securities 37,960 40,042
------- -------
Total $81,156 $86,336
======= =======
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 $ 5,616 $ 5,364 $ 4,675
Short-term investments 190 84 390
------- ------- -------
Investment income, before expense 5,806 5,448 5,065
Investment expense 115 302 177
------- ------- -------
Net investment income $ 5,691 $ 5,146 $ 4,888
======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
Fixed income securities $ 2 $ (70) $ (22)
Short-term investments -- 2 2
------- ------- -------
Realized capital gains and losses 2 (68) (20)
Income tax (1) 24 7
------- ------- -------
Realized capital gains and losses, after tax $ 1 $ (44) $ (13)
======= ======= =======
Excluding calls and prepayments, gross losses of $9, $70 and $32 were realized
on sales of fixed income securities during 1998, 1997 and 1996, respectively.
F-11
<PAGE>
UNREALIZED NET CAPITAL GAINS
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
COST/
AMORTIZED FAIR GROSS UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES NET GAINS
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 81,156 $ 86,336 $ 5,364 $ (184) $ 5,180
======== ======== ======== ========
Deferred income taxes (1,813)
--------
Unrealized net capital gains $ 3,367
========
</TABLE>
CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
Fixed income securities $ 1,269 $ 1,932 $(2,108)
Deferred income taxes (444) (676) 737
------- ------- -------
Increase (decrease) in unrealized net
capital gains $ 825 $ 1,256 $(1,371)
======= ======= =======
SECURITIES ON DEPOSIT
At December 31, 1998, fixed income securities with a carrying value of $9,188
were on deposit with regulatory authorities as required by law.
6. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including 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.
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 $ 86,336 $ 86,336 $ 76,402 $ 76,402
Short-term investments 5,083 5,083 3,031 3,031
Separate Accounts 7,031,083 7,031,083 5,719,203 5,719,203
F-12
<PAGE>
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 $1,839,114 $1,814,684 $1,977,479 $1,951,214
Separate Accounts 7,031,083 7,031,083 5,719,203 5,719,203
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
7. INCOME TAXES
The Company joins the Corporation and its other eligible domestic subsidiaries
(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.
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.
F-13
<PAGE>
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 assets and liabilities at December 31,
are as follows:
1998 1997
---- ----
DEFERRED ASSETS
Separate Accounts $ -- $ 149
------- -------
DEFERRED LIABILITIES
Difference in tax bases of investments (1,503) (1,454)
Unrealized net capital gains (1,813) (1,369)
------- -------
Total deferred liabilities (3,316) (2,823)
------- -------
Net deferred liability $(3,316) $(2,674)
======= =======
The components of income tax expense for the year ended December 31, are as
follows:
1998 1997 1996
---- ---- ----
Current $ 1,797 $ 1,843 $ 1,642
Deferred 198 (87) 24
------- ------- -------
Total income tax expense $ 1,995 $ 1,756 $ 1,666
======= ======= =======
The Company paid income taxes of $129, $2,236 and $2,308 in 1998, 1997 and 1996,
respectively. The Company had a current income tax liability of $1,830 and $162
at December 31, 1998 and 1997, respectively.
F-14
<PAGE>
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%
Tax-exempt income (0.2) (0.4) (0.6)
Other 0.2 -- (0.2)
------ ------ ------
Effective income tax rate 35.0% 34.6% 34.2%
====== ====== ======
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1998, approximately $16,
will result in federal income taxes payable of $6 if distributed by the Company.
No provision for taxes has been made as the Company has no plan to distribute
amounts from this account. No further additions to the account have been
permitted since the Tax Reform Act of 1984.
8. STATUTORY FINANCIAL INFORMATION
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.
F-15
<PAGE>
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
$3,518.
9. 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:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ---------------------------- -----------------------------
After- After- After-
Pretax Tax tax Pretax Tax tax Pretax Tax tax
------ --- --- ------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized capital gains
and losses:
- ---------------------------------
Unrealized holding gains
(losses) arising during
the period $ 1,271 $ (445) $ 826 $ 1,862 $ (652) $ 1,210 $(2,130) $ 745 $(1,385)
Less: reclassification
adjustment for realized
net capital gains
included in net income 2 (1) 1 (70) 24 (46) (22) 8 (14)
------- ------- ------- ------- ------- ------- ------- ------- -------
Unrealized net capital
gains (losses) 1,269 (444) 825 1,932 (676) 1,256 (2,108) 737 (1,371)
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
income $ 1,269 $ (444) $ 825 $ 1,932 $ (676) $ 1,256 $(2,108) $ 737 $(1,371)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
10. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social, economic
and regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing banks
from engaging in the securities and insurance business, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and proposed legislation to prohibit the use of gender in
determining insurance rates and benefits. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. In the opinion of management, the ultimate liability, if any, arising
from such pending or threatened litigation is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
F-16
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 494,256 $ 494,256 $ --
========= ========= =========
Premiums and contract charges:
Life and annuities $ 104,746 $ 104,746 $ --
========= ========= =========
GROSS NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 515,890 $ 515,890 $ --
========= ========= =========
Premiums and contract charges:
Life and annuities $ 85,538 $ 85,538 $ --
========= ========= =========
GROSS NET
YEAR ENDED DECEMBER 31, 1996 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 556,242 $ 556,242 $ --
========= ========= ==========
Premiums and contract charges:
Life and annuities $ 64,519 $ 64,519 $ --
========= ========= ==========
F-17
<PAGE>
- --------------------------------------------------------------------------------
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
Financial Statements as of December 31, 1998 and
for the periods ended December 31,1998 and
December 31,1997, and Independent Auditors' Report
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Independent Auditors' Report 1
Statements of Net Assets as of December 31, 1998 for the following:
Investments in the Morgan Stanley Dean Witter Investment Series
Portfolios: 2
Money Market
High Yield
Equity
Quality Income Plus
Strategist
Dividend Growth
Utilities
European Growth
Capital Growth
Global Dividend Growth
Pacific Growth
Capital Appreciation
Income Builder
Statements of Operations for the following:
For the Year Ended December 31, 1998 and the Period November
13, 1997 (commencement of operations) to December 31, 1997
Investments in the Morgan Stanley Dean Witter
Investment Series Portfolios:
Money Market 3,5
High Yield
Equity
Quality Income Plus
Strategist
Dividend Growth
Utilities
European Growth 4,6
Capital Growth
Global Dividend Growth
Pacific Growth
Capital Appreciation
Income Builder
Statements of Changes in Net Assets for the following:
For the Year Ended December 31, 1998 and the Period
November 13, 1997 (commencement of operations) to December 31, 1997
Investments in the Morgan Stanley Dean Witter Investment
Series Portfolios:
Money Market 7,9
High Yield
Equity
Quality Income Plus
Strategist
Dividend Growth
Utilities
European Growth 8,10
Capital Growth
Global Dividend Growth
Pacific Growth
Capital Appreciation
Income Builder
Notes to Financial Statements 11 - 13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Northbrook Life Insurance Company:
We have audited the accompanying statements of net assets of each of the
sub-accounts ("portfolios" for the purposes of this report), listed in the table
of contents, that comprise Northbrook Life Variable Life Separate Account A (the
"Account"), a Separate Account of Northbrook Life Insurance Company, an
affiliate of The Allstate Corporation, as of December 31, 1998, and the related
statements of operations and changes in net assets for the applicable periods
indicated in the table of contents. These financial statements are the
responsibility of the Account's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. Our procedures included
confirmation of securities owned at December 31, 1998. 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 each of the portfolios, listed in the table
of contents, that comprise the Account as of December 31, 1998, and the results
of their operations, and the changes in their net assets for each of the
periods, indicated in the table of contents, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 18, 1999
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF NET ASSETS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
($ and shares in whole amounts)
ASSETS
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Money Market, 1,038,941 shares (cost $1,038,941) ................ $1,038,941
High Yield, 119,278 shares (cost $712,411) ...................... 604,737
Equity, 36,997 shares (cost $1,309,419) ......................... 1,427,346
Quality Income Plus, 106,470 shares (cost $1,163,132) ........... 1,171,172
Strategist, 31,502 shares (cost $485,109) ....................... 524,196
Dividend Growth, 132,210 shares (cost $2,890,639) ............... 2,925,803
Utilities, 19,127 shares (cost $372,569) ........................ 406,451
European Growth 14,708 shares (cost $386,702) ................... 399,768
Capital Growth, 10,092 shares (cost $176,341) ................... 205,469
Global Dividend Growth, 55,575 shares (cost $771,925) ........... 768,603
Pacific Growth, 3,202 shares (cost $17,918) ..................... 16,490
Capital Appreciation, 4,237 shares (cost $48,404) ............... 43,898
Income Builder, 25,284 shares (cost $299,604) ................... 289,760
----------
Total assets ........................................... 9,822,634
LIABILITIES
Payable to Northbrook Life Insurance Company:
Accrued contract charges ........................................ 2,584
----------
Net assets ............................................. $9,820,050
==========
See notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------
For the Year Ended December 31, 1998
---------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ............................. $ 75,284 $ 51,206 $ 97,876 $ 38,133 $ 31,144 $ 173,939 $ 15,610
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk .......... (6,262) (4,830) (7,287) (4,159) (2,485) (15,782) (1,265)
--------- --------- --------- --------- --------- --------- ---------
Net investment income (loss)..... 69,022 46,376 90,589 33,974 28,659 158,157 14,345
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Realized gains (losses) from sales of
investments:
Proceeds from sales ............... 812,217 159,264 143,153 10,611 17,799 131,654 12,499
Cost of investments sold .......... 812,217 186,549 128,870 41,674 57,283 186,529 17,658
--------- --------- --------- --------- --------- --------- ---------
Net realized gains (losses) ..... -- (27,285) 14,283 (31,063) (39,484) (54,875) (5,159)
Change in unrealized gains (losses) . -- (107,673) 114,532 7,597 38,959 32,997 33,698
--------- --------- --------- --------- --------- --------- ---------
Net gains (losses) on investments -- (134,958) 128,815 (23,466) (525) (21,878) 28,539
--------- --------- --------- --------- --------- --------- ---------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS .......................... $ 69,022 $ (88,582) $ 219,404 $ 10,508 $ 28,134 $ 136,279 $ 42,884
========= ========= ========= ========= ========= ========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
----------------------------------------------------------------
For the Year Ended December 31, 1998
----------------------------------------------------------------
Global Capital
European Capital Dividend Pacific Appreci- Income
Growth Growth Growth Growth ation Builder
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends .......................................... $ 17,237 $ 2,673 $ 51,502 $ 400 $ 204 $ 9,718
Charges from Northbrook Life Insurance Company:
Mortality and expense risk ....................... (2,436) (666) (3,900) (155) (334) (1,910)
-------- -------- -------- -------- -------- --------
Net investment income (loss).................. 14,801 2,007 47,602 245 (130) 7,808
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales ............................ 47,367 1,573 54,620 551 964 36,892
Cost of investments sold ....................... 43,899 1,580 51,388 281 931 70,635
-------- -------- -------- -------- -------- --------
Net realized gains (losses) .................. 3,468 (7) 3,232 270 33 (33,743)
Change in unrealized gains (losses) .............. 13,019 28,508 (3,294) (1,428) (3,776) (9,844)
-------- -------- -------- -------- -------- --------
Net gains (losses) on investments ............ 16,487 28,501 (62) (1,158) (3,743) (43,587)
-------- -------- -------- -------- -------- --------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS ....................................... $ 31,288 $ 30,508 $ 47,540 $ (913) $ (3,873) $(35,779)
======== ======== ======== ======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------
For the Period November 13, 1997 (commencement of operations)
to December 31, 1997
---------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ............................. $ 455 $ 337 $ 268 $ 711 $ 110 $ 1,300 $ 67
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk .......... (78) (17) (100) (68) (5) (160) (3)
--------- --------- --------- --------- --------- --------- ---------
Net investment income (loss) .... 377 320 168 643 105 1,140 64
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Realized gains (losses) from sales
of investments:
Proceeds from sales ............... 59,910 16 142 189 5 175 3
Cost of investments sold .......... 59,910 16 143 188 5 174 3
--------- --------- --------- --------- --------- --------- ---------
Net realized gains (losses) ..... -- -- (1) 1 -- 1 --
Change in unrealized gains (losses) . -- (1) 3,395 443 128 2,167 184
--------- --------- --------- --------- --------- --------- ---------
Net gains (losses) on investments -- (1) 3,394 444 128 2,168 184
--------- --------- --------- --------- --------- --------- ---------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS .......................... $ 377 $ 319 $ 3,562 $ 1,087 $ 233 $ 3,308 $ 248
========= ========= ========= ========= ========= ========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Dean Witter Variable Investment Series Portfolios
----------------------------------------------------------------
For the Period November 13, 1997 (commencement of operations)
to December 31, 1997
----------------------------------------------------------------
Global Capital
European Capital Dividend Pacific Appreci- Income
Growth Growth Growth Growth ation Builder
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends .......................................... $ -- $ -- $ 104 $ -- $ -- $ --
Charges from Northbrook Life Insurance Company:
Mortality and expense risk ....................... (23) (4) (21) -- (11) --
-------- -------- -------- -------- -------- --------
Net investment income (loss) ............ (23) (4) 83 -- (11) --
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales ............................ 25 4 30 -- 16 --
Cost of investments sold ....................... 26 4 30 -- 17 --
-------- -------- -------- -------- -------- --------
Net realized gains (losses) ............. (1) -- -- -- (1) --
Change in unrealized gains (losses) .............. 47 620 (28) -- (730) --
-------- -------- -------- -------- -------- --------
Net gains (losses) on investments ....... 46 620 (28) -- (731) --
-------- -------- -------- -------- -------- --------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS ....................................... $ 23 $ 616 $ 55 $ -- $ (742) $ --
======== ======== ======== ======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
-------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998
-------------------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
----------- ---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ....... $ 69,022 $ 46,376 $ 90,589 $ 33,974 $ 28,659 $ 158,157 $ 14,345
Net realized gains (losses) ........ -- (27,285) 14,283 (31,063) (39,484) (54,875) (5,159)
Change in unrealized gains (losses) -- (107,673) 114,532 7,597 38,959 32,997 33,698
----------- ---------- ----------- ----------- ---------- ---------- ----------
Change in net assets resulting
from operations ............ 69,022 (88,582) 219,404 10,508 28,134 136,279 42,884
FROM CAPITAL TRANSACTIONS
Deposits ........................... 8,943,005 687 -- 13,132 -- -- --
Benefit payments ................... -- -- -- -- -- -- --
Payments on termination ............ (57,013) -- -- -- -- -- --
Contract charges ................... (11,773) (9,932) (13,312) (7,231) (5,135) (29,869) (2,389)
Transfers among the portfolios
and with the general
account - net .................... (8,042,636) 671,848 1,062,866 1,081,871 483,699 2,558,640 357,037
----------- ---------- ----------- ----------- ---------- ---------- ----------
Change in net assets resulting
from capital transaction ... 831,583 662,603 1,049,554 1,087,772 478,564 2,528,771 354,648
----------- ---------- ----------- ----------- ---------- ---------- ----------
INCREASE IN NET ASSETS ............. 900,605 574,021 1,268,958 1,098,280 506,698 2,665,050 397,532
NET ASSETS AT BEGINNING OF YEAR .... 138,062 30,557 158,013 72,584 17,360 259,983 8,812
----------- ---------- ----------- ----------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR .......... $ 1,038,667 $ 604,578 $ 1,426,971 $ 1,170,864 $ 524,058 $2,925,033 $ 406,344
=========== ========== =========== =========== ========== ========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------
For the Year Ended December 31, 1998
---------------------------------------------------------------------
Global Capital
European Capital Dividend Pacific Appreci- Income
Growth Growth Growth Growth ation Builder
--------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) .............. $ 14,801 $ 2,007 $ 47,602 $ 245 $ (130) $ 7,808
Net realized gains (losses) ............... 3,468 (7) 3,232 270 33 (33,743)
Change in unrealized gains (losses) ....... 13,019 28,508 (3,294) (1,428) (3,776) (9,844)
--------- --------- ---------- -------- --------- ---------
Change in net assets resulting
from operations ................... 31,288 30,508 47,540 (913) (3,873) (35,779)
FROM CAPITAL TRANSACTIONS
Deposits .................................. 687 -- -- -- -- --
Benefit payments .......................... -- -- -- -- -- --
Payments on termination ................... -- -- -- -- -- --
Contract charges .......................... (4,711) (1,188) (7,595) (159) (618) (4,127)
Transfers among the portfolios
and with the general account - net 336,917 161,739 673,671 17,558 29,147 329,590
--------- --------- --------- --------- --------- ---------
Change in net assets resulting from
capital transactions .............. 332,893 160,551 666,076 17,399 28,529 325,463
--------- --------- --------- --------- --------- ---------
INCREASE IN NET ASSETS .................... 364,181 191,059 713,616 16,486 24,656 289,684
NET ASSETS AT BEGINNING OF YEAR ........... 35,482 14,356 54,784 -- 19,230 --
--------- --------- --------- --------- --------- ---------
NET ASSETS AT END OF YEAR ................. $ 399,663 $ 205,415 $ 768,400 $ 16,486 $ 43,886 $ 289,684
========= ========= ========= ========= ========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------
For the Period November 13, 1997 (commencement of operations) to December 31, 1997
---------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ................ $ 377 $ 320 $ 168 $ 643 $ 105 $ 1,140 $ 64
Net realized gains (losses) ................. -- -- (1) 1 -- 1 --
Change in unrealized gains (losses) ......... -- (1) 3,395 443 128 2,167 184
--------- --------- --------- --------- --------- --------- ---------
Change in net assets resulting
from operations ..................... 377 319 3,562 1,087 233 3,308 248
FROM CAPITAL TRANSACTIONS
Deposits .................................... -- -- -- -- -- -- --
Benefit payments ............................ -- -- -- -- -- -- --
Payments on termination ..................... -- -- -- -- -- -- --
Contract charges ............................ (209) (40) (252) (131) (19) (410) (9)
Transfers among the portfolios and
with the general account - net ............ 137,894 30,278 154,703 71,628 17,146 257,086 8,573
--------- --------- --------- --------- --------- --------- ---------
Change in net assets resulting from
capital transactions ................ 137,685 30,238 154,451 71,497 17,127 256,676 8,564
--------- --------- --------- --------- --------- --------- ---------
INCREASE IN NET ASSETS ...................... 138,062 30,557 158,013 72,584 17,360 259,984 8,812
NET ASSETS AT BEGINNING OF PERIOD ........... -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
NET ASSETS AT END OF PERIOD ................. $ 138,062 $ 30,557 $ 158,013 $ 72,584 $ 17,360 $ 259,984 $ 8,812
========= ========= ========= ========= ========= ========= =========
Net asset value per unit at end of period $ 10.06 $ 10.16 $ 10.47 $ 10.19 $ 10.22 $ 10.24 $ 11.15
========= ========= ========= ========= ========= ========= =========
Units outstanding at end of period .......... 13,725 3,006 15,088 7,123 1,699 25,395 790
========= ========= ========= ========= ========= ========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
9
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
($ in whole amounts)
Dean Witter Variable Investment Series Portfolios
----------------------------------------------------------------
For the Period November 13, 1997 (commencement of Operations)
to December 31, 1997
----------------------------------------------------------------
Global Capital
European Capital Dividend Pacific Appreci- Income
Growth Growth Growth Growth ation Builder
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ................ $ (23) $ (4) $ 83 $ -- $ (11) $ --
Net realized gains (losses) ................. (1) -- -- -- (1) --
Change in unrealized gains (losses) ......... 47 620 (28) -- (730) --
-------- -------- -------- -------- -------- --------
Change in net assets resulting
from operations ..................... 23 616 55 -- (742) --
FROM CAPITAL TRANSACTIONS
Deposits .................................... -- -- -- -- -- --
Benefit payments ............................ -- -- -- -- -- --
Payments on termination ..................... -- -- -- -- -- --
Contract charges ............................ (48) (20) (81) -- (28) --
Transfers among the portfolios and
with the general account - net ............ 35,507 13,760 54,810 -- 20,000 --
-------- -------- -------- -------- -------- --------
Change in net assets resulting from
capital transactions ................ 35,459 13,740 54,729 -- 19,972 --
-------- -------- -------- -------- -------- --------
INCREASE IN NET ASSETS ...................... 35,482 14,356 54,784 -- 19,230 --
NET ASSETS AT BEGINNING OF PERIOD ........... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
NET ASSETS AT END OF PERIOD ................. $ 35,482 $ 14,356 $ 54,784 $ -- $ 19,230 $ --
======== ======== ======== ======== ======== ========
Net asset value per unit at end of period $ 10.26 $ 9.43 $ 10.17 $ -- $ 9.63 $ --
======== ======== ======== ======== ======== ========
Units outstanding at end of period 3,458 1,522 5,388 -- 1,997 --
======== ======== ======== ======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
10
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION
Northbrook Life Variable Life Separate Account A (the "Account"), a unit
investment trust registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, is a Separate Account of
Northbrook Life Insurance Company ("Northbrook Life"). The assets of the
Account are legally segregated from those of Northbrook Life. Northbrook
Life is wholly owned by Allstate Life Insurance Company, a wholly owned
subsidiary of Allstate Insurance Company, which is a wholly owned
subsidiary of The Allstate Corporation. The Account was established January
15, 1996, by resolution of the Board of Directors of Northbrook Life and
began accepting policyholder deposits on November 13, 1997.
Northbrook Life issues the Morgan Stanley Dean Witter Variable Life policy,
the deposits of which are invested at the direction of the policyholder in
the sub-accounts ("portfolios" for purposes of this report) that comprise
the Account. Policyholders bear all of the investment risk. The portfolios
invest in the Morgan Stanley Dean Witter Variable Investment Series (the
"Fund").
Northbrook Life provides insurance and administrative services to the
policyholder for a fee.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS - Investments consist of shares of the Funds and
are stated at fair value based on quoted market prices at December 31,
1998.
INVESTMENT INCOME - Investment income consists of dividends declared by the
Funds and is recognized on the date of record.
REALIZED GAINS AND LOSSES - Realized gains and losses represent the
difference between the proceeds from sales of portfolio shares by the
Account and the cost of such shares, which is determined on a weighted
average basis.
FEDERAL INCOME TAXES - The Account intends to qualify as a segregated asset
account as defined in the Internal Revenue Code ("Code"). As such, the
operations of the Account are included in the tax return of Northbrook
Life. Northbrook Life is taxed as a life insurance company under the Code.
No federal income taxes are payable by the Account in 1998 and 1997 as the
Account did not generate taxable income.
11
<PAGE>
3. CONTRACT CHARGES
Northbrook Life assesses each policyholder a mortality and expense risk
related to operations of the Account. Charges are deducted daily at a rate
equal to .90% per annum of the daily net assets of the Account.
Northbrook Life charges each policyholder monthly for cost of insurance,
tax expense and administrative expense. The cost of insurance is determined
based upon several variables, including the policyholder's death benefit
amount and Account value. Tax expenses is charged at an annual rate equal
to .40% of the Account value for the first ten contract years. Northbrook
Life deducts a monthly administrative fee of .25% of the Account value.
If aggregate deposits are less than $40,000, the Account will deduct an
annual maintenance fee of $30 on each contract anniversary.
4. FINANCIAL INSTRUMENT
The investments of the Account are carried at fair value, based on quoted
market prices. Accrued contract maintenance charges are of a short-term
nature. It is assumed that their carrying value approximates fair value.
12
<PAGE>
<TABLE>
<CAPTION>
5. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
Unit activity during 1998:
-------------------------------------
Units Units Accumulation
Outstanding Outstanding Value
December Units Units December December
31, 1997 Issued Redeemed 31, 1998 31, 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter
Variable Investment Series Portfolios:
Money Market ......................... 13,725 1,460,923 (1,366,671) 107,977 $ 9.62
High Yield ........................... 3,006 107,267 (46,285) 63,988 9.45
Equity Fund .......................... 15,088 134,029 (43,721) 105,396 13.54
Quality Income Plus .................. 7,123 143,038 (43,474) 106,687 10.98
Strategist ........................... 1,699 70,993 (31,795) 40,897 12.82
Dividend Growth ...................... 25,395 354,205 (127,320) 252,280 11.60
Utilities ............................ 790 30,617 (1,696) 29,711 13.68
European Growth ...................... 3,458 39,082 (10,839) 31,701 12.61
Capital Growth ....................... 1,522 21,389 (4,540) 18,371 11.18
Global Dividend Growth ............... 5,388 71,861 (9,486) 67,763 11.34
Pacific Growth ....................... -- 2,075 (95) 1,980 8.33
Capital Appreciation ................. 1,997 3,525 (525) 4,997 8.78
Income Builder ....................... -- 64,771 (37,425) 27,346 10.60
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
13
<PAGE>
Part II - Other Information
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
REPRESENTATIONS AS TO FEES AND CHARGES
Northbrook Life Insurance Company represents that the fees and charges
deducted under the Modified Single Premium Variable Life Insurance Contract
registered by this Registration Statement, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed by the Company.
REPRESENTATIONS PURSUANT TO RULE 6e-3(T)
This filing is made pursuant to Rules 6c-3 and 63-3(T) under the Investment
Company Act of 1940 ("Investment Company Act").
RULE 484 UNDERTAKING
The By-Laws of Northbrook Life Insurance Company ("Depositor") which are
incorporated herein by reference as Exhibit 1 (A)(6)(b), provide that it will
indemnify its officers and directors for certain damages and expenses that may
be incurred in the performance of their duty to Depositor. No indemnification
is provided, however, when such person is adjudged to be liable for negligence
or misconduct in the performance of his or her duty, unless indemnification is
deemed appropriate by the court upon application. Insofar as indemnification
for liability arising under the Securities Act of 1933 (the "Act") may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settle by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The Facing Sheet.
Reconciliation and tie between items in Form N-8B-2 and the Prospectus.
The Prospectus consisting of [__] PAGES.
The Undertaking to File Reports.
Representations as to fees and charges.
Representations Pursuant to Rule 6e-3(T).
Rule 484 Undertaking.
The Signatures.
Written Consents of the following persons:
(a) Freedman Levy Kroll & Simonds
(b) Deloitte & Touche LLP
The following exhibits:
1. The following exhibits are required by Article IX, paragraph A of the Form
N-8B-2, and, unless otherwise noted, are filed herewith:
(1) Form of resolution of the Board of Directors of Glenbrook Life and
Annuity Company authorizing establishment of the Variable Life
Separate Account A.*
(2) Not applicable.
(3) (a) Form of Principal Underwriting Agreement.** (b) Form of Selling
Agreement.** (c) See Exhibit 1(A)(3)(b).
(4) Not applicable.
(5) (a) Specimen Contract.*
(6) (a) Amended and Restated Articles of Incorporation and Article of
Redomestication of Glenbrook Life and Annuity Company***
(b) Amended and Restated By-laws of Glenbrook Life and Annuity
Company***
(7) Not applicable.
(8) Form of Participation Agreement.****
(9) Not Applicable.
(10) Form of Application for Contract.*****
2. Opinion of Counsel
(a) Illinois*****
(b) Arizona
3. Not Applicable
(1) Not applicable
(2) Not applicable
4. Not applicable.
5. Not applicable.
6. Powers of Attorney
(a)Powers of Attorney for Louis G. Lower, II, Michael J. Velotta, Peter
H. Heckman, John R. Hunter, Kevin R. Slawin, G. Craig Whitehead, Keith
A. Hauschildt*
(b)Power of Attorney for Thomas J. Wilson, II
7. Consents:
(1) Freedman Levy Kroll & Simonds
(2) Deloitte & Touche LLP
8. Representations Pursuant to Rule 6e-3(T)
9. Procedures Memorandum pursuant to Rule 6e-3(T)(b)(12)(3)(iii)*****
10. Actuarial Opinion and Consent******
11. Hypothetical Illustrations******
* Previously file in the initial filing to this Registration Statement (File No.
333-25057) dated April 11, 1997.
** Incorporated herein by reference to Post-Effective Amendment No. 13 to
Depositor's Form N-4 Registration Statement (File No. 033-35412) dated December
31, 1996.
***Incororated herein by reference to Depositor's Form 10-K Annual Report filed
March 30, 1999
**** Incorporated herein by reference to Post-Effective Amendment No. 20 to
Depositor's Form N-4 Registration Statement (File No. 002-82511) dated April 30,
1996.
***** Previously file in Pre-Effective Amendment No. 1 to this Registration
Statement (File No. 333-25057) dated August 22, 1997.
***** Previously file in Post-Effective Amendment No. 1 to this Registration
Statement (File No. 333-25057) dated April 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "Act"), the
registrant, Northbrook Life Variable Life Separate Account A, certifies that
it meets all of the requirements for effectiveness of this amended
Registration Statement pursuant to Rule 485(b) under the Act and has duly
caused this amended registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, and its seal to be hereunto affixed
and attested, all in the Village of Northfield, and State of Illinois, on the
27th day of April 1999.
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
(Registrant)
NORTHBROOK LIFE INSURANCE COMPANY
(Depositor)
(SEAL)
Attest:/s/BRENDA D. SNEED By:/s/MICHAEL J. VELOTTA
------------------ ---------------------
Brenda D. Sneed Michael J. Velotta
Assistant Secretary and Vice President, Secretary
Assistant General Counsel and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following Directors and
Officers of Glenbrook Life and Annuity Company on the 27th day of April, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
*/LOUIS G. LOWER, II Chairman of the Board and Chief Executive Officer
-------------------- (Principal Executive Office)
Louis G. Lower, II
/s/MICHAEL J. VELOTTA Vice President, Secretary, General Counsel and Director
---------------------
Michael J. Velotta
*/THOMAS J. WILSON Vice Chairman and Director
--------------------
Thomas J. Wilson, II
*/PETER H. HECKMAN President, Chief Operating Officer and Director
------------------
Peter H. Heckman
<PAGE>
*/JOHN R. HUNTER Assistant Vice President and Director
----------------
John R. Hunter
*/Kevin R. SLAWIN Vice President and Director
----------------- (Principal Financial Officer)
Kevin R. Slawin
*/G. CRAIG WHITEHEAD Senior Vice President and Director
--------------------
Craig Whitehead
*/KEITH A. HAUSCHILDT Assistant Vice President and Controller
--------------------- (Principal Account Officer)
Keith A. Hauschildt
</TABLE>
*/ By Michael J. Velotta, pursuant to Power of Attorney, previously filed.
<PAGE>
EXHIBIT LIST
The following exhibits are filed herewith:
Exhibit No. Description
------------- --------------
2 Opinion and Consent of General Counsel
6(b) Power of Attorney for Thomas J. Wilson,II
7(1) Consent of Freedman, Levy, Kroll & Simonds
7(2) Independent Auditors' Consent
NORTHBROOK LIFE INSURANCE COMPANY
LAW AND REGULATION DEPARTMENT
3100 Sanders Road, J5B
Northbrook, Illinois 60062
Direct Dial Number 847-402-2400
Facsimile 847-402-4371
Michael J. Velotta
Vice President, Secretary
and General Counsel
April 14, 1999
TO: NORTHBROOK LIFE INSURANCE COMPANY
NORTHBROOK, ILLINOIS 60062
FROM: MICHAEL J. VELOTTA
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
RE: FORM S-6 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
FILE NO. 333-25057
With reference to the Registration Statement on Form S-6 filed by
Glenbrook Life and Annuity Company (the "Company") with the Securities and
Exchange Commission covering the Modified Single Premium Variable Life Insurance
Contracts, I have examined such documents and such law as I have considered
necessary and appropriate, and on the basis of such examination, it is my
opinion that as of December 28, 1998:
1. The Company is duly organized and existing under the laws of the State
of Arizona and has been duly authorized to do business by the Director
of Insurance of the State of Arizona.
2. The securities registered by the above Registration Statement when
issued will be valid, legal and binding obligations of the Company.
I hereby consent to the filing of this opinion as an exhibit to the
above referenced Registration Statement and to the use of my name under the
caption "Legal Matters" in the Prospectus constituting a part of the
Registration Statement.
Sincerely,
/s/ Michael J. Velotta
- -------------------------
Michael J. Velotta
Vice President, Secretary and
General Counsel
POWER OF ATTORNEY
WITH RESPECT TO
NORTHBROOK LIFE INSURANCE COMPANY
AND
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
Know all men by these presents that Thomas J. Wilson, II, whose
signature appears below, constitutes and appoints Louis G. Lower, II and Michael
J. Velotta, each acting individually, his attorney-in-fact, with power of
substitution and in any and all capacities, to sign any registration statements
and amendments thereto for the Northbrook Life Insurance Company, Northbrook
Life Variable Life Separate Account A and related Contracts and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
April 23, 1999
Date
/s/Thomas J. Wilson, II
Thomas J. Wilson, II
Vice Chairman and Director
Exhibit 7(1)
Freedman, Levy, Kroll & Simonds
CONSENT OF
FREEDMAN, LEVY, KROLL & SIMONDS
We hereby consent to the reference to our firm under the caption "Legal Matters"
in the prospectus contained in Post-Effective Amendment No. 2 to the Form S-6
Registration Statement of Northbrook Life Variable Life Separate Account A (File
No. 333-25057).
/s/FREEDMAN, LEVY, KROLL & SIMONDS
Washington, D.C.
April 26, 1999
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 333-25057 of Northbrook Life Variable Life Separate Account A of
Northbrook Life Insurance Company on Form S-6 of our report dated February 19,
1999 relating to the financial statements and the related financial statement
schedule of Northbrook Life Insurance Company, and our report dated March 18,
1999 relating to the financial statements of Northbrook Life Variable Life
Separate Account A appearing in the Prospectus, which is part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Chicago Illinois
April 26, 1999
